Joint Committee Report JCS-10-87: General Explanation of the Tax Reform Act of 1986

¹ In addition to this overall chronology of the Act, specific references to the legislative background of each provision are set forth in footnotes accompanying the explanation of the provisions in Part III of this document. These legislative background references include, as appropriate, citations to the following. H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985 (H. Rep. 99-426); H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986 (S. Rep. 99-313); House and Senate floor amendments to H.R. 3838; and the conference report on H.R. 3838 as filed on September 18, 1986 (H. Rep. 99-841).

² The White House, The The President's Tax Reform Proposals to the Congress for Fairness, Growth, and Simplicity, May 1985.

³ Treasury Department, Tax Reform for Fairness, Simplicity, and Economic Growth, November 1984.

⁴ See explanation in Title XV. Part. A., footnote 14. A technical correction may be needed so that the statute reflects this intent.

III. Title I.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 101-03, 131; H.Rep. 99-426, pp. 80-93; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 101-04, 131, and 151; S.Rep. 99-313, pp. 29-42; Senate floor amendment, 132 Cong. Rec. S 7665-73 (June 17, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 1-11 (Conference Report).

² For tax purposes, an individual's marital status for a year generally is determined on the last day of the year. If one spouse dies during the year, the surviving spouse generally is eligible to file a joint return for that year.

³ See text below for computation of standard deduction where an elderly or blind individual is eligible to be claimed as a dependent on the tax return of another taxpayer.

⁴ A technical correction may be needed to reflect this intent.

⁵ A technical correction may be needed to reflect this intent.

⁶ In the case of a married individual filing a separate return, inflation adjustments to the bracket amounts will be rounded down to the nearest multiple of $25 (except with respect to sec. 63(c)(4)).

⁷ The rate reduction estimate includes the effects relating to capital gains as well as interactions between rate changes and other provisions of the Act.

⁸ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 111; H.Rep. 99-426, pp. 94-95; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 111; S.Rep. 99-313, pp. 43-44; Senate floor amendment, 132 Cong. Rec. S 7969 (June 19, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 12-13 (Conference Report).

⁹ For definitions of head of household and surviving spouse, see Title I., Part A., above.

¹⁰ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 122; H.Rep. 99-426. pp. 98-99; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 121; S.Rep. 99-313, pp. 46-47; and H.Rep. 99-841. Vol. II (September 18, 1986), p. 14 (Conference Report).

¹¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 123(b); H.Rep. 99-426, pp. 103-07; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 122; S.Rep. 99-313, pp. 47-54; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 17-19 (Conference Report).

¹² Treas. Reg. sec. 1.74-1(b). But see Jones v. Comm'r, 743 F.2d 1429 (9th Cir. 1984), holding that an award from an employer to an employee could qualify for the prior-law section 74(b) exclusion under extraordinary circumstances. The court held that the exclusion applied in the case of a prominent scientist who was rewarded by the National Aeronautics and Space Administration (NASA) for lifetime scientific achievement, only part of which was accomplished while the scientist was employed by NASA. No inference is intended under the Act as to whether the decision in this case was a correct interpretation of section 74(b) as in effect prior to the Act.

¹³ Under Duberstein, the determination of whether property transferred from an employer to an employee for otherwise transferred in a business context) constituted a gift to the recipient was to be made on a case-by-case basis, by an "objective inquiry" into the facts and circumstances. If the transferor's motive was "the incentive of anticipated benefit," or if the payment was in return for services rendered (whether or not the payor received an economic benefit from the payment), then the payment must be included in income by the recipient.

¹⁴ Thus, an employee award for productivity, or for any other purpose not specified in sec. 274(j), is not excludable under sec. 74(c).

¹⁵ The types of conditions and circumstances that are to be deemed to create a significant likelihood of payment of disguised compensation include, for example, the making of employee awards at the time of annual salary adjustments or as a substitute for a prior program of awarding cash bonuses, or the providing of employee awards in a way that discriminates in favor of highly paid employees.

¹⁶ Accordingly, no exclusion for safety achievement awards is available in the case of an employer with nine or fewer eligible employees.

¹⁷ In the case of an employee award provided by a partnership, the deduction limitations of section 274(j) apply to the partnership as well as to each partner. The new employee achievement award exclusion is not available for any award made by a sole proprietorship to the sole proprietor; consequently, the deduction limitations in sec. 274(j) do not apply with respect to such an includible award.

¹⁸ In the case of a tax-exempt employer, the deduction limitation amount is that amount that would be deductible if the employer were not exempt from taxation (sec. 74(c)(3)).

¹⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 123; H.Rep. 99-426, pp. 99-103; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 14-17 (Conference Report).

²⁰ As the U.S. Tax Court stated in one case: "Interns and residents have been flooding the courts for years seeking to have their remuneration declared a 'fellowship grant' and hence partially excludable from income. They have advanced such illuminating arguments as they could have earned more elsewhere and they were enjoying a learning experience so therefore what they did receive must have been a grant. They have been almost universally unsuccessful and deservedly so. Why the amounts received by a young doctor just out of school should be treated differently from the amounts received by a young lawyer, engineer, or business school graduate has never been made clear." (Zonkerman v. Comm'r, 36 T.C.M. 6, 9 (1977), aff'd (4th Cir. 1978))

²¹ Two Code provisions applicable to private foundations contain references to scholarship or fellowship grants "subject to the provisions of section 117(a)" (secs. 4941(d)(2)(G)(ii); 4945(g)(1)). The amendments made by the Act to the section 117 exclusion are not intended to treat scholarship or fellowship grants by a private foundation that would not have triggered section 4941 or 4945 excise taxes under prior law as self-dealing acts or taxable expenditures merely because such grants exceed the amount excludable by degree candidates under section 117 as amended by the Act or are made to nondegree candidates (up to the amount excludable under prior law). A technical amendment may be needed so that the statute reflects this intent.

²² Amounts received as payment for teaching or other services also constitute earned income.

²³ For this purpose, a scholarship or fellowship is to be treated as granted before August 17, 1986 to the extent that the grantor made a firm commitment, in the notice of award made before that date, to provide the recipient with a fixed cash amount or a readily determinable amount. If the scholarship or fellowship is granted for a period exceeding one academic period (e.g., if the grant is made for three semesters), amounts received in subsequent academic periods are to be treated as granted before August 17, 1986 only if (1) the amount awarded for the first academic period is described in the original notice of award as a fixed cash amount or readily determinable amount, (2) the original notice of award contains a firm commitment by the grantor to provide the scholarship or fellowship amount for more than one academic period, and (3) the recipient is not required to reapply to the grantor in order to receive the scholarship or fellowship grant in future academic periods. A requirement that the recipient must file periodic financial statements to show continuing financial need does not constitute a requirement to reapply for the grant.

²⁴ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 135; S.Rep. 99-313, pp. 55-57; Senate floor amendment, 132 Cong. Rec. S 7893-98 (June 19, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), p. 20 (Conference Report).

²⁵ This test could be satisfied in the case of a compensating use tax, i.e., a tax on the use, consumption, or storage of an item that would have been subject to a general sales tax if sold in the State or locality imposing the use tax.

²⁶ See, e.g., Helvering v. Taylor, 293 U.S. 507, 514 (1935).

²⁷ Local sales taxes also are imposed in various States. An additional amount for local taxes was built into the IRS-published tables for some of these jurisdictions. For other States having local sales taxes, a further computation had to be made after deriving the table amount (e.g., itemizers in one State were allowed to increase the table amount by sales taxes imposed on electricity or gas during certain months of the year).

²⁸ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 134; S.Rep. 99-313, pp. 57-60; Senate floor amendment, 132 Cong. Rec. S 7665-73 (June 17, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 21-22 (Conference Report).

²⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 134; H. Rep. 99-426, p. 113; and H. Rep. 99-841. Vol. II (September 18, 1986), pp. 22-23 (Conference Report).

³⁰ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 144; H.Rep. 99-426, pp. 135-36; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 144; S.Rep. 99-313, pp. 60-61; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 23 (Conference Report).

³¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 142; H.Rep. 99-426, pp. 115-130; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 142; S.Rep. 99-313, pp. 62-85; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 24-32 (Conference Report).

³² See Part E.2., below, for rules relating to the deductibility of business expenses incurred by employees.

³³ See, e.g., Interstate Transit Lines v. Comm'r, 319 U.S. 590, 593 (1943); Comm'r v. Heininger, 320 U.S. 467 (1943).

³⁴Fausner v. Comm'r, 413 U.S. 838 (1973).

^34a H. Rpt. No. 87-1447, 87th Cong., 2d Sess. (1962), at 19.

^34bSee, e.g., H. Rept. 99-67, 99th Cong., 1st Sess. 8-9 (1985) (Conference Report on P.L. 99-44).

³⁵ For purposes of this rule, an entertainment activity is defined in accordance with sec. 274(a)(1)(A), i.e., as an activity that is of a type generally considered to constitute entertainment. amusement, or recreation. Thus, for example, the percentage reduction rule applies to any amount of social or athletic club dues or fees that otherwise are allowable as business deductions under sec. 274(a)(2).

³⁶ If a tax-exempt organization incurs otherwise deductible meal or entertainment expenses in conducting an unrelated trade or business, the percentage reduction rule applies in computing the organization's unrelated business taxable income (secs. 511-514).

³⁷ However, if meal or entertainment costs incurred in the course of luxury water travel are separately stated, the percentage reduction rule is applied prior to application of the limitation on luxury water travel expenses in new sec. 274(m), as discussed below.

³⁸ Likewise, the percentage reduction rule applies prior to the deduction limitations on luxury water travel (in the case of separately stated meal and entertainment expenses). See discussion below of the exception to the percentage reduction rule for qualified banquet meetings in 1987 and 1988.

³⁹ The Congress anticipated that the Treasury Department will provide additional guidance regarding when allocation is necessary and how the amounts properly allocable to meals and entertainment are to be determined.

⁴⁰ The employer may deduct the full reimbursed amount if the employer treats such amount as compensation to the employee under the first exception described above.

⁴¹ Thus, this exception to the percentage reduction rule does not apply if a charge is made to persons consuming the meal for an amount for the meal separate from the charge for the program of which the meal is an integral part, or if program attendees who do not have the meal are refunded a separate amount for not having the meal. However, the exception does not become inapplicable merely because the hotel, caterer, or other business that is unrelated to the taxpayer and that provides the food or beverages may state to the taxpayer as program sponsor a separate amount that represents the food and beverage charges to the taxpayer, which amount the taxpayer then may factor into the total fee for the program that includes the meal.

⁴² In order to qualify for this exception to the percentage reduction rule, it is not necessary that the speaker be paid an honorarium for speaking at the meal. This exception can apply to meals served at an employee training facility if the requirements (such as a bona fide speaker) for the exception are met.

⁴³ Thus, the statutory exceptions to the business-connection requirement that apply in the case of other entertainment expenses also apply in the case of business meal expenses.

⁴⁴ However, the requirement that the taxpayer be present does not apply in the case of a transfer for business purposes of a packaged food or beverage item, such as a holiday turkey, ham. fruitcake, or bottle of wine.

⁴⁵ A taxpayer cannot circumvent this effective date by "setting aside" amounts, or paying amounts, prior to January 1, 1987, to a fund or account that is to be used to finance travel costs after December 31, 1986 that would be nondeductible expenditures under the Act.

⁴⁶ Also, this clarification does not disallow deductions for costs, other than travel, meal, or entertainment expenses, of renting or using business-related video-taped materials that are deductible trade or business expenses under section 162.

⁴⁷ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 132; H. Rep. 99-426, pp. 108-111; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 132-33; S. Rep. 99-313, pp. 77-80; and H. Rep. 99-841, Vol. II (September 18, 1986) pp. 32-34 (Conference Report).

⁴⁸ For this purpose, the term outside salesperson meant an individual who solicits business as a full-time salesperson for his or her employer away from the employer's place of business. The term outside salesperson did not include a taxpayer whose principal activities consist of service and delivery, such as a bread driver-salesperson. However, an outside salesperson could perform incidental inside activities at the employer's place of business, such as writing up and transmitting orders and spending short periods at the employer's place of business to make and receive telephone calls (Treas. Reg. sec. 1.62-1(b)).

⁴⁹ See secs. 143(b) and 143(c) of the Act, amending the rules relating to home office deductions.

⁵⁰ See sec. 142 of the Act, disallowing deductions for travel as a form of education.

⁵¹ See sec. 143(a) of the Act, amending the rules relating to hobby losses.

⁵² Common taxpayer errors have included disregarding the restrictions on home office deductions, and on the types of education expenses that are deductible; claiming a deduction for safe deposit expenses even if used only to store personal belongings; and deducting the cost of subscriptions to widely read publications outlining business information without a sufficient business or investment purpose.

⁵³ The term "impairment-related work expenses" means expenses of a handicapped individual (as defined in sec. 190(b)(3)) for attendant care services at the individual's place of employment that are necessary for such individual to be able to work, provided such expenses are otherwise deductible under sec. 162.

⁵⁴ A technical correction may be necessary so that the statute reflects this intent. Such a correction was included in the version of H. Con. Res. 395 that passed the Senate in the 99th Congress.

⁵⁵ See Treas. Reg. secs. 1.162-17(b), 1.274-5T(f), and 1.274-5(e). For rules relating to reporting and substantiation of certain reimbursements of persons other than employees, see Reg. secs. 1 274-5T(h) and 1.274-5(g).

⁵⁶ The Congress intended that the Treasury make explicit in these regulations that these reimbursements by third parties are to be treated as expenses described in sec. 62(a)(2)(A).

⁵⁷ Under the Act, it is intended that the Treasury Department issue regulations or other guidance coordinating the treatment of employee business expenses and the provisions in sec. 162(h), relating to travel expenses away from home of State legislators. Under the intended rules, any excess of the allowable amount as determined under sec. 162(h) over the amount actually reimbursed to the legislator electing that provision would be allocated between meals and other travel expenses in accordance with the ratio of meals and other travel expenses under the Federal per diem reimbursement rules for travel in the United States. The reimbursed amount would be deductible pursuant to sec. 62(a)(2)(A), and 80 percent of the amount allocated to meals would be deductible by itemizers as an employee business expense (subject to the new two-percent floor under miscellaneous itemized deductions).

As described in the text above, the two-percent floor applies after application of the percentage reduction rule and prior to any deduction limitation that is specifically expressed in dollars. For example, with regard to away-from-home expenses of Members of Congress, the two-percent floor applies prior to application of the statutory $3,000 limitation (sec. 162(a)). In addition, if a Member has expenses subject to the $3,000 limitation and other miscellaneous itemized deductions, the amounts disallowed by the two-percent floor are disallowed proportionately. For example, assume that a Member with adjusted gross income of $100,000 has $5,000 of away-from-home expenses (qualifying for the deduction, disregarding application of the $3,000 limit and the two-percent floor, but after application of the 80-percent rule for meal and entertainment expenses) and $5,000 of other miscellaneous itemized deductions, for a total of $10,000 of potential deductions subject to the two-percent floor. Application of the two-percent floor would limit these deductions to $8,000, and the amount disallowed because of the two-percent floor would be disallowed proportionately. Thus, after application of the two-percent floor, the Member could deduct $4,000 of the away-from-home expenses and $4,000 of the miscellaneous itemized deductions. The former amount (i.e., the away-from-home expenses) is further limited to $3,000 because of the special limitation on deducting Member's expenses. Thus, the Member could deduct a total of $7,000 of miscellaneous itemized deductions. See 132 Cong. Rec. H8357 (daily ed. Sept. 25, 1986) (statement of Mr. Rostenkowski).

⁵⁸ The Code provides that an employer is treated as nominal if the amount received by the individual for his or her services as an employee in the performing arts for such employer during the taxable year is less than $200.

⁵⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 143; H.Rep. 99-426; pp. 130-32; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 143(a); S. Rep. 99-313, pp. 80-81: and H. Rep. 99-841, Vol. II (September 18, 1986) pp. 35-36 (Conference Report).

⁶⁰ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 143(c); H. Rep. 99-426, pp. 132-35; H.R.3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 143; S. Rep. 99-313, pp. 81-85; and H. Rep. 99-841, Vol. II (September 18, 1986) p. 35 (Conference Report).

⁶¹ Proposed Treas. Reg. sec. 1.280A-2(i)(2)(iii). 48 Fed. Reg. 33325 (July 21, 1983).

⁶² See Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1976 (JCS-33-76) at 139

⁶³ Also, payments to an employee from his or her employer that constitute wages are not exempted from withholding requirements and employment taxes merely because the employer and employee label such payments as "rent" under a "rental" or "lease" agreement.

⁶⁴ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 112; H. Rep. 99-426, pp. 95-96; House floor amendment, 131 Cong. Rec. H 12731 (Dec. 17, 1985); H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 112; S. Rep. 99-313, p. 86; and H. Rep. 99-841, Vol. II (September 18, 1986) p. 37 (Conference Report).

III. Title II.A. through III. Title II.E.1.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 201-211; H.Rep. 99-426, pp. 137-190; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 201-213; S.Rep. 99-313, pp. 87-117; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 38-66 (Conference Report).

² H. Rep. 99-841, Vol. II (September 18, 1986), p. 40.

³ In addition, the Congress intended taxpayers to have an election to use the 150-percent declining balance method, switching to the straight-line method, over ADR midpoints, permitted for purposes of the minimum tax.

⁴ The Congress intended the determination (of whether a corporation is a member of an affiliated group) to be made by reference to section 1504(b) (which excludes certain corporations).

⁵ The Congress intended this rule to apply to transfers of property that was subject to section 168 as in effect before the amendments made by the Act in the hands of the transferor.

⁶ The anti-churning rules are not implicated by the conversion of property from personal use to business use; however, the Congress did not intend such property to qualify for more generous prior-law depreciation upon conversion to business use. For example, a taxpayer who acquired a residence for personal use before January 1, 1987, and converted the residence to business use after that date, will depreciate the property under the amendments made by the Act if prior-law depreciation would be more generous.

⁷ Floor Statement by Senator Packwood, Cong. Rec. Sec. 13955-56 (September 27, 1986); Floor Statement by Mr. Rostenkowski, Cong. Rec. H 8360 (September 25, 1986).

⁸ For example, if property with a class life of less than 7 years is incorporated into an equipped building, then such property would not independently need to satisfy the placed-in-service requirements. Instead, such property would qualify for transition relief as part of the equipped building-as long as the equipped building is placed in service by the prescribed date.

⁹ In the case of an option to purchase, the governmental entity will be treated as having made a financial commitment only if an amount is paid for the option and such consideration is forfeitable.

¹⁰ Property that qualified for exemption from deferral of the finance lease rules under the general transition rule included in section 12(c)(1) of the 1984 Act (by virtue of a binding contract entered into before March 7, 1984) falls within the general binding contract rule in section 203(b)(1) of the Act. Thus, the finance lease rules would continue to apply to this property if the property is placed in service by the applicable date.

¹¹See Floor Statement by Mr. Rostenkowski, Cong. Rec. E3393 (October 2, 1986). Technical corrections are recommended to clarify this result, as well as the intent to conform the reference to section 209(d)(1)(B) of TEFRA (relating to finance leases of farm equipment) in section 204(b) to the reference in 204(a)(4) (to include the reference to further amendments made by the Tax Reform Act of 1984).

¹² Under a literal interpretation of the statute, a full basis adjustment is required with respect to the energy percentage (as modified by section 421(a) of the Act), but only where the underlying asset also constitutes "transition property" within the meaning of new section 49. Congress did not intend this result; the full-basis adjustment rule only applies to the portion of an investment credit attributable to the regular percentage. Cf. Section 421(b) of the Act (which explicitly incorporates the full-basis adjustment rule for application to certain energy credits allowed under the affirmative commitment provisions).

¹³ The Congress intended that if a credit for which a full basis adjustment was required (1) is recaptured, there will be an upward basis adjustment of 100 percent of the recapture amount, or (2) expires at the end of the carryover period, a deduction will be allowed for 100 percent of the unused credit.

¹⁴ The Congress intended to apply the phased-in 35-percent reduction to investment tax credits used in a taxable year beginning after December 31, 1986, irrespective of when the property with respect to which the credit is claimed was placed in service, or whether the credit was carried forward pursuant to sections 38 and 39, or some other section (e.g., section 465 or prior law section 168(i)).

^15a A technical correction may be necessary so that the statute reflects this intent.

^15b It should be noted that the Statement of Managers for the depreciation provisions (on page II-64) is incorrect in stating that taxpayers have only 30 days after the date of enactment to avoid penalties for underpayments. See floor statement by Mr. Rostenkowski, 132 Cong. Rec. H.8359 (September 25, 1986).

¹⁶ For example, television films produced by a film producer pursuant to a license agreement with a television network (including cable) that was in writing and binding on December 31, 1985,??? or produced in-house by a television network using production services provided pursuant to an agreement for production services between the network and a producer that was in writing and binding on that date, will be eligible for credit if placed in service before January 1, 1989. (In accordance with industry practice, written contemporaneous evidence of a binding contract is treated as a written binding contract.) Television films not the subject of a contract binding on December 31, 1985, that are placed in service after December 31, 1985, but before January 1, 1989, are eligible for credit only if the lesser of ???1 million or 5 percent of the cost of producing such films was incurred or committed by December 31, 1985, and production began by that date.

¹⁷ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 231; H.Rep. 99-426, pp. 176-85; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1301; S.Rep. 99-313, pp. 693-702; and H.Rep. 99-841, Vol. II (September 18, 1986). pp. 68-76 (Conference Report).

¹⁸ H. Rpt. No. 1337, 83d Cong., 2d Sess. at 28 (1954); S. Rpt. 1622, 83d Cong., 2d Sess. at 33 (1954); Snow v. Comm'r, 416 U.S. 500 (1974) (citing Congressional intent to encourage research by both "oncoming" and "ongoing" businesses); Green v. Comm'r, 83 T.C. 667 (1984) (intent of sec. 174 was to encourage "up-and-coming" small businesses to engage in research, not to allow passive investor entities to obtain current deductions).

¹⁹ The statute also excludes expenditures to ascertain the existence, location, extent, or quality of mineral deposits, including oil and gas, from eligibility for section 174 elections (sec. 174(d)). However, expenses of developing new and innovative methods of extracting minerals from the ground may be eligible for sec. 174 elections (Rev. Rul. 74-67, 1974-1 C.B. 63). Certain expenses for development of a mine or other natural deposit (other than an oil or gas well) may be deductible under sec. 616.

²⁰ As enacted in the 1981 Act, the credit was set forth in section 44F of the Code. The Deficit Reduction Act of 1984 renumbered the credit provision as Code section 30. The Tax Reform Act of 1986 renumbered the credit, as amended, as section 41 of the Code.

²¹ Except pursuant to the rule stated in the text for the exclusion of certain rental costs from base-period expenditures, the Act does not authorize modifications to base-period computations for taxable years beginning prior to 1986 (see text below under "Effective Date").

²² As noted above, sec. 174 also excludes from eligibility for expensing (1) expenditures for the acquisition or improvement of depreciable property, or land, to be used in connection with research, and (2) expenditures to ascertain the existence, location, extent, or quality of mineral deposits, including oil and gas.

²³ Research does not rely on the principles of computer science merely because a computer is employed. Research may be treated as undertaken to discover information that is technological in nature, however, if the research is intended to expand or refine existing principles of computer science.

²⁴ The exclusion from credit-eligibility for activities with respect to a business component after the beginning of commercial production of the component does not preclude the costs of improvements in an existing product from eligibility for the credit. Thus, for example, the expenses of an automobile manufacturer in developing, through a process of experimentation, a more efficient and reliable diesel fuel injector are eligible for the incremental research tax credit even though the research expenses are incurred during or after production by the manufacturer of automobile engines containing the existing (unimproved) diesel fuel injector. However, the costs of any activities of the automobile manufacturer with respect to the improved diesel fuel injector after the beginning of commercial production of the improved diesel fuel injector are not eligible for the research credit.

²⁵ The Act provides a single research credit (Code sec. 41), consisting of a 20-percent incremental component and a 20-percent university basic research component. For convenience, this explanation generally refers to these components as the incremental research credit and the university basic research credit.

²⁶ For this purpose, the term corporation does not include S corporations (sec. 1361(a)), personal holding companies (sec. 542), or service organizations (sec. 414(m)(3)).

²⁷ An educational organization is described in sec. 170(b)(1)(A)(ii) "if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on." The term includes public or private colleges and universities (Treas. Reg. sec. 1.170A-9(b)(1)).

Sec. 3304(f) defines "institution of higher education" as an educational institution which (1) admits as regular students only individuals having a certificate of graduation from a high school, or the recognized equivalent of such a certificate; (2) is legally authorized to provide a program of education beyond high school; (3) provides an educational program for it which awards a bachelor's or higher degree, or provides a program which is acceptable for full credit toward such a degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and (4) is a public or other nonprofit institution.

²⁸ The Act provides that in the case of any taxable year which begins before January 1, 1989, and ends after December 31, 1988, any amount for any base period with respect to such taxable year shall be the amount which bears the same ratio to such amount for such base period as the number of days in such taxable year before January 1, 1989, bears to the total number of days in such taxable year.

²⁹ Base-period expenditures for such years may be redetermined to exclude certain rental costs (see text accompanying note 21 above).

³⁰ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 231(f); H.Rep. 99-426, p. 185; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 76-77 (Conference Report).

³¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 283; H.Rep. 99-426, p. 230; Senate floor amendment, 132 Cong. Rec. S 7793 (June 18, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), p. 77 (Conference Report).

³² See also sec. 1879(b) of the Act, making certain changes to the definition of rare disease or condition in Code sec. 28(d)(1).

³³ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 221; H.Rep. 99-426, pp. 171-172; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 634; S.Rep. 99-313, pp. 256-257; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 78 (Conference Report).

³⁴ See, S. Rep. 1941, 84th Cong. 2d Sess., pp. 8-9 (1956).

³⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 224; H.Rep. 99-426, pp. 174-5; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 202(g); and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 79-80 (Conference Report).

³⁶ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 635; S.Rep. 99-313, pp. 257-9; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 80 (Conference Report).

³⁷See, e.g., Consolidated Freight Lines, Inc. v. Comm'r, 37 B.T.A. 576 (1938), affd, 101 F.2d 813 (9th Cir.), cert. denied, 308 U.S. 562 (1939) (denial of loss deduction attributable to loss of monopoly due to State deregulation of the interstate motor carrier industry); Monroe W. Beatty, 46 T.C. 835 (1966) (no deduction allowed for diminution in value of liquor license resulting from change in State law limiting grant of such licenses).

³⁸ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 225; H.Rep. 99-426, p. 175; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1707; S.Rep. 99-313, p. 882; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 81 (Conference Report).

³⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 232; H. Rep. 99-426, pp. 185-190; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1412; S.Rep. 99-313, pp. 752-756; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 82-83 (Conference Report).

⁴⁰ A technical correction may be necessary to clarify that--under this rule--the rehabilitation need not be completed pursuant to a written contract that was binding on March 1, 1986.

⁴¹ Similarly, property that qualifies for the 25-percent credit under a transitional rule is not subject to the full basis adjustment requirement. A technical correction may be needed to accomplish this result.

III. Title II.E.2. through Title II.F.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1413; S.Rep. 99-313, pp. 757-768; Senate floor amendment, 132 Cong. Rec. S8146-8158 (June 23, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 85-103 (Conference Report).

² United States General Accounting Office, Report to the Chairman, Joint Committee on Taxation, Rental Housing: Costs and Benefits of Financing with Tax-Exempt Bonds (GAO/RCED-86-2), February 1986.

³ Congress understood that in certain cases low-income rental housing tax credit projects would be owned indirectly through partnerships. Congress intended that Treasury Department regulations will include rules treating partnerships as if they were taxpayers where appropriate to carry out the objectives of the tax credit. Congress intended, for example, that the partnership be treated as the taxpayer for purposes of determining whether a building is new (sec. 42(i)(4)). Where a partner's interest changes during a taxable year, it is intended that each partner's distributive share of the tax credit be determined under general partnership allocation rules (see sec. 706), i.e., by the use of a method prescribed in Treasury Department regulations that takes into account the varying interests of the partners in the partnership during such taxable year.

⁴ As discussed below, a credit percentage equal to two-thirds of the credit percentage for the initial qualified basis is applicable to additions to qualified basis.

⁵ A technical amendment may be needed so that the statute reflects this intent and the intent of Congress that such an election would be binding on the taxpayer and all successors in interest.

⁶ Congress intended that the election to determine the credit percentage at the time a binding commitment for a credit allocation is received, described above, also apply in the case of credits attributable to rehabilitation expenditures (in excess of a prescribed minimum amount). A technical amendment may be needed so that the statute reflects this intent.

⁷ The adjusted basis is determined by taking into account the adjustments described in section 1016 (other than paragraphs (2) and (3) of sec. 1016(a), relating to depreciation deductions), including, for example, the basis adjustment provided in section 48(q) for any rehabilitation credits allowed under section 38.

⁸ See, however, the discussion below on single room occupancy housing as property eligible for the low-income housing credit.

⁹ A technical amendment may be needed so that the statute reflects this intent.

¹⁰ See, below, in the case of rehabilitation expenditures incurred in connection with the acquisition of an existing building that do not exceed the $2,000 per unit minimum.

¹¹ Congress intended that inherited property not be treated as being newly placed in service for purposes of the 10-year requirement. A technical amendment may be needed so that the statute reflects this intent.

¹² A technical amendment may be needed so that the statute reflects this intent.

¹³ A technical amendment may be needed so that the statute reflects this intent.

¹⁴ A technical amendment may be needed so that the statute reflects this intent.

¹⁵ A special set-aside requirement providing that 25 percent or more of the units are occupied by individuals with incomes of 60 percent or less of area median income is provided for New York City (see sec. 142(d)(6)).

¹⁶ Congress intended that for projects electing this stricter set-aside requirement the definition of gross rent is that used generally for purposes of the low-income credit. A technical amendment may be needed so that the statute reflects this intent.

¹⁷ Congress intended that if within 12 months of the date a first building is placed in service, (1) the first building does not meet the set-aside requirement with respect to the first building and (2) a second building is placed in service, then the project is a qualified low-income project if the set-aside requirement is satisfied with respect to both buildings within 12 months of the placed-in-service date of the first building. A technical amendment may be needed so that the statute reflects this intent. Congress intended that similar rules apply by Treasury Department regulations in the case of projects with more than two buildings.

¹⁸ Until the expanded requirement is met, the set-aside requirements determined by reference to all previously existing buildings must be continuously satisfied.

¹⁹ In the case of projects electing the deep-rent skewing set-aside, a tenant's income may increase to 70 percent more than the maximum qualifying income.

²⁰ A technical amendment may be needed so that the statute reflects this intent. Such an amendment was included in the versions of H. Con. Res. 395 which passed the House of Representatives and Senate in the 99th Congress.

²¹ Congress intended that the penalty under sec. 6652(j) shall apply for failure to provide such information. A technical amendment may be needed so that the statute reflects this intent.

²² Congress intended that the presence of corporate partners not disqualify the partnership from this special exception provided the partnership is at least 50 percent owned by at least 35 individual taxpayers. A technical amendment may be needed so that the statute reflects this intent.

²³ A technical amendment may be needed so that the statute reflects this intent.

²⁴ A technical amendment may be needed so that the statute reflects this intent. Credits allocated pursuant to an earlier binding commitment are counted against the State's annual credit authority limitation in the calendar year of the allocation.

²⁵ A technical amendment may be needed so that the statute reflects this intent.

²⁶ This exception was enacted in the Omnibus Budget Reconciliation Act of 1986, P.L. 99-509.

²⁷ A technical amendment may be needed so that the statute reflects this intent.

²⁸ A technical amendment may be needed so that the statute reflects this intent.

²⁹ The Act contains a general rule preventing the allocation of credit authority to buildings placed in service after 1990. Congress intended that tax-exempt bond-financed projects be treated in the same manner as other projects. and are not eligible for the credit if placed in service after 1990. A technical amendment may be needed so that the statute reflects this intent. Such an amendment was included in the versions of H. Con. Res. 395 which passed the House of Representatives and Senate in the 99th Congress.

³⁰ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 13; H.Rep. 99-426, pp. 190-195; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 104 (Conference Report).

III. Title III.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 241; H.Rep. 99-426, pp. 196-197; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 401 and 402; S.Rep. 99-313. pp. 169-170; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 105-106 (Conference Report).

² The Act includes a conforming amendment to Code section 170(e)(1)(B), relating to certain charitable contributions of property. Under prior law, the deduction for contributions by individuals of unrelated-use tangible personal property, or of any appreciated property donated to certain private nonoperating (grant-making) foundations, essentially was limited to the donor's basis in the property plus the excludable amount of any long-term capital gain which would have been realized if the property had been sold. (The deductible amount for such contributions by corporations also is limited.) In conformity to the repeal of the capital gains exclusion for individuals, the Act essentially limits the deductible amount of such contributions by individuals to the donor's basis in the property. (A related change is made to the deductible amount of such contributions by corporations.) No change is made to the reduction rule in section 170(e)(1)(A) for contributions of ordinary-income property or to the exception to the reduction rule in section 170(e)(5) for contributions of qualified appreciated stock to certain private foundations. Under the Act (as under prior law), the amount of charitable deduction allowable to an itemizer for a donation of stock to a public charity equals (for regular tax purposes) the full fair market value of the stock at the time of the donation if the donor has held the stock for the long-term capital gain holding period, or the donor's basis in the stock if the donor has not held the stock for the long-term capital gain holding period (Code section 170(e)).

³ For legislative background of the provision, see: H.R. 3838 as reported by the House Committee on Ways and Means on December 7, 1985, secs. 301 and 302; H.Rep. 99-426, pp. 231-233; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 106-107 (Conference Report).

⁴ Congress intended the application of the alternative tax to long-term capital gain to depend solely on when gain is properly taken into income under the taxpayer's method of accounting. Thus, for example, the alternative tax rates applicable to a particular item of long-term capital gain under these provisions (28 percent or 34 percent, as the case may be) determines the alternative tax on such gain. However, in determining whether such alternative tax is less than the tax otherwise payable, the otherwise applicable rules of section 15 of the Code shall apply in determining the section 11 rates in the case of a corporate taxpayer whose taxable year includes but does not begin on July 1, 1987. (See Title VI, Part A).

⁵ For legislative background of the provision, see: H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 411; S.Rep. 99-313, p. 171; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 107 (Conference Report).

⁶ For legislative background of the provision, see: H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 422; S.Rep. 99-313, pp. 172-173; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 108 (Conference Report).

III. Title IV.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 921-922; H. Rep. 99-426, pp. 649-651; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 701-702; S. Rep. 99-313, pp. 264-265; Senate floor amendment, 132 Cong. Rec. S7827 (June 18, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 110-111 (Conference Report).

² For legislative background of the provision, see: H.R. 3838, as reported by the Committee on Ways and Means on December 7, 1985, sec. 923; H. Rep. 99-426, pp. 651-652; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 703; S. Rep. 99-313, pp. 266-267; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 111-112 (Conference Report).

³ Since other provisions of the Act (see Title III) eliminated the preferential rates applicable to individual and corporate capital gains, after 1986 the principal effect of this provision on gains is to prevent a taxpayer from offsetting the gains against capital losses.

⁴ Thus, land that has been converted could become eligible for section 1231 treatment in the hands of, for example, a subsequent purchaser or legatee, provided the purchaser or legatee has used the property only for nonfarming purposes.

⁵ For legislative background of the provision, see: H.R. 3838, as reported by the Subcommittee on Finance on May 29, 1986, sec. 704; S.Rep. 99-313, pp. 267-270; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 114 (Conference Report).

^5a Under the Act, farming syndicates (as defined under secs. 464 of prior law) are now required to use the accrual method of accounting. (See, new sec. 448.)

⁶ Generally these are the expenses reported on Schedule F of the taxpayer's Federal income tax return. Farm expenses do not include costs that must be inventoried or capitalized, e.g., the purchase price of an animal purchased for subsequent resale.

⁷ Prepaid expenses of taxpayers eligible for one of these exceptions may be deducted to the same extent as under prior law, without regard to the 50-percent limitation.

⁸ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 706; S.Rep. 99-313, pp. 271-272; Senate floor amendment, 132 Cong. Rec. S7827 (June 18, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 115-116 (Conference Report).

⁹ The amount of a taxpayer's insolvency is the excess of its liabilities over the fair market value of its assets.

¹⁰ The reduction in basis is limited to the excess of the aggregate bases of the taxpayer's property over the taxpayer's aggregate liabilities immediately after the discharge.

¹¹ As under prior law, discharges of nonrecourse "loans" made by the Commodity Credit Corporation in connection with governmental crop price support programs, or other similar transactions that in substance constitute a sale of a farm product, are not within the scope of section 108 and hence are ineligible for relief under this provision.

¹² A technical amendment may be necessary to clarify that this was the intended operation of the gross receipts test.

¹³ A technical amendment may be necessary to conform the Congress' intent that the relief for solvent farmers be as described above.

¹⁴ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 251 and 262; H. Rep. 99-426, pp. 200-20 213-215; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 71 716; S. Rep. 99-313, pp. 280-282: and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 120-125 (Conference Report).

¹⁵See, Treas. Reg. sec. 1.612-4 (pertaining to oil and gas wells) and sec. 1.612-5 (pertaining geothermal wells).

¹⁶ An integrated oil company, for purposes of this provision, is any producer that is not an independent producer (as defined for the purposes of percentage depletion (sec. 613A) and the crude oil windfall profit tax).

¹⁷ Because percentage depletion deductions are limited to 50 percent of net income from the property, deductions which reduce net income (e.g., the deduction for expensed exploration costs) may reduce the value of percentage depletion to the taxpayer.

¹⁸ The prior law rule limiting the expensing of foreign exploration costs where cumulative expensed exploration costs exceed $400,000 (sec. 617(h) of prior law) remains in effect for costs paid or incurred prior to the effective date.

¹⁹ For legislative background of the provision, see: H.R. 3838 as reported by the House Committee on Ways and Means on December 7, 1985, sec. 253; H. Rep. 99-426, pp. 204-208; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 122 (Conference Report.)

²⁰ The 65-percent limitation, and the limitations imposed by the 1975 legislation (discussed below), do not apply to geothermal wells.

²¹ For legislative background of the provision, see: H.R. 3838 as reported by the House Committee on Ways and Means on December 7, 1985, sec. 261; H. Rep. 99-426, pp. 211-213; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 125-126 (Conference Report).

²² For legislative background of the provision, see: H.R. 3838 as reported by the House Committee on Ways and Means on December 7, 1985, secs. 243 and 262; H. Rep. 99-426, pp. 198-199; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 123-124, 126 (Conference Report).

²³ While generally conforming capital gain tax rates to the tax rates on ordinary income, the Act retains provisions of prior law relating to the capital gain/ordinary income distinction. (See Title III, above.)

²⁴ Where a property is placed in service before January 1, 1987, by a corporation and the property is transferred after 1986 to a second corporation filing a consolidated return with the transferor corporation, a subsequent disposition by the second corporation in a year in which the two corporations continue to file a consolidated return will not be subject to the new provision, so long as any additional depletion available to the group by reason of a stepped-up basis results in a corresponding current recognition of ordinary income (e.g., as in a deferred intercompany sale under Treas. Reg. 1.1502-13). The subsequent disposition outside the group will remain subject to the recapture of certain expensed IDCs as provided under prior law.

²⁵ For legislative background of this subtitle, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 271-275; H.Rep. 99-426, pp. 216-227; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 711-714; S. Rep. 99-313, pp. 274-279; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 128-133 (Conference Report).

²⁶ A technical correction may be needed so that the statute reflects this intent.

²⁷ See footnote 25 (above), under Business Energy Tax Credits, for legislative background.

²⁸ See footnote 25 (above), under Business Energy Tax Credits, for legislative background.

²⁹ See footnote 25 (above), under Business Energy Tax Credits, for legislative background.

III. Title V.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1401; S.Rep. 99-313, pp. 713-746; Senate floor amendment, 132 Cong. Rec. S8146-8158 (June 23, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 137-150 (Conference Report).

² In the case of an individual, a net capital loss of up to $3,000 was deductible. Net capital losses of corporations generally were not deductible.

³ Treasury Department, "Taxes Paid by High-Income Taxpayers and the Growth of Partnerships," reprinted in IRS Statistics of Income Bulletin (Fall 1985), beginning at page 55.

⁴ Total positive income was defined as the sum of salary, interest, dividends, and income from profitable businesses and investments, as reported on tax returns.

⁵ Other studies similarly reached the conclusion that tax shelters, by flowing through tax benefits to individuals with positive sources of income, permitted some taxpayers with sizeable economic incomes substantially to reduce their tax liabilities. See Joint Committee on Taxation, Tax Reform Proposals: Tax Shelters and Minimum Tax (JCS-34-85), August 7, 1985.

⁶ Gain of a C corporation, while generally not taxed to the shareholder prior to distribution, is taxed at the entity level upon recognition.

⁷ The at-risk rules of prior law, while important and useful in preventing overvaluation of assets, and in preventing the transfer of tax benefits to taxpayers with no real equity in an activity, were viewed as not addressing the adverse consequences arising specifically from such transfers to nonparticipating investors.

⁸ Gain recognized on a transfer of a partial interest in the passive activity, and gain (boot) on a tax-free transfer of an entire or partial interest, are treated as from a passive activity. Gain on such transfers may be offset by losses and credits from passive activities, but such transfers are not treated as dispositions triggering all suspended losses from the activity.

⁹ Such regulatory authority might appropriately address the general situation where an individual holds a limited partnership interest in an activity for which the individual (or spouse) performs personal services, and treatment of net income attributable to the limited partnership interest as income from a passive activity would permit sheltering of the type of positive income meant to be separated from passive losses under the provision. For example, unintended results could arise if net income from an activity were treated as passive where the taxpayer's interest in it is held partly, but not wholly, as a limited partner, and the activity is an integral part of his (or his spouse's) source of livelihood. Thus, the Treasury may provide in regulations that, in appropriate circumstances, a person who is both a general partner and a limited partner in a limited partnership is not treated as passive with respect to the limited partnership interest.

¹⁰ Under the at-risk rules as extended by the Act to the activity of holding real estate, the holding of real property includes the holding of personal property and the providing of services which are incidental to making real property available as living accommodations. Whether an activity constitutes the holding of real estate for purposes of the at-risk rules is not determinative of whether it constitutes a rental activity under the passive loss rule.

¹¹ However, as described in Part C, below, any passive losses allowed by reason of the phase-in of the passive loss provision reduce net investment income. Passive losses allowed on different grounds (e.g., disposition losses, or losses allowed by reason of the taxpayer's active participation in rental real estate activities) do not so reduce net investment income.

¹² A trust does not qualify for the allowance of up to $25,000 in losses and (deduction equivalent) credits from a rental real estate activity in which there is active participation, so that individuals cannot circumvent the $25,000 ceiling, or multiply the number of $25,000 allowances, simply by transferring various rental real properties to one or more trusts.

¹³ By contrast, losses (or credits) carried over from a year in which the taxpayer did actively participate, but that were not allowed against non-passive income in such year because they exceeded $25,000 (as reduced by the applicable AGI phaseout), are deductible (or allowable) under the $25,000 rule in a subsequent year, but only if the taxpayer is actively participating in the activity in such subsequent year.

¹⁴ Closely held C corporations that also constitute personal service corporations for purposes of the passive loss rule are subject to the rule in full, rather than to the more limited closely held rule.

¹⁵ See colloquy between Senators Johnston and Packwood, 132 Cong. Rec. S13958-9 (September 27, 1986), and statement of Mr. Rostenkowski affirming the colloquy at 132 Cong. Rec. E 3390 (October 2, 1986).

¹⁶ For example, net operating losses carried forward from taxable years prior to 1987 are not limited under the passive loss rule even though they may arise from activities that, once the provision becomes effective, are treated as passive activities.

¹⁷ Amounts at risk are reduced even if deductions which would be allowed under the at-risk rules are suspended under the passive loss rule. Similarly, basis is reduced as under present law, even in the case where deductions are suspended under the passive loss rule. However, if an amount at risk or basis has been reduced by a deduction not allowed under the passive loss rule, the amount at risk or basis is not again reduced when the deduction becomes allowable under the passive loss rule.

¹⁸ The allowability of foreign tax credits, however, is unaffected by the passive loss provision. Instead, foreign tax credits are limited solely by the various rules applying generally to such credits (e.g., the sec. 904 limitation, which is applied after determining the amounts of foreign source and worldwide income consistently with the application of the passive loss rule).

¹⁹ Credits that are subject to special limitations (e.g., the limitation on the use of research and development credits to offset certain unrelated income of the taxpayer) continue to be subject to such limitations when they cease to be limited by the passive activity rules.

²⁰ For purposes of determining the donee's loss in a subsequent transaction. however, the donee's basis may not exceed the fair market value of the gift at the time the donee received it. See, sec. 1015(a). As under prior law, losses attributable to unrealized depreciation in value of the property at the time of the gift are not deductible.

²¹ This rule does not apply, however, to permit the offset of suspended passive losses against dividends or other income or gain otherwise treated as portfolio income. In addition, following some transactions such as a sec. 1031 like-kind exchange, for example, the taxpayer may no longer have an interest in the original activity. Therefore, there is no special rule permitting suspended losses from the prior interest to be offset by income from the new activity, unless it, too, is a passive activity.

²² For example, suspended passive activity losses cannot be applied against portfolio income of a pass-through entity.

²³ The reason for this treatment is that the taxpayer could have deducted the suspended losses against income from the activity had the change in his relation to the activity not occurred. Although income from the activity may no longer be passive activity income, prior passive activity losses generated by that activity continue to be deductible against income from the activity. It would be inequitable to give less favorable treatment to a taxpayer whose income from an activity becomes active (i.e., not passive) than to one who continues to be merely a passive investor.

²⁴ Similarly, dividends paid by an S corporation that was formerly a C corporation, that are treated as derived from earnings and profits from a C corporation year under Code sec. 1368, are treated as portfolio income, even though the income or loss passed through to the S corporation shareholders would otherwise be treated as passive. Subpart F income that is included in the taxpayer's gross income under sec. 951 is likewise treated as portfolio income.

²⁵ For example, an interest deduction that is disallowed under sec. 265 should not be allowed, capitalized, or suspended under another provision.

²⁶ Similar considerations apply where a partnership makes a loan to a partner (e.g., to finance such partner's purchase of all or part of his interest in the partnership, and the interest expense may be treated as part of his passive loss).

²⁷ This rule is applied by considering services provided both by the taxpayer and by the taxpayer's spouse (whether or not such taxpayer and spouse file a joint return). Further, it is intended that in determining whether the taxpayer has materially participated throughout the year, all the facts and circumstances are to be taken into account. Thus, for example, if the taxpayer's involvement rises to the level of material participation in an activity on some, but not all, days during the year, but the taxpayer's involvement for the year as a whole is regular, continuous and substantial, then the taxpayer has materially participated for the year. Material participation is determined with respect to the activity for the entire period during the year that he owns an interest in the activity (not, e.g., prorated between periods of greater or lesser involvement). For example, the fact that a taxpayer takes vacations during the year can be fully consistent with a finding of material participation.

²⁸ The generally "active" nature of the above two undertakings is relevant, not only to the question of whether the taxpayer satisfies the material participation standard, but also to whether either of such two undertakings can be part of the same activity as any other undertaking. See sec. 5, infra.

²⁹ Examples of such evasion would include attempting to treat income that generally is regarded as not passive in nature (e.g., personal service income) as passive and accordingly as shelterable, or creating an unrealistically small separate "activity" in order to trigger suspended losses upon a partial disposition. Even absent the exercise of the Secretary's authority, items such as a guaranteed cash return or portfolio income from a limited partnership are not regarded as passive. Similarly, payments to a retiring partner under sec. 736 that are in the nature of income for past (or present) services, for example, are not regarded as passive.

^29A Section 469(e)(3) provides in any event that earned income is not taken into account in computing income or loss from a passive activity.

³⁰ For example, management decisions may be unimportant to the business where the tax benefits from the business outweigh any risk of economic loss that may result from the decisions.

³¹ Experience in applying existing legal standards confirms that a test based on participation in management is subject to manipulation and creates frequent factual disputes between taxpayers and the Internal Revenue Service. Sec. 464. for example, disallows prepaid expenses incurred in a farming activity if more than 35 percent of the loss from the activity is allocated to limited partners or persons who do not actively participate in management. As a result, farming activities that rely upon syndication to outside investors, and that are operated principally under the direction of an agent, have been structured so as to assist otherwise passive investors in demonstrating that they play a role in management decisions. While the Internal Revenue Service may argue in any such instance that an investor is not truly participating in management, such argument may be difficult to sustain in the absence of reliable direct evidence regarding the investor's independence of judgment. Congress expects that the material participation standard for purposes of the passive loss rule, in light of its focus on the taxpayer's role in actual operations, will not be similarly subject to manipulation and ambiguity.

³²See 132 Cong. Rec. S8244-46 (June 24, 1986) and S13958 (September 27, 1986) (colloquies between Senators Packwood and Hatfield).

³³ No special rule is provided for determining material participation by a trust. Prior and present law provide that, generally speaking, an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint venture for the conduct of business for profit (Treas. Reg. sec. 301.7701-4). A trust may be treated as an association taxable as a corporation, for tax purposes, if it is a joint enterprise for the conduct of business for profit. Thus, it is unlikely that a trust as such for Federal income tax purposes will be materially participating in a trade or business activity, within the meaning of the passive loss rule. In the case of a grantor trust, to the extent the grantor or beneficiary is treated as the owner for tax purposes (sec. 671), the material participation of the person treated as the owner is relevant to the determination of whether income or loss from an activity owned through the grantor trust is treated as passive in the hands of the owner. Similarly, in the case of a qualified electing Subchapter S trust (sec. 1361(d)(1)(B)) that is treated as a grantor trust (i.e., the beneficiary is treated as the owner for tax purposes), the material participation of the beneficiary is relevant to the determination of whether the S corporation's activity is a passive activity with respect to the beneficiary.

³⁴ For example, in the case of a rental real estate investor whose cash expenses with respect to the investment (e.g., mortgage payments, condominium or management fees, and costs of upkeep) exceed cash inflows (i.e., rent), tax losses other than those relating to depreciation may not be providing any cash flow benefit.

³⁵ For purposes of applying this standard, as with respect to material participation, services performed both by the taxpayer and by the taxpayer's spouse are considered (whether or not such individuals file a joint return). It is worth noting that, while standards requiring active management or active participation in management apply for certain purposes under prior law (see secs. 55(e), 464(e)(2)(b), and 2032A), these standards are not the same as the active participation standard described herein.

³⁶See Overview, supra.

³⁷ Since low-income housing and rehabilitation credits are allowable without re-participation, they are unaffected by this requirement.

³⁸ The active participation rules do not prevent a limited partner from receiving $25,000 of benefit with regard to the low-income housing or rehabilitation credit, since relief relating to such credits does not depend upon active participation.

³⁹ Determining the scope of an activity also is important with respect to the 10 percent ownership requirement for actively participating in a rental real estate activity, and in certain situations where the taxpayer disposes of an activity other than through a taxable transaction.

⁴⁰ By contrast, the at-risk rules, to the extent that they define "activity," address issues different from those that are relevant with respect to passive losses. See sec. 465(c)(2). The at-risk rules define "activity" in terms of narrow asset units, such as individual items of property, in light of the goal of such rules to establish a relationship between each such asset and financing attributable to it. In the passive loss context, unlike the at-risk context, financing is not the relevant issue.

⁴¹See Treas. Reg. sec. 1.183-1(d)(1). The provision in this regulation that a taxpayer's characterization of what constitutes an activity will be accepted unless it is unduly "artificial" does not apply with respect to the passive loss rule. While the Congress anticipated that artificial characterizations will be disregarded as a matter of course with respect to passive losses, there is no presumption that the taxpayer's characterization is correct even absent such "artificiality.

⁴² These special rules regarding limited partnership interests do not apply in the case of any such interest that, pursuant to the Secretary's special regulatory authority, is treated as not intrinsically passive (i.e., as passive only to the extent established by examination of the relevant facts and circumstances).

⁴³See sec. 6, infra, noting that, for the same reasons, a rental real estate undertaking, as well as a rental undertaking involving property other than real estate, each is treated as not part of the same activity as any other type of undertaking.

⁴⁴ Sec. 1372(e)(5) (as in effect prior to the Subchapter S Revision Act of 1982) applied principles that are relevant in determining whether significant services are performed in connection with furnishing property. For example, regulations applicable in interpreting that section provided that rents did not include payments for the use or occupancy of rooms where significant services were also rendered to the occupant (such as hotels and the like which furnish hotel services). The regulations further provided, "services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only. The supplying of maid service, for example, constitutes such services; whereas the furnishing of heat, light, ... the collection of trash, etc., are not considered as services rendered to the occupant.

⁴⁵ A rental activity generally does not include payments for the use of intangible property (e.g., stocks), or other payments more properly characterized as interest (e.g., for the use or forbearance of money).

⁴⁶See Treas. Reg. sec. 1.612-4(a), along with cases and rulings decided thereunder, such as Phillips v. Comm'r, 233 F. Supp. 59 (E.D. Tex. 1964), aff'd. per curium, (5th Cir.), 66-1 U.S.T.C. Paragraph 9157; Haass v. Comm'r, 55 T.C. 43 (1970), acq., 1971-2 C.B. 2; Cottingham v. Comm'r, 63 T.C. 695 (1975); Miller v. Comm'r, 78-1 U.S.T.C. paragraph 9127 (C.D. Cal. 1977); Rev. Rul. 68-139, 1968-1 C.B. 311.

⁴⁷ However, the fact that an interest is not treated as a working interest for purposes of the passive loss rules due to the taxpayer's form of ownership has no effect on whether it qualifies as a working interest for any other purpose under the Internal Revenue Code.

⁴⁸ This rule applies whether or not the working interest would have been treated as passive in the absence of the provision treating working interests as per se active, i.e., if material participation were relevant in this context.

⁴⁹ Phase-in relief applies only with respect to the percentage interest held by the taxpayer at all times after October 22, 1986. Thus, for example, if a taxpayer after October 22, 1986 reduces his interest in an activity from 50 percent to 25 percent, and subsequently purchases additional interests restoring his share to 50 percent, then only the 25 percent share held throughout qualifies for phase-in relief after such subsequent purchase.

⁵⁰See, 132 Cong. Rec. E3392, October 2, 1986 (statement of Mr. Rostenkowski).

⁵¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 401; H.Rep. 99-426, pp. 292-295; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1411; S.Rep. 99-313, pp. 747-751; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 134-136 (Conference Report).

⁵² The Tax Reform Act of 1976 (P.L. 94-455) applied the at-risk rule to four specific activities: (1) holding, producing, or distributing motion picture films or video tapes; (2) farming; (3) leasing of personal property; and (4) exploring for, or exploiting, oil and natural gas resources. The Revenue Act of 1978 (P.L. 95-600) extended the rule to all activities except real estate and certain equipment leasing engaged in by closely held corporations. The Deficit Reduction Act of 1984 (P.L. 98-369) created an exception for certain active businesses of closely held C corporations.

⁵³ Similar rules apply in the case of activities described in sec. 465(c)(2)(A) (which includes certain motion picture, farming, leasing, oil and gas and geothermal deposit activities).

⁵⁴ For special rules relating to the application of the credit at-risk rules to the low-income housing credit, see Title II, Part E, supra.

⁵⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 402; H.Rep. 99-426, pp. 296-301; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1421; S.Rep. 99-313, pp. 802-808; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 151-157 (Conference Report).

⁵⁶ Proposed Treas. Reg. sec. 1.57-2(b)(2)(i) implied that the interest would not be investment interest where the underlying assets are not investment assets. Compare Rev. Proc. 72-18, 1972-1 C.B. 740, sec. 4.05 (relating to sec. 265 of the Code), and sec. 163(d)(7); see H.R. Rep. No. 97-760, 97th Cong., 2d Sess. at 476-477 (1982).

⁵⁷ As under prior law, interest on indebtedness incurred to purchase an interest in a trade or business partnership as a general partner (that is not treated as an interest in a passive activity) generally is not treated as investment interest for purposes of sec. 163(d). See, e.g., Technical Advice Memorandum 8235004 (May 21, 1982). Similarly, it is intended that interest on indebtedness to acquire stock in an S corporation whose assets are used solely in conducting a trade or business, where the stock is not an interest in a passive activity because the taxpayer materially participates in the trade or business of the S corporation, is not investment interest, but rather is treated as interest incurred or continued in connection with a trade or business. In addition, interest treated as allocable to an interest in a partnership, or stock in an S corporation, that is treated as an interest in a passive activity under the passive loss rule (see discussion of the passive loss rule, supra), is not subject to the investment interest limitation (except to the extent such interest expense is allocated to portfolio income under the passive loss rule).

⁵⁸ A technical correction (deleting the flush language at the end of Act sec. 163(d)(4)(B)) may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 that passed the House and the Senate in the 99th Congress.

⁵⁹ Thus, for example, interest on debt to finance an employee business expense is not deductible, under this rule.

⁶⁰ Personal interest does not include interest on taxes, other than income taxes, that are incurred in connection with a trade or business. (For the rule that taxes on net income are not attributable to a trade or business, see Treas. Reg. sec. 1.62-1(d), relating to nondeductibility of State income taxes in computing adjusted gross income.) In addition, personal interest does not include interest of an S corporation which is attributable to an underpayment of income tax from a year in which the corporation was a C corporation or from the underpayment of the taxes imposed by sec. 1374 or 1375. Nor does personal interest include interest on an underpayment of income tax of a corporation payable by a shareholder by reason of transferee liability (under sec. 6901).

⁶¹ Generally, under local law such a security interest must be recorded.

⁶² See colloquy between Senators Bentsen and Packwood, 132 Cong. Rec. S13956 (September 27, 1986); and Statement of Chairman Rostenkowski, 132 Cong. Rec. H8363 (September 25, 1986).

⁶³ A principal residence may also include a houseboat or house trailer. See Treas. Reg. sec. 1.1034-1(c)(3).

⁶⁴ A technical correction may be needed so that the statute properly reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 that passed the House and the Senate in the 99th Congress.

⁶⁵ In the case of a home improvement loan, it is intended that the basis limitation under this provision will be adjusted to reflect the use of the loan proceeds for home improvements.

⁶⁶ A technical correction may be needed so that the statute properly reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 that passed the House and the Senate.

⁶⁷ For example, assume that, in 1987, the taxpayer has a passive loss of $80,000 of which $30,000 is attributable to rental real estate activities in which the taxpayer actively participates. Assuming the taxpayer is entitled to deduct $25,000 of active rental losses, then 35 percent of the remaining $55,000, or $19,250, would be suspended under the passive loss limitation. Of the deductible $35,750 of passive losses, the portion not attributable to active rental activities reduces the taxpayer's net investment income under the investment interest limitation for 1987.

That portion is determined by first calculating the ratio of (1) the amount of 1987 losses that are not attributable to rental real estate activities in which the taxpayer actively participates ($50,000) to (2) the amount of 1987 losses that are subject to the passive loss phase-in rule ($55,000). The ratio is applied to the total amount of passive losses allowed in 1987, other than those allowed under the $25,000 allowance ($35,750), to determine the portion allowed under the passive loss phase-in rule. This portion (i.e., $32,500) is subtracted from the amount of net investment income, under the investment interest limitation phase-in rule.

III. Title VI.A. through Title VI.K

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 301; H.Rep. 99-426, pp. 231-233; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 601; S.Rep. 99-313, pp. 219-221; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 158-159 (Conference Report).

² Under prior and present law, rules are provided in the Code to prevent the benefits of graduated rates from being proliferated through the use of multiple, commonly controlled corporations (secs. 1551, 1561-1564). Other statutory provisions attempt to limit the use of corporations to avoid the imposition of individual income tax. These are principally the accumulated earnings tax (sec. 531 et seq.), the personal holding company tax (sec. 541 et seq.), and certain personal service corporation provisions (sec. 269A).

³See Treas. Reg. sec. 1.21-1(b).

⁴ 181 is the number of days in the calendar year 1987 prior to July 1; 184 is the number of days in the calendar year 1987 on or after July 1.

⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 303; H.Rep. 99-426, pp. 243-246; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 611; S.Rep. 99-313, pp. 221; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 161 (Conference Report).

⁶ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 313; H.Rep. 99-426, p. 247; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 612; S.Rep. 99-313, p. 222; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 162 (Conference Report).

⁷ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 314; H.Rep. 99-426, pp. 248-249; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1985, sec. 613; S.Rep. 99-313, pp. 222-224; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 168-169 (Conference Report).

⁸ See, e.g., Jim Walter Corp. v. United States, 498 F. 2d 631 (5th Cir. 1974); Markham & Brown, Inc. v. United States, 648 F.2d 1043 (5th Cir. 1981); H. & G. Industries v. Comm'r, 495 F.2d 653 (3d Cir. 1974); Harder Services. Inc. v. Comm'r, 67 T.C. 585 (1976), affd without opinion 573 F.2d 1290 (2d Cir. 1977).

⁹ See, e.g., Proskauer v. Comm'r, 46 T.C.M. 679, 684 (1983), noting that the Five Star court may have applied the "primary purpose" standard that was often used in determining whether the expenditure was capital in nature before the Supreme Court's rejection of that standard in Woodward v. Comm'r, 397 U.S. 572 (1970).

¹⁰ See Woodward v. Comm'r, supra; United States v. Hilton Hotels Corp., 397 U.S. 580 (1970).

¹¹ Thus, the provision was intended to apply where the costs are incurred indirectly as well as directly, for example, by a controlling shareholder, a controlled subsidiary, or other related party.

¹² See secs. 535, 545, 556, 852. and 857.

¹³ See Rev. Rul. 73-463, 1973-2 C.B. 34.

¹⁴ This would be so whether the employment contract and the redemption agreement were contained in one document or separate documents, and whether or not they were separately negotiated. Likewise, this provision was not intended to deny an employer a deduction for compensation where a deduction has been deferred under other provisions of the Code, and the deduction becomes allowable when the employer reacquires the employee's stock. See, e.g., sections 83 and 421(b).

¹⁵Compare American International Coal Co. v. Comm'r, PH Memo TC para. 82,204 (1982) (corporation's payment to shareholder-employee was nondeductible distribution in redemption of stock, not compensation for services) with Atwater & Co. v. Comm'r, 10 T.C. 218 (1948) (corporation's payment to shareholder-employee under agreement to repurchase shares upon termination of employment, held, deductible to extent represented additional compensation for services).

¹⁶ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 614; S. Rep. 99-313, pp. 248-250; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 163-166, (Conference Report).

¹⁷ Although the shareholder in such transactions was exposed to the risk that the value of the stock would decline during the one-year holding period, taxpayers continued to engage in such transactions. Given the substantial potential tax benefit, the apparent premise for the more than one year holding period requirement of prior law--that the shareholder's exposure to market risk during this period would be sufficient to deter such tax arbitrage--in many situations appeared to be unfounded.

¹⁸ It is understood that liquidation preference for this purpose and for other purposes of the provision does not include dividend arrearages, if any.

¹⁹ If the dividend were 3 percent paid quarterly, it would not be an extraordinary dividend under the general rule and no basis reduction would be required.

²⁰ Congress intended that there will be a presumption, rebuttable by clear and convincing evidence, that this characterization of the distribution is correct. Congress anticipated that the Treasury Department may require the taxpayer to disclose on its return the fact that it is taking a contrary position and its reasons for doing so.

²¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 321; H. Rep. 99-426, pp. 250-273; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 621; S. Rep. 99-313, pp. 224-248; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 170-196 (Conference Report).

²² H.R. Rep. No. 1337, 83d Cong., 2d Sess. 27 (1954).

²³ The legislative history of the 1976 Act amendments to section 382--discussed below--specifically provided that Libson Shops would have no application to years governed by those amendments. See S. Rep. 938, 94th Cong., 2d Sess. p. 206 (1976).

²⁴ Prior law section 368(a)(3)(D)(ii) provided nonrecognition treatment to thrift reorganizations that would otherwise qualify as G reorganizations, provided the Federal Home Loan Bank Board, the Federal Savings and Loan Insurance Corporation ("FSLIC"), or an equivalent State authority certified that the thrift was insolvent, could not meet its obligations currently, or would be unable to meet its obligations in the immediate future.

²⁵ 343 F.2d 713 (9th Cir. 1965).

²⁶Cf. Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179 (1942) ("When the equity owners are excluded and the old creditors become the stockholders ..., it conforms to reality to date [the creditors] equity ownership from the time when they invoked the processes of the law to enforce their rights of full priority").

²⁷ Unless specifically identified as a taxable year, all references to any period constituting a year (or multiple thereof) means a 365-day period (or multiple thereof).

²⁸ The regulatory authority provided by section 382(g)(3)(B) should not be construed to limit the scope of section 382(g)(4)(C), as augmented by section 382(m)(5). See discussion in text following Example 8, supra.

²⁹ A different result would occur if the public offering were performed by an underwriter on a "firm commitment" basis, because the underwriter would be a 5-percent shareholder whose percentage of stock (66.67 percent) has increased by more than 50 percentage points over the lowest percentage of stock owned by the underwriter at any time during the testing period (0 percent prior to public offering). See Rev. Rul. 78-294, 1978-2 C.B. 141.

³⁰ The attribution rules apply to stock or other interests in a manner consistent with the basic definition of an ownership change under the Act. Thus, section 318 is applied only to "stock" that is taken into account for purposes of section 382 . For example, assume a corporation owns both common stock and stock described in section 1504(a)(4) of a type which is not counted in determining whether there has been an ownership change (referred to as "pure preferred") in a holding company. The pure preferred represents 55 percent of the holding company's value. The holding company's only asset consists of 100 percent of the common stock--the only class outstanding--in an operating subsidiary that is a loss corporation. The sale of the pure preferred would not constitute an ownership change because no stock in the loss corporation may be attributed through such stock. On the other hand, assume 100 percent of the stock in a loss corporation is transferred in a section 351 exchange, in which the loss corporation's sole shareholder receives pure preferred representing 51 percent of the transferee's value, and an unrelated party receives 100 percent of the transferees common stock. Here, an ownership change would result with respect to the loss corporation.

Similar rules would apply where a loss corporation is owned directly or indirectly by a partnership (or other intermediary) that has outstanding ownership interests substantially similar to a pure preferred stock interest.

³¹ The Act contemplates that regulations may provide rules to allow a widely held loss corporation to establish the extent if any, to which there is overlapping stock ownership between an acquiring widely held corporation and such loss corporation.

³² Thus, except as provided in regulations, the stock underlying an option or other interest subject to the rule in section 382(1)(3)(A)(iv) may be taken into account on and after the date on which the interest is acquired or is later transferred, for purposes of determining whether an ownership change occurs following any transaction (including such acquisition or transfer). It is expected that the Treasury Department may consider whether there are circumstances in which it may be appropriate to limit the operation of this rule to transactions occurring during any three-year testing period that includes the date the option or other interest is issued or transferred.

³³ The types of rights to acquire stock that are subject to this rule thus may extend beyond those rights that have been treated as options under section 318(a)(4) as applied for other purposes. For example, it is intended that a right to acquire unissued stock of a corporation would (except as provided in regulations) be treated as exercised if an ownership change would result, without regard to how such a right may have been treated under section 318(a)(4). Compare Rev. Rul. 68-601, 1968-2 C.B. 124; J. Milton Sorem v. Commissioner, 335 F.2d 275 (10th Cir. 1964); W.H. Bloch v. United States, 261 F. Supp. 597 (S.D. Tex. 1967), aff'd per curium, 386 F.2d 531 (5th Cir., 1968). It is expected that Treasury will exercise its regulatory authority, however, to prevent the use of this rule in appropriate cases--as one example, where options or other interests subject to the rule are issued shortly after a corporation has incurred a de minimis amount of loss.

³⁴ The rules described above aggregate all less-than-5-percent shareholders of any corporation. These aggregation rules are to be applied after taking into account the attribution rules. In the above example, the old loss corporation and new loss corporation are properly treated as the same corporation. Thus, even though L does not survive the reorganization, Public/L is properly treated as a continuing 5-percent shareholder of Newco, the new loss corporation. The same result would be appropriate if the transaction had been structured as a reverse triangular merger under section 368(a)(2)(E).

³⁵ It was intended that the redemption provisions would apply to transactions that effectively accomplish similar economic results, without regard to formal differences in the structure used, or the order of events by which similar consequences are achieved. Thus, the fact that a transaction might not constitute a "redemption" for other tax purposes does not determine the treatment of the transaction for purposes of this provision. As one example, a "bootstrap" acquisition, in which aggregate corporate value is directly or indirectly reduced or burdened by debt to provide funds to the old shareholders, could generally be subject to the provision. This may include cases in which debt used to pay the old shareholders remains an obligation of an acquisition corporation or an affiliate, where the source of funds for repayment of the obligation is the acquired corporation. See section 382(m)(4), relating to corporate contractions.

³⁶ Similarly, Section 382 does not provide relief for built-in income other than gain on disposition of an asset.

³⁷ For example, a supervisory conversion of a mutual thrift into a stock thrift qualifying under section 368(a)(3)(D)(ii), followed by an issuance of stock for cash, would come within this special rule. The issuance of stock would not be regarded as a second ownership change for purposes of the bankruptcy exception.

³⁸ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in H. Con Res. 395 as passed by the House and Senate in the 99th Congress. Also, under a literal interpretation of the statute, in order to meet the requirements of section 1504(a)(2), the shareholders and creditors of the old loss corporation must meet the 20-percent test in terms of value and voting power. New section 382(1)(5)(F)(ii)(III) provides a rule for determining the deemed value, but there is no similar rule for measuring voting power. It was not intended that the voting power requirement would apply in this situation to cause a failure of the 20 percent test solely because deposits do not carry adequate voting power. A technical correction may be needed so that the statute reflects this intent.

^38a A reorganization pursuant to a 1986 plan is thus treated under the Act as if the reorganization (and any ownership change resulting from the plan) occurred in 1986 when the plan was adopted. Other shifts in ownership in 1987 before completion of a 1986 plan are not protected.

³⁹ The Congress intended the May 6, 1986 date to apply for purposes of determining whether an ownership change occurred after May 5, 1986 but before January 1, 1987.

⁴⁰ A technical correction may be needed so that the statute reflects this intent.

^41a No inference is intended as to how pre-May 6, 1986 options or other interests would be treated.

⁴¹See Floor statements by Mr. Rostenkowski, 132 Cong. Rec. H8363 (September 25, 1986) and 132 Cong. Rec. E 3390 (October 2, 1986); and Senators Dole and Packwood, 132 Cong. Rec. S 13958 (September 27, 1986).

⁴² For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 331; H.Rep. 99-426, pp. 274-291; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 198-207 (Conference Report).

⁴³General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935).

⁴⁴ Taxable gain may result on disposition of property even if the property's economic value remains constant (or decreases) over the taxpayer's holding period, due to tax depreciation and other downward adjustments to basis. The term "appreciated property" as used herein refers to property whose fair market value or sales price exceeds its adjusted (and not necessarily its original) basis in the hands of the transferor corporation.

⁴⁵ Unless otherwise indicated, all section references in this section ("Prior Law") are to the Internal Revenue Code of 1954, as in effect immediately prior to the effective date of the amendments made by the Act.

⁴⁶ 284 U.S. 1 (1931).

⁴⁷ 324 U.S. 331 (1945).

⁴⁸ 338 U.S. 451 (1950).

⁴⁹ Id. at 454-455.

⁵⁰ This exception for partial liquidations is discussed below under the heading "Nonliquidating distributions".

⁵¹ Treas. Reg. sec. 1.311-1(a).

⁵² The statute (sec. 311(d)(1)(A)) by its terms applied only to "distribution[s] to which subpart A [of subchapter C, part I] applies ...."

⁵³ See secs. 311(d)(2)(A) and 302(b)(4) and (e). The Treasury Department was granted regulatory authority to prevent taxpayers not eligible for this special partial liquidation treatment from obtaining these benefits through the use of section 355, 351, 337, or other provisions of the Code or the regulations (sec. 346(b)).

⁵⁴ Sec. 311(e)(3).

⁵⁵ Sec. 311(e)(2)(B)(i).

⁵⁶ Sec. 311(d)(2)(B).

⁵⁷ Sec. 311(d)(2)(C), (D), (E).

⁵⁸ In the case of a distribution of property that was subject to a liability that was not assumed by the shareholder, the gain recognized was limited to the excess of the property's fair market value over its adjusted basis (sec. 311(c)). If the liability was nonrecourse, however, fair market value was treated as being not less than the amount of the liability (sec. 7701(g)).

⁵⁹ Sec. 311(b). Under the last-in, first-out or "LIFO" method of accounting, goods purchased or produced most recently are deemed to be the first goods sold. "FIFO" (first-in, first-out) accounting assumes that the first goods purchased or produced are the first goods sold. The LIFO recapture and installment obligation rules were applied before the recognition rules of section 311(d)(1).

⁶⁰ Sec. 453B. Installment obligations received by a corporation in a sale or exchange qualifying for nonrecognition under section 337 could be distributed to shareholders without recognition at the corporate level. Sec. 453B(d)(2).

⁶¹ Sec. 453B(d).

⁶² A shareholder would under the subchapter S rules be entitled to a basis increase equal to the amount of gain recognized by the corporation.

⁶³ These rules applied not just to corporate distributions but to sales and other dispositions of property, other than in tax-free reorganizations.

⁶⁴ In the case of sales or exchanges of property in taxable transactions, the effect of this provision was to convert a portion of what would otherwise be capital gain into ordinary income. In the case of nonrecognition transactions, the effect was to require recognition of gain that would otherwise have gone unrecognized.

⁶⁵ Sec. 1245(a)(5). See also sec. 291(a), subjecting a portion of the straight-line depreciation on real estate to recapture in the case of corporations.

⁶⁶ It was possible for gain on sales of capital or section 1231 assets in a section 337 liquidation of a collapsible corporation to be eligible for taxation at capital gains rates. A sale in liquidation could produce corporate level income that eliminated the collapsible status of the corporation, so that the shareholders were eligible for capital gains treatment on any gain realized on relinquishment of their shares in the liquidation.

⁶⁷ Prior to TEFRA, a step-up could be achieved through a partial liquidation of the target as well as a complete liquidation under sections 332 and 334(b)(2).

⁶⁸ Exceptions are provided for assets acquired in the ordinary course of business, acquisitions in which the basis of property is carried over, and other asset acquisitions as provided in regulations.

⁶⁹ See, e.g., Bliss Dairy v. United States, 460 U.S. 370 (1983) and Tennessee Carolina Transportation, Inc. v. Commissioner, 65 T.C. 440 (1975), aff'd 582 F.2d 378 (6th Cir. 1978) (liquidating distribution of previously expensed items); Estate of Munter v. Commissioner, 63 T.C. 663 (1975) (sale of previously deducted items pursuant to plan of liquidation).

⁷⁰Bliss Dairy, supra.

⁷¹E.g., Commissioner v. First State Bank, 168 F.2d 1004 (5th Cir.), cert. denied, 335 U.S. 867 (1948) (a decision rendered prior to the enactment of sec. 311): Siegel v. United States, 464 U.S. 891 (1972), cert. dism'd, 410 U.S. 918 (1973).

⁷² The price of this basis step up was, at most, a single, shareholder-level capital gains tax (and perhaps recapture, tax benefit, and other similar amounts). In some cases, moreover, payment of the capital gains tax was deferred because the shareholder's gain was reported under the installment method.

⁷³ See secs. 311 and 336 as amended by the Act. See also 361 as amended by the Act.

⁷⁴ In amending section 311 in 1984, Congress determined that the existence of a carryover basis in the hands of a corporate distributee, even where the distributee was a member of the same affiliated group, did not justify nonrecognition for nonliquidating distributions. Nonliquidating distributions present opportunities for selective transfer of gain or loss that were not believed to be present in a corporate liquidation qualifying for relief. See, H. Rep. 98-861 (June 23, 1984), p. 821.

⁷⁵ As discussed above, section 338(h)(10) permits an election under which the selling corporation's gain on the sale of its subsidiary's stock is ignored, and gain is recognized by the subsidiary as if it had sold its assets in a taxable sale and then liquidated in a section 332 liquidation.

⁷⁶ Distributions of subsidiary stock may qualify for nonrecognition at both the corporate and shareholder levels if the requirements of section 355 are met. However, specific statutory requirements, including a five-year active business test, must be met before section 355 is applicable.

⁷⁷ See also section 7701(g) of the Code, providing that an identical rule for nonrecourse debt applies with respect to any Code provision (including secs. 336 and 311) in which the amount of gain realized with respect to certain transfers or dispositions is determined by specific reference to the fair market value of the property directly or indirectly disposed of. Treas. Reg. secs. 1.1001-1 and 1.1001-2 also provide generally for the treatment of transfers in which recourse or nonrecourse liabilities are involved. As under these provisions, Congress did not intend to require that any liabilities incurred by reason of the acquisition of property that were not taken into account in determining the transferor's basis for such property be taken into account in determining the amount of gain or loss under this provision.

⁷⁸ Congress anticipated that, in a consolidated return context, the Treasury Department will consider whether aggregation of ownership rules similar to those in sec. 1.1502-34 of the regulations should be provided for purposes of determining a corporation's status as an 80-percent distributee.

⁷⁹ See sec. 336(d)(3) of the Code, as amended by the Act.

⁸⁰ A technical correction may be needed so that the statute reflects this intent.

⁸¹ Section 361 provides rules governing the treatment of certain distributions in a reorganization. Under amended section 361, sections 336 and 337 do not apply to distributions of property pursuant to a plan of reorganization.

⁸² A technical correction may be needed so that the statute reflects this intent.

⁸³ A technical correction may also be needed to clarify that the distributing corporation recognizes gain but not loss on a distribution of boot in these circumstances.

⁸⁴ See, e.g., section 482 and Treas. Reg. section 1.482-1(d)(5); National Securities Corp. v. Comm'r, 137 F.2d 600 (3d Cir. 1943), aff'g 46 B.T.A. 562 (1942), cert. denied, 320 U.S. 794 (1943) (loss on sale by subsidiary of securities transferred by parent in nonrecognition transaction reallocated to parent, where purpose of transfer was to shift unrealized loss on securities to subsidiary); Court Holding Co. v. U.S., 324 U.S. 321 (1945) (corporation treated as true seller of property distributed to shareholders and purportedly sold by them to third party); and Gregory v. Helvering, 293 U.S. 465 (1935) (in addition to meeting literal requirements of statute, transaction must have valid business purpose to qualify for nonrecognition).

⁸⁵ This was intended to refer to a person having a relationship to the distributing corporation that is described in section 267(b).

⁸⁶ The effect of the rule is to deny recognition to the liquidating corporation of that portion of the loss on the property that accrued prior to the contribution, but to permit recognition of any loss accruing after the contribution. In the event that a transaction is described both in section 336(d)(1) and section 336(d)(2), section 336(d)(1) will prevail.

This provision was not intended to override section 311(a). Thus, if property is distributed in a nonliquidating context, the entire loss (and not merely the built-in loss) will be disallowed.

⁸⁷ A technical correction may be needed so that the statute reflects the intention that recapture in the year of liquidation is required unless regulations provide otherwise.

⁸⁸See footnote 87, supra.

⁸⁹ For the particular purposes of this built-in gain tax under new section 1374, Congress intended the term "disposition of any asset" to include not only sales or exchanges but other income-recognition events that effectively dispose of or relinquish the taxpayer's right to claim or receive income. For instance, the term "disposition of any asset" for purposes of this provision will include the collection of accounts receivable by a cash method taxpayer and the completion of a long-term contract performed by a taxpayer using the completed contract method of accounting.

⁹⁰ Congress intended that the recognized built-in gains taken into account for any taxable year shall not exceed the excess, if any, of (a) the net unrealized built-in gain at the time of the conversion, over (b) the amount (if any) by which recognized built-in gains for prior taxable years beginning in the recognition period exceed recognized built-in losses for such years.

⁹¹ A technical correction may be needed so that the statute reflects this intent in the case of capital loss carryovers and similar items.

⁹² The Act provides in the case of a sale or distribution of stock of a subsidiary by a qualifying parent corporation, that under regulations "such corporation" may make the election. Congress did not intend to require the election to be made unilaterally. Compare section 338(h)(10).

⁹³ These special rules do not apply, however, for purposes of the transitional rules based on pre-August 1, 1986, action.

⁹⁴ For purposes of these transitional rules generally, transactions described in section 336 or 337 of prior law include complete liquidations and the related distributions, sales or exchanges described in those sections.

⁹⁵ As an example, if prior to November 20, 1985, the company had entered a letter of intent specifying that either substantially all the assets of the company will be sold to a particular purchaser or purchasers for a particular price, or that all the stock of the company will be sold to such persons (who may then liquidate the corporation or make a section 338 election), it will generally be considered that the requisite shareholder or board approval of a transaction described in section 337 of prior law occurred if the contract to sell assets was in fact entered and the corporation liquidates in a transaction described in section 337 before 1988. The same transaction could qualify under the transitional rule for an offer to acquire stock if the contract to sell stock were entered into (and the purchaser made a section 338 election with respect to a pre-1988 acquisition date, or liquidated the corporation before 1988).

⁹⁶ If the "acquisition date" under section 338 occurs before the relevant transition date, the prior law provision allowing additional stock to be purchased within a year after the section 338 "acquisition date" is also available. Thus, if there is a qualified stock purchase of 80 percent of the stock of a qualified corporation on December 1, 1986, followed by purchase of the remaining 20 percent on February 1, 1987, the nonrecognition percentage for purposes of section 337 of prior law would be 100 percent. See section 338(c)(1) and Prop. Treas. Reg. section 1.338-4T(k)(5).

⁹⁷ For purposes of the transition provisions, if a corporation was a C corporation at any time before December 31, 1986, any "S" status of such a corporation prior to its "C" corporation status is disregarded in determining whether under the statute the first taxable year for which the corporation is an S corporation is pursuant to an S election made after December 31, 1986.

⁹⁸ See Act section 633(d).

⁹⁹ A technical correction may be needed to clarify that the election need only be made (not become effective) by this date. Such a correction was included in H. Con. Res. 395 as passed by the House and Senate in the 99th Congress.

¹⁰⁰ A technical correction may be needed so that the statute reflects this intent.

¹⁰¹ See Act section 633(d)(5)(A).

¹⁰² A technical correction may be needed so that the statute reflects the holding period requirement. A similar correction was included in H. Con. Res. 395 as passed by the House and Senate in the 99th Congress.

Congress intended that, where stock passes to an estate, the holding period of the estate includes that of the decedent. Also, it was intended that the "look-through" attribution rules, generally applicable where stock is held by an entity, would not apply in the case of trusts qualifying under section 1361(c)(2)(ii) or (iii) just as they do not apply under the statute in the case of estates. Thus, stock held by such entities, like stock held by an estate, is to be treated as held by a single qualified person, so that the 10 shareholder test will not cease to be satisfied merely because a decedent's stock passes to such a trust. (In the case of other trusts holding stock, it was intended that the "look-through" attribution rules would apply to determine whether more than 10 qualified persons ultimately own stock.) It was also intended that the holding period of a decedent's estate (or a 1361(c)(2)(ii) or (iii) trust) would be tacked with that of a beneficiary who would have been treated as "one person" with the decedent under the applicable attribution rules. Technical corrections may be needed so that the statute reflects such intent.

In the case of indirect ownership attributed through another entity (for example, a corporation or a partnership) Congress did not intend the rules of section 1223 to apply in all cases for purposes of determining the holding period of the qualified person. In such cases, the qualified person's holding period is the lesser of (1) the period during which the entity held the stock in the qualified corporation, or (2) the period during which the qualified person held the interest in the entity. In the case of holdings through tiers of entities, similar rules apply at each level in determining the holding period of intermediate entities. A technical correction may be necessary so that the statute reflects this intent.

¹⁰³ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 632; S. Rep. 99-313, pp. 251-255; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 208-209 (Conference Report).

¹⁰⁴ Williams v. McGowan, 152 F.2d 570 (2d Cir. 1945).

¹⁰⁵See, e.g., Ullman v. Comm'r, 264 F. 2d 305 (2d Cir. 1959), Comm'r v. Danielson, 378 F. 2d 771 (3d Cir. 1967) cert. den. 389 U.S. 858.

¹⁰⁶ The adversity of the parties' tax interests is deemed to be evidence supporting the validity of the allocation against an Internal Revenue Service challenge. Compare, Black Industries, Inc., 38 TCM 242 (1979) in which the Tax Court concluded that a portion of the price was properly allocable to nondepreciable going concern value even though the parties had specifically allocated all of the price to other assets. The Tax Court observed that the parties did not as a practical matter have adverse tax interests and accordingly, the court was justified in "carefully scrutinizing the merits of the allocation." 38 TCM 242 at 253.

¹⁰⁷ For example, the allocation could affect the amount of income recognized under the tax benefit doctrine or other judicial exceptions to section 337. It could also affect the amount of LIFO recapture with respect to inventory and the amount of additional inventory gain if the bulk sale exception of section 337 did not apply.

¹⁰⁸ See Treas. Reg. sec. 1.167(a)-5.

¹⁰⁹ As described in A.R.M. 34, 2 C.B. 31 (1920), superseded by Rev. Rul. 68-609, 1968-2 C.B. 327.

¹¹⁰ This assumed rate of return is the rate prevailing on the valuation date in the industry in which the business is classified, adjusted to reflect the risk involved in the particular business.

¹¹¹ Here, too, the rate must reflect the riskiness of the particular business.

¹¹² Rev. Rul. 68-609, supra.

¹¹³E.g., Banc One Corp. v. Comm'r, 84 T.C. 476 (1985); Jack Daniel Distillery v. United States, 379 F.2d 569 (Ct.Cl. 1967); Black Industries, Inc. v. Comm'r, 38 T.C.M. 242 (1979). Compare Concord Control Inc. v. Commissioner, 78 T.C. 742 (1982) (in which the Court stated that it was rejecting the residual method of valuation because of the difficulty of ascertaining other fair market values, but nevertheless based its approach on a finding of such values). The residual method is also applied in computing the value of goodwill under generally accepted accounting principles. A.P.B. Opinion Nos. 16 and 17 (November 1, 1970).

¹¹⁴ Some taxpayers referred to Rev. Rul. 77-456, 1977-2 C. B. 102, although that ruling did not involve a purchase for a price other than the value of all the assets. The ruling involved a purchase price that was stated to represent the fair market value of all the corporate assets at the time of purchase, and addressed only the issue of allocating basis under section 334(b)(2) when there were post-acquisition changes in asset value occurring prior to the liquidation of the acquired target. See also United States v. Cornish, 348 F.2d 175 (9th Cir. 1965), a case involving the valuation of partnership assets in the context of a sale of partnership interests. The court there found that a "premium" had been paid, but was able to identify the items to which it was attributable--one, the value of certain partners' future services, and the other, the value of an interest element in a deferred purchase price that the law at the time did not require be accounted for as interest. It nevertheless allowed amounts attributable to these items to be allocated to other assets apparently because it concluded that the partners' services were not an "asset" that was purchased, and that it had no mechanism to treat the interest element as interest.

¹¹⁵ Prop. and Temp. Treas. Reg. sec. 1.338(b)-2T.

¹¹⁶ The proposed and temporary regulations apply to all stock acquisitions occurring after August 31, 1982. However, the Internal Revenue Service has amended the regulations to provide an election for acquisitions occurring before January 30, 1986. A taxpayer making this "transitional allocation election" may allocate basis according to the allocation rules applicable on the acquisition date when a group of assets are acquired for a lump-sum purchase price. See Temp. and Prop. Reg. sec. 1.338(b)-4T (June 27, 1986).

¹¹⁷ Congress intended to endorse the use of the residual method and generally to apply the same method regardless of whether the transfer took the form of a stock transfer or an asset transfer. It did not intend to preclude the Treasury Department from making changes to the final regulations, not inconsistent with the statutory purpose.

¹¹⁸ Thus, Congress intended the residual method to be used in determining the fair market value of partnership assets for purposes of applying the provisions of section 755 of the Code dealing with basis allocation in partnership transactions.

¹¹⁹ For legislative background of the provision, see: Senate floor amendment, 132 Cong, Rec. S 8216-8 (June 24, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), p. 210 (Conference Report).

¹²⁰ Congress intended the provisions denying installment sale treatment, as well as the provisions denying capital gains treatment, to apply to transactions between partnerships that have a relationship described in section 707(b)(2)(B). A technical amendment may be needed so that the statute reflects this intent with respect to installment sales.

¹²¹ This basis provision applies not only to contingent payments as to which the fair market value may not be reasonably ascertained but also to any other amount in an installment sale of depreciable property between related parties. A technical correction may be needed so that the statute reflects this intent. Such a correction was included in H.Con.Res. 395 as passed by the House and Senate in the 99th Congress.

¹²² For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S8286 (June 24, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), p. 211.

¹²³ See also sec. 1803 of the Act (which conforms the calculation of bond premium to that of original issue discount, consistent with the treatment of bond premium as interest).

¹²⁴ See also sec. 132 of the Act (amortizable bond premium is not subject to the two-percent floor applicable to miscellaneous itemized deductions).

¹²⁵ See sec. 1803 of the Act.

¹²⁶ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 8216-8218 (June 24, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), p. 249 (Conference Report).

III. Title VI.L. through Title VI.P.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1405; H.Rep. 99-426, pp. 868-870; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 1703 and 1704; S.Rep. 99-313, pp. 890-892; and H.Rep. 99-841. Vol. II (September 18, 1986), pp. 212-213 (Conference Report).

² For legislative background of the provision, see: H.R. 3838. as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1406; H.Rep. 99-426, pp. 870-875; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1302; S.Rep. 99-313, pp. 708-711; and H.Rep. 99-841, Vol. II (September 18, 1986). pp. 247-248 (Conference Report).

³ Under section 1222 of the Act, a corporation would be treated as a foreign personal holding company if either more than 50 percent of its stock, in value or voting power, was held by the requisite number of shareholders, and if the other applicable requirements were met.

⁴ For purposes of this computation, any deduction specifically allowable under any section of the Code other than section 162 may not be treated as allowable under section 162.

⁵ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 633; S.Rep. 99-313, pp. 260-262; Senate floor amendment, 132 Cong. Rec. S8206-S8207 (June 24, 1986); and H.Rep. 99-841, Vol. II (September 18. 1986), pp. 242-246 (Conference Report).

⁶See Union Trusteed Funds v. Commissioner, 8 T.C. 1133 (1947), acq. 1947-2 C.B. 4; Rev. Rul. 56-246, 1956-1 C.B. 316.

⁷ The Congress understood that in applying this rule, the period ending October 31, of each calendar year would be treated as the taxpayer's taxable year for purposes of the capital loss carryover provisions and for purposes of the year-end straddle and mark-to-market rules.

⁸ Although the statutory definition of the grossed up required distribution seems to require computations of a RIC's income and distributions beginning with the commencement of the RIC's existence, it is anticipated that RICs will be able to derive the proper grossed up required distribution without taking into account periods prior to the first taxable year of the RIC ending before January 1, 1987. In general, after taking into account the spillover dividend, all income for all taxable years ending before January 1, 1987, would either have been distributed to shareholders or taxed to the RIC, and thus would be treated as distributed amounts under section 4982(c). In calculating these amounts, the Congress intended that proper adjustments will be made for periods in which the corporation did not qualify as a RIC.

⁹ Thus, a RIC that has a taxable year ending on November 30, may treat such dividends as having been paid prior to December under section 855(a).

¹⁰ The Congress intended that any such regulations would prevent avoidance of tax, particularly in circumstances where a RIC takes advantage of the rule in order to pay return of capital dividends in the following taxable year, or to offset the tax that would be incurred on capital gains recognized in the following year.

¹¹ The Congress intended that the definition of securities for this purpose would have the same meaning as the definition of securities as clarified for purposes of section 851(b)(2). A technical correction may be necessary to reflect this intention.

¹² A technical correction may be necessary to reflect this intention.

¹³ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 1431-1438; S.Rep. 99-313, pp. 769-782; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 214-221 (Conference Report).

¹⁴ The amount of the dividends paid deduction is computed without regard to the amount of dividends attributable to such income, however.

¹⁵ This requirement is considered to be met if it is satisfied for 335 days out of a 12 month taxable year or a proportionate part of a shorter taxable year.

¹⁶ A corporation at least 50 percent of whose stock is held directly or indirectly by or for five or fewer individuals at any time during the last half of its taxable year is treated as a personal holding company if at least 60 percent of its ordinary adjusted gross income for the taxable year comprises personal holding company income (sec. 542). The entity is required to keep records for the purpose of determining actual ownership of interests in the entity for this purpose. See Treas. Reg. sec. 1.857-8.

¹⁷ Commitment fees relating to an agreement to make loans which would be secured by real property also are treated as qualifying income.

¹⁸ Gains on the sale of interests in a REIT would not qualify if such interests were treated as property held for sale to customers in the ordinary course of business.

¹⁹E.g., six months for property acquired after June 22, 1984 and before January 1, 1988.

²⁰ The allocation of rent to the real and personal properties under a lease generally is based on the relative adjusted bases of the leased properties. If the rent attributable to personal property under this allocation is greater than 15 percent of the total rent under the lease, then all rent attributable to personal property from the lease will be treated as nonqualifying income.

²¹ Similar rules apply in determining whether interest income is treated as qualifying income.

²² This requirement is 90 percent for taxable years beginning before January 1, 1980.

²³ This requirement is 90 percent for taxable years beginning before January 1, 1980.

²⁴ Amounts counted toward the 75-percent requirement are only amounts that qualify for the dividends paid deduction for the current year. Therefore, any spillover dividends or deficiency dividends (which relate only to a prior year) are not counted toward this 75-percent requirement.

²⁵ For this purpose, the amount of the adjustment would include adjustments attributable both to ordinary income and capital gains. However, no interest and penalties are assessed in the event of the late designation of a capital gains dividend where the amount was distributed previously as an ordinary income distribution.

²⁶ P.L. 98-369.

²⁷ The Congress intended that any entity that is treated as a corporation within the meaning of section 7701(a)(3) may qualify as a REIT subsidiary.

²⁸ In the case of the shareholder REIT ceasing to be treated as a REIT, the Congress intended that the transfer would be deemed to take place as of the first day of the first taxable year in which the entity's REIT status ceases.

²⁹ Nevertheless, the REIT would continue to be required to meet the "95 percent income test" including income from the new equity capital. For this purpose, the Congress intended that the term "debt instrument" is to have the same meaning as under section 1275(a)(1).

³⁰ Thus, for example, rents based on the net income of a tenant of the REIT who provides services to its subtenants, which services a REIT would be required to provide through an independent contractor in order for the REIT to be treated as receiving rents from real property, could not be treated as rents from real property by the REIT unless the tenant provides such services through a contractor that is independent with respect to the tenant.

³¹ A technical correction may be necessary to achieve this result.

³² The Congress intended that the provisions of section 1223 are to be taken into account for purposes of determining the holding period of the person holding the secured property.

³³ The Congress intended that the REIT's holding period of the obligation to which the shared appreciation provision relates (and not the obligor's holding period of the secured property if longer than the REIT's holding period) must be at least four years for the safe harbor to apply.

³⁴ Thus, for example, in the case of a REIT using the accrual method of accounting, the provision would apply in the case of a section 467 rental agreement only to the extent that the income required to be recognized under section 467 exceeded the amount of income that the taxpayer would include under the accrual method if section 467 did not apply.

³⁵ A technical correction may be necessary so that the statute reflects this intent.

³⁶ The computation of REITTI would take into account the change made by the Act, which would permit the deduction of the REIT's net loss from prohibited transactions, as described below.

³⁷ Although the statutory definition of the grossed up required distribution seems to require computations of a REIT's income and distributions beginning with the commencement of the REIT's existence, it is anticipated that REITs will be able to derive the proper grossed up required distribution without taking into account periods prior to the first taxable year of the REIT ending before January 1, 1987. In general, after taking into account spillover dividends, all income for all taxable years ending before January 1, 1987 would either have been distributed to shareholders or taxed to the REIT, and thus would be treated as distributed amounts under section 4981(c). In calculating these amounts, the Congress intended that proper adjustments will be made for periods in which the corporation did not qualify as a REIT.

³⁸ The Congress intended that any such regulations would prevent the avoidance of tax, particularly in circumstances where a REIT takes advantage of the rule in order to pay return of capital dividends in the following taxable year, or to offset the tax that would be incurred on capital gains recognized in the following year.

³⁹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 1441-1445; S.Rep. 99-313, pp. 783-801; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 222-241 (Conference Report).

⁴⁰ In some cases, persons other than the transferors are treated as owners of the trust's assets.

⁴¹ Certain corporations may be treated as complete or partial conduit entities, however. See discussion of S corporations and real estate investment trusts, below.

⁴² Under prior law, an individual generally was allowed to exclude from taxable income up to $100 of dividends per year ($200 for a joint return) (sec. 116), and corporations were entitled to a dividends received deduction for 85 or 100 percent of dividends received (secs. 243-245). Section 612 of the Act repeals the limited dividend exclusion for individuals, and section 611 of the Act reduces the 85 percent dividends received deduction for corporations to 80 percent.

⁴³ A partnership is treated as an entity separate from its partners for purposes of calculating items of taxable income, deduction, and credit. It also is treated as an entity for purposes of reporting information to the Internal Revenue Service.

⁴⁴ See discussion of entity classification, below.

⁴⁵ An S corporation may be subject to tax at the entity level under certain limited circumstances.

⁴⁶ A deficiency dividend procedure was added to the REIT provisions as part of the Tax Reform Act of 1976 so that a REIT, acting in good faith but failing to satisfy the distribution requirement, could avoid disqualification. In addition, section 668 of the Act imposes an excise tax that is intended to ensure that a REIT distributes most of the income earned in a calendar year during that year.

⁴⁷ In addition. section 651 of the Act imposes an excise tax that is intended to ensure that a RIC distributes most of the income earned in a calendar year during that year.

⁴⁸ See discussion of entity classification, below.

⁴⁹ Treas. Reg. sec. 301.7701-2(a).

⁵⁰Id.

⁵¹ Treas. Reg. sec. 301.7701-2(a)(2).

⁵² Treas. Reg. sec. 301.7701-4(a).

⁵³ Treas. Reg. sec. 301.7701-4(b).

⁵⁴ Treas. Reg. sec. 301.7701-4(c).

⁵⁵ United States v. Midland-Ross Corp., 381 U.S. 54 (1965); see also Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134 (1974).

⁵⁶ Prior to 1982, the OID rules applied only to a limited class of obligations. The Tax Equity and Fiscal Responsibility Act of 1982 and the Tax Reform Act of 1984 greatly expanded the number and types of obligations to which the OID rules apply.

⁵⁷ Presently, only stock or securities traded on an established securities market are treated as publicly traded. However, section 1803(a)(10) of the Act grants the Treasury Department authority to issue regulations treating as publicly traded other property "of a kind regularly traded on an established market."

⁵⁸ Under proposed Treasury regulations, different accrual periods may be required. See Prop. Treas. Reg. sec. 1.1272-1(d).

⁵⁹ The premise of the OID rules is that, for Federal income tax purposes, an obligation issued at a discount should be treated like an obligation issued at par requiring current payments of interest. Accordingly, the effect of the OID rules is to treat the borrower as having paid semiannually to the lender the interest accruing on the outstanding principal balance of the loan, thereby permitting the borrower to deduct as interest expense and requiring the lender to include in income such interest which has accrued but is unpaid. The lender then is deemed to have lent the accrued but unpaid interest back to the borrower, who in subsequent periods is deemed to pay interest on this amount as well as on the principal balance. This concept of accruing interest on unpaid interest is commonly referred to as the "economic accrual" of interest, or interest "compounding."

⁶⁰ See sec. 1271(b)(1). In addition, obligations issued before July 2, 1982, by an issuer other than a corporation or a government (or political subdivision thereof) do not qualify for capital gains treatment. See sec. 1271(b)(2).

⁶¹ The constant interest rate method results in smaller amounts being treated as accrued market discount in the earlier years.

⁶² A lower rate of tax may be imposed pursuant to a treaty.

⁶³ Temp. Treas. Reg. sec. 35a.9999-5(a) (Q & A 1).

⁶⁴ Temp. Treas. Reg. sec. 35a.9999-5(d) (Q & A 20).

⁶⁵Id.

⁶⁶ In absence of the provision of adequate rules for the taxation of the various interests, the Congress believed that the treatment of multiple class trusts provided by Treas. Reg. sec. 301.7701-4(c) is an appropriate treatment of such entities.

⁶⁷ The Congress intended that stripped coupons and stripped bonds (within the meaning of sec. 1286) may be treated as qualifying mortgages if the bonds (within the meaning of sec. 1286) from which such stripped coupons or stripped bonds arose would have been qualified mortgages. The Congress also intended that interests in grantor trusts would be treated as qualified mortgages, to the extent that the assets of the trusts that holders of the beneficial interest therein are treated as owning, would be treated as qualifying mortgages. In addition, the Congress intended that interests in qualifying mortgages in the nature of the interests described in Treas. Reg. sec. 301.7701-4(c)(2)(Example 2), and loans principally secured by stock of a tenant-stockholder of a cooperative housing corporation would be treated as qualifying mortgages. Nevertheless, except for regular interests in a REMIC, Congress did not intend that debt obligations that are secured primarily by other debt obligations would be treated as qualified mortgages even where such other debt obligations are secured primarily by interests in real property. A technical correction may be necessary to reflect this intention.

⁶⁸ For this purpose, the Congress intended that a defective qualified mortgage generally would have the same meaning as that used for purposes of determining the ability of a grantor trust that holds mortgages to substitute those mortgages without losing its status as a grantor trust for Federal income tax purposes. Thus, for example, a defective qualified mortgage is a qualified mortgage with respect to which there is a default or threatened default by the obligor.

⁶⁹ Congress intended that property would not fail to be considered to be held for investment, solely because the REMIC holds the property for these reasons.

⁷⁰ The status of an interest as a regular interest in this case does not depend on whether the subordinated regular interest is sold or retained.

⁷¹ See text accompanying nn. 84-87, infra.

⁷² The Congress intended that a holder of a mortgage should not be permitted to recognize loss where mortgages are indirectly transferred to a REMIC. Thus, the Congress intended that no gain or loss would be recognized, for example, if pursuant to a plan, mortgages are sold by one taxpayer to another, and the buyer transfers the purchased mortgages to a REMIC in which interests are purchased by the initial seller of the mortgages.

⁷³ The Congress intended that the Treasury regulations may provide that the basis of qualified mortgages held by the REMIC in certain circumstances may be determined based on the fair market value of such mortgages at a reasonable time prior to transfer to the REMIC where such mortgages were purchased by the transferor solely for the purpose of transfer to the REMIC.

⁷⁴ Thus, for example, if a REMIC is formed by issuing regular and residual interests for cash and the REMIC subsequently purchases qualified mortgages from a holder of a residual interest, such holder would be treated as transferring the qualified mortgages to the REMIC in exchange for regular and residual interests and then having sold all the interests other than those held at the time of the sale. Moreover, the allocation of basis between the regular and residual interests should reflect the relative fair market values of such interests as if the formation had actually taken place by transferring mortgages in exchange for the regular and residual interests.

⁷⁵ Withholding also may be required with respect to certain amounts without actual payment to foreign holders, however. See text accompanying nn. 86-87, infra.

⁷⁶ For purposes of subtitle F of the Code (relating to certain administrative matters) the REMIC is treated as a partnership in which residual interests are the partnership interests, however. The Congress intended that the initial election of REMIC status is to be made on the first partnership information return that the REMIC is required to file.

⁷⁷ The Congress intended that payment by the obligor on a debt instrument is not to be considered to be a disposition of such debt instrument for these purposes.

⁷⁸ The Congress intended that periodic payments of interest (or similar amounts) are to be treated as accruing pro rata between the dates that such interest (or similar amounts) is paid.

⁷⁹ In the event that the amount so determined exceeds the income of the REMIC, however, there is no diminution of the required inclusions for such holders.

⁸⁰ For this purpose, the Congress intended that the fair market value of the property is to be determined by reference to the fair market value of the regular interests received in exchange.

⁸¹ The Congress understood that the taxable income allocated to holders of residual interests in a REMIC who purchased such interests from a prior holder after a significant change in value of the interest, could be substantially accelerated or deferred on account of any premium or discount in the price paid by such purchaser. Accordingly, the Congress recognized that certain modifications of the rules governing taxation of holders of residual interests may be appropriate where the method of taxation of holders of residual interests prescribed by the Act has such consequences.

⁸² The Congress intended that no gain or loss is recognized to the REMIC on the exchange of regular or residual interests in the REMIC for property. In addition, the Congress understood that the treatment of deductions allowable under section 212 will be addressed in Treasury regulations. In this regard, the Congress intended that such deductions would be allocated to all holders of interests in REMICs that are similar to single-class grantor trusts under present law. However, the Congress intended that such deductions would be allocated to the holders of the residual interests in the case of other REMICs.

⁸³ I.e., the exception provided for thrift institutions in section 860E(a)(2) would not be available in these circumstances.

⁸⁴ The Congress intended that these regulations may apply in appropriate cases to residual interests issued before regulations are issued.

⁸⁵ The Congress intended that withholding upon disposition of such interests is to be similar to withholding upon disposition of debt instruments that have original issue discount.

⁸⁶ The Congress intended that these regulations may apply in appropriate cases to residual interests issued before regulations are issued.

⁸⁷ The Congress intended that the treatment of a holder to whom amounts merely are credited would be the same as if amounts actually were distributed.

⁸⁸See discussion of prohibited transactions, above.

⁸⁹See sec. 1803(a)(13) of the Act.

⁹⁰ If 95 percent of the assets of the REMIC would be treated as qualifying assets at all times during a calendar year then the entire regular or residual interest is so treated for the calendar year.

⁹¹ A technical correction may be necessary to clarify the treatment of income from a REMIC taken into account by a REIT.

⁹² If 95 percent of the assets of the REMIC would be treated as real estate assets at all times during a calendar year, then the entire regular or residual is so treated for the calendar year.

⁹³ In computing the accrual of OID (or market discount) on qualified mortgages held by the REMIC, only assumptions about the rate of prepayments on such mortgages would be taken into account.

⁹⁴ The Congress intended that in the case of publicly offered instruments, a prepayment assumption will be treated as unreasonable only in the presence of clear and convincing evidence. In addition, the Congress intended that in determining whether a prepayment assumption is reasonable, the nature of the debt instruments on which prepayments are being assumed, and the availability of information about prepayments thereon, will be taken into account. Thus, for example, under currently prevailing conditions, the Congress understood that there should be less tolerance in the evaluation of prepayment assumptions relating to pools of home mortgages than prepayment assumptions relating to pools of commercial mortgages.

⁹⁵ For this purpose, the Congress intended that debt instruments that may have the same stated maturity but different rights relating to acceleration of that maturity, are to be treated as having different maturities. In addition, the Act provides that to the extent provided in Treasury regulations, equity interests of varying classes that correspond to differing maturity classes of debt are to be treated as debt for these purposes.

⁹⁶ For example, certain arrangements that are commonly known as "Owners' Trusts" would be treated as TMPs under the Act.

⁹⁷ If a portion of a REIT is treated as a TMP, such portion may qualify as a REIT subsidiary (see sec. 662 of the Act).

⁹⁸ But see section 860E(a)(2).

⁹⁹ If the REIT has a REIT subsidiary that is a TMP, then the Congress intended that the portion of the REIT's income that is subject to the special rules is determined based on calculations made at the level of the REIT subsidiary.

¹⁰⁰ The Congress intended that in the case of REMICs issued after December 31, 1986, such REMICs and the holders of interests therein would be governed by the provisions of the Act regardless of the taxable years of the holders.

III. Title VII.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 501; H.Rep. 99-426, pp. 302-328; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1101; S.Rep. 99-313, p] 515-540; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 250-284 (Conference Report).

² A taxpayer's regular tax meant the taxes imposed by chapter 1 of the Code (other than the alternative minimum tax, the investment credit recapture tax (sec. 47), the taxes applicable in some instances for annuities (sec. 72(m)(5)(B) and 72(q)), lump sum distributions from qualified pension plans (sec. 402(e)), individual retirement accounts (sec. 408(f)), and certain trust distributions (sec. 667(b)), reduced by all nonrefundable credits including the foreign tax credit.

³ Moreover, in the case of intangible drilling costs, a taxpayer (other than a limited partner or a passive subchapter S shareholder) could elect to forego the expense deduction and claim five-year ACRS and the investment tax credit instead. A taxpayer making this election was not subject to the minimum tax on these items.

⁴ Since this limitation applied only to itemized deductions for interest expenses, it generally had no effect on interest deductions that were claimed "above-the-line," such as business interest and interest attributable to the production of rents and royalties. Interest to carry limited partnership interests and S corporation stock was treated as an itemized deduction, however.

⁵ Where a corporation's tax base is measured by something other than taxable income, such as unrelated business taxable income, real estate investment trust taxable income, or life insurance company taxable income, alternative minimum taxable income is determined using that tax base. A technical correction may be appropriate to clarify this result.

⁶ A taxpayer's regular tax means the regular tax liability as defined in section 26(b) reduced by the foreign tax credit. It does not include the tax on lump sum distributions under section 402(e) or the recapture taxes under sections 42 and 47. In addition, it is intended that the regular tax be reduced for this purpose by the possessions tax credit under section 27(b) since income eligible for the credit is not in the minimum tax base. A technical correction will be needed to achieve this result.

⁷ As a technical matter, alternative minimum taxable income is computed by making adjustments to taxable income, rather than adjusted gross income, as under prior law, in order to conform the structure of the individual minimum tax with the corporate minimum tax.

⁸ However, "structural" issues such as whether there has been a taxable event, or whether a particular nonrecognition provision applies, generally are determined identically for regular tax and minimum tax purposes (disregarding, e.g., the situation where a nonrecognition applies only to gains, or only to losses, and a gain or loss, as the case may be, exists only for regular tax, or only for minimum tax, purposes).

⁹ Due to the complexity and additional recordkeeping burdens that may result in some cases from such alternative computations, the Treasury may find it appropriate to prescribe regulations that ease compliance. Congress intended that the Treasury have some flexibility in prescribing regulations in this area, to the extent consistent with the intended substantive results.

¹⁰ The alternative depreciation system applies with respect to property leased by a taxable entity to a tax-exempt entity, property placed in service outside of the United States, in measuring depreciation for purposes of determining earnings and profits, and under an election to use the system for regular tax purposes.

¹¹ Alternative deductions typically exceed ACRS deductions in the later years of the useful life of an item of property for which ACRS is allowed; i.e., at such time the ACRS deduction typically is understated because it has been overstated in prior taxable years.

¹² Property placed in service after 1986 to which the anti-churning rules of section 168(f)(5) apply is subject to the new minimum tax depreciation rules.

¹³ As a transition rule, property grandfathered under the depreciation rules (by reason of section 203 or 204 of the Act) is treated for purposes of the depreciation preference as property placed in service prior to 1987. For property that is depreciated under the new ACRS rules during a taxable year of the taxpayer that begins before 1987, it is intended that the new minimum tax depreciation rules apply to measure amount of the preference for such taxable year, but the preference only applies to property to which the prior law rules of section 57(a)(12) applied and the old minimum structure (e.g., no minimum tax credit) continues to apply for such taxable year. A technical correction may be necessary to achieve this result.

¹⁴ Because the Act allows a basis adjustment for the amount of the preference, it is intended that the preference apply where there is an early disposition of the stock causing income to be increased in the year of disposition by reason of section 421(b). A technical correction may be appropriate to clarify this result.

¹⁵ Under this rule, it is possible for a taxpayer to have a passive loss under one system but not under the other. For example, assume that the above taxpayer's deductions with respect to passive activities equaled $80,000 for regular tax purposes and $40,000 for minimum tax purposes. The taxpayer would have regular taxable income of $200,000, a suspended passive loss of $30,000 for regular tax purposes, alternative minimum taxable income of $210,000, and no suspended passive loss for minimum tax purposes.

¹⁶ Financial statement income generally will include the amount of any interest received by the taxpayer that otherwise is exempt from taxation (e.g., interest described in section 103).

¹⁷ A technical correction may be appropriate to clarify this result.

¹⁸ Thus, for example, a consolidated return does not include foreign companies or section 936 corporations, which cannot be consolidated for tax purposes. Corporations that are not included in the taxpayer's consolidated group income tax return may themselves be subject to this preference. In the case of a corporation that is eligible for the section 936 credit, however, book income is adjusted to remove any amount that meets the requirements of section 936(a)(1)(A) or (B) as discussed below.

¹⁹ A technical correction may be necessary to achieve this result.

²⁰ The ability to compute adjusted net book income using tax accounting rules is limited by the requirement that there be no duplications or omissions. For example, a taxpayer computing net book income using tax accounting rules would still be required to include as adjusted net book income interest that is exempt from tax under section 103. Otherwise, an omission of income would result.

²¹ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in H.Con. Res. 395 as passed by the House and Senate in the 99th Congress.

²² It was intended that only interest qualifying as qualified residence interest for purposes of the regular tax would qualify as such for purposes of the minimum tax. A technical correction may be necessary to achieve this result.

²³ It is intended that pre-1987 preferences deferred under old section 56(b) that reduce minimum tax NOL's are not to be treated as exclusion preferences for this purpose.

²⁴ This can happen, for example, upon the sale of an item of depreciable property with respect to which allowable regular tax depreciation exceeded allowable minimum tax depreciation. For taxable years prior to the year of the sale, by $100,000, since minimum tax basis for the item exceeds regular tax basis by $100,000, the taxpayer has $100,000 more of gain for regular tax than for minimum tax purposes.

²⁵ Certain other transitional rules also apply with regard to the minimum tax treatment of investment tax credits. Where relevant in applying these transitional rules, the megawattage of an electric generating unit is determined with reference to the Summary Information Report (NUREG-0871, Vol. No. 4, Issue Date: October 1985), published by the U.S. Nuclear Regulatory Commission.

²⁶ A technical correction may be appropriate to clarify the computation of the credit limitation (under section 38(c)(3)) where the taxpayer has both regular investment tax credits and other credits included in the general business credit.

²⁷ In the absence of sufficient other tax credits, the corporation could use minimum tax credits arising by reason of the adjusted net minimum tax imposed in prior taxable years to reduce its net tax liability to not less than $4 million.

²⁸ As discussed above, a dividend paid by a section 936 corporation to its parent corporation may be included in alternative minimum taxable income, by increasing the amount of the parent's adjusted net book income or adjusted current earnings. In such a case, a certain amount of foreign taxes paid with respect to such dividends and paid by the 936 corporation that are treated as paid by the parent (under the principles of section 902) are allowed to be taken as a foreign tax credit for alternative minimum tax purposes.

²⁹ Net operating losses that are not allowed in a particular taxable year because they excess 90 percent of alternative minimum taxable income for the year may be carried over to other taxable years, in accordance with the rules of section 172(b).

³⁰ A technical correction may be needed so that the statute properly reflects this intent. Such a correction was included in H.Con.Res. 395 as passed by the House and Senate in the 99th Congress.

³¹ In the absence of this rule, the general transitional rule for investment tax credits would permit the taxpayer to use investment tax credits in the amount of $62,500, i.e., 25 percent of tentative minimum tax liability (as determined after the use of net operating losses and foreign tax credits).

³² As described in Title II of this part, normative elections are also allowed with respect to depreciation.

³³ For example, if a RIC or REIT distributes all its pre-dividend taxable income in each taxable year, it is intended that the minimum tax adjustments and preferences be apportioned to the shareholders and beneficiaries since the adjustments and preferences either reduced or increased the entity's taxable income and therefore the amount of the dividend. Where any shareholder or beneficiary incurs a minimum tax attributable to deferral items, that shareholder or beneficiary may use the minimum tax credit in future years to offset regular tax under usual rules. Where the RIC or REIT distributes more or less than its taxable income in a taxable year, the Treasury Department is to prescribe regulations providing rules for apportioning the preferences and adjustments.

III. Title VIII.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 902; H. Rep. 99-26, pp. 604-609; H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 321; S. Rep. 99-313, pp. 118-119; and H. Rep. 99-841, Vol. II, (September 18, 1986), pp. 285-289 (Conference Report).

² A technical correction may be needed to reflect this intention.

^2a A technical correction may be needed to reflect this intention.

³ A technical correction may be needed to reflect this intention.

⁴ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 901; H. Rep. 99-426, pp. 598-604; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 290-292 (Conference Report).

⁵ The 11 categories in the Consumer Price Index are food and beverages; housing, maintenance and repair commodities; fuels (other than gasoline); house furnishings and housekeeping supplies; apparel commodities; private transportation (including gasoline); medical care commodities; entertainment commodities; tobacco products; toilet goods and personal care appliances; and school books and supplies. The 15 categories in the Producers Price Index are farm products; processed food and feeds; textile products and apparel; hides, skin, leather, and related products; fuels and related products and power; chemicals and allied products; rubber and plastic products; lumber and wood products; pulp, paper, and allied products; metals and metal products; machinery and equipment; furniture and household durables; nonmetallic mineral products; transportation equipment; and miscellaneous products.

⁶ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 903; H.Rep. 99-426, pp. 609-615; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 311 and 312; S.Rep. 99-313, pp. 122-132; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 293-301 (Conference Report).

⁷See, e.g., Town and Country Food Co., Inc. v. Commissioner, 51 T.C. 1049 (1969), acq. 1969 C.B. XXV; United Surgical Steel Company, Inc. v. Commissioner, 54 T.C. 1215 (1970), acq. 1971 C.B. 3.

⁸ The Congress intended no change in present law regarding the circumstances under which an installment obligation may be treated as having been disposed of.

⁹ The Congress intended no inference regarding the treatment of any particular transaction as either sales or consignments.

¹⁰ The provisions of the Act do not affect the treatment of any payment (within the meaning of sec. 453(c)) prior to the close of the taxable year of sale, which payment would be accounted for under the ordinary rules for applying the installment method.

¹¹ Thus, for example, if an installment obligation were issued with an original face amount of $1,000, and payments of $400 were actually received on the obligation during the year of sale, the outstanding face amount of the obligation for purposes of applying the provision would be $600 as of the end of the year of sale. Similarly, if an additional $400 were paid on the obligation in the subsequent year, then the outstanding face amount of the obligation would be $200 for purposes of applying the provision as of the end of such subsequent year. Payments deemed to be made under the proportionate disallowance rule do not affect the amounts treated as outstanding, however.

¹² Taxpayers may elect to use depreciation deductions as calculated under 312(k) for purposes of computing the adjusted basis of its assets under this formula.

¹³ Thus, for example, an installment obligation arising from the sale of a parcel of undeveloped land that is held for investment only (and is not held for sale to customers, or for rental, or for use in a trade or business), would not be treated as an applicable installment obligation.

¹⁴ Thus, for example, the proportionate disallowance rule does not apply to installment obligations arising from the sale of crops or livestock held for slaughter.

¹⁵ A technical correction may be necessary so that the statute reflects this in correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

¹⁶ The Treasury Department is given authority to issue regulations that would prevent possible avoidance of the proportionate disallowance rule where the calculation of indebtedness is made on an annual basis.

¹⁷ Where any indebtedness of the taxpayer, or any applicable installment obligation, is subject to the rules of either section 483 or section 1274, and either such section causes a portion of the principal amount of such indebtedness or applicable installment obligation to be recharacterized as interest, then the provisions of the Act are to be applied based on the restated principal amounts.

¹⁸ All sales referred to in the example are assumed to be of property that is held for sale to customers in the ordinary course of the taxpayer's trade or business. The facts of the example are intended only for purposes of illustrating the provisions of the Act limiting the use of the installment method. The Congress intended no inference regarding the circumstances under which property is properly considered to be held for sale to customers in the ordinary course of a trade or business.

¹⁹ All installment obligations received in this example are assumed not to be payable on demand or readily tradable (within the meaning of sec. 453(f)). In addition, such installment obligation are assumed to have stated interest sufficient to avoid the recharacterization of any portion of the principal amount as interest under section 483 or section 1274. Payments referred to in the example are payments of principal on the obligations.

²⁰ It is assumed that none of the taxpayer's assets in the example other than its applicable installment obligations are installment obligations. If so, these assets would be taken into account at their outstanding face amount rather than their adjusted basis.

²¹ Where the taxpayer has more than one applicable installment obligation outstanding as of the close of the taxable year, the amount of allocable installment indebtedness for the year would be allocated pro rata (by outstanding face amount) to the obligations, and the proportionately allocated amount would be treated as a payment on each respective outstanding obligation.

²² The Congress intended that any Federal or private insurance relating to the payment of the individual's obligation would prevent the obligation from qualifying for the special election.

²³ The Congress intended that a parcel of land is not to be considered to have been improved or developed if it merely has been provided with the benefits of common infrastructure items such as roads and sewers.

²⁴ For this purpose, an individual and the individual's spouse, parents, children, and grandchildren are treated as related parties.

²⁵ The Congress intended no inference whether income from transactions involving such "campground timeshares" may properly be accounted for on the installment method.

²⁶I.e., the sale of the property must be intended to be for resale or leasing by the dealer.

²⁷ See Treas. Reg. sec. 1.453-2(d).

²⁸ A technical correction may be appropriate to reflect this intention.

²⁹ A technical correction may be necessary so that the statute reflects this intention.

³⁰ A technical correction may be necessary so that the statute reflects this intention. Such correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

³¹ A technical correction may be necessary so that the statute reflects this intention.

³² A technical correction may be necessary so that the statute reflects this intention. Such correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

³³ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 905; H.Rep. 99-426, pp. 615-638; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 302; S.Rep. 99-313, pp. 133-152;; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 302-309 (Conference Report).

³⁴ The purpose of maintaining inventories is to assure that the costs of producing or acquiring goods are matched with the revenues realized from their sale. Inventory accounting accomplishes this by accumulating production or acquisition costs in an inventory account as they are incurred rather than allowing an immediate deduction when incurred. When the related goods are sold, these costs are removed from the inventory account and recorded as costs of sale, which reduce taxable income for the year of the sale.

³⁵ Treas. Reg. sec. 1.471-3(b).

³⁶See, e.g., Rev. Rul. 80-141, 1980-1 C.B. 111; McDonald v. Commissioner, 2 B.T.A. 906 (1925).

³⁷See, e.g., McIntosh-Mills v. Commissioner, 9 B.T.A. 301 (1927), acq. VII-1 C.B. 21.

³⁸ Treas. Reg. sec. 1.471-11.

³⁹ Treas. Reg. sec. 1.471-11(b)(2).

⁴⁰ Treas. Reg. sec. 1.471-11(c)(2)(i).

⁴¹ Treas. Reg. sec. 1.471-11(c)(2)(ii).

⁴² Treas. Reg. sec. 1.471-11(c)(2)(iii).

⁴³ Treas. Reg. sec. 1.471-11(c)(3).

⁴⁴See also, Treas. Reg. secs. 1.263(a)-2(a); 1.263(a)-1(b); 1.446-1(a)(4)(ii); 1.461-1(a)(2).

⁴⁵Idaho Power Co. v. Commissioner, 418 U.S. 1 (1974).

⁴⁶See, e.g., Adolph Coors Co. v. Commissioner, 519 F.2d 1280 (10th Cir. 1975), cert. denied, 423 U.S. 1087 (1976) (Internal Revenue Service is justified in requiring capitalization of overhead costs of construction): Louisville & Nashville R.R. Co. v. Commissioner, 641 F.2d 735, (6th Cir. 1981), aff'g, rev'g, and remanding 66 T.C. 962 (1976) (upholding Tax Court's determination that vacation pay and health and welfare benefits were subject to capitalization, but reversing as to payroll taxes); Variety Construction Co. v. Commissioner, T.C. Memo 1962-257 (1962) (overhead costs held subject to capitalization).

⁴⁷Fort Howard Paper Co. v. Commissioner, 49 T.C. 275 (1967) (incremental method and full absorption method equally permissible because taxpayer used the method for 35 years and the Internal Revenue Service had previously audited the taxpayer and did not object). See also I.T. 2196, IV-2 C.B. 112 (1925); Paducah Water Co. v. Commissioner, 33 F.2d 559 (D.C. Cir. 1929).

⁴⁸ For example, the cash method normally may not be used by a taxpayer required to maintain inventories.

⁴⁹ Treas. Reg. sec. 1.451-3.

⁵⁰ Treas. Reg. sec. 1.451-3(c)(2).

⁵¹ S. Rep. 97-530, 97th Cong., 2d Sess. (1982), p. 547.

⁵² Treasury Decision 8067, 51 Fed. Reg. 376 (January 6, 1986).

⁵³See Treas. Reg. secs. 1.451-3(d)(5), (6).

⁵⁴ Treas. Reg. sec. 1.451-3(d)(9)(vi).

⁵⁵See H. Rep. No. 97-760, 97th Cong., 2d Sess. (1982) at p. 485.

⁵⁶Id.

⁵⁷ As described below, special rules apply to interest costs.

⁵⁸ For this purpose, tangible property includes films, sound recordings, video tapes, books, and other similar property embodying words, ideas, concepts, images, or sounds, by the creator thereof. Thus, for example, the uniform capitalization rules apply to the costs of producing a motion picture or researching and writing a book. No inference was intended as to the nature of these properties under prior law or for other provisions of the Act.

⁵⁹ Long-term contracts not reported under the percentage of completion method are subject to similar capitalization rules under new section 460 of the Code. (See section 804 of the Act, described in E. "Long-Term Contracts, below.)

⁶⁰ The definition of timber for purposes of this exception is intended to be coextensive with the definition of timber under prior law, and nothing in the definition of timber was intended to be construed as narrowing the types of activities which constitute the growing of timber for purposes of this exclusion from the uniform capitalization rules. Thus, the production of timber remains subject to the capitalization rules applicable to timber under prior law.

⁶¹ For this purpose, distribution expenses are intended to include only external distribution costs, that is, those costs incurred in transporting goods from the taxpayer's warehouse or retail outlet to the customer, or to the customer's agent, a common carrier, or some other intermediary. Distribution expenses do not include costs of moving inventory from a taxpayer's warehouse to its retail store or other internal transportation costs.

⁶²See Treas. Reg. sec. 1.471-11(d) (authorizing use of the manufacturing burden rate method, the standard cost method, or any other method that fairly apportions such costs among items of inventory).

⁶³ Section 189 of prior law also required capitalization of real property taxes. Under the Act, taxes that are properly allocable to such property (for example, income taxes) are subject to capitalization (or inclusion in inventory) to the same extent as other types of costs. Capitalization of interest is not required in the case of property acquired for resale (i.e., inventory held by a dealer).

⁶⁴ Where property is constructed by another for a taxpayer under a contract, interest could be subject to capitalization by the taxpayer under the rule that treat the taxpayer as the producer of the property.

⁶⁵ The avoided cost method of determining the amount of interest allocable to production was intended to apply irrespective of whether application of such method (or a similar method) is required, authorized, or considered appropriate under financial or regulatory accounting principles applicable to the taxpayer. Thus, for example, a regulated utility company must apply the avoided cost method of determining capitalized interest even though a different method is authorized or required by Financial Accounting Standards Board Statement 34 or the regulatory authority having jurisdiction over the utility. No inference was intended that the avoided cost method was not required in such circumstances under section 189 of prior law.

⁶⁶ A technical correction may be necessary to reflect this intention.

⁶⁷ Interest of the partner (beneficiary) that must be capitalized under this rule may be recovered by the partner (beneficiary), under regulations issued by the Secretary of the Treasure, at the same time and to the same extent as if the interest had been paid or incurred directly by the partnership.

⁶⁸ The contractor in such circumstances is required to capitalize interest only with respect to the excess of its accumulated contract costs over the accumulated payments received during year.

⁶⁹ The Treasury Department may make reasonable distinctions among different varieties of plants, and may weight the average using such factors as it deems appropriate.

⁷⁰ It is anticipated that a technical correction will be made clarifying that relief is not limited to expenses incurred by the minority participants during the four-year period beginning with the taxable year in which the loss or damage occurred; rather, the relief applies to all expenses of such taxpayers that would otherwise be subject to capitalization.

⁷¹ An election by a person related to the taxpayer also binds the taxpayer to use the alternative depreciation system. For this purpose, a related person includes the spouse and all minor children of the taxpayer and on any entity in which the taxpayer owns a 50 percent or more interest (applying the attribution rules of section 318(a)).

⁷² Thus, the election does not apply to the same persons who were subject to section 278 of prior law.

⁷³ The test is applied for the three-taxable year period ending with the taxable year preceding the year in question.

⁷⁴ The Congress intended that storage costs incurred by a manufacturer following completion or substantial completion of the manufacturing process with regard to a product (as well as those incurred during the manufacturing process) will likewise be subject to capitalization under these rules. Thus, the Act overrules any case law holding to the contrary (without inference as to the validity of such cases under prior law). See, e.g., Heaven Hill Distilleries, Inc. v. U.S., 476 F.2d 1327 (Ct.Cl. 1973) (holding that storage costs incurred by the manufacturer of whisky during the aging process were currently deductible), and Van Pickerill & Sons, Inc. v. U.S., 445 F.2d 918 (7th Cir. 1971).

⁷⁵ No inference is intended regarding the deductibility of such costs under prior law.

⁷⁶ Off-site storage and warehousing costs generally include the costs of a facility which function in the storage or warehousing of goods.

⁷⁷ Any reasonable method of apportioning labor costs between inventoriable and noninventoriable functions may be used. The Congress did not intend that detailed records establishing the time spent by an employee performing a particular function generally will be required to substantiate an allocation by the taxpayer. However, if such records are available, they generally should be used in making allocations.

⁷⁸ This is computed as follows: [(100 x ($7.00 - $6.00)) + (100 x ($7.75 - $6.50)) + [50 x ($9.00 - $7.00)] divided by [(100 x $6.00) + (100 x $6.50) + (50 x $7.00)].

⁷⁹ This is computed as follows: [(100 x ($6.00 - $5.00)) + (100 x ($7.00 - $6.00))] divided by [(100 x $5.00) + (100 x $6.00)].

⁸⁰See, e.g., W.C. & A.N. Miller Development v. Commissioner, 81 T.C. 619 (1983).

⁸¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 904; H.Rep. 99-426, pp. 615-638; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 301; S.Rep. 99-313, pp. 133-152; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 310-313 (Conference Report).

⁸² For example, the cash method normally may not be used by a taxpayer required to maintain inventories.

⁸³ Treas. Reg. sec. 1.451-3(c)(2).

⁸⁴ Treas. Reg. sec. 1.471-11. (For a discussion of these rules, see Title VIII., Part C, supra.)

⁸⁵ S. Rep. 97-530, 97th Cong., 2d Sess. (1982), p. 547.

⁸⁶ Treasury Decision 8067, 51 Fed. Reg. 376 (January 6, 1986).

⁸⁷See Treas. Reg. sec. 1.451-3(d)(5), (6).

⁸⁸ Treas. Reg. sec. 1.451-3(d)(9)(vi).

⁸⁹ This calculation is done on a cumulative basis. Thus, the amount included in gross income in a particular year is that proportion of the expected contract price that the amount of costs incurred through the end of the taxable year bears to the total expected costs, reduced by amounts of gross contract price included in gross income in previous taxable years.

⁹⁰See, e.g., Treas. Reg. sec. 1.451-3(c)(3).

⁹¹ The Congress intended that any costs that qualify as independent research and development costs under the Federal Acquisition Regulations System, 48 C.F.R. sec. 31.205-18 (1985), will qualify under this provision.

⁹² The Congress was aware that the treatment of independent research and development was a subject of controversy between taxpayers and the Internal Revenue Service. Under the Act, the position of the Internal Revenue Service in several recent technical advice memoranda was expressly overruled.

⁹³ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 906; H. Rep. 99-426, pp. 638-641; H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 303; S. Rep. 99-313, pp. 153-158; and H. Rep. 99-841, Vol. II September 18, 1986), pp. 314-316 (Conference Report).

⁹⁴ For legislative background of the provision, see: H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 304; S. Rep. 99-313, pp. 163-167; Senate floor amendment, 132 Cong. Rec. S 8190 (June 23, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 317-320 (Conference Report).

⁹⁵ A technical correction may be required to accomplish this result.

⁹⁶ A technical correction may be required to accomplish this intent.

⁹⁷ A technical correction may be required to accomplish this intent.

⁹⁸ If the change in the taxable year of the partnership did not take into account the change in the taxable year of its personal service corporation owners, the partnership could be considered to be required to first adopt a June year and later, after its partners had been required to adopt a calendar year, adopt the calendar year itself.

⁹⁹ A technical correction may be required to accomplish this intent.

¹⁰⁰ For legislative background of the provision, see: H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 324; S. Rep. 99-313, pp. 158-159; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 321-322.

¹⁰¹ For legislative background of the provision, see: H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 322; S. Rep. 99-313, pp. 120-121; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 322-324 (Conference Report).

¹⁰² A technical correction may be necessary to reflect this intention.

¹⁰³ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 908; H. Rep. 99-426, pp. C43-645; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 324 (Conference Report).

¹⁰⁴ For legislative background of the provision, see: H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 323; S. Rep. 99-313, pp. 161-162; and H. Rep. 99-841. Vol. II (September 18, 1986), pp. 324-325 (Conference Report).

¹⁰⁵ Sec. 405 of the Act provides special rules for certain solvent farmers for the purpose of determining whether there is income from the discharge of indebtedness. (See Title IV., Part A.4).

III. Title IX.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 801; H. Rep. 99-426, pp. 574-583; H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 801; S. Rep. 99-313, pp. 285-288; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 326-332 (Conference Report).

² A commercial bank is defined as a domestic or foreign corporation, a substantial portion of whose business consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted national banks, and who are subject by law to supervision and examination by State or Federal authority having supervision over banking institutions (sec. 581). For the purpose of determining the deduction for bad debts, the term "commercial bank" does not include domestic building and loan associations, mutual savings banks, or cooperative nonprofit mutual banks ("thrift institutions").

³ For taxable years beginning after 1975 and before 1982, the specified percentage was 1.2 percent. For taxable years beginning in 1982, the specified percentage was 1.0 percent.

⁴ Specifically excluded from the definition of an eligible loan are a loan to a bank; a loan to a domestic branch of a foreign corporation which would be a bank were it not a foreign corporation; a loan secured by a deposit in the lending bank or in another bank if the taxpayer bank has control over the withdrawal of such deposit; a loan to or guaranteed by the United States, a possession or instrumentality thereof, or to a State or political subdivision thereof; a loan evidenced by a security; a loan of Federal funds; and commercial paper. Sec. 585(b)(4).

⁵ For purposes of determining the deduction under the percentage of taxable income method, taxable income is computed without regard to any deduction allowable for any addition to the reserve for bad debts and exclusive of 18/46 of any net long-term capital gain, gains on assets the interest on which was tax-exempt, any dividends eligible for the corporate dividends received deduction and any additions to gross income from the thrift institution's own distributions from previously accumulated reserves.

⁶ Until 1952, thrift institutions were exempt from Federal income tax. In 1952, the Congress repealed the exemption of these institutions and subjected them to the regular corporate income tax. At that time, however, these institutions were allowed a special deduction for additions to bad debt reserves which proved to be so large that thrift institutions remained virtually tax exempt. In 1962, the Congress established an alternative 60-percent of taxable income deduction for bad debts. Savings and loan associations were eligible for the full deduction only if 82 percent of their assets were invested in qualifying assets. Mutual savings banks were not subjected to the 82-percent test. In 1969, the Congress established the basics of the prior law (described above) by providing that a thrift institution could determine its deduction for bad debts under either of the methods allowed commercial banks (the bank experience and the percentage of eligible loans methods) as well as the alternative of the percentage of taxable income method. The 60-percent rate in place at the time of the 1969 legislation was phased down at a rate of 3 percent per year until it reached 40 percent in 1979. The requirement that a percentage of the thrift institution's assets be qualifying assets was extended to mutual savings banks in 1969. In passing the 1969 legislation, the Congress was concerned that the previous bad debt reserve provisions for thrift institutions were unduly generous, allowing a much lower effective rate of tax than the average effective rate for all corporations.

⁷ The effect of the present-law 40-percent deduction, in combination with the 20-percent disallowance for corporate preferences, is to provide a maximum effective tax rate of 31.28 percent to thrift institutions, while other corporations are subject to a maximum effective tax rate of 46 percent. The effect of continuing the 40-percent deduction and the 20-percent disallowance for corporate preferences in combination with the 34-percent maximum corporate rate in the Act would have been to provide a maximum tax rate of 23.12 percent to thrift institutions.

⁸ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 802; H. Rep. 99-426, pp. 584-91; and H Rep. 99-841, Vol. II (September 18, 1986), pp. 332-34 (Conference Report).

⁹ The Act redesignates this provision as section 265(a)(2).

¹⁰ In addition to interest deductions, prior and present law (sec. 265(a)(1) as redesignated by the Act) deny a deduction for nonbusiness expenses for the production of tax-exempt interest income, which expenses would otherwise be deductible under section 212. This may include, for example, brokerage and other fees associated with a tax-exempt portfolio. Prior and present law also disallow deductions for certain expenses of mutual funds which pay tax-exempt dividends and for interest used to purchase or carry shares in such a fund.

¹¹ Legislative history indicates that Congress intended the purposes test to apply. See, e.g., S Rep. No. 617, 65th Cong., 3d Sess. pp. 6-7 (1918); S. Rep. No. 398, 68th Cong., 1st Sess. p. 24 (1924); S. Rep. No. 558, 73d Cong., 2d Sess. p. 24 (1934).

¹² That is, those situations not covered by Rev. Proc. 70-20, 1970-2 C.B. 499, discussed below.

¹³ See, Leslie v. Commissioner, 413 F.2d 636 (2d Cir. 1969), cert. den. 396 U.S. 1007 (1970). The court in Leslie held specifically that the effective exemption of banks from the disallowance provision (discussed below) did not apply to a brokerage business.

¹⁴See, S. Rep. No. 558, 73d Cong., 2d Sess. p. 24 (1934); S. Rep. No. 830, 88th Cong., 2d Sess. p. 80 (1964).

¹⁵ For purposes of the revenue procedure, "short-term bank indebtedness" meant indebtedness for a term not to exceed three years. A deposit for a term exceeding three years was treated as short-term when there was no restriction on withdrawal, other than loss of interest.

¹⁶ Rev. Proc. 70-20 was modified by Rev. Proc. 83-91, 1983-2 C.B. 618, to provide that a deduction would generally not be disallowed in the case of repurchase agreements collateralized by tax-exempt securities (as well as agreements collateralized by taxable obligations). This modification was in response to the decision in New Mexico Bancorporation v. Commissioner, 74 T.C. 1342 (1980) (discussed below).

¹⁷ Face-amount certificates are certificates under which the issuer agrees to pay to the holder, on a stated maturity date, at least the face amount of the certificate, including some increment over the holder's payments. Prior law (sec. 265(2)) provided that interest paid on face-amount certificates by a registered face-amount certificate company was not to be considered as interest incurred or continued to purchase or carry tax-exempt obligations, to the extent that the average amount of tax-exempt obligations held by such institution during the taxable year did not exceed 15 percent of its average total assets. The Investors Diversified Services case involved a face-amount certificate company whose tax-exempt holdings exceeded 15 percent of its total assets.

¹⁸ Rev. Proc. 80-55, 1980-2 C.B. 849, would have disallowed a deduction for interest paid by commercial banks on certain time deposits made by a State and secured by pledges of tax-exempt obligations. The revenue procedure concerned banks that participated in a State program that required the banks to bid for State funds and negotiate the rate of interest, and required the State to leave such deposits for a specified period of time. The IRS took the position that direct evidence of a purpose to purchase or carry tax-exempt obligations existed in such transactions under Rev. Proc. 72-18.

Rev. Proc. 80-55 was revoked by Rev. Proc. 81-16, 1981-1 C.B. 688. However, Rev. Proc. 81-16 stated that the disallowance provision would continue to apply to interest paid on deposits that are incurred outside of the ordinary course of the banking business, or in circumstances demonstrating a direct connection between the borrowing and the tax-exempt obligations.

¹⁹ The provision applied to commercial banks (including U.S. branches of foreign banks), mutual savings banks, domestic building and loan associations, and cooperative banks.

²⁰ This adjusted basis is reduced by the basis of any debt which is used to purchase or carry tax-exempt obligations under section 265(a)(2).

²¹ A description of this provision is found in Title VIII., Part D., above.

²² For purposes of the small issuer exception only, qualified 501(c)(3) bonds (as defined in Title XIII of the Act) are not treated as private activity bonds. In the case of bonds issued on or before August 15, 1986, for purposes of this provision only, bonds are not to be treated as private activity bonds if they are not IDBs, mortgage revenue bonds student loan bonds, or other private ("consumer") loan bonds for which tax exemption was permitted under prior law.

²³ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in H. Con. Res. 395 as passed by the House and Senate in the 99th Congress.

²⁴ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 803; H. Rep. 99-426, p. 592; H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 802; S. Rep. 99-313, pp. 289-290; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 335-336 (Conference Report).

²⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 804; H.Rep. 99-426, pp. 593-595; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 336 (Conference Report).

²⁶ Pub. L. 97-34, 97th Cong., 1st Sess. (1981); referred to as the "1981 Act".

²⁷ See Penellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462, 468-470; Treas. Reg. sec. 1.368-1(b), 1.368-2(a).

²⁸Paulsen v. Commissioner, 105 S. Ct. 627 (1985).

²⁹ For discussion of amendments to Code section 382, see Title VI., Part F., supra.

³⁰ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 805; H.Rep. 99-426, pp. 596-597; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 803; S.Rep. 99-313, pp. 291-292; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 291-292 (Conference Report).

³¹ It is anticipated that a technical amendment will be made permitting the taxpayer an alternative election to treat the loss as an ordinary loss under section 165(c)(2) of the Code. This election will be available only if no portion of the deposit is insured under Federal law, and the deduction will be limited in amount to $20,000 for any taxable year ($10,000 in the case of a separate return by a married individual) minus the amount of any insurance proceeds that can reasonably be expected to be received with respect to the deposit. Such an amendment was included in the versions of H. Con. Res. 395 which passed the House and the Senate in the 99th Congress.

³² Although basis includes any interest credited to a depositor's account where such interest has been included in income, it does not include any interest on frozen deposits the recognition of which has been deferred under section 451(f) as added by the Act.

³³ The failure of a taxpayer to claim a loss under this provision in the year in which such loss can first be reasonably estimated will not preclude the taxpayer from claiming such loss in a later year, either under this election or as a bad debt under section 166.

³⁴ The terms "qualified individual" and "qualified financial institution" have the same meanings as under section 165(1), relating to the treatment of losses on deposits.

³⁵ It is anticipated that a technical amendment will be made under which the provision will be effective for taxable years beginning after December 31, 1981. Such an amendment was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

III. Title X.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1001; H.Rep. 99-426, p. 657; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1001; S.Rep. 99-313, pp. 487-488; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 338-339 (Conference Report).

² For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1003; H.Rep. 99-426, p. 659; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1002; S.Rep. 99-313, pp. 488-490; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 339-340 (Conference Report).

³ By contrast, if a party liable for damage payments does not assign the liability in a structured settlement arrangement, then (1) income on amounts used to fund periodic payments of damages is subject to tax, and (2) investment income earned on lump-sum settlements is taxed to the recipient.

⁴ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S8051 (June 20, 1986), and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 340-341 (Conference Report).

⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1002; H.Rep. 99-426, p. 658; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 342-343 (Conference Report).

⁶ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1011; H. Rep. 99-426, p. 662; H.R. 3838, as reported by Senate Committee on Finance on May 29, 1986, sec. 1011; S. Rep. 99-313, pp. 491-492; and H. Rep. 99-841, Volume II (September 18, 1986), p. 344 (Conference Report).

⁷ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1012; H. Rep. 99-426, pp. 662-666; and H. Rep. 99-841, Volume II (September 18, 1986), pp. 344-351 (Conference Report).

⁸ Treas. Reg. sec. 1.501(c)(3)-1(d)(1).

⁹ See, e.g., GCM 39122, CC:EE-36-82 (January 25, 1984); GCM 39003, CC:EE-37-82 (June 24, 1983).

¹⁰ Sec. 501(c)(4).

¹¹N.Y. State Association of Real Estate Boards Insurance Fund v. Comm'r, 54 TC 1325 (1970).

¹² Rev. Rul. 75-199, 1975-1 CB 160.

¹³ See Helvering v. LeGierse, 312 U.S. 531 (1941). The Internal Revenue Service has ruled that risk shifting and risk distribution are necessary to a valid insurance transaction. See Rev. Rul. 77-316, 1977-2 C.B. 53, and Rev. Rul. 78-338, 1978-2 C.B. 107.

¹⁴ Congress intends that, to the extent such determinations of tax exemption for any taxable year beginning before 1987 were not under audit or in litigation before August 16, 1986, the Internal Revenue Service will not seek to revoke such determinations.

¹⁵ As under present and prior law, insurance loss reserves must be reasonable (see title X; part C.1., below). Generally, it is intended that the loss reserves of organizations eligible for the deduction under this provision also be reasonable, and that they be comparable to the historical loss reserves of the organization in relation to its claims and expenses.

¹⁶ A technical correction (with respect to the name of the Missouri Hospital Plan) may be needed so that the statute reflects this intent.

¹⁷ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H.Con. Res. 395 which passed the House and Senate in the 99th Congress.

¹⁸ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1013; H. Rep. 99-426, pp. 666-667; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1012; S. Rep. 99-313, pp 492-493; and H. Rep. 99-841, Volume II (September 18, 1986), pp. 351-352 (Conference Report).

¹⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1021; H.Rep. 99-426, pp. 668-670; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1021; S.Rep. 99-313, pp. 495-498; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 354-355 (Conference Report).

²⁰ The use of the term "property and casualty insurance company" is intended to refer to all those taxpayers subject to tax under Part II or III of subchapter L of the Code prior to amendment by the Act, or Part II of subchapter L as amended by the Act.

²¹ Under prior law, mutual companies with certain gross receipts less than $150,000 were exempt from tax (sec. 501(c)(15)), and other rules set forth special rates, deductions, and exemptions for mutual companies with certain categories and amounts of income (sec. 821 et seq.). In addition, mutual companies were allowed a special deduction for additions to a bookkeeping protection against loss account (sec. 824). (See the separate discussion of the protection against loss account, below.)

²² See National Association of Insurance Commissioners ("NAIC")-approved annual statement form (often called the yellow blank) used by property and casualty insurance companies for financial reporting. The accounting techniques used in preparing this annual statement are referred to as statutory accounting principles (SAP), and generally are more conservative than generally accepted accounting principles (GAAP) and the cash and accrual methods of tax accounting.

²³ A technical correction may be needed so that the statute reflects this intent.

²⁴ A technical correction may be needed so that the statute reflects this intent.

²⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1022; H.Rep. 99-426, pp. 670-672; and H.Rep. 99-841. Vol. II (September 18, 1986), pp. 356-357 (Conference Report).

²⁶ Also, the dividends received deduction is reduced by the policyholders' share of the dividends (sec. 805(a)(4)).

²⁷ 100 percent deductible dividends include any dividend if the percentage used for purposes of determining the deduction allowable under sec. 243, 244, or 245(b) is 100 percent. Under the Act, such dividends also include a dividend received by a foreign corporation from a domestic corporation which would be a 100 percent dividend if sec. 1504(b)(3) did not apply for purposes of applying sec. 243(b)(5).

²⁸ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1023; S.Rep. 99-313, pp. 498-510; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 357-367 (Conference Report).

²⁹ Whether a loss has occurred, and the time between occurrence and payment, depends on whether the insurance contract is written on a "loss incurred" or on a "claims made" basis. If insurance is provided on a "loss incurred" basis, coverage is provided with respect to losses that occur during the period of coverage. Alternatively, if a policy is written on a "claims made" basis, coverage is provided with respect to claims reported during the period of coverage. Typically, the time between occurrence of a loss and payment of a claim is shorter if policies are written on a claims made basis.

³⁰ To obtain this degree of accuracy in the reserve discount factor, the percent of losses deemed paid in AY + 12 (0.319307) and AY + 13 (0.0591628) must be carried out to six significant digits.

³¹ Part 1 of Schedule O contains data on losses; part 2 contains data on loss adjustment expense. In this example, loss adjustment expense is disregarded because the consolidated industry totals for part 2 data are not published. A taxpayer electing its own experience is required to compute reserve discount factors using combined loss and loss expense development data.

³² No inference is intended with respect to the applicability of Rev. Ruls. 83-174 and 84-107, above.

³³ In the case of an insurance company that first becomes fully taxable (i.e., not exempt under sec. 501(c)(15) and not electing under sec. 831(b) to be taxed only on investment income) in a later taxable year, e.g., 1995, the fresh start adjustment should be made with respect to the company's undiscounted loss reserves at the close of the year immediately preceding such year. A technical correction may be needed so that the statute reflects this intent.

³⁴ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1024; H.Rep. 99-426, pp. 676-677; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1023; S.Rep. 99-313, pp. 510-511; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 369-370 (Conference Report).

³⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1025; H.Rep. 99-426, pp. 677-678; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1024; S. Rep. 99-313, pp. 511-512; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 369-370 (Conference Report).

³⁶ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 1026 and 1027; H.Rep. 99-426, pp. 678-680; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 368-369 (Conference Report).

³⁷ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S7956-7958 (June 19, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 371-372 (Conference Report).

III. Title X. Table X-1.

¹ "Total losses and loss expense incurred" equals "loss and loss expense payments" plus "losses unpaid" plus "loss expense unpaid" as defined in Schedule P.

² "Cumulative fraction of loss paid" equals ratio of "loss and loss expense payments" to "total losses and loss expense incurred".

³ "Fraction of loss paid during year" equals the change in the "cumulative fraction of loss paid" from the previous year for AY+0 through AY+9) (see text for computation after AY+9).

⁴ The reserve discount factor is 96.5834 in AY + 12 and all subsequent years.

III. Title X. Table X-2.

¹ "Net losses paid in year" equals "losses paid during the year less reinsurance received during the year" less "salvage and subrogation received in the current year" as defined in Schedule O.

² "Unpaid losses, beginning year" equals "net losses paid in year" plus "losses unpaid" as defined in Schedule O.

³ "Fraction unpaid loss paid in year" equals ratio of "net losses paid in year" to "unpaid losses, beginning year".

⁴ "Fraction of total loss paid in year" equals "fraction unpaid loss paid in year" times previous year's "fraction of total loss unpaid, year-end" for AY + 0 and AY + 1 (see text for computation after AY + 1).

⁵ The reserve discount factor is 96.5834 in AY + 2 and all subsequent years.

III. Title XI.A.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1101; H.Rep. 99-429, pp. 682-85; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 1201-1204; S.Rep. 99-313, pp. 541-547; Senate floor amendment, 132 Cong. Rec. S7931-7932 (June 19, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 373-380 (Conference Report).

² A technical correction may be needed so that the statute reflects this intent.

³ See Reg. sec. 1.219-2.

⁴ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 which passed the House and the Senate in the 99th Congress.

⁵ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

⁶ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 1102, 1111, and 1112; H.Rep. 99-426, pp. 685-694; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 1205 and 1216; S.Rep. 99-313, pp. 547-559; and H.Rep. 99-841, Vol II (September 18, 1986), pp. 380-392 (Conference Report).

⁷ Prop. Reg. sec. 1.401(k)-1(d)(2).

⁸ A technical correction may be needed so that the statute reflects this intent.

⁹ A technical correction may be needed so that the statute reflects this intent.

¹⁰ A technical correction may be needed so that the statute reflects this intent.

¹¹ A technical correction may be needed so that the statute reflects this intent.

¹² A technical correction may be needed so that the statute reflects this intent.

¹³ A technical correction may be needed so that the statute reflects this intent.

¹⁴ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1112; H.Rep. 99-426, pp. 694-698; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1217; S.Rep. 99-313, pp. 559-563; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 392-397 (Conference Report).

¹⁵ A technical correction may be needed so that the statute reflects this intent.

¹⁶ A technical correction may be needed so that the statute reflects this intent.

¹⁷ A technical correction may be needed so that the statute reflects this intent.

¹⁸ A technical correction may be needed so that the statute reflects this intent.

¹⁹ A technical correction may be needed so that the statute reflects this intent.

²⁰ A technical correction may be needed so that the statute reflects this intent.

²¹ A technical correction may be needed so that the statute reflects this intent.

²² A technical correction may be needed so that the statute reflects this intent.

²³ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1104; H.Rep. 99-426, pp. 698-702; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1207; S.Rep. 99-313, pp. 563-566; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 397-400 (Conference Report).

²⁴ See Goldsmith v. United States, 586 F.2d 810 (Ct. Cl. 1978); James F. Oates, 18 T.C. 570 (1952); aff'd, 207 F.2d 711 (7th Cir. 1953); acq. (and prior nonacq. withdrawn) 1960-1 C.B. 5; Howard Veit, 8 T.C. 809 (1947), acq. 1947-2 C.B. 4; cf. Kay Kimbell, 41 B.T.A. 940 (1940), acq. and nonacq. 1940-2 C.B. 5, 12; J.D. Amend, 13 T.C. 178 (1949), acq. 1950-1 C.B. 1; James Gould Cozzens, 19 T.C. 663 (1953); Howard Veit, 8 CCH Tax Ct. Mem. 919 (1949). See, also, Rev. Rul. 60-31, 1960-1 C.B. 174.

²⁵ Prop. reg. sec. 1.61-16.

²⁶ A technical correction may be needed so that the statute reflects this intent.

²⁷ A technical correction may be needed so that the statute reflects this intent.

²⁸ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H.Con. Res. 395 which passed the House and Senate in the 99th Congress.

²⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1135; H.Rep. 99-426, pp. 703-705; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1234; S.Rep. 99-313, pp. 566-569; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 400-404 (Conference Report).

³⁰ A technical correction may not be needed so that the statute reflects this intent

³¹ A technical correction may be needed so that the statute reflects this intent.

³² The technical corrections provisions of the Act clarify the applicability of the additional income tax on early withdrawals in the case of the holder's death.

³³ A technical correction may be needed so that the statute reflects this intent.

³⁴ A technical correction may be needed so that the statute reflects this intent.

³⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1102; H.Rep. 99-426, pp. 705-708; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 404-406 (Conference Report).

³⁶ A technical correction may be needed so that the statute reflects this intent.

³⁷ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1208; S.Rep. 99-313, pp. 569-572; and H.Rep. 99-841. Vol. II (September 18, 1986), pp. 406-408 (Conference Report).

³⁸ A technical correction may be needed so that the statute reflects this intent.

³⁹ Age 25 is reduced to age 21 under the provisions of the Act making technical corrections to the Retirement Equity Act of 1984.

⁴⁰ A technical correction may be needed so that the statute reflects this intent with respect to the effective date of the integration rules.

⁴¹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1209; S.Rep. 99-313. pp. 573-574; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 408-409 (Conference Report).

⁴² Rev. Rul. 82-127, 1982-1 C.B. 215.

III. Title XI.B.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 1113 and 1116; H.Rep. 99-426, pp. 709-16; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 1212 and 1215; S.Rep. 99-313, pp. 575-586; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 410-420 (Conference Report).

² 1983-2 C.B. 70.

³ Treas. Reg. sec. 1.410(b)-1(d)(3)(ii) prohibits this designation in certain cases involving TRASOPs and, prior to 1984, certain plans subject to sec. 401(a)(17). In addition, Treas. Reg. sec. 54.4975-11(e)(1) prohibits this designation in certain cases involving ESOPs.

⁴ 1981-2 C.B. 93.

⁵ A technical correction may be needed so that the statute reflects this intent.

⁶ The Act provides that the definition of compensation applies "for purposes of this part." Congress intended such definition to apply only where it is specifically cross-referenced. A technical correction may be needed so that the statute reflects this intent.

⁷ A technical correction may be needed so that the statute reflects this intent.

⁸ A technical correction may be needed so that the statute reflects this intent.

⁹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1212; S.Rep. 99-313, pp. 586-588; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 420-424 (Conference Report).

¹⁰ 1981-2 C.B. 93.

¹¹ A technical correction may be needed so that the statute reflects this intent.

¹² A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

¹³ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1213; S.Rep. 99-313, pp. 588-592; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 424-426 (Conference Report).

¹⁴ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1211; S.Rep. 99-313, pp. 592-599; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 427-440 (Conference Report).

¹⁵ A technical correction may be needed so that the statute reflects this intent.

¹⁶ A technical correction may be needed so that the statute reflects this intent.

¹⁷ A technical correction may be needed so that the statute reflects this intent.

¹⁸ A technical correction may be needed so that the statute reflects this intent.

¹⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1115; H.Rep. 99-426, pp. 720-721; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1218; S.Rep. 99-313, pp. 599-601; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 440-441 (Conference Report).

²⁰ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1116; H.Rep. 99-426, pp. 722-723; H.R. 3838, as reported by the Senate Committee on Finance on May 29 1986, sec. 1219; S.Rep. 99-313, pp. 601-602; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 442 (Conference Report).

²¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 1111 and 1151; H.Rep. 99-426, pp. 689-690 and 771-772; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1214; S.Rep. 99-313, pp. 575-86; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 442-448 (Conference Report).

²² A technical correction may be needed so that the statute reflects this intent.

²³ A technical correction may be needed so that the statute reflects this intent.

III. Title XI.C.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1121; H.Rep. 99-426, pp. 724-727; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1221; S.Rep. 99-313, pp. 603-607; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 449-452 (Conference Report).

² See, e.g., Rev. Rul. 72-241, 1972-1 C.B. 108.

³ The technical corrections provisions of the Act make it clear that both the before and after-death distribution rules applicable to qualified plans also apply to all tax-sheltered annuities and custodial accounts, effective with respect to benefits accrued after December 31, 1986.

⁴ The Act further modifies the minimum distribution requirements for eligible deferred compensation plans of State and local governments and tax-exempt employers (sec. 457 plans). For a discussion of these modifications, see Part A.4., above.

⁵ The technical corrections provisions of the Act modify the rules prohibiting rollovers to apply to 5-percent owners rather than key employees.

⁶ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1123; H.Rep. 99-426, pp. 727-731; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1223; S.Rep. 99-313, pp. 611-617; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 452-458 (Conference Report).

⁷ A technical correction may be needed so that the statute reflects this intent.

⁸ A technical correction may be needed so that the statute reflects this intent.

⁹ For a discussion of what constitutes an elective deferral under a tax-sheltered annuity, see Part A.6., above.

¹⁰ A technical correction may be needed so that the statute reflects this intent.

¹¹ A technical correction may be needed so that the statute reflects this intent.

¹² A technical correction may be needed so that the statute reflects this intent.

¹³ A technical correction may be needed so that the statute reflects this intent.

¹⁴ A technical correction may be needed so that the statute reflects this intent.

¹⁵ A technical correction with respect to the ESOP rule may be needed so that the statute reflects this intent.

¹⁶ A technical correction may be needed so that the statute reflects this intent.

¹⁷ A technical correction may be needed so that the statute reflects this intent.

¹⁸ A technical correction may be needed so that the statute reflects this intent.

¹⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1122; H.Rep. 99-426, pp. 731-734; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1222; S.Rep. 99-313, pp. 607-611; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 458-463 (Conference Report).

²⁰ A technical correction may be needed so that the statute reflects this intent.

²¹ A technical correction may be needed so that the statute reflects this intent.

²² A technical correction may be needed so that the statute reflects this intent.

²³ A technical correction may be needed so that the statute reflects this intent.

²⁴ A technical correction may be needed so that the statute reflects this intent.

²⁵ A technical correction may be needed so that the statute reflects this intent.

²⁶A technical correction may be needed so that the statute reflects this intent.

²⁷ A technical correction may be needed so that the statute reflects this intent.

²⁸ A technical correction may be needed so that the statute reflects this intent.

²⁹ A technical correction may be needed so that the statute reflects this intent.

³⁰ A technical correction may be needed so that the statute reflects this intent.

³¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1134; H.Rep. 99-426, pp. 734-735; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1234; S.Rep. 99-313, pp. 618-619; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 463-465 (Conference Report).

³² ERISA sec. 408(d).

III. Title XI.D.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1103; H.Rep. 99-426 pp. 737-749; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1206; S.Rep. 99-313, pp. 620-631; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 466-479 (Conference Report).

² For purposes of applying the limit on annual additions, all defined contribution plans of an employer are treated as a single defined contribution plan.

³ Under prior law, deductible employee contributions were not taken into account in computing annual additions, but were instead coordinated with the individual's deductible IRA contributions.

⁴ For purposes of applying the limit on annual benefits, all defined benefit pension plans of an employer are treated as a single defined benefit pension plan. Under transition rules provided by ERISA and by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the dollar limit on annual benefits may exceed $90,000.

⁵ A technical correction may be needed so that the statute reflects this intent.

⁶ A technical correction may be needed so that the statute reflects this intent.

⁷ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

⁸ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1131: H. Rep. 99-426, pp. 750-755: H.R. 3838. as reported by the Senate Committee on Finance on May 29, 1986, sec. 1231: S. Rep. 99-313, pp. 631-635; and H. Rep. 99-841. Vol. 11 (September 18. 1986), pp. 479-482 (Conference Report).

⁹ Under the minimum funding standard, the normal cost of a plan for a year is required to be funded currently Past service costs are required to be spread over a period of years, (The amortization period depends on the origin of the past service cost and on the funding method used by the plan.) Because the deduction limit is not less than the contribution required by the minimum funding standard, an employer is generally not required by that standard to make a non-deductible contribution. Contributions may be reduced or eliminated under a plan that has reached the full funding limitation.

¹⁰ A technical correction may be needed so that the statute reflects this intent.

¹¹ A technical correction may be needed so that the statute reflects this intent.

¹² A technical correction may be needed so that the statute reflects this intent.

¹³ A technical correction may be needed so that the statute reflects this intent.

¹⁴ A technical correction may be needed so that the statute reflects this intent.

¹⁵ A technical correction may be needed so that the statute reflects this intent.

¹⁶ A technical correction may be needed so that the statute reflects this intent.

¹⁷ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1132; H. Rep. 99-426, pp. 756-7; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1232; S. Rep. 99-313, pp. 635-8; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 482-4 (Conference Report).

¹⁸ Under prior and present law, guidelines developed jointly by the Department of the Treasury, the Department of Labor, and the PBGC (the "implementation guidelines") set forth rules governing certain terminations of qualified defined benefit pension plans involving reversions of excess assets. In addition, prior and present law provides that certain contributions may be returned to employers if (1) the contribution is made by mistake of fact; (2) the contribution is conditioned on initial plan qualification and the plan does not qualify; or (3) the contribution is conditioned on its deductibility and the deduction is disallowed. See Rev. Rul. 77-200, 1977-1 C.B. 98.

¹⁹ A technical correction may be needed so that the statute reflects this intent.

²⁰ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

²¹ A technical correction may be needed so that the statute reflects this intent.

²² For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1133; H. Rep. 99-426, pp. 737-749; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 466-479 (Conference Report).

²³ A technical correction may be needed so that the statute reflects this intent.

²⁴ A technical correction may be needed so that the statute reflects this intent.

²⁵ A technical correction may be needed so that the statute reflects this intent.

²⁶ A technical correction may be needed so that the statute reflects this intent.

²⁷ A technical correction may be needed so that the statute reflects this intent.

²⁸ A technical correction may be needed so that the statute reflects this intent.

²⁹ A technical correction may be needed so that the statute reflects this intent.

³⁰ A technical correction may be needed so that the statute reflects this intent.

³¹ A technical correction may be needed so that the statute reflects this intent.

III. Title XI.E.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1111; H. Rep. 99-426, pp. 685-694; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1235; S. Rep. 99-313, p. 639; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 485 (Conference Report).

² For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1138; H. Rep. 99-426, pp. 759-760; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1236; S. Rep. 99-313, pp. 639-641; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 485-486 (Conference Report).

³ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1237; S. Rep. 99-313, pp. 641-642; and H. Rep. 99-841. Vol. II (September 18, 1986), pp. 486-487 (Conference Report).

⁴ Rev. Rul. 79-101, 1979-1 CB 156.

⁵ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1238; S. Rep. 99-313, pp. 642-643; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 487-489 (Conference Report).

⁶ The Technical Corrections title of the Act provided that the determination of whether a participant's accrued benefit may be cashed out without consent is to depend on the amount of the vested accrued benefit, rather than the amount of the total accrued benefit.

⁷ A technical correction may be needed so that the statute reflects this intent.

⁸ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1137; H. Rep. 99-426, pp. 758-759: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 1239-1241; S. Rep. 99-313, pp. 643-645; and H. Rep. 99-841. Vol. II (September 18, 1986), pp. 489-491 (Conference Report).

⁹ Under Treasury regulations, plan provisions (or the absence thereof) that would cause disqualification due to ERISA or TEFRA (but not other Acts) generally are "disqualifying provisions" eligible for an extended period in which to amend the plan ("remedial amendment period").

¹⁰ A technical correction may be needed so that the statute reflects this intent.

¹¹ A technical correction may be needed so that the statute reflects this intent.

¹² A technical correction may be needed so that the statute reflects this intent.

¹³ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1139; H. Rep. 99-426, pp. 760-764; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 491-493 (Conference Report).

¹⁴ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S8066 (June 20, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 493-494 (Conference Report).

¹⁵ For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), pp. 494-497 (Conference Report).

¹⁶ For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), p. 497 (Conference Report).

III. Title XI.F.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1151; H. Rep. 99-426, pp. 765-779; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1251; S. Rep. 99-313, pp. 646-665; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 498-538 (Conference Report).

² A technical correction may be needed so that the statute reflects this intent.

³ See note 5, below, for a discussion of the term "salary reduction".

⁴ A technical correction may be needed so that the statute reflects this intent.

⁵ The terms "elective contribution" and "salary reduction" are used interchangeably to refer to the provision of nontaxable benefits in lieu of available taxable benefits. Nontaxable benefits provided by an employer on a nonelective basis, or through a choice among nontaxable benefits only, are, of course, employer-provided benefits but are not considered elective contributions or provided through salary reduction.

⁶ A technical correction may be needed so that the statute reflects this intent.

⁷ A technical correction may be needed so that the statute reflects this intent.

⁸ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

⁹ A technical correction may be needed so that the statute reflects this intent.

¹⁰ A technical correction may be needed so that the statute reflects the treatment of family coverage described below.

¹¹ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

¹² This benefits test was intended to apply notwithstanding the provision providing that utilization rates cannot cause a dependent care assistance program to fail to qualify. (Sec. 129(e)(6).) A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

¹³ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the version of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

¹⁴ A technical correction may be needed so that the statute reflects the intent that an employer may elect whether to disregard employees with compensation below $25,000.

¹⁵ A technical correction may be needed so that the statute reflects this intent.

¹⁶ A technical correction may be needed so that the statute reflects this intent.

¹⁷ A technical correction may be needed so that the statute reflects this intent. A correction that reflected part of this intent was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

¹⁸ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

¹⁹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1261; S. Rep. 99-313, pp. 665-667; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 538-539 (Conference Report).

²⁰ A technical correction may be needed so that the statute reflects this intent.

²¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1161; H. Rep. 99-426, pp. 779-781; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1262; S. Rep. 99-313, pp. 667-670; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 539-542 (Conference Report).

²² For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec, 1162; H. Rep. 99-426, pp. 781-782; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 542 (Conference Report).

²³ A technical correction may be needed so that the statute reflects this intent.

²⁴ For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), pp. 542-543 (Conference Report).

²⁵ For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), p. 543 (Conference Report).

²⁶ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. which passed the House and Senate in the 99th Congress.

²⁷ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1263; S. Rep. 99-313, pp. 670-672; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 544-545 (Conference Report).

²⁸Bob Jones Univ. v. U.S., 670 F.2d 167 (Ct. Cl. 1982); Goldsboro Christian Schools, Inc. v. U.S., 79-1 CCH USTC para. 9266, E.D.N.C. 1978 (value of lodging furnished to faculty constitutes wages subject to income tax, FICA, and FUTA withholding, in light of "long and consistent history of regulations and rulings, expressly and explicitly applying withholding taxes to lodging not furnished for the employer's convenience * * *"), aff'g order entered in Goldsboro Christian Schools, Inc. v. U.S., 436 F.Supp. 1314 (E.D.N.C. 1977), aff'd per curium in unpublished opinion (4th Cir. 1981), aff'd 103 S.Ct. 2017 (1983); Winchell v. U.S., 564 F. Supp. 131 (D. Neb. 1983) (value of campus home taxed to college president); and Coulbourn H. Tyler, 44 CCH Tax Ct. Mem. 1221 (1982).

²⁹ An educational organization is described in sec. 170(b)(1)(A)(ii) "if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities," and includes both public and private schools (Treas. Reg. sec. 1.170A-9(b)(1)).

³⁰ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1263; S. Rep. 99-313, pp. 672-674; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 545-546 (Conference Report).

³¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 907; H. Rep. 99-426, pp. 641-643; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 325; S. Rep. 99-313, pp. 674-676; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 546-548 (Conference Report).

³² Special deduction-timing rules apply to benefits provided under a qualified pension, profit-sharing, or stock bonus plan.

³³ For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), pp. 548-549 (Conference Report).

³⁴ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. which passed the House and Senate in the 99th Congress.

³⁵ A technical correction may be needed so that the statute reflects this intent. Such a correction was included in the versions of H. Con. Res. 395 which passed the House and Senate in the 99th Congress.

III. Title XI.G.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1173; H. Rep. 99-426, pp. 783-794; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1275; S. Rep. 99-313, pp. 684-691; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 550-560 (Conference Report).

² A technical correction may be needed so that the statute reflects this intent.

³ A technical correction may be needed so that the statute reflects this intent.

⁴ A technical correction may be needed so that the statute reflects this intent.

⁵ A technical correction may be needed so that the statute reflects this intent.

⁶ See, e.g., secs. 411(a)(11) and 417.

⁷ A technical correction may be needed so that the statute reflects this intent.

⁸ A technical correction may be needed so that the statute reflects this intent.

⁹ A technical correction may be needed so that the statute reflects this intent.

¹⁰ A technical correction may be needed so that the statute reflects this intent.

¹¹ A technical correction may be needed so that the statute reflects this intent.

¹² For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1171; H. Rep. 99-426, pp. 794-796; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1272; S. Rep. 99-313, pp. 678-679; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 553, 556, and 558 (Conference Report).

¹³ If the employer was a member of a controlled group of corporations, the $25,000 amount against which the tax credit may be fully applied was reduced by apportioning such amount (pursuant to Treasury regulations) among the member corporations (sec. 38(c)(3)(B)).

¹⁴ The unused tax credit could have been carried back to each of the 3 preceding taxable years and carried forward to each of the 15 succeeding taxable years (sec. 39(a)). The amount of any unused credit that expired at the end of the last taxable year to which it could have been carried was allowed as a deduction to the employer for such taxable year without regard to the usual limits on deductions for employer contributions to qualified plans (sec. 404(i)).

¹⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 1172 and 1175; H. Rep. 99-426, pp. 797-799; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 1273 and 1274; S. Rep. 99-313, pp. 669-684; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 553, 556 558-560 (Conference Report).

¹⁶ Temp. Treas. Reg. sec. 1.133-IT Q&A 1.

¹⁷ Temp. Treas. Reg. sec. 1.133-IT Q&A 4.

¹⁸ H.R. 1311 and S. 591 (100th Cong.) would make modifications to section 2057. The modifications are designed to conform the provision to Congressional intent and to reduce the revenue loss of the provision to the original level estimated during consideration of the Tax Reform Act of 1986.

¹⁹ A technical correction may be needed so that the statute reflects this intent.

²⁰ A technical correction may be needed so that the statute reflects this intent.

²¹ Items (1) and (4) are in the technical corrections portion of the 1986 Act.

²² This provision is contained in the technical corrections provisions of the Act (sec. 1854(c)).

²³ A technical correction may be needed so that the statute reflects this intent.

²⁴ A technical correction may be needed so that the statute reflects this intent.

²⁵ A technical correction may be needed so that the statute reflects this intent. Such a technical correction was included in the versions of H. Con. Res. 395 that passed the House and Senate in the 99th Congress.

²⁶ Rev. Rul. 74-177, 1974-1 C.B. 165.

²⁷ A technical correction may be needed so that the statute reflects this intent.

III. Title XII.A.

¹ For legislative background of the provisions, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 601-04; H. Rep. 99-426, pp. 329-58; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 901-05; S. Rep. 99-313, pp. 293-327; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 561-94 (Conference Report).

²Biddle v. Commissioner, 302 U.S. 573 (1938).

³Bank of America National T. & S. Association v. United States, 459 F.2d 513 (Ct. Cl. 1972).

⁴ Unlike the deemed-paid credit for actual dividend distributions, the deemed-paid credit for subpart F inclusions can be available to individual shareholders in certain circumstances if an election is made.

⁵Compare Champion International Corp., 81 T.C. 424. 442 (1983): Pacific Gamble Robinson Co. v United States. 62-1 USTC Para. 9160 (W.D. Wash. 1961).

⁶ For example, assume a foreign subsidiary earns $100 of income on which it pays $30 of foreign income tax. If a $35 dividend were paid (or if there were a $35 income inclusion under subpart F) out of the $70 of after-tax earnings, the U.S. shareholder would have a $15 indirect foreign tax credit (35/70 x $30) and $50 of income ($35 + $15). The "gross-up" prevents the U.S. corporate taxpayer from effectively obtaining a deduction as well as a credit for foreign taxes, since the amount of the actual distribution or subpart F inclusion reflects only after-foreign tax profits.

⁷Steel Improvement & Forge Co., 36 T.C. 265 (1961), rev'd on another issue, 314 F. 2d 96 (6th Cir. 1963); Rev. Rul. 63-6, 1963-1 C.B. 126: Treas. Reg. sec. 1.902-1(e); see H.H. Robertson Co., 59 T.C. 56 (1972), aff'd in unpublished opinion (3d Cir. July 24, 1974).

⁸ S. K. Witcher, "Foreign Banks Worry Mexican Ruling Could Mean Loss of Tax Credits at Home," Wall Street Journal, Jan. 25, 1985, p. 24.

⁹ S. Frazier & S. K. Witcher, "Debt-Swap Plan Is Proposed by Mexicans," Wall Street Journal, March 15, 1985, p. 29.

¹⁰ Absent an applicable look-through rule, interest, dividends, and passive rents and royalties are generally fully subject to the separate limitation for passive income.

¹¹ This rule for stock gains applies to nonsection 1248 gain amounts only. For purposes of determining the separate limitation character of any section 1248 gain that gain is treated as a dividend. (See "Other rules relating to new separate limitations," below.)

¹² A technical correction may be needed so that the statute reflects this intent.

III. Title XII.B.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 611; H. Rep. 99-426, pp. 359-365; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 911; S. Rep. 99-313, pp. 328-333; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 595-596 (Conference Report).

² A technical correction may be necessary so that the statute reflects this intent.

³ A technical correction may be needed so that the statute reflects this intent.

⁴ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 613; H. Rep. 99-426, pp. 369-372 and 443-448; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 913: S. Rep. 99-313, pp. 336-344; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 596-599 (Conference Report).

⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 615; H. Rep. 99-426, pp. 381-383; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 915; S. Rep. 99-313, pp. 357-360; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 599-600 (Conference Report).

⁶ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 612: H. Rep. 99-426, pp. 365-369; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 912; S. Rep. 99-313, pp. 333-336; H. Rep. 99-841, Vol. II (September 18, 1986), pp. 600-604 (Conference Report).

⁷ A technical correction may be needed so that the statute reflects this intent.

⁸ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 614; H. Rep. 99-426, pp. 372-381; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 914; S. Rep. 99-313, pp. 344-356; Senate floor amendments, 132 Cong. Rec. S7464 (June 13, 1986), and S7795 (June 18, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 604-607 (Conference Report).

⁹ The subsidiary was a U.S. asset in the hands of the parent under prior law as long as less than 80 percent of its gross income from the prior three years was foreign source.

¹⁰ Congress did not intend, however, that new Code section 864(e)(1) apply for purposes of computations under section 936(h) (relating to the possessions tax credit).

¹¹ A technical correction may be needed so that the statute reflects this intent with respect to the 3-year and targeted 10-year transition rules.

¹² A technical correction may be needed so that the statute reflects this intent.

¹³ A technical correction may be needed so that the statute reflects this intent.

¹⁴ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 616, H. Rep. 99-426, pp. 383-388: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1303; S. Rep. 99-313, pp. 703-707; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 608 (Conference Report)

III. Title XII.C.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 622; H. Rep. 99-426, pp. 389-401; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 921 and 989; S. Rep. 99-313, pp. 361-70; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 609-26 (Conference Report).

² The unratified U.S. income tax treaty with Bermuda (signed on July 11, 1986) also waives the insurance excise tax, notwithstanding the absence of any Bermuda income tax. Were the Bermuda treaty to be ratified, captives in Bermuda with relatively dispersed U.S. ownership could escape all current tax also, in the absence of the Act. In a letter to the Secretary of the Treasury, dated July 15, 1986, the Chairman of the Ways and Means Committee expressed "serious concerns about both the substance and the procedures followed by the Treasury Department in negotiating this proposed tax treaty." The letter states that the "proposed treaty, rather than preventing double taxation of income, seems to guarantee that significant sums of income will escape any taxation in either jurisdiction . . . The proposal would bless U.S.-owned Bermuda insurance companies, which, in some cases, through the use of spread captive devices, now may be avoiding all tax other than the excise tax on income earned by insuring U.S. risks. In addition, the U.S. premium payors may be deducting the premiums from U.S. taxable income. Thus, the proposed treaty, by exempting these insurance premiums from U.S. tax, would eliminate not double taxation but any taxation."

³ In Rev. Rul. 77-316 (1977-2 C.B. 53), the IRS ruled that the amounts described as premiums paid by a domestic corporation and its domestic subsidiaries to the parent's wholly owned foreign subsidiary are not deductible premiums if the subsidiary does not also insure risks of insureds outside its own corporate family. The IRS concluded that because the insured and the "insurance" subsidiary (though separate corporate entities) represent one economic family, those who bear the ultimate economic burden of the loss are the same persons who suffer the loss. Thus, the required risk-shifting and risk-distribution of a valid insurance transaction are missing. This position of the IRS was favorably cited by the Ninth Circuit in Carnation Co. v. United States, 640 F.2d 1010 (9th Cir. 1981), cert. denied, 454 U.S. 965. In the recent cases of Humana, Inc. and Subsidiaries v. Commissioner, 50 T.C.M. 784 (1985) and Mobil Oil Corp. v. United States, 8 Ct. Cl. 555 (1985), the courts have advanced a more developed theory and indicated that the primary criterion in distinguishing a self-insurance arrangement from a true insurance arrangement is the absence of risk-shifting. So long as a wholly owned subsidiary of the taxpayer bears the taxpayer's risk of loss, there has not been sufficient risk-shifting to constitute true insurance, premium payments for which could be deductible.

⁴ A technical correction may be needed so that the statute reflects this intent.

⁵ A technical correction may be needed so that the statute reflects this intent.

⁶ Under the Act, the maximum corporate tax rate generally is 34 percent. However, income in taxable years that include July 1, 1987 (other than as the first date of such year) is subject to blended rates under the rules specified in Code section 15. For purposes of section 954(b)(4), the maximum tax rate for such income is the maximum blended rate specified in section 15 for the taxpayer. A technical correction may be needed so that the statute reflects this intent.

⁷ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 622, 623, and 624; H. Rep. 99-426, pp. 402-06; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 922, 923, and 924; S. Rep. 99-313, pp. 370-74; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 609-14 and 626-28 (Conference Report).

⁸ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 626; H. Rep. 99-426, pp. 436-438; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 926; S. Rep. 99-313, pp. 431-432; and H. Rep. 99-841. Vol. II (September 18, 1986), p. 628 (Conference Report).

⁹ A technical correction will be needed to codify the January date.

¹⁰ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 987; S. Rep. 99-313, pp. 374-378; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 628-630 (Conference Report).

III. Title XII.D.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 641; H. Rep. 99-246, pp. 413-429; H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 941; S. Rep. 99-313, pp. 379-384; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 631-634 (Conference Report).

² In 1954, these provisions were incorporated in Code section 931. Possessions to which special tax rules presently apply include Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands.

³ Report of the Committee on Finance, United States Senate, on H.R. 10612, Sen. Rpt. 94-938 (June 10, 1976), p. 279.

⁴ U.S. General Accounting Office, Puerto Rico's Political Future: A Divisive Issue with Many Dimensions (March 2, 1981), GGD-81-48, p. 69.

⁵ Dividends paid by a section 936 corporation generally qualify for a 100-percent dividends received deduction (sec. 243(a)(3)).

⁶ Sen. Rept. No. 97-494, (July 12, 1982). pp. 81-2.

⁷ The portion of the cost sharing payment allocable to the product (service) is that portion which gross income from the product (service) bears to gross income from all products (services) within the product area.

⁸ Export sales within a product group are exempt from this requirement.

⁹ Under the Puerto Rican Industrial Incentives Act of 1978, income derived from a business operating under a tax-exemption grant may be reinvested free of Puerto Rican tax in certain assets. including term deposits in qualifying Puerto Rican banks.

¹⁰ For example, if product area research expenditures allocable to a product are $10 for a taxable year, then under prior law at least $10 of research cost must be taken into account in computing the product's combined taxable income for that taxable year. The Act requires that at least $12 (120 percent of $10) of research cost be taken into account in computing the product's combined taxable income. Consequently, the combined taxable income from sales of the product is reduced by at most $2 ($12 minus $10), and the amount of income allocable to nonpossessions affiliates is increased by at most $1 (50 percent of $2) for companies electing the profit split option. For companies electing the cost sharing option, the Act requires an increase in the cost sharing payment for this product, and thus the amount of income allocable to nonpossessions affiliates, of at least $1 (10 percent of $10).

¹¹ The Act clarifies that the portion of the cost sharing payment allocable to a product or service, for purposes of computing combined taxable income, is that portion which gross income from the product bears to gross income from all products within the product area (rather than within all product areas). This clarification applies as if enacted as part of TEFRA.

¹² "Memorandum of Agreement between the Government of the United States and the Government of Puerto Rico (draft)," November 14, 1985.

¹³ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 642; H. Rep. 99-426, pp. 427-28; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 942; S. Rep. 99-313, pp. 385-87; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 634-35 (Conference Report).

¹⁴ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 644; H. Rep. 99-426, p. 430; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 943 and 988; S. Rep. 99-313, pp. 387-89; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 636 (Conference Report).

¹⁵ This scheduled increase in the exclusion was set in the Deficit Reduction Act of 1984. Under the Economic Recovery Tax Act of 1981, the exclusion was scheduled to increase to $85,000 in 1984, $90,000 in 1985, and to $95,000 in 1986 and thereafter.

¹⁶ For legislative background of the provision, see H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 641; H. Rep. 99-426, pp. 420-427; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 637-638 (Conference Report).

¹⁷ These provisions are discussed in greater detail in connection with the amendments dealing with section 936 possessions corporations (sec. 1231 of the Act).

¹⁸ See, e.g., U.S. General Accounting Office, IRS Could Better Protect U.S. Tax Interests in Determining the Income of Multinational Corporations (GGD-81-81, September 30, 1981); Schindler and Henderson. Intercorporate Transfer Pricing 1985 Survey of Section 482 Audits (1985) and materials cited therein. Cf. Department of the Treasury, Internal Revenue Service, IRS Examination Data Reveal an Effective Administration of Section 482 Regulations, Report prepared by The Assistant Commissioner (Examinations). April, 1984.

¹⁹ Schindler and Henderson, supra n.18, at p. 6. See GAO report, supra n.18.

²⁰ H.R. 3838, as reported by the Committee on Ways and Means of the House of Representatives on December 7, 1985. A technical correction may be needed so that the statute reflects this intent.

²¹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 986(a) and (b); S. Rep. 99-313, pp. 389-91; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 638-40 (Conference Report).

²² For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 625; H. Rep. 99-426, pp. 406-412. H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 925; S. Rep. 99-313, pp. 392-399; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 610-645 (Conference Report).

²³ A technical correction may be needed so that the statute reflects this intent.

²⁴ A technical correction may be needed so that the statute reflects this intent.

²⁵ A technical correction may be needed so that the statute reflects this intent.

III. Title XII.E

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 651; H. Rep. 99-426, pp. 431-435; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 951; S. Rep. 99-313, pp. 400-407; and H. Rep. 99-841. Vol. II (September 18, 1986), pp. 646-650 (Conference Report).

² This is the case without regard to whether the corporation earning the income has made an election under section 897(l) to be treated as a U.S. corporation. Since the election under section 897(i) is effective only for purposes of sections 897, 1445, and 6039C, this election does not result in the corporation being treated as a U.S. corporation for branch profits tax purposes.

³ Thus, earnings attributable to income that is related person insurance income within the meaning of section 953(c)(2) and that is effectively connected without regard to the election under section 953(c)(3)(C) are not excludable from the branch profits tax base.

⁴ A technical correction may be needed so that the statute reflects this intent.

⁵ Technically, this provision only applies for purposes of sections 871, 881, 1441 and 1442. A technical correction may be needed so that the statute reflects Congress' intent that the provision apply for all purposes.

⁶ A technical correction may be necessary so that the statute reflects this intent.

⁷ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 652; H. Rep. 99-126, pp. 435-436; H.R. 3838. as reported by the Senate Committee on Finance on May 29, 1986, sec. 953; S. Rep. 99-313, pp. 407-409; Senate floor amendment, 132 Cong. Rec. S 8227 and 8370 (June 24 and June 25, 1986), and H. Rep. 99-841, Vol. II (September 18, 1986), p. 651 (Conference Report).

⁸ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 653: H. Rep 99-426, p. 438; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 954: S. Rep. 99-313, pp. 409-410: and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 651-652 (Conference Report).

⁹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 955; S. Rep. 99-313, pp. 410-412; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 652 (Conference Report).

¹⁰ For legislative background of the provision. see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 986(c); S. Rep. 99-313. pp. 412-414; and H. Rep. 99-841. Vol. II (September 18, 1986), pp. 653 (Conference Report).

¹¹ For the purpose of the reporting requirement, the term "controlled group" incorporates the definition of controlled group of corporations in section 1563(a) with certain changes in the percentage tests of that section and with certain exceptions. Although under section 1563(b) foreign corporations subject to tax under section 881 and certain other corporations are "excluded members" of a controlled group rather than "component members" for the purpose of section 1561, the exclusion of these corporations from the definition of "component members" for that purpose does not remove them from the controlled group, as defined in section 1563(a). Therefore, TEFRA requires reporting about any foreign corporation that otherwise qualifies as a member of the controlled group.

¹² For legislative background of the provision, see: H.R. 3838. as reported by the Senate Committee on Finance on May 29, 1986, sec. 985: S. Rep. 99-313, pp. 413-415: and H. Rep. 99-841. Vol. II (September 18, 1986). pp. 653-654 (Conference Report).

¹³ For legislative background of the provision. see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 982; S. Rep. 99-313, pp. 415-418; Senate floor amendment, 132 Cong. Rec. S8054 (June 20, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 654-655 (Conference Report).

¹⁴ See Tillinghast, Sovereign Immunity from the Tax Collector; United States Income Taxation of Foreign Governments and International Organizations, 10 Law and Policy in International Business 495, 503 (1978).

¹⁵ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 981; S. Rep. 99-313, pp. 418-419; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 656 (Conference Report).

¹⁶ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 983; S. Rep. 99-313. pp. 419-421; and H. Rep. 99-841. Vol. II (September 18, 1986), pp. 656-658 (Conference Report).

¹⁷ See "Dollars at 0.2% After Tax? How a UK Company Did It Via a Dual-Residence Sub," Business International Money Report, December 20, 1985, at 401.

III. Title XII.F.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 321; H. Rep. 99-426, pp. 449-481; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 621; S. Rep. 99-313, pp. 433-474; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 659-678 (Conference Report).

²See Rev. Rul. 74-7, 1974-1 C.B. 198 (the IRS ruled that a taxpayer who converts U.S. dollars to a foreign currency for personal use--while travelling abroad--realizes exchange gain or loss on reconversion of appreciated or depreciated foreign currency).

³ Although the law on this point was fairly well settled, there was a contrary line of older cases that provided authority for determining overall gain or loss by aggregating exchange gain or loss and gain or loss from the underlying transaction. Compare National-Standard Co., 80 T.C. 551 (1983), aff'd, 749 F.2d 369 (6th Cir. 1984) (where the taxpayer and the IRS stipulated that the separate transactions principle applied) with Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926) (where the U.S. Supreme Court determined that no net income was realized where the overall transaction generated a loss that exceeded an exchange gain on repayment of a foreign currency loan). There are two well recognized exceptions to the separate transactions principle: (1) a dealer in foreign exchange can use the lower of cost or value to determine foreign currency inventory (Rev. Rul. 75-104, 1975-1 C.B. 18), and (2) a foreign branch of a U.S. taxpayer may translate unremitted foreign currency denominated profits into dollars at the exchange rate in effect at the end of a taxable year, as described below.

⁴ $.004545 x 24 million = $109,091.

⁵ The term "capital asset" includes all classes of property not specifically excluded by Section 1221 of the Code. Foreign currency generally falls within the definition of a capital asset; however, under Corn Products Refining Co. v. Commissioner, 350 U.S. 46 (1955), property that satisfies the literal language of section 1221 of the Code is not considered a capital asset if the property is used by a taxpayer as an integral part of a trade or business.

⁶See, e.g., Kenan v. Commissioner, 114 F.2d 217 (2d Cir. 1940) (where property was transferred in satisfaction of a legatee's claim against an estate); Rogers v. Commissioner, 103 F.2d 790 (9th Cir.), cert. denied, 308 U.S. 580 (1939) (where property was transferred in return for cancellation of a note representing part of the purchase price); Rev. Rul. 76-111, 1976-1 C.B. 214. See also United States v. Davis, 370 U.S. 65 (1962) (where property was transferred to a spouse to discharge marital claims; this particular result was reversed by the Deficit Reduction Act of 1984).

⁷See Rev. Rul. 78-396, 1978-2 C.B. 114; Rev. Rul. 78-281, 1978-2 C.B. 204; G.C.M. 39294 (June 15, 1984).

⁸National-Standard Co., 749 F.2d 369 (6th Cir. 1984), aff'g 80 T.C. 551 (1983).

⁹Fairbanks v. United States, 306 U.S. 436 (1939), aff'g 95 F.2d 794 (9th Cir. 1938) (the result in the case was reversed by statute).

¹⁰Kentucky & Indiana Terminal Railroad Co. v. United States, 330 F.2d 520 (6th Cir. 1964). See also Gillin v. United States, 423 F.2d 309 (Ct. Cl. 1970).

¹¹See National-Standard, 80 T.C. at 567-568 (Judge Tannenwald's dissent).

¹² Section 904(b)(3)(C) was designed to limit abuse of the "title passage" rule (i.e., the making of sales abroad solely to generate foreign source gains and thereby increase the foreign tax credit limitation), and applied unless (1) the property was sold in a country in which the taxpayer derived more than 50 percent of its gross income for the three-year period preceding the sale; (2) personal property was sold by an individual in a foreign country where the individual was resident; (3) shares in a corporation were sold by a corporate taxpayer in the country in which the issuer was resident, and the issuer derived more than 50 percent of its gross income from that country during the preceding three-year period; or (4) a foreign tax of ten percent or more was paid on the sale or exchange.

¹³ See KVP Sutherland Paper Co. v. United States, 344 F.2d 377 (Ct. Cl. 1965). In KVP Sutherland, the court found three recognition events in a loan transaction: (1) the exchange of foreign currency for a note, (2) the receipt of foreign currency on repayment, and (3) the conversion of the foreign currency received on repayment to U.S. dollars.

¹⁴See Bennett's Travel Bureau, Inc., 29 T.C. 198 (1956) (where the taxpayer accrued a deduction for accounts payable in Norwegian kroner but, in a later year, settled the account at less than the U.S. dollar amount it had deducted); Foundation Co., 14 T.C. 1333 (1950) (where the taxpayer performed services in Peru and accrued Peruvian soles, and the currency's value at the time of payment was lower than when the income was accrued).

¹⁵See American-Southeast Asia Co., 26 T.C. 198, 201 (1956) (where the U.S. Tax Court considered this point).

¹⁶See Church's English Shoes, Ltd., 24 T.C. 56 (1955), aff'd per curium, 229 F.2d 957 (2d Cir. 1956) (where the taxpayer imported goods on credit, the purchase of foreign currency to settle the account payable was viewed as part of the taxpayer's ordinary business, and, thus, an exchange gain was taxable as ordinary income). See also I.R.C. sec. 1221(4) (an account receivable acquired for services rendered or sales of property in the ordinary course of business is excluded from the definition of a capital asset).

¹⁷ Essentially, the borrower is deemed to pay the lender interest based on the actual yield to maturity times the issue price of the obligation. The deemed interest is deductible by the borrower and includible in the income of the lender, and the lender is treated as lending the same amount back to the borrower. Thereafter, the borrower is viewed as paying the deemed rate of interest on the unpaid interest (periodically recomputed as above) as well as on the issue price.

¹⁸ The 30-percent withholding tax also applies to other fixed or determinable annual or periodical income from U.S. sources.

¹ The spot rate.

² One plus the interest rate.

¹⁹See Rev. Rul. 87-5, 1987-3 I.R.B. 6; Notice 87-4, 1987-3 I.R.B. 7.

²⁰See Rev. Rul. 87-5, 1987-3 I.R.B. 6 (holding that a cross border U.S. dollar denominated interest rate swap between a U.S. person and a Netherlands bank resulted in industrial and commercial profits exempt from U.S. tax under the U.S.-Netherlands Income Tax Conventional.

²¹Compare National-Standard Co., 80 T.C. 551 (1983), aff'd, 749 F.2d 369 (6th Cir. 1984), with G.C.M. 39294 (June 15, 1984).

²²American Home Products Co. v. United States, 601 F.2d 540 (Ct. Cl. 1979); Carborundum Co., 74 T.C. 730 (1980).

²³ Technical Advice Memorandum 8016004 (December 18, 1979). Although a technical advice memorandum is not binding as precedent on the IRS or the courts, a technical advice memorandum is helpful in interpreting the law in the absence of clear authority.

²⁴International Flavors & Fragrances, 62 T.C. 232 (1974), rev'd and rem'd, 524 F.2d 357 (2d Cir. 1975), on remand, 36 T.C.M. 260 (1977) (taxpayer sold British pounds short to hedge net asset position of U.K. subsidiary); The Hoover Co., 72 T.C. 206 (1979) (taxpayer entered into forward contracts to offset potential decline in value of stock in a foreign subsidiary), nonacq., 1980-1 C.B. 2 (the nonacquiescence relates to the court's holding that Hoover's sale of a forward sale contract for foreign currency shortly before the time set for performance--but after the currency was devalued--resulted in long-term capital gain; the IRS's concern was based on the fact that short-term capital gain would have resulted if the taxpayer had made delivery under the contract by purchasing foreign currency at the spot rate immediately before the delivery).

²⁵See Rev. Rul. 75-107, 1975-1 C.B. 32 (relating to the profit and loss method); Rev. Rul. 75-106, 1975-1 C.B. 31; Rev. Rul. 75-134, 1975-1 C.B. 33 (relating to the net worth method); Rev. Rul. 75-105, 1975-1 C.B. 29 (applying the net worth method to a bank).

²⁶See American Pad & Textile Co., 16 T.C. 1304 (1951), acq., 1951-2 C.B. 1.

²⁷See Treas. reg. sec. 1.964-1(d)(2). If the value of the relevant currency fluctuated substantially during the year, the appropriate rate of exchange might be a weighted monthly average, depending on whether that rate more closely approximated the results of translating individual transactions at the exchange rates in effect when the transactions occurred. Also, for any transaction, a taxpayer could choose the actual rate of exchange for the date of the transaction. Treas. reg. sec. 1.964-1(d)(7)(iii).

²⁸ Rev. Rul. 73-491, 1973-2 C.B. 268.

²⁹First Nat'l City Bank v. United States, 557 F. 2d 1379 (Ct. Cl. 1977); Comprehensive Designers International Ltd., 66 T.C. 348(1976); Rev. Rul. 73-506, 1973-2 C.B. 268.

³⁰American Telephone & Telegraph v. United States, 430 F. Supp. 172 (S.D.N.Y. 1977), aff'd, 567 F.2d 554 (2d Cir. 1978); Rev. Rul. 58-237, 1958-1 C.B. 534.

³¹ 39 B.T.A. 825 (1939) (a case decided under the predecessor to section 902 of the Code).

³²But see Commissioner v. American Metal Co., 221 F.2d 134, 141 (2d Cir.), cert. denied, 350 U.S. 879 (1955) (where the foreign corporation kept its books in U.S. dollars, foreign taxes were translated as of their payment date).

³³ The after-tax accumulated profits are included in the denominator (FF300 x $.10/FF = $30).

³⁴But see D. Ravenscroft, Taxation and Foreign Currency 627 (1973) (setting forth an argument that the numerator in the section 902 fraction could be determined under the limited subpart F. method, since the full subpart F method of determining earnings and profits is only a limitation on the amount that can be treated as a section 1248 dividend).

³⁵But see G.C.M. 37133 (May 24, 1977) (concluding that accumulated profits should also be determined under the full subpart F method); G.C.M. 37839 (January 31, 1979) (concluding that foreign taxes should be determined using the full subpart F method for purposes of the section 902 credit -- where an election under now repealed section 963 was in effect-and that Bon Ami has no application where the full subpart F method is used to compute the U.S. dollar value of the IRS or the courts, a G.C.M. is helpful in interpreting the law in the absence of clear authority.

³⁶ There was no uniform system of accounting for foreign currency transactions prescribed by the accounting profession prior to the issuance of Statement of Financial Accounting Standards No. 8 ("FAS 8") by the Financial Accounting Standards Board. FAS 8, which was issued in 1975 effective for fiscal years beginning on or after January 1, 1976, generally required the inclusion of exchange gain or loss in net income for financial reporting purposes. In 1981, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 52 ("FAS 52"), relating to foreign currency translation, for application to foreign currency transactions and financial statements of foreign entities (including branches and subsidiaries). FAS 52 introduced the "functional currency" approach, under which the currency of the economic environment in which a foreign entity operates generally is used as the unit of measure for gains and losses. Under FAS 52, in most cases, exchange gain or loss is treated as an adjustment to shareholders' equity, and not as an adjustment to net income. In defining a "reporting enterprise," FAS 52 distinguishes a "self-contained" operation from an operation that is an integral extension of a U.S. operation; in the latter case, the indicated functional currency is the U.S. dollar.

³⁷ Committee on Foreign Activities of U.S. Taxpayers, Section of Taxation, American Bar Association, Report on the U.S. Treasury Department Discussion Draft on Taxing Foreign Exchange Gains and Losses, 36 Tax L. Rev. 425, 441 (1981). For a contrary view, see Newman, Tax Consequences of Foreign Currency Transactions: A Look at Current Law and an Analysis of the Treasury Department Discussion Draft, 36 Tax Lawyer 223, 236 (1983).

³⁸See American Air Filter Co., 81 T.C. 709 (1983) (where a loan agreement provided that a liability payable in foreign currency could be converted to one payable in another currency, the conversion to a U.S.-dollar liability was treated as a realization event); G.C.M. 39294 (June 15, 1984) (where the IRS noted that repayment in U.S. dollars instead of foreign currency does not alter the tax consequences).

³⁹See, e.g., New York State Bar Association's Ad Hoc Committee on Original Issue Discount and Coupon Stripping, Preliminary Report on Issues to be Addressed in Regulations and Corrective Legislation, Tax Notes, March 5, 1984, at 993-1034.

⁴⁰ An operation that meets this standard is not automatically treated as a separate trade or business for other purposes of the Internal Revenue Code. For example, geographical separation would not provide a basis for treating a business unit as a trade or business under section 446(d), which section permits a single taxpayer to use different accounting methods for separate trades or businesses. Thus, apart from the adoption of a foreign currency as the functional currency of a QBU--which is itself a method of accounting--a taxpayer may be required to use consistent accounting methods for its foreign operations (e.g., cash versus accrual accounting).

⁴¹See Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation," issued by the Financial Accounting Standards Board (December 7, 1981).

⁴² This definition is intended to apply to gain or loss attributable to exchange rate movements affecting the value of forward contracts or similar instruments, regardless of the particular transaction in which the gain or loss is realized.

⁴³ 330 F.2d 520 (6th Cir. 1964) (exchange gain realized by virtue of repayment of a foreign currency borrowing with depreciated currency characterized as income from discharge of indebtedness).

⁴⁴ The rules for sourcing or allocating foreign currency gain or loss apply to investment products with respect to which an election is made to treat gain or loss as capital.

⁴⁵ The Act contemplates that the Secretary will address the appropriate treatment of payments made to a counter-party under a swap transaction for purposes of withholding under sections 871 and 881.

⁴⁶ The Act provides the Secretary with regulatory authority to apply rules similar to the rules for related-party loans to loans to U.S. persons.

⁴⁷ The determination of whether expenses would be deductible under section 212 is made without regard to the two-percent floor (added by sec. 132 of the Act) applicable to investment expenses.

⁴⁸ The Congress intended to apply the same rules to taxpayers who do not operate through QBUs, for purposes of section 901.

⁴⁹ The Act did not change the rules that permit taxpayers to calculate foreign tax credits on the basis of foreign taxes accrued but not paid. See Section 905. Thus, the Congress did not intend the payment date rule to prevent the allowance of a credit based on accrued foreign taxes where those taxes are unpaid when the credit must be computed.

⁵⁰ The Congress was made aware of tax shelters that are premised on the creation of debt denominated in a hyperinflationary currency. For example, in one transaction, a U.S. partnership entered into an agreement with a Brazilian sociedade civil limitada for the performance of services in Brazil. Payment was to be made in cruzeiros--the currency used by Brazil before introduction of the cruzado--on a deferred basis, beginning seven years after the services were performed. The taxpayers involved took the position that the foreign currency account payable could be accrued currently by the U.S. partnership, even though the actual U.S. dollars required seven years hence will be much less than the U.S.-dollar value of the amount accrued. In this transaction, stated interest was 11 percent per annum, which might be adequate for a dollar borrowing but is below market when compared to the analogous AFR for cruzeiros. Thus, it was concluded that the Secretary has adequate authority to treat this transaction in accordance with its economic substance under the rules relating to below market loans (See Prop. Treas. reg. sec. 1.7872-11(f)). Nevertheless, the Congress determined that the Secretary should be granted additional regulatory authority to ensure that such transactions are properly characterized under Federal tax laws, apart from whether stated interest is adequate when measured in a foreign currency.

⁵¹Cf. sec. 1202 of the Act (pre-1987 earnings and profits are not subject to the new pooling rules applicable for purposes of the deemed-paid credit).

III. Title XII.G.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 645 and 671-677; H. Rep. 99-426, pp.482-491; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 944 and 971-977; S. Rep. 99-313, pp. 475-485; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 679-682 (Conference Report).

III. Title XIII.

¹ For legislative background of the provisions, see H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 701-703; H. Rep. 99-426, pp. 492-573; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 1501-1516 and 1518; S. Rep. 99-313, pp. 809-861; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 683-762 (Conference Report).

² To the extent not changed by the Act, the provisions of prior law are retained. The fact that these provisions may be described in the past tense, in the discussion of Prior Law, is not intended to imply that any rules not so changed by the Act no longer apply to bonds issued under the Internal Revenue Code of 1986.

³ Governments of States, U.S. possessions and the District of Columbia, and their political subdivisions, are hereinafter referred to collectively as qualified governmental units.

⁴ Under a special rule, Indian tribal governments were permitted to issue tax-exempt bonds to finance essential governmental functions of the tribal governments. These governments could not, however, issue IDBs and other conduit-financing bonds.

In certain cases, tax-exempt bonds may be issued on behalf of States or local governments. (See, e.g., Treas. Reg. sec. 1.103-1(b); Rev. Rul. 63-20, 1963-1 C.B. 24; and, Rev. Proc. 82-26, 1982-1 C.B. 476.) References to bonds issued by States or local governments herein generally include bonds issued on behalf of those governmental units under the rules established in these Treasury Department regulations and rulings.

Bonds issued by qualified scholarship funding corporations, and by certain volunteer fire departments, also are treated as obligations of qualified governmental units (secs. 103(e) and 103(i) of prior law).

⁵ In general, prior law treated bonds for the benefit of section 501(c)(3) organizations in a manner similar to bonds used to finance governmental operations. While denominated private activity bonds under the Act, these bonds in many respects remain exempt from rules applicable to other private activity bonds.

⁶ The United States (including its agencies and instrumentalities) and all persons other than States or local governments (or organizations described in sec. 501(c)(3)), were nonexempt persons under these rules.

⁷ Treasury Department regulations defined a major portion as more than 25 percent of the bond proceeds.

⁸ The term private loan bond was substituted for the prior-law term "consumer loan bond" by Title XVIII of the Act, relating to technical corrections to the Deficit Reduction Act of 1984 (the 1984 Act).

⁹ Certain private loan bond programs in existence when this restriction was enacted also were not subject to the requirement. (See, sec. 626(b) of the 1984 Act.) These programs included certain supplemental student loan bond programs; a veterans' land bond program that had been continuously in effect in substantially the same form for more than 30 years before the enactment of the 1984 Act; and two small-scale energy conservation programs authorized by section 243 of the Crude Oil Windfall Profit Tax Act of 1980.

¹⁰ Tax-exempt financing for mass commuting vehicles (as opposed to terminals, etc.) previously was authorized as an exempt activity; that authorization expired for bonds issued after 1984.

¹¹ Under the 1984 Act, two special exceptions were provided treating the Long Island Lighting Company and the Bradley Lake hydroelectric facility in Alaska as satisfying the local furnishing of electricity test (secs. 644 and 645 of the 1984 Act).

¹² Bonds issued under section 11b of the United States Housing Act of 1937 that were in substance IDBs were required to satisfy all Internal Revenue Code requirements applicable to IDBs for multifamily residential rental property, in order to qualify for tax-exemption. This rule applied both to new money and refunding bonds issued after June 18, 1984.

¹³ This provision was extended (through 1988) for property with respect to which an application for a license had been docketed by the Federal Energy Regulatory Commission (FERC) before January 1. 1986.

¹⁴ The small-issue exception did not apply to obligations a significant portion of the proceeds of which was to be used to provide multifamily residential rental property. Thus, IDBs to finance residential rental property had to be issued under the exempt-activity IDB exception, discussed above.

¹⁵ Prior law precluded any refunding of small-issue IDBs after the scheduled termination date for originally issuing the type of bond involved.

¹⁶ In the case of facilities with respect to which an Urban Development Action Grant (UDAG grant) had been made (before issuance of the bonds) under the Housing and Community Development Act of 1974, capital expenditures of up to $20 million were allowed.

¹⁷ The excluded expenditures under this exception could not exceed $1 million.

¹⁸ Prior law precluded refunding small-issue IDBs if a beneficiary of the IDBs was allocated more than $40 million in tax-exempt IDBs at the time of the refunding (e.g., as a result of bonds issued before enactment of this provision in the 1984 Act). Tax-exemption of interest on bonds issued before the effective date of the 1984 Act was not affected by this provision.

¹⁹ This allocation also was made with respect to bonds issued before enactment of this provision by the 1984 Act, using the 3-year period related to the actual date of issuance of the bonds.

²⁰ If the $40-million limit was exceeded for any owner or principal user as a result of a change during the test period, interest on the issue of IDBs that caused the limit to be exceeded was taxable from the date of issue. The tax-exempt status of interest on other, previously issued, IDBs was not affected.

²¹ The Act retitles mortgage subsidy bonds as mortgage revenue bonds.

²² Sec. 611(c) of the Deficit Reduction Act of 1984 incorrectly provided that this date was January 1, 1985. Title XVIII of the 1986 Act, relating to technical corrections to the 1984 Act, corrects this reference.

²³ These bonds were treated as nongovernmental bonds for purposes of the prior-law information reporting requirements (former sec. 103(l)).

²⁴ The 1984 Act provided that, effective after December 31, 1983, new authorizations of tax-exemption may be made only in a revenue Act.

²⁵ This was to be determined by reference to the most recent estimate of the State's population released by the Bureau of the Census before the beginning of the calendar year to which the limitation applied.

²⁶See, note 4, supra.

²⁷ The State of Texas has a program called the Texas Veterans' Land Bond Program under which general obligation bonds are issued for the purchase of land. Loans under this program are limited to $20,000 per veteran. Where the proceeds of such a bond issue, other than an amount that was not a major portion of the proceeds, were used, for example, for the acquisition of land for recreational or other non-trade or non-business purposes of its owners, the issue was not subject to this State volume limitation.

²⁸ This determination was made without regard to bonds issued during the calendar year (or portion thereof) during this period when the lowest volume of such bonds was issued.

²⁹ This determination was made without regard to any bonds issued by the State after June 22, 1984.

³⁰ Qualified veterans' mortgage bonds must be general obligation bonds of the issuing State. Thus, these bonds can be issued only by the State itself.

³¹ A special rule prevented a State from reducing the bond authority allocation of a constitutional home rule city. In the case of such a city, the Mayor generally was treated as a governor and the city council as a State legislature.

³²See, Treas. Reg. sec. 1.103-13(j), relating to "artifice or device." Similarly, the maturity of an issue may not be lengthened to exploit the difference between taxable and tax-exempt rates.

³³ Under prior law, qualified veterans' mortgage bonds were not subject to any additional arbitrage restrictions beyond the restrictions imposed on tax-exempt bonds generally.

³⁴ The Congressional Budget Office portion of this study was submitted to Congress in August 1986. The General Accounting Office portion of the study has not yet been submitted to Congress.

³⁵ This restriction applied both to qualified mortgage bonds and to qualified veterans' mortgage bonds.

³⁶See, H. Rpt. No. 97-760. 97th Cong. 2d Sess. (August 17, 1982). p 519.

³⁷ Agricultural land is eligible for financing only under the small-issue exception

³⁸ Because ownership of bond-financed property was treated as use of bond proceeds, property owned by nongovernmental persons (other than section 501(c)(3) organizations generally could be financed only with IDBs and mortgage revenue bonds.

³⁹ The Act permits issuance of tax-exempt private activity bonds if the bonds are exempt-facility bonds (bonds for airports, docks and wharves, mass commuting facilities, water-furnishing facilities, sewage and solid waste disposal facilities, facilities for the local furnishing of electricity or gas, local district heating or cooling facilities, qualified hazardous waste disposal facilities, and multifamily residential rental projects), qualified small-issue bonds, certain mortgage revenue bonds, qualified 501(c)(3) bonds, qualified student loan bonds, and qualified redevelopment bonds.

⁴⁰ A rebate requirement was applied to mortgage revenue bonds in 1980 and to most IDBs in 1984.

⁴¹ The term qualified governmental unit means a State or a possession of the United States, any political subdivision of the foregoing, and the District of Columbia. The term also includes Indian tribal governments, except that such tribal governments may not issue any private activity bonds, and to the extent bond volume authority is required for the nongovernmental portion of any large (e.g., over $150 million) issue of governmental bonds, must receive the allocation of that authority from the private activity bond volume limitation of the State in which the bond financed facilities are to be located.

⁴² As under prior law, interest on certain bonds authorized by non-Code provisions of law is tax-exempt if the authorization was enacted before January 1, 1984, and the bonds comply with all appropriate Code requirements. The appropriate Code requirements include all requirements that apply to Code bonds with respect to which the use of bond proceeds is comparable, including (but not limited to) the new State private activity bond volume limitations, the arbitrage rules, the information reporting requirements, the limitation on bond-financing of costs of issuance, and the restrictions on tax-exempt bonds for certain activities.

⁴³ Under these rules, as under prior law, the term bond also includes debt obligations of a qualified governmental unit that do not involve the formal issuance of a bond or note. For example, installment purchase agreements, finance leases, and other evidences of debt issued pursuant to the borrowing power of a qualified governmental unit are treated as bonds.

⁴⁴ The Act continues the prior-law rule allowing bonds to be issued either by or on behalf of qualified governmental units. See, e.g., Treas. Reg. sec. 1.103-1(b); Rev. Rul. 63-20, 1963-1 C.B. 24; and Rev. Proc. 82-26, 1982-1 C.B. 476.

⁴⁵ A nongovernmental person is any person, including the Federal Government and any of its agencies or instrumentalities, other than a State or local governmental unit.

⁴⁶ Congress was aware that certain State universities, hospitals, and other State or local government entities (including certain public benefit corporations) also have received determination letters regarding their tax-exempt status under Code section 501(c)(3). Congress intended that, to the extent of such an entity's activities as a qualified governmental unit, bonds for the entity will be treated as governmental bonds rather than as private activity bonds for activities of a section 501(c)(3) organization.

⁴⁷ These four programs are the Texas Veterans' Land Bond program, the Oregon Small Scale Energy Conservation and Renewable Resource Loan programs, and the Iowa Industrial New Jobs Training Program (subject to a limit of $100 million in outstanding bonds, including bonds issued before August 16, 1986). The prior-law sunset date for the Texas Veterans' Land Bond Program is deleted. Bonds issued as part of any of these programs are subject to all restrictions that generally apply to private activity bonds, including (but not limited to) the requirements that 95 percent or more of the proceeds of these bonds be used for the exempt purpose of the borrowing and that no more than 2 percent of bond proceeds be used to finance certain costs of issuance (described below), and the new State private activity bond volume limitations.

⁴⁸ Under prior law, such income was required to be used to purchase additional student loan notes or alternatively to be paid over to the State or a political subdivision chartering the corporation. In modifying this requirement. Congress did not intend that existing qualified scholarship funding corporations cease operations, pending modification of their articles of incorporation to reflect the revised law; rather, existing corporations may continue to operate as such provided that steps are taken to effect the necessary amendment to their articles of incorporation with reasonable speed. See, 132 Cong. Rec. E3392 (October 2, 1986) (statement of Mr. Rostenkowski).

⁴⁹ For this purpose, taxable financing of costs associated with a tax-exempt issue, in excess of the 2-percent maximum permitted to be financed with proceeds of the tax-exempt issue, is treated as a discrete purpose.

⁵⁰ Any rules adopted by Treasury pursuant to this direction will apply exclusively to cases involving both taxable and tax-exempt issues which finance discrete purposes which otherwise might be aggregated under existing Code and Treasury Department rules. Congress did not intend by this action to imply an intent to change the prior-law rules with respect to either (i) the circumstances in which multiple tax-exempt "issues" are treated as a single tax-exempt issue or (ii) the treatment of an entire tax-exempt issue (including issues treated as a single issue) as a private activity issue if the private business tests or the private loan test are satisfied. Thus, private use and governmental use portions of a tax-exempt issue may not be treated as separate issues pursuant to this direction where such separate treatment was precluded under prior law. (The Act includes one limited exception to this rule under which the governmental and 501(c)(3) organization use portions of an issue may be treated as separate issues if certain requirements are satisfied.)

⁵¹ In determining the amount of proceeds for purposes of the 10-percent business use and security interest tests and the private loan restriction, costs of issuance and amounts invested in a reasonably required reserve or replacement fund are allocated between the governmental use and private use portions of the issue.

⁵² As described below, the 10-percent limit is reduced to the lesser of 10-percent or $15 million per facility in the case of financing for output facilities (other than water facilities.)

⁵³ Similarly, the use of bond proceeds is treated as use of any property financed with the proceeds.

⁵⁴ Congress was aware that, under Treasury Department rules, limited use of facilities by nongovernmental persons on a basis unlike that of the general public was disregarded in certain cases. See, e.g., Treas. Reg. sec. 1.103-7(c). Examples (6) and (11); Rev. Proc. 82-14. 1982-1 C.B. 459; and Rev. Proc. 82-15, 1982-1 C.B. 460. See also, Treas. Reg. sec. 1.103-7(b)(3) and Rev. Rul. 77-352, 1977-2 C.B. 34. Neither these rules, nor the Treasury Department's general authority to determine what constitutes (or does not constitute) a use of bond proceeds, is modified by the Act. (But see, note 60, below, regarding the modification of certain de minimis rules pertaining to output facilities.)

⁵⁵ The Act provides a special exception under which use of bond proceeds by the Bonneville Power Administration (BPA) will continue to be treated as use by a governmental unit to the extent that BPA was treated as an exempt person under a transitional exception contained in prior-law Treasury Department regulations (See, Act sec. 1316(d) and Treas. Reg. sec. 1.103-7(b)(2)(iii).

⁵⁶ The periodic, fixed-fee may be subject to an annual cost of living adjustment but may not be subject to any incentive adjustment (e.g., based on the output or efficiency of the project). (See, section 3.01 of Rev. Proc. 82-14. supra.)

⁵⁷ Congress intended that a similar change will be made to the advance ruling guidelines as applied to qualified 501(c)(3) bonds. (See, Rev. Proc. 82-15, 1982-1 C.B. 460.) Cf., the continuing allowance of certain more liberal rules for section 501(c)(3) organizations, described in note 58, below.

⁵⁸ For example, the provision of Rev. Proc. 82-15, which disregards certain private use pursuant to management contracts of up to two years where compensation is exclusively on a percentage basis, is not altered by this direction to Treasury. (See, sec. 3.01 of Rev. Proc. 82-15, supra.)

⁵⁹ This special limit does not change the determination of when a nongovernmental person is treated as a user of bond proceeds, e.g., in the case of facilities that are used in part by governmental utilities and in part by investor-owned utilities.

⁶⁰ The Act directs the Treasury Department to modify its existing regulations (Treas. Reg. sec. 1.103-7(b)(5)) for determining the portion of an output facility that is privately used to delete the special exception under which users of three percent or less of the output of a facility were disregarded in determining whether an issue satisfied the trade or business use and security interest tests.

⁶¹ A parallel reduction applies to the security interest test.

⁶² Issues that were issued before September 1, 1986, together with all subsequent issues, are counted for purposes of applying this limit to issues that are issued after August 31, 1986.

⁶³ The Bonneville Power Administration (BPA) is involved in two types of pooling and exchange arrangements as part of its statutory responsibility to manage the Federal hydroelectric system in the Northwest. The first uses coordination agreements, in which both governmentally-owned and investor-owned utilities make power available to a power pool. Each utility has the right to draw power from the pool which approximately equals the amount of power made available to the pool. Because of unique issues arising from variations in rainfall, snowfall, and runoff, some of these agreements have to utilize a 4-year critical water planning period to coordinate the use of each utility's hydroelectric resources in a manner that is most efficient for the region as a whole. The second arrangement involves residential purchase and sale agreements mandated by the Northwest Regional Power Act. Under these agreements, BPA exchanges power with both governmentally-owned and investor-owned utilities for the purpose of spreading the costs and benefits of Federal hydroelectric energy to the residential customers of these utilities. Congress intended that neither of these pooling arrangements, as constituted on October 22, 1986, gives rise to a trade or business use of bond proceeds on the part of BPA. (See, 132 Cong. Rec. H8363 (September 25, 1986) (statement of Mr. Rostenkowski); 132 Cong. Rec. S13936 (September 27, 1986) (colloquy between Senator Packwood and Senator Gorton).

⁶⁴ Congress was aware that certain governmental financings (as opposed to private activity bond financings) historically have been accomplished on a composite basis with multiple governmental facilities receiving funding from regularly scheduled issues on a "current disbursements" basis. Congress intended that, to the extent permitted by the Treasury Department, the unrelated and disproportionate use requirements may be applied in such cases on the basis of total financing for a facility rather than on an issue-by-issue basis if. for example, the total amount of financing for the facility (including both governmental and private use portions) is specified in a detailed plan adopted in advance of initial financing for the facility.

⁶⁵ Under the general test for private activity bonds, all private use financing (including related and unrelated private use financing provided from an issue) may not exceed 10 percent of the proceeds of the issue.

⁶⁶ Additionally, if a governmental unit transfers property to a nongovernmental person in exchange for a right to all or any portion of the income from the property, the transfer involve a loan.

⁶⁷ As under prior law, a use arises in every case in which a loan is present. A private bond may not satisfy the private business tests, however, in cases in which (e.g.) the loan is made to an individual not engaged in a trade or business.

⁶⁸ Bonds for these activities generally were classified as exempt-activity IDBs under prior law.

⁶⁹ For purposes of these limitations, the term passengers includes persons meeting or accompanying persons arriving and departing on flights to and from the airport.

⁷⁰ Public parking is not treated as a retail facility for purposes of this limitation, but such parking must be limited to no more than a size necessary to serve passengers and employees at the airport.

⁷¹See below, for governmental ownership requirement for all property financed with exempt-facility bonds for airports, docks and wharves and mass commuting facilities.

⁷²See, items (1)-(4) under the discussion of airport bonds, above.

⁷³ Mass commuting vehicles are not included in the definition. A separate prior-law exception permitting tax-exempt financing of such vehicles expired after 1984.

⁷⁴See, items (1)-(4) under the discussion of airports, above.

⁷⁵See, below, for limitations on financing office buildings with the proceeds of exempt-facility bonds generally.

⁷⁶See, e.g., Temp. Treas. Reg. sec. 17.1.

⁷⁷ Congress intended that this clarification provide no inference regarding the treatment of radioactive waste under prior law (i.e., for bonds issued before August 16, 1986). See, 132 Cong. Rec. E3392, October 2, 1986 (statement of Mr. Rostenkowski). See also, the discussion below of the new category of exempt-facility bonds for qualified hazardous waste disposal facilities.

⁷⁸ Congress intended that, for this purpose, the term incineration include equivalent thermal treatment processes subject to final permit requirements under subtitle C of Title II of the Solid Waste Disposal Act (as such subtitle was in effect on October 22, 1986), e.g., supercritical wet-air oxidation.

⁷⁹ This requirement is considered satisfied, if 95 percent or more of the net proceeds are to be used with respect to that portion of the facility used to dispose of hazardous waste generated by persons other than the owner or operator of the facility (or a related person).

⁸⁰ This requirement is referred to as the "set-aside" requirement.

⁸¹ Unlike under prior law, there is no special set-aside requirement for projects located in targeted areas.

⁸² For New York City only, 25 percent is substituted for 40 percent.

⁸³ For a more complete discussion of new rules governing deductibility of interest on bond-financed loans, see 8., below, regarding changes in use of property financed with tax-exempt private activity bonds.

⁸⁴ Parking facilities that are functionally related and subordinate to other exempt facilities may continue to be financed with exempt-facility bonds in appropriate cases (e.g., airport public parking facilities).

⁸⁵ This prior-law exception generally expired with respect to costs attributable to periods after 1985.

⁸⁶ The Act clarifies that an application for a license (rather than a preliminary permit) must have been docketed by FERC, in order for this transitional exception to apply.

⁸⁷ The special rules regarding offices financed as part of an airport, dock or wharf, or mass commuting facility (described above) take precedence over these rules with respect to those facilities.

⁸⁸ These same principles applied under prior law, and are continued under the Act, as part of the definition of manufacturing facility for purposes of the small-issue bond exception.

⁸⁹ The prior-law rule allowing an exception from the State volume limitations for bonds for certain airport, dock and wharf, and mass commuting facilities, pursuant to which property was treated as governmentally owned if the user made an irrevocable election to forego cost recovery deductions and the investment tax credit, is repealed.

⁹⁰ The term net proceeds is defined in the same manner as for exempt-facility bonds.

⁹¹ Beneficiaries of these bonds include all persons (other than governmental units) who are principal users of bond-financed property during a 3-year test period.

⁹² Congress did not intend, as a result of the amendments to the tax-exempt bond provisions, that use by a section 501(c)(3) organization during the six-year period for aggregating capital expenditures provided in sec. 144(a)(4) (former sec. 103(b)(6)(D)) for qualifying certain small-issue IDBs for tax-exemption be treated as use by a nonexempt person so as to render that capital expenditures limit violated with respect to bonds issued before August 16, 1986. The same result applies under the $40 million limitation.

⁹³ Any current refunding issue for an amount in excess of that required to redeem the outstanding principal amount of the refunded bonds (assuming redemption at no greater than par value) counts toward the $40-million limit.

⁹⁴ The 90-day limit is reduced to 30 days in the case of refundings of bonds originally issued before August 16, 1986, as under prior law. See, Title XVIII..

⁹⁵ Any refunding issue for an amount in excess of that necessary to redeem the outstanding principal amount of refunded bonds (assuming redemption at no greater than par value) is not eligible for the exception.

⁹⁶ The special limitations on refunding bonds contained in sec. 144(a)(12) apply only to refundings occurring after the otherwise applicable termination date of authority to issue the refunded bonds (original bonds in the case of a series of refundings), i.e., to refundings bonds issued after the applicable sunset date. Congress intended that post-sunset-date refundings of qualified small-issue IDBs originally issued before August 16, 1986, be permitted under limitations identical to those described for refundings of small-issue bonds originally issued after August 15, 1986. (But see, Act sec. 1313(a).) A technical amendment may be necessary for the statute to reflect this intent. It further may be necessary to provide in this technical amendment that bonds which were not subject to the new 95-percent-of-net-proceeds requirement of the Act when issued may be refunded under these rules although the refunding bonds do not meet the 95-percent test.

⁹⁷ The first-time farmer rule is an exception to the general rule prohibiting the use of exempt-facility and qualified small-issue bonds (previously IDBs) to acquire agricultural land, described in 7.c., below.

⁹⁸ Bonds issued before August 16, 1986, count in determining whether later issues exceed the $250,000 limit; however, the tax-exempt status of these earlier issues themselves is not affected.

⁹⁹See, note 48, supra., and the accompanying text, for amendments relating to qualified scholarship funding corporations.

¹⁰⁰ Congress intended that student loan bonds that fail to satisfy any of the requirements. Title IV of the Higher Education Act of 1965 (e.g., bonds that receive Federal guarantees, but which SAP payments are waived) be permitted to be issued as supplemental student loan bond if the bonds otherwise satisfy all requirements applicable to such bonds. A technical amendment may be necessary for the statute to reflect this intent.

¹⁰¹ Congress intended that Federal GSL or PLUS student loan bonds and supplemental student loan bonds may be issued as part of a single issue assuming appropriate allocations are made to ensure compliance with, e.g., the different requirements for Federal GSL and PLUS student loan bonds and for supplemental student loan bonds as to "bad money" portions, arbitrage rebate rules, and allowable temporary periods when bond proceeds may be invested without regard to yield restrictions.

¹⁰² Under the Act, a bond may not be treated as a student loan bond if it satisfies the private trade or business use and security interest tests (described in 2, above); however, Congress did not intend this provision to apply to use by section 501(c)(3) organizations solely by reason of their administration of a student loan bond program provided that that activity is not an unrelated trade or business of the organization. A technical amendment may be necessary for the statute to reflect this intent. Such an amendment was included in the versions of H. Con. Res. 395 that passed the House of Representatives and the Senate in the 99th Congress.

¹⁰³ These two types of bonds, formerly called mortgage subsidy bonds, are collectively retitled mortgage revenue bonds.

¹⁰⁴ Mortgage loans do not qualify as excluded loans eligible for the tax-assessment bond exception.

¹⁰⁵ Qualified veterans' mortgage bonds are not subject to the new State volume limitations for private activity bonds, discussed in 4., below.

¹⁰⁶ This requirement is identical to the requirement for exempt-facility bonds, described in a, above.

¹⁰⁷ Advance refundings of mortgage revenue bonds are prohibited. A special exception is provided, however, under Act sec. 1863, permitting issuance of up to $300 million of advance refundings of qualified veterans' mortgage bonds, subject to the eligible State's qualified veterans' mortgage bond volume limitation.

¹⁰⁸ Qualified mortgage bonds are subject to the new State volume limitations for private activity bonds, discussed in 4., below, in lieu of the separate limitations imposed on their issuance under prior law.

¹⁰⁹ The new income limits included in the Act are similar to income limits passed by the House of Representatives during its consideration of the Mortgage Subsidy Bond Tax Act of 1980.

¹¹⁰ This requirement is identical to the requirement for exempt-facility bonds, described in a., above.

¹¹¹ The Act generally conforms the exterior walls requirement in the definition of qualified rehabilitation to the new rules regarding the rehabilitation credit (other than for certified historic structures), however, the amount required to be spent for rehabilitation remains at 25 percent of the mortgagor's adjusted basis, rather than the 100-percent requirement of the rehabilitation credit.

¹¹² Congress intended that this cost-of-living adjustment would not be used to avoid the intended effect of the limited equity requirement, e.g., by adjusting the price of cooperative shares to reflect increases in the value of housing not subject to this requirement.

¹¹³ Congress intended that this sunset date be extended from 1987 to 1988, to parallel the qualified mortgage bond sunset date. A technical amendment may be necessary for the statute to reflect this intent.

¹¹⁴ Congress intended that this requirement not apply to current refundings issued after August 15, 1986, of bonds originally issued before August 16, 1986. (But see, Act sec. 1313(a).) A technical amendment may be necessary for the statute to reflect this intent.

¹¹⁵ This requirement is identical to the requirement for exempt-facility bonds, described in a., above.

¹¹⁶ This five percent is reduced by other so-called "bad money" uses of the issue proceeds.

¹¹⁷See, Rev. Rul. 77-352, 77-2 C.B. 34, for an example of circumstances under which use of section 501(c)(3) organization facilities by other nongovernmental persons may result in the facilities being treated as used in the other person's trade or business.

¹¹⁸ Qualified student loan bonds used to finance student loans to students enrolled in a section 501(c)(3) educational institution are not allocated to the institution for purposes of the limitation.

¹¹⁹ Any current refunding issue for an amount in excess of that required to redeem the outstanding principal amount of refunded bonds (assuming redemption at no greater than par value) counts toward the $150-million limit.

¹²⁰ This determination is different from the determination under the $40-million limit on beneficiaries of small-issue bonds. Under that provision, Treasury Department regulations require actual test-period beneficiaries of pre-effective date bonds to be determined and the bonds allocated accordingly.

¹²¹The tax-exempt status of bonds issued pursuant to transitional exceptions to this rule similarly is not affected; however, these bonds (like bonds issued before August 16, 1986) are counted in determining how many bonds are allocated to a section 501(c)(3) organization for purposes of evaluating compliance with the requirement at the time later issues are issued.

¹²² This requirement is identical to the requirement for exempt-facility bonds, described in a., above.

¹²³ For this purpose, tax-increment bonds (as defined in sec. 1869(c)(3) of the Act) which were issued before August 16, 1986, are treated as similar issues.

¹²⁴ For example, assume that bonds for a redevelopment project are nominally secured by incremental property tax revenues attributable to the redevelopment: however, a nongovernmental person has (1) entered into a special agreement with the city that the redevelopment site will be considered to have an assessed value for local property tax purposes of not less than a prescribed amount, until such time as the bonds are repaid, (2) agreed to be personally liable to pay the difference between the amount of real property taxes levied against the site and the amount of debt service on the bonds, or (3) agreed to finance the cost of credit enhancement for the bonds. Because repayment of the bonds is indirectly secured by payments derived from, or property used in the developer's business, the bonds may not be issued as qualified redevelopment bonds.

¹²⁵ Bonds the proceeds of which are used to finance construction and repair of such governmental facilities as street paving, sidewalks, street-lighting, and similar facilities are governmental bonds, and thus are not subject to the new requirements for qualified redevelopment bonds, if the bonds do not violate the trade or business use and security interest tests, the unrelated use restriction, or the private loan restriction, described in 2., above (i.e., if the bonds are not private activity bonds).

¹²⁶ This determination is similar to that used for allocating bond authority among overlapping units. See, the description of allocations under the State private activity bond volume limitations, in 4.d., below.

¹²⁷ Congress was aware that, in the case of the District of Columbia, the city council fulfills roles equivalent to both a State and local government, and intended that the D.C. city council be treated as both a State and local governmental body, as appropriate, for purposes of these requirements.

¹²⁸ The State is, however, to establish criteria for designating these areas, consistent with the Federal statutory criteria described below.

¹²⁹ Housing, the rehabilitation of which is financed with qualified redevelopment bonds, need not satisfy the targeting requirements applicable to exempt-facility bonds for residential rental projects or qualified mortgage bonds. As described below, rehabilitation (of housing or other structures) does not include new construction or the expansion of existing buildings.

¹³⁰ Existing redevelopment agencies, which had adopted redevelopment plans as of August 15, 1986, pursuant to State law, are not required to reexamine the original criteria used to designate blighted areas; however, no new financing may be provided for activities in these areas which otherwise may not be financed with qualified redevelopment bonds.

¹³¹ For purposes of determining these percentages, the total assessed value of real property in the jurisdiction includes the assessed value of real property located in previously designated blighted areas (determined as of the date of the subsequent designation).

¹³² Qualified redevelopment bonds may be issued in amounts necessary to finance the land that subsequently is transferred to private parties and for the other purposes (e.g., rehabilitation) for which the bonds may be issued, or only for the difference between the cost to the government and the amount paid by private parties for the land--for example, "gap financing". As under prior law, however, bonds are not private activity bonds if property is given or transferred for only a nominal amount to private parties, as opposed to being transferred for an amount that satisfies the revised security interest test included in the Act. See, 132 Cong. Rec. H8362, September 25, 1986 (statement of Mr. Rostenkowski).

¹³³ The limitation on use of bond proceeds to acquire existing facilities, unless rehabilitation expenditures equal or exceed 15 percent of the acquisition cost of the facilities, applies to qualified redevelopment bonds. If land and existing structures located thereon are acquired with an intent to demolish the structures, however, all costs of acquiring the property are to be treated as land acquisition costs. (See also, sec. 280B.)

¹³⁴ These restrictions parallel the facilities the financing of which was restricted or prohibited with respect to small-issue IDBs, or IDBs generally, under prior law.

¹³⁵ Congress intended that the Treasury Department will adopt rules to ensure that premiums and discounts are not used for the purpose of avoiding accurate reflection of the true principal amount of an issue. Examples of situations in which these rules may apply include (but are not limited to):

¹³⁷ Notwithstanding their characterization as private activity bonds for other purposes under the Act, bonds issued before August 16, 1986, are not counted under the new State private activity bond volume limitations for 1986.

¹³⁸ The portion of a governmental bond that may be used in a trade or business of a person other than a qualified governmental unit may not exceed 10 percent of net proceeds. Under a special restriction on bonds for output facilities (other than facilities for the furnishing of water), the aggregate bond-financed private use for such facilities may not exceed $15 million; therefore, private use for these facilities will never exceed the amount that renders the private use portion of governmental bonds subject to the new volume limitations (except in the case of certain bonds to advance refund bonds originally issued before September 1, 1986).

¹³⁹ Private activity bonds authorized under transitional exceptions to the Act also are subject to these volume limitations unless an exception is provided for these bonds in Act sec. 1315 (providing exceptions to the new volume limitations) or under the specific terms of a project-specific transitional exception.

¹⁴⁰ Bonds issued under the Taxes Veterans' Land Bond Program, the Oregon Small-Scale Energy Conservation and Renewable Resource Loan Bond programs, and the Iowa Industrial New Jobs Training Program are subject to the new private activity bond volume limitations.

¹⁴¹ Advance refundings of governmental bonds originally issued before September 1, 1986, are subject to the new volume limitations only if more than 5 percent of the net proceeds of the issue were used for output facilities (not including facilities for the furnishing of water).

¹⁴² The fact that loans financed with certain student loan bonds generally must be available to all individuals attending schools within the issuing State (regardless of their State of legal residence) and to all residents of the State (regardless of the State in which they attend school) is not affected by the limitation on financing out-of-state facilities, since those bonds are not used to finance facilities. (See, 3.c., however, describing a new prohibition on financing loans for students who are enrolled in out-of-state schools and who are not residents of the issuing State.)

¹⁴³ Congress intended that volume authority allocations be permitted for the private-use portion of governmentally owned and operated output and other facilities of the type for which out-of-State allocations are permitted in the case of private activity bonds. A technical amendment may be necessary for the statute to reflect this intent.

¹⁴⁴ In the case of governmental facilities, only the private business use portion of bond-financing in excess of $15 million is subject to the new volume limitations. Accordingly, the benefit analysis required for out-of-State allocations is limited to the private use portion of the applicable bond financing and facilities.

¹⁴⁵ Alternatively, the determination of tax ownership may be made using general concepts tax ownership. See 3.a., above, for a description of these rules.

¹⁴⁶ Any current refunding issue for an amount in excess of that required to redeem the outstanding principal amount of the refunded bonds (assuming redemption at no greater than per value) is not eligible for this exception.

¹⁴⁷ For current refundings of student loan bonds and mortgage revenue bonds to be exempt from the volume limitation, the period permitted for making loans to finance student loans owner-occupied residences must be measured from the date the refunded (or original) bonds were issued. See, Effective Dates, below, for a more detailed description of this requirement.

¹⁴⁸ The term refunding includes a rollover of commercial paper and other comparable action which, under prior (and present) law, constitutes a reissuance of so-called flexible bonds. See, 131 Cong. Rec. H12461, December 17, 1985 (colloquy between Mr. Rostenkowski and Mr. Matsui.

¹⁴⁹ A governmental unit may voluntarily transfer all or part of its allocation to the unit having jurisdiction over the next largest geographic area.

¹⁵⁰ For example, a gubernatorial proclamation that refers to the "unified volume limitation contained in H.R. 3838, as passed by the House of Representatives, or any modification of that limitation enacted as part of tax reform legislation included in a conference report on H.R. 3838" is to be treated as satisfying this requirement.

¹⁵¹ Carryforwards of prior-law 1986 bond volume authority are prohibited under the Act.

¹⁵² In the case of acquired program obligations, the prior-law limit of 1.5 percentage points (plus certain costs) permitted by Treasury Department regulations also is not affected.

¹⁵³ Section 648 of the Deficit Reduction Act of 1984 provides that, in certain cases, property held in a Permanent University Fund for two specified universities is not treated as an investment of bond proceeds for purposes of the Code arbitrage restrictions. The Act does not affect this provision.

¹⁵⁴ Congress was aware that bond proceeds might be used to prepay items as a means to avoid arbitrage restrictions, and intended for the Treasury Department to adopt rules to treat such prepayments as investment-type property where appropriate. This treatment was not intended to apply, e.g., to customary prepayments for bond insurance.

¹⁵⁵ A technical amendment may be necessary for the statute to reflect this intent.

¹⁵⁶See, Temp. Treas. Reg. sec. 6a.103A-2.

¹⁵⁷ Bonds that receive a Federal guarantee under the GSL program, but which do not meet the other requirements of sec. 144(b)(1)(4), are not eligible for this special exception. See, the description of the new rules applicable to student loan bonds, above.

¹⁵⁸ As under prior law, in a refunding issue, the minor portion exception applies only to transferred proceeds that originally were proceeds of a nonrefunding issue.

¹⁵⁹ Congress intended that the Treasury Department adopt rules to prevent avoidance of this and other restrictions through artificial allocations (or replacements) of bond proceeds. For example, it was not intended that the restrictions on bond-financed issuance costs could be avoided by using unexpended proceeds of a prior issue to pay issuance costs of a refunding issue.

¹⁶⁰ Congress understood that in certain cases where bonds are repaid from a tax of general application, which tax is levied by the voters of a governmental unit specifically for the purpose of paying debt service in conjunction with the unit's issuance of bonds, State law may be interpreted to preclude the governmental unit from using those taxes (or income derived from investments of the taxes pending payment of debt service) for any purpose other than payment of debt service while such "tax bonds" are outstanding. In such cases, the governmental unit's inability to predict precisely the extent to which there will be nonpayments or a delay in payment of taxes may lead to the establishment of a tax rate which results in tax collections in any given year exceeding the debt service on its bonds during that year. These circumstances may, in turn, result in an accumulation of taxes and investment income in a fund dedicated to repayment of the bonds. Congress intended that the Treasury Department will adopt rules that will treat such excess amounts as part of a reasonably required reserve or replacement fund. This treatment does not, however, increase the maximum amount that may be invested in a reserve fund for any bond issue or the maximum amount that may be invested without regard to yield restrictions. Additionally, amounts treated as a reserve fund pursuant to such rules are subject to the rebate requirement applicable generally to gross proceeds invested as part of a reserve fund.

¹⁶¹See, 132 Cong. Rec. E3392 (October 2, 1986) (statement of Mr. Rostenkowski).

¹⁶² Arbitrage profits on such additional amounts are subject to the rebate requirements of the Act and prior law (where appropriate) to the same extent as other proceeds of the issue.

¹⁶³ As under prior law, amounts invested in a reserve or replacement fund are not treated as having been spent for the governmental purpose of the borrowing; thus under the Act, any arbitrage profits on such a fund must be rebated to the Federal Government. See, the discussion of the arbitrage rebate requirements, below.

¹⁶⁴ This definition of yield does not affect the ability to treat certain credit enhancement fees as interest costs under the arbitrage restrictions, as discussed above.

¹⁶⁵ The term refunding includes rollovers of commercial paper and other comparable actions which, under prior (and present) law, constitute a reissuance of so-called flexible bonds. See, 131 Cong. Rec. H12461, December 17, 1985 (colloquy between Mr. Rostenkowski and Mr. Matsui).

^165a Congress understood that Treasury Department regulations with respect to IDBs provide that the purchase or sale of a certificate of deposit (CD) does not result in a prohibited payment for rebate purposes if, inter alia, the price paid is the same as would be paid on an active secondary market in such CD's (or comparable obligations). Because of State-law requirements, political subdivisions in some States generally have invested proceeds of bonds other than private activity bonds in CD's for which no secondary market exists. Congress intended that the investment of such governmental bond proceeds in bank CD's generally will not result in a prohibited payment if, for example, the issuer receives bona fide bids from three or more unrelated financial institutions and purchases a CD at the bank offering the highest yield.

¹⁶⁶ This is separate from the rebate exception for certain small governmental issues, discussed below.

¹⁶⁷ A technical amendment may be necessary for the statute to reflect this intent. Such an amendment was included in the versions of H. Con. Res. 395 which passed both the House of Representatives and the Senate in the 99th Congress. A further technical amendment may be necessary for the statute to reflect Congress' intent that this rule be self-implementing and authorizing Treasury to extend this rule to other circumstances involving a series of issues. Congress intended that any rules issued pursuant to this direction may involve only the timing of rebate payments as opposed to the amount ultimately required to be rebated by an issuer.

¹⁶⁸ Congress intended that, where (i) a governmental unit having general taxing powers borrows from a bond bank (including a similar arrangement) which bank exclusively lends bond proceeds in a manner that does not result its bonds being private activity bonds, (ii) the use of the proceeds by each borrower from the bank would not result in those proceeds being private activity bonds (if viewed as a separate issue), and (iii) issues (other than private activity issues) by the borrowing governmental unit and subordinate entities (including borrowings from the bond bank and other sources) are not reasonably expected to exceed $5 million for the calendar year, the small-issuer rebate exception is to be available to the borrowing governmental unit with respect to the borrowings from the bond bank. In applying the rebate rule to nonpurpose investments acquired by other borrowers with proceeds of the bonds issued by the bond bank (i.e., those issuers directly or indirectly issuing more than $5 million of governmental bonds during the calendar year), the yield on the bonds, rather than the yield on loans to the borrower from the bond bank, is to be used in computing the amount of rebate (As under the general rule on expenditures for the governmental purpose of the borrowing, the making of a loan by the bond bank is not an expenditure for purposes of the 6-month expenditure rebate exception; thus, the bond bank and its borrowers are subject to rebate unless all proceeds of the issue are expended for the ultimate purposes of the borrowing within that period or, in the case of governmental units borrowing from the bank, the unit qualifies under the small-issuer rebate exception.)

¹⁶⁹ In making this determination, bonds issued before September 1, 1986, are counted.

¹⁷⁰ This exception does not apply to so-called tax and revenue anticipation notes (TRANs); rather, a special safe-harbor exception from the rebate requirement, described below, is provided for those governmental bonds.

¹⁷¹ As noted in the description of the new rules applicable to student loan bonds, above, bonds that receive a Federal guarantee under the GSL program but which do not meet the other requirements of sec. 144(b)(1)(A) are not eligible for this special exception.

¹⁷² In addition to this safe-harbor exception, TRANs may qualify for a rebate exception if the governmental issuer establishes that it has actually spent the proceeds of the notes for governmental purposes within six months of their issue. For this purpose, as described above, TRAN proceeds are treated as spent only as actual cash-flow deficits arise and the note proceeds are used to offset these deficits. Proceeds held on hand in governmental treasuries at the end of a determination period and expenditures occurring when other funds are available are not treated as made from TRAN proceeds. (See, 132 Cong. Rec. S13960 (September 27, 1986) (colloquy between Senator Moynihan and Senator Packwood); 136 Cong. Rec. E3391 (October 2, 1986) (statement of Mr. Rostenkowski).)

¹⁷³ Congress intended that, for purposes of the rebate requirement, the Treasury Department will adopt rules that provide that deficits are treated as occurring only if no amounts other than bond proceeds are available to the governmental units to pay the expenses for which bond proceeds are to be used. In determining whether an amount is available to a governmental unit, these rules may provide that the fact that the amount is deposited in special purpose accounts or otherwise earmarked is to be disregarded if the governmental unit using the TRAN proceeds either (i) established the restrictions on the use of the other funds, or (ii) has the power to alter the use of the other fund. But see, Treas. reg. sec. 1.103-14(c)(3).

¹⁷⁴ This safe-harbor does not affect the amount of TRANs that may be issued by a governmental unit or that qualify for a temporary period exception from arbitrage yield restrictions.

¹⁷⁵ A technical amendment may be necessary for the statute to reflect Congress' intent that the standard for waiver is the absence of willful neglect (rather than reasonable cause).

¹⁷⁶ Bonds that may not be currently refunded as a result of any provision of the Act or of prior law (e.g., the 1984 Act), or that could not be advance refunded under prior law, may not be advance refunded under this provision. Similarly, bonds authorized for certain specified State programs, pursuant to non-Code provisions of the Act, are private activity bonds and may not be advance refunded.

¹⁷⁷ These requirements were intended to apply, inter alia, to any crossover refunding of a floating- or fixed-rate issue and to any other advance refunding that does not result in the defeasance of the prior issue. If two or more prior issues are refunded by a single issue, and the refunding of one or more prior issue may produce a present-value debt service savings, that issue or issues must satisfy the applicable call requirements. If such a refunding may produce a present-value debt service savings in the aggregate, all of the refunded issues must satisfy the applicable call requirements.

¹⁷⁸ Additionally, Congress intended that Treasury may provide rules to prevent any attempt to evade the first call date requirement through artificial means, e.g., by extending the call protection of the refunded bonds.

¹⁷⁹ The 30-day temporary period rule applies only to proceeds to be used to redeem the refunded bonds. Thus, special temporary period rules for amounts used to pay accrued interest, issuance costs, and certain de minimis amounts provided in Treasury Department regulations are unaffected by the Act. (See, Treas. Reg. sec. 1.103-14(e)(3)(vii), (viii), and (ix).)

¹⁸⁰ This rule applies whether or not the refunded bonds were issued on or after September 1, 1986.

¹⁸¹ Congress did not intend, however, for this rule to preclude a second advance refunding (where permitted under the Act), when because of escrow terms in effect before January 1, 1986, that may not be amended, the minor portion for the first advance refunding legally may not be reduced. In such cases, Congress anticipated that the Treasury Department may permit issues to adjust down the yield of the proceeds of the prior issue by investing the proceeds of the refunding issue at a lower yield.

¹⁸² Congress intended that, in most circumstances, Treasury will exercise its authority under sec. 7805(b) to make such regulations or rulings prospective in effect. Congress did not intend, however, to limit the authority of the Treasury Department to apply such regulations or rulings retroactively where the device involves a deliberate and intentional effort to earn economic arbitrage in connection with the issuance of advance refunding bonds.

¹⁸³ No inference was intended that transactions described (or not described) in these examples did not render interest on bonds taxable under prior law.

¹⁸⁴ This percentage is reduced to 90 percent in the case of qualified student loan bonds issued in connection with the Federal GSL and PLUS programs.

¹⁸⁵ The fact that proceeds in excess of two percent were used to finance costs of issuance of refunded bonds issued before the effective date of this provision does not preclude issuance of refunding bonds where otherwise permitted under the Act.

¹⁸⁶ If land and existing structures are acquired with an intent to demolish the structures, all costs of acquiring the property are treated as land acquisition costs.

¹⁸⁷ Amendments to the first-time farmer exception are described above, in the discussion of rules applicable to small-issue bonds.

¹⁸⁸ Qualified redevelopment bonds are subject to special rules regarding facilities for which financing is restricted or prohibited. See, the discussion of rules applicable to these bonds in 3.f, above.

¹⁸⁹ Under the Act, bonds issued pursuant to the Texas Veterans' Land Bond Program are treated as private activity bonds, and are subject to this public approval requirement. These bonds are issued pursuant to constitutional referenda approved, from time to time, by the voters of the State of Texas. Bonds issued as part of the Texas Veterans' Land Bond Program pursuant to any prior or future referendum approved by the voters of the State of Texas amending Article III of the Constitution of the State of Texas will satisfy the public approval requirements even though the identity of individual borrowers/mortgagors and the location of land to be financed is not known prior to or on the date such bonds are approved or issued. Such a referendum amending the Texas Constitution will satisfy the public approval requirements provided that a public hearing is held with respect to any issue subsequent to the first issue covered by the referendum. See, 132 Cong. Rec. H8362 (September 25, 1986) (statement of Mr. Rostenkowski); 132 Cong. Rec. S13960 (September 27, 1986) (colloquy between Senator Bentsen and Senator Packwood).

¹⁹⁰ These additional restrictions do not apply to property financed with governmental (i.e., non-private activity) bonds; however, those bonds remain subject to all prior-law rules under which bond interest may become taxable.

¹⁹¹ This requirement applies throughout the prescribed qualified project period in the case of projects for residential rental property financed with exempt-facility bonds.

¹⁹² Unlike the restoration of future deductions for interest (or other) payments, bonds the interest on which becomes taxable do not regain tax-exempt status upon correction of any violation of the qualifications for tax-exemption.

¹⁹³See, 3.a., above, for special change in use rules applicable to multifamily residential rental projects.

¹⁹⁴ A technical amendment may be necessary for the statute to reflect Congress' intent that facilities financed with qualified small-issue bonds be subject to the change in use restrictions.

¹⁹⁵ The change in use rules are not intended to require any bond-financed property to meet targeting rules more stringent than those that applied to the bonds at the time of issue. For example, bonds for residential rental projects that are exempt from the new targeting requirements of the Act, pursuant to transitional exceptions, are required to meet the targeting requirements of sec. 103(b)(4)(A) of prior law (rather than new sec. 142(d)) in order to avoid the change in use penalties.

¹⁹⁶ Congress intended that the disallowance of interest deductions for bond-financed housing cease prospectively if the residence again qualifies as the mortgagor's principal residence. A technical amendment may be necessary for the statute to reflect this intent.

¹⁹⁷ Mortgage loans financed with qualified mortgage bond proceeds may be assumed only if the new mortgagor satisfies all requirements for initial borrowers. Therefore, this loss of interest deductions would not apply to such transfers of ownership. Congress was aware that certain veterans' mortgage programs permit assumptions of these financings by persons not qualified to be initial borrowers, and intended that changes in ownership accompanied by such assumptions not be treated as a change in use for purposes of the Act provided the loan assumption satisfies all requirements of the applicable veterans' mortgage bond program (as in effect on the date of the Act's enactment).

¹⁹⁸See, e.g., sec. 147(f) (regarding the $150-million-per-institution limit on outstanding nonhospital bonds).

¹⁹⁹ In the case of a partial change in use (including a partial change in ownership) where an interest element is imputed as a portion of another user fee (e.g., rent), the maximum amount treated as nondeductible will be the amount of the rent or other user fee, but not exceeding an allocable amount of interest on the underlying bond financing.

²⁰⁰ Other provisions retained by the Act include, but are not limited to, (i) the requirement that most tax-exempt bonds be issued in registered form, and (ii) special requirements pertaining to non-Code bonds. Thus, as under prior law, tax-exemption for all bonds may be derived only from the Internal Revenue Code, including tax-exemption for interest on all bonds authorized to be issued under certain pre-1984 non-Code statutes. As a condition of receiving tax-exemption, these bonds must satisfy all requirements for tax-exemption that apply to bonds the proceeds of which are used for a comparable purpose for which tax-exemption is authorized under the Code. Non-Code bonds for which no comparable tax-exempt use is authorized under the Code are not eligible for tax-exemption.

²⁰¹ A technical amendment may be necessary for the statute to reflect Congress' intent that this exception be permanently extended. Such an amendment was included in the versions of H. Con Res. 395 that passed the House and the Senate in the 99th Congress.

²⁰² A technical amendment may be necessary for the statute to reflect Congress' intent with respect to issuance of qualified redevelopment bonds by the District of Columbia. Such an amendment was included in the versions of H. Con. Res. 395 which passed the House of Representatives and the Senate in the 99th Congress.

²⁰³ Certain provisions of other legislation have established Federal entities to guarantee certain types of tax-exempt bonds, while stating that the guarantees are not (or may not) be treated as Federal guarantees. Congress intended that the substance of these guarantee transactions, as opposed to any statements as to form or intent in the enacting legislation, govern their treatment under the tax laws. Thus, guarantees by federally chartered and controlled entities like the new College Construction Loan Insurance Association established in P.L. 99-498 are treated as Federal guarantees that are prohibited by the rules governing tax-exempt financing. See, 132 Cong. Rec. E3392 (October 2, 1986) (statement of Mr. Rostenkowski).

²⁰⁴ A more complete description of the depreciation provisions of the Act is found in Title. II., Part A., above.

²⁰⁵ A technical amendment may be necessary for the statute to reflect Congress' intent that the standard for waiving loss of tax-exemption is the absence of willful neglect (rather than reasonable cause).

²⁰⁶ For a fuller description of these effective dates, see, Joint Statement by The Honorable Dan Rostenkowski (D., III.), Chairman, Committee on Ways and Means. The Honorable Bob Packwood (R., Ore.), Chairman, Committee on Finance. The Honorable John J. Duncan (R., Tenn.). Ranking Member, Committee on Ways and Means, The Honorable Russell Long (D., La.). Ranking Member, Committee on Finance, and The Honorable James A. Baker, III, Secretary of the Treasury, on the Effective Dates of Pending Tax Reform Legislation, March 14, 1986; and Joint Statement of Chairman Rostenkowski, Chairman Packwood, and Secretary Baker, July 17, 1986 (reproduced as Appendices XIII-1 and XIII-2, infra).

²⁰⁷ The revisions to the exceptions to the private loan restriction (including continuation of the prior-law exceptions) are effective for bonds issued after August 15, 1986.

²⁰⁸ These private loan bonds include bonds issued as part of the Texas Veterans' Land Bond Program, the Oregon Small-Scale Energy Conservation and Renewable Resource Loan programs, and the Iowa Industrial New Jobs Training Program.

²⁰⁹ This rule applies equally to non-Code bonds, regardless of when issued, that are comparable to any of the foregoing categories.

²¹⁰ Bonds issued pursuant to this exception include only those issues to finance the transitioned facility. The fact that a portion of the proceeds of a larger, multipurpose issue is used for a transitioned facility does not exempt the issue from any of the provisions of the Act.

²¹¹ Advance refunding bonds, as defined in the Act, may not be issued pursuant to this exception.

²¹² This date is August 16, 1986, for private activity bonds, and September 1, 1986, for bonds other than private activity bonds.

²¹³ Any current refunding issue for an amount in excess of that required to redeem the outstanding principal amount of the refunded bonds (assuming redemption at no greater than par value) does not qualify for this exception.

²¹⁴ A similar rule applies to qualified mortgage bonds and qualified veterans' mortgage bonds, using a 32-year rather than a 17-year limit. (This rule is discussed under the effective dates for mortgage revenue bonds.)

²¹⁵ A technical amendment may be necessary for this statute to reflect Congress' intent that bonds used to make excluded loans (so-called tax assessment bonds) may be advance refunded under this exception, provided that the bonds would be governmental bonds (but for the private loan bond restriction).

²¹⁶ This includes, inter alia, the requirement that all property financed with exempt-facility issues for airports, docks and wharves, and mass commuting facilities be governmentally owned.

²¹⁷ This rule, and subsequent transitional exceptions for current refunding bonds (where appropriate), also apply to current refundings of bonds issued pursuant to the transitional exception for certain in-progress projects, described in the preceding paragraph, except that such refundings of transitioned bonds must comply with all provisions of the Act that applied to the refunded bonds (in addition to all such provisions that apply to bonds issued under the refunding transitional exception generally).

²¹⁸ A technical amendment may be necessary to reflect Congress' intent with respect to post-sunset date refundings of small-issue bonds. See, 3.b., above.

²¹⁹ Any current refunding issue for an amount in excess of that required to redeem the outstanding principal amount of the refunded bonds (assuming redemption at no greater than par value) does not satisfy this requirement.

²²⁰ Any current refunding issue for an amount in excess of that required to redeem the outstanding principal amount of the refunded bonds (assuming redemption at no greater than par value) does not satisfy this requirement.

²²¹ A technical amendment may be necessary for the statute to reflect Congress' intent that the repeal of the prior-law annual policy statement requirement be effective for current refunding bonds issued after August 16, 1986, notwithstanding the transitional exception for current refunding bonds contained in Act sec. 1313(a)(1). See, 3.d., above.

²²² A technical amendment may be necessary for the statute to reflect Congress' intent regarding this effective date. Such an amendment was included in the versions of H. Con. Res. 395 that passed the House of Representatives and the Senate in the 99th Congress.

²²³ An exception for certain current refunding bonds for purposes of the $150-million-per-institution limit on non-hospital bonds is included in the substantive rules pertaining to that limit.

²²⁴ Certain bonds, issuance of which is authorized under generic transitional exceptions in the Act (Act secs. 1312 and 1313) involve a use of proceeds comparable to that of categories of private activity bonds (e.g., exempt facility bonds) for which carryforward elections may be made under the State new private activity bond volume limitations. In such cases, Congress intended that carryforward elections under these new private activity bond volume limitations (for years 1986 and thereafter) be permitted to the same extent as if the bonds were identified in new Code sec. 146(f)(5), provided all such bonds are issued within the allowable carryforward period for such bonds. A technical amendment may be necessary for the statute to reflect this intent. See also, note 237, below, for a comparable rule for certain project-specific transitional exceptions.

²²⁵ The November 1, 1985, date is extended to January 1, 1986, with respect to facilities covered by a special generic transitional exception to the depreciation and investment tax credit provisions of the Act for certain solid waste disposal facilities (sec. 204(a)(8) of the Act) or by certain project-specific transitional exceptions (Act sec. 1315(d)). The generic exception covers solid waste disposal facilities--

²²⁶See, the Joint Statement on Effective Dates of March 14, 1986, supra.

²²⁷ This change generally was not intended to apply to bonds issued before August 16, 1986.

²²⁸See, the Joint Statement on Effective Dates of March 14, 1986, supra.

²²⁹ A pooled financing is to be deemed to satisfy the requirement that bond proceeds be used exclusively for activities of the issuer and subordinate governmental units in a case where (1) the physical boundaries of the city/issuer are coterminous with those of the county in which it is located, and (2) the bond proceeds are for use by an independent hospital authority serving only the city/issuer except for certain de minimis areas that physically are entirely surrounded by the city, but which legally are independent jurisdictions under applicable State law. See, 132 Cong. Rec. p. E3392 (October 2, 1986) (statement of Mr. Rostenkowski).

²³⁰ A technical amendment may be necessary for the statute to reflect Congress' intent that this requirement apply to refundings of bonds originally issued before January 1, 1986.

²³¹See, the Joint Statement on Effective Dates of March 14, 1986, supra.

²³² A technical amendment may be necessary for the statute to reflect Congress' intent that this effective date be August 15, 1986, (or August 31, 1986, where applicable), rather than December 31, 1986. Such an amendment was included in the versions of H. Con. Res. 395 that passed the House of Representatives and the Senate in the 99th Congress.

²³³ A technical amendment may be necessary for the statute to reflect Congress' intent that this extension be effective for bonds issued after December 31, 1986 (rather than August 15, 1986).

²³⁴ Congress intended that these project-specific transition rules would be in addition to any generic transition rules applicable under the Act.

²³⁵ A technical amendment may be necessary for the statute to reflect Congress' intent that, subject to restrictions similar to those imposed on post-sunset refundings of qualified small-issue bonds, bonds authorized under these project-specific transitional exceptions may be currently refunded. Advance refundings of bonds authorized under these transitional exceptions is not permitted.

²³⁶ This provision also applies to bonds for governmentally owned airports, docks and wharves, mass commuting facilities, and convention or trade show facilities.

²³⁷ Certain of these project-specific transitional exceptions specifically describe the bonds authorized under the exceptions as exempt-facility or other types of bonds for which carryforward elections are permitted under the new State private activity bond volume limitations. In such cases, Congress intended that carryforward elections under the new State private activity bond volume limitations (for years 1986 and thereafter) be permitted to the same extent as if the bonds were identified in new Code sec. 146(f)(5), provided all such bonds are issued before the termination date for the transitional exception authorizing their issuance. A technical amendment may be necessary for the statute to reflect this intent.

²³⁸ Re-enactment of these project-specific transition rules does not change the general prohibition contained in the 1984 Act and other previous revenue Acts on refunding certain obligations (e.g., private loan bonds) that may not be originally issued under those Acts.

²³⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 702; H. Rep. 99-426, p. 573; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 1517 and 1518; S. Rep. 99-313, pp. 860-1; and H. Rep. 99-841, Vol. II (September 18, 1986), p. II-762 (Conference Report).

III. Title XIV.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1211; H. Rep. 99-426, pp. 804-19; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 101, 1611-14; S. Rep. 99-313, pp. 866-74; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 763-66 (Conference Report).

² The income tax schedule for estates and trusts for 1987 would be as follows:

 If taxable income is--                 The tax is--

⁴ This spreading of the inclusion of income applies to distributions of distributable net income of the trust. It does not apply to any accumulation distributions occurring during the short taxable year.

⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1201; H. Rep. 99-426, pp. 800-03; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1601; S. Rep. 99-313, pp. 862-5; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 767-69 (Conference Report).

⁶ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1615; S. Rep. 99-313, pp. 876-7; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 770-71 (Conference Report).

⁷ This provision applies only to estates of individuals where attempted elections were timely (within the meaning of sec. 2032A(d)(1)).

⁸ The absence of a direction that an agreement is required under sec. 2032A(d) was corrected on the January 1984 edition of Form 706.

⁹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 717; S. Rep. 99-313, pp. 283-84; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 771-72 (Conference Report).

¹⁰ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1618; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 772-73 (Conference Report).

¹¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 1221-23; H. Rep. 99-426, pp. 820-28; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 774-76 (Conference Report).

¹² The new generation-skipping transfer tax does not apply to the exercise of a limited power of appointment under an otherwise grandfathered trust or to trusts to which the trust property is appointed provided such exercise cannot postpone vesting of any estate or interest in the trust property for a period ascertainable without regard to the date of the creation of the trust. See, 132 Cong. Rec. H8362 (September 25, 1986) (colloquy between Mr. Rostenkowski and Mr. Andrews) and 132 Cong. Rec. S13952 (September 26, 1986) (colloquy between Senator Packwood and Senator Bentsen).

¹³ Congress intended that the generation-skipping transfer tax not apply to transfers made pursuant to revocable trusts created before the date of enactment (October 22, 1986) if the grantor of the trust died before January 1, 1987. A technical amendment may be necessary for the statute to reflect this intent. Such an amendment was included in the H. Cong. Res. 395, as passed by the House of Representatives and Senate in the 99th Congress.

III. Title XV.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1301; H. Rep. 99-426, pp. 829-831; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 501; S. Rep. 99-313, pp. 175-177; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 777-778 (Conference Report).

² The Act also raises from $50,000 to $100,000 per calendar year the maximum penalty for failure to supply taxpayer identification numbers (sec. 6676).

³ See Code sec. 6050I.

⁴ See Code sec. 6050K.

⁵ See Code sec. 6050L.

⁶ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1302; H. Rep. 99-426, pp. 831-833; H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 502; S. Rep. 99-313, pp. 177-179; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 778-779 (Conference Report).

⁷ Once the penalty rate in effect is one percent for any month with respect to a particular taxable year and type of tax, the one-percent rate is applicable to any penalty for failure to pay taxes for that taxpayer for all subsequent months.

⁸ Generally, the IRS sends taxpayers a series of four or five letters demanding payment before a levy is made. These letters will go out over a period of approximately six months. The IRS will, however, truncate the number of letters and the time between them for reasons such as concern that delay will jeopardize collection.

⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1303; H. Rep. 99-426, pp. 833-836; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 503; S. Rep. 99-313, pp. 179-182; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 779-782 (Conference Report).

¹⁰ In a recent case, the Sixth Circuit held that the negligence penalty "should be applied only to that portion of the deficiency attributable to [the negligent action]." (Asphalt Products Co. v. Comm'r., Nos. 84-1841, 84-1882, slip op. (6th Cir. July 17, 1986)). The Act provides that the negligence penalty applies (once one element of negligence has been demonstrated) to the entire underpayment, not just to the portion attributable to negligence. The Act is, with respect to this issue, a continuation of the rule of prior law, which also provided that the negligence penalty applies to the entire underpayment, not just to the portion attributable to negligence. Congress noted that this case both inaccurately states prior law and is in any event of no effect under the Act.

¹¹ The IRS may issue regulations implementing this rule.

¹² For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 504; S. Rep. 99-313, pp. 182-183; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 782-783 (Conference Report).

¹³ Examples of the types of taxes to which this provision applies include individual income taxes, corporate income taxes, and the unrelated business income tax.

¹⁴ Sec. 8002 of the Omnibus Budget Reconciliation Act of 1986 (P.L. 99-509) increased this penalty to 25 percent of the underpayment, effective for penalties assessed after the date of enactment of the Omnibus Budget Reconciliation Act (October 21, 1986). The date of enactment of the Tax Reform Act of 1986 was October 22, 1986. Congress intended that the increase in this penalty provided by the Omnibus Budget Reconciliation Act supercede the increase provided by the Tax Reform Act, regardless of which was enacted first. A technical correction may be needed so that the statute reflects this intent.

¹⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1331; H. Rep. 99-426, pp. 849-850; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 511; S. Rep. 99-313, pp. 184-185; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 784-785 (Conference Report).

¹⁶ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1332; H. Rep. 99-426, pp. 850-851; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 512; S. Rep. 99-313, pp. 185-186; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 785 (Conference Report).

¹⁷See Rev. Rul. 72-324, 1972-1 C.B. 399.

¹⁸ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1341; H. Rep. 99-426, p. 855; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 521; S. Rep. 99-313, pp. 187-188; Senate floor amendment, 132 Cong. Rec. S7968-7969 (June 19, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 786-787 (Conference Report).

¹⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1342; H. Rep. 99-426, p. 856; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 522; S. Rep. 99-313, pp. 188-189; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 787-788 (Conference Report).

²⁰ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 523; S. Rep. 99-313, pp. 189-190; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 788-789 (Conference Report).

²¹ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S7893-7898 (June 19, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 789-790 (Conference Report).

²² For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1343; H. Rep. 99-426, pp. 857-858; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 790 (Conference Report).

²³ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 501(c)(2), (3), and (5) and 523; S. Rep. 99-313. pp. 190-191; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 791 (Conference Report).

²⁴ These are in addition to the other enclosures, such as other information reports or tax forms, that the IRS currently permits to be enclosed.

²⁵ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 532; S. Rep. 99-313, p. 193; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 793-794 (Conference Report).

²⁶ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 533; S. Rep. 99-313, pp. 193-194; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 794 (Conference Report).

²⁷ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 534; S. Rep. 99-313, p. 194; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 794-795 (Conference Report).

²⁸ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 535; S. Rep. 99-313, pp. 194-195; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 795 (Conference Report).

²⁹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 536; S. Rep. 99-313, p. 195; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 795-796 (Conference Report).

³⁰ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1311; H. Rep. 99-426, p. 837; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 561; S. Rep. 99-313, p. 196; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 797 (Conference Report).

³¹ In fact, a number of these taxpayers are over-withheld. A substantial portion of over-withholding appears to occur because of taxpayer preference, however, rather than widespread defects in the withholding system.

³² For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S8078-8079 (June 20, 1986); S8223-8224 (June 24, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 797-798 (Conference Report).

³³ For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), p. 798 (Conference Report).

³⁴ The rule described on page 64 of volume II of the Conference Report (providing 30 days from the date of enactment to pay underpayments attributable to the repeal of the investment tax credit) is of no effect, since it is subsumed by the statutory rule described above. See 132 Cong. Rec. H8359 (September 25, 1986) (Statement of Mr. Rostenkowski).

³⁵ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1315; H. Rep. 99-426, pp. 838-841; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 541; S. Rep. 99-313, pp. 197-199; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 799-802 (Conference Report).

³⁶ This is because the Equal Access to Justice Act is contained in Title 28 of the United States Code, which deals with courts created under Article III of the United States Constitution. The United States Tax Court is established under Article I of the United States Constitution.

³⁷ The exceptions are "that an organization described in section 501(c)(3) of the Internal Revenue Code of 1954 (26 U.S.C. 501(c)(3)) exempt from taxation under section 501(a) of such Code. or a cooperative association as defined in section 15(a) of the Agricultural Marketing Act (12 U.S.C. section 1141j(a)), may be a party regardless of the net worth of such organization or cooperative association." Such an organization or cooperative association may not recover fees if it has more than 500 employees.

³⁸ A technical correction may be needed so that the statute reflects this intent.

³⁹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1316(a)-(c); H. Rep. 99-426, pp. 841-842; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 802-803 (Conference Report).

⁴⁰ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1316(d); H. Rep. 99-426, pp. 841-842; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 803 (Conference Report).

⁴¹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 542; S. Rep. 99-313, pp. 199-200; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 803-804 (Conference Report).

⁴² For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 543; S. Rep. 99-313, p. 200; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 804 (Conference Report).

⁴³ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 544; S. Rep. 99-313, p. 201; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 804-805 (Conference Report).

⁴⁴ For legislative background of the provision. see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 545; S. Rep. 99-313, pp. 201-202; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 805 (Conference Report).

⁴⁵ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 546; S. Rep. 99-313, p. 202; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 805-806 (Conference Report).

⁴⁶ For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), p. 806 (Conference Report).

⁴⁷ For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), p. 807 (Conference Report).

⁴⁸ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 556; S. Rep. 99-313, pp. 206-207; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 809 (Conference Report).

⁴⁹ The statute is, however, suspended if the taxpayer intervenes in the dispute between the IRS and the third-party recordkeeper (sec. 7609(e)).

⁵⁰ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1321; H. Rep. 99-426, p. 843; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 551; S. Rep. 99-313, p. 207; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 810 (Conference Report).

⁵¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1322; H. Rep. 99-426, pp. 844-845; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 552; S. Rep. 99-313, pp. 208-209; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 810-811 (Conference Report).

⁵² For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1323; H. Rep. 99-426, pp. 845-846; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 553; S. Rep. 99-313, pp. 209-210; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 812 (Conference Report).

⁵³ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1324; H. Rep. 99-426, pp. 846-847; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 554; S. Rep. 99-313, pp. 210-211; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 812-813 (Conference Report).

⁵⁴ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1325; H. Rep. 99-426, p. 847; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 813 (Conference Report).

⁵⁵ The $2,500 amount was last increased in 1958 (sec. 204 of the Excise Tax Technical Changes Act of 1958 (P.L. 85-859)); the $250 amount was in the Internal Revenue Code of 1954 as originally enacted.

⁵⁶See 19 U.S.C. secs. 1607, 1608.

⁵⁷ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1326; H. Rep. 99-426, pp. 847-848; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 555; S. Rep. 99-313, p. 211; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 814 (Conference Report).

⁵⁸ H. Rep. 99-67 (May 7, 1985).

⁵⁹ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 557; S. Rep. 99-313, pp. 212-213; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 814-815 (Conference Report).

⁶⁰ The Secretary may, in accordance with this discretion, implement this provision on a trial basis.

⁶¹ For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), pp. 815-816 (Conference Report).

⁶² For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), pp. 816-817 (Conference Report).

⁶³ For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), pp. 817-818 (Conference Report).

⁶⁴See Treas. Reg. sec. 31.6053-3.

⁶⁵ For legislative background of the provision, see: H. Rep. 99-841, Vol. II (September 18, 1986), p. 818 (Conference Report).

⁶⁶ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1335; H. Rep. 99-426, pp. 852-854; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 562; S. Rep. 99-313, pp. 214-216; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 819-820 (Conference Report).

⁶⁷ The employer is required to furnish copies of certain Forms W-4 to the IRS, such as those that claim more than a specified number of allowances or that claim total exemption from withholding (where wages are above $200 per week). Treas. Reg. sec. 31.3402(f)(2)-1(g). The IRS examines these forms, and if, after contacting the employee, it determines that a claim of withholding allowances cannot be justified, it notifies the employer to change the employee's withholding.

⁶⁸ It is also permissible for employees to fulfill the requirements of this provision by filing on a substitute Form W-4 provided by the employer, so long as that form has been revised to parallel the official form and the substitute form complies with all IRS requirements pertaining to substitute Forms W-4.

⁶⁹ A significant portion of over-withholding appears to be attributable to taxpayer preference.

⁷⁰ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1345; H. Rep. 99-426, pp. 859-860; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 563; S. Rep. 99-313, pp. 217-218; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 821 (Conference Report).

III. Title XVI.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1404; H. Rep. 99-426, pp. 866-68; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1702; S. Rep. 99-313, pp. 884-85; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 822-23 (Conference Report).

² For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 8078-79 (June 20, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), p. 823 (Conference Report).

³ For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1706; S. Rep. 99-313, pp. 885-86; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 824 (Conference Report).

⁴ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 7793-94 (June 18, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), p. 826 (Conference Report).

⁵ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 8072 (June 20, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 826-27 (Conference Report).

⁶Washington Research Foundation v. Comm'r, 50 CCH TCM 1457 (1985).

⁷ For legislative background of the provision, see: H. Rep. 99-841, Vol. I (September 18, 1986), sec. 1606 (Conference Report).

III. Title XVII.

¹ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 282; H. Rep. 99-426, pp. 228-29; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1708; S. Rep. 99-313, pp. 880-82; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 828-29 (Conference Report).

² If the employed individual received a written preliminary determination of targeted-group membership by the date on which the individual began work, the employer has until the fifth day of such individual's employment to receive or request certification.

³ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1351; H. Rep. 99-426, p. 861; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 830-831 (Conference Report).

⁴ An additional tax of 0.1 cents per gallon was imposed on diesel fuel by P.L. 99-499. The Congress intended that this additional tax is to be collected by wholesalers in the same manner as the general diesel tax of 15.0 cents per gallon. A technical amendment may be necessary to reflect this intent.

⁵ For legislative background of the provision, see H. Rep. 99-841, Vol. II (September 18, 1986), pp. 830-831 (Conference Report).

⁶ The Congress intended that this rate be 3.05 cents per gallon rather than three cents per gallon. A technical amendment may be necessary to reflect this intent.

⁷ A technical amendment may be necessary to reflect the intent of the Congress that the floor stocks rate be 9.1 cents per gallon.

⁸ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 7795, 7802-03 (June 18, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 831-32 (Conference Report).

⁹ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 7794-95 (June 18, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 833-34 (Conference Report).

¹⁰ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 8088-89 (June 20, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 834-35 (Conference Report).

¹¹ This difference in tax rates is being phased out, pursuant to the Social Security Amendments of 1983 (P.L. 98-21). In years beginning after 1989, the difference will be substantially eliminated.

¹² For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1401; H. Rep. 99-426, pp. 863-864; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 838-839 (Conference Report).

¹³ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1402; H. Rep. 99-426, p. 864; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1701; S. Rep. 99-313, pp. 882-883; and H. Rep. 99-841, Vol. II (September 18, 1986), p. 839 (Conference Report).

¹⁴ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 8053-54 (June 20, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), p. 839 (Conference Report).

¹⁵ Act of September 1, 1937 (50 Stat. 900, ch. 897).

¹⁶ For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 7952 (June 19, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), p. 840 (Conference Report).

¹⁷ For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1407; H. Rep. 99-426, pp. 875-876; and Rep. 99-841, Vol. II (September 18, 1986), pp. 22-23 (Conference Report).