1 

" ! HOUSE OF REPRESENTATIVES 116TH CONGRESS

1st Session 

REPORT

116–161 

PROMOTING RESPECT FOR INDIVIDUALS’ 

DIGNITY AND 

EQUALITY ACT OF 2019 

R E P O R T 

OF THE

COMMITTEE ON WAYS AND MEANS 

HOUSE OF REPRESENTATIVES 

ON

H.R. 3299 

[Including cost estimate of the Congressional Budget Office] 

together with 

MINORITY VIEWS 

JULY 18, 2019.—Ordered to be printed 


E:\Seals\Congress.#13
PROMOTING RESPECT FOR INDIVIDUALS’ DIGNITY AND 

EQUALITY ACT OF 2019 

U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

1 

37–115 

" ! HOUSE OF REPRESENTATIVES 116TH CONGRESS

1st Session 

REPORT

2019

116–161 

PROMOTING RESPECT FOR INDIVIDUALS’ 

DIGNITY AND 

EQUALITY ACT OF 2019 

R E P O R T 

OF THE

COMMITTEE ON WAYS AND MEANS 

HOUSE OF REPRESENTATIVES 

ON

H.R. 3299 

[Including cost estimate of the Congressional Budget Office] 

together with 

MINORITY VIEWS 

JULY 18, 2019.—Ordered to be printed 


E:\Seals\Congress.#13
(III) 

C O N T E N T S 

Page 

I. SUMMARY AND BACKGROUND ........................................ 7 

A. Purpose and Summary ................................................... 7 

B. Background and Need for Legislation ........................... 8 

C. Legislative History .......................................................... 8 

II. EXPLANATION OF THE BILL ............................................ 9 

A. Extension of period of limitation for certain legally 

married couples (sec. 2 of the bill and sec. 6511 of 

the Code) ........................................................................... 9 

B. Rules relating to all legally married couples, and 

rules relating to the gender of spouses, etc. (secs. 3 

and 4 of the bill) ............................................................... 11 

III. VOTES OF THE COMMITTEE .......................................... 12 

IV. BUDGET EFFECTS OF THE BILL ................................... 12 

A. Committee Estimate of Budgetary Effects .................... 12 

B. Statement Regarding New Budget Authority and Tax 

Expenditures Budget Authority ...................................... 14 

C. Cost Estimate Prepared by the Congressional Budget 

Office ................................................................................. 14 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE 

RULES OF THE HOUSE ....................................................... 15 

A. Committee Oversight Findings and Recommendations ................................................................................... 15 

B. Statement of General Performance Goals and Objectives ................................................................................... 16 

C. Information Relating to Unfunded Mandates ............... 16 

D. Applicability of House Rule XXI, Clause 5(b) ............... 16 

E. Tax Complexity Analysis ................................................ 16 

F. Congressional Earmarks, Limited Tax Benefits, and 

Limited Tariff Benefits .................................................... 16 

G. Duplication of Federal Programs ................................... 17 

H. Hearings .......................................................................... 17 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL .... 17 

A. Changes in Existing Law Proposed by the Bill ............ 17 

VII. MINORITY VIEWS ............................................................. 588 

116TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 116–161 

PROMOTING RESPECT FOR INDIVIDUALS’ DIGNITY AND 

EQUALITY ACT OF 2019 

JULY 18, 2019.—Committed to the Committee of the Whole House on the State of 

the Union and ordered to be printed 

Mr. NEAL, from the Committee on Ways and Means, 

submitted the following 

R E P O R T 

together with 

MINORITY VIEWS 

[To accompany H.R. 3299] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Ways and Means, to whom was referred the 

bill (H.R. 3299) to permit legally married same-sex couples to 

amend their filing status for income tax returns outside the statute 

of limitations, to amend the Internal Revenue Code of 1986 to clarify that all provisions shall apply to legally married same-sex couples in the same manner as other married couples, and for other 

purposes, having considered the same, report favorably thereon 

with an amendment and recommend that the bill as amended do 

pass. 

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Promoting Respect for Individuals’ Dignity and 

Equality Act of 2019’’ or as the ‘‘PRIDE Act of 2019’’. 

SEC. 2. EXTENSION OF PERIOD OF LIMITATION FOR CERTAIN LEGALLY MARRIED COUPLES. 

(a) IN GENERAL.—In the case of an individual first treated as married for purposes of the Internal Revenue Code of 1986 by the application of the holdings of 

Revenue Ruling 2013–17— 

(1) if such individual filed a return (other than a joint return) for a taxable 

year ending before September 16, 2013, for which a joint return could have been 

made by the individual and the individual’s spouse but for the fact that such 

holdings were not effective at the time of filing, such return shall be treated 

as a separate return within the meaning of section 6013(b) of such Code and 

2 

the time prescribed by section 6013(b)(2)(A) of such Code for filing a joint return 

after filing a separate return shall not expire before the date prescribed by law 

(including extensions) for filing the return of tax for the taxable year that includes the date of the enactment of this Act, and 

(2) in the case of a joint return filed pursuant to paragraph (1)— 

(A) the period of limitation prescribed by section 6511(a) of such Code for 

any such taxable year shall be extended until the date prescribed by law 

(including extensions) for filing the return of tax for the taxable year that 

includes the date of the enactment of this Act, and 

(B) section 6511(b)(2) of such Code shall not apply to any claim of credit 

or refund with respect to such return. 

(b) AMENDMENTS, ETC. RESTRICTED TO CHANGE IN MARITAL STATUS.—Subsection 

(a) shall apply only with respect to amendments to the return of tax, and claims 

for credit or refund, relating to a change in the marital status for purposes of the 

Internal Revenue Code of 1986 of the individual. 

SEC. 3. RULES RELATING TO ALL LEGALLY MARRIED COUPLES. 

(a) IN GENERAL.—The Internal Revenue Code of 1986 is amended— 

(1) in section 21(d)(2)— 

(A) by striking ‘‘HIMSELF’’ in the heading and inserting ‘‘SELF’’; and 

(B) by striking ‘‘any husband and wife’’ and inserting ‘‘any married couple’’; 

(2) in section 22(e)(1)— 

(A) by striking ‘‘husband and wife who live’’ and inserting ‘‘married couple who lives’’; and 

(B) by striking ‘‘the taxpayer and his spouse’’ and inserting ‘‘the taxpayer 

and the spouse of the taxpayer’’; 

(3) in section 38(c)(6)(A), by striking ‘‘husband or wife who files’’ and inserting 

‘‘married individual who files’’; 

(4) in section 42(j)(5)(C), by striking clause (i) and inserting the following new 

clause: 

‘‘(i) MARRIED COUPLE TREATED AS 1 PARTNER.—For purposes of subparagraph (B), individuals married to one another (and their estates) 

shall be treated as 1 partner.’’; 

(5) in section 62(b)(3)— 

(A) in subparagraph (A)— 

(i) by striking ‘‘husband and wife who lived apart’’ and inserting 

‘‘married couple who lived apart’’; and 

(ii) by striking ‘‘the taxpayer and his spouse’’ and inserting ‘‘the taxpayer and the spouse of the taxpayer’’; and 

(B) in subparagraph (D), by striking ‘‘husband and wife’’ and inserting 

‘‘married couple’’; 

(6) in section 121— 

(A) in subsection (b)(2), by striking ‘‘husband and wife who make’’ and inserting ‘‘married couple who makes’’; and 

(B) in subsection (d)(1), by striking ‘‘husband and wife make’’ and inserting ‘‘married couple makes’’; 

(7) in section 165(h)(4)(B), by striking ‘‘husband and wife’’ and inserting ‘‘married couple’’; 

(8) in section 179(b)(4), by striking ‘‘a husband and wife filing’’ and inserting 

‘‘individuals married to one another who file’’; 

(9) in section 213(d)(8), by striking ‘‘status as husband and wife’’ and inserting ‘‘marital status’’; 

(10) in section 219(g)(4), in the matter preceding subparagraph (A), by striking ‘‘A husband and wife’’ and inserting ‘‘Married individuals’’; 

(11) in section 274(b)(2)(B), by striking ‘‘husband and wife’’ and inserting 

‘‘married couple’’; 

(12) in section 643(f), by striking ‘‘husband and wife’’ in the second sentence 

and inserting ‘‘married couple’’; 

(13) in section 761(f)— 

(A) in paragraph (1), by striking ‘‘husband and wife’’ and inserting ‘‘married couple’’; and 

(B) in paragraph (2)(A), by striking ‘‘husband and wife’’ and inserting 

‘‘married couple’’; 

(14) in section 911— 

(A) in subsection (b)(2), by striking subparagraph (C) and inserting the 

following new subparagraph: 

‘‘(C) TREATMENT OF COMMUNITY INCOME.—In applying subparagraph (A) 

with respect to amounts received from services performed by a married inVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00008 Fmt 6659 Sfmt 6621 E:\HR\OC\HR161.XXX HR161
3 

dividual which are community income under community property laws applicable to such income, the aggregate amount which may be excludable 

from the gross income of such individual and such individual’s spouse under 

subsection (a)(1) for any taxable year shall equal the amount which would 

be so excludable if such amounts did not constitute community income.’’; 

and 

(B) in subsection (d)(9)(A), by striking ‘‘where a husband and wife each 

have’’ and inserting ‘‘where both spouses have’’; 

(15) in section 1244(b)(2), by striking ‘‘a husband and wife filing’’; 

(16) in section 1272(a)(2)(D), by striking clause (iii) and inserting the following new clause: 

‘‘(iii) TREATMENT OF A MARRIED COUPLE.—For purposes of this subparagraph, a married couple shall be treated as 1 person. The preceding sentence shall not apply where the spouses lived apart at all 

times during the taxable year in which the loan is made.’’; 

(17) in section 1313(c)(1), by striking ‘‘husband and wife’’ and inserting 

‘‘spouses’’; 

(18) in section 1361(c)(1)(A)(i), by striking ‘‘a husband and wife’’ and inserting 

‘‘a married couple’’; 

(19) in section 2040(b), by striking ‘‘CERTAIN JOINT INTERESTS OF HUSBAND

AND WIFE’’ in the heading and inserting ‘‘CERTAIN JOINT INTERESTS OF MARRIED

COUPLE’’; 

(20) in section 2513— 

(A) by striking ‘‘gift by husband or wife to third party’’ in the heading and inserting 

‘‘gift by spouse to third party’’; and 

(B) by striking paragraph (1) of subsection (a) and inserting the following 

new paragraph: 

‘‘(1) IN GENERAL.—A gift made by one individual to any person other than 

such individual’s spouse shall, for the purposes of this chapter, be considered 

as made one-half by the individual and one-half by such individual’s spouse, but 

only if at the time of the gift each spouse is a citizen or resident of the United 

States. This paragraph shall not apply with respect to a gift by an individual 

of an interest in property if such individual creates in the individual’s spouse 

a general power of appointment, as defined in section 2514(c), over such interest. For purposes of this section, an individual shall be considered as the spouse 

of another only if the individual is married to the individual’s spouse at the 

time of the gift and does not remarry during the remainder of the calendar 

year.’’; 

(21) in section 2516— 

(A) by striking ‘‘Where a husband and wife enter’’ and inserting the following: 

‘‘(a) IN GENERAL.—Where a married couple enters’’; and 

(B) by adding at the end the following new subsection: 

‘‘(b) SPOUSE.—For purposes of this section, if the spouses referred to are divorced, 

wherever appropriate to the meaning of this section, the term ‘spouse’ shall read 

‘former spouse’.’’; 

(22) in section 5733(d)(2), by striking ‘‘husband or wife’’ and inserting ‘‘married individual’’; 

(23) in section 6013— 

(A) by striking ‘‘joint returns of income tax by husband and wife’’ in the heading and 

inserting ‘‘joint returns of income tax by a married couple’’; 

(B) in subsection (a), in the matter preceding paragraph (1), by striking 

‘‘husband and wife’’ and inserting ‘‘married couple’’; 

(C) in subsection (a)(1), by striking ‘‘either the husband or wife’’ and inserting ‘‘either spouse’’; 

(D) in subsection (a)(2)— 

(i) by striking ‘‘husband and wife’’ and inserting ‘‘spouses’’; and 

(ii) by striking ‘‘his taxable year’’ and inserting ‘‘such spouse’s taxable 

year’’; 

(E) in subsection (a)(3)— 

(i) by striking ‘‘his executor or administrator’’ and inserting ‘‘the decedent’s executor or administrator’’; 

(ii) by striking ‘‘with respect to both himself and the decedent’’ and 

inserting ‘‘with respect to both the surviving spouse and the decedent’’; 

and 

(iii) by striking ‘‘constitute his separate return’’ and inserting ‘‘constitute the survivor’s separate return’’; 

(F) in subsection (b), by striking paragraph (1) and inserting the following 

new paragraph: 

4 

‘‘(1) IN GENERAL.—Except as provided in paragraph (2), if an individual has 

filed a separate return for a taxable year for which a joint return could have 

been made by the individual and the individual’s spouse under subsection (a) 

and the time prescribed by law for filing the return for such taxable year has 

expired, such individual and such spouse may nevertheless make a joint return 

for such taxable year. A joint return filed under this subsection shall constitute 

the return of the individual and the individual’s spouse for such taxable year, 

and all payments, credits, refunds, or other repayments made or allowed with 

respect to the separate return of either spouse for such taxable year shall be 

taken into account in determining the extent to which the tax based upon the 

joint return has been paid. If a joint return is made under this subsection, any 

election (other than the election to file a separate return) made by either spouse 

in a separate return for such taxable year with respect to the treatment of any 

income, deduction, or credit of such spouse shall not be changed in the making 

of the joint return where such election would have been irrevocable if the joint 

return had not been made. If a joint return is made under this subsection after 

the death of either spouse, such return with respect to the decedent can be 

made only by the decedent’s executor or administrator.’’; 

(G) in subsection (c), by striking ‘‘husband and wife’’ and inserting 

‘‘spouses’’; 

(H) in subsection (d)(1), by striking ‘‘status as husband and wife’’ and inserting ‘‘the marital status with respect to each other’’; 

(I) in subsection (d)(2), by striking ‘‘his spouse’’ and inserting ‘‘the spouse 

of the individual’’; 

(J) in subsection (f)(2)(B), by striking ‘‘such individual, his spouse, and his 

estate shall be determined as if he were alive’’ and inserting ‘‘such individual, the individual’s spouse, and the individual’s estate shall be determined as if the individual were alive’’; and 

(K) in subsection (f)(3)— 

(i) in subparagraph (A), by striking ‘‘for which he is entitled’’ and inserting ‘‘for which such member is entitled’’; and 

(ii) in subparagraph (B), by striking ‘‘for which he is entitled’’ and inserting ‘‘for which such employee is entitled’’; 

(24) in section 6014(b), by striking ‘‘husband and wife’’ in the second sentence 

and inserting ‘‘a married couple’’; 

(25) in section 6017, by striking ‘‘husband and wife’’ and inserting ‘‘married 

couple’’; 

(26) in section 6096(a), by striking ‘‘of husband and wife having’’ and inserting 

‘‘reporting’’; 

(27) in section 6166(b)(2), by striking subparagraph (B) and inserting the following new subparagraph: 

‘‘(B) CERTAIN INTERESTS HELD BY MARRIED COUPLE.—Stock or a partnership interest which— 

‘‘(i) is community property of a married couple (or the income from 

which is community income) under the applicable community property 

law of a State, or 

‘‘(ii) is held by a married couple as joint tenants, tenants by the entirety, or tenants in common, 

shall be treated as owned by 1 shareholder or 1 partner, as the case may 

be.’’; 

(28) in section 6212(b)(2)— 

(A) by striking ‘‘return filed by husband and wife’’ and inserting ‘‘return’’; 

and 

(B) by striking ‘‘his last known address’’ and inserting ‘‘the last known 

address of such spouse’’; 

(29) in section 7428(c)(2)(A), by striking ‘‘husband and wife’’ and inserting 

‘‘married couple’’; 

(30) in section 7701(a)— 

(A) by striking paragraph (17); and 

(B) in paragraph (38), by striking ‘‘husband and wife’’ and inserting ‘‘married couple’’; and 

(31) in section 7872(f), by striking paragraph (7) and inserting the following 

new paragraph: 

‘‘(7) MARRIED COUPLE TREATED AS 1 PERSON.—A married couple shall be treated as 1 person.’’. 

(b) CONFORMING AMENDMENTS.— 

5 

(1) The table of sections for subchapter B of chapter 12 of the Internal Revenue Code of 1986 is amended by striking the item relating to section 2513 and 

inserting the following new item: 

‘‘Sec. 2513. Gift by spouse to third party.’’. 

(2) The table of sections for subpart B of part II of subchapter A of chapter 

61 of such Code is amended by striking the item relating to section 6013 and 

inserting the following new item: 

‘‘Sec. 6013. Joint returns of income tax by a married couple.’’. 

SEC. 4. RULES RELATING TO THE GENDER OF SPOUSES, ETC. 

(a) IN GENERAL.—The following provisions of the Internal Revenue Code of 1986 

are each amended by striking ‘‘his spouse’’ each place it appears and inserting ‘‘the 

individual’s spouse’’: 

(1) Subsections (a)(1) and (d) of section 1. 

(2) Section 2(b)(2)(A). 

(3) Subsections (d)(1)(B) and (e)(3) of section 21. 

(4) Section 36(c)(5). 

(5) Section 179(d)(2)(A). 

(6) Section 318(a)(1)(A)(i). 

(7) Section 408(d)(6). 

(8) Section 469(i)(5)(B)(ii). 

(9) Section 507(d)(2)(B)(iii). 

(10) Clauses (ii) and (iii) of section 613A(c)(8)(D). 

(11) Section 672(e)(2). 

(12) Section 704(e)(2). 

(13) Subparagraphs (A) and (B)(ii) of section 911(c)(3). 

(14) Section 1235(c)(2). 

(15) Section 1563(e)(5). 

(16) Section 3121(b)(3)(B). 

(17) Section 4946(d). 

(18) Section 4975(e)(6). 

(19) Subparagraphs (A)(iv) and (B) of section 6012(a)(1). 

(20) Section 7703(a). 

(b) CONFORMING AMENDMENTS.— 

(1) The following provisions of the Internal Revenue Code of 1986 are each 

amended by striking ‘‘his spouse’’ each place it appears and inserting ‘‘the taxpayer’s spouse’’: 

(A) Section 2(a)(2)(B). 

(B) Subparagraphs (B) and (C) of section 2(b)(2). 

(C) Paragraphs (2) and (6)(A) of section 21(e). 

(D) Section 36B(e)(1). 

(E) Section 63(e)(3)(B). 

(F) Section 86(c)(1)(C)(ii). 

(G) Section 105(c)(1). 

(H) Section 135(d)(3). 

(I) Section 151(b). 

(J) Subsections (a) and (d)(7) of section 213. 

(K) Section 1233(e)(2)(C). 

(L) Section 1239(b)(2). 

(M) Section 6504(2). 

(2) The following provisions of the Internal Revenue Code of 1986 are each 

amended by striking ‘‘his spouse’’ each place it appears and inserting ‘‘the employee’s spouse’’: 

(A) Section 132(m)(1). 

(B) Section 401(h)(6). 

(C) Section 3402(l)(3). 

(3) The following provisions of the Internal Revenue Code of 1986 are each 

amended by striking ‘‘his taxable year’’ each place it appears and inserting ‘‘the 

individual’s taxable year’’: 

(A) Section 2(b)(1). 

(B) Section 7703(a)(1). 

(4) The following provisions of the Internal Revenue Code of 1986 are each 

amended by striking ‘‘his taxable year’’ each place it appears and inserting ‘‘the 

taxpayer’s taxable year’’: 

(A) Subparagraphs (B) and (C) of section 2(b)(2) (as amended by paragraph (1)(B)). 

(B) Section 63(f)(1)(A). 

6 

(5) The following provisions of the Internal Revenue Code of 1986 are each 

amended by striking ‘‘his home’’ and inserting ‘‘the individual’s home’’: 

(A) Section 2(b)(1)(A). 

(B) Section 21(e)(4)(A)(i). 

(C) Section 7703(b)(1). 

(6) The Internal Revenue Code of 1986, as amended by this section, is amended— 

(A) in section 2(a)(1)(A), by striking ‘‘his two taxable years’’ and inserting 

‘‘the taxpayer’s two taxable years’’; 

(B) in section 2(a)(1)(B), by striking ‘‘his home’’ and inserting ‘‘the taxpayer’s home’’; 

(C) in paragraphs (1)(A) and (2)(A) of section 63(f), by striking ‘‘for himself if he’’ both places it appears and inserting ‘‘for the taxpayer if the taxpayer’’; 

(D) in section 63(f)(4), by striking ‘‘his’’ both places it appears and inserting ‘‘the individual’s’’; 

(E) in section 105(b)— 

(i) by striking ‘‘his spouse, his dependents’’ and inserting ‘‘the taxpayer’s spouse, the taxpayer’s dependents’’; and 

(ii) by striking ‘‘by him’’; 

(F) in the heading of section 119(a), by striking ‘‘, HIS SPOUSE, AND HIS

DEPENDENTS’’ and inserting ‘‘AND THE EMPLOYEE’S SPOUSE AND DEPENDENTS’’; 

(G) in section 119(a), by striking ‘‘him, his spouse, or any of his dependents by or on behalf of his employer’’ and inserting ‘‘the employee or the 

employee’s spouse or dependents by or on behalf of the employer of the employee’’; 

(H) in section 119(a)(2), by striking ‘‘his’’ both places it appears and inserting ‘‘the employee’s’’; 

(I) in section 119(d)(3)(B), by striking ‘‘his spouse, and any of his dependents’’ and inserting ‘‘the employee’s spouse, and any of the employee’s dependents’’; 

(J) in section 129(b)(2), by striking ‘‘himself’’ and inserting ‘‘the spouse’s 

self’’; 

(K) in section 170(b)(1)(F)(iii)— 

(i) by striking ‘‘his spouse’’ and inserting ‘‘the spouse of such donor’’; 

and 

(ii) by striking ‘‘his death or after the death of his surviving spouse 

if she’’ and inserting ‘‘the death of the donor or after the death of the 

donor’s surviving spouse if such surviving spouse’’; 

(L) in section 213(c)(1)— 

(i) by striking ‘‘his estate’’ and inserting ‘‘the estate of the taxpayer’’; 

and 

(ii) by striking ‘‘his death’’ and inserting ‘‘the death of the taxpayer’’; 

(M) in section 213(d)(7), by striking ‘‘he’’ and inserting ‘‘the taxpayer’’; 

(N) in section 217(g)— 

(i) by striking ‘‘, his spouse, or his dependents’’ in paragraph (2) and 

inserting ‘‘or the spouse or dependents of such member’’; 

(ii) by striking ‘‘his dependents’’ in paragraph (3) and inserting ‘‘dependents’’; and 

(iii) by striking ‘‘his spouse’’ each place it appears in paragraph (3) 

and inserting ‘‘the member’s spouse’’; 

(O) in section 217(i)(3)(A), by striking ‘‘his’’; 

(P) in section 267(c), by striking ‘‘his’’ each place it appears and inserting 

‘‘the individual’s’’; 

(Q) in section 318(a)(1)(A)(ii), by striking ‘‘his’’ and inserting ‘‘the individual’s’’; 

(R) in section 402(l)(4)(D), by striking ‘‘, his spouse, and dependents’’ and 

inserting ‘‘and the spouse and dependents of such officer’’; 

(S) in section 415(l)(2)(B), by striking ‘‘, his spouse, or his dependents’’ 

and inserting ‘‘or the participant’s spouse or dependents’’; 

(T) in section 420(f)(6)(A), by striking ‘‘his covered spouse and dependents’’ each place it appears and inserting ‘‘the covered spouse and dependents of such retiree’’; 

(U) in section 424(d)(1), by striking ‘‘his’’ and inserting ‘‘the individual’s’’; 

(V) in section 544(a)(2), by striking ‘‘his’’ each place it appears and inserting ‘‘the individual’s’’; 

(W) in section 911(c)(3), by striking ‘‘him’’ each place it appears in subparagraphs (A) and (B)(ii) and inserting ‘‘the individual’’; 

7 

(X) in section 1015(d)(3), by striking ‘‘his spouse’’ and inserting ‘‘the donor’s spouse’’; 

(Y) in section 1563(e)— 

(i) by striking ‘‘his children’’ both places it appears in paragraphs 

(5)(D) and (6)(A) and inserting ‘‘the individual’s children’’; and 

(ii) by striking ‘‘his parents’’ both places it appears in subparagraphs 

(A) and (B) of paragraph (6) and inserting ‘‘the individual’s parents’’; 

(Z) in section 1563(f)(2)(B), by striking ‘‘him’’ and inserting ‘‘the individual’’; 

(AA) in section 2012(c), by striking ‘‘his spouse’’ and inserting ‘‘the decedent’s spouse’’; 

(BB) in section 2032A(e)(10), by striking ‘‘his surviving spouse’’ and inserting ‘‘the decedent’s surviving spouse’’; 

(CC) in section 2035(b)— 

(i) by striking ‘‘his estate’’ and inserting ‘‘the decedent’s estate’’; and 

(ii) by striking ‘‘his spouse’’ and inserting ‘‘the decedent’s spouse’’; 

(DD) in subsections (a) and (b)(5) of section 2056, by striking ‘‘his’’; 

(EE) in section 2523(b)— 

(i) by striking ‘‘(or his heirs or assigns) or such person (or his heirs 

or assigns)’’ in paragraph (1) and inserting ‘‘(or the donor’s heirs or assigns) or such person (or such person’s heirs or assigns)’’; 

(ii) by striking ‘‘himself’’ in paragraph (1) and inserting ‘‘the donor’s 

self’’; 

(iii) by striking ‘‘he’’ in paragraph (2) and inserting ‘‘the donor’’; and 

(iv) by striking ‘‘him’’ each place it appears in the matter following 

paragraph (2) and inserting ‘‘the donor’’; 

(FF) in section 2523(d), by striking ‘‘himself’’ and inserting ‘‘the donor’s 

self’’; 

(GG) in section 2523(e), by striking ‘‘his spouse’’ and inserting ‘‘the donor’s spouse’’; 

(HH) in section 3121(b)(3)— 

(i) by striking ‘‘his father’’ in subparagraph (A) and inserting ‘‘the 

child’s father’’; 

(ii) by striking ‘‘his father’’ in subparagraph (B) and inserting ‘‘the individual’s father’’; and 

(iii) by striking ‘‘his son’’ in subparagraph (B) and inserting ‘‘the individual’s son’’; 

(II) in section 3306(c)(5)— 

(i) by striking ‘‘his son’’ and inserting ‘‘the individual’s son’’; and 

(ii) by striking ‘‘his father’’ and inserting ‘‘the child’s father’’; 

(JJ) in section 3402(l)— 

(i) by striking ‘‘he’’ each place it appears in paragraphs (2) and (3)(A) 

and inserting ‘‘the employee’’; and 

(ii) by striking ‘‘his taxable year’’ both places it appears in paragraph 

(3)(B) and inserting ‘‘the employee’s taxable year’’; 

(KK) in section 4905(a), by striking ‘‘his spouse’’ and inserting ‘‘such person’s spouse’’; 

(LL) in section 6046(c), by striking ‘‘his’’ both places it appears and inserting ‘‘the individual’s’’; 

(MM) in section 6103(e)(1)(A)(ii), by striking ‘‘him’’ and inserting ‘‘the individual’’; 

(NN) in section 7448(a)(8), by striking ‘‘his death’’ and inserting ‘‘the individual’s death’’; 

(OO) in subsections (d), (m), and (n) of section 7448, by striking ‘‘his’’ each 

place it appears and inserting ‘‘the individual’s’’; 

(PP) in subsection (m) of section 7448, as so amended, by striking ‘‘he’’ 

each place it appears and inserting ‘‘such judge or special trial judge’’; and 

(QQ) in section 7448(q)— 

(i) by striking ‘‘his’’ both places it appears and inserting ‘‘such 

judge’s’’; and 

(ii) by striking ‘‘to bring himself’’ and inserting ‘‘to come’’. 

I. SUMMARY AND BACKGROUND 

A. PURPOSE AND SUMMARY

The bill H.R. 3999, the Promoting Respect for Individuals’ Dignity and Equality (PRIDE) Act of 2019, as ordered reported by the 

8 

Committee on Ways and Means on June 20, 2019, amends the Internal Revenue Code of 1986 so as to provide lawfully married 

same-sex couples with the ability to file claims for credits and refunds related to a change in marital status back to their year of 

marriage, and to amend such code so that provisions that apply to 

married couples use gender-neutral language. 

B. BACKGROUND AND NEED FOR LEGISLATION

The Promoting Respect for Individuals’ Dignity and Equality 

(PRIDE) Act of 2019 makes long-overdue changes to the tax code 

for same-sex married couples. June 28, 2019 is the 50th anniversary of the Stonewall riots. To commemorate that moment in the 

LGBTQ+ movement, the PRIDE Act scrubs the tax code of any gendered language related to married couples. 

Additionally, the legislation resolves a problem related to the 

mismatched timing of IRS guidance changes and state-level samesex marriage legalization. Specifically, after the 2013 Supreme 

Court ruling in United States v. Windsor, 570 U.S. 744 (2013), the 

IRS updated its procedures to allow same-sex couples to amend old 

returns from 2010 onwards to reflect their marital status and claim 

overpayment credits for years they were married but unable to file 

jointly. H.R. 3299 allows same-sex couples to file federal income tax 

adjustments back to the date of marriage providing additional relief for those couples who were lawfully married under state law 

before 2010. 

C. LEGISLATIVE HISTORY

Background 

H.R. 3299, the ‘‘Promoting Respect for Individuals’ Dignity and 

Equality Act of 2019,’’ was introduced on June 18, 2019, and was 

referred to the Committee on Ways and Means. 

Committee action 

The Committee on Ways and Means marked up H.R. 3299 on 

June 20, 2019, and ordered the bill, as amended, favorably reported 

(with a quorum being present). 

Committee hearings 

The Committee on Ways and Means heard testimony from Rep. 

Andy Levin on June 4, 2019 regarding H.R. 1244, the Equal Dignity for Married Taxpayers Act of 2019. Additionally, on June 4, 

2019, the Committee heard testimony from Rep. Judy Chu regarding H.R. 3294, the Refund Equality Act of 2019. Provisions substantially similar to both H.R. 1244 and H.R. 3294 are included in 

H.R. 3299. 

9 

1Sec. 6511(a). 

2Sec. 6511(b)(2). 

3Sec. 6013(b)(1). 

4Sec. 6013(b)(2). 

5 570 U.S. 744 (2013). 

6 1 U.S.C. sec. 7. 

7 2013–38 I.R.B. 201. 

II. EXPLANATION OF THE BILL 

A. EXTENSION OF PERIOD OF LIMITATION FOR CERTAIN LEGALLY

MARRIED COUPLES (SEC. 2 OF THE BILL AND SEC. 6511 OF THE

CODE) 

PRESENT LAW

Statute of limitations on credit or refund 

In general, a taxpayer must file a claim for credit or refund within three years of the filing of the tax return or within two years 

of the payment of the tax, whichever expires later (if no tax return 

is filed, the two-year limit applies).1 A claim for credit or refund 

that is not filed within these time periods is rejected as untimely. 

In addition, the amount of credit or refund is limited to the portion 

of tax paid within the three-year period (plus any filing extension) 

or the two-year period, as applicable, immediately preceding the filing of the claim.2

Limitation on filing a joint return after filing a separate return 

An individual filing a separate return for a tax year for which 

the individual and the individual’s spouse could have filed a joint 

return may file a joint return amending the prior separate return 

for the tax year after the due date for filing the return has passed.3

However, an individual cannot elect to file a joint return after having filed a separate return more than three years after the due 

date of the return (without regard to any extensions) for the applicable tax year.4

Federal tax treatment of same-sex marriage 

Prior to the Supreme Court’s decision in United States v. Windsor,5 section 3 of the Defense of Marriage Act (DOMA) 6 prohibited 

the IRS from recognizing same-sex marriages for purposes of the 

provisions of the Code that refer to the marital status of the taxpayer and convey benefits upon such status. In Windsor, the Supreme Court held that section 3 of DOMA was unconstitutional because it violated principles of equal protection. 

Following the Windsor decision, the IRS issued Revenue Ruling 

2013–177 (the ‘‘Revenue Ruling’’), which provided guidance on the 

effect of the Windsor decision on the IRS’s interpretation of the 

provisions of the Code that refer to a taxpayer’s marital status. In 

the Revenue Ruling, the IRS recognized the validity of same-sex 

marriages that were lawful in the State where they occurred. In 

particular, the Revenue Ruling made three specific holdings for 

Federal tax purposes: 

1. The terms ‘‘spouse,’’ ‘‘husband and wife,’’ ‘‘husband,’’ and 

‘‘wife’’ include an individual married to a person of the same 

sex if the individuals are lawfully married under State law, 

and the term ‘‘marriage’’ includes such a marriage between individuals of the same sex. 

10 

8The States that recognized same-sex marriage prior to 2010 (the years for which the statute 

of limitations would generally be closed for taxpayers amending their returns in calendar year 

2013) are Massachusetts, California (during a portion of 2008), Connecticut, Iowa and Vermont. 9 Because this legislation involves the novel situation of a retroactive change in the marital 

status of an individual for purpose of the Code, the provision clarifies that in applying section 

6013(b) in this situation, the term ‘‘separate return’’ means any return other than a joint return. 

No inference is intended as the application of section 6013(b) in any other situation. 

2. The IRS adopts a general rule recognizing a marriage of 

same-sex individuals that was validly entered into in a State 

whose laws authorize the marriage of two individuals of the 

same sex even if the married couple is domiciled in a State 

that does not recognize the validity of same-sex marriages. 

3. The terms ‘‘spouse,’’ ‘‘husband and wife,’’ ‘‘husband,’’ and 

‘‘wife’’ do not include individuals (whether of the opposite sex 

or the same sex) who have entered into a registered domestic 

partnership, civil union, or other similar formal relationship 

recognized under State law that is not denominated as a marriage under the laws of that State, and the term ‘‘marriage’’ 

does not include such formal relationships. 

The holdings of Revenue Ruling 2013–17 were applied prospectively as of September 16, 2013. The Revenue Ruling allowed affected taxpayers to rely on the ruling for purposes of filing original 

returns, amended returns, adjusted returns, or claims for credit or 

refund resulting from its holdings but only if the applicable limitations period for filing such claims had not expired. Thus, taxpayers 

lawfully married under State law during tax years for which the 

statute of limitations was closed as of September 16, 2013, could 

not claim the tax benefits of Federal recognition of same-sex marriage. Among those that were affected were residents of Massachusetts and several other States that recognized same-sex marriage 

during years for which the statute of limitations generally was 

closed as of September 16, 2013.8 Accordingly, some lawfully married same-sex couples were not able to claim Federal tax benefits 

associated with their marital status for all tax years for which they 

were lawfully married. 

REASONS FOR CHANGE

The Committee believes that lawfully married same-sex couples 

should be entitled to the Federal tax benefits of their marital status for all years for which their marriages are recognized under 

State law. Although the Revenue Ruling provided limited relief for 

married same-sex couples, the IRS does not have the authority to 

allow claims for years for which the statute of limitations was 

closed. This provision provides full relief to married same-sex couples and ensures equal Federal tax treatment between same-sex 

married couples and other married couples for all applicable years. 

EXPLANATION OF PROVISION

Under the provision, lawfully married same-sex couples may file 

an amended return (including a joint return after filing a return 

other than a joint return 9) and a claim for credit or refund relating 

to a change in marital status as a result of the holdings in Revenue 

Ruling 2013–17 for taxable years ending before September 16, 

2013. The period for filing an amended return or claim for refund 

under the provision expires on the filing date (including extensions) 

of the return for the tax year that includes the date of enactment 

11 

10 Rev. Rul. 2013–17. For a full description of Revenue Ruling 2013–17, see discussion above. 

of the provision. In addition, the limitation on the dollar amounts 

recoverable is made inapplicable for newly-filed joint returns. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

B. RULES RELATING TO ALL LEGALLY MARRIED COUPLES, AND

RULES RELATING TO THE GENDER OF SPOUSES, ETC. (SECS. 3 AND

4 OF THE BILL) 

PRESENT LAW

The Code contains a number of provisions that apply to married 

couples. While these provisions apply to both opposite-sex and 

same-sex married couples,10 they generally refer to ‘‘husband and 

wife’’ or otherwise use gendered language in describing the couple 

or one or both spouses. 

For example, the Code allows taxpayers to claim a nonrefundable 

child and dependent care credit, for which the allowable credit is 

an applicable percentage of employment-related expenses. For purposes of this credit, qualifying expenses are limited by the earned 

income of the taxpayer. A special rule applies in the case of married couples: 

Section 21(d)(2). Special rule for spouse who is a student 

or incapable of caring for himself. In the case of a spouse 

who is a student or a qualifying individual described in 

subsection (b)(1)(C), for purposes of the paragraph (1), 

such spouse shall be deemed for each month during which 

such spouse is a full-time student at an educational institution, or is such a qualifying individual, to be gainfully 

employed and to have earned income of not less than— 

(A) $250 if subsection (c)(1) applies for the taxable year, 

or 

(B) $500 if subsection (c)(2) applies for the taxable year. 

In the case of any husband and wife, this paragraph 

shall apply with respect to only one spouse for any one 

month. 

REASONS FOR CHANGE

The Committee believes that the Code should be modernized to 

remove outdated references relating to marriage and replace them 

with gender-neutral terms. This provision ensures equal dignity for 

all taxpayers. 

EXPLANATION OF PROVISIONS

The provisions amend the Code so that provisions that apply to 

married couples use gender-neutral language, by changing terms 

such as ‘‘husband and wife’’ or other gendered language. 

For example, with respect to section 21(d)(2), quoted above, the 

provisions change ‘‘himself’’ to ‘‘self’’ and ‘‘husband and wife’’ to 

‘‘any married couple.’’ 

12 

EFFECTIVE DATE

The provisions are effective on the date of enactment. 

III. VOTES OF THE COMMITTEE 

Pursuant to clause 3(b) of rule XIII of the Rules of the House of 

Representatives, the following statement is made concerning the 

vote of the Committee on Ways and Means during the markup consideration of H.R. 3299, the ‘‘Promoting Respect for Individuals’ 

Dignity and Equality Act of 2019’’ on June 20, 2019. 

The amendment in the nature of a substitute was agreed to by 

voice vote (with a quorum being present). 

The bill, H.R. 3299, as amended, was ordered favorably reported 

to the House of Representatives by voice vote (with a quorum being 

present). 

IV. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d) of rule XIII of the Rules of the 

House of Representatives, the following statement is made concerning the effects on the budget of the bill, H.R. 3299, as ordered 

reported. 

The bill is estimated to decrease Federal fiscal year budget receipts by $57 million dollars for the period 2019 through 2029. 

13 

ESTIMATED BUDGET EFFECTS OF H.R. 3299, THE ‘‘PROMPTING RESPECT FOR INDIVIDUALS’ DIGNITY AND EQUALITY ACT OF 2019,’’ AS REPORTED BY THE COMMITTEE 

ON WAYS AND MEANS—Fiscal Years 2019–2029 

[Millions of Dollars] 

Provision Effective 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2019– 24 2019– 29 

1. Extension of period of limitation for certain legally 

married couples.

DOE .......................... [1] ¥57 [1] – – – – – – – – – – – – – – – – – – – – – – – – ¥57 ¥57 

2. Rules relating to all legally married couples ......... DOE .......................... .............. No Revenue Effect 3. Rules relating to the gender of spouses, etc. ........ .................................. No Revenue Effect 

NET TOTAL ........................................................... .................................. [1] ¥57 [1] [2] [2] [2] [2] [2] [2] [2] [2] ¥57 ¥57 

Joint Committee on Taxation ---------------------- NOTE: Details may not add to totals due to rounding. Legend for ′′Effective′′ column: DOE = date of enactment [1]Loss of less than $500,000. [2] No revenue effect. 

14 

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX

EXPENDITURES BUDGET AUTHORITY

Pursuant to clause 3(c)(2) of rule XIII of the Rules of the House 

of Representatives, the Committee states that the bill involves no 

new or increased budget authority. The Committee further states 

that the bill involves no new tax expenditure. 

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET

OFFICE

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House 

of Representatives, requiring a cost estimate prepared by CBO, the 

following statement by CBO is provided. 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, June 25, 2019. 

Hon. RICHARD NEAL, 

Chairman, Committee on Ways and Means, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 3299, the Promoting Respect for Individuals’ Dignity and Equality Act of 2019. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Shannon Mok. 

Sincerely, 

MARK P. HADLEY

(For Phillip L. Swagel, Director). 

Enclosure. 

The bill would 

• Extend the statute of limitations for certain lawfully married same-sex couples to file amended tax returns and claims 

for credit or refund 


Insert offset folio 23 here 37115.001
15 

1For JCT’s estimates of the provisions, which include detail beyond the summary presented 

below, see Joint Committee on Taxation, Estimated Revenue Effects of H.R. 3299, The ‘‘Promoting Respect for Individuals’ Dignity and Equality Act of 2019,’’ JCX–27–19 (June 18, 2019) 

https://go.usa.gov/xyCgv 

• Amend the Internal Revenue Code to use gender-neutral 

language 

Estimated budgetary effects would primarily stem from • A reduction in tax liability from filing a joint return 

The Congressional Budget Act of 1974, as amended, stipulates 

that revenue estimates provided by the staff of the Joint Committee on Taxation (JCT) are the official estimates for all tax legislation considered by the Congress. CBO therefore incorporates such 

estimates into its cost estimates of the effects of legislation. All of 

the estimates for the provisions of H.R. 3299 were provided by 

JCT. 

Bill summary: H.R. 3299 would extend the statute of limitations 

for filing amended returns or claims for credit or refund for samesex couples who were married prior to the federal recognition of 

same-sex marriage and for whom the statute of limitations had 

closed as of September 16, 2013. The extended statute of limitations would expire on the filing date (including extensions) of the 

return for the tax year in which the proposal is enacted. In addition, it would amend the Internal Revenue Code to use gender-neutral language in describing couples and spouses. 

Estimated Federal cost: The estimated budgetary effect of H.R. 

3299 is shown in Table 1. 

TABLE 1.—ESTIMATED BUDGETARY EFFECTS OF H.R. 3299 

By fiscal year, millions of dollars— 

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2019– 

2024 

2019– 

2029 

Decreases (¥) in Revenues 

Estimated Revenues * ¥57 * 0 0 0 0 0 0 0 0 ¥57 ¥57 

Increases in the Deficit From Changes in Revenues 

Effect on the Deficit * 57 * 0 0 0 0 0 0 0 0 57 57 

Source: Staff of the Joint Committee on Taxation. 

Components may not sum to totals because of rounding; * = between ¥$500,000 and $500,000. 

Basis of estimate: The Congressional Budget Act of 1974, as 

amended, stipulates that revenue estimates provided by the staff 

of the Joint Committee on Taxation (JCT) are the official estimates 

for all tax legislation considered by the Congress. CBO therefore incorporates such estimates into its cost estimates of the effects of 

legislation. All of the estimates for the provisions of H.R. 3299 were 

provided by JCT.1

Revenues: On net, JCT estimates, enacting the bill would decrease revenues by $57 million over the 2019–2029 period. 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE 

RULES OF THE HOUSE 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the Committee advises that the findings and 

recommendations of the Committee, based on oversight activities 

16 

under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated into the explanations of the provisions in this report. 

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House 

of Representatives, the Committee states that, because the bill contains no measure that authorizes funding, no statement of general 

performance goals and objectives is required. 

C. INFORMATION RELATING TO UNFUNDED MANDATES

Pursuant to section 423 of Public Law 104–4, the Unfunded Mandates Reform Act of 1995, the Committee has determined that the 

bill does not contain Federal mandates on the private sector. Further, the Committee has determined that the bill does not impose 

a Federal intergovernmental mandate on State, local, or tribal governments. 

D. APPLICABILITY OF HOUSE RULE XXI, CLAUSE 5(B) 

Clause 5(b) of rule XXI of the Rules of the House of Representatives provides, in part, that ‘‘It shall not be in order to consider a 

bill, joint resolution, amendment, or conference report carrying a 

retroactive Federal income tax rate increase.’’ The Committee, after 

careful review, states that the bill does not involve any retroactive 

Federal income tax rate increase within the meaning of the rule. 

E. TAX COMPLEXITY ANALYSIS

Section 4022(b) of Public Law 105–206, the Internal Revenue 

Service Restructuring and Reform Act of 1998 (the ‘‘RRA’’), requires the staff of the Joint Committee on Taxation (in consultation 

with the Internal Revenue Service and the Treasury Department) 

to provide a tax complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House Committee on Ways and Means, or any committee of conference if the legislation includes a provision that directly or indirectly amends the Internal Revenue Code of 1986 and 

has widespread applicability to individuals or small businesses. 

Pursuant to clause 3(h)(1) of rule XIII of the Rules of the House 

of Representatives, the staff of the Joint Committee on Taxation 

has determined that a complexity analysis is not required under 

section 4022(b) of the RRA because the bill contains no provision 

that amends the Internal Revenue Code of 1986 and has ‘‘widespread applicability’’ to individuals or small businesses within the 

meaning of the rule. 

F. CONGRESSIONAL EARMARKS, LIMITED TAX BENEFITS, AND

LIMITED TARIFF BENEFITS

With respect to clause 9 of rule XXI of the Rules of the House 

of Representatives, the Committee, after careful review, states that 

no provision of the bill contains any congressional earmark, limited 

tax benefit, or limited tariff benefit within the meaning of the rule. 

17 

G. DUPLICATION OF FEDERAL PROGRAMS

Pursuant to clause 3(c)(5) of rule XIII of the Rules of the House 

of Representatives, the Committee states that no provision of the 

bill establishes or reauthorizes: (1) a program of the Federal Government known to be duplicative of another Federal program, (2) 

a program included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public Law 

111–139, or (3) a program related to a program identified in the 

most recent Catalog of Federal Domestic Assistance, published pursuant to section 6104 of title 31, United States Code. 

H. HEARINGS

In compliance with Sec. 103(i) of H. Res. 6 (116th Congress) the 

following hearing was used to develop or consider H.R. 3299: House 

Ways and Means Committee Member Day Hearing held on June 4, 

2019 during which Representative Andy Levin (D–MI) and Representative Judy Chu (D–CA) testified regarding legislation that is 

incorporated into H.R. 3299. 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL 

A. CHANGES IN EXISTING LAW PROPOSED BY THE BILL

Pursuant to clause 3(e)(1)(B) of rule XIII of the Rules of the 

House of Representatives, changes in existing law proposed by the 

bill are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics, existing 

law in which no change is proposed is shown in roman): 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics, 

and existing law in which no change is proposed is shown in 

roman): 

INTERNAL REVENUE CODE OF 1986 

* * * * * * * 

Subtitle A—Income Taxes 

* * * * * * * 

CHAPTER 1—NORMAL TAXES AND SURTAXES 

* * * * * * * 

Subchapter A—DETERMINATION OF TAX 

LIABILITY 

* * * * * * * 

18 

PART I—TAX ON INDIVIDUALS 

* * * * * * * 

SEC. 1. TAX IMPOSED. 

(a) MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING

SPOUSES.—There is hereby imposed on the taxable income of— 

(1) every married individual (as defined in section 7703) who 

makes a single return jointly with øhis spouse¿ the individual’s spouse under section 6013, and 

(2) every surviving spouse (as defined in section 2(a)), 

a tax determined in accordance with the following table: 

(b) HEADS OF HOUSEHOLDS.—There is hereby imposed on the taxable income of every head of a household (as defined in section 

2(b)) a tax determined in accordance with the following table: 

(c) UNMARRIED INDIVIDUALS (OTHER THAN SURVIVING SPOUSES

AND HEADS OF HOUSEHOLDS).—There is hereby imposed on the taxable income of every individual (other than a surviving spouse as 

defined in section 2(a) or the head of a household as defined in section 2(b)) who is not a married individual (as defined in section 

7703) a tax determined in accordance with the following table: 

(d) MARRIED INDIVIDUALS FILING SEPARATE RETURNS.—There is 

hereby imposed on the taxable income of every married individual 

(as defined in section 7703) who does not make a single return 

jointly with øhis spouse¿ the individual’s spouse under section 

6013, a tax determined in accordance with the following table: 

(e) ESTATES AND TRUSTS.—There is hereby imposed on the taxable income of— 

(1) every estate, and 

(2) every trust, 

taxable under this subsection a tax determined in accordance with 

the following table: 

(f) PHASEOUT OF MARRIAGE PENALTY IN 15-PERCENT BRACKET; ADJUSTMENTS IN TAX TABLES SO THAT INFLATION WILL NOT RESULT IN

TAX INCREASES.— 

(1) IN GENERAL.—Not later than December 15 of 1993, and 

each subsequent calendar year, the Secretary shall prescribe 

tables which shall apply in lieu of the tables contained in subsections (a), (b), (c), (d), and (e) with respect to taxable years 

beginning in the succeeding calendar year. 

(2) METHOD OF PRESCRIBING TABLES.—The table which under 

paragraph (1) is to apply in lieu of the table contained in subsection (a), (b), (c), (d), or (e), as the case may be, with respect 

to taxable years beginning in any calendar year shall be prescribed— 

(A) except as provided in paragraph (8), by increasing 

the minimum and maximum dollar amounts for each 

bracket for which a tax is imposed under such table by the 

cost-of-living adjustment for such calendar year, determined— 

(i) except as provided in clause (ii), by substituting 

‘‘1992’’ for ‘‘2016’’ in paragraph (3)(A)(ii), and 

(ii) in the case of adjustments to the dollar amounts 

at which the 36 percent rate bracket begins or at 

which the 39.6 percent rate bracket begins, by substituting ‘‘1993’’ for ‘‘2016’’ in paragraph (3)(A)(ii), 

19 

(B) by not changing the rate applicable to any rate 

bracket as adjusted under subparagraph (A), and 

(C) by adjusting the amounts setting forth the tax to the 

extent necessary to reflect the adjustments in the rate 

brackets. 

(3) COST-OF-LIVING ADJUSTMENT.—For purposes of this subsection— 

(A) IN GENERAL.—The cost-of-living adjustment for any 

calendar year is the percentage (if any) by which— 

(i) the C-CPI-U for the preceding calendar year, exceeds 

(ii) the CPI for calendar year 2016, multiplied by the 

amount determined under subparagraph (B). 

(B) AMOUNT DETERMINED.—The amount determined 

under this clause is the amount obtained by dividing— 

(i) the C-CPI-U for calendar year 2016, by 

(ii) the CPI for calendar year 2016. 

(C) SPECIAL RULE FOR ADJUSTMENTS WITH A BASE YEAR

AFTER 2016.—For purposes of any provision of this title 

which provides for the substitution of a year after 2016 for 

‘‘2016’’ in subparagraph (A)(ii), subparagraph (A) shall be 

applied by substituting ‘‘the C-CPI-U for calendar year 

2016’’ for ‘‘the CPI for calendar year 2016’’ and all that follows in clause (ii) thereof. 

(4) CPI FOR ANY CALENDAR YEAR.—For purposes of paragraph (3), the CPI for any calendar year is the average of the 

Consumer Price Index as of the close of the 12-month period 

ending on August 31 of such calendar year. 

(5) CONSUMER PRICE INDEX.—For purposes of paragraph (4), 

the term ‘‘Consumer Price Index’’ means the last Consumer 

Price Index for all-urban consumers published by the Department of Labor. For purposes of the preceding sentence, the revision of the Consumer Price Index which is most consistent 

with the Consumer Price Index for calendar year 1986 shall be 

used. 

(6) C-CPI-U.—For purposes of this subsection— 

(A) IN GENERAL.—The term ‘‘C-CPI-U’’ means the 

Chained Consumer Price Index for All Urban Consumers 

(as published by the Bureau of Labor Statistics of the Department of Labor). The values of the Chained Consumer 

Price Index for All Urban Consumers taken into account 

for purposes of determining the cost-of-living adjustment 

for any calendar year under this subsection shall be the 

latest values so published as of the date on which such Bureau publishes the initial value of the Chained Consumer 

Price Index for All Urban Consumers for the month of August for the preceding calendar year. 

(B) DETERMINATION FOR CALENDAR YEAR.—The C-CPI-U 

for any calendar year is the average of the C-CPI-U as of 

the close of the 12-month period ending on August 31 of 

such calendar year. 

(7) ROUNDING.— 

(A) IN GENERAL.—If any increase determined under 

paragraph (2)(A), section 63(c)(4), section 68(b)(2) or secVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00025 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
20 

tion 151(d)(4) is not a multiple of $50, such increase shall 

be rounded to the next lowest multiple of $50. 

(B) TABLE FOR MARRIED INDIVIDUALS FILING SEPARATELY.—In the case of a married individual filing a separate return, subparagraph (A) (other than with respect to 

sections 63(c)(4) and 151(d)(4)(A)) shall be applied by substituting ‘‘$25’’ for ‘‘$50’’ each place it appears. 

(8) ELIMINATION OF MARRIAGE PENALTY IN 15-PERCENT BRACKET.—With respect to taxable years beginning after December 

31, 2003, in prescribing the tables under paragraph (1)— 

(A) the maximum taxable income in the 15-percent rate 

bracket in the table contained in subsection (a) (and the 

minimum taxable income in the next higher taxable income bracket in such table) shall be 200 percent of the 

maximum taxable income in the 15-percent rate bracket in 

the table contained in subsection (c) (after any other adjustment under this subsection), and 

(B) the comparable taxable income amounts in the table 

contained in subsection (d) shall be 1/2 of the amounts determined under subparagraph (A). 

(g) CERTAIN UNEARNED INCOME OF CHILDREN TAXED AS IF PARENT’S INCOME.— 

(1) IN GENERAL.—In the case of any child to whom this subsection applies, the tax imposed by this section shall be equal 

to the greater of— 

(A) the tax imposed by this section without regard to 

this subsection, or 

(B) the sum of— 

(i) the tax which would be imposed by this section 

if the taxable income of such child for the taxable year 

were reduced by the net unearned income of such 

child, plus 

(ii) such child’s share of the allocable parental tax. 

(2) CHILD TO WHOM SUBSECTION APPLIES.—This subsection 

shall apply to any child for any taxable year if— 

(A) such child— 

(i) has not attained age 18 before the close of the 

taxable year, or 

(ii)(I) has attained age 18 before the close of the taxable year and meets the age requirements of section 

152(c)(3) (determined without regard to subparagraph 

(B) thereof), and 

(II) whose earned income (as defined in section 

911(d)(2)) for such taxable year does not exceed onehalf of the amount of the individual’s support (within 

the meaning of section 152(c)(1)(D) after the application of section 152(f)(5) (without regard to subparagraph (A) thereof)) for such taxable year, 

(B) either parent of such child is alive at the close of the 

taxable year, and 

(C) such child does not file a joint return for the taxable 

year. 

(3) ALLOCABLE PARENTAL TAX.—For purposes of this subsection— 

21 

(A) IN GENERAL.—The term ‘‘allocable parental tax’’ 

means the excess of— 

(i) the tax which would be imposed by this section 

on the parent’s taxable income if such income included 

the net unearned income of all children of the parent 

to whom this subsection applies, over 

(ii) the tax imposed by this section on the parent 

without regard to this subsection. 

For purposes of clause (i), net unearned income of all children of the parent shall not be taken into account in computing any exclusion, deduction, or credit of the parent. 

(B) CHILD’S SHARE.—A child’s share of any allocable parental tax of a parent shall be equal to an amount which 

bears the same ratio to the total allocable parental tax as 

the child’s net unearned income bears to the aggregate net 

unearned income of all children of such parent to whom 

this subsection applies. 

(C) SPECIAL RULE WHERE PARENT HAS DIFFERENT TAXABLE YEAR.—Except as provided in regulations, if the parent does not have the same taxable year as the child, the 

allocable parental tax shall be determined on the basis of 

the taxable year of the parent ending in the child’s taxable 

year. 

(4) NET UNEARNED INCOME.—For purposes of this subsection— 

(A) IN GENERAL.—The term ‘‘net unearned income’’ 

means the excess of— 

(i) the portion of the adjusted gross income for the 

taxable year which is not attributable to earned income (as defined in section 911(d)(2)), over 

(ii) the sum of— 

(I) the amount in effect for the taxable year 

under section 63(c)(5)(A) (relating to limitation on 

standard deduction in the case of certain dependents), plus 

(II) the greater of the amount described in subclause (I) or, if the child itemizes his deductions 

for the taxable year, the amount of the itemized 

deductions allowed by this chapter for the taxable 

year which are directly connected with the production of the portion of adjusted gross income referred to in clause (i). 

(B) LIMITATION BASED ON TAXABLE INCOME.—The 

amount of the net unearned income for any taxable year 

shall not exceed the individual’s taxable income for such 

taxable year. 

(C) TREATMENT OF DISTRIBUTIONS FROM QUALIFIED DISABILITY TRUSTS.—For purposes of this subsection, in the 

case of any child who is a beneficiary of a qualified disability trust (as defined in section 642(b)(2)(C)(ii)), any 

amount included in the income of such child under sections 

652 and 662 during a taxable year shall be considered 

earned income of such child for such taxable year. 

22 

(5) SPECIAL RULES FOR DETERMINING PARENT TO WHOM SUBSECTION APPLIES.—For purposes of this subsection, the parent 

whose taxable income shall be taken into account shall be— 

(A) in the case of parents who are not married (within 

the meaning of section 7703), the custodial parent (within 

the meaning of section 152(e)) of the child, and 

(B) in the case of married individuals filing separately, 

the individual with the greater taxable income. 

(6) PROVIDING OF PARENT’S TIN.—The parent of any child to 

whom this subsection applies for any taxable year shall provide the TIN of such parent to such child and such child shall 

include such TIN on the child’s return of tax imposed by this 

section for such taxable year. 

(7) ELECTION TO CLAIM CERTAIN UNEARNED INCOME OF CHILD

ON PARENT’S RETURN.— 

(A) IN GENERAL.—If— 

(i) any child to whom this subsection applies has 

gross income for the taxable year only from interest 

and dividends (including Alaska Permanent Fund dividends), 

(ii) such gross income is more than the amount described in paragraph (4)(A)(ii)(I) and less than 10 

times the amount so described, 

(iii) no estimated tax payments for such year are 

made in the name and TIN of such child, and no 

amount has been deducted and withheld under section 

3406, and 

(iv) the parent of such child (as determined under 

paragraph (5)) elects the application of subparagraph 

(B), 

such child shall be treated (other than for purposes of this 

paragraph) as having no gross income for such year and 

shall not be required to file a return under section 6012. 

(B) INCOME INCLUDED ON PARENT’S RETURN.—In the case 

of a parent making the election under this paragraph— 

(i) the gross income of each child to whom such election applies (to the extent the gross income of such 

child exceeds twice the amount described in paragraph 

(4)(A)(ii)(I)) shall be included in such parent’s gross income for the taxable year, 

(ii) the tax imposed by this section for such year 

with respect to such parent shall be the amount equal 

to the sum of— 

(I) the amount determined under this section 

after the application of clause (i), plus 

(II) for each such child, 10 percent of the lesser 

of the amount described in paragraph (4)(A)(ii)(I) 

or the excess of the gross income of such child 

over the amount so described, and 

(iii) any interest which is an item of tax preference 

under section 57(a)(5) of the child shall be treated as 

an item of tax preference of such parent (and not of 

such child). 

23 

(C) REGULATIONS.—The Secretary shall prescribe such 

regulations as may be necessary or appropriate to carry 

out the purposes of this paragraph. 

(h) MAXIMUM CAPITAL GAINS RATE.— (1) IN GENERAL.—If a taxpayer has a net capital gain for any 

taxable year, the tax imposed by this section for such taxable 

year shall not exceed the sum of— 

(A) a tax computed at the rates and in the same manner 

as if this subsection had not been enacted on the greater 

of— 

(i) taxable income reduced by the net capital gain; or 

(ii) the lesser of— 

(I) the amount of taxable income taxed at a rate 

below 25 percent; or 

(II) taxable income reduced by the adjusted net 

capital gain; 

(B) 0 percent of so much of the adjusted net capital gain 

(or, if less, taxable income) as does not exceed the excess 

(if any) of— 

(i) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 

25 percent, over 

(ii) the taxable income reduced by the adjusted net 

capital gain; 

(C) 15 percent of the lesser of— 

(i) so much of the adjusted net capital gain (or, if 

less, taxable income) as exceeds the amount on which 

a tax is determined under subparagraph (B), or 

(ii) the excess of— 

(I) the amount of taxable income which would 

(without regard to this paragraph) be taxed at a 

rate below 39.6 percent, over 

(II) the sum of the amounts on which a tax is 

determined under subparagraphs (A) and (B), 

(D) 20 percent of the adjusted net capital gain (or, if 

less, taxable income) in excess of the sum of the amounts 

on which tax is determined under subparagraphs (B) and 

(C), 

(E) 25 percent of the excess (if any) of— 

(i) the unrecaptured section 1250 gain (or, if less, 

the net capital gain (determined without regard to 

paragraph (11))), over 

(ii) the excess (if any) of— 

(I) the sum of the amount on which tax is determined under subparagraph (A) plus the net capital gain, over 

(II) taxable income; and 

(F) 28 percent of the amount of taxable income in excess 

of the sum of the amounts on which tax is determined 

under the preceding subparagraphs of this paragraph. 

(2) NET CAPITAL GAIN TAKEN INTO ACCOUNT AS INVESTMENT

INCOME.—For purposes of this subsection, the net capital gain 

for any taxable year shall be reduced (but not below zero) by 

the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii). 

24 

(3) ADJUSTED NET CAPITAL GAIN.—For purposes of this subsection, the term ‘‘adjusted net capital gain’’ means the sum 

of— 

(A) net capital gain (determined without regard to paragraph (11)) reduced (but not below zero) by the sum of— 

(i) unrecaptured section 1250 gain, and 

(ii) 28-percent rate gain, plus 

(B) qualified dividend income (as defined in paragraph 

(11)). 

(4) 28-PERCENT RATE GAIN.—For purposes of this subsection, 

the term ‘‘28-percent rate gain’’ means the excess (if any) of— 

(A) the sum of— 

(i) collectibles gain; and 

(ii) section 1202 gain, over 

(B) the sum of— 

(i) collectibles loss; 

(ii) the net short-term capital loss; and 

(iii) the amount of long-term capital loss carried 

under section 1212(b)(1)(B) to the taxable year. 

(5) COLLECTIBLES GAIN AND LOSS.—For purposes of this subsection— 

(A) IN GENERAL.—The terms ‘‘collectibles gain’’ and ‘‘collectibles loss’’ mean gain or loss (respectively) from the 

sale or exchange of a collectible (as defined in section 

408(m) without regard to paragraph (3) thereof) which is 

a capital asset held for more than 1 year but only to the 

extent such gain is taken into account in computing gross 

income and such loss is taken into account in computing 

taxable income. 

(B) PARTNERSHIPS, ETC..—For purposes of subparagraph 

(A), any gain from the sale of an interest in a partnership, 

S corporation, or trust which is attributable to unrealized 

appreciation in the value of collectibles shall be treated as 

gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of 

the preceding sentence. 

(6) UNRECAPTURED SECTION 1250 GAIN.—For purposes of this 

subsection— 

(A) IN GENERAL.—The term ‘‘unrecaptured section 1250 

gain’’ means the excess (if any) of— 

(i) the amount of long-term capital gain (not otherwise treated as ordinary income) which would be 

treated as ordinary income if section 1250(b)(1) included all depreciation and the applicable percentage 

under section 1250(a) were 100 percent, over 

(ii) the excess (if any) of— 

(I) the amount described in paragraph (4)(B); 

over 

(II) the amount described in paragraph (4)(A). 

(B) LIMITATION WITH RESPECT TO SECTION 1231 PROP- ERTY.—The amount described in subparagraph (A)(i) from 

sales, exchanges, and conversions described in section 

1231(a)(3)(A) for any taxable year shall not exceed the net 

section 1231 gain (as defined in section 1231(c)(3)) for such 

year. 

25 

(7) SECTION 1202 GAIN.—For purposes of this subsection, the 

term ‘‘section 1202 gain’’ means the excess of— 

(A) the gain which would be excluded from gross income 

under section 1202 but for the percentage limitation in 

section 1202(a), over 

(B) the gain excluded from gross income under section 

1202. 

(8) COORDINATION WITH RECAPTURE OF NET ORDINARY LOSSES

UNDER SECTION 1231.—If any amount is treated as ordinary income under section 1231(c), such amount shall be allocated 

among the separate categories of net section 1231 gain (as defined in section 1231(c)(3)) in such manner as the Secretary 

may by forms or regulations prescribe. 

(9) REGULATIONS.—The Secretary may prescribe such regulations as are appropriate (including regulations requiring reporting) to apply this subsection in the case of sales and exchanges by pass-thru entities and of interests in such entities. 

(10) PASS-THRU ENTITY DEFINED.—For purposes of this subsection, the term ‘‘pass-thru entity’’ means— 

(A) a regulated investment company; 

(B) a real estate investment trust; 

(C) an S corporation; 

(D) a partnership; 

(E) an estate or trust; 

(F) a common trust fund; and 

(G) a qualified electing fund (as defined in section 1295). 

(11) DIVIDENDS TAXED AS NET CAPITAL GAIN.— 

(A) IN GENERAL.—For purposes of this subsection, the 

term ‘‘net capital gain’’ means net capital gain (determined 

without regard to this paragraph) increased by qualified 

dividend income. 

(B) QUALIFIED DIVIDEND INCOME.—For purposes of this 

paragraph— 

(i) IN GENERAL.—The term ‘‘qualified dividend income’’ means dividends received during the taxable 

year from— 

(I) domestic corporations, and 

(II) qualified foreign corporations. 

(ii) CERTAIN DIVIDENDS EXCLUDED.—Such term shall 

not include— 

(I) any dividend from a corporation which for 

the taxable year of the corporation in which the 

distribution is made, or the preceding taxable 

year, is a corporation exempt from tax under section 501 or 521, 

(II) any amount allowed as a deduction under 

section 591 (relating to deduction for dividends 

paid by mutual savings banks, etc.), and 

(III) any dividend described in section 404(k). 

(iii) COORDINATION WITH SECTION 246(C).—Such term 

shall not include any dividend on any share of stock— 

(I) with respect to which the holding period requirements of section 246(c) are not met (determined by substituting in section 246(c) ‘‘60 days’’ 

26 

for ‘‘45 days’’ each place it appears and by substituting ‘‘121-day period’’ for ‘‘91-day period’’), or 

(II) to the extent that the taxpayer is under an 

obligation (whether pursuant to a short sale or 

otherwise) to make related payments with respect 

to positions in substantially similar or related 

property. 

(C) QUALIFIED FOREIGN CORPORATIONS.— (i) IN GENERAL.—Except as otherwise provided in 

this paragraph, the term ‘‘qualified foreign corporation’’ means any foreign corporation if— 

(I) such corporation is incorporated in a possession of the United States, or 

(II) such corporation is eligible for benefits of a 

comprehensive income tax treaty with the United 

States which the Secretary determines is satisfactory for purposes of this paragraph and which includes an exchange of information program. 

(ii) DIVIDENDS ON STOCK READILY TRADABLE ON

UNITED STATES SECURITIES MARKET.—A foreign corporation not otherwise treated as a qualified foreign 

corporation under clause (i) shall be so treated with 

respect to any dividend paid by such corporation if the 

stock with respect to which such dividend is paid is 

readily tradable on an established securities market in 

the United States. 

(iii) EXCLUSION OF DIVIDENDS OF CERTAIN FOREIGN

CORPORATIONS.—Such term shall not include— 

(I) any foreign corporation which for the taxable 

year of the corporation in which the dividend was 

paid, or the preceding taxable year, is a passive 

foreign investment company (as defined in section 

1297), and 

(II) any corporation which first becomes a surrogate foreign corporation (as defined in section 

7874(a)(2)(B)) after the date of the enactment of 

this subclause, other than a foreign corporation 

which is treated as a domestic corporation under 

section 7874(b). 

(iv) COORDINATION WITH FOREIGN TAX CREDIT LIMITATION.—Rules similar to the rules of section 

904(b)(2)(B) shall apply with respect to the dividend 

rate differential under this paragraph. 

(D) SPECIAL RULES.— 

(i) AMOUNTS TAKEN INTO ACCOUNT AS INVESTMENT

INCOME.—Qualified dividend income shall not include 

any amount which the taxpayer takes into account as 

investment income under section 163(d)(4)(B). 

(ii) EXTRAORDINARY DIVIDENDS.—If a taxpayer to 

whom this section applies receives, with respect to any 

share of stock, qualified dividend income from 1 or 

more dividends which are extraordinary dividends 

(within the meaning of section 1059(c)), any loss on 

the sale or exchange of such share shall, to the extent 

of such dividends, be treated as long-term capital loss. 

27 

(iii) TREATMENT OF DIVIDENDS FROM REGULATED INVESTMENT COMPANIES AND REAL ESTATE INVESTMENT

TRUSTS.—A dividend received from a regulated investment company or a real estate investment trust shall 

be subject to the limitations prescribed in sections 854 

and 857. 

(i) RATE REDUCTIONS AFTER 2000.— 

(1) 10-PERCENT RATE BRACKET.— 

(A) IN GENERAL.—In the case of taxable years beginning 

after December 31, 2000— 

(i) the rate of tax under subsections (a), (b), (c), and 

(d) on taxable income not over the initial bracket 

amount shall be 10 percent, and 

(ii) the 15 percent rate of tax shall apply only to taxable income over the initial bracket amount but not 

over the maximum dollar amount for the 15-percent 

rate bracket. 

(B) INITIAL BRACKET AMOUNT.—For purposes of this 

paragraph, the initial bracket amount is— 

(i) $14,000 in the case of subsection (a), 

(ii) $10,000 in the case of subsection (b), and 

(iii) 1/2 the amount applicable under clause (i) (after 

adjustment, if any, under subparagraph (C)) in the 

case of subsections (c) and (d). 

(C) INFLATION ADJUSTMENT.—In prescribing the tables 

under subsection (f) which apply with respect to taxable 

years beginning in calendar years after 2003— 

(i) the cost-of-living adjustment shall be determined 

under subsection (f)(3) by substituting ‘‘2002’’ for 

‘‘2016’’ in subparagraph (A)(ii) thereof, and 

(ii) the adjustments under clause (i) shall not apply 

to the amount referred to in subparagraph (B)(iii). 

If any amount after adjustment under the preceding sentence is not a multiple of $50, such amount shall be rounded to the next lowest multiple of $50. 

(2) 25-, 28-, AND 33-PERCENT RATE BRACKETS.—The tables 

under subsections (a), (b), (c), (d), and (e) shall be applied— 

(A) by substituting ‘‘25%’’ for ‘‘28%’’ each place it appears 

(before the application of subparagraph (B)), 

(B) by substituting ‘‘28%’’ for ‘‘31%’’ each place it appears, and 

(C) by substituting ‘‘33%’’ for ‘‘36%’’ each place it appears. 

(3) MODIFICATIONS TO INCOME TAX BRACKETS FOR HIGH-INCOME TAXPAYERS.— 

(A) 35-PERCENT RATE BRACKET.—In the case of taxable 

years beginning after December 31, 2012— 

(i) the rate of tax under subsections (a), (b), (c), and 

(d) on a taxpayer’s taxable income in the highest rate 

bracket shall be 35 percent to the extent such income 

does not exceed an amount equal to the excess of— 

(I) the applicable threshold, over 

(II) the dollar amount at which such bracket begins, and 

28 

(ii) the 39.6 percent rate of tax under such subsections shall apply only to the taxpayer’s taxable income in such bracket in excess of the amount to which 

clause (i) applies. 

(B) APPLICABLE THRESHOLD.—For purposes of this paragraph, the term ‘‘applicable threshold’’ means— (i) $450,000 in the case of subsection (a), 

(ii) $425,000 in the case of subsection (b), 

(iii) $400,000 in the case of subsection (c), and 

(iv) 1/2 the amount applicable under clause (i) (after 

adjustment, if any, under subparagraph (C)) in the 

case of subsection (d). 

(C) INFLATION ADJUSTMENT.—For purposes of this paragraph, with respect to taxable years beginning in calendar 

years after 2013, each of the dollar amounts under clauses 

(i), (ii), and (iii) of subparagraph (B) shall be adjusted in 

the same manner as under paragraph (1)(C)(i), except that 

subsection (f)(3)(A)(ii) shall be applied by substituting 

‘‘2012’’ for ‘‘2016’’. 

(4) ADJUSTMENT OF TABLES.—The Secretary shall adjust the 

tables prescribed under subsection (f) to carry out this subsection. 

(j) MODIFICATIONS FOR TAXABLE YEARS 2018 THROUGH 2025.— 

(1) IN GENERAL.—In the case of a taxable year beginning 

after December 31, 2017, and before January 1, 2026— 

(A) subsection (i) shall not apply, and 

(B) this section (other than subsection (i)) shall be applied as provided in paragraphs (2) through (6). 

(2) RATE TABLES.— 

(A) MARRIED INDIVIDUALS FILING JOINT RETURNS AND

SURVIVING SPOUSES.—The following table shall be applied 

in lieu of the table contained in subsection (a): 

(B) HEADS OF HOUSEHOLDS.—The following table shall 

be applied in lieu of the table contained in subsection (b): 

(C) UNMARRIED INDIVIDUALS OTHER THAN SURVIVING

SPOUSES AND HEADS OF HOUSEHOLDS.—The following table 

shall be applied in lieu of the table contained in subsection 

(c): 

(D) MARRIED INDIVIDUALS FILING SEPARATE RETURNS.— The following table shall be applied in lieu of the table 

contained in subsection (d): 

(E) ESTATES AND TRUSTS.—The following table shall be 

applied in lieu of the table contained in subsection (e): 

(F) REFERENCES TO RATE TABLES.—Any reference in this 

title to a rate of tax under subsection (c) shall be treated 

as a reference to the corresponding rate bracket under subparagraph (C) of this paragraph, except that the reference 

in section 3402(q)(1) to the third lowest rate of tax applicable under subsection (c) shall be treated as a reference to 

the fourth lowest rate of tax under subparagraph (C). 

(3) ADJUSTMENTS.— (A) NO ADJUSTMENT IN 2018.—The tables contained in 

paragraph (2) shall apply without adjustment for taxable 

years beginning after December 31, 2017, and before January 1, 2019. 

29 

(B) SUBSEQUENT YEARS.—For taxable years beginning 

after December 31, 2018, the Secretary shall prescribe tables which shall apply in lieu of the tables contained in 

paragraph (2) in the same manner as under paragraphs (1) 

and (2) of subsection (f) (applied without regard to clauses 

(i) and (ii) of subsection (f)(2)(A)), except that in prescribing such tables— 

(i) subsection (f)(3) shall be applied by substituting 

‘‘calendar year 2017’’ for ‘‘calendar year 2016’’ in subparagraph (A)(ii) thereof, 

(ii) subsection (f)(7)(B) shall apply to any unmarried 

individual other than a surviving spouse or head of 

household, and 

(iii) subsection (f)(8) shall not apply. 

(4) SPECIAL RULES FOR CERTAIN CHILDREN WITH UNEARNED

INCOME.— 

(A) IN GENERAL.—In the case of a child to whom subsection (g) applies for the taxable year, the rules of subparagraphs (B) and (C) shall apply in lieu of the rule 

under subsection (g)(1). 

(B) MODIFICATIONS TO APPLICABLE RATE BRACKETS.—In 

determining the amount of tax imposed by this section for 

the taxable year on a child described in subparagraph (A), 

the income tax table otherwise applicable under this subsection to the child shall be applied with the following 

modifications: 

(i) 24-PERCENT BRACKET.—The maximum taxable income which is taxed at a rate below 24 percent shall 

not be more than the sum of— 

(I) the earned taxable income of such child, plus 

(II) the minimum taxable income for the 24-percent bracket in the table under paragraph (2)(E) 

(as adjusted under paragraph (3)) for the taxable 

year. 

(ii) 35-PERCENT BRACKET.—The maximum taxable 

income which is taxed at a rate below 35 percent shall 

not be more than the sum of— 

(I) the earned taxable income of such child, plus 

(II) the minimum taxable income for the 35-percent bracket in the table under paragraph (2)(E) 

(as adjusted under paragraph (3)) for the taxable 

year. 

(iii) 37-PERCENT BRACKET.—The maximum taxable 

income which is taxed at a rate below 37 percent shall 

not be more than the sum of— 

(I) the earned taxable income of such child, plus 

(II) the minimum taxable income for the 37-percent bracket in the table under paragraph (2)(E) 

(as adjusted under paragraph (3)) for the taxable 

year. 

(C) COORDINATION WITH CAPITAL GAINS RATES.—For purposes of applying section 1(h) (after the modifications 

under paragraph (5)(A))— 

(i) the maximum zero rate amount shall not be more 

than the sum of— 

30 

(I) the earned taxable income of such child, plus 

(II) the amount in effect under paragraph 

(5)(B)(i)(IV) for the taxable year, and 

(ii) the maximum 15-percent rate amount shall not 

be more than the sum of— 

(I) the earned taxable income of such child, plus 

(II) the amount in effect under paragraph 

(5)(B)(ii)(IV) for the taxable year. 

(D) EARNED TAXABLE INCOME.—For purposes of this 

paragraph, the term ‘‘earned taxable income’’ means, with 

respect to any child for any taxable year, the taxable income of such child reduced (but not below zero) by the net 

unearned income (as defined in subsection (g)(4)) of such 

child. 

(5) APPLICATION OF CURRENT INCOME TAX BRACKETS TO CAPITAL GAINS BRACKETS.— 

(A) IN GENERAL.—Section 1(h)(1) shall be applied— 

(i) by substituting ‘‘below the maximum zero rate 

amount’’ for ‘‘which would (without regard to this 

paragraph) be taxed at a rate below 25 percent’’ in 

subparagraph (B)(i), and 

(ii) by substituting ‘‘below the maximum 15-percent 

rate amount’’ for ‘‘which would (without regard to this 

paragraph) be taxed at a rate below 39.6 percent’’ in 

subparagraph (C)(ii)(I). 

(B) MAXIMUM AMOUNTS DEFINED.—For purposes of applying section 1(h) with the modifications described in subparagraph (A)— 

(i) MAXIMUM ZERO RATE AMOUNT.—The maximum 

zero rate amount shall be— 

(I) in the case of a joint return or surviving 

spouse, $77,200, 

(II) in the case of an individual who is a head 

of household (as defined in section 2(b)), $51,700, 

(III) in the case of any other individual (other 

than an estate or trust), an amount equal to 1/2 

of the amount in effect for the taxable year under 

subclause (I), and 

(IV) in the case of an estate or trust, $2,600. 

(ii) MAXIMUM 15-PERCENT RATE AMOUNT.—The maximum 15-percent rate amount shall be— 

(I) in the case of a joint return or surviving 

spouse, $479,000 (1/2 such amount in the case of 

a married individual filing a separate return), 

(II) in the case of an individual who is the head 

of a household (as defined in section 2(b)), 

$452,400, 

(III) in the case of any other individual (other 

than an estate or trust), $425,800, and 

(IV) in the case of an estate or trust, $12,700. 

(C) INFLATION ADJUSTMENT.—In the case of any taxable 

year beginning after 2018, each of the dollar amounts in 

clauses (i) and (ii) of subparagraph (B) shall be increased 

by an amount equal to— 

(i) such dollar amount, multiplied by 

31 

(ii) the cost-of-living adjustment determined under 

subsection (f)(3) for the calendar year in which the 

taxable year begins, determined by substituting ‘‘calendar year 2017’’ for ‘‘calendar year 2016’’ in subparagraph (A)(ii) thereof. 

If any increase under this subparagraph is not a multiple 

of $50, such increase shall be rounded to the next lowest 

multiple of $50. 

(6) SECTION 15 NOT TO APPLY.—Section 15 shall not apply to 

any change in a rate of tax by reason of this subsection. 

SEC. 2. DEFINITIONS AND SPECIAL RULES. 

(a) DEFINITION OF SURVIVING SPOUSE.— (1) IN GENERAL.—For purposes of section 1, the term ‘‘surviving spouse’’ means a taxpayer— 

(A) whose spouse died during either of øhis two taxable 

years¿ the taxpayer’s two taxable years immediately preceding the taxable year, and 

(B) who maintains as øhis home¿ the taxpayer’s home a 

household which constitutes for the taxable year the principal place of abode (as a member of such household) of a 

dependent (i) who (within the meaning of section 152, determined without regard to subsections (b)(1), (b)(2), and 

(d)(1)(B) thereof) is a son, stepson, daughter, or stepdaughter of the taxpayer, and (ii) with respect to whom 

the taxpayer is entitled to a deduction for the taxable year 

under section 151. 

For purposes of this paragraph, an individual shall be considered as maintaining a household only if over half of the cost 

of maintaining the household during the taxable year is furnished by such individual. 

(2) LIMITATIONS.—Notwithstanding paragraph (1), for purposes of section 1 a taxpayer shall not be considered to be a 

surviving spouse— 

(A) if the taxpayer has remarried at any time before the 

close of the taxable year, or 

(B) unless, for the taxpayer’s taxable year during which 

øhis spouse¿ the taxpayer’s spouse died, a joint return 

could have been made under the provisions of section 6013 

(without regard to subsection (a)(3) thereof). 

(3) SPECIAL RULE WHERE DECEASED SPOUSE WAS IN MISSING

STATUS.—If an individual was in a missing status (within the 

meaning of section 6013(f)(3)) as a result of service in a combat 

zone (as determined for purposes of section 112) and if such individual remains in such status until the date referred to in 

subparagraph (A) or (B), then, for purposes of paragraph 

(1)(A), the date on which such individual died shall be treated 

as the earlier of the date determined under subparagraph (A) 

or the date determined under subparagraph (B): 

(A) the date on which the determination is made under 

section 556 of title 37 of the United States Code or under 

section 5566 of title 5 of such Code (whichever is applicable) that such individual died while in such missing status, 

or 

(B) except in the case of the combat zone designated for 

purposes of the Vietnam conflict, the date which is 2 years 

32 

after the date designated under section 112 as the date of 

termination of combatant activities in that zone. 

(b) DEFINITION OF HEAD OF HOUSEHOLD.— 

(1) IN GENERAL.—For purposes of this subtitle, an individual 

shall be considered a head of a household if, and only if, such 

individual is not married at the close of his taxable year, is not 

a surviving spouse (as defined in subsection (a)), and either— 

(A) maintains as his home a household which constitutes 

for more than one-half of such taxable year the principal 

place of abode, as a member of such household, of— 

(i) a qualifying child of the individual (as defined in 

section 152(c), determined without regard to section 

152(e)), but not if such child— 

(I) is married at the close of the taxpayer’s taxable year, and 

(II) is not a dependent of such individual by reason of section 152(b)(2) or 152(b)(3), or both, or 

(ii) any other person who is a dependent of the taxpayer, if the taxpayer is entitled to a deduction for the 

taxable year for such person under section 151, or 

(B) maintains a household which constitutes for such 

taxable year the principal place of abode of the father or 

mother of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such father or mother 

under section 151. 

For purposes of this paragraph, an individual shall be considered as maintaining a household only if over half of the cost 

of maintaining the household during the taxable year is furnished by such individual. 

(2) DETERMINATION OF STATUS.—For purposes of this subsection— 

(A) an individual who is legally separated from øhis 

spouse¿ the individual’s spouse under a decree of divorce 

or of separate maintenance shall not be considered as married; 

(B) a taxpayer shall be considered as not married at the 

close of øhis taxable year¿ the taxpayer’s taxable year if at 

any time during the taxable year øhis spouse¿ the taxpayer’s spouse is a nonresident alien; and 

(C) a taxpayer shall be considered as married at the 

close of øhis taxable year¿ the taxpayer’s taxable year if 

øhis spouse¿ the taxpayer’s spouse (other than a spouse described in subparagraph (B)) died during the taxable year. 

(3) LIMITATIONS.—Notwithstanding paragraph (1), for purposes of this subtitle a taxpayer shall not be considered to be 

a head of a household— 

(A) if at any time during the taxable year he is a nonresident alien; or 

(B) by reason of an individual who would not be a dependent for the taxable year but for— 

(i) subparagraph (H) of section 152(d)(2), or 

(ii) paragraph (3) of section 152(d). 

(c) CERTAIN MARRIED INDIVIDUALS LIVING APART.—For purposes 

of this part, an individual shall be treated as not married at the 

33 

close of the taxable year if such individual is so treated under the 

provisions of section 7703(b). 

(d) NONRESIDENT ALIENS.—In the case of a nonresident alien individual, the taxes imposed by sections 1 and 55 shall apply only 

as provided by section 871 or 877. 

(e) CROSS REFERENCE.—For definition of taxable income, see section 63. 

* * * * * * * 

PART IV—CREDITS AGAINST TAX 

* * * * * * * 

Subpart A—NONREFUNDABLE PERSONAL CREDITS 

* * * * * * * 

SEC. 21. EXPENSES FOR HOUSEHOLD AND DEPENDENT CARE SERVICES NECESSARY FOR GAINFUL EMPLOYMENT. 

(a) ALLOWANCE OF CREDIT.— (1) IN GENERAL.—In the case of an individual for which there 

are 1 or more qualifying individuals (as defined in subsection 

(b)(1)) with respect to such individual, there shall be allowed 

as a credit against the tax imposed by this chapter for the taxable year an amount equal to the applicable percentage of the 

employment-related expenses (as defined in subsection (b)(2)) 

paid by such individual during the taxable year. 

(2) APPLICABLE PERCENTAGE DEFINED.—For purposes of paragraph (1), the term ‘‘applicable percentage’’ means 35 percent 

reduced (but not below 20 percent) by 1 percentage point for 

each $2,000 (or fraction thereof) by which the taxpayer’s adjusted gross income for the taxable year exceeds $15,000. 

(b) DEFINITIONS OF QUALIFYING INDIVIDUAL AND EMPLOYMENT-RE- LATED EXPENSES.—For purposes of this section— 

(1) QUALIFYING INDIVIDUAL.—The term ‘‘qualifying individual’’ means— 

(A) a dependent of the taxpayer (as defined in section 

152(a)(1)) who has not attained age 13, 

(B) a dependent of the taxpayer (as defined in section 

152, determined without regard to subsections (b)(1), 

(b)(2), and (d)(1)(B)) who is physically or mentally incapable of caring for himself or herself and who has the same 

principal place of abode as the taxpayer for more than onehalf of such taxable year, or 

(C) the spouse of the taxpayer, if the spouse is physically 

or mentally incapable of caring for himself or herself and 

who has the same principal place of abode as the taxpayer 

for more than one-half of such taxable year. 

(2) EMPLOYMENT-RELATED EXPENSES.— 

(A) IN GENERAL.—The term ‘‘employment-related expenses’’ means amounts paid for the following expenses, 

but only if such expenses are incurred to enable the taxpayer to be gainfully employed for any period for which 

there are 1 or more qualifying individuals with respect to 

the taxpayer: 

(i) expenses for household services, and 

(ii) expenses for the care of a qualifying individual. 

34 

Such term shall not include any amount paid for services 

outside the taxpayer’s household at a camp where the 

qualifying individual stays overnight. 

(B) EXCEPTION.—Employment-related expenses described in subparagraph (A) which are incurred for services outside the taxpayer’s household shall be taken into 

account only if incurred for the care of— 

(i) a qualifying individual described in paragraph 

(1)(A), or 

(ii) a qualifying individual (not described in paragraph (1)(A)) who regularly spends at least 8 hours 

each day in the taxpayer’s household. 

(C) DEPENDENT CARE CENTERS.—Employment-related expenses described in subparagraph (A) which are incurred 

for services provided outside the taxpayer’s household by 

a dependent care center (as defined in subparagraph (D)) 

shall be taken into account only if— 

(i) such center complies with all applicable laws and 

regulations of a State or unit of local government, and 

(ii) the requirements of subparagraph (B) are met. 

(D) DEPENDENT CARE CENTER DEFINED.—For purposes of 

this paragraph, the term ‘‘dependent care center’’ means 

any facility which— 

(i) provides care for more than six individuals (other 

than individuals who reside at the facility), and 

(ii) receives a fee, payment, or grant for providing 

services for any of the individuals (regardless of 

whether such facility is operated for profit). 

(c) DOLLAR LIMIT ON AMOUNT CREDITABLE.—The amount of the 

employment-related expenses incurred during any taxable year 

which may be taken into account under subsection (a) shall not exceed— 

(1) $3,000 if there is 1 qualifying individual with respect to 

the taxpayer for such taxable year, or (2) $6,000 if there are 2 or more qualifying individuals with 

respect to the taxpayer for such taxable year. 

The amount determined under paragraph (1) or (2) (whichever is 

applicable) shall be reduced by the aggregate amount excludable 

from gross income under section 129 for the taxable year. 

(d) EARNED INCOME LIMITATION.— 

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amount of the employment-related expenses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed— 

(A) in the case of an individual who is not married at the 

close of such year, such individual’s earned income for 

such year, or 

(B) in the case of an individual who is married at the 

close of such year, the lesser of such individual’s earned income or the earned income of øhis spouse¿ the individual’s 

spouse for such year. 

(2) SPECIAL RULE FOR SPOUSE WHO IS A STUDENT OR INCAPA- BLE OF CARING FOR øHIMSELF¿ SELF.—In the case of a spouse 

who is a student or a qualifying individual described in subsection (b)(1)(C), for purposes of paragraph (1), such spouse 

35 

shall be deemed for each month during which such spouse is 

a full-time student at an educational institution, or is such a 

qualifying individual, to be gainfully employed and to have 

earned income of not less than— 

(A) $250 if subsection (c)(1) applies for the taxable year, 

or 

(B) $500 if subsection (c)(2) applies for the taxable year. 

In the case of øany husband and wife¿ any married couple, this 

paragraph shall apply with respect to only one spouse for any 

one month. 

(e) SPECIAL RULES.—For purposes of this section— 

(1) PLACE OF ABODE.—An individual shall not be treated as 

having the same principal place of abode of the taxpayer if at 

any time during the taxable year of the taxpayer the relationship between the individual and the taxpayer is in violation of 

local law. 

(2) MARRIED COUPLES MUST FILE JOINT RETURN.—If the taxpayer is married at the close of the taxable year, the credit 

shall be allowed under subsection (a) only if the taxpayer and 

øhis spouse¿ the taxpayer’s spouse file a joint return for the 

taxable year. 

(3) MARITAL STATUS.—An individual legally separated from 

øhis spouse¿ the individual’s spouse under a decree of divorce 

or of separate maintenance shall not be considered as married. 

(4) CERTAIN MARRIED INDIVIDUALS LIVING APART.—If— 

(A) an individual who is married and who files a separate return— 

(i) maintains as øhis home¿ the individual’s home a 

household which constitutes for more than one-half of 

the taxable year the principal place of abode of a 

qualifying individual, and 

(ii) furnishes over half of the cost of maintaining 

such household during the taxable year, and 

(B) during the last 6 months of such taxable year such 

individual’s spouse is not a member of such household, 

such individual shall not be considered as married. 

(5) SPECIAL DEPENDENCY TEST IN CASE OF DIVORCED PAR- ENTS, ETC..—If— 

(A) section 152(e) applies to any child with respect to 

any calendar year, and 

(B) such child is under the age of 13 or is physically or 

mentally incapable of caring for himself, 

in the case of any taxable year beginning in such calendar 

year, such child shall be treated as a qualifying individual described in subparagraph (A) or (B) of subsection (b)(1) (whichever is appropriate) with respect to the custodial parent (as defined in section 152(e)(4)(A)), and shall not be treated as a 

qualifying individual with respect to the noncustodial parent. 

(6) PAYMENTS TO RELATED INDIVIDUALS.—No credit shall be 

allowed under subsection (a) for any amount paid by the taxpayer to an individual— 

(A) with respect to whom, for the taxable year, a deduction under section 151(c) (relating to deduction for personal exemptions for dependents) is allowable either to the 

taxpayer or øhis spouse¿ the taxpayer’s spouse, or 

36 

(B) who is a child of the taxpayer (within the meaning 

of section 152(f)(1)) who has not attained the age of 19 at 

the close of the taxable year. 

For purposes of this paragraph, the term ‘‘taxable year’’ means 

the taxable year of the taxpayer in which the service is performed. 

(7) STUDENT.—The term ‘‘student’’ means an individual who 

during each of 5 calendar months during the taxable year is 

a full-time student at an educational organization. 

(8) EDUCATIONAL ORGANIZATION.—The term ‘‘educational organization’’ means an educational organization described in 

section 170(b)(1)(A)(ii). 

(9) IDENTIFYING INFORMATION REQUIRED WITH RESPECT TO

SERVICE PROVIDER.—No credit shall be allowed under subsection (a) for any amount paid to any person unless— 

(A) the name, address, and taxpayer identification number of such person are included on the return claiming the 

credit, or 

(B) if such person is an organization described in section 

501(c)(3) and exempt from tax under section 501(a), the 

name and address of such person are included on the return claiming the credit. 

In the case of a failure to provide the information required 

under the preceding sentence, the preceding sentence shall not 

apply if it is shown that the taxpayer exercised due diligence 

in attempting to provide the information so required. 

(10) IDENTIFYING INFORMATION REQUIRED WITH RESPECT TO

QUALIFYING INDIVIDUALS.—No credit shall be allowed under 

this section with respect to any qualifying individual unless 

the TIN of such individual is included on the return claiming 

the credit. 

(f) REGULATIONS.—The Secretary shall prescribe such regulations 

as may be necessary to carry out the purposes of this section. 

SEC. 22. CREDIT FOR THE ELDERLY AND THE PERMANENTLY AND TOTALLY DISABLED. 

(a) GENERAL RULE.—In the case of a qualified individual, there 

shall be allowed as a credit against the tax imposed by this chapter 

for the taxable year an amount equal to 15 percent of such individual’s section 22 amount for such taxable year. 

(b) QUALIFIED INDIVIDUAL.—For purposes of this section, the 

term ‘‘qualified individual’’ means any individual— 

(1) who has attained age 65 before the close of the taxable 

year, or 

(2) who retired on disability before the close of the taxable 

year and who, when he retired, was permanently and totally 

disabled. 

(c) SECTION 22 AMOUNT.—For purposes of subsection (a)— 

(1) IN GENERAL.—An individual’s section 22 amount for the 

taxable year shall be the applicable initial amount determined 

under paragraph (2), reduced as provided in paragraph (3) and 

in subsection (d). 

(2) INITIAL AMOUNT.— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), the initial amount shall be— 

37 

(i) $5,000 in the case of a single individual, or a joint 

return where only one spouse is a qualified individual, (ii) $7,500 in the case of a joint return where both 

spouses are qualified individuals, or (iii) $3,750 in the case of a married individual filing 

a separate return. 

(B) LIMITATION IN CASE OF INDIVIDUALS WHO HAVE NOT

ATTAINED AGE 65.— (i) IN GENERAL.—In the case of a qualified individual 

who has not attained age 65 before the close of the 

taxable year, except as provided in clause (ii), the initial amount shall not exceed the disability income for 

the taxable year. 

(ii) SPECIAL RULES IN CASE OF JOINT RETURN.—In 

the case of a joint return where both spouses are 

qualified individuals and at least one spouse has not 

attained age 65 before the close of the taxable year— 

(I) if both spouses have not attained age 65 before the close of the taxable year, the initial 

amount shall not exceed the sum of such spouses’ 

disability income, or 

(II) if one spouse has attained age 65 before the 

close of the taxable year, the initial amount shall 

not exceed the sum of $5,000 plus the disability 

income for the taxable year of the spouse who has 

not attained age 65 before the close of the taxable 

year. 

(iii) DISABILITY INCOME.—For purposes of this subparagraph, the term ‘‘disability income’’ means the aggregate amount includable in the gross income of the 

individual for the taxable year under section 72 or 

105(a) to the extent such amount constitutes wages (or 

payments in lieu of wages) for the period during which 

the individual is absent from work on account of permanent and total disability. 

(3) REDUCTION.— (A) IN GENERAL.—The reduction under this paragraph is 

an amount equal to the sum of the amounts received by 

the individual (or, in the case of a joint return, by either 

spouse) as a pension or annuity or as a disability benefit— 

(i) which is excluded from gross income and payable 

under— 

(I) title II of the Social Security Act, 

(II) the Railroad Retirement Act of 1974, or 

(III) a law administered by the Department of 

Veterans Affairs, or 

(ii) which is excluded from gross income under any 

provision of law not contained in this title. 

No reduction shall be made under clause (i)(III) for any 

amount described in section 104(a)(4). 

(B) TREATMENT OF CERTAIN WORKMEN’S COMPENSATION

BENEFITS.—For purposes of subparagraph (A), any amount 

treated as a social security benefit under section 86(d)(3) 

shall be treated as a disability benefit received under title 

II of the Social Security Act. 

38 

(d) ADJUSTED GROSS INCOME LIMITATION.—If the adjusted gross 

income of the taxpayer exceeds— (1) $7,500 in the case of a single individual, 

(2) $10,000 in the case of a joint return, or 

(3) $5,000 in the case of a married individual filing a separate return, 

the section 22 amount shall be reduced by one-half of the excess 

of the adjusted gross income over $7,500, $10,000, or $5,000, as the 

case may be. 

(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— 

(1) MARRIED COUPLE MUST FILE JOINT RETURN.—Except in 

the case of a øhusband and wife who live¿ married couple who 

lives apart at all times during the taxable year, if the taxpayer 

is married at the close of the taxable year, the credit provided 

by this section shall be allowed only if øthe taxpayer and his 

spouse¿ the taxpayer and the spouse of the taxpayer file a joint 

return for the taxable year. 

(2) MARITAL STATUS.—Marital status shall be determined 

under section 7703. 

(3) PERMANENT AND TOTAL DISABILITY DEFINED.—An individual is permanently and totally disabled if he is unable to 

engage in any substantial gainful activity by reason of any 

medically determinable physical or mental impairment which 

can be expected to result in death or which has lasted or can 

be expected to last for a continuous period of not less than 12 

months. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, 

as the Secretary may require. 

(f) NONRESIDENT ALIEN INELIGIBLE FOR CREDIT.—No credit shall 

be allowed under this section to any nonresident alien. 

* * * * * * * 

Subpart C—REFUNDABLE CREDITS 

* * * * * * * 

SEC. 36. FIRST-TIME HOMEBUYER CREDIT. 

(a) ALLOWANCE OF CREDIT.—In the case of an individual who is 

a first-time homebuyer of a principal residence in the United 

States during a taxable year, there shall be allowed as a credit 

against the tax imposed by this subtitle for such taxable year an 

amount equal to 10 percent of the purchase price of the residence. 

(b) LIMITATIONS.— 

(1) DOLLAR LIMITATION.— 

(A) IN GENERAL.—Except as otherwise provided in this 

paragraph, the credit allowed under subsection (a) shall 

not exceed $8,000. 

(B) MARRIED INDIVIDUALS FILING SEPARATELY.—In the 

case of a married individual filing a separate return, subparagraph (A) shall be applied by substituting ‘‘$4,000’’ for 

‘‘$8,000’’. 

(C) OTHER INDIVIDUALS.—If two or more individuals who 

are not married purchase a principal residence, the 

amount of the credit allowed under subsection (a) shall be 

39 

allocated among such individuals in such manner as the 

Secretary may prescribe, except that the total amount of 

the credits allowed to all such individuals shall not exceed 

$8,000. 

(D) SPECIAL RULE FOR LONG-TIME RESIDENTS OF SAME

PRINCIPAL RESIDENCE.—In the case of a taxpayer to whom 

a credit under subsection (a) is allowed by reason of subsection (c)(6), subparagraphs (A), (B), and (C) shall be applied by substituting ‘‘$6,500’’ for ‘‘$8,000’’ and ‘‘$3,250’’ for 

‘‘$4,000’’. 

(2) LIMITATION BASED ON MODIFIED ADJUSTED GROSS INCOME.— 

(A) IN GENERAL.—The amount allowable as a credit 

under subsection (a) (determined without regard to this 

paragraph) for the taxable year shall be reduced (but not 

below zero) by the amount which bears the same ratio to 

the amount which is so allowable as— 

(i) the excess (if any) of— 

(I) the taxpayer’s modified adjusted gross income for such taxable year, over 

(II) $125,000 ($225,000 in the case of a joint return), bears to 

(ii) $20,000. 

(B) MODIFIED ADJUSTED GROSS INCOME.—For purposes of 

subparagraph (A), the term ‘‘modified adjusted gross income’’ means the adjusted gross income of the taxpayer for 

the taxable year increased by any amount excluded from 

gross income under section 911, 931, or 933. 

(3) LIMITATION BASED ON PURCHASE PRICE.—No credit shall 

be allowed under subsection (a) for the purchase of any residence if the purchase price of such residence exceeds $800,000. 

(4) AGE LIMITATION.—No credit shall be allowed under subsection (a) with respect to the purchase of any residence unless 

the taxpayer has attained age 18 as of the date of such purchase. In the case of any taxpayer who is married (within the 

meaning of section 7703), the taxpayer shall be treated as 

meeting the age requirement of the preceding sentence if the 

taxpayer or the taxpayer’s spouse meets such age requirement. 

(c) DEFINITIONS.—For purposes of this section— 

(1) FIRST-TIME HOMEBUYER.—The term ‘‘first-time homebuyer’’ means any individual if such individual (and if married, 

such individual’s spouse) had no present ownership interest in 

a principal residence during the 3-year period ending on the 

date of the purchase of the principal residence to which this 

section applies. 

(2) PRINCIPAL RESIDENCE.—The term ‘‘principal residence’’ 

has the same meaning as when used in section 121. 

(3) PURCHASE.— 

(A) IN GENERAL.—The term ‘‘purchase’’ means any acquisition, but only if— 

(i) the property is not acquired from a person related 

to the person acquiring such property (or, if married, 

such individual’s spouse), and 

(ii) the basis of the property in the hands of the person acquiring such property is not determined— 

40 

(I) in whole or in part by reference to the adjusted basis of such property in the hands of the 

person from whom acquired, or 

(II) under section 1014(a) (relating to property 

acquired from a decedent). 

(B) CONSTRUCTION.—A residence which is constructed by 

the taxpayer shall be treated as purchased by the taxpayer 

on the date the taxpayer first occupies such residence. 

(4) PURCHASE PRICE.—The term ‘‘purchase price’’ means the 

adjusted basis of the principal residence on the date such residence is purchased. 

(5) RELATED PERSONS.—A person shall be treated as related 

to another person if the relationship between such persons 

would result in the disallowance of losses under section 267 or 

707(b) (but, in applying section 267(b) and (c) for purposes of 

this section, paragraph (4) of section 267(c) shall be treated as 

providing that the family of an individual shall include only 

øhis spouse¿ the individual’s spouse , ancestors, and lineal descendants). 

(6) EXCEPTION FOR LONG-TIME RESIDENTS OF SAME PRINCIPAL

RESIDENCE.—In the case of an individual (and, if married, such 

individual’s spouse) who has owned and used the same residence as such individual’s principal residence for any 5-consecutive-year period during the 8-year period ending on the 

date of the purchase of a subsequent principal residence, such 

individual shall be treated as a first-time homebuyer for purposes of this section with respect to the purchase of such subsequent residence. 

(d) EXCEPTIONS.—No credit under subsection (a) shall be allowed 

to any taxpayer for any taxable year with respect to the purchase 

of a residence if— 

(1) the taxpayer is a nonresident alien, 

(2) the taxpayer disposes of such residence (or such residence 

ceases to be the principal residence of the taxpayer (and, if 

married, the taxpayer’s spouse)) before the close of such taxable year, 

(3) a deduction under section 151 with respect to such taxpayer is allowable to another taxpayer for such taxable year, 

or 

(4) the taxpayer fails to attach to the return of tax for such 

taxable year a properly executed copy of the settlement statement used to complete such purchase. 

(e) REPORTING.—If the Secretary requires information reporting 

under section 6045 by a person described in subsection (e)(2) thereof to verify the eligibility of taxpayers for the credit allowable by 

this section, the exception provided by section 6045(e) shall not 

apply. 

(f) RECAPTURE OF CREDIT.— 

(1) IN GENERAL.—Except as otherwise provided in this subsection, if a credit under subsection (a) is allowed to a taxpayer, the tax imposed by this chapter shall be increased by 

62/3 percent of the amount of such credit for each taxable year 

in the recapture period. 

(2) ACCELERATION OF RECAPTURE.—If a taxpayer disposes of 

the principal residence with respect to which a credit was alVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00046 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
41 

lowed under subsection (a) (or such residence ceases to be the 

principal residence of the taxpayer (and, if married, the taxpayer’s spouse)) before the end of the recapture period— 

(A) the tax imposed by this chapter for the taxable year 

of such disposition or cessation shall be increased by the 

excess of the amount of the credit allowed over the 

amounts of tax imposed by paragraph (1) for preceding 

taxable years, and 

(B) paragraph (1) shall not apply with respect to such 

credit for such taxable year or any subsequent taxable 

year. 

(3) LIMITATION BASED ON GAIN.—In the case of the sale of the 

principal residence to a person who is not related to the taxpayer, the increase in tax determined under paragraph (2) 

shall not exceed the amount of gain (if any) on such sale. Solely for purposes of the preceding sentence, the adjusted basis of 

such residence shall be reduced by the amount of the credit allowed under subsection (a) to the extent not previously recaptured under paragraph (1). 

(4) EXCEPTIONS.— 

(A) DEATH OF TAXPAYER.—Paragraphs (1) and (2) shall 

not apply to any taxable year ending after the date of the 

taxpayer’s death. 

(B) INVOLUNTARY CONVERSION.—Paragraph (2) shall not 

apply in the case of a residence which is compulsorily or 

involuntarily converted (within the meaning of section 

1033(a)) if the taxpayer acquires a new principal residence 

during the 2-year period beginning on the date of the disposition or cessation referred to in paragraph (2). Paragraph (2) shall apply to such new principal residence during the recapture period in the same manner as if such 

new principal residence were the converted residence. 

(C) TRANSFERS BETWEEN SPOUSES OR INCIDENT TO DIVORCE.—In the case of a transfer of a residence to which 

section 1041(a) applies— 

(i) paragraph (2) shall not apply to such transfer, 

and 

(ii) in the case of taxable years ending after such 

transfer, paragraphs (1) and (2) shall apply to the 

transferee in the same manner as if such transferee 

were the transferor (and shall not apply to the transferor). 

(D) WAIVER OF RECAPTURE FOR PURCHASES IN 2009 AND

2010.—In the case of any credit allowed with respect to the 

purchase of a principal residence after December 31, 

2008— 

(i) paragraph (1) shall not apply, and 

(ii) paragraph (2) shall apply only if the disposition 

or cessation described in paragraph (2) with respect to 

such residence occurs during the 36-month period beginning on the date of the purchase of such residence 

by the taxpayer. 

(E) SPECIAL RULE FOR MEMBERS OF THE ARMED FORCES, 

ETC..— 

42 

(i) IN GENERAL.—In the case of the disposition of a 

principal residence by an individual (or a cessation referred to in paragraph (2)) after December 31, 2008, in 

connection with Government orders received by such 

individual, or such individual’s spouse, for qualified official extended duty service— 

(I) paragraph (2) and subsection (d)(2) shall not 

apply to such disposition (or cessation), and 

(II) if such residence was acquired before January 1, 2009, paragraph (1) shall not apply to the 

taxable year in which such disposition (or cessation) occurs or any subsequent taxable year. 

(ii) QUALIFIED OFFICIAL EXTENDED DUTY SERVICE.— 

For purposes of this section, the term ‘‘qualified official extended duty service’’ means service on qualified 

official extended duty as— 

(I) a member of the uniformed services, 

(II) a member of the Foreign Service of the 

United States, or 

(III) an employee of the intelligence community. 

(iii) DEFINITIONS.—Any term used in this subparagraph which is also used in paragraph (9) of section 

121(d) shall have the same meaning as when used in 

such paragraph. 

(5) JOINT RETURNS.—In the case of a credit allowed under 

subsection (a) with respect to a joint return, half of such credit 

shall be treated as having been allowed to each individual filing such return for purposes of this subsection. 

(6) RETURN REQUIREMENT.—If the tax imposed by this chapter for the taxable year is increased under this subsection, the 

taxpayer shall, notwithstanding section 6012, be required to 

file a return with respect to the taxes imposed under this subtitle. 

(7) RECAPTURE PERIOD.—For purposes of this subsection, the 

term ‘‘recapture period’’ means the 15 taxable years beginning 

with the second taxable year following the taxable year in 

which the purchase of the principal residence for which a credit is allowed under subsection (a) was made. 

(g) ELECTION TO TREAT PURCHASE IN PRIOR YEAR.—In the case of 

a purchase of a principal residence after December 31, 2008, a taxpayer may elect to treat such purchase as made on December 31 

of the calendar year preceding such purchase for purposes of this 

section (other than subsections (b)(4), (c), (f)(4)(D), and (h)). 

(h) APPLICATION OF SECTION.— 

(1) IN GENERAL.—This section shall only apply to a principal 

residence purchased by the taxpayer on or after April 9, 2008, 

and before May 1, 2010. 

(2) EXCEPTION IN CASE OF BINDING CONTRACT.—In the case 

of any taxpayer who enters into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010, and who purchases such residence 

before October 1, 2010, paragraph (1) shall be applied by substituting ‘‘October 1, 2010’’ for ‘‘May 1, 2010’’. 

(3) SPECIAL RULE FOR INDIVIDUALS ON QUALIFIED OFFICIAL

EXTENDED DUTY OUTSIDE THE UNITED STATES.—In the case of 

43 

any individual who serves on qualified official extended duty 

service (as defined in section 121(d)(9)(C)(i)) outside the United 

States for at least 90 days during the period beginning after 

December 31, 2008, and ending before May 1, 2010, and, if 

married, such individual’s spouse— 

(A) paragraphs (1) and (2) shall each be applied by substituting ‘‘May 1, 2011’’ for ‘‘May 1, 2010’’, and 

(B) paragraph (2) shall be applied by substituting ‘‘July 

1, 2011’’ for ‘‘July 1, 2010’’, and for ‘‘October 1, 2010’’. 

* * * * * * * 

SEC. 36B. REFUNDABLE CREDIT FOR COVERAGE UNDER A QUALIFIED 

HEALTH PLAN. 

(a) IN GENERAL.—In the case of an applicable taxpayer, there 

shall be allowed as a credit against the tax imposed by this subtitle 

for any taxable year an amount equal to the premium assistance 

credit amount of the taxpayer for the taxable year. 

(b) PREMIUM ASSISTANCE CREDIT AMOUNT.—For purposes of this 

section— 

(1) IN GENERAL.—The term ‘‘premium assistance credit 

amount’’ means, with respect to any taxable year, the sum of 

the premium assistance amounts determined under paragraph 

(2) with respect to all coverage months of the taxpayer occurring during the taxable year. 

(2) PREMIUM ASSISTANCE AMOUNT.—The premium assistance 

amount determined under this subsection with respect to any 

coverage month is the amount equal to the lesser of— 

(A) the monthly premiums for such month for 1 or more 

qualified health plans offered in the individual market 

within a State which cover the taxpayer, the taxpayer’s 

spouse, or any dependent (as defined in section 152) of the 

taxpayer and which were enrolled in through an Exchange 

established by the State under 1311 of the Patient Protection and Affordable Care Act, or 

(B) the excess (if any) of— 

(i) the adjusted monthly premium for such month 

for the applicable second lowest cost silver plan with 

respect to the taxpayer, over 

(ii) an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s household income for the taxable year. 

(3) OTHER TERMS AND RULES RELATING TO PREMIUM ASSISTANCE AMOUNTS.—For purposes of paragraph (2)— 

(A) APPLICABLE PERCENTAGE.— 

(i) IN GENERAL.—Except as provided in clause (ii), 

the applicable percentage for any taxable year shall be 

the percentage such that the applicable percentage for 

any taxpayer whose household income is within an income tier specified in the following table shall increase, on a sliding scale in a linear manner, from the 

initial premium percentage to the final premium percentage specified in such table for such income tier: 

(ii) INDEXING.— 

(I) IN GENERAL.—Subject to subclause (II), in 

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44 

endar year after 2014, the initial and final applicable percentages under clause (i) (as in effect for 

the preceding calendar year after application of 

this clause) shall be adjusted to reflect the excess 

of the rate of premium growth for the preceding 

calendar year over the rate of income growth for 

the preceding calendar year. 

(II) ADDITIONAL ADJUSTMENT.—Except as provided in subclause (III), in the case of any calendar year after 2018, the percentages described 

in subclause (I) shall, in addition to the adjustment under subclause (I), be adjusted to reflect 

the excess (if any) of the rate of premium growth 

estimated under subclause (I) for the preceding 

calendar year over the rate of growth in the consumer price index for the preceding calendar year. 

(III) FAILSAFE.—Subclause (II) shall apply for 

any calendar year only if the aggregate amount of 

premium tax credits under this section and costsharing reductions under section 1402 of the Patient Protection and Affordable Care Act for the 

preceding calendar year exceeds an amount equal 

to 0.504 percent of the gross domestic product for 

the preceding calendar year. 

(B) APPLICABLE SECOND LOWEST COST SILVER PLAN.—The 

applicable second lowest cost silver plan with respect to 

any applicable taxpayer is the second lowest cost silver 

plan of the individual market in the rating area in which 

the taxpayer resides which— 

(i) is offered through the same Exchange through 

which the qualified health plans taken into account 

under paragraph (2)(A) were offered, and 

(ii) provides— 

(I) self-only coverage in the case of an applicable 

taxpayer— 

(aa) whose tax for the taxable year is determined under section 1(c) (relating to unmarried individuals other than surviving spouses 

and heads of households) and who is not allowed a deduction under section 151 for the 

taxable year with respect to a dependent, or 

(bb) who is not described in item (aa) but 

who purchases only self-only coverage, and 

(II) family coverage in the case of any other applicable taxpayer. 

If a taxpayer files a joint return and no credit is allowed 

under this section with respect to 1 of the spouses by reason of subsection (e), the taxpayer shall be treated as described in clause (ii)(I) unless a deduction is allowed under 

section 151 for the taxable year with respect to a dependent other than either spouse and subsection (e) does not 

apply to the dependent. 

(C) ADJUSTED MONTHLY PREMIUM.—The adjusted monthly premium for an applicable second lowest cost silver plan 

is the monthly premium which would have been charged 

45 

(for the rating area with respect to which the premiums 

under paragraph (2)(A) were determined) for the plan if 

each individual covered under a qualified health plan 

taken into account under paragraph (2)(A) were covered by 

such silver plan and the premium was adjusted only for 

the age of each such individual in the manner allowed 

under section 2701 of the Public Health Service Act. In the 

case of a State participating in the wellness discount demonstration project under section 2705(d) of the Public 

Health Service Act, the adjusted monthly premium shall 

be determined without regard to any premium discount or 

rebate under such project. 

(D) ADDITIONAL BENEFITS.—If— 

(i) a qualified health plan under section 1302(b)(5) of 

the Patient Protection and Affordable Care Act offers 

benefits in addition to the essential health benefits required to be provided by the plan, or 

(ii) a State requires a qualified health plan under 

section 1311(d)(3)(B) of such Act to cover benefits in 

addition to the essential health benefits required to be 

provided by the plan, 

the portion of the premium for the plan properly allocable 

(under rules prescribed by the Secretary of Health and 

Human Services) to such additional benefits shall not be 

taken into account in determining either the monthly premium or the adjusted monthly premium under paragraph 

(2). 

(E) SPECIAL RULE FOR PEDIATRIC DENTAL COVERAGE.— For purposes of determining the amount of any monthly 

premium, if an individual enrolls in both a qualified health 

plan and a plan described in section 1311(d)(2)(B)(ii)(I) of 

the Patient Protection and Affordable Care Act for any 

plan year, the portion of the premium for the plan described in such section that (under regulations prescribed 

by the Secretary) is properly allocable to pediatric dental 

benefits which are included in the essential health benefits 

required to be provided by a qualified health plan under 

section 1302(b)(1)(J) of such Act shall be treated as a premium payable for a qualified health plan. 

(c) DEFINITION AND RULES RELATING TO APPLICABLE TAXPAYERS, 

COVERAGE MONTHS, AND QUALIFIED HEALTH PLAN.—For purposes of 

this section— 

(1) APPLICABLE TAXPAYER.— 

(A) IN GENERAL.—The term ‘‘applicable taxpayer’’ means, 

with respect to any taxable year, a taxpayer whose household income for the taxable year equals or exceeds 100 percent but does not exceed 400 percent of an amount equal 

to the poverty line for a family of the size involved. 

(B) SPECIAL RULE FOR CERTAIN INDIVIDUALS LAWFULLY

PRESENT IN THE UNITED STATES.—If— 

(i) a taxpayer has a household income which is not 

greater than 100 percent of an amount equal to the 

poverty line for a family of the size involved, and 

(ii) the taxpayer is an alien lawfully present in the 

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46 

gram under title XIX of the Social Security Act by reason of such alien status, 

the taxpayer shall, for purposes of the credit under this 

section, be treated as an applicable taxpayer with a household income which is equal to 100 percent of the poverty 

line for a family of the size involved. 

(C) MARRIED COUPLES MUST FILE JOINT RETURN.—If the 

taxpayer is married (within the meaning of section 7703) 

at the close of the taxable year, the taxpayer shall be 

treated as an applicable taxpayer only if the taxpayer and 

the taxpayer’s spouse file a joint return for the taxable 

year. 

(D) DENIAL OF CREDIT TO DEPENDENTS.—No credit shall 

be allowed under this section to any individual with respect to whom a deduction under section 151 is allowable 

to another taxpayer for a taxable year beginning in the 

calendar year in which such individual’s taxable year begins. 

(2) COVERAGE MONTH.—For purposes of this subsection— 

(A) IN GENERAL.—The term ‘‘coverage month’’ means, 

with respect to an applicable taxpayer, any month if— 

(i) as of the first day of such month the taxpayer, 

the taxpayer’s spouse, or any dependent of the taxpayer is covered by a qualified health plan described 

in subsection (b)(2)(A) that was enrolled in through an 

Exchange established by the State under section 1311 

of the Patient Protection and Affordable Care Act, and 

(ii) the premium for coverage under such plan for 

such month is paid by the taxpayer (or through advance payment of the credit under subsection (a) 

under section 1412 of the Patient Protection and Affordable Care Act). 

(B) EXCEPTION FOR MINIMUM ESSENTIAL COVERAGE.— (i) IN GENERAL.—The term ‘‘coverage month’’ shall 

not include any month with respect to an individual if 

for such month the individual is eligible for minimum 

essential coverage other than eligibility for coverage 

described in section 5000A(f)(1)(C) (relating to coverage in the individual market). 

(ii) MINIMUM ESSENTIAL COVERAGE.—The term ‘‘minimum essential coverage’’ has the meaning given such 

term by section 5000A(f). 

(C) SPECIAL RULE FOR EMPLOYER-SPONSORED MINIMUM

ESSENTIAL COVERAGE.—For purposes of subparagraph 

(B)— 

(i) COVERAGE MUST BE AFFORDABLE.—Except as provided in clause (iii), an employee shall not be treated 

as eligible for minimum essential coverage if such coverage— 

(I) consists of an eligible employer-sponsored 

plan (as defined in section 5000A(f)(2)), and 

(II) the employee’s required contribution (within 

the meaning of section 5000A(e)(1)(B)) with respect to the plan exceeds 9.5 percent of the applicable taxpayer’s household income. 

47 

This clause shall also apply to an individual who is eligible 

to enroll in the plan by reason of a relationship the individual bears to the employee. 

(ii) COVERAGE MUST PROVIDE MINIMUM VALUE.—Except as provided in clause (iii), an employee shall not 

be treated as eligible for minimum essential coverage 

if such coverage consists of an eligible employer-sponsored plan (as defined in section 5000A(f)(2)) and the 

plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such 

costs. 

(iii) EMPLOYEE OR FAMILY MUST NOT BE COVERED

UNDER EMPLOYER PLAN.—Clauses (i) and (ii) shall not 

apply if the employee (or any individual described in 

the last sentence of clause (i)) is covered under the eligible employer-sponsored plan or the grandfathered 

health plan. 

(iv) INDEXING.—In the case of plan years beginning 

in any calendar year after 2014, the Secretary shall 

adjust the 9.5 percent under clause (i)(II) in the same 

manner as the percentages are adjusted under subsection (b)(3)(A)(ii). 

(3) DEFINITIONS AND OTHER RULES.— 

(A) QUALIFIED HEALTH PLAN.—The term ‘‘qualified 

health plan’’ has the meaning given such term by section 

1301(a) of the Patient Protection and Affordable Care Act, 

except that such term shall not include a qualified health 

plan which is a catastrophic plan described in section 

1302(e) of such Act. 

(B) GRANDFATHERED HEALTH PLAN.—The term ‘‘grandfathered health plan’’ has the meaning given such term by 

section 1251 of the Patient Protection and Affordable Care 

Act. 

(4) SPECIAL RULES FOR QUALIFIED SMALL EMPLOYER HEALTH

REIMBURSEMENT ARRANGEMENTS.— 

(A) IN GENERAL.—The term ‘‘coverage month’’ shall not 

include any month with respect to an employee (or any 

spouse or dependent of such employee) if for such month 

the employee is provided a qualified small employer health 

reimbursement arrangement which constitutes affordable 

coverage. 

(B) DENIAL OF DOUBLE BENEFIT.—In the case of any employee who is provided a qualified small employer health 

reimbursement arrangement for any coverage month (determined without regard to subparagraph (A)), the credit 

otherwise allowable under subsection (a) to the taxpayer 

for such month shall be reduced (but not below zero) by 

the amount described in subparagraph (C)(i)(II) for such 

month. 

(C) AFFORDABLE COVERAGE.—For purposes of subparagraph (A), a qualified small employer health reimbursement arrangement shall be treated as constituting affordable coverage for a month if— 

(i) the excess of— 

48 

(I) the amount that would be paid by the employee as the premium for such month for selfonly coverage under the second lowest cost silver 

plan offered in the relevant individual health insurance market, over 

(II) 1/12 of the employee’s permitted benefit (as 

defined in section 9831(d)(3)(C)) under such arrangement, does not exceed— 

(ii) 1/12 of 9.5 percent of the employee’s household income. 

(D) QUALIFIED SMALL EMPLOYER HEALTH REIMBURSEMENT ARRANGEMENT.—For purposes of this paragraph, the 

term ‘‘qualified small employer health reimbursement arrangement’’ has the meaning given such term by section 

9831(d)(2). 

(E) COVERAGE FOR LESS THAN ENTIRE YEAR.—In the case 

of an employee who is provided a qualified small employer 

health reimbursement arrangement for less than an entire 

year, subparagraph (C)(i)(II) shall be applied by substituting ‘‘the number of months during the year for which 

such arrangement was provided’’ for ‘‘12’’. 

(F) INDEXING.—In the case of plan years beginning in 

any calendar year after 2014, the Secretary shall adjust 

the 9.5 percent amount under subparagraph (C)(ii) in the 

same manner as the percentages are adjusted under subsection (b)(3)(A)(ii). 

(d) TERMS RELATING TO INCOME AND FAMILIES.—For purposes of 

this section— 

(1) FAMILY SIZE.—The family size involved with respect to 

any taxpayer shall be equal to the number of individuals for 

whom the taxpayer is allowed a deduction under section 151 

(relating to allowance of deduction for personal exemptions) for 

the taxable year. 

(2) HOUSEHOLD INCOME.— 

(A) HOUSEHOLD INCOME.—The term ‘‘household income’’ 

means, with respect to any taxpayer, an amount equal to 

the sum of— 

(i) the modified adjusted gross income of the taxpayer, plus 

(ii) the aggregate modified adjusted gross incomes of 

all other individuals who— 

(I) were taken into account in determining the 

taxpayer’s family size under paragraph (1), and 

(II) were required to file a return of tax imposed 

by section 1 for the taxable year. 

(B) MODIFIED ADJUSTED GROSS INCOME.—The term 

‘‘modified adjusted gross income’’ means adjusted gross income increased by— 

(i) any amount excluded from gross income under 

section 911, 

(ii) any amount of interest received or accrued by 

the taxpayer during the taxable year which is exempt 

from tax, and 

(iii) an amount equal to the portion of the taxpayer’s 

social security benefits (as defined in section 86(d)) 

49 

which is not included in gross income under section 86 

for the taxable year. 

(3) POVERTY LINE.— (A) IN GENERAL.—The term ‘‘poverty line’’ has the meaning given that term in section 2110(c)(5) of the Social Security Act (42 U.S.C. 1397jj(c)(5)). 

(B) POVERTY LINE USED.—In the case of any qualified 

health plan offered through an Exchange for coverage during a taxable year beginning in a calendar year, the poverty line used shall be the most recently published poverty 

line as of the 1st day of the regular enrollment period for 

coverage during such calendar year. 

(e) RULES FOR INDIVIDUALS NOT LAWFULLY PRESENT.— 

(1) IN GENERAL.—If 1 or more individuals for whom a taxpayer is allowed a deduction under section 151 (relating to allowance of deduction for personal exemptions) for the taxable 

year (including the taxpayer or øhis spouse¿ the taxpayer’s 

spouse ) are individuals who are not lawfully present— 

(A) the aggregate amount of premiums otherwise taken 

into account under clauses (i) and (ii) of subsection 

(b)(2)(A) shall be reduced by the portion (if any) of such 

premiums which is attributable to such individuals, and 

(B) for purposes of applying this section, the determination as to what percentage a taxpayer’s household income 

bears to the poverty level for a family of the size involved 

shall be made under one of the following methods: 

(i) A method under which— 

(I) the taxpayer’s family size is determined by 

not taking such individuals into account, and 

(II) the taxpayer’s household income is equal to 

the product of the taxpayer’s household income 

(determined without regard to this subsection) 

and a fraction— 

(aa) the numerator of which is the poverty 

line for the taxpayer’s family size determined 

after application of subclause (I), and 

(bb) the denominator of which is the poverty line for the taxpayer’s family size determined without regard to subclause (I). 

(ii) A comparable method reaching the same result 

as the method under clause (i). 

(2) LAWFULLY PRESENT.—For purposes of this section, an individual shall be treated as lawfully present only if the individual is, and is reasonably expected to be for the entire period 

of enrollment for which the credit under this section is being 

claimed, a citizen or national of the United States or an alien 

lawfully present in the United States. 

(3) SECRETARIAL AUTHORITY.—The Secretary of Health and 

Human Services, in consultation with the Secretary, shall prescribe rules setting forth the methods by which calculations of 

family size and household income are made for purposes of this 

subsection. Such rules shall be designed to ensure that the 

least burden is placed on individuals enrolling in qualified 

health plans through an Exchange and taxpayers eligible for 

the credit allowable under this section. 

50 

(f) RECONCILIATION OF CREDIT AND ADVANCE CREDIT.— 

(1) IN GENERAL.—The amount of the credit allowed under 

this section for any taxable year shall be reduced (but not 

below zero) by the amount of any advance payment of such 

credit under section 1412 of the Patient Protection and Affordable Care Act. 

(2) EXCESS ADVANCE PAYMENTS.— 

(A) IN GENERAL.—If the advance payments to a taxpayer 

under section 1412 of the Patient Protection and Affordable Care Act for a taxable year exceed the credit allowed 

by this section (determined without regard to paragraph 

(1)), the tax imposed by this chapter for the taxable year 

shall be increased by the amount of such excess. 

(B) LIMITATION ON INCREASE.— 

(i) IN GENERAL.—In the case of a taxpayer whose 

household income is less than 400 percent of the poverty line for the size of the family involved for the taxable year, the amount of the increase under subparagraph (A) shall in no event exceed the applicable dollar amount determined in accordance with the following table (one-half of such amount in the case of a 

taxpayer whose tax is determined under section 1(c) 

for the taxable year): 

(ii) INDEXING OF AMOUNT.—In the case of any calendar year beginning after 2014, each of the dollar 

amounts in the table contained under clause (i) shall 

be increased by an amount equal to— 

(I) such dollar amount, multiplied by 

(II) the cost-of-living adjustment determined 

under section 1(f)(3) for the calendar year, determined by substituting ‘‘calendar year 2013’’ for 

‘‘calendar year 2016’’ in subparagraph (A)(ii) 

thereof. 

If the amount of any increase under clause (i) is not a multiple of $50, such increase shall be rounded to the next 

lowest multiple of $50. 

(3) INFORMATION REQUIREMENT.—Each Exchange (or any 

person carrying out 1 or more responsibilities of an Exchange 

under section 1311(f)(3) or 1321(c) of the Patient Protection 

and Affordable Care Act) shall provide the following information to the Secretary and to the taxpayer with respect to any 

health plan provided through the Exchange: 

(A) The level of coverage described in section 1302(d) of 

the Patient Protection and Affordable Care Act and the period such coverage was in effect. 

(B) The total premium for the coverage without regard 

to the credit under this section or cost-sharing reductions 

under section 1402 of such Act. 

(C) The aggregate amount of any advance payment of 

such credit or reductions under section 1412 of such Act. 

(D) The name, address, and TIN of the primary insured 

and the name and TIN of each other individual obtaining 

coverage under the policy. 

51 

(E) Any information provided to the Exchange, including 

any change of circumstances, necessary to determine eligibility for, and the amount of, such credit. 

(F) Information necessary to determine whether a taxpayer has received excess advance payments. 

(g) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section, including regulations which provide for— 

(1) the coordination of the credit allowed under this section 

with the program for advance payment of the credit under section 1412 of the Patient Protection and Affordable Care Act, 

and 

(2) the application of subsection (f) where the filing status of 

the taxpayer for a taxable year is different from such status 

used for determining the advance payment of the credit. 

* * * * * * * 

Subpart D—BUSINESS RELATED CREDITS 

* * * * * * * 

SEC. 38. GENERAL BUSINESS CREDIT. 

(a) ALLOWANCE OF CREDIT.—There shall be allowed as a credit 

against the tax imposed by this chapter for the taxable year an 

amount equal to the sum of— 

(1) the business credit carryforwards carried to such taxable 

year, 

(2) the amount of the current year business credit, plus 

(3) the business credit carrybacks carried to such taxable 

year. 

(b) CURRENT YEAR BUSINESS CREDIT.—For purposes of this subpart, the amount of the current year business credit is the sum of 

the following credits determined for the taxable year: 

(1) the investment credit determined under section 46, 

(2) the work opportunity credit determined under section 

51(a), 

(3) the alcohol fuels credit determined under section 40(a), 

(4) the research credit determined under section 41(a), 

(5) the low-income housing credit determined under section 

42(a), 

(6) the enhanced oil recovery credit under section 43(a), 

(7) in the case of an eligible small business (as defined in 

section 44(b)), the disabled access credit determined under section 44(a), 

(8) the renewable electricity production credit under section 

45(a), 

(9) the empowerment zone employment credit determined 

under section 1396(a), 

(10) the Indian employment credit as determined under section 45A(a), 

(11) the employer social security credit determined under 

section 45B(a), 

(12) the orphan drug credit determined under section 45C(a), 

(13) the new markets tax credit determined under section 

45D(a), 

52 

(14) in the case of an eligible employer (as defined in section 

45E(c)), the small employer pension plan startup cost credit determined under section 45E(a), 

(15) the employer-provided child care credit determined 

under section 45F(a), 

(16) the railroad track maintenance credit determined under 

section 45G(a), 

(17) the biodiesel fuels credit determined under section 

40A(a), 

(18) the low sulfur diesel fuel production credit determined 

under section 45H(a), 

(19) the marginal oil and gas well production credit determined under section 45I(a), 

(20) the distilled spirits credit determined under section 

5011(a), 

(21) the advanced nuclear power facility production credit determined under section 45J(a), 

(22) the nonconventional source production credit determined 

under section 45K(a), 

(23) the new energy efficient home credit determined under 

section 45L(a), 

(24) the portion of the alternative motor vehicle credit to 

which section 30B(g)(1) applies, 

(25) the portion of the alternative fuel vehicle refueling property credit to which section 30C(d)(1) applies, 

(26) the mine rescue team training credit determined under 

section 45N(a), 

(27) in the case of an eligible agricultural business (as defined in section 45O(e)), the agricultural chemicals security 

credit determined under section 45O(a), 

(28) the differential wage payment credit determined under 

section 45P(a), 

(29) the carbon dioxide sequestration credit determined 

under section 45Q(a), 

(30) the portion of the new qualified plug-in electric drive 

motor vehicle credit to which section 30D(c)(1) applies, 

(31) the small employer health insurance credit determined 

under section 45R, plus 

(32) in the case of an eligible employer (as defined in section 

45S(c)), the paid family and medical leave credit determined 

under section 45S(a). 

(c) LIMITATION BASED ON AMOUNT OF TAX.— 

(1) IN GENERAL.—The credit allowed under subsection (a) for 

any taxable year shall not exceed the excess (if any) of the taxpayer’s net income tax over the greater of— 

(A) the tentative minimum tax for the taxable year, or 

(B) 25 percent of so much of the taxpayer’s net regular 

tax liability as exceeds $25,000. 

For purposes of the preceding sentence, the term ‘‘net income 

tax’’ means the sum of the regular tax liability and the tax imposed by section 55, reduced by the credits allowable under 

subparts A and B of this part, and the term ‘‘net regular tax 

liability’’ means the regular tax liability reduced by the sum of 

the credits allowable under subparts A and B of this part. 

53 

(2) EMPOWERMENT ZONE EMPLOYMENT CREDIT MAY OFFSET 25

PERCENT OF MINIMUM TAX.— 

(A) IN GENERAL.—In the case of the empowerment zone 

employment credit— 

(i) this section and section 39 shall be applied separately with respect to such credit, and 

(ii) for purposes of applying paragraph (1) to such 

credit— 

(I) 75 percent of the tentative minimum tax 

shall be substituted for the tentative minimum 

tax under subparagraph (A) thereof, and 

(II) the limitation under paragraph (1) (as modified by subclause (I)) shall be reduced by the credit allowed under subsection (a) for the taxable 

year (other than the empowerment zone employment credit and the specified credits). 

(B) EMPOWERMENT ZONE EMPLOYMENT CREDIT.—For purposes of this paragraph, the term ‘‘empowerment zone employment credit’’ means the portion of the credit under 

subsection (a) which is attributable to the credit determined under section 1396 (relating to empowerment zone 

employment credit). 

(4) SPECIAL RULES FOR SPECIFIED CREDITS.— 

(A) IN GENERAL.—In the case of specified credits— 

(i) this section and section 39 shall be applied separately with respect to such credits, and 

(ii) in applying paragraph (1) to such credits— 

(I) the tentative minimum tax shall be treated 

as being zero, and 

(II) the limitation under paragraph (1) (as modified by subclause (I)) shall be reduced by the credit allowed under subsection (a) for the taxable 

year (other than the specified credits). 

(B) SPECIFIED CREDITS.—For purposes of this subsection, 

the term ‘‘specified credits’’ means— 

(i) for taxable years beginning after December 31, 

2004, the credit determined under section 40, 

(ii) the credit determined under section 41 for the 

taxable year with respect to an eligible small business 

(as defined in paragraph (5)(A) after application of the 

rules of paragraph (5)(B)), 

(iii) the credit determined under section 42 to the 

extent attributable to buildings placed in service after 

December 31, 2007, 

(iv) the credit determined under section 45 to the extent that such credit is attributable to electricity or refined coal produced— 

(I) at a facility which is originally placed in 

service after the date of the enactment of this 

paragraph, and 

(II) during the 4-year period beginning on the 

date that such facility was originally placed in 

service, 

54 

(v) the credit determined under section 45 to the extent that such credit is attributable to section 45(e)(10) 

(relating to Indian coal production facilities), 

(vi) the credit determined under section 45B, 

(vii) the credit determined under section 45G, 

(viii) the credit determined under section 45R, 

(ix) the credit determined under section 45S, 

(x) the credit determined under section 46 to the extent that such credit is attributable to the energy credit determined under section 48, 

(xi) the credit determined under section 46 to the extent that such credit is attributable to the rehabilitation credit under section 47, but only with respect to 

qualified rehabilitation expenditures properly taken 

into account for periods after December 31, 2007, and 

(xii) the credit determined under section 51. 

(5) RULES RELATED TO ELIGIBLE SMALL BUSINESSES.— 

(A) ELIGIBLE SMALL BUSINESS.—For purposes of this subsection, the term ‘‘eligible small business’’ means, with respect to any taxable year— 

(i) a corporation the stock of which is not publicly 

traded, 

(ii) a partnership, or 

(iii) a sole proprietorship, 

if the average annual gross receipts of such corporation, 

partnership, or sole proprietorship for the 3-taxable-year 

period preceding such taxable year does not exceed 

$50,000,000. For purposes of applying the test under the 

preceding sentence, rules similar to the rules of paragraphs (2) and (3) of section 448(c) shall apply. 

(B) TREATMENT OF PARTNERS AND S CORPORATION SHAREHOLDERS.—For purposes of paragraph (4)(B)(ii), any credit 

determined under section 41 with respect to a partnership 

or S corporation shall not be treated as a specified credit 

by any partner or shareholder unless such partner or 

shareholder meets the gross receipts test under subparagraph (A) for the taxable year in which such credit is 

treated as a current year business credit. 

(6) SPECIAL RULES.— 

(A) MARRIED INDIVIDUALS.—In the case of a øhusband or 

wife who files¿ married individual who files a separate return, the amount specified under subparagraph (B) of 

paragraph (1) shall be $12,500 in lieu of $25,000. This subparagraph shall not apply if the spouse of the taxpayer has 

no business credit carryforward or carryback to, and has 

no current year business credit for, the taxable year of 

such spouse which ends within or with the taxpayer’s taxable year. 

(B) CONTROLLED GROUPS.—In the case of a controlled 

group, the $25,000 amount specified under subparagraph 

(B) of paragraph (1) shall be reduced for each component 

member of such group by apportioning $25,000 among the 

component members of such group in such manner as the 

Secretary shall by regulations prescribe. For purposes of 

55 

the preceding sentence, the term ‘‘controlled group’’ has 

the meaning given to such term by section 1563(a). 

(C) LIMITATIONS WITH RESPECT TO CERTAIN PERSONS.—In 

the case of a person described in subparagraph (A) or (B) 

of section 46(e)(1) (as in effect on the day before the date 

of the enactment of the Revenue Reconciliation Act of 

1990), the $25,000 amount specified under subparagraph 

(B) of paragraph (1) shall equal such person’s ratable 

share (as determined under section 46(e)(2) (as so in effect) 

of such amount. 

(D) ESTATES AND TRUSTS.—In the case of an estate or 

trust, the $25,000 amount specified under subparagraph 

(B) of paragraph (1) shall be reduced to an amount which 

bears the same ratio to $25,000 as the portion of the income of the estate or trust which is not allocated to beneficiaries bears to the total income of the estate or trust. 

(E) CORPORATIONS.—In the case of a corporation, this 

subsection shall be applied by treating the corporation as 

having a tentative minimum tax of zero. 

(d) ORDERING RULES.—For purposes of any provision of this title 

where it is necessary to ascertain the extent to which the credits 

determined under any section referred to in subsection (b) are used 

in a taxable year or as a carryback or carryforward— 

(1) IN GENERAL.—The order in which such credits are used 

shall be determined on the basis of the order in which they are 

listed in subsection (b) as of the close of the taxable year in 

which the credit is used. 

(2) COMPONENTS OF INVESTMENT CREDIT.—The order in 

which the credits listed in section 46 are used shall be determined on the basis of the order in which such credits are listed 

in section 46 as of the close of the taxable year in which the 

credit is used. 

* * * * * * * 

SEC. 42. LOW-INCOME HOUSING CREDIT. 

(a) IN GENERAL.—For purposes of section 38, the amount of the 

low-income housing credit determined under this section for any 

taxable year in the credit period shall be an amount equal to— 

(1) the applicable percentage of 

(2) the qualified basis of each qualified low-income building. 

(b) APPLICABLE PERCENTAGE: 70 PERCENT PRESENT VALUE CREDIT

FOR CERTAIN NEW BUILDINGS; 30 PERCENT PRESENT VALUE CREDIT

FOR CERTAIN OTHER BUILDINGS.— 

(1) DETERMINATION OF APPLICABLE PERCENTAGE.—For purposes of this section— 

(A) IN GENERAL.—The term ‘‘applicable percentage’’ 

means, with respect to any building, the appropriate percentage prescribed by the Secretary for the earlier of— 

(i) the month in which such building is placed in 

service, or 

(ii) at the election of the taxpayer— 

(I) the month in which the taxpayer and the 

housing credit agency enter into an agreement 

with respect to such building (which is binding on 

such agency, the taxpayer, and all successors in 

56 

interest) as to the housing credit dollar amount to 

be allocated to such building, or 

(II) in the case of any building to which subsection (h)(4)(B) applies, the month in which the 

tax-exempt obligations are issued. 

A month may be elected under clause (ii) only if the election is made not later than the 5th day after the close of 

such month. Such an election, once made, shall be irrevocable. 

(B) METHOD OF PRESCRIBING PERCENTAGES.—The percentages prescribed by the Secretary for any month shall 

be percentages which will yield over a 10-year period 

amounts of credit under subsection (a) which have a 

present value equal to— 

(i) 70 percent of the qualified basis of a new building 

which is not federally subsidized for the taxable year, 

and 

(ii) 30 percent of the qualified basis of a building not 

described in clause (i). 

(C) METHOD OF DISCOUNTING.—The present value under 

subparagraph (B) shall be determined— 

(i) as of the last day of the 1st year of the 10-year 

period referred to in subparagraph (B), 

(ii) by using a discount rate equal to 72 percent of 

the average of the annual Federal mid-term rate and 

the annual Federal long-term rate applicable under 

section 1274(d)(1) to the month applicable under 

clause (i) or (ii) of subparagraph (A) and compounded 

annually, and 

(iii) by assuming that the credit allowable under 

this section for any year is received on the last day of 

such year. 

(2) MINIMUM CREDIT RATE FOR NON-FEDERALLY SUBSIDIZED

NEW BUILDINGS.—In the case of any new building— 

(A) which is placed in service by the taxpayer after the 

date of the enactment of this paragraph, and 

(B) which is not federally subsidized for the taxable 

year, 

the applicable percentage shall not be less than 9 percent. 

(3) CROSS REFERENCES.— 

(A) For treatment of certain rehabilitation expenditures 

as separate new buildings, see subsection (e). 

(B) For determination of applicable percentage for increases in qualified basis after the 1st year of the credit 

period, see subsection (f)(3). 

(C) For authority of housing credit agency to limit applicable percentage and qualified basis which may be taken 

into account under this section with respect to any building, see subsection (h)(7). 

(c) QUALIFIED BASIS; QUALIFIED LOW-INCOME BUILDING.—For purposes of this section— 

(1) QUALIFIED BASIS.— (A) DETERMINATION.—The qualified basis of any qualified low-income building for any taxable year is an amount 

equal to— 

57 

(i) the applicable fraction (determined as of the close 

of such taxable year) of 

(ii) the eligible basis of such building (determined 

under subsection (d)(5)). 

(B) APPLICABLE FRACTION.—For purposes of subparagraph (A), the term ‘‘applicable fraction’’ means the smaller of the unit fraction or the floor space fraction. 

(C) UNIT FRACTION.—For purposes of subparagraph (B), 

the term ‘‘unit fraction’’ means the fraction— 

(i) the numerator of which is the number of low-income units in the building, and 

(ii) the denominator of which is the number of residential rental units (whether or not occupied) in such 

building. 

(D) FLOOR SPACE FRACTION.—For purposes of subparagraph (B), the term ‘‘floor space fraction’’ means the fraction— 

(i) the numerator of which is the total floor space of 

the low-income units in such building, and 

(ii) the denominator of which is the total floor space 

of the residential rental units (whether or not occupied) in such building. 

(E) QUALIFIED BASIS TO INCLUDE PORTION OF BUILDING

USED TO PROVIDE SUPPORTIVE SERVICES FOR HOMELESS.—In 

the case of a qualified low-income building described in 

subsection (i)(3)(B)(iii), the qualified basis of such building 

for any taxable year shall be increased by the lesser of— 

(i) so much of the eligible basis of such building as 

is used throughout the year to provide supportive 

services designed to assist tenants in locating and retaining permanent housing, or 

(ii) 20 percent of the qualified basis of such building 

(determined without regard to this subparagraph). 

(2) QUALIFIED LOW-INCOME BUILDING.—The term ‘‘qualified 

low-income building’’ means any building— 

(A) which is part of a qualified low-income housing 

project at all times during the period— 

(i) beginning on the 1st day in the compliance period 

on which such building is part of such a project, and 

(ii) ending on the last day of the compliance period 

with respect to such building, and 

(B) to which the amendments made by section 201(a) of 

the Tax Reform Act of 1986 apply. 

(d) ELIGIBLE BASIS.—For purposes of this section— 

(1) NEW BUILDINGS.—The eligible basis of a new building is 

its adjusted basis as of the close of the 1st taxable year of the 

credit period. 

(2) EXISTING BUILDINGS.— 

(A) IN GENERAL.—The eligible basis of an existing building is— 

(i) in the case of a building which meets the requirements of subparagraph (B), its adjusted basis as of the 

close of the 1st taxable year of the credit period, and 

(ii) zero in any other case. 

58 

(B) REQUIREMENTS.—A building meets the requirements 

of this subparagraph if— 

(i) the building is acquired by purchase (as defined 

in section 179(d)(2)), 

(ii) there is a period of at least 10 years between the 

date of its acquisition by the taxpayer and the date 

the building was last placed in service, 

(iii) the building was not previously placed in service 

by the taxpayer or by any person who was a related 

person with respect to the taxpayer as of the time previously placed in service, and 

(iv) except as provided in subsection (f)(5), a credit 

is allowable under subsection (a) by reason of subsection (e) with respect to the building. 

(C) ADJUSTED BASIS.—For purposes of subparagraph (A), 

the adjusted basis of any building shall not include so 

much of the basis of such building as is determined by reference to the basis of other property held at any time by 

the person acquiring the building. 

(D) SPECIAL RULES FOR SUBPARAGRAPH (B).— 

(i) SPECIAL RULES FOR CERTAIN TRANSFERS.—For 

purposes of determining under subparagraph (B)(ii) 

when a building was last placed in service, there shall 

not be taken into account any placement in service— 

(I) in connection with the acquisition of the 

building in a transaction in which the basis of the 

building in the hands of the person acquiring it is 

determined in whole or in part by reference to the 

adjusted basis of such building in the hands of the 

person from whom acquired, 

(II) by a person whose basis in such building is 

determined under section 1014(a) (relating to 

property acquired from a decedent), 

(III) by any governmental unit or qualified nonprofit organization (as defined in subsection (h)(5)) 

if the requirements of subparagraph (B)(ii) are 

met with respect to the placement in service by 

such unit or organization and all the income from 

such property is exempt from Federal income taxation, 

(IV) by any person who acquired such building 

by foreclosure (or by instrument in lieu of foreclosure) of any purchase-money security interest 

held by such person if the requirements of subparagraph (B)(ii) are met with respect to the 

placement in service by such person and such 

building is resold within 12 months after the date 

such building is placed in service by such person 

after such foreclosure, or 

(V) of a single-family residence by any individual who owned and used such residence for no 

other purpose than as his principal residence. 

(ii) RELATED PERSON.—For purposes of subparagraph (B)(iii), a person (hereinafter in this subclause 

referred to as the ‘‘related person’’) is related to any 

59 

person if the related person bears a relationship to 

such person specified in section 267(b) or 707(b)(1), or 

the related person and such person are engaged in 

trades or businesses under common control (within the 

meaning of subsections (a) and (b) of section 52). 

(3) ELIGIBLE BASIS REDUCED WHERE DISPROPORTIONATE

STANDARDS FOR UNITS.— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), the eligible basis of any building shall be reduced by 

an amount equal to the portion of the adjusted basis of the 

building which is attributable to residential rental units in 

the building which are not low-income units and which are 

above the average quality standard of the low-income units 

in the building. 

(B) EXCEPTION WHERE TAXPAYER ELECTS TO EXCLUDE EXCESS COSTS.— 

(i) IN GENERAL.—Subparagraph (A) shall not apply 

with respect to a residential rental unit in a building 

which is not a low-income unit if— 

(I) the excess described in clause (ii) with respect to such unit is not greater than 15 percent 

of the cost described in clause (ii)(II), and 

(II) the taxpayer elects to exclude from the eligible basis of such building the excess described in 

clause (ii) with respect to such unit. 

(ii) EXCESS.—The excess described in this clause 

with respect to any unit is the excess of— 

(I) the cost of such unit, over 

(II) the amount which would be the cost of such 

unit if the average cost per square foot of low-income units in the building were substituted for 

the cost per square foot of such unit. 

The Secretary may by regulation provide for the determination of the excess under this clause on a basis other 

than square foot costs. 

(4) SPECIAL RULES RELATING TO DETERMINATION OF ADJUSTED

BASIS.—For purposes of this subsection— 

(A) IN GENERAL.—Except as provided in subparagraphs 

(B) and (C), the adjusted basis of any building shall be determined without regard to the adjusted basis of any property which is not residential rental property. 

(B) BASIS OF PROPERTY IN COMMON AREAS, ETC., INCLUDED.—The adjusted basis of any building shall be determined by taking into account the adjusted basis of property (of a character subject to the allowance for depreciation) used in common areas or provided as comparable 

amenities to all residential rental units in such building. 

(C) INCLUSION OF BASIS OF PROPERTY USED TO PROVIDE

SERVICES FOR CERTAIN NONTENANTS.— 

(i) IN GENERAL.—The adjusted basis of any building 

located in a qualified census tract (as defined in paragraph (5)(B)(ii)) shall be determined by taking into account the adjusted basis of property (of a character 

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60 

erwise taken into account) used throughout the taxable year in providing any community service facility. 

(ii) LIMITATION.—The increase in the adjusted basis 

of any building which is taken into account by reason 

of clause (i) shall not exceed the sum of— 

(I) 25 percent of so much of the eligible basis of 

the qualified low-income housing project of which 

it is a part as does not exceed $15,000,000, plus 

(II) 10 percent of so much of the eligible basis 

of such project as is not taken into account under 

subclause (I). 

For purposes of the preceding sentence, all community 

service facilities which are part of the same qualified lowincome housing project shall be treated as one facility. 

(iii) COMMUNITY SERVICE FACILITY.—For purposes of 

this subparagraph, the term ‘‘community service facility’’ means any facility designed to serve primarily individuals whose income is 60 percent or less of area 

median income (within the meaning of subsection 

(g)(1)(B)). 

(D) NO REDUCTION FOR DEPRECIATION.—The adjusted 

basis of any building shall be determined without regard 

to paragraphs (2) and (3) of section 1016(a). 

(5) SPECIAL RULES FOR DETERMINING ELIGIBLE BASIS.— (A) FEDERAL GRANTS NOT TAKEN INTO ACCOUNT IN DE- TERMINING ELIGIBLE BASIS.—The eligible basis of a building shall not include any costs financed with the proceeds 

of a federally funded grant. 

(B) INCREASE IN CREDIT FOR BUILDINGS IN HIGH COST

AREAS.— 

(i) IN GENERAL.—In the case of any building located 

in a qualified census tract or difficult development 

area which is designated for purposes of this subparagraph— 

(I) in the case of a new building, the eligible 

basis of such building shall be 130 percent of such 

basis determined without regard to this subparagraph, and 

(II) in the case of an existing building, the rehabilitation expenditures taken into account under 

subsection (e) shall be 130 percent of such expenditures determined without regard to this subparagraph. 

(ii) QUALIFIED CENSUS TRACT.— 

(I) IN GENERAL.—The term ‘‘qualified census 

tract’’ means any census tract which is designated 

by the Secretary of Housing and Urban Development and, for the most recent year for which census data are available on household income in 

such tract, either in which 50 percent or more of 

the households have an income which is less than 

60 percent of the area median gross income for 

such year or which has a poverty rate of at least 

25 percent. If the Secretary of Housing and Urban 

Development determines that sufficient data for 

61 

any period are not available to apply this clause 

on the basis of census tracts, such Secretary shall 

apply this clause for such period on the basis of 

enumeration districts. 

(II) LIMIT ON MSA’S DESIGNATED.—The portion 

of a metropolitan statistical area which may be 

designated for purposes of this subparagraph shall 

not exceed an area having 20 percent of the population of such metropolitan statistical area. 

(III) DETERMINATION OF AREAS.—For purposes 

of this clause, each metropolitan statistical area 

shall be treated as a separate area and all nonmetropolitan areas in a State shall be treated as 

1 area. 

(iii) DIFFICULT DEVELOPMENT AREAS.— 

(I) IN GENERAL.—The term ‘‘difficult development areas’’ means any area designated by the 

Secretary of Housing and Urban Development as 

an area which has high construction, land, and 

utility costs relative to area median gross income. 

(II) LIMIT ON AREAS DESIGNATED.—The portions 

of metropolitan statistical areas which may be 

designated for purposes of this subparagraph shall 

not exceed an aggregate area having 20 percent of 

the population of such metropolitan statistical 

areas. A comparable rule shall apply to nonmetropolitan areas. 

(iv) SPECIAL RULES AND DEFINITIONS.—For purposes 

of this subparagraph— 

(I) population shall be determined on the basis 

of the most recent decennial census for which data 

are available, 

(II) area median gross income shall be determined in accordance with subsection (g)(4), 

(III) the term ‘‘metropolitan statistical area’’ has 

the same meaning as when used in section 

143(k)(2)(B), and 

(IV) the term ‘‘nonmetropolitan area’’ means any 

county (or portion thereof) which is not within a 

metropolitan statistical area. 

(v) BUILDINGS DESIGNATED BY STATE HOUSING CREDIT AGENCY.—Any building which is designated by the 

State housing credit agency as requiring the increase 

in credit under this subparagraph in order for such 

building to be financially feasible as part of a qualified 

low-income housing project shall be treated for purposes of this subparagraph as located in a difficult development area which is designated for purposes of 

this subparagraph. The preceding sentence shall not 

apply to any building if paragraph (1) of subsection (h) 

does not apply to any portion of the eligible basis of 

such building by reason of paragraph (4) of such subsection. 

(6) CREDIT ALLOWABLE FOR CERTAIN BUILDINGS ACQUIRED

DURING 10-YEAR PERIOD DESCRIBED IN PARAGRAPH (2)(B)(II).— 

62 

(A) IN GENERAL.—Paragraph (2)(B)(ii) shall not apply to 

any federally- or State-assisted building. 

(B) BUILDINGS ACQUIRED FROM INSURED DEPOSITORY INSTITUTIONS IN DEFAULT.—On application by the taxpayer, 

the Secretary may waive paragraph (2)(B)(ii) with respect 

to any building acquired from an insured depository institution in default (as defined in section 3 of the Federal Deposit Insurance Act) or from a receiver or conservator of 

such an institution. 

(C) FEDERALLY- OR STATE-ASSISTED BUILDING.—For purposes of this paragraph— 

(i) FEDERALLY-ASSISTED BUILDING.—The term ‘‘federally-assisted building’’ means any building which is 

substantially assisted, financed, or operated under section 8 of the United States Housing Act of 1937, section 221(d)(3), 221(d)(4), or 236 of the National Housing Act, section 515 of the Housing Act of 1949, or any 

other housing program administered by the Department of Housing and Urban Development or by the 

Rural Housing Service of the Department of Agriculture. 

(ii) STATE-ASSISTED BUILDING.—The term ‘‘State-assisted building’’ means any building which is substantially assisted, financed, or operated under any State 

law similar in purposes to any of the laws referred to 

in clause (i). 

(7) ACQUISITION OF BUILDING BEFORE END OF PRIOR COMPLIANCE PERIOD.— 

(A) IN GENERAL.—Under regulations prescribed by the 

Secretary, in the case of a building described in subparagraph (B) (or interest therein) which is acquired by the 

taxpayer— 

(i) paragraph (2)(B) shall not apply, but 

(ii) the credit allowable by reason of subsection (a) 

to the taxpayer for any period after such acquisition 

shall be equal to the amount of credit which would 

have been allowable under subsection (a) for such period to the prior owner referred to in subparagraph (B) 

had such owner not disposed of the building. 

(B) DESCRIPTION OF BUILDING.—A building is described 

in this subparagraph if— 

(i) a credit was allowed by reason of subsection (a) 

to any prior owner of such building, and 

(ii) the taxpayer acquired such building before the 

end of the compliance period for such building with respect to such prior owner (determined without regard 

to any disposition by such prior owner). 

(e) REHABILITATION EXPENDITURES TREATED AS SEPARATE NEW

BUILDING.— 

(1) IN GENERAL.—Rehabilitation expenditures paid or incurred by the taxpayer with respect to any building shall be 

treated for purposes of this section as a separate new building. 

(2) REHABILITATION EXPENDITURES.—For purposes of paragraph (1)— 

63 

(A) IN GENERAL.—The term ‘‘rehabilitation expenditures’’ 

means amounts chargeable to capital account and incurred 

for property (or additions or improvements to property) of 

a character subject to the allowance for depreciation in 

connection with the rehabilitation of a building. 

(B) COST OF ACQUISITION, ETC., NOT INCLUDED.—Such 

term does not include the cost of acquiring any building (or 

interest therein) or any amount not permitted to be taken 

into account under paragraph (3) or (4) of subsection (d). 

(3) MINIMUM EXPENDITURES TO QUALIFY.— 

(A) IN GENERAL.—Paragraph (1) shall apply to rehabilitation expenditures with respect to any building only if— 

(i) the expenditures are allocable to 1 or more lowincome units or substantially benefit such units, and 

(ii) the amount of such expenditures during any 24- 

month period meets the requirements of whichever of 

the following subclauses requires the greater amount 

of such expenditures: 

(I) The requirement of this subclause is met if 

such amount is not less than 20 percent of the adjusted basis of the building (determined as of the 

1st day of such period and without regard to paragraphs (2) and (3) of section 1016(a)). 

(II) The requirement of this subclause is met if 

the qualified basis attributable to such amount, 

when divided by the number of low-income units 

in the building, is $6,000 or more. 

(B) EXCEPTION FROM 10 PERCENT REHABILITATION.—In 

the case of a building acquired by the taxpayer from a governmental unit, at the election of the taxpayer, subparagraph (A)(ii)(I) shall not apply and the credit under this 

section for such rehabilitation expenditures shall be determined using the percentage applicable under subsection 

(b)(2)(B)(ii). 

(C) DATE OF DETERMINATION.—The determination under 

subparagraph (A) shall be made as of the close of the 1st 

taxable year in the credit period with respect to such expenditures. 

(D) INFLATION ADJUSTMENT.—In the case of any expenditures which are treated under paragraph (4) as placed in 

service during any calendar year after 2009, the $6,000 

amount in subparagraph (A)(ii)(II) shall be increased by an 

amount equal to— 

(i) such dollar amount, multiplied by 

(ii) the cost-of-living adjustment determined under 

section 1(f)(3) for such calendar year by substituting 

‘‘calendar year 2008’’ for ‘‘calendar year 2016’’ in subparagraph (A)(ii) thereof. 

Any increase under the preceding sentence which is not a 

multiple of $100 shall be rounded to the nearest multiple 

of $100. 

(4) SPECIAL RULES.—For purposes of applying this section 

with respect to expenditures which are treated as a separate 

building by reason of this subsection— 

64 

(A) such expenditures shall be treated as placed in service at the close of the 24-month period referred to in paragraph (3)(A), and 

(B) the applicable fraction under subsection (c)(1) shall 

be the applicable fraction for the building (without regard 

to paragraph (1)) with respect to which the expenditures 

were incurred. 

Nothing in subsection (d)(2) shall prevent a credit from being 

allowed by reason of this subsection. 

(5) NO DOUBLE COUNTING.—Rehabilitation expenditures may, 

at the election of the taxpayer, be taken into account under 

this subsection or subsection (d)(2)(A)(i) but not under both 

such subsections. 

(6) REGULATIONS TO APPLY SUBSECTION WITH RESPECT TO

GROUP OF UNITS IN BUILDING.—The Secretary may prescribe 

regulations, consistent with the purposes of this subsection, 

treating a group of units with respect to which rehabilitation 

expenditures are incurred as a separate new building. 

(f) DEFINITION AND SPECIAL RULES RELATING TO CREDIT PERIOD.— 

(1) CREDIT PERIOD DEFINED.—For purposes of this section, 

the term ‘‘credit period’’ means, with respect to any building, 

the period of 10 taxable years beginning with— 

(A) the taxable year in which the building is placed in 

service, or 

(B) at the election of the taxpayer, the succeeding taxable year, 

but only if the building is a qualified low-income building as 

of the close of the 1st year of such period. The election under 

subparagraph (B), once made, shall be irrevocable. 

(2) SPECIAL RULE FOR 1ST YEAR OF CREDIT PERIOD.— 

(A) IN GENERAL.—The credit allowable under subsection 

(a) with respect to any building for the 1st taxable year of 

the credit period shall be determined by substituting for 

the applicable fraction under subsection (c)(1) the fraction— 

(i) the numerator of which is the sum of the applicable fractions determined under subsection (c)(1) as of 

the close of each full month of such year during which 

such building was in service, and 

(ii) the denominator of which is 12. 

(B) DISALLOWED 1ST YEAR CREDIT ALLOWED IN 11TH

YEAR.—Any reduction by reason of subparagraph (A) in the 

credit allowable (without regard to subparagraph (A)) for 

the 1st taxable year of the credit period shall be allowable 

under subsection (a) for the 1st taxable year following the 

credit period. 

(3) DETERMINATION OF APPLICABLE PERCENTAGE WITH RESPECT TO INCREASES IN QUALIFIED BASIS AFTER 1ST YEAR OF

CREDIT PERIOD.— 

(A) IN GENERAL.—In the case of any building which was 

a qualified low-income building as of the close of the 1st 

year of the credit period, if— 

65 

(i) as of the close of any taxable year in the compliance period (after the 1st year of the credit period) the 

qualified basis of such building exceeds 

(ii) the qualified basis of such building as of the 

close of the 1st year of the credit period, 

the applicable percentage which shall apply under subsection (a) for the taxable year to such excess shall be the 

percentage equal to 2/3 of the applicable percentage which 

(after the application of subsection (h)) would but for this 

paragraph apply to such basis. 

(B) 1ST YEAR COMPUTATION APPLIES.—A rule similar to 

the rule of paragraph (2)(A) shall apply to any increase in 

qualified basis to which subparagraph (A) applies for the 

1st year of such increase. 

(4) DISPOSITIONS OF PROPERTY.—If a building (or an interest 

therein) is disposed of during any year for which credit is allowable under subsection (a), such credit shall be allocated between the parties on the basis of the number of days during 

such year the building (or interest) was held by each. In any 

such case, proper adjustments shall be made in the application 

of subsection (j). 

(5) CREDIT PERIOD FOR EXISTING BUILDINGS NOT TO BEGIN BE- FORE REHABILITATION CREDIT ALLOWED.— (A) IN GENERAL.—The credit period for an existing building shall not begin before the 1st taxable year of the credit 

period for rehabilitation expenditures with respect to the 

building. 

(B) ACQUISITION CREDIT ALLOWED FOR CERTAIN BUILDINGS NOT ALLOWED A REHABILITATION CREDIT.— 

(i) IN GENERAL.—In the case of a building described 

in clause (ii)— 

(I) subsection (d)(2)(B)(iv) shall not apply, and 

(II) the credit period for such building shall not 

begin before the taxable year which would be the 

1st taxable year of the credit period for rehabilitation expenditures with respect to the building 

under the modifications described in clause (ii)(II). 

(ii) BUILDING DESCRIBED.—A building is described in 

this clause if— 

(I) a waiver is granted under subsection 

(d)(6)(B) with respect to the acquisition of the 

building, and 

(II) a credit would be allowed for rehabilitation 

expenditures with respect to such building if subsection (e)(3)(A)(ii)(I) did not apply and if the dollar amount in effect under subsection 

(e)(3)(A)(ii)(II) were two-thirds of such amount. 

(g) QUALIFIED LOW-INCOME HOUSING PROJECT.—For purposes of 

this section— 

(1) IN GENERAL.—The term ‘‘qualified low-income housing 

project’’ means any project for residential rental property if the 

project meets the requirements of subparagraph (A), (B), or (C) 

whichever is elected by the taxpayer: 

(A) 20–50 TEST.—The project meets the requirements of 

this subparagraph if 20 percent or more of the residential 

66 

units in such project are both rent-restricted and occupied 

by individuals whose income is 50 percent or less of area 

median gross income. 

(B) 40–60 TEST.—The project meets the requirements of 

this subparagraph if 40 percent or more of the residential 

units in such project are both rent-restricted and occupied 

by individuals whose income is 60 percent or less of area 

median gross income. 

(C) AVERAGE INCOME TEST.— (i) IN GENERAL.—The project meets the minimum requirements of this subparagraph if 40 percent or more 

(25 percent or more in the case of a project described 

in section 142(d)(6)) of the residential units in such 

project are both rent-restricted and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit. 

(ii) SPECIAL RULES RELATING TO INCOME LIMITATION.—For purposes of clause (i)— 

(I) DESIGNATION.—The taxpayer shall designate 

the imputed income limitation of each unit taken 

into account under such clause. 

(II) AVERAGE TEST.—The average of the imputed 

income limitations designated under subclause (I) 

shall not exceed 60 percent of area median gross 

income. 

(III) 10-PERCENT INCREMENTS.—The designated 

imputed income limitation of any unit under subclause (I) shall be 20 percent, 30 percent, 40 percent, 50 percent, 60 percent, 70 percent, or 80 percent of area median gross income. 

Any election under this paragraph, once made, shall be irrevocable. For purposes of this paragraph, any property shall not 

be treated as failing to be residential rental property merely 

because part of the building in which such property is located 

is used for purposes other than residential rental purposes. 

(2) RENT-RESTRICTED UNITS.— (A) IN GENERAL.—For purposes of paragraph (1), a residential unit is rent-restricted if the gross rent with respect 

to such unit does not exceed 30 percent of the imputed income limitation applicable to such unit. For purposes of 

the preceding sentence, the amount of the income limitation under paragraph (1) applicable for any period shall 

not be less than such limitation applicable for the earliest 

period the building (which contains the unit) was included 

in the determination of whether the project is a qualified 

low-income housing project. 

(B) GROSS RENT.—For purposes of subparagraph (A), 

gross rent— 

(i) does not include any payment under section 8 of 

the United States Housing Act of 1937 or any comparable rental assistance program (with respect to 

such unit or occupants thereof), 

(ii) includes any utility allowance determined by the 

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67 

tions under section 8 of the United States Housing Act 

of 1937, 

(iii) does not include any fee for a supportive service 

which is paid to the owner of the unit (on the basis of 

the low-income status of the tenant of the unit) by any 

governmental program of assistance (or by an organization described in section 501(c)(3) and exempt from 

tax under section 501(a)) if such program (or organization) provides assistance for rent and the amount of 

assistance provided for rent is not separable from the 

amount of assistance provided for supportive services, 

and 

(iv) does not include any rental payment to the 

owner of the unit to the extent such owner pays an 

equivalent amount to the Farmers’ Home Administration under section 515 of the Housing Act of 1949. 

For purposes of clause (iii), the term ‘‘supportive service’’ 

means any service provided under a planned program of 

services designed to enable residents of a residential rental 

property to remain independent and avoid placement in a 

hospital, nursing home, or intermediate care facility for 

the mentally or physically handicapped. In the case of a 

single-room occupancy unit or a building described in subsection (i)(3)(B)(iii), such term includes any service provided to assist tenants in locating and retaining permanent housing. 

(C) IMPUTED INCOME LIMITATION APPLICABLE TO UNIT.— For purposes of this paragraph, the imputed income limitation applicable to a unit is the income limitation which 

would apply under paragraph (1) to individuals occupying 

the unit if the number of individuals occupying the unit 

were as follows: 

(i) In the case of a unit which does not have a separate bedroom, 1 individual. 

(ii) In the case of a unit which has 1 or more separate bedrooms, 1.5 individuals for each separate bedroom. 

In the case of a project with respect to which a credit is 

allowable by reason of this section and for which financing 

is provided by a bond described in section 142(a)(7), the 

imputed income limitation shall apply in lieu of the otherwise applicable income limitation for purposes of applying 

section 142(d)(4)(B)(ii). 

(D) TREATMENT OF UNITS OCCUPIED BY INDIVIDUALS

WHOSE INCOMES RISE ABOVE LIMIT.— 

(i) IN GENERAL.—Except as provided in clauses (ii), 

(iii), and (iv), notwithstanding an increase in the income of the occupants of a low-income unit above the 

income limitation applicable under paragraph (1), such 

unit shall continue to be treated as a low-income unit 

if the income of such occupants initially met such income limitation and such unit continues to be rent-restricted. 

(ii) RENTAL OF NEXT AVAILABLE UNIT IN CASE OF 20– 

50 OR 40–60 TEST.—In the case of a project with respect 

68 

to which the taxpayer elects the requirements of subparagraph (A) or (B) of paragraph (1), if the income of 

the occupants of the unit increases above 140 percent 

of the income limitation applicable under paragraph 

(1), clause (i) shall cease to apply to such unit if any 

residential rental unit in the building (of a size comparable to, or smaller than, such unit) is occupied by 

a new resident whose income exceeds such income limitation. 

(iii) RENTAL OF NEXT AVAILABLE UNIT IN CASE OF AV- ERAGE INCOME TEST.—In the case of a project with respect to which the taxpayer elects the requirements of 

subparagraph (C) of paragraph (1), if the income of the 

occupants of the unit increases above 140 percent of 

the greater of— 

(I) 60 percent of area median gross income, or 

(II) the imputed income limitation designated 

with respect to the unit under paragraph 

(1)(C)(ii)(I), 

clause (i) shall cease to apply to any such unit if any residential rental unit in the building (of a size comparable to, 

or smaller than, such unit) is occupied by a new resident 

whose income exceeds the limitation described in clause 

(v). 

(iv) DEEP RENT SKEWED PROJECTS.—In the case of a 

project described in section 142(d)(4)(B), clause (ii) or 

(iii), whichever is applicable, shall be applied by substituting ‘‘170 percent’’ for ‘‘140 percent’’, and— 

(I) in the case of clause (ii), by substituting ‘‘any 

low-income unit in the building is occupied by a 

new resident whose income exceeds 40 percent of 

area median gross income’’ for ‘‘any residential 

rental unit’’ and all that follows in such clause, 

and 

(II) in the case of clause (iii), by substituting 

‘‘any low-income unit in the building is occupied 

by a new resident whose income exceeds the lesser 

of 40 percent of area median gross income or the 

imputed income limitation designated with respect 

to such unit under paragraph (1)(C)(ii)(I)’’ for ‘‘any 

residential rental unit’’ and all that follows in 

such clause. 

(v) LIMITATION DESCRIBED.—For purposes of clause 

(iii), the limitation described in this clause with respect to any unit is— 

(I) the imputed income limitation designated 

with respect to such unit under paragraph 

(1)(C)(ii)(I), in the case of a unit which was taken 

into account as a low-income unit prior to becoming vacant, and 

(II) the imputed income limitation which would 

have to be designated with respect to such unit 

under such paragraph in order for the project to 

continue to meet the requirements of paragraph 

(1)(C)(ii)(II), in the case of any other unit. 

69 

(E) UNITS WHERE FEDERAL RENTAL ASSISTANCE IS REDUCED AS TENANT’S INCOME INCREASES.—If the gross rent 

with respect to a residential unit exceeds the limitation 

under subparagraph (A) by reason of the fact that the income of the occupants thereof exceeds the income limitation applicable under paragraph (1), such unit shall, nevertheless, be treated as a rent-restricted unit for purposes of 

paragraph (1) if— 

(i) a Federal rental assistance payment described in 

subparagraph (B)(i) is made with respect to such unit 

or its occupants, and 

(ii) the sum of such payment and the gross rent with 

respect to such unit does not exceed the sum of the 

amount of such payment which would be made and 

the gross rent which would be payable with respect to 

such unit if— 

(I) the income of the occupants thereof did not 

exceed the income limitation applicable under 

paragraph (1), and 

(II) such units were rent-restricted within the 

meaning of subparagraph (A). 

The preceding sentence shall apply to any unit only if the 

result described in clause (ii) is required by Federal statute as of the date of the enactment of this subparagraph 

and as of the date the Federal rental assistance payment 

is made. 

(3) DATE FOR MEETING REQUIREMENTS.— 

(A) IN GENERAL.—Except as otherwise provided in this 

paragraph, a building shall be treated as a qualified lowincome building only if the project (of which such building 

is a part) meets the requirements of paragraph (1) not 

later than the close of the 1st year of the credit period for 

such building. 

(B) BUILDINGS WHICH RELY ON LATER BUILDINGS FOR

QUALIFICATION.— 

(i) IN GENERAL.—In determining whether a building 

(hereinafter in this subparagraph referred to as the 

‘‘prior building’’) is a qualified low-income building, the 

taxpayer may take into account 1 or more additional 

buildings placed in service during the 12-month period 

described in subparagraph (A) with respect to the 

prior building only if the taxpayer elects to apply 

clause (ii) with respect to each additional building 

taken into account. 

(ii) TREATMENT OF ELECTED BUILDINGS.—In the case 

of a building which the taxpayer elects to take into account under clause (i), the period under subparagraph 

(A) for such building shall end at the close of the 12- 

month period applicable to the prior building. 

(iii) DATE PRIOR BUILDING IS TREATED AS PLACED IN

SERVICE.—For purposes of determining the credit period and the compliance period for the prior building, 

the prior building shall be treated for purposes of this 

section as placed in service on the most recent date 

70 

any additional building elected by the taxpayer (with 

respect to such prior building) was placed in service. 

(C) SPECIAL RULE.—A building— 

(i) other than the 1st building placed in service as 

part of a project, and 

(ii) other than a building which is placed in service 

during the 12-month period described in subparagraph 

(A) with respect to a prior building which becomes a 

qualified low-income building, 

shall in no event be treated as a qualified low-income 

building unless the project is a qualified low-income housing project (without regard to such building) on the date 

such building is placed in service. 

(D) PROJECTS WITH MORE THAN 1 BUILDING MUST BE

IDENTIFIED.—For purposes of this section, a project shall 

be treated as consisting of only 1 building unless, before 

the close of the 1st calendar year in the project period (as 

defined in subsection (h)(1)(F)(ii)), each building which is 

(or will be) part of such project is identified in such form 

and manner as the Secretary may provide. 

(4) CERTAIN RULES MADE APPLICABLE.—Paragraphs (2) (other 

than subparagraph (A) thereof), (3), (4), (5), (6), and (7) of section 142(d), and section 6652(j), shall apply for purposes of determining whether any project is a qualified low-income housing project and whether any unit is a low-income unit; except 

that, in applying such provisions for such purposes, the term 

‘‘gross rent’’ shall have the meaning given such term by paragraph (2)(B) of this subsection. 

(5) ELECTION TO TREAT BUILDING AFTER COMPLIANCE PERIOD

AS NOT PART OF A PROJECT.—For purposes of this section, the 

taxpayer may elect to treat any building as not part of a qualified low-income housing project for any period beginning after 

the compliance period for such building. 

(6) SPECIAL RULE WHERE DE MINIMIS EQUITY CONTRIBUTION.—Property shall not be treated as failing to be residential 

rental property for purposes of this section merely because the 

occupant of a residential unit in the project pays (on a voluntary basis) to the lessor a de minimis amount to be held toward the purchase by such occupant of a residential unit in 

such project if— 

(A) all amounts so paid are refunded to the occupant on 

the cessation of his occupancy of a unit in the project, and 

(B) the purchase of the unit is not permitted until after 

the close of the compliance period with respect to the 

building in which the unit is located. 

Any amount paid to the lessor as described in the preceding 

sentence shall be included in gross rent under paragraph (2) 

for purposes of determining whether the unit is rent-restricted. 

(7) SCATTERED SITE PROJECTS.—Buildings which would (but 

for their lack of proximity) be treated as a project for purposes 

of this section shall be so treated if all of the dwelling units 

in each of the buildings are rent-restricted (within the meaning 

of paragraph (2)) residential rental units. 

71 

(8) WAIVER OF CERTAIN DE MINIMIS ERRORS AND RECERTIFI- CATIONS.—On application by the taxpayer, the Secretary may 

waive— 

(A) any recapture under subsection (j) in the case of any 

de minimis error in complying with paragraph (1), or 

(B) any annual recertification of tenant income for purposes of this subsection, if the entire building is occupied 

by low-income tenants. 

(9) CLARIFICATION OF GENERAL PUBLIC USE REQUIREMENT.— A project does not fail to meet the general public use requirement solely because of occupancy restrictions or preferences 

that favor tenants— 

(A) with special needs, 

(B) who are members of a specified group under a Federal program or State program or policy that supports 

housing for such a specified group, or 

(C) who are involved in artistic or literary activities. 

(h) LIMITATION ON AGGREGATE CREDIT ALLOWABLE WITH RESPECT

TO PROJECTS LOCATED IN A STATE.— 

(1) CREDIT MAY NOT EXCEED CREDIT AMOUNT ALLOCATED TO

BUILDING.— (A) IN GENERAL.—The amount of the credit determined 

under this section for any taxable year with respect to any 

building shall not exceed the housing credit dollar amount 

allocated to such building under this subsection. 

(B) TIME FOR MAKING ALLOCATION.—Except in the case 

of an allocation which meets the requirements of subparagraph (C), (D), (E), or (F), an allocation shall be taken into 

account under subparagraph (A) only if it is made not later 

than the close of the calendar year in which the building 

is placed in service. 

(C) EXCEPTION WHERE BINDING COMMITMENT.—An allocation meets the requirements of this subparagraph if 

there is a binding commitment (not later than the close of 

the calendar year in which the building is placed in service) by the housing credit agency to allocate a specified 

housing credit dollar amount to such building beginning in 

a specified later taxable year. 

(D) EXCEPTION WHERE INCREASE IN QUALIFIED BASIS.— (i) IN GENERAL.—An allocation meets the requirements of this subparagraph if such allocation is made 

not later than the close of the calendar year in which 

ends the taxable year to which it will 1st apply but 

only to the extent the amount of such allocation does 

not exceed the limitation under clause (ii). 

(ii) LIMITATION.—The limitation under this clause is 

the amount of credit allowable under this section 

(without regard to this subsection) for a taxable year 

with respect to an increase in the qualified basis of the 

building equal to the excess of— 

(I) the qualified basis of such building as of the 

close of the 1st taxable year to which such allocation will apply, over 

(II) the qualified basis of such building as of the 

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72 

cent prior housing credit allocation with respect to 

such building applied. 

(iii) HOUSING CREDIT DOLLAR AMOUNT REDUCED BY

FULL ALLOCATION.—Notwithstanding clause (i), the 

full amount of the allocation shall be taken into account under paragraph (2). 

(E) EXCEPTION WHERE 10 PERCENT OF COST INCURRED.— 

(i) IN GENERAL.—An allocation meets the requirements of this subparagraph if such allocation is made 

with respect to a qualified building which is placed in 

service not later than the close of the second calendar 

year following the calendar year in which the allocation is made. 

(ii) QUALIFIED BUILDING.—For purposes of clause (i), 

the term ‘‘qualified building’’ means any building 

which is part of a project if the taxpayer’s basis in 

such project (as of the date which is 1 year after the 

date that the allocation was made) is more than 10 

percent of the taxpayer’s reasonably expected basis in 

such project (as of the close of the second calendar 

year referred to in clause (i)). Such term does not include any existing building unless a credit is allowable 

under subsection (e) for rehabilitation expenditures 

paid or incurred by the taxpayer with respect to such 

building for a taxable year ending during the second 

calendar year referred to in clause (i) or the prior taxable year. 

(F) ALLOCATION OF CREDIT ON A PROJECT BASIS.— 

(i) IN GENERAL.—In the case of a project which includes (or will include) more than 1 building, an allocation meets the requirements of this subparagraph 

if— 

(I) the allocation is made to the project for a calendar year during the project period, 

(II) the allocation only applies to buildings 

placed in service during or after the calendar year 

for which the allocation is made, and 

(III) the portion of such allocation which is allocated to any building in such project is specified 

not later than the close of the calendar year in 

which the building is placed in service. 

(ii) PROJECT PERIOD.—For purposes of clause (i), the 

term ‘‘project period’’ means the period— 

(I) beginning with the 1st calendar year for 

which an allocation may be made for the 1st 

building placed in service as part of such project, 

and 

(II) ending with the calendar year the last 

building is placed in service as part of such 

project. 

(2) ALLOCATED CREDIT AMOUNT TO APPLY TO ALL TAXABLE

YEARS ENDING DURING OR AFTER CREDIT ALLOCATION YEAR.— 

Any housing credit dollar amount allocated to any building for 

any calendar year— 

73 

(A) shall apply to such building for all taxable years in 

the compliance period ending during or after such calendar 

year, and 

(B) shall reduce the aggregate housing credit dollar 

amount of the allocating agency only for such calendar 

year. 

(3) HOUSING CREDIT DOLLAR AMOUNT FOR AGENCIES.— 

(A) IN GENERAL.—The aggregate housing credit dollar 

amount which a housing credit agency may allocate for 

any calendar year is the portion of the State housing credit 

ceiling allocated under this paragraph for such calendar 

year to such agency. 

(B) STATE CEILING INITIALLY ALLOCATED TO STATE HOUSING CREDIT AGENCIES.—Except as provided in subparagraphs (D) and (E), the State housing credit ceiling for 

each calendar year shall be allocated to the housing credit 

agency of such State. If there is more than 1 housing credit agency of a State, all such agencies shall be treated as 

a single agency. 

(C) STATE HOUSING CREDIT CEILING.—The State housing 

credit ceiling applicable to any State for any calendar year 

shall be an amount equal to the sum of— 

(i) the unused State housing credit ceiling (if any) of 

such State for the preceding calendar year, 

(ii) the greater of— 

(I) $1.75 multiplied by the State population, or 

(II) $2,000,000, 

(iii) the amount of State housing credit ceiling returned in the calendar year, plus 

(iv) the amount (if any) allocated under subparagraph (D) to such State by the Secretary. 

For purposes of clause (i), the unused State housing credit 

ceiling for any calendar year is the excess (if any) of the 

sum of the amounts described in clauses (ii) through (iv) 

over the aggregate housing credit dollar amount allocated 

for such year. For purposes of clause (iii), the amount of 

State housing credit ceiling returned in the calendar year 

equals the housing credit dollar amount previously allocated within the State to any project which fails to meet 

the 10 percent test under paragraph (1)(E)(ii) on a date 

after the close of the calendar year in which the allocation 

was made or which does not become a qualified low-income 

housing project within the period required by this section 

or the terms of the allocation or to any project with respect 

to which an allocation is cancelled by mutual consent of 

the housing credit agency and the allocation recipient. 

(D) UNUSED HOUSING CREDIT CARRYOVERS ALLOCATED

AMONG CERTAIN STATES.— 

(i) IN GENERAL.—The unused housing credit carryover of a State for any calendar year shall be assigned 

to the Secretary for allocation among qualified States 

for the succeeding calendar year. 

(ii) UNUSED HOUSING CREDIT CARRYOVER.—For purposes of this subparagraph, the unused housing credit 

74 

carryover of a State for any calendar year is the excess 

(if any) of— 

(I) the unused State housing credit ceiling for 

the year preceding such year, over 

(II) the aggregate housing credit dollar amount 

allocated for such year. 

(iii) FORMULA FOR ALLOCATION OF UNUSED HOUSING

CREDIT CARRYOVERS AMONG QUALIFIED STATES.—The 

amount allocated under this subparagraph to a qualified State for any calendar year shall be the amount 

determined by the Secretary to bear the same ratio to 

the aggregate unused housing credit carryovers of all 

States for the preceding calendar year as such State’s 

population for the calendar year bears to the population of all qualified States for the calendar year. For 

purposes of the preceding sentence, population shall 

be determined in accordance with section 146(j). 

(iv) QUALIFIED STATE.—For purposes of this subparagraph, the term ‘‘qualified State’’ means, with respect to a calendar year, any State— 

(I) which allocated its entire State housing credit ceiling for the preceding calendar year, and 

(II) for which a request is made (not later than 

May 1 of the calendar year) to receive an allocation under clause (iii). 

(E) SPECIAL RULE FOR STATES WITH CONSTITUTIONAL

HOME RULE CITIES.—For purposes of this subsection— 

(i) IN GENERAL.—The aggregate housing credit dollar 

amount for any constitutional home rule city for any 

calendar year shall be an amount which bears the 

same ratio to the State housing credit ceiling for such 

calendar year as— 

(I) the population of such city, bears to 

(II) the population of the entire State. 

(ii) COORDINATION WITH OTHER ALLOCATIONS.—In 

the case of any State which contains 1 or more constitutional home rule cities, for purposes of applying 

this paragraph with respect to housing credit agencies 

in such State other than constitutional home rule cities, the State housing credit ceiling for any calendar 

year shall be reduced by the aggregate housing credit 

dollar amounts determined for such year for all constitutional home rule cities in such State. 

(iii) CONSTITUTIONAL HOME RULE CITY.—For purposes of this paragraph, the term ‘‘constitutional home 

rule city’’ has the meaning given such term by section 

146(d)(3)(C). 

(F) STATE MAY PROVIDE FOR DIFFERENT ALLOCATION.— 

Rules similar to the rules of section 146(e) (other than 

paragraph (2)(B) thereof) shall apply for purposes of this 

paragraph. 

(G) POPULATION.—For purposes of this paragraph, population shall be determined in accordance with section 

146(j). 

(H) COST-OF-LIVING ADJUSTMENT.— 

75 

(i) IN GENERAL.—In the case of a calendar year after 2002, the $2,000,000 and $1.75 amounts in subparagraph (C) shall each be increased by an amount equal 

to— 

(I) such dollar amount, multiplied by 

(II) the cost-of-living adjustment determined 

under section 1(f)(3) for such calendar year by 

substituting ‘‘calendar year 2001’’ for ‘‘calendar 

year 2016’’ in subparagraph (A)(ii) thereof. 

(ii) ROUNDING.—(I) In the case of the $2,000,000 

amount, any increase under clause (i) which is not a 

multiple of $5,000 shall be rounded to the next lowest 

multiple of $5,000. (II) In the case of the $1.75 amount, any increase 

under clause (i) which is not a multiple of 5 cents shall 

be rounded to the next lowest multiple of 5 cents. 

(I) INCREASE IN STATE HOUSING CREDIT CEILING FOR 2018, 2019, 2020, AND 2021.—In the case of calendar years 2018, 

2019, 2020, and 2021, each of the dollar amounts in effect 

under clauses (I) and (II) of subparagraph (C)(ii) for any 

calendar year (after any increase under subparagraph (H)) 

shall be increased by multiplying such dollar amount by 

1.125. 

(4) CREDIT FOR BUILDINGS FINANCED BY TAX-EXEMPT BONDS

SUBJECT TO VOLUME CAP NOT TAKEN INTO ACCOUNT.— (A) IN GENERAL.—Paragraph (1) shall not apply to the 

portion of any credit allowable under subsection (a) which 

is attributable to eligible basis financed by any obligation 

the interest on which is exempt from tax under section 103 

if— 

(i) such obligation is taken into account under section 146, and 

(ii) principal payments on such financing are applied 

within a reasonable period to redeem obligations the 

proceeds of which were used to provide such financing 

or such financing is refunded as described in section 

146(i)(6). 

(B) SPECIAL RULE WHERE 50 PERCENT OR MORE OF BUILD- ING IS FINANCED WITH TAX-EXEMPT BONDS SUBJECT TO VOL- UME CAP.—For purposes of subparagraph (A), if 50 percent 

or more of the aggregate basis of any building and the 

land on which the building is located is financed by any 

obligation described in subparagraph (A), paragraph (1) 

shall not apply to any portion of the credit allowable under 

subsection (a) with respect to such building. 

(5) PORTION OF STATE CEILING SET-ASIDE FOR CERTAIN

PROJECTS INVOLVING QUALIFIED NONPROFIT ORGANIZATIONS.— 

(A) IN GENERAL.—Not more than 90 percent of the State 

housing credit ceiling for any State for any calendar year 

shall be allocated to projects other than qualified low-income housing projects described in subparagraph (B). 

(B) PROJECTS INVOLVING QUALIFIED NONPROFIT ORGANI- ZATIONS.—For purposes of subparagraph (A), a qualified 

low-income housing project is described in this subparagraph if a qualified nonprofit organization is to own an inVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00081 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
76 

terest in the project (directly or through a partnership) 

and materially participate (within the meaning of section 

469(h)) in the development and operation of the project 

throughout the compliance period. 

(C) QUALIFIED NONPROFIT ORGANIZATION.—For purposes 

of this paragraph, the term ‘‘qualified nonprofit organization’’ means any organization if— 

(i) such organization is described in paragraph (3) or 

(4) of section 501(c) and is exempt from tax under section 501(a), 

(ii) such organization is determined by the State 

housing credit agency not to be affiliated with or controlled by a for-profit organization, and 

(iii) 1 of the exempt purposes of such organization 

includes the fostering of low-income housing. 

(D) TREATMENT OF CERTAIN SUBSIDIARIES.— 

(i) IN GENERAL.—For purposes of this paragraph, a 

qualified nonprofit organization shall be treated as 

satisfying the ownership and material participation 

test of subparagraph (B) if any qualified corporation in 

which such organization holds stock satisfies such 

test. 

(ii) QUALIFIED CORPORATION.—For purposes of 

clause (i), the term ‘‘qualified corporation’’ means any 

corporation if 100 percent of the stock of such corporation is held by 1 or more qualified nonprofit organizations at all times during the period such corporation 

is in existence. 

(E) STATE MAY NOT OVERRIDE SET-ASIDE.—Nothing in 

subparagraph (F) of paragraph (3) shall be construed to 

permit a State not to comply with subparagraph (A) of this 

paragraph. 

(6) BUILDINGS ELIGIBLE FOR CREDIT ONLY IF MINIMUM LONG- TERM COMMITMENT TO LOW-INCOME HOUSING.— 

(A) IN GENERAL.—No credit shall be allowed by reason of 

this section with respect to any building for the taxable 

year unless an extended low-income housing commitment 

is in effect as of the end of such taxable year. 

(B) EXTENDED LOW-INCOME HOUSING COMMITMENT.—For 

purposes of this paragraph, the term ‘‘extended low-income 

housing commitment’’ means any agreement between the 

taxpayer and the housing credit agency— 

(i) which requires that the applicable fraction (as defined in subsection (c)(1)) for the building for each taxable year in the extended use period will not be less 

than the applicable fraction specified in such agreement and which prohibits the actions described in subclauses (I) and (II) of subparagraph (E)(ii), 

(ii) which allows individuals who meet the income 

limitation applicable to the building under subsection 

(g) (whether prospective, present, or former occupants 

of the building) the right to enforce in any State court 

the requirement and prohibitions of clause (i), 

(iii) which prohibits the disposition to any person of 

any portion of the building to which such agreement 

77 

applies unless all of the building to which such agreement applies is disposed of to such person, 

(iv) which prohibits the refusal to lease to a holder 

of a voucher or certificate of eligibility under section 8 

of the United States Housing Act of 1937 because of 

the status of the prospective tenant as such a holder, 

(v) which is binding on all successors of the taxpayer, and 

(vi) which, with respect to the property, is recorded 

pursuant to State law as a restrictive covenant. 

(C) ALLOCATION OF CREDIT MAY NOT EXCEED AMOUNT

NECESSARY TO SUPPORT COMMITMENT.— 

(i) IN GENERAL.—The housing credit dollar amount 

allocated to any building may not exceed the amount 

necessary to support the applicable fraction specified 

in the extended low-income housing commitment for 

such building, including any increase in such fraction 

pursuant to the application of subsection (f)(3) if such 

increase is reflected in an amended low-income housing commitment. 

(ii) BUILDINGS FINANCED BY TAX-EXEMPT BONDS.—If 

paragraph (4) applies to any building the amount of 

credit allowed in any taxable year may not exceed the 

amount necessary to support the applicable fraction 

specified in the extended low-income housing commitment for such building. Such commitment may be 

amended to increase such fraction. 

(D) EXTENDED USE PERIOD.—For purposes of this paragraph, the term ‘‘extended use period’’ means the period— 

(i) beginning on the 1st day in the compliance period 

on which such building is part of a qualified low-income housing project, and 

(ii) ending on the later of— 

(I) the date specified by such agency in such 

agreement, or 

(II) the date which is 15 years after the close of 

the compliance period. 

(E) EXCEPTIONS IF FORECLOSURE OR IF NO BUYER WILLING TO MAINTAIN LOW-INCOME STATUS.— 

(i) IN GENERAL.—The extended use period for any 

building shall terminate— 

(I) on the date the building is acquired by foreclosure (or instrument in lieu of foreclosure) unless the Secretary determines that such acquisition is part of an arrangement with the taxpayer 

a purpose of which is to terminate such period, or 

(II) on the last day of the period specified in 

subparagraph (I) if the housing credit agency is 

unable to present during such period a qualified 

contract for the acquisition of the low-income portion of the building by any person who will continue to operate such portion as a qualified low-income building. 

78 

Subclause (II) shall not apply to the extent more stringent 

requirements are provided in the agreement or in State 

law. 

(ii) EVICTION, ETC. OF EXISTING LOW-INCOME TEN- ANTS NOT PERMITTED.—The termination of an extended use period under clause (i) shall not be construed to permit before the close of the 3-year period 

following such termination— 

(I) the eviction or the termination of tenancy 

(other than for good cause) of an existing tenant 

of any low-income unit, or 

(II) any increase in the gross rent with respect 

to such unit not otherwise permitted under this 

section. 

(F) QUALIFIED CONTRACT.—For purposes of subparagraph (E), the term ‘‘qualified contract’’ means a bona fide 

contract to acquire (within a reasonable period after the 

contract is entered into) the nonlow-income portion of the 

building for fair market value and the low-income portion 

of the building for an amount not less than the applicable 

fraction (specified in the extended low-income housing 

commitment) of— 

(i) the sum of— 

(I) the outstanding indebtedness secured by, or 

with respect to, the building, 

(II) the adjusted investor equity in the building, 

plus 

(III) other capital contributions not reflected in 

the amounts described in subclause (I) or (II), reduced by 

(ii) cash distributions from (or available for distribution from) the project. 

The Secretary shall prescribe such regulations as may be 

necessary or appropriate to carry out this paragraph, including regulations to prevent the manipulation of the 

amount determined under the preceding sentence. 

(G) ADJUSTED INVESTOR EQUITY.— (i) IN GENERAL.—For purposes of subparagraph (E), 

the term ‘‘adjusted investor equity’’ means, with respect to any calendar year, the aggregate amount of 

cash taxpayers invested with respect to the project increased by the amount equal to— 

(I) such amount, multiplied by 

(II) the cost-of-living adjustment for such calendar year, determined under section 1(f)(3) by 

substituting the base calendar year for ‘‘calendar 

year 2016’’ in subparagraph (A)(ii) thereof. 

An amount shall be taken into account as an investment 

in the project only to the extent there was an obligation to 

invest such amount as of the beginning of the credit period 

and to the extent such amount is reflected in the adjusted 

basis of the project. 

(ii) COST-OF-LIVING INCREASES IN EXCESS OF 5 PERCENT NOT TAKEN INTO ACCOUNT.—Under regulations 

prescribed by the Secretary, if the C-CPI-U for any 

79 

calendar year (as defined in section 1(f)(6)) exceeds the 

C-CPI-U for the preceding calendar year by more than 

5 percent, the C-CPI-U for the base calendar year 

shall be increased such that such excess shall never be 

taken into account under clause (i). In the case of a 

base calendar year before 2017, the C-CPI-U for such 

year shall be determined by multiplying the CPI for 

such year by the amount determined under section 

1(f)(3)(B). 

(iii) BASE CALENDAR YEAR.—For purposes of this 

subparagraph, the term ‘‘base calendar year’’ means 

the calendar year with or within which the 1st taxable 

year of the credit period ends. 

(H) LOW-INCOME PORTION.—For purposes of this paragraph, the low-income portion of a building is the portion 

of such building equal to the applicable fraction specified 

in the extended low-income housing commitment for the 

building. 

(I) PERIOD FOR FINDING BUYER.—The period referred to 

in this subparagraph is the 1-year period beginning on the 

date (after the 14th year of the compliance period) the taxpayer submits a written request to the housing credit 

agency to find a person to acquire the taxpayer’s interest 

in the low-income portion of the building. 

(J) EFFECT OF NONCOMPLIANCE.—If, during a taxable 

year, there is a determination that an extended low-income housing agreement was not in effect as of the beginning of such year, such determination shall not apply to 

any period before such year and subparagraph (A) shall be 

applied without regard to such determination if the failure 

is corrected within 1 year from the date of the determination. 

(K) PROJECTS WHICH CONSIST OF MORE THAN 1 BUILDING.—The application of this paragraph to projects which 

consist of more than 1 building shall be made under regulations prescribed by the Secretary. 

(7) SPECIAL RULES.— 

(A) BUILDING MUST BE LOCATED WITHIN JURISDICTION OF

CREDIT AGENCY.—A housing credit agency may allocate its 

aggregate housing credit dollar amount only to buildings 

located in the jurisdiction of the governmental unit of 

which such agency is a part. 

(B) AGENCY ALLOCATIONS IN EXCESS OF LIMIT.—If the aggregate housing credit dollar amounts allocated by a housing credit agency for any calendar year exceed the portion 

of the State housing credit ceiling allocated to such agency 

for such calendar year, the housing credit dollar amounts 

so allocated shall be reduced (to the extent of such excess) 

for buildings in the reverse of the order in which the allocations of such amounts were made. 

(C) CREDIT REDUCED IF ALLOCATED CREDIT DOLLAR

AMOUNT IS LESS THAN CREDIT WHICH WOULD BE ALLOWABLE

WITHOUT REGARD TO PLACED IN SERVICE CONVENTION, 

ETC..— 

80 

(i) IN GENERAL.—The amount of the credit determined under this section with respect to any building 

shall not exceed the clause (ii) percentage of the 

amount of the credit which would (but for this subparagraph) be determined under this section with respect to such building. 

(ii) DETERMINATION OF PERCENTAGE.—For purposes 

of clause (i), the clause (ii) percentage with respect to 

any building is the percentage which— 

(I) the housing credit dollar amount allocated to 

such building bears to 

(II) the credit amount determined in accordance 

with clause (iii). 

(iii) DETERMINATION OF CREDIT AMOUNT.—The credit 

amount determined in accordance with this clause is 

the amount of the credit which would (but for this subparagraph) be determined under this section with respect to the building if— 

(I) this section were applied without regard to 

paragraphs (2)(A) and (3)(B) of subsection (f), and 

(II) subsection (f)(3)(A) were applied without regard to ‘‘the percentage equal to 2/3 of’’. 

(D) HOUSING CREDIT AGENCY TO SPECIFY APPLICABLE

PERCENTAGE AND MAXIMUM QUALIFIED BASIS.—In allocating 

a housing credit dollar amount to any building, the housing credit agency shall specify the applicable percentage 

and the maximum qualified basis which may be taken into 

account under this section with respect to such building. 

The applicable percentage and maximum qualified basis so 

specified shall not exceed the applicable percentage and 

qualified basis determined under this section without regard to this subsection. 

(8) OTHER DEFINITIONS.—For purposes of this subsection— 

(A) HOUSING CREDIT AGENCY.—The term ‘‘housing credit 

agency’’ means any agency authorized to carry out this 

subsection. 

(B) POSSESSIONS TREATED AS STATES.—The term ‘‘State’’ 

includes a possession of the United States. 

(i) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— 

(1) COMPLIANCE PERIOD.—The term ‘‘compliance period’’ 

means, with respect to any building, the period of 15 taxable 

years beginning with the 1st taxable year of the credit period 

with respect thereto. 

(2) DETERMINATION OF WHETHER BUILDING IS FEDERALLY

SUBSIDIZED.— 

(A) IN GENERAL.—Except as otherwise provided in this 

paragraph, for purposes of subsection (b)(1), a new building shall be treated as federally subsidized for any taxable 

year if, at any time during such taxable year or any prior 

taxable year, there is or was outstanding any obligation 

the interest on which is exempt from tax under section 103 

the proceeds of which are or were used (directly or indirectly) with respect to such building or the operation thereof. 

81 

(B) ELECTION TO REDUCE ELIGIBLE BASIS BY PROCEEDS OF

OBLIGATIONS.—A tax-exempt obligation shall not be taken 

into account under subparagraph (A) if the taxpayer elects 

to exclude from the eligible basis of the building for purposes of subsection (d) the proceeds of such obligation. 

(C) SPECIAL RULE FOR SUBSIDIZED CONSTRUCTION FI- NANCING.—Subparagraph (A) shall not apply to any tax-exempt obligation used to provide construction financing for 

any building if— 

(i) such obligation (when issued) identified the building for which the proceeds of such obligation would be 

used, and 

(ii) such obligation is redeemed before such building 

is placed in service. 

(3) LOW-INCOME UNIT.— 

(A) IN GENERAL.—The term ‘‘low-income unit’’ means 

any unit in a building if— 

(i) such unit is rent-restricted (as defined in subsection (g)(2)), and 

(ii) the individuals occupying such unit meet the income limitation applicable under subsection (g)(1) to 

the project of which such building is a part. 

(B) EXCEPTIONS.— (i) IN GENERAL.—A unit shall not be treated as a 

low-income unit unless the unit is suitable for occupancy and used other than on a transient basis. 

(ii) SUITABILITY FOR OCCUPANCY.—For purposes of 

clause (i), the suitability of a unit for occupancy shall 

be determined under regulations prescribed by the 

Secretary taking into account local health, safety, and 

building codes. 

(iii) TRANSITIONAL HOUSING FOR HOMELESS.—For 

purposes of clause (i), a unit shall be considered to be 

used other than on a transient basis if the unit contains sleeping accommodations and kitchen and bathroom facilities and is located in a building— 

(I) which is used exclusively to facilitate the 

transition of homeless individuals (within the 

meaning of section 103 of the McKinney-Vento 

Homeless Assistance Act (42 U.S.C. 11302), as in 

effect on the date of the enactment of this clause) 

to independent living within 24 months, and 

(II) in which a governmental entity or qualified 

nonprofit organization (as defined in subsection 

(h)(5)) provides such individuals with temporary 

housing and supportive services designed to assist 

such individuals in locating and retaining permanent housing. 

(iv) SINGLE-ROOM OCCUPANCY UNITS.—For purposes 

of clause (i), a single-room occupancy unit shall not be 

treated as used on a transient basis merely because it 

is rented on a month-by-month basis. 

(C) SPECIAL RULE FOR BUILDINGS HAVING 4 OR FEWER

UNITS.—In the case of any building which has 4 or fewer 

residential rental units, no unit in such building shall be 

82 

treated as a low-income unit if the units in such building 

are owned by— 

(i) any individual who occupies a residential unit in 

such building, or 

(ii) any person who is related (as defined in subsection (d)(2)(D)(iii)) to such individual. 

(D) CERTAIN STUDENTS NOT TO DISQUALIFY UNIT.—A unit 

shall not fail to be treated as a low-income unit merely because it is occupied— 

(i) by an individual who is— 

(I) a student and receiving assistance under 

title IV of the Social Security Act, 

(II) a student who was previously under the 

care and placement responsibility of the State 

agency responsible for administering a plan under 

part B or part E of title IV of the Social Security 

Act, or 

(III) enrolled in a job training program receiving 

assistance under the Job Training Partnership Act 

or under other similar Federal, State, or local 

laws, or 

(ii) entirely by full-time students if such students 

are— 

(I) single parents and their children and such 

parents are not dependents (as defined in section 

152, determined without regard to subsections 

(b)(1), (b)(2), and (d)(1)(B) thereof) of another individual and such children are not dependents (as 

so defined) of another individual other than a parent of such children, or 

(II) married and file a joint return. 

(E) OWNER-OCCUPIED BUILDINGS HAVING 4 OR FEWER

UNITS ELIGIBLE FOR CREDIT WHERE DEVELOPMENT PLAN.— 

(i) IN GENERAL.—Subparagraph (C) shall not apply 

to the acquisition or rehabilitation of a building pursuant to a development plan of action sponsored by a 

State or local government or a qualified nonprofit organization (as defined in subsection (h)(5)(C)). 

(ii) LIMITATION ON CREDIT.—In the case of a building 

to which clause (i) applies, the applicable fraction shall 

not exceed 80 percent of the unit fraction. 

(iii) CERTAIN UNRENTED UNITS TREATED AS OWNEROCCUPIED.—In the case of a building to which clause 

(i) applies, any unit which is not rented for 90 days or 

more shall be treated as occupied by the owner of the 

building as of the 1st day it is not rented. 

(4) NEW BUILDING.—The term ‘‘new building’’ means a building the original use of which begins with the taxpayer. 

(5) EXISTING BUILDING.—The term ‘‘existing building’’ means 

any building which is not a new building. 

(6) APPLICATION TO ESTATES AND TRUSTS.—In the case of an 

estate or trust, the amount of the credit determined under subsection (a) and any increase in tax under subsection (j) shall 

be apportioned between the estate or trust and the beneVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00088 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
83 

ficiaries on the basis of the income of the estate or trust allocable to each. 

(7) IMPACT OF TENANT’S RIGHT OF 1ST REFUSAL TO ACQUIRE

PROPERTY.— 

(A) IN GENERAL.—No Federal income tax benefit shall 

fail to be allowable to the taxpayer with respect to any 

qualified low-income building merely by reason of a right 

of 1st refusal held by the tenants (in cooperative form or 

otherwise) or resident management corporation of such 

building or by a qualified nonprofit organization (as defined in subsection (h)(5)(C)) or government agency to purchase the property after the close of the compliance period 

for a price which is not less than the minimum purchase 

price determined under subparagraph (B). 

(B) MINIMUM PURCHASE PRICE.—For purposes of subparagraph (A), the minimum purchase price under this 

subparagraph is an amount equal to the sum of— 

(i) the principal amount of outstanding indebtedness 

secured by the building (other than indebtedness incurred within the 5-year period ending on the date of 

the sale to the tenants), and 

(ii) all Federal, State, and local taxes attributable to 

such sale. 

Except in the case of Federal income taxes, there shall not 

be taken into account under clause (ii) any additional tax 

attributable to the application of clause (ii). 

(8) TREATMENT OF RURAL PROJECTS.—For purposes of this 

section, in the case of any project for residential rental property located in a rural area (as defined in section 520 of the 

Housing Act of 1949), any income limitation measured by reference to area median gross income shall be measured by reference to the greater of area median gross income or national 

non-metropolitan median income. The preceding sentence shall 

not apply with respect to any building if paragraph (1) of section 42(h) does not apply by reason of paragraph (4) thereof to 

any portion of the credit determined under this section with respect to such building. 

(9) COORDINATION WITH LOW-INCOME HOUSING GRANTS.— 

(A) REDUCTION IN STATE HOUSING CREDIT CEILING FOR

LOW-INCOME HOUSING GRANTS RECEIVED IN 2009.—For purposes of this section, the amounts described in clauses (i) 

through (iv) of subsection (h)(3)(C) with respect to any 

State for 2009 shall each be reduced by so much of such 

amount as is taken into account in determining the 

amount of any grant to such State under section 1602 of 

the American Recovery and Reinvestment Tax Act of 2009. 

(B) SPECIAL RULE FOR BASIS.—Basis of a qualified lowincome building shall not be reduced by the amount of any 

grant described in subparagraph (A). 

(j) RECAPTURE OF CREDIT.— 

(1) IN GENERAL.—If— 

(A) as of the close of any taxable year in the compliance 

period, the amount of the qualified basis of any building 

with respect to the taxpayer is less than 

84 

(B) the amount of such basis as of the close of the preceding taxable year, 

then the taxpayer’s tax under this chapter for the taxable year 

shall be increased by the credit recapture amount. 

(2) CREDIT RECAPTURE AMOUNT.—For purposes of paragraph 

(1), the credit recapture amount is an amount equal to the sum 

of— 

(A) the aggregate decrease in the credits allowed to the 

taxpayer under section 38 for all prior taxable years which 

would have resulted if the accelerated portion of the credit 

allowable by reason of this section were not allowed for all 

prior taxable years with respect to the excess of the 

amount described in paragraph (1)(B) over the amount described in paragraph (1)(A), plus 

(B) interest at the overpayment rate established under 

section 6621 on the amount determined under subparagraph (A) for each prior taxable year for the period beginning on the due date for filing the return for the prior taxable year involved. 

No deduction shall be allowed under this chapter for interest 

described in subparagraph (B). 

(3) ACCELERATED PORTION OF CREDIT.—For purposes of paragraph (2), the accelerated portion of the credit for the prior taxable years with respect to any amount of basis is the excess 

of— 

(A) the aggregate credit allowed by reason of this section 

(without regard to this subsection) for such years with respect to such basis, over 

(B) the aggregate credit which would be allowable by 

reason of this section for such years with respect to such 

basis if the aggregate credit which would (but for this subsection) have been allowable for the entire compliance period were allowable ratably over 15 years. 

(4) SPECIAL RULES.— 

(A) TAX BENEFIT RULE.—The tax for the taxable year 

shall be increased under paragraph (1) only with respect 

to credits allowed by reason of this section which were 

used to reduce tax liability. In the case of credits not so 

used to reduce tax liability, the carryforwards and 

carrybacks under section 39 shall be appropriately adjusted. 

(B) ONLY BASIS FOR WHICH CREDIT ALLOWED TAKEN INTO

ACCOUNT.—Qualified basis shall be taken into account 

under paragraph (1)(B) only to the extent such basis was 

taken into account in determining the credit under subsection (a) for the preceding taxable year referred to in 

such paragraph. 

(C) NO RECAPTURE OF ADDITIONAL CREDIT ALLOWABLE BY

REASON OF SUBSECTION (F)(3).—Paragraph (1) shall apply to 

a decrease in qualified basis only to the extent such decrease exceeds the amount of qualified basis with respect 

to which a credit was allowable for the taxable year referred to in paragraph (1)(B) by reason of subsection (f)(3). 

(D) NO CREDITS AGAINST TAX.—Any increase in tax 

under this subsection shall not be treated as a tax imposed 

85 

by this chapter for purposes of determining the amount of 

any credit under this chapter. 

(E) NO RECAPTURE BY REASON OF CASUALTY LOSS.—The 

increase in tax under this subsection shall not apply to a 

reduction in qualified basis by reason of a casualty loss to 

the extent such loss is restored by reconstruction or replacement within a reasonable period established by the 

Secretary. 

(F) NO RECAPTURE WHERE DE MINIMIS CHANGES IN FLOOR

SPACE.—The Secretary may provide that the increase in 

tax under this subsection shall not apply with respect to 

any building if— 

(i) such increase results from a de minimis change 

in the floor space fraction under subsection (c)(1), and 

(ii) the building is a qualified low-income building 

after such change. 

(5) CERTAIN PARTNERSHIPS TREATED AS THE TAXPAYER.— 

(A) IN GENERAL.—For purposes of applying this subsection to a partnership to which this paragraph applies— 

(i) such partnership shall be treated as the taxpayer 

to which the credit allowable under subsection (a) was 

allowed, 

(ii) the amount of such credit allowed shall be treated as the amount which would have been allowed to 

the partnership were such credit allowable to such 

partnership, 

(iii) paragraph (4)(A) shall not apply, and 

(iv) the amount of the increase in tax under this 

subsection for any taxable year shall be allocated 

among the partners of such partnership in the same 

manner as such partnership’s taxable income for such 

year is allocated among such partners. 

(B) PARTNERSHIPS TO WHICH PARAGRAPH APPLIES.—This 

paragraph shall apply to any partnership which has 35 or 

more partners unless the partnership elects not to have 

this paragraph apply. 

(C) SPECIAL RULES.— 

ø(i) HUSBAND AND WIFE TREATED AS 1 PARTNER.—For 

purposes of subparagraph (B)(i), a husband and wife 

(and their estates) shall be treated as 1 partner.¿ 

(i) MARRIED COUPLE TREATED AS 1 PARTNER.—For 

purposes of subparagraph (B), individuals married to 

one another (and their estates) shall be treated as 1 

partner. 

(ii) ELECTION IRREVOCABLE.—Any election under 

subparagraph (B), once made, shall be irrevocable. 

(6) NO RECAPTURE ON DISPOSITION OF BUILDING WHICH CONTINUES IN QUALIFIED USE.— 

(A) IN GENERAL.—The increase in tax under this subsection shall not apply solely by reason of the disposition 

of a building (or an interest therein) if it is reasonably expected that such building will continue to be operated as 

a qualified low-income building for the remaining compliance period with respect to such building. 

86 

(B) STATUTE OF LIMITATIONS.—If a building (or an interest therein) is disposed of during any taxable year and 

there is any reduction in the qualified basis of such building which results in an increase in tax under this subsection for such taxable or any subsequent taxable year, 

then— 

(i) the statutory period for the assessment of any deficiency with respect to such increase in tax shall not 

expire before the expiration of 3 years from the date 

the Secretary is notified by the taxpayer (in such manner as the Secretary may prescribe) of such reduction 

in qualified basis, and 

(ii) such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment. 

(k) APPLICATION OF AT-RISK RULES.—For purposes of this section— 

(1) IN GENERAL.—Except as otherwise provided in this subsection, rules similar to the rules of section 49(a)(1) (other than 

subparagraphs (D)(ii)(II) and (D)(iv)(I) thereof), section 

49(a)(2), and section 49(b)(1) shall apply in determining the 

qualified basis of any building in the same manner as such sections apply in determining the credit base of property. 

(2) SPECIAL RULES FOR DETERMINING QUALIFIED PERSON.— For purposes of paragraph (1)— 

(A) IN GENERAL.—If the requirements of subparagraphs 

(B), (C), and (D) are met with respect to any financing borrowed from a qualified nonprofit organization (as defined 

in subsection (h)(5)), the determination of whether such financing is qualified commercial financing with respect to 

any qualified low-income building shall be made without 

regard to whether such organization— 

(i) is actively and regularly engaged in the business 

of lending money, or 

(ii) is a person described in section 

49(a)(1)(D)(iv)(II). 

(B) FINANCING SECURED BY PROPERTY.—The requirements of this subparagraph are met with respect to any financing if such financing is secured by the qualified lowincome building, except that this subparagraph shall not 

apply in the case of a federally assisted building described 

in subsection (d)(6)(C) if— 

(i) a security interest in such building is not permitted by a Federal agency holding or insuring the 

mortgage secured by such building, and 

(ii) the proceeds from the financing (if any) are applied to acquire or improve such building. 

(C) PORTION OF BUILDING ATTRIBUTABLE TO FINANCING.— The requirements of this subparagraph are met with respect to any financing for any taxable year in the compliance period if, as of the close of such taxable year, not 

more than 60 percent of the eligible basis of the qualified 

low-income building is attributable to such financing (reduced by the principal and interest of any governmental fiVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00092 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
87 

nancing which is part of a wrap-around mortgage involving such financing). 

(D) REPAYMENT OF PRINCIPAL AND INTEREST.—The requirements of this subparagraph are met with respect to 

any financing if such financing is fully repaid on or before 

the earliest of— 

(i) the date on which such financing matures, 

(ii) the 90th day after the close of the compliance period with respect to the qualified low-income building, 

or 

(iii) the date of its refinancing or the sale of the 

building to which such financing relates. 

In the case of a qualified nonprofit organization which is 

not described in section 49(a)(1)(D)(iv)(II) with respect to a 

building, clause (ii) of this subparagraph shall be applied 

as if the date described therein were the 90th day after the 

earlier of the date the building ceases to be a qualified 

low-income building or the date which is 15 years after the 

close of a compliance period with respect thereto. 

(3) PRESENT VALUE OF FINANCING.—If the rate of interest on 

any financing described in paragraph (2)(A) is less than the 

rate which is 1 percentage point below the applicable Federal 

rate as of the time such financing is incurred, then the qualified basis (to which such financing relates) of the qualified lowincome building shall be the present value of the amount of 

such financing, using as the discount rate such applicable Federal rate. For purposes of the preceding sentence, the rate of 

interest on any financing shall be determined by treating interest to the extent of government subsidies as not payable. 

(4) FAILURE TO FULLY REPAY.— 

(A) IN GENERAL.—To the extent that the requirements of 

paragraph (2)(D) are not met, then the taxpayer’s tax 

under this chapter for the taxable year in which such failure occurs shall be increased by an amount equal to the 

applicable portion of the credit under this section with respect to such building, increased by an amount of interest 

for the period— 

(i) beginning with the due date for the filing of the 

return of tax imposed by chapter 1 for the 1st taxable 

year for which such credit was allowable, and 

(ii) ending with the due date for the taxable year in 

which such failure occurs, 

determined by using the underpayment rate and method 

under section 6621. 

(B) APPLICABLE PORTION.—For purposes of subparagraph 

(A), the term ‘‘applicable portion’’ means the aggregate decrease in the credits allowed to a taxpayer under section 

38 for all prior taxable years which would have resulted if 

the eligible basis of the building were reduced by the 

amount of financing which does not meet requirements of 

paragraph (2)(D). 

(C) CERTAIN RULES TO APPLY.—Rules similar to the rules 

of subparagraphs (A) and (D) of subsection (j)(4) shall 

apply for purposes of this subsection. 

(l) CERTIFICATIONS AND OTHER REPORTS TO SECRETARY.— 

88 

(1) CERTIFICATION WITH RESPECT TO 1ST YEAR OF CREDIT PE- RIOD.—Following the close of the 1st taxable year in the credit 

period with respect to any qualified low-income building, the 

taxpayer shall certify to the Secretary (at such time and in 

such form and in such manner as the Secretary prescribes)— 

(A) the taxable year, and calendar year, in which such 

building was placed in service, 

(B) the adjusted basis and eligible basis of such building 

as of the close of the 1st year of the credit period, 

(C) the maximum applicable percentage and qualified 

basis permitted to be taken into account by the appropriate housing credit agency under subsection (h), 

(D) the election made under subsection (g) with respect 

to the qualified low-income housing project of which such 

building is a part, and 

(E) such other information as the Secretary may require. 

In the case of a failure to make the certification required by 

the preceding sentence on the date prescribed therefor, unless 

it is shown that such failure is due to reasonable cause and not 

to willful neglect, no credit shall be allowable by reason of subsection (a) with respect to such building for any taxable year 

ending before such certification is made. 

(2) ANNUAL REPORTS TO THE SECRETARY.—The Secretary 

may require taxpayers to submit an information return (at 

such time and in such form and manner as the Secretary prescribes) for each taxable year setting forth— 

(A) the qualified basis for the taxable year of each qualified low-income building of the taxpayer, 

(B) the information described in paragraph (1)(C) for the 

taxable year, and 

(C) such other information as the Secretary may require. 

The penalty under section 6652(j) shall apply to any failure to 

submit the return required by the Secretary under the preceding sentence on the date prescribed therefor. 

(3) ANNUAL REPORTS FROM HOUSING CREDIT AGENCIES.—Each 

agency which allocates any housing credit amount to any 

building for any calendar year shall submit to the Secretary (at 

such time and in such manner as the Secretary shall prescribe) 

an annual report specifying— 

(A) the amount of housing credit amount allocated to 

each building for such year, 

(B) sufficient information to identify each such building 

and the taxpayer with respect thereto, and 

(C) such other information as the Secretary may require. 

The penalty under section 6652(j) shall apply to any failure to 

submit the report required by the preceding sentence on the 

date prescribed therefor. 

(m) RESPONSIBILITIES OF HOUSING CREDIT AGENCIES.— 

(1) PLANS FOR ALLOCATION OF CREDIT AMONG PROJECTS.— (A) IN GENERAL.—Notwithstanding any other provision 

of this section, the housing credit dollar amount with respect to any building shall be zero unless— 

(i) such amount was allocated pursuant to a qualified allocation plan of the housing credit agency which 

is approved by the governmental unit (in accordance 

89 

with rules similar to the rules of section 147(f)(2) 

(other than subparagraph (B)(ii) thereof)) of which 

such agency is a part, 

(ii) such agency notifies the chief executive officer 

(or the equivalent) of the local jurisdiction within 

which the building is located of such project and provides such individual a reasonable opportunity to comment on the project, 

(iii) a comprehensive market study of the housing 

needs of low-income individuals in the area to be 

served by the project is conducted before the credit allocation is made and at the developer’s expense by a 

disinterested party who is approved by such agency, 

and 

(iv) a written explanation is available to the general 

public for any allocation of a housing credit dollar 

amount which is not made in accordance with established priorities and selection criteria of the housing 

credit agency. 

(B) QUALIFIED ALLOCATION PLAN.—For purposes of this 

paragraph, the term ‘‘qualified allocation plan’’ means any 

plan— 

(i) which sets forth selection criteria to be used to 

determine housing priorities of the housing credit 

agency which are appropriate to local conditions, 

(ii) which also gives preference in allocating housing 

credit dollar amounts among selected projects to— 

(I) projects serving the lowest income tenants, 

(II) projects obligated to serve qualified tenants 

for the longest periods, and 

(III) projects which are located in qualified census tracts (as defined in subsection (d)(5)(B)(ii)) 

and the development of which contributes to a 

concerted community revitalization plan, and 

(iii) which provides a procedure that the agency (or 

an agent or other private contractor of such agency) 

will follow in monitoring for noncompliance with the 

provisions of this section and in notifying the Internal 

Revenue Service of such noncompliance which such 

agency becomes aware of and in monitoring for noncompliance with habitability standards through regular site visits. 

(C) CERTAIN SELECTION CRITERIA MUST BE USED.—The 

selection criteria set forth in a qualified allocation plan 

must include 

(i) project location, 

(ii) housing needs characteristics, 

(iii) project characteristics, including whether the 

project includes the use of existing housing as part of 

a community revitalization plan, 

(iv) sponsor characteristics, 

(v) tenant populations with special housing needs, 

(vi) public housing waiting lists, 

(vii) tenant populations of individuals with children, 

90 

(viii) projects intended for eventual tenant ownership, 

(ix) the energy efficiency of the project, and 

(x) the historic nature of the project. 

(D) APPLICATION TO BOND FINANCED PROJECTS.—Subsection (h)(4) shall not apply to any project unless the 

project satisfies the requirements for allocation of a housing credit dollar amount under the qualified allocation 

plan applicable to the area in which the project is located. 

(2) CREDIT ALLOCATED TO BUILDING NOT TO EXCEED AMOUNT

NECESSARY TO ASSURE PROJECT FEASIBILITY.— 

(A) IN GENERAL.—The housing credit dollar amount allocated to a project shall not exceed the amount the housing 

credit agency determines is necessary for the financial feasibility of the project and its viability as a qualified lowincome housing project throughout the credit period. 

(B) AGENCY EVALUATION.—In making the determination 

under subparagraph (A), the housing credit agency shall 

consider— 

(i) the sources and uses of funds and the total financing planned for the project, 

(ii) any proceeds or receipts expected to be generated 

by reason of tax benefits, 

(iii) the percentage of the housing credit dollar 

amount used for project costs other than the cost of 

intermediaries, and 

(iv) the reasonableness of the developmental and 

operational costs of the project. 

Clause (iii) shall not be applied so as to impede the development of projects in hard-to-develop areas. Such a determination shall not be construed to be a representation or 

warranty as to the feasibility or viability of the project. 

(C) DETERMINATION MADE WHEN CREDIT AMOUNT APPLIED

FOR AND WHEN BUILDING PLACED IN SERVICE.— 

(i) IN GENERAL.—A determination under subparagraph (A) shall be made as of each of the following 

times: 

(I) The application for the housing credit dollar 

amount. 

(II) The allocation of the housing credit dollar 

amount. 

(III) The date the building is placed in service. 

(ii) CERTIFICATION AS TO AMOUNT OF OTHER SUBSIDIES.—Prior to each determination under clause (i), 

the taxpayer shall certify to the housing credit agency 

the full extent of all Federal, State, and local subsidies 

which apply (or which the taxpayer expects to apply) 

with respect to the building. 

(D) APPLICATION TO BOND FINANCED PROJECTS.—Subsection (h)(4) shall not apply to any project unless the governmental unit which issued the bonds (or on behalf of 

which the bonds were issued) makes a determination 

under rules similar to the rules of subparagraphs (A) and 

(B). 

91 

(n) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes 

of this section, including regulations— 

(1) dealing with— 

(A) projects which include more than 1 building or only 

a portion of a building, 

(B) buildings which are placed in service in portions, 

(2) providing for the application of this section to short taxable years, 

(3) preventing the avoidance of the rules of this section, and 

(4) providing the opportunity for housing credit agencies to 

correct administrative errors and omissions with respect to allocations and record keeping within a reasonable period after 

their discovery, taking into account the availability of regulations and other administrative guidance from the Secretary. 

Subchapter B—COMPUTATION OF TAXABLE 

INCOME 

* * * * * * * 

PART I—DEFINITION OF GROSS INCOME, ADJUSTED 

GROSS INCOME, TAXABLE INCOME, ETC. 

* * * * * * * 

SEC. 62. ADJUSTED GROSS INCOME DEFINED. 

(a) GENERAL RULE.—For purposes of this subtitle, the term ‘‘adjusted gross income’’ means, in the case of an individual, gross income minus the following deductions: 

(1) TRADE AND BUSINESS DEDUCTIONS.—The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried 

on by the taxpayer, if such trade or business does not consist 

of the performance of services by the taxpayer as an employee. 

(2) CERTAIN TRADE AND BUSINESS DEDUCTIONS OF EMPLOY- EES.— (A) REIMBURSED EXPENSES OF EMPLOYEES.—The deductions allowed by part VI (section 161 and following) which 

consist of expenses paid or incurred by the taxpayer, in 

connection with the performance by him of services as an 

employee, under a reimbursement or other expense allowance arrangement with his employer. The fact that the reimbursement may be provided by a third party shall not 

be determinative of whether or not the preceding sentence 

applies. 

(B) CERTAIN EXPENSES OF PERFORMING ARTISTS.—The deductions allowed by section 162 which consist of expenses 

paid or incurred by a qualified performing artist in connection with the performances by him of services in the performing arts as an employee. 

(C) CERTAIN EXPENSES OF OFFICIALS.—The deductions allowed by section 162 which consist of expenses paid or incurred with respect to services performed by an official as 

an employee of a State or a political subdivision thereof in 

a position compensated in whole or in part on a fee basis. 

92 

(D) CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY

SCHOOL TEACHERS.—The deductions allowed by section 162 which consist of expenses, not in excess of $250, paid or incurred by an eligible educator— 

(i) by reason of the participation of the educator in 

professional development courses related to the curriculum in which the educator provides instruction or 

to the students for which the educator provides instruction, and 

(ii) in connection with books, supplies (other than 

nonathletic supplies for courses of instruction in 

health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom. 

(E) CERTAIN EXPENSES OF MEMBERS OF RESERVE COMPONENTS OF THE ARMED FORCES OF THE UNITED STATES.— 

The deductions allowed by section 162 which consist of expenses, determined at a rate not in excess of the rates for 

travel expenses (including per diem in lieu of subsistence) 

authorized for employees of agencies under subchapter I of 

chapter 57 of title 5, United States Code, paid or incurred 

by the taxpayer in connection with the performance of 

services by such taxpayer as a member of a reserve component of the Armed Forces of the United States for any period during which such individual is more than 100 miles 

away from home in connection with such services. 

(3) LOSSES FROM SALE OR EXCHANGE OF PROPERTY.—The deductions allowed by part VI (sec. 161 and following) as losses 

from the sale or exchange of property. 

(4) DEDUCTIONS ATTRIBUTABLE TO RENTS AND ROYALTIES.— The deductions allowed by part VI (sec. 161 and following), by 

section 212 (relating to expenses for production of income), and 

by section 611 (relating to depletion) which are attributable to 

property held for the production of rents or royalties. 

(5) CERTAIN DEDUCTIONS OF LIFE TENANTS AND INCOME BENE- FICIARIES OF PROPERTY.—In the case of a life tenant of property, or an income beneficiary of property held in trust, or an 

heir, legatee, or devisee of an estate, the deduction for depreciation allowed by section 167 and the deduction allowed by 

section 611. 

(6) PENSION, PROFIT-SHARING, AND ANNUITY PLANS OF SELFEMPLOYED INDIVIDUALS.—In the case of an individual who is an 

employee within the meaning of section 401(c)(1), the deduction allowed by section 404. 

(7) RETIREMENT SAVINGS.—The deduction allowed by section 

219 (relating to deduction of certain retirement savings). 

(9) PENALTIES FORFEITED BECAUSE OF PREMATURE WITHDRAWAL OF FUNDS FROM TIME SAVINGS ACCOUNTS OR DEPOS- ITS.—The deductions allowed by section 165 for losses incurred 

in any transaction entered into for profit, though not connected 

with a trade or business, to the extent that such losses include 

amounts forfeited to a bank, mutual savings bank, savings and 

loan association, building and loan association, cooperative 

bank or homestead association as a penalty for premature 

93 

withdrawal of funds from a time savings account, certificate of 

deposit, or similar class of deposit. 

(11) REFORESTATION EXPENSES.—The deduction allowed by 

section 194. 

(12) CERTAIN REQUIRED REPAYMENTS OF SUPPLEMENTAL UNEMPLOYMENT COMPENSATION BENEFITS.—The deduction allowed 

by section 165 for the repayment to a trust described in paragraph (9) or (17) of section 501(c) of supplemental unemployment compensation benefits received from such trust if such 

repayment is required because of the receipt of trade readjustment allowances under section 231 or 232 of the Trade Act of 

1974 (19 U.S.C. 2291 and 2292). 

(13) JURY DUTY PAY REMITTED TO EMPLOYER.—Any deduction 

allowable under this chapter by reason of an individual remitting any portion of any jury pay to such individual’s employer 

in exchange for payment by the employer of compensation for 

the period such individual was performing jury duty. For purposes of the preceding sentence, the term ‘‘jury pay’’ means any 

payment received by the individual for the discharge of jury 

duty. 

(15) MOVING EXPENSES.—The deduction allowed by section 

217. 

(16) ARCHER MSAS.—The deduction allowed by section 220. 

(17) INTEREST ON EDUCATION LOANS.—The deduction allowed 

by section 221. 

(18) HIGHER EDUCATION EXPENSES.—The deduction allowed 

by section 222. 

(19) HEALTH SAVINGS ACCOUNTS.—The deduction allowed by 

section 223. 

(20) COSTS INVOLVING DISCRIMINATION SUITS, ETC..—Any deduction allowable under this chapter for attorney fees and 

court costs paid by, or on behalf of, the taxpayer in connection 

with any action involving a claim of unlawful discrimination 

(as defined in subsection (e)) or a claim of a violation of subchapter III of chapter 37 of title 31, United States Code, or a 

claim made under section 1862(b)(3)(A) of the Social Security 

Act (42 U.S.C. 1395y(b)(3)(A)). The preceding sentence shall 

not apply to any deduction in excess of the amount includible 

in the taxpayer’s gross income for the taxable year on account 

of a judgment or settlement (whether by suit or agreement and 

whether as lump sum or periodic payments) resulting from 

such claim. 

(21) ATTORNEYS’ FEES RELATING TO AWARDS TO WHISTLEBLOWERS.— 

(A) IN GENERAL.—Any deduction allowable under this 

chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any award under— 

(i) section 7623(b), or 

(ii) in the case of taxable years beginning after December 31, 2017, any action brought under— 

(I) section 21F of the Securities Exchange Act of 

1934 (15 U.S.C. 78u–6), 

(II) a State false claims act, including a State 

false claims act with qui tam provisions, or 

94 

(III) section 23 of the Commodity Exchange Act 

(7 U.S.C. 26). 

(B) MAY NOT EXCEED AWARD.—Subparagraph (A) shall 

not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on 

account of such award. 

Nothing in this section shall permit the same item to be deducted 

more than once. Any deduction allowed by section 199A shall not 

be treated as a deduction described in any of the preceding paragraphs of this subsection. 

(b) QUALIFIED PERFORMING ARTIST.— 

(1) IN GENERAL.—For purposes of subsection (a)(2)(B), the 

term ‘‘qualified performing artist’’ means, with respect to any 

taxable year, any individual if— 

(A) such individual performed services in the performing 

arts as an employee during the taxable year for at least 2 

employers, 

(B) the aggregate amount allowable as a deduction 

under section 162 in connection with the performance of 

such services exceeds 10 percent of such individual’s gross 

income attributable to the performance of such services, 

and 

(C) the adjusted gross income of such individual for the 

taxable year (determined without regard to subsection 

(a)(2)(B)) does not exceed $16,000. 

(2) NOMINAL EMPLOYER NOT TAKEN INTO ACCOUNT.—An individual shall not be treated as performing services in the performing arts as an employee for any employer during any taxable year unless the amount received by such individual from 

such employer for the performance of such services during the 

taxable year equals or exceeds $200. 

(3) SPECIAL RULES FOR MARRIED COUPLES.— 

(A) IN GENERAL.—Except in the case of a øhusband and 

wife who lived apart¿ married couple who lived apart at 

all times during the taxable year, if the taxpayer is married at the close of the taxable year, subsection (a)(2)(B) 

shall apply only if øthe taxpayer and his spouse¿ the taxpayer and the spouse of the taxpayer file a joint return for 

the taxable year. 

(B) APPLICATION OF PARAGRAPH (1).—In the case of a 

joint return— 

(i) paragraph (1) (other than subparagraph (C) 

thereof) shall be applied separately with respect to 

each spouse, but 

(ii) paragraph (1)(C) shall be applied with respect to 

their combined adjusted gross income. 

(C) DETERMINATION OF MARITAL STATUS.—For purposes 

of this subsection, marital status shall be determined 

under section 7703(a). 

(D) JOINT RETURN.—For purposes of this subsection, the 

term ‘‘joint return’’ means the joint return of a øhusband 

and wife¿ married couple made under section 6013. 

(c) CERTAIN ARRANGEMENTS NOT TREATED AS REIMBURSEMENT ARRANGEMENTS.—For purposes of subsection (a)(2)(A), an arrangeVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00100 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
95 

ment shall in no event be treated as a reimbursement or other expense allowance arrangement if— 

(1) such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement, or 

(2) such arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement. 

The substantiation requirements of the preceding sentence shall 

not apply to any expense to the extent that substantiation is not 

required under section 274(d) for such expense by reason of the 

regulations prescribed under the 2nd sentence thereof. 

(d) DEFINITION; SPECIAL RULES.— 

(1) ELIGIBLE EDUCATOR.— 

(A) IN GENERAL.—For purposes of subsection (a)(2)(D), 

the term ‘‘eligible educator’’ means, with respect to any 

taxable year, an individual who is a kindergarten through 

grade 12 teacher, instructor, counselor, principal, or aide 

in a school for at least 900 hours during a school year. 

(B) SCHOOL.—The term ‘‘school’’ means any school which 

provides elementary education or secondary education 

(kindergarten through grade 12), as determined under 

State law. 

(2) COORDINATION WITH EXCLUSIONS.—A deduction shall be 

allowed under subsection (a)(2)(D) for expenses only to the extent the amount of such expenses exceeds the amount excludable under section 135, 529(c)(1), or 530(d)(2) for the taxable 

year. 

(3) INFLATION ADJUSTMENT.—In the case of any taxable year 

beginning after 2015, the $250 amount in subsection (a)(2)(D) 

shall be increased by an amount equal to— 

(A) such dollar amount, multiplied by 

(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year 

begins, determined by substituting ‘‘calendar year 2014’’ 

for ‘‘calendar year 2016’’ in subparagraph (A)(ii) thereof. 

Any increase determined under the preceding sentence shall be 

rounded to the nearest multiple of $50. 

(e) UNLAWFUL DISCRIMINATION DEFINED.—For purposes of subsection (a)(20), the term ‘‘unlawful discrimination’’ means an act 

that is unlawful under any of the following: 

(1) Section 302 of the Civil Rights Act of 1991 (42 U.S.C. 

2000e–16b). 

(2) Section 201, 202, 203, 204, 205, 206, or 207 of the Congressional Accountability Act of 1995 (2 U.S.C. 1311, 1312, 

1313, 1314, 1315, 1316, or 1317). 

(3) The National Labor Relations Act (29 U.S.C. 151 et seq.). 

(4) The Fair Labor Standards Act of 1938 (29 U.S.C. 201 et 

seq.). 

(5) Section 4 or 15 of the Age Discrimination in Employment 

Act of 1967 (29 U.S.C. 623 or 633a). 

(6) Section 501 or 504 of the Rehabilitation Act of 1973 (29 

U.S.C. 791 or 794). 

(7) Section 510 of the Employee Retirement Income Security 

Act of 1974 (29 U.S.C. 1140). 

96 

(8) Title IX of the Education Amendments of 1972 (20 U.S.C. 

1681 et seq.). 

(9) The Employee Polygraph Protection Act of 1988 (29 

U.S.C. 2001 et seq.). 

(10) The Worker Adjustment and Retraining Notification Act 

(29 U.S.C. 2102 et seq.). 

(11) Section 105 of the Family and Medical Leave Act of 

1993 (29 U.S.C. 2615). 

(12) Chapter 43 of title 38, United States Code (relating to 

employment and reemployment rights of members of the uniformed services). 

(13) Section 1977, 1979, or 1980 of the Revised Statutes (42 

U.S.C. 1981, 1983, or 1985). 

(14) Section 703, 704, or 717 of the Civil Rights Act of 1964 

(42 U.S.C. 2000e–2, 2000e–3, or 2000e–16). 

(15) Section 804, 805, 806, 808, or 818 of the Fair Housing 

Act (42 U.S.C. 3604, 3605, 3606, 3608, or 3617). 

(16) Section 102, 202, 302, or 503 of the Americans with Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182, or 12203). 

(17) Any provision of Federal law (popularly known as whistleblower protection provisions) prohibiting the discharge of an 

employee, the discrimination against an employee, or any other 

form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted under Federal law. 

(18) Any provision of Federal, State, or local law, or common 

law claims permitted under Federal, State, or local law— 

(i) providing for the enforcement of civil rights, or 

(ii) regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, 

or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or 

taking other actions permitted by law. 

SEC. 63. TAXABLE INCOME DEFINED. 

(a) IN GENERAL.—Except as provided in subsection (b), for purposes of this subtitle, the term ‘‘taxable income’’ means gross income minus the deductions allowed by this chapter (other than the 

standard deduction). 

(b) INDIVIDUALS WHO DO NOT ITEMIZE THEIR DEDUCTIONS.—In the 

case of an individual who does not elect to itemize his deductions 

for the taxable year, for purposes of this subtitle, the term ‘‘taxable 

income’’ means adjusted gross income, minus— 

(1) the standard deduction, 

(2) the deduction for personal exemptions provided in section 

151, and 

(3) any deduction provided in section 199A. 

(c) STANDARD DEDUCTION.—For purposes of this subtitle— 

(1) IN GENERAL.—Except as otherwise provided in this subsection, the term ‘‘standard deduction’’ means the sum of— 

(A) the basic standard deduction, and 

(B) the additional standard deduction. 

(2) BASIC STANDARD DEDUCTION.—For purposes of paragraph 

(1), the basic standard deduction is— 

97 

(A) 200 percent of the dollar amount in effect under subparagraph (C) for the taxable year in the case of— 

(i) a joint return, or 

(ii) a surviving spouse (as defined in section 2(a)), (B) $4,400 in the case of a head of household (as defined 

in section 2(b)), or 

(C) $3,000 in any other case. 

(3) ADDITIONAL STANDARD DEDUCTION FOR AGED AND

BLIND.—For purposes of paragraph (1), the additional standard 

deduction is the sum of each additional amount to which the 

taxpayer is entitled under subsection (f). 

(4) ADJUSTMENTS FOR INFLATION.—In the case of any taxable 

year beginning in a calendar year after 1988, each dollar 

amount contained in paragraph (2)(B), (2)(C), or (5) or subsection (f) shall be increased by an amount equal to— 

(A) such dollar amount, multiplied by 

(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year 

begins, by substituting for ‘‘calendar year 2016’’ in subparagraph (A)(ii) thereof— 

(i) ‘‘calendar year 1987’’ in the case of the dollar 

amounts contained in paragraph (2)(B), (2)(C), or 

(5)(A) or subsection (f), and 

(ii) ‘‘calendar year 1997’’ in the case of the dollar 

amount contained in paragraph (5)(B). 

(5) LIMITATION ON BASIC STANDARD DEDUCTION IN THE CASE

OF CERTAIN DEPENDENTS.—In the case of an individual with respect to whom a deduction under section 151 is allowable to 

another taxpayer for a taxable year beginning in the calendar 

year in which the individual’s taxable year begins, the basic 

standard deduction applicable to such individual for such individual’s taxable year shall not exceed the greater of— (A) $500, or 

(B) the sum of $250 and such individual’s earned income. 

(6) CERTAIN INDIVIDUALS, ETC., NOT ELIGIBLE FOR STANDARD

DEDUCTION.—In the case of— 

(A) a married individual filing a separate return where 

either spouse itemizes deductions, 

(B) a nonresident alien individual, 

(C) an individual making a return under section 

443(a)(1) for a period of less than 12 months on account of 

a change in his annual accounting period, or 

(D) an estate or trust, common trust fund, or partnership, 

the standard deduction shall be zero. 

(7) SPECIAL RULES FOR TAXABLE YEARS 2018 THROUGH 2025.— 

In the case of a taxable year beginning after December 31, 

2017, and before January 1, 2026— 

(A) INCREASE IN STANDARD DEDUCTION.—Paragraph (2) 

shall be applied— (i) by substituting ‘‘$18,000’’ for ‘‘$4,400’’ in subparagraph (B), and 

(ii) by substituting ‘‘$12,000’’ for ‘‘$3,000’’ in subparagraph (C). 

98 

(B) ADJUSTMENT FOR INFLATION.— 

(i) IN GENERAL.—Paragraph (4) shall not apply to 

the dollar amounts contained in paragraphs (2)(B) and 

(2)(C). 

(ii) ADJUSTMENT OF INCREASED AMOUNTS.—In the 

case of a taxable year beginning after 2018, the 

$18,000 and $12,000 amounts in subparagraph (A) 

shall each be increased by an amount equal to— 

(I) such dollar amount, multiplied by 

(II) the cost-of-living adjustment determined 

under section 1(f)(3) for the calendar year in 

which the taxable year begins, determined by substituting ‘‘2017’’ for ‘‘2016’’ in subparagraph (A)(ii) 

thereof. 

If any increase under this clause is not a multiple of $50, 

such increase shall be rounded to the next lowest multiple 

of $50. 

(d) ITEMIZED DEDUCTIONS.—For purposes of this subtitle, the 

term ‘‘itemized deductions’’ means the deductions allowable under 

this chapter other than— 

(1) the deductions allowable in arriving at adjusted gross income, 

(2) the deduction for personal exemptions provided by section 

151, and 

(3) any deduction provided in section 199A. 

(e) ELECTION TO ITEMIZE.— 

(1) IN GENERAL.—Unless an individual makes an election 

under this subsection for the taxable year, no itemized deduction shall be allowed for the taxable year. For purposes of this 

subtitle, the determination of whether a deduction is allowable 

under this chapter shall be made without regard to the preceding sentence. 

(2) TIME AND MANNER OF ELECTION.—Any election under this 

subsection shall be made on the taxpayer’s return, and the Secretary shall prescribe the manner of signifying such election on 

the return. 

(3) CHANGE OF ELECTION.—Under regulations prescribed by 

the Secretary, a change of election with respect to itemized deductions for any taxable year may be made after the filing of 

the return for such year. If the spouse of the taxpayer filed a 

separate return for any taxable year corresponding to the taxable year of the taxpayer, the change shall not be allowed unless, in accordance with such regulations— 

(A) the spouse makes a change of election with respect 

to itemized deductions, for the taxable year covered in 

such separate return, consistent with the change of treatment sought by the taxpayer, and 

(B) the taxpayer and øhis spouse¿ the taxpayer’s spouse 

consent in writing to the assessment (within such period 

as may be agreed on with the Secretary) of any deficiency, 

to the extent attributable to such change of election, even 

though at the time of the filing of such consent the assessment of such deficiency would otherwise be prevented by 

the operation of any law or rule of law. 

99 

This paragraph shall not apply if the tax liability of the taxpayer’s spouse for the taxable year corresponding to the taxable year of the taxpayer has been compromised under section 

7122. 

(f) AGED OR BLIND ADDITIONAL AMOUNTS.— (1) ADDITIONAL AMOUNTS FOR THE AGED.—The taxpayer shall be entitled to an additional amount of $600— 

(A) øfor himself if he¿ for the taxpayer if the taxpayer 

has attained age 65 before the close of øhis taxable year¿ 

the taxpayer’s taxable year , and 

(B) for the spouse of the taxpayer if the spouse has attained age 65 before the close of the taxable year and an 

additional exemption is allowable to the taxpayer for such 

spouse under section 151(b). 

(2) ADDITIONAL AMOUNT FOR BLIND.—The taxpayer shall be 

entitled to an additional amount of $600— 

(A) øfor himself if he¿ for the taxpayer if the taxpayer is 

blind at the close of the taxable year, and 

(B) for the spouse of the taxpayer if the spouse is blind 

as of the close of the taxable year and an additional exemption is allowable to the taxpayer for such spouse under 

section 151(b). 

For purposes of subparagraph (B), if the spouse dies during the 

taxable year the determination of whether such spouse is blind 

shall be made as of the time of such death. 

(3) HIGHER AMOUNT FOR CERTAIN UNMARRIED INDIVIDUALS.— 

In the case of an individual who is not married and is not a 

surviving spouse, paragraphs (1) and (2) shall be applied by 

substituting ‘‘$750’’ for ‘‘$600’’. 

(4) BLINDNESS DEFINED.—For purposes of this subsection, an 

individual is blind only if øhis¿ the individual’s central visual 

acuity does not exceed 20/200 in the better eye with correcting 

lenses, or if øhis¿ the individual’s visual acuity is greater than 

20/200 but is accompanied by a limitation in the fields of vision 

such that the widest diameter of the visual field subtends an 

angle no greater than 20 degrees. 

(g) MARITAL STATUS.—For purposes of this section, marital status 

shall be determined under section 7703. 

* * * * * * * 

PART II—ITEMS SPECIFICALLY INCLUDED IN GROSS 

INCOME 

* * * * * * * 

SEC. 86. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS. 

(a) IN GENERAL.— 

(1) IN GENERAL.—Except as provided in paragraph (2), gross 

income for the taxable year of any taxpayer described in subsection (b) (notwithstanding section 207 of the Social Security 

Act) includes social security benefits in an amount equal to the 

lesser of— 

(A) one-half of the social security benefits received during the taxable year, or 

(B) one-half of the excess described in subsection (b)(1). 

100 

(2) ADDITIONAL AMOUNT.—In the case of a taxpayer with respect to whom the amount determined under subsection 

(b)(1)(A) exceeds the adjusted base amount, the amount included in gross income under this section shall be equal to the 

lesser of— 

(A) the sum of— 

(i) 85 percent of such excess, plus 

(ii) the lesser of the amount determined under paragraph (1) or an amount equal to one-half of the difference between the adjusted base amount and the 

base amount of the taxpayer, or 

(B) 85 percent of the social security benefits received 

during the taxable year. 

(b) TAXPAYERS TO WHOM SUBSECTION (A) APPLIES.— 

(1) IN GENERAL.—A taxpayer is described in this subsection 

if— 

(A) the sum of— 

(i) the modified adjusted gross income of the taxpayer for the taxable year, plus 

(ii) one-half of the social security benefits received 

during the taxable year, exceeds 

(B) the base amount. 

(2) MODIFIED ADJUSTED GROSS INCOME.—For purposes of this 

subsection, the term ‘‘modified adjusted gross income’’ means 

adjusted gross income— 

(A) determined without regard to this section and sections 135, 137, 221, 222, 911, 931, and 933, and 

(B) increased by the amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax. 

(c) BASE AMOUNT AND ADJUSTED BASE AMOUNT.—For purposes of 

this section— 

(1) BASE AMOUNT.—The term ‘‘base amount’’ means— 

(A) except as otherwise provided in this paragraph, 

$25,000, 

(B) $32,000 in the case of a joint return, and 

(C) zero in the case of a taxpayer who— 

(i) is married as of the close of the taxable year 

(within the meaning of section 7703) but does not file 

a joint return for such year, and 

(ii) does not live apart from øhis spouse¿ the taxpayer’s spouse at all times during the taxable year. 

(2) ADJUSTED BASE AMOUNT.—The term ‘‘adjusted base 

amount’’ means— 

(A) except as otherwise provided in this paragraph, 

$34,000, 

(B) $44,000 in the case of a joint return, and 

(C) zero in the case of a taxpayer described in paragraph 

(1)(C). 

(d) SOCIAL SECURITY BENEFIT.— (1) IN GENERAL.—For purposes of this section, the term ‘‘social security benefit’’ means any amount received by the taxpayer by reason of entitlement to— 

(A) a monthly benefit under title II of the Social Security 

Act, or 

101 

(B) a tier 1 railroad retirement benefit. 

(2) ADJUSTMENT FOR REPAYMENTS DURING YEAR.— 

(A) IN GENERAL.—For purposes of this section, the 

amount of social security benefits received during any taxable year shall be reduced by any repayment made by the 

taxpayer during the taxable year of a social security benefit previously received by the taxpayer (whether or not 

such benefit was received during the taxable year). 

(B) DENIAL OF DEDUCTION.—If (but for this subparagraph) any portion of the repayments referred to in subparagraph (A) would have been allowable as a deduction 

for the taxable year under section 165, such portion shall 

be allowable as a deduction only to the extent it exceeds 

the social security benefits received by the taxpayer during 

the taxable year (and not repaid during such taxable year). 

(3) WORKMEN’S COMPENSATION BENEFITS SUBSTITUTED FOR

SOCIAL SECURITY BENEFITS.—For purposes of this section, if, by 

reason of section 224 of the Social Security Act (or by reason 

of section 3(a)(1) of the Railroad Retirement Act of 1974), any 

social security benefit is reduced by reason of the receipt of a 

benefit under a workmen’s compensation act, the term ‘‘social 

security benefit’’ includes that portion of such benefit received 

under the workmen’s compensation act which equals such reduction. 

(4) TIER 1 RAILROAD RETIREMENT BENEFIT.—For purposes of 

paragraph (1), the term ‘‘tier 1 railroad retirement benefit’’ 

means— 

(A) the amount of the annuity under the Railroad Retirement Act of 1974 equal to the amount of the benefit to 

which the taxpayer would have been entitled under the Social Security Act if all of the service after December 31, 

1936, of the employee (on whose employment record the 

annuity is being paid) had been included in the term ‘‘employment’’ as defined in the Social Security Act, and 

(B) a monthly annuity amount under section 3(f)(3) of 

the Railroad Retirement Act of 1974. 

(5) EFFECT OF EARLY DELIVERY OF BENEFIT CHECKS.—For 

purposes of subsection (a), in any case where section 708 of the 

Social Security Act causes social security benefit checks to be 

delivered before the end of the calendar month for which they 

are issued, the benefits involved shall be deemed to have been 

received in the succeeding calendar month. 

(e) LIMITATION ON AMOUNT INCLUDED WHERE TAXPAYER RECEIVES

LUMP-SUM PAYMENT.— 

(1) LIMITATION.—If— 

(A) any portion of a lump-sum payment of social security 

benefits received during the taxable year is attributable to 

prior taxable years, and 

(B) the taxpayer makes an election under this subsection 

for the taxable year, 

then the amount included in gross income under this section 

for the taxable year by reason of the receipt of such portion 

shall not exceed the sum of the increases in gross income 

under this chapter for prior taxable years which would result 

102 

solely from taking into account such portion in the taxable 

years to which it is attributable. 

(2) SPECIAL RULES.— (A) YEAR TO WHICH BENEFIT ATTRIBUTABLE.—For purposes of this subsection, a social security benefit is attributable to a taxable year if the generally applicable payment date for such benefit occurred during such taxable 

year. 

(B) ELECTION.—An election under this subsection shall 

be made at such time and in such manner as the Secretary 

shall by regulations prescribe. Such election, once made, 

may be revoked only with the consent of the Secretary. 

(f) TREATMENT AS PENSION OR ANNUITY FOR CERTAIN PURPOSES.— For purposes of— 

(1) section 22(c)(3)(A) (relating to reduction for amounts received as pension or annuity), 

(2) section 32(c)(2) (defining earned income), 

(3) section 219(f)(1) (defining compensation), and 

(4) section 911(b)(1) (defining foreign earned income), 

any social security benefit shall be treated as an amount received 

as a pension or annuity. 

* * * * * * * 

PART III—ITEMS SPECIFICALLY EXCLUDED FROM 

GROSS INCOME 

* * * * * * * 

SEC. 105. AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH 

PLANS. 

(a) AMOUNTS ATTRIBUTABLE TO EMPLOYER CONTRIBUTIONS.—Except as otherwise provided in this section, amounts received by an 

employee through accident or health insurance for personal injuries 

or sickness shall be included in gross income to the extent such 

amounts (1) are attributable to contributions by the employer 

which were not includible in the gross income of the employee, or 

(2) are paid by the employer. 

(b) AMOUNTS EXPENDED FOR MEDICAL CARE.—Except in the case 

of amounts attributable to (and not in excess of) deductions allowed 

under section 213 (relating to medical, etc., expenses) for any prior 

taxable year, gross income does not include amounts referred to in 

subsection (a) if such amounts are paid, directly or indirectly, to 

the taxpayer to reimburse the taxpayer for expenses incurred øby 

him¿ for the medical care (as defined in section 213(d)) of the taxpayer, øhis spouse, his dependents¿ the taxpayer’s spouse, the taxpayer’s dependents (as defined in section 152, determined without 

regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), and any 

child (as defined in section 152(f)(1)) of the taxpayer who as of the 

end of the taxable year has not attained age 27. Any child to whom 

section 152(e) applies shall be treated as a dependent of both parents for purposes of this subsection. 

(c) PAYMENTS UNRELATED TO ABSENCE FROM WORK.—Gross income does not include amounts referred to in subsection (a) to the 

extent such amounts— 

(1) constitute payment for the permanent loss or loss of use 

of a member or function of the body, or the permanent disVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00108 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
103 

figurement, of the taxpayer, øhis spouse¿ the taxpayer’s spouse 

, or a dependent (as defined in section 152, determined without 

regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), and 

(2) are computed with reference to the nature of the injury 

without regard to the period the employee is absent from work. 

(e) ACCIDENT AND HEALTH PLANS.—For purposes of this section 

and section 104— 

(1) amounts received under an accident or health plan for 

employees, and 

(2) amounts received from a sickness and disability fund for 

employees maintained under the law of a State or the District 

of Columbia, 

shall be treated as amounts received through accident or health insurance. 

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

for medical care. 

(g) SELF-EMPLOYED INDIVIDUAL NOT CONSIDERED AN EMPLOYEE.— 

For purposes of this section, the term ‘‘employee’’ does not include 

an individual who is an employee within the meaning of section 

401(c)(1) (relating to self-employed individuals). 

(h) AMOUNT PAID TO HIGHLY COMPENSATED INDIVIDUALS UNDER A

DISCRIMINATORY SELF-INSURED MEDICAL EXPENSE REIMBURSEMENT

PLAN.— 

(1) IN GENERAL.—In the case of amounts paid to a highly 

compensated individual under a self-insured medical reimbursement plan which does not satisfy the requirements of 

paragraph (2) for a plan year, subsection (b) shall not apply to 

such amounts to the extent they constitute an excess reimbursement of such highly compensated individual. 

(2) PROHIBITION OF DISCRIMINATION.—A self-insured medical 

reimbursement plan satisfies the requirements of this paragraph only if— 

(A) the plan does not discriminate in favor of highly 

compensated individuals as to eligibility to participate; and 

(B) the benefits provided under the plan do not discriminate in favor of participants who are highly compensated 

individuals. 

(3) NONDISCRIMINATORY ELIGIBILITY CLASSIFICATIONS.— 

(A) IN GENERAL.—A self-insured medical reimbursement 

plan does not satisfy the requirements of subparagraph (A) 

of paragraph (2) unless such plan benefits— 

(i) 70 percent or more of all employees, or 80 percent 

or more of all the employees who are eligible to benefit 

under the plan if 70 percent or more of all employees 

are eligible to benefit under the plan; or 

(ii) such employees as qualify under a classification 

set up by the employer and found by the Secretary not 

to be discriminatory in favor of highly compensated individuals. 

(B) EXCLUSION OF CERTAIN EMPLOYEES.—For purposes of 

subparagraph (A), there may be excluded from consideration— 

104 

(i) employees who have not completed 3 years of 

service; 

(ii) employees who have not attained age 25; 

(iii) part-time or seasonal employees; 

(iv) employees not included in the plan who are included in a unit of employees covered by an agreement 

between employee representatives and one or more 

employers which the Secretary finds to be a collective 

bargaining agreement, if accident and health benefits 

were the subject of good faith bargaining between such 

employee representatives and such employer or employers; and 

(v) employees who are nonresident aliens and who 

receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within 

the meaning of section 861(a)(3)). 

(4) NONDISCRIMINATORY BENEFITS.—A self-insured medical 

reimbursement plan does not meet the requirements of subparagraph (B) of paragraph (2) unless all benefits provided for 

participants who are highly compensated individuals are provided for all other participants. 

(5) HIGHLY COMPENSATED INDIVIDUAL DEFINED.—For purposes of this subsection, the term ‘‘highly compensated individual’’ means an individual who is— 

(A) one of the 5 highest paid officers, 

(B) a shareholder who owns (with the application of section 318) more than 10 percent in value of the stock of the 

employer, or 

(C) among the highest paid 25 percent of all employees 

(other than employees described in paragraph (3)(B) who 

are not participants). 

(6) SELF-INSURED MEDICAL REIMBURSEMENT PLAN.—The term 

‘‘self-insured medical reimbursement plan’’ means a plan of an 

employer to reimburse employees for expenses referred to in 

subsection (b) for which reimbursement is not provided under 

a policy of accident and health insurance. 

(7) EXCESS REIMBURSEMENT OF HIGHLY COMPENSATED INDI- VIDUAL.—For purposes of this section, the excess reimbursement of a highly compensated individual which is attributable 

to a self-insured medical reimbursement plan is— 

(A) in the case of a benefit available to highly compensated individuals but not to all other participants (or 

which otherwise fails to satisfy the requirements of paragraph (2)(B)), the amount reimbursed under the plan to 

the employee with respect to such benefit, and 

(B) in the case of benefits (other than benefits described 

in subparagraph (A)) paid to a highly compensated individual by a plan which fails to satisfy the requirements of 

paragraph (2), the total amount reimbursed to the highly 

compensated individual for the plan year multiplied by a 

fraction— 

(i) the numerator of which is the total amount reimbursed to all participants who are highly compensated 

individuals under the plan for the plan year, and 

105 

(ii) the denominator of which is the total amount reimbursed to all employees under the plan for such 

plan year. 

In determining the fraction under subparagraph (B), there 

shall not be taken into account any reimbursement which is attributable to a benefit described in subparagraph (A). 

(8) CERTAIN CONTROLLED GROUPS, ETC..—All employees who 

are treated as employed by a single employer under subsection 

(b), (c), or (m) of section 414 shall be treated as employed by 

a single employer for purposes of this section. 

(9) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this 

section. 

(10) TIME OF INCLUSION.—Any amount paid for a plan year 

that is included in income by reason of this subsection shall be 

treated as received or accrued in the taxable year of the participant in which the plan year ends. 

(i) SICK PAY UNDER RAILROAD UNEMPLOYMENT INSURANCE ACT.— Notwithstanding any other provision of law, gross income includes 

benefits paid under section 2(a) of the Railroad Unemployment Insurance Act for days of sickness; except to the extent such sickness 

(as determined in accordance with standards prescribed by the 

Railroad Retirement Board) is the result of on-the-job injury. 

(j) SPECIAL RULE FOR CERTAIN GOVERNMENTAL PLANS.— (1) IN GENERAL.—For purposes of subsection (b), amounts 

paid (directly or indirectly) to a qualified taxpayer from an accident or health plan described in paragraph (2) shall not fail 

to be excluded from gross income solely because such plan, on 

or before January 1, 2008, provides for reimbursements of 

health care expenses of a deceased employee’s beneficiary 

(other than an individual described in paragraph (3)(B)). 

(2) PLAN DESCRIBED.—An accident or health plan is described in this paragraph if such plan is funded by a medical 

trust that is established in connection with a public retirement 

system or established by or on behalf of a State or political 

subdivision thereof and that— 

(A) has been authorized by a State legislature, or 

(B) has received a favorable ruling from the Internal 

Revenue Service that the trust’s income is not includible 

in gross income under section 115 or 501(c)(9). 

(3) QUALIFIED TAXPAYER.—For purposes of paragraph (1), 

with respect to an accident or health plan described in paragraph (2), the term ‘‘qualified taxpayer’’ means a taxpayer who 

is— 

(A) an employee, or 

(B) the spouse, dependent (as defined for purposes of 

subsection (b)), or child (as defined for purposes of such 

subsection) of an employee. 

* * * * * * * 

SEC. 119. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF 

THE EMPLOYER. 

(a) MEALS AND LODGING FURNISHED TO EMPLOYEEø, HIS SPOUSE, 

AND HIS DEPENDENTS¿ AND THE EMPLOYEE’S SPOUSE AND DEPENDENTS, PURSUANT TO EMPLOYMENT.—There shall be excluded from 

106 

gross income of an employee the value of any meals or lodging furnished to øhim, his spouse, or any of his dependents by or on behalf of his employer¿ the employee or the employee’s spouse or dependents by or on behalf of the employer of the employee for the convenience of the employer, but only if— 

(1) in the case of meals, the meals are furnished on the business premises of the employer, or 

(2) in the case of lodging, the employee is required to accept 

such lodging on the business premises of øhis¿ the employee’s 

employer as a condition of øhis¿ the employee’s employment. 

(b) SPECIAL RULES.—For purposes of subsection (a)— 

(1) PROVISIONS OF EMPLOYMENT CONTRACT OR STATE STATUTE

NOT TO BE DETERMINATIVE.—In determining whether meals or 

lodging are furnished for the convenience of the employer, the 

provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether 

the meals or lodging are intended as compensation. 

(2) CERTAIN FACTORS NOT TAKEN INTO ACCOUNT WITH RESPECT TO MEALS.—In determining whether meals are furnished 

for the convenience of the employer, the fact that a charge is 

made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account. 

(3) CERTAIN FIXED CHARGES FOR MEALS.— 

(A) IN GENERAL.—If— 

(i) an employee is required to pay on a periodic basis 

a fixed charge for his meals, and 

(ii) such meals are furnished by the employer for the 

convenience of the employer, 

there shall be excluded from the employee’s gross income 

an amount equal to such fixed charge. 

(B) APPLICATION OF SUBPARAGRAPH (A).—Subparagraph 

(A) shall apply— 

(i) whether the employee pays the fixed charge out 

of his stated compensation or out of his own funds, 

and 

(ii) only if the employee is required to make the payment whether he accepts or declines the meals. 

(4) MEALS FURNISHED TO EMPLOYEES ON BUSINESS PREMISES

WHERE MEALS OF MOST EMPLOYEES ARE OTHERWISE EXCLUDABLE.—All meals furnished on the business premises of an employer to such employer’s employees shall be treated as furnished for the convenience of the employer if, without regard 

to this paragraph, more than half of the employees to whom 

such meals are furnished on such premises are furnished such 

meals for the convenience of the employer. 

(c) EMPLOYEES LIVING IN CERTAIN CAMPS.— 

(1) IN GENERAL.—In the case of an individual who is furnished lodging in a camp located in a foreign country by or on 

behalf of his employer, such camp shall be considered to be 

part of the business premises of the employer. 

(2) CAMP.—For purposes of this section, a camp constitutes 

lodging which is— 

(A) provided by or on behalf of the employer for the convenience of the employer because the place at which such 

107 

individual renders services is in a remote area where satisfactory housing is not available on the open market, 

(B) located, as near as practicable, in the vicinity of the 

place at which such individual renders services, and 

(C) furnished in a common area (or enclave) which is not 

available to the public and which normally accommodates 

10 or more employees. 

(d) LODGING FURNISHED BY CERTAIN EDUCATIONAL INSTITUTIONS

TO EMPLOYEES.— (1) IN GENERAL.—In the case of an employee of an educational institution, gross income shall not include the value of 

qualified campus lodging furnished to such employee during 

the taxable year. 

(2) EXCEPTION IN CASES OF INADEQUATE RENT.—Paragraph 

(1) shall not apply to the extent of the excess of— 

(A) the lesser of— 

(i) 5 percent of the appraised value of the qualified 

campus lodging, or 

(ii) the average of the rentals paid by individuals 

(other than employees or students of the educational 

institution) during such calendar year for lodging provided by the educational institution which is comparable to the qualified campus lodging provided to 

the employee, over 

(B) the rent paid by the employee for the qualified campus lodging during such calendar year. 

The appraised value under subparagraph (A)(i) shall be determined as of the close of the calendar year in which the taxable 

year begins, or, in the case of a rental period not greater than 

1 year, at any time during the calendar year in which such period begins. 

(3) QUALIFIED CAMPUS LODGING.—For purposes of this subsection, the term ‘‘qualified campus lodging’’ means lodging to 

which subsection (a) does not apply and which is— 

(A) located on, or in the proximity of, a campus of the 

educational institution, and 

(B) furnished to the employee, øhis spouse, and any of 

his dependents¿ the employee’s spouse, and any of the employee’s dependents by or on behalf of such institution for 

use as a residence. 

(4) EDUCATIONAL INSTITUTION, ETC..—For purposes of this 

subsection— 

(A) IN GENERAL.—The term ‘‘educational institution’’ 

means— 

(i) an institution described in section 170(b)(1)(A)(ii) 

(or an entity organized under State law and composed 

of public institutions so described), or 

(ii) an academic health center. 

(B) ACADEMIC HEALTH CENTER.—For purposes of subparagraph (A), the term ‘‘academic health center’’ means 

an entity— 

(i) which is described in section 170(b)(1)(A)(iii), 

(ii) which receives (during the calendar year in 

which the taxable year of the taxpayer begins) payments under subsection (d)(5)(B) or (h) of section 1886 

108 

of the Social Security Act (relating to graduate medical education), and 

(iii) which has as one of its principal purposes or 

functions the providing and teaching of basic and clinical medical science and research with the entity’s own 

faculty. 

* * * * * * * 

SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE. 

(a) EXCLUSION.—Gross income shall not include gain from the 

sale or exchange of property if, during the 5-year period ending on 

the date of the sale or exchange, such property has been owned and 

used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more. 

(b) LIMITATIONS.— (1) IN GENERAL.—The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange 

shall not exceed $250,000. 

(2) SPECIAL RULES FOR JOINT RETURNS.—In the case of a 

øhusband and wife who make¿ married couple who makes a 

joint return for the taxable year of the sale or exchange of the 

property— (A) $500,000 LIMITATION FOR CERTAIN JOINT RETURNS.— Paragraph (1) shall be applied by substituting ‘‘$500,000’’ 

for ‘‘$250,000’’ if— 

(i) either spouse meets the ownership requirements 

of subsection (a) with respect to such property; 

(ii) both spouses meet the use requirements of subsection (a) with respect to such property; and 

(iii) neither spouse is ineligible for the benefits of 

subsection (a) with respect to such property by reason 

of paragraph (3). 

(B) OTHER JOINT RETURNS.—If such spouses do not meet 

the requirements of subparagraph (A), the limitation 

under paragraph (1) shall be the sum of the limitations 

under paragraph (1) to which each spouse would be entitled if such spouses had not been married. For purposes of 

the preceding sentence, each spouse shall be treated as 

owning the property during the period that either spouse 

owned the property. 

(3) APPLICATION TO ONLY 1 SALE OR EXCHANGE EVERY 2

YEARS.—Subsection (a) shall not apply to any sale or exchange 

by the taxpayer if, during the 2-year period ending on the date 

of such sale or exchange, there was any other sale or exchange 

by the taxpayer to which subsection (a) applied. 

(4) SPECIAL RULE FOR CERTAIN SALES BY SURVIVING

SPOUSES.—In the case of a sale or exchange of property by an 

unmarried individual whose spouse is deceased on the date of 

such sale, paragraph (1) shall be applied by substituting 

‘‘$500,000’’ for ‘‘$250,000’’ if such sale occurs not later than 2 

years after the date of death of such spouse and the requirements of paragraph (2)(A) were met immediately before such 

date of death. 

(5) EXCLUSION OF GAIN ALLOCATED TO NONQUALIFIED USE.— 

109 

(A) IN GENERAL.—Subsection (a) shall not apply to so 

much of the gain from the sale or exchange of property as 

is allocated to periods of nonqualified use. 

(B) GAIN ALLOCATED TO PERIODS OF NONQUALIFIED

USE.—For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio 

which— 

(i) the aggregate periods of nonqualified use during 

the period such property was owned by the taxpayer, 

bears to 

(ii) the period such property was owned by the taxpayer. 

(C) PERIOD OF NONQUALIFIED USE.—For purposes of this 

paragraph— 

(i) IN GENERAL.—The term ‘‘period of nonqualified 

use’’ means any period (other than the portion of any 

period preceding January 1, 2009) during which the 

property is not used as the principal residence of the 

taxpayer or the taxpayer’s spouse or former spouse. 

(ii) EXCEPTIONS.—The term ‘‘period of nonqualified 

use’’ does not include— 

(I) any portion of the 5-year period described in 

subsection (a) which is after the last date that 

such property is used as the principal residence of 

the taxpayer or the taxpayer’s spouse, 

(II) any period (not to exceed an aggregate period of 10 years) during which the taxpayer or the 

taxpayer’s spouse is serving on qualified official 

extended duty (as defined in subsection (d)(9)(C)) 

described in clause (i), (ii), or (iii) of subsection 

(d)(9)(A), and 

(III) any other period of temporary absence (not 

to exceed an aggregate period of 2 years) due to 

change of employment, health conditions, or such 

other unforeseen circumstances as may be specified by the Secretary. 

(D) COORDINATION WITH RECOGNITION OF GAIN ATTRIB- UTABLE TO DEPRECIATION.—For purposes of this paragraph— 

(i) subparagraph (A) shall be applied after the application of subsection (d)(6), and 

(ii) subparagraph (B) shall be applied without regard to any gain to which subsection (d)(6) applies. 

(c) EXCLUSION FOR TAXPAYERS FAILING TO MEET CERTAIN REQUIREMENTS.— 

(1) IN GENERAL.—In the case of a sale or exchange to which 

this subsection applies, the ownership and use requirements of 

subsection (a), and subsection (b)(3), shall not apply; but the 

dollar limitation under paragraph (1) or (2) of subsection (b), 

whichever is applicable, shall be equal to— 

(A) the amount which bears the same ratio to such limitation (determined without regard to this paragraph) as 

(B)(i) the shorter of— 

(I) the aggregate periods, during the 5-year period 

ending on the date of such sale or exchange, such 

110 

property has been owned and used by the taxpayer as 

the taxpayer’s principal residence; or 

(II) the period after the date of the most recent prior 

sale or exchange by the taxpayer to which subsection 

(a) applied and before the date of such sale or exchange, bears to 

(ii) 2 years. 

(2) SALES AND EXCHANGES TO WHICH SUBSECTION APPLIES.— This subsection shall apply to any sale or exchange if— 

(A) subsection (a) would not (but for this subsection) 

apply to such sale or exchange by reason of— 

(i) a failure to meet the ownership and use requirements of subsection (a), or 

(ii) subsection (b)(3), and 

(B) such sale or exchange is by reason of a change in 

place of employment, health, or, to the extent provided in 

regulations, unforeseen circumstances. 

(d) SPECIAL RULES.— (1) JOINT RETURNS.—If a øhusband and wife make¿ married 

couple makes a joint return for the taxable year of the sale or 

exchange of the property, subsections (a) and (c) shall apply if 

either spouse meets the ownership and use requirements of 

subsection (a) with respect to such property. 

(2) PROPERTY OF DECEASED SPOUSE.—For purposes of this 

section, in the case of an unmarried individual whose spouse 

is deceased on the date of the sale or exchange of property, the 

period such unmarried individual owned and used such property shall include the period such deceased spouse owned and 

used such property before death. 

(3) PROPERTY OWNED BY SPOUSE OR FORMER SPOUSE.—For 

purposes of this section— 

(A) PROPERTY TRANSFERRED TO INDIVIDUAL FROM SPOUSE

OR FORMER SPOUSE.—In the case of an individual holding 

property transferred to such individual in a transaction described in section 1041(a), the period such individual owns 

such property shall include the period the transferor 

owned the property. 

(B) PROPERTY USED BY FORMER SPOUSE PURSUANT TO DI- VORCE DECREE, ETC..—Solely for purposes of this section, 

an individual shall be treated as using property as such individual’s principal residence during any period of ownership while such individual’s spouse or former spouse is 

granted use of the property under a divorce or separation 

instrument. 

(C) DIVORCE OR SEPARATION INSTRUMENT.—For purposes 

of this paragraph, the term ‘‘divorce or separation instrument’’ means— 

(i) a decree of divorce or separate maintenance or a 

written instrument incident to such a decree, 

(ii) a written separation agreement, or 

(iii) a decree (not described in clause (i)) requiring a 

spouse to make payments for the support or maintenance of the other spouse. 

(4) TENANT-STOCKHOLDER IN COOPERATIVE HOUSING CORPORATION.—For purposes of this section, if the taxpayer holds 

111 

stock as a tenant-stockholder (as defined in section 216) in a 

cooperative housing corporation (as defined in such section), 

then— 

(A) the holding requirements of subsection (a) shall be 

applied to the holding of such stock, and 

(B) the use requirements of subsection (a) shall be applied to the house or apartment which the taxpayer was 

entitled to occupy as such stockholder. 

(5) INVOLUNTARY CONVERSIONS.— (A) IN GENERAL.—For purposes of this section, the destruction, theft, seizure, requisition, or condemnation of 

property shall be treated as the sale of such property. 

(B) APPLICATION OF SECTION 1033.—In applying section 

1033 (relating to involuntary conversions), the amount realized from the sale or exchange of property shall be treated as being the amount determined without regard to this 

section, reduced by the amount of gain not included in 

gross income pursuant to this section. 

(C) PROPERTY ACQUIRED AFTER INVOLUNTARY CONVERSION.—If the basis of the property sold or exchanged is determined (in whole or in part) under section 1033(b) (relating to basis of property acquired through involuntary conversion), then the holding and use by the taxpayer of the 

converted property shall be treated as holding and use by 

the taxpayer of the property sold or exchanged. 

(6) RECOGNITION OF GAIN ATTRIBUTABLE TO DEPRECIATION.— Subsection (a) shall not apply to so much of the gain from the 

sale of any property as does not exceed the portion of the depreciation adjustments (as defined in section 1250(b)(3)) attributable to periods after May 6, 1997, in respect of such property. 

(7) DETERMINATION OF USE DURING PERIODS OF OUT-OF-RESIDENCE CARE.—In the case of a taxpayer who— 

(A) becomes physically or mentally incapable of self-care, 

and 

(B) owns property and uses such property as the taxpayer’s principal residence during the 5-year period described in subsection (a) for periods aggregating at least 1 

year, 

then the taxpayer shall be treated as using such property as 

the taxpayer’s principal residence during any time during such 

5-year period in which the taxpayer owns the property and resides in any facility (including a nursing home) licensed by a 

State or political subdivision to care for an individual in the 

taxpayer’s condition. 

(8) SALES OF REMAINDER INTERESTS.—For purposes of this 

section— 

(A) IN GENERAL.—At the election of the taxpayer, this 

section shall not fail to apply to the sale or exchange of an 

interest in a principal residence by reason of such interest 

being a remainder interest in such residence, but this section shall not apply to any other interest in such residence 

which is sold or exchanged separately. 

(B) EXCEPTION FOR SALES TO RELATED PARTIES.—Subparagraph (A) shall not apply to any sale to, or exchange 

112 

with, any person who bears a relationship to the taxpayer 

which is described in section 267(b) or 707(b). 

(9) UNIFORMED SERVICES, FOREIGN SERVICE, AND INTELLIGENCE COMMUNITY.— 

(A) IN GENERAL.—At the election of an individual with 

respect to a property, the running of the 5-year period described in subsections (a) and (c)(1)(B) and paragraph (7) 

of this subsection with respect to such property shall be 

suspended during any period that such individual or such 

individual’s spouse is serving on qualified official extended 

duty— 

(i) as a member of the uniformed services, 

(ii) as a member of the Foreign Service of the United 

States, or 

(iii) as an employee of the intelligence community. 

(B) MAXIMUM PERIOD OF SUSPENSION.—The 5-year period 

described in subsection (a) shall not be extended more 

than 10 years by reason of subparagraph (A). 

(C) QUALIFIED OFFICIAL EXTENDED DUTY.—For purposes 

of this paragraph— 

(i) IN GENERAL.—The term ‘‘qualified official extended duty’’ means any extended duty while serving 

at a duty station which is at least 50 miles from such 

property or while residing under Government orders 

in Government quarters. 

(ii) UNIFORMED SERVICES.—The term ‘‘uniformed 

services’’ has the meaning given such term by section 

101(a)(5) of title 10, United States Code, as in effect 

on the date of the enactment of this paragraph. 

(iii) FOREIGN SERVICE OF THE UNITED STATES.—The 

term ‘‘member of the Foreign Service of the United 

States’’ has the meaning given the term ‘‘member of 

the Service’’ by paragraph (1), (2), (3), (4), or (5) of section 103 of the Foreign Service Act of 1980, as in effect 

on the date of the enactment of this paragraph. 

(iv) EMPLOYEE OF INTELLIGENCE COMMUNITY.—The 

term ‘‘employee of the intelligence community’’ means 

an employee (as defined by section 2105 of title 5, 

United States Code) of— 

(I) the Office of the Director of National Intelligence, 

(II) the Central Intelligence Agency, 

(III) the National Security Agency, 

(IV) the Defense Intelligence Agency, 

(V) the National Geospatial-Intelligence Agency, 

(VI) the National Reconnaissance Office, 

(VII) any other office within the Department of 

Defense for the collection of specialized national 

intelligence through reconnaissance programs, 

(VIII) any of the intelligence elements of the 

Army, the Navy, the Air Force, the Marine Corps, 

the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and 

the Coast Guard, 

113 

(IX) the Bureau of Intelligence and Research of 

the Department of State, or 

(X) any of the elements of the Department of 

Homeland Security concerned with the analyses of 

foreign intelligence information. 

(v) EXTENDED DUTY.—The term ‘‘extended duty’’ 

means any period of active duty pursuant to a call or 

order to such duty for a period in excess of 90 days or 

for an indefinite period. 

(D) SPECIAL RULES RELATING TO ELECTION.— (i) ELECTION LIMITED TO 1 PROPERTY AT A TIME.—An 

election under subparagraph (A) with respect to any 

property may not be made if such an election is in effect with respect to any other property. 

(ii) REVOCATION OF ELECTION.—An election under 

subparagraph (A) may be revoked at any time. 

(10) PROPERTY ACQUIRED IN LIKE-KIND EXCHANGE.—If a taxpayer acquires property in an exchange with respect to which 

gain is not recognized (in whole or in part) to the taxpayer 

under subsection (a) or (b) of section 1031, subsection (a) shall 

not apply to the sale or exchange of such property by such taxpayer (or by any person whose basis in such property is determined, in whole or in part, by reference to the basis in the 

hands of such taxpayer) during the 5-year period beginning 

with the date of such acquisition. 

(12) PEACE CORPS.— (A) IN GENERAL.—At the election of an individual with 

respect to a property, the running of the 5-year period described in subsections (a) and (c)(1)(B) and paragraph (7) 

of this subsection with respect to such property shall be 

suspended during any period that such individual or such 

individual’s spouse is serving outside the United States— 

(i) on qualified official extended duty (as defined in 

paragraph (9)(C)) as an employee of the Peace Corps, 

or 

(ii) as an enrolled volunteer or volunteer leader 

under section 5 or 6 (as the case may be) of the Peace 

Corps Act (22 U.S.C. 2504, 2505). 

(B) APPLICABLE RULES.—For purposes of subparagraph 

(A), rules similar to the rules of subparagraphs (B) and (D) 

of paragraph (9) shall apply. 

(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—This section shall 

not apply to any sale or exchange by an individual if the treatment 

provided by section 877(a)(1) applies to such individual. 

(f) ELECTION TO HAVE SECTION NOT APPLY.—This section shall not 

apply to any sale or exchange with respect to which the taxpayer 

elects not to have this section apply. 

(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER SECTION 1034.— 

For purposes of this section, in the case of property the acquisition 

of which by the taxpayer resulted under section 1034 (as in effect 

on the day before the date of the enactment of this section) in the 

nonrecognition of any part of the gain realized on the sale or exchange of another residence, in determining the period for which 

the taxpayer has owned and used such property as the taxpayer’s 

principal residence, there shall be included the aggregate periods 

114 

for which such other residence (and each prior residence taken into 

account under section 1223(6) in determining the holding period of 

such property) had been so owned and used. 

* * * * * * * 

SEC. 129. DEPENDENT CARE ASSISTANCE PROGRAMS. 

(a) EXCLUSION.— 

(1) IN GENERAL.—Gross income of an employee does not include amounts paid or incurred by the employer for dependent 

care assistance provided to such employee if the assistance is 

furnished pursuant to a program which is described in subsection (d). 

(2) LIMITATION OF EXCLUSION.— 

(A) IN GENERAL.—The amount which may be excluded 

under paragraph (1) for dependent care assistance with respect to dependent care services provided during a taxable 

year shall not exceed $5,000 ($2,500 in the case of a separate return by a married individual). 

(B) YEAR OF INCLUSION.—The amount of any excess 

under subparagraph (A) shall be included in gross income 

in the taxable year in which the dependent care services 

were provided (even if payment of dependent care assistance for such services occurs in a subsequent taxable 

year). 

(C) MARITAL STATUS.—For purposes of this paragraph, 

marital status shall be determined under the rules of paragraphs (3) and (4) of section 21(e). 

(b) EARNED INCOME LIMITATION.— 

(1) IN GENERAL.—The amount excluded from the income of 

an employee under subsection (a) for any taxable year shall not 

exceed— 

(A) in the case of an employee who is not married at the 

close of such taxable year, the earned income of such employee for such taxable year, or 

(B) in the case of an employee who is married at the 

close of such taxable year, the lesser of— 

(i) the earned income of such employee for such taxable year, or 

(ii) the earned income of the spouse of such employee for such taxable year. 

(2) SPECIAL RULE FOR CERTAIN SPOUSES.—For purposes of 

paragraph (1), the provisions of section 21(d)(2) shall apply in 

determining the earned income of a spouse who is a student 

or incapable of caring for øhimself¿ the spouse’s self . 

(c) PAYMENTS TO RELATED INDIVIDUALS.—No amount paid or incurred during the taxable year of an employee by an employer in 

providing dependent care assistance to such employee shall be excluded under subsection (a) if such amount was paid or incurred 

to an individual— 

(1) with respect to whom, for such taxable year, a deduction 

is allowable under section 151(c) (relating to personal exemptions for dependents) to such employee or the spouse of such 

employee, or 

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(2) who is a child of such employee (within the meaning of 

section 152(f)(1)) under the age of 19 at the close of such taxable year. 

(d) DEPENDENT CARE ASSISTANCE PROGRAM.— 

(1) IN GENERAL.—For purposes of this section a dependent 

care assistance program is a separate written plan of an employer for the exclusive benefit of his employees to provide 

such employees with dependent care assistance which meets 

the requirements of paragraphs (2) through (8) of this subsection. If any plan would qualify as a dependent care assistance program but for a failure to meet the requirements of this 

subsection, then, notwithstanding such failure, such plan shall 

be treated as a dependent care assistance program in the case 

of employees who are not highly compensated employees. 

(2) DISCRIMINATION.—The contributions or benefits provided 

under the plan shall not discriminate in favor of employees 

who are highly compensated employees (within the meaning of 

section 414(q)) or their dependents. 

(3) ELIGIBILITY.—The program shall benefit employees who 

qualify under a classification set up by the employer and found 

by the Secretary not to be discriminatory in favor of employees 

described in paragraph (2), or their dependents. 

(4) PRINCIPAL SHAREHOLDERS OR OWNERS.—Not more than 

25 percent of the amounts paid or incurred by the employer for 

dependent care assistance during the year may be provided for 

the class of individuals who are shareholders or owners (or 

their spouses or dependents), each of whom (on any day of the 

year) owns more than 5 percent of the stock or of the capital 

or profits interest in the employer. 

(5) NO FUNDING REQUIRED.—A program referred to in paragraph (1) is not required to be funded. 

(6) NOTIFICATION OF ELIGIBLE EMPLOYEES.—Reasonable notification of the availability and terms of the program shall be 

provided to eligible employees. 

(7) STATEMENT OF EXPENSES.—The plan shall furnish to an 

employee, on or before January 31, a written statement showing the amounts paid or expenses incurred by the employer in 

providing dependent care assistance to such employee during 

the previous calendar year. 

(8) BENEFITS.— 

(A) IN GENERAL.—A plan meets the requirements of this 

paragraph if the average benefits provided to employees 

who are not highly compensated employees under all plans 

of the employer is at least 55 percent of the average benefits provided to highly compensated employees under all 

plans of the employer. 

(B) SALARY REDUCTION AGREEMENTS.—For purposes of 

subparagraph (A), in the case of any benefits provided 

through a salary reduction agreement, a plan may disregard any employees whose compensation is less than 

$25,000. For purposes of this subparagraph, the term 

‘‘compensation’’ has the meaning given such term by section 414(q)(4), except that, under rules prescribed by the 

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tion on any other basis which does not discriminate in 

favor of highly compensated employees. 

(9) EXCLUDED EMPLOYEES.—For purposes of paragraphs (3) 

and (8), there shall be excluded from consideration— 

(A) subject to rules similar to the rules of section 

410(b)(4), employees who have not attained the age of 21 

and completed 1 year of service (as defined in section 

410(a)(3)), and 

(B) employees not included in a dependent care assistance program who are included in a unit of employees covered by an agreement which the Secretary finds to be a 

collective bargaining agreement between employee representatives and 1 or more employees, if there is evidence 

that dependent care benefits were the subject of good faith 

bargaining between such employee representatives and 

such employer or employers. 

(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— 

(1) DEPENDENT CARE ASSISTANCE.—The term ‘‘dependent 

care assistance’’ means the payment of, or provision of, those 

services which if paid for by the employee would be considered 

employment-related expenses under section 21(b)(2) (relating 

to expenses for household and dependent care services necessary for gainful employment). 

(2) EARNED INCOME.—The term ‘‘earned income’’ shall have 

the meaning given such term in section 32(c)(2), but such term 

shall not include any amounts paid or incurred by an employer 

for dependent care assistance to an employee. 

(3) EMPLOYEE.—The term ‘‘employee’’ includes, for any year, 

an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals). 

(4) EMPLOYER.—An individual who owns the entire interest 

in an unincorporated trade or business shall be treated as his 

own employer. A partnership shall be treated as the employer 

of each partner who is an employee within the meaning of 

paragraph (3). 

(5) ATTRIBUTION RULES.— (A) OWNERSHIP OF STOCK.—Ownership of stock in a corporation shall be determined in accordance with the rules 

provided under subsections (d) and (e) of section 1563 

(without regard to section 1563(e)(3)(C)). 

(B) INTEREST IN UNINCORPORATED TRADE OR BUSINESS.— 

The interest of an employee in a trade or business which 

is not incorporated shall be determined in accordance with 

regulations prescribed by the Secretary, which shall be 

based on principles similar to the principles which apply 

in the case of subparagraph (A). 

(6) UTILIZATION TEST NOT APPLICABLE.—A dependent care assistance program shall not be held or considered to fail to meet 

any requirements of subsection (d) (other than paragraphs (4) 

and (8) thereof) merely because of utilization rates for the different types of assistance made available under the program. 

(7) DISALLOWANCE OF EXCLUDED AMOUNTS AS CREDIT OR DEDUCTION.—No deduction or credit shall be allowed to the employee under any other section of this chapter for any amount 

117 

excluded from the gross income of the employee by reason of 

this section. 

(8) TREATMENT OF ONSITE FACILITIES.—In the case of an onsite facility maintained by an employer, except to the extent 

provided in regulations, the amount of dependent care assistance provided to an employee excluded with respect to any dependent shall be based on— 

(A) utilization of the facility by a dependent of the employee, and 

(B) the value of the services provided with respect to 

such dependent. 

(9) IDENTIFYING INFORMATION REQUIRED WITH RESPECT TO

SERVICE PROVIDER.—No amount paid or incurred by an employer for dependent care assistance provided to an employee 

shall be excluded from the gross income of such employee unless— 

(A) the name, address, and taxpayer identification number of the person performing the services are included on 

the return to which the exclusion relates, or 

(B) if such person is an organization described in section 

501(c)(3) and exempt from tax under section 501(a), the 

name and address of such person are included on the return to which the exclusion relates. 

In the case of a failure to provide the information required 

under the preceding sentence, the preceding sentence shall not 

apply if it is shown that the taxpayer exercised due diligence 

in attempting to provide the information so required. 

* * * * * * * 

SEC. 132. CERTAIN FRINGE BENEFITS. 

(a) EXCLUSION FROM GROSS INCOME.—Gross income shall not include any fringe benefit which qualifies as a— 

(1) no-additional-cost service, 

(2) qualified employee discount, 

(3) working condition fringe, 

(4) de minimis fringe, 

(5) qualified transportation fringe, 

(6) qualified moving expense reimbursement, 

(7) qualified retirement planning services, or 

(8) qualified military base realignment and closure fringe. 

(b) NO-ADDITIONAL-COST SERVICE DEFINED.—For purposes of this 

section, the term ‘‘no-additional-cost service’’ means any service 

provided by an employer to an employee for use by such employee 

if— 

(1) such service is offered for sale to customers in the ordinary course of the line of business of the employer in which the 

employee is performing services, and 

(2) the employer incurs no substantial additional cost (including forgone revenue) in providing such service to the employee (determined without regard to any amount paid by the 

employee for such service). 

(c) QUALIFIED EMPLOYEE DISCOUNT DEFINED.—For purposes of 

this section— 

(1) QUALIFIED EMPLOYEE DISCOUNT.—The term ‘‘qualified 

employee discount’’ means any employee discount with respect 

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to qualified property or services to the extent such discount 

does not exceed— 

(A) in the case of property, the gross profit percentage 

of the price at which the property is being offered by the 

employer to customers, or 

(B) in the case of services, 20 percent of the price at 

which the services are being offered by the employer to 

customers. 

(2) GROSS PROFIT PERCENTAGE.— (A) IN GENERAL.—The term ‘‘gross profit percentage’’ 

means the percent which— 

(i) the excess of the aggregate sales price of property 

sold by the employer to customers over the aggregate 

cost of such property to the employer, is of 

(ii) the aggregate sale price of such property. 

(B) DETERMINATION OF GROSS PROFIT PERCENTAGE.— 

Gross profit percentage shall be determined on the basis 

of— 

(i) all property offered to customers in the ordinary 

course of the line of business of the employer in which 

the employee is performing services (or a reasonable 

classification of property selected by the employer), 

and 

(ii) the employer’s experience during a representative period. 

(3) EMPLOYEE DISCOUNT DEFINED.—The term ‘‘employee discount’’ means the amount by which— 

(A) the price at which the property or services are provided by the employer to an employee for use by such employee, is less than 

(B) the price at which such property or services are 

being offered by the employer to customers. 

(4) QUALIFIED PROPERTY OR SERVICES.—The term ‘‘qualified 

property or services’’ means any property (other than real 

property and other than personal property of a kind held for 

investment) or services which are offered for sale to customers 

in the ordinary course of the line of business of the employer 

in which the employee is performing services. 

(d) WORKING CONDITION FRINGE DEFINED.—For purposes of this 

section, the term ‘‘working condition fringe’’ means any property or 

services provided to an employee of the employer to the extent 

that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167. 

(e) DE MINIMIS FRINGE DEFINED.—For purposes of this section— 

(1) IN GENERAL.—The term ‘‘de minimis fringe’’ means any 

property or service the value of which is (after taking into account the frequency with which similar fringes are provided by 

the employer to the employer’s employees) so small as to make 

accounting for it unreasonable or administratively impracticable. 

(2) TREATMENT OF CERTAIN EATING FACILITIES.—The operation by an employer of any eating facility for employees shall 

be treated as a de minimis fringe if— 

(A) such facility is located on or near the business premises of the employer, and 

119 

(B) revenue derived from such facility normally equals or 

exceeds the direct operating costs of such facility. 

The preceding sentence shall apply with respect to any highly 

compensated employee only if access to the facility is available 

on substantially the same terms to each member of a group of 

employees which is defined under a reasonable classification 

set up by the employer which does not discriminate in favor of 

highly compensated employees. For purposes of subparagraph 

(B), an employee entitled under section 119 to exclude the 

value of a meal provided at such facility shall be treated as 

having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal. 

(f) QUALIFIED TRANSPORTATION FRINGE.— 

(1) IN GENERAL.—For purposes of this section, the term 

‘‘qualified transportation fringe’’ means any of the following 

provided by an employer to an employee: 

(A) Transportation in a commuter highway vehicle if 

such transportation is in connection with travel between 

the employee’s residence and place of employment. 

(B) Any transit pass. 

(C) Qualified parking. 

(D) Any qualified bicycle commuting reimbursement. 

(2) LIMITATION ON EXCLUSION.—The amount of the fringe 

benefits which are provided by an employer to any employee 

and which may be excluded from gross income under subsection (a)(5) shall not exceed— 

(A) $175 per month in the case of the aggregate of the 

benefits described in subparagraphs (A) and (B) of paragraph (1), (B) $175 per month in the case of qualified parking, and 

(C) the applicable annual limitation in the case of any 

qualified bicycle commuting reimbursement. 

(3) CASH REIMBURSEMENTS.—For purposes of this subsection, 

the term ‘‘qualified transportation fringe’’ includes a cash reimbursement by an employer to an employee for a benefit described in paragraph (1). The preceding sentence shall apply to 

a cash reimbursement for any transit pass only if a voucher or 

similar item which may be exchanged only for a transit pass 

is not readily available for direct distribution by the employer 

to the employee. 

(4) NO CONSTRUCTIVE RECEIPT.—No amount shall be included 

in the gross income of an employee solely because the employee 

may choose between any qualified transportation fringe (other 

than a qualified bicycle commuting reimbursement) and compensation which would otherwise be includible in gross income 

of such employee. 

(5) DEFINITIONS.—For purposes of this subsection— 

(A) TRANSIT PASS.—The term ‘‘transit pass’’ means any 

pass, token, farecard, voucher, or similar item entitling a 

person to transportation (or transportation at a reduced 

price) if such transportation is— 

(i) on mass transit facilities (whether or not publicly 

owned), or 

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portation is provided in a vehicle meeting the requirements of subparagraph (B)(i). 

(B) COMMUTER HIGHWAY VEHICLE.—The term ‘‘commuter 

highway vehicle’’ means any highway vehicle— 

(i) the seating capacity of which is at least 6 adults 

(not including the driver), and 

(ii) at least 80 percent of the mileage use of which 

can reasonably be expected to be— 

(I) for purposes of transporting employees in 

connection with travel between their residences 

and their place of employment, and 

(II) on trips during which the number of employees transported for such purposes is at least 1/ 

2 of the adult seating capacity of such vehicle (not 

including the driver). 

(C) QUALIFIED PARKING.—The term ‘‘qualified parking’’ 

means parking provided to an employee on or near the 

business premises of the employer or on or near a location 

from which the employee commutes to work by transportation described in subparagraph (A), in a commuter highway vehicle, or by carpool. Such term shall not include any 

parking on or near property used by the employee for residential purposes. 

(D) TRANSPORTATION PROVIDED BY EMPLOYER.—Transportation referred to in paragraph (1)(A) shall be considered to be provided by an employer if such transportation 

is furnished in a commuter highway vehicle operated by or 

for the employer. 

(E) EMPLOYEE.—For purposes of this subsection, the 

term ‘‘employee’’ does not include an individual who is an 

employee within the meaning of section 401(c)(1). 

(F) DEFINITIONS RELATED TO BICYCLE COMMUTING REIMBURSEMENT.— (i) QUALIFIED BICYCLE COMMUTING REIMBURSEMENT.—The term ‘‘qualified bicycle commuting reimbursement’’ means, with respect to any calendar year, 

any employer reimbursement during the 15-month period beginning with the first day of such calendar year 

for reasonable expenses incurred by the employee during such calendar year for the purchase of a bicycle 

and bicycle improvements, repair, and storage, if such 

bicycle is regularly used for travel between the employee’s residence and place of employment. 

(ii) APPLICABLE ANNUAL LIMITATION.—The term ‘‘applicable annual limitation’’ means, with respect to any 

employee for any calendar year, the product of $20 

multiplied by the number of qualified bicycle commuting months during such year. 

(iii) QUALIFIED BICYCLE COMMUTING MONTH.—The 

term ‘‘qualified bicycle commuting month’’ means, with 

respect to any employee, any month during which 

such employee— 

(I) regularly uses the bicycle for a substantial 

portion of the travel between the employee’s residence and place of employment, and 

121 

(II) does not receive any benefit described in 

subparagraph (A), (B), or (C) of paragraph (1). 

(6) INFLATION ADJUSTMENT.— (A) IN GENERAL.—In the case of any taxable year beginning in a calendar year after 1999, the dollar amounts contained in subparagraphs (A) and (B) of paragraph (2) shall 

be increased by an amount equal to— 

(i) such dollar amount, multiplied by 

(ii) the cost-of-living adjustment determined under 

section 1(f)(3) for the calendar year in which the taxable year begins, by substituting ‘‘calendar year 1998’’ 

for ‘‘calendar year 2016’’ in subparagraph (A)(ii) thereof. 

(B) ROUNDING.—If any increase determined under subparagraph (A) is not a multiple of $5, such increase shall 

be rounded to the next lowest multiple of $5. 

(7) COORDINATION WITH OTHER PROVISIONS.—For purposes of 

this section, the terms ‘‘working condition fringe’’ and ‘‘de minimis fringe’’ shall not include any qualified transportation 

fringe (determined without regard to paragraph (2)). 

(8) SUSPENSION OF QUALIFIED BICYCLE COMMUTING REIM- BURSEMENT EXCLUSION.—Paragraph (1)(D) shall not apply to 

any taxable year beginning after December 31, 2017, and before January 1, 2026. 

(g) QUALIFIED MOVING EXPENSE REIMBURSEMENT.—For purposes 

of this section— 

(1) IN GENERAL.—The term ‘‘qualified moving expense reimbursement’’ means any amount received (directly or indirectly) 

by an individual from an employer as a payment for (or a reimbursement of) expenses which would be deductible as moving 

expenses under section 217 if directly paid or incurred by the 

individual. Such term shall not include any payment for (or reimbursement of) an expense actually deducted by the individual in a prior taxable year. 

(2) SUSPENSION FOR TAXABLE YEARS 2018 THROUGH 2025.—Except in the case of a member of the Armed Forces of the United 

States on active duty who moves pursuant to a military order 

and incident to a permanent change of station, subsection 

(a)(6) shall not apply to any taxable year beginning after December 31, 2017, and before January 1, 2026. 

(h) CERTAIN INDIVIDUALS TREATED AS EMPLOYEES FOR PURPOSES

OF SUBSECTIONS (A)(1) AND (2).—For purposes of paragraphs (1) 

and (2) of subsection (a)— 

(1) RETIRED AND DISABLED EMPLOYEES AND SURVIVING

SPOUSE OF EMPLOYEE TREATED AS EMPLOYEE.—With respect to 

a line of business of an employer, the term ‘‘employee’’ includes— 

(A) any individual who was formerly employed by such 

employer in such line of business and who separated from 

service with such employer in such line of business by reason of retirement or disability, and 

(B) any widow or widower of any individual who died 

while employed by such employer in such line of business 

or while an employee within the meaning of subparagraph 

(A). 

122 

(2) SPOUSE AND DEPENDENT CHILDREN.— (A) IN GENERAL.—Any use by the spouse or a dependent 

child of the employee shall be treated as use by the employee. 

(B) DEPENDENT CHILD.—For purposes of subparagraph 

(A), the term ‘‘dependent child’’ means any child (as defined in section 152(f)(1)) of the employee— 

(i) who is a dependent of the employee, or 

(ii) both of whose parents are deceased and who has 

not attained age 25. 

For purposes of the preceding sentence, any child to whom 

section 152(e) applies shall be treated as the dependent of 

both parents. 

(3) SPECIAL RULE FOR PARENTS IN THE CASE OF AIR TRANSPORTATION.—Any use of air transportation by a parent of an 

employee (determined without regard to paragraph (1)(B)) 

shall be treated as use by the employee. 

(i) RECIPROCAL AGREEMENTS.—For purposes of paragraph (1) of 

subsection (a), any service provided by an employer to an employee 

of another employer shall be treated as provided by the employer 

of such employee if— 

(1) such service is provided pursuant to a written agreement 

between such employers, and 

(2) neither of such employers incurs any substantial additional costs (including foregone revenue) in providing such 

service or pursuant to such agreement. 

(j) SPECIAL RULES.— (1) EXCLUSIONS UNDER SUBSECTION (A)(1) AND (2) APPLY TO

HIGHLY COMPENSATED EMPLOYEES ONLY IF NO DISCRIMINATION.—Paragraphs (1) and (2) of subsection (a) shall apply with 

respect to any fringe benefit described therein provided with 

respect to any highly compensated employee only if such fringe 

benefit is available on substantially the same terms to each 

member of a group of employees which is defined under a reasonable classification set up by the employer which does not 

discriminate in favor of highly compensated employees. 

(2) SPECIAL RULE FOR LEASED SECTIONS OF DEPARTMENT

STORES.— 

(A) IN GENERAL.—For purposes of paragraph (2) of subsection (a), in the case of a leased section of a department 

store— 

(i) such section shall be treated as part of the line 

of business of the person operating the department 

store, and 

(ii) employees in the leased section shall be treated 

as employees of the person operating the department 

store. 

(B) LEASED SECTION OF DEPARTMENT STORE.—For purposes of subparagraph (A), a leased section of a department store is any part of a department store where overthe-counter sales of property are made under a lease or 

similar arrangement where it appears to the general public that individuals making such sales are employed by the 

person operating the department store. 

(3) AUTO SALESMEN.— 

123 

(A) IN GENERAL.—For purposes of subsection (a)(3), 

qualified automobile demonstration use shall be treated as 

a working condition fringe. 

(B) QUALIFIED AUTOMOBILE DEMONSTRATION USE.—For 

purposes of subparagraph (A), the term ‘‘qualified automobile demonstration use’’ means any use of an automobile by a full-time automobile salesman in the sales 

area in which the automobile dealer’s sales office is located 

if— 

(i) such use is provided primarily to facilitate the 

salesman’s performance of services for the employer, 

and 

(ii) there are substantial restrictions on the personal 

use of such automobile by such salesman. 

(4) ON-PREMISES GYMS AND OTHER ATHLETIC FACILITIES.— 

(A) IN GENERAL.—Gross income shall not include the 

value of any on-premises athletic facility provided by an 

employer to his employees. 

(B) ON-PREMISES ATHLETIC FACILITY.—For purposes of 

this paragraph, the term ‘‘on-premises athletic facility’’ 

means any gym or other athletic facility— 

(i) which is located on the premises of the employer, 

(ii) which is operated by the employer, and 

(iii) substantially all the use of which is by employees of the employer, their spouses, and their dependent children (within the meaning of subsection (h)). 

(5) SPECIAL RULE FOR AFFILIATES OF AIRLINES.— 

(A) IN GENERAL.—If— 

(i) a qualified affiliate is a member of an affiliated 

group another member of which operates an airline, 

and 

(ii) employees of the qualified affiliate who are directly engaged in providing airline-related services are 

entitled to no-additional-cost service with respect to 

air transportation provided by such other member, 

then, for purposes of applying paragraph (1) of subsection 

(a) to such no-additional-cost service provided to such employees, such qualified affiliate shall be treated as engaged 

in the same line of business as such other member. 

(B) QUALIFIED AFFILIATE.—For purposes of this paragraph, the term ‘‘qualified affiliate’’ means any corporation 

which is predominantly engaged in airline-related services. 

(C) AIRLINE-RELATED SERVICES.—For purposes of this 

paragraph, the term ‘‘airline-related services’’ means any 

of the following services provided in connection with air 

transportation: 

(i) Catering. 

(ii) Baggage handling. 

(iii) Ticketing and reservations. 

(iv) Flight planning and weather analysis. 

(v) Restaurants and gift shops located at an airport. 

(vi) Such other similar services provided to the airline as the Secretary may prescribe. 

124 

(D) AFFILIATED GROUP.—For purposes of this paragraph, 

the term ‘‘affiliated group’’ has the meaning given such 

term by section 1504(a). 

(6) HIGHLY COMPENSATED EMPLOYEE.—For purposes of this 

section, the term ‘‘highly compensated employee’’ has the 

meaning given such term by section 414(q). 

(7) AIR CARGO.—For purposes of subsection (b), the transportation of cargo by air and the transportation of passengers by 

air shall be treated as the same service. 

(8) APPLICATION OF SECTION TO OTHERWISE TAXABLE EDUCATIONAL OR TRAINING BENEFITS.—Amounts paid or expenses 

incurred by the employer for education or training provided to 

the employee which are not excludable from gross income 

under section 127 shall be excluded from gross income under 

this section if (and only if) such amounts or expenses are a 

working condition fringe. 

(k) CUSTOMERS NOT TO INCLUDE EMPLOYEES.—For purposes of 

this section (other than subsection (c)(2)), the term ‘‘customers’’ 

shall only include customers who are not employees. 

(l) SECTION NOT TO APPLY TO FRINGE BENEFITS EXPRESSLY PROVIDED FOR ELSEWHERE.—This section (other than subsections (e) 

and (g)) shall not apply to any fringe benefits of a type the tax 

treatment of which is expressly provided for in any other section 

of this chapter. 

(m) QUALIFIED RETIREMENT PLANNING SERVICES.— 

(1) IN GENERAL.—For purposes of this section, the term 

‘‘qualified retirement planning services’’ means any retirement 

planning advice or information provided to an employee and 

øhis spouse¿ the employee’s spouse by an employer maintaining 

a qualified employer plan. 

(2) NONDISCRIMINATION RULE.—Subsection (a)(7) shall apply 

in the case of highly compensated employees only if such services are available on substantially the same terms to each 

member of the group of employees normally provided education 

and information regarding the employer’s qualified employer 

plan. 

(3) QUALIFIED EMPLOYER PLAN.—For purposes of this subsection, the term ‘‘qualified employer plan’’ means a plan, contract, pension, or account described in section 219(g)(5). 

(n) QUALIFIED MILITARY BASE REALIGNMENT AND CLOSURE

FRINGE.—For purposes of this section— 

(1) IN GENERAL.—The term ‘‘qualified military base realignment and closure fringe’’ means 1 or more payments under the 

authority of section 1013 of the Demonstration Cities and Metropolitan Development Act of 1966 (42 U.S.C. 3374) (as in effect on the date of the enactment of the American Recovery 

and Reinvestment Tax Act of 2009). 

(2) LIMITATION.—With respect to any property, such term 

shall not include any payment referred to in paragraph (1) to 

the extent that the sum of all of such payments related to such 

property exceeds the maximum amount described in subsection 

(c) of such section (as in effect on such date). 

125 

(o) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes 

of this section. 

* * * * * * * 

SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO 

PAY HIGHER EDUCATION TUITION AND FEES. 

(a) GENERAL RULE.—In the case of an individual who pays qualified higher education expenses during the taxable year, no amount 

shall be includible in gross income by reason of the redemption 

during such year of any qualified United States savings bond. 

(b) LIMITATIONS.— 

(1) LIMITATION WHERE REDEMPTION PROCEEDS EXCEED HIGHER EDUCATION EXPENSES.— 

(A) IN GENERAL.—If— 

(i) the aggregate proceeds of qualified United States 

savings bonds redeemed by the taxpayer during the 

taxable year exceed 

(ii) the qualified higher education expenses paid by 

the taxpayer during such taxable year, 

the amount excludable from gross income under subsection 

(a) shall not exceed the applicable fraction of the amount 

excludable from gross income under subsection (a) without 

regard to this subsection. 

(B) APPLICABLE FRACTION.—For purposes of subparagraph (A), the term ‘‘applicable fraction’’ means the fraction the numerator of which is the amount described in 

subparagraph (A)(ii) and the denominator of which is the 

amount described in subparagraph (A)(i). 

(2) LIMITATION BASED ON MODIFIED ADJUSTED GROSS INCOME.— 

(A) IN GENERAL.—If the modified adjusted gross income 

of the taxpayer for the taxable year exceeds $40,000 

($60,000 in the case of a joint return), the amount which 

would (but for this paragraph) be excludable from gross income under subsection (a) shall be reduced (but not below 

zero) by the amount which bears the same ratio to the 

amount which would be so excludable as such excess bears 

to $15,000 ($30,000 in the case of a joint return). 

(B) INFLATION ADJUSTMENT.—In the case of any taxable 

year beginning in a calendar year after 1990, the $40,000 

and $60,000 amounts contained in subparagraph (A) shall 

be increased by an amount equal to— 

(i) such dollar amount, multiplied by 

(ii) the cost-of-living adjustment under section 1(f)(3) 

for the calendar year in which the taxable year begins, 

determined by substituting ‘‘calendar year 1989’’ for 

‘‘calendar year 2016’’ in subparagraph (A)(ii) thereof. 

(C) ROUNDING.—If any amount as adjusted under subparagraph (B) is not a multiple of $50, such amount shall 

be rounded to the nearest multiple of $50 (or if such 

amount is a multiple of $25, such amount shall be rounded 

to the next highest multiple of $50). 

(c) DEFINITIONS.—For purposes of this section— 

126 

(1) QUALIFIED UNITED STATES SAVINGS BOND.—The term 

‘‘qualified United States savings bond’’ means any United 

States savings bond issued— 

(A) after December 31, 1989, 

(B) to an individual who has attained age 24 before the 

date of issuance, and 

(C) at discount under section 3105 of title 31, United 

States Code. 

(2) QUALIFIED HIGHER EDUCATION EXPENSES.— 

(A) IN GENERAL.—The term ‘‘qualified higher education 

expenses’’ means tuition and fees required for the enrollment or attendance of— 

(i) the taxpayer, 

(ii) the taxpayer’s spouse, or 

(iii) any dependent of the taxpayer with respect to 

whom the taxpayer is allowed a deduction under section 151, 

at an eligible educational institution. 

(B) EXCEPTION FOR EDUCATION INVOLVING SPORTS, 

ETC..—Such term shall not include expenses with respect 

to any course or other education involving sports, games, 

or hobbies other than as part of a degree program. 

(C) CONTRIBUTIONS TO QUALIFIED TUITION PROGRAM AND

COVERDELL EDUCATION SAVINGS ACCOUNTS.—Such term 

shall include any contribution to a qualified tuition program (as defined in section 529) on behalf of a designated 

beneficiary (as defined in such section), or to a Coverdell 

education savings account (as defined in section 530) on 

behalf of an account beneficiary, who is an individual described in subparagraph (A); but there shall be no increase 

in the investment in the contract for purposes of applying 

section 72 by reason of any portion of such contribution 

which is not includible in gross income by reason of this 

subparagraph. 

(3) ELIGIBLE EDUCATIONAL INSTITUTION.—The term ‘‘eligible 

educational institution’’ has the meaning given such term by 

section 529(e)(5). 

(4) MODIFIED ADJUSTED GROSS INCOME.—The term ‘‘modified 

adjusted gross income’’ means the adjusted gross income of the 

taxpayer for the taxable year determined— 

(A) without regard to this section and sections 137, 221, 

222, 911, 931, and 933, and 

(B) after the application of sections 86, 469, and 219. 

(d) SPECIAL RULES.— 

(1) ADJUSTMENT FOR CERTAIN SCHOLARSHIPS AND VETERANS

BENEFITS.—The amount of qualified higher education expenses 

otherwise taken into account under subsection (a) with respect 

to the education of an individual shall be reduced (before the 

application of subsection (b)) by the sum of the amounts received with respect to such individual for the taxable year as— 

(A) a qualified scholarship which under section 117 is 

not includable in gross income, 

(B) an educational assistance allowance under chapter 

30, 31, 32, 34, or 35 of title 38, United States Code, 

127 

(C) a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a)) for educational expenses, or attributable to attendance at an eligible educational institution, which is exempt from income 

taxation by any law of the United States, or 

(D) a payment, waiver, or reimbursement of qualified 

higher education expenses under a qualified tuition program (within the meaning of section 529(b)). 

(2) COORDINATION WITH OTHER HIGHER EDUCATION BENE- FITS.—The amount of the qualified higher education expenses 

otherwise taken into account under subsection (a) with respect 

to the education of an individual shall be reduced (before the 

application of subsection (b)) by— 

(A) the amount of such expenses which are taken into 

account in determining the credit allowed to the taxpayer 

or any other person under section 25A with respect to such 

expenses; and 

(B) the amount of such expenses which are taken into 

account in determining the exclusions under sections 

529(c)(3)(B) and 530(d)(2). 

(3) NO EXCLUSION FOR MARRIED INDIVIDUALS FILING SEPA- RATE RETURNS.—If the taxpayer is a married individual (within 

the meaning of section 7703), this section shall apply only if 

the taxpayer and øhis spouse¿ the taxpayer’s spouse file a joint 

return for the taxable year. 

(4) REGULATIONS.—The Secretary may prescribe such regulations as may be necessary or appropriate to carry out this section, including regulations requiring record keeping and information reporting. 

* * * * * * * 

PART V—DEDUCTIONS FOR PERSONAL EXEMPTIONS 

* * * * * * * 

SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS. 

(a) ALLOWANCE OF DEDUCTIONS.—In the case of an individual, 

the exemptions provided by this section shall be allowed as deductions in computing taxable income. 

(b) TAXPAYER AND SPOUSE.—An exemption of the exemption 

amount for the taxpayer; and an additional exemption of the exemption amount for the spouse of the taxpayer if a joint return is 

not made by the taxpayer and øhis spouse¿ the taxpayer’s spouse 

, and if the spouse, for the calendar year in which the taxable year 

of the taxpayer begins, has no gross income and is not the dependent of another taxpayer. 

(c) ADDITIONAL EXEMPTION FOR DEPENDENTS.—An exemption of 

the exemption amount for each individual who is a dependent (as 

defined in section 152) of the taxpayer for the taxable year. 

(d) EXEMPTION AMOUNT.—For purposes of this section— 

(1) IN GENERAL.—Except as otherwise provided in this subsection, the term ‘‘exemption amount’’ means $2,000. 

(2) EXEMPTION AMOUNT DISALLOWED IN CASE OF CERTAIN DEPENDENTS.—In the case of an individual with respect to whom 

a deduction under this section is allowable to another taxpayer 

for a taxable year beginning in the calendar year in which the 

128 

individual’s taxable year begins, the exemption amount applicable to such individual for such individual’s taxable year shall 

be zero. 

(3) PHASEOUT.— 

(A) IN GENERAL.—In the case of any taxpayer whose adjusted gross income for the taxable year exceeds the applicable amount in effect under section 68(b), the exemption 

amount shall be reduced by the applicable percentage. 

(B) APPLICABLE PERCENTAGE.—For purposes of subparagraph (A), the term ‘‘applicable percentage’’ means 2 percentage points for each $2,500 (or fraction thereof) by 

which the taxpayer’s adjusted gross income for the taxable 

year exceeds the applicable amount in effect under section 

68(b). In the case of a married individual filing a separate 

return, the preceding sentence shall be applied by substituting ‘‘$1,250’’ for ‘‘$2,500’’. In no event shall the applicable percentage exceed 100 percent. 

(C) COORDINATION WITH OTHER PROVISIONS.—The provisions of this paragraph shall not apply for purposes of determining whether a deduction under this section with respect to any individual is allowable to another taxpayer for 

any taxable year. 

(4) INFLATION ADJUSTMENT.—Except as provided in paragraph (5), in the case of any taxable year beginning in a calendar year after 1989, the dollar amount contained in paragraph (1) shall be increased by an amount equal to— 

(A) such dollar amount, multiplied by 

(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year 

begins, by substituting ‘‘calendar year 1988’’ for ‘‘calendar 

year 2016’’ in subparagraph (A)(ii) thereof. 

(5) SPECIAL RULES FOR TAXABLE YEARS 2018 THROUGH 2025.— 

In the case of a taxable year beginning after December 31, 

2017, and before January 1, 2026— 

(A) EXEMPTION AMOUNT.—The term ‘‘exemption amount’’ 

means zero. 

(B) REFERENCES.—For purposes of any other provision of 

this title, the reduction of the exemption amount to zero 

under subparagraph (A) shall not be taken into account in 

determining whether a deduction is allowed or allowable, 

or whether a taxpayer is entitled to a deduction, under 

this section. 

(e) IDENTIFYING INFORMATION REQUIRED.—No exemption shall be 

allowed under this section with respect to any individual unless the 

TIN of such individual is included on the return claiming the exemption. 

* * * * * * * 

PART VI—ITEMIZED DEDUCTIONS FOR INDIVIDUALS 

AND CORPORATIONS 

* * * * * * * 

129 

SEC. 165. LOSSES. 

(a) GENERAL RULE.—There shall be allowed as a deduction any 

loss sustained during the taxable year and not compensated for by 

insurance or otherwise. 

(b) AMOUNT OF DEDUCTION.—For purposes of subsection (a), the 

basis for determining the amount of the deduction for any loss 

shall be the adjusted basis provided in section 1011 for determining 

the loss from the sale or other disposition of property. 

(c) LIMITATION ON LOSSES OF INDIVIDUALS.—In the case of an individual, the deduction under subsection (a) shall be limited to— 

(1) losses incurred in a trade or business; 

(2) losses incurred in any transaction entered into for profit, 

though not connected with a trade or business; and 

(3) except as provided in subsection (h), losses of property 

not connected with a trade or business or a transaction entered 

into for profit, if such losses arise from fire, storm, shipwreck, 

or other casualty, or from theft. 

(d) WAGERING LOSSES.—Losses from wagering transactions shall 

be allowed only to the extent of the gains from such transactions. 

For purposes of the preceding sentence, in the case of taxable years 

beginning after December 31, 2017, and before January 1, 2026, 

the term ‘‘losses from wagering transactions’’ includes any deduction otherwise allowable under this chapter incurred in carrying on 

any wagering transaction. 

(e) THEFT LOSSES.—For purposes of subsection (a), any loss arising from theft shall be treated as sustained during the taxable year 

in which the taxpayer discovers such loss. 

(f) CAPITAL LOSSES.—Losses from sales or exchanges of capital 

assets shall be allowed only to the extent allowed in sections 1211 

and 1212. 

(g) WORTHLESS SECURITIES.— 

(1) GENERAL RULE.—If any security which is a capital asset 

becomes worthless during the taxable year, the loss resulting 

therefrom shall, for purposes of this subtitle, be treated as a 

loss from the sale or exchange, on the last day of the taxable 

year, of a capital asset. 

(2) SECURITY DEFINED.—For purposes of this subsection, the 

term ‘‘security’’ means— 

(A) a share of stock in a corporation; 

(B) a right to subscribe for, or to receive, a share of stock 

in a corporation; or 

(C) a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form. 

(3) SECURITIES IN AFFILIATED CORPORATION.—For purposes of 

paragraph (1), any security in a corporation affiliated with a 

taxpayer which is a domestic corporation shall not be treated 

as a capital asset. For purposes of the preceding sentence, a 

corporation shall be treated as affiliated with the taxpayer only 

if— 

(A) the taxpayer owns directly stock in such corporation 

meeting the requirements of section 1504(a)(2), and 

(B) more than 90 percent of the aggregate of its gross receipts for all taxable years has been from sources other 

130 

than royalties, rents (except rents derived from rental of 

properties to employees of the corporation in the ordinary 

course of its operating business), dividends, interest (except interest received on deferred purchase price of operating assets sold), annuities, and gains from sales or exchanges of stocks and securities. 

In computing gross receipts for purposes of the preceding sentence, gross receipts from sales or exchanges of stocks and securities shall be taken into account only to the extent of gains 

therefrom. 

(h) TREATMENT OF CASUALTY GAINS AND LOSSES.— (1) DOLLAR LIMITATION PER CASUALTY.—Any loss of an individual described in subsection (c)(3) shall be allowed only to 

the extent that the amount of the loss to such individual arising from each casualty, or from each theft, exceeds $500 ($100 

for taxable years beginning after December 31, 2009). 

(2) NET CASUALTY LOSS ALLOWED ONLY TO THE EXTENT IT EX- CEEDS 10 PERCENT OF ADJUSTED GROSS INCOME.— (A) IN GENERAL.—If the personal casualty losses for any 

taxable year exceed the personal casualty gains for such 

taxable year, such losses shall be allowed for the taxable 

year only to the extent of the sum of— 

(i) the amount of the personal casualty gains for the 

taxable year, plus 

(ii) so much of such excess as exceeds 10 percent of 

the adjusted gross income of the individual. 

(B) SPECIAL RULE WHERE PERSONAL CASUALTY GAINS EX- CEED PERSONAL CASUALTY LOSSES.—If the personal casualty gains for any taxable year exceed the personal casualty losses for such taxable year— 

(i) all such gains shall be treated as gains from sales 

or exchanges of capital assets, and 

(ii) all such losses shall be treated as losses from 

sales or exchanges of capital assets. 

(3) DEFINITIONS OF PERSONAL CASUALTY GAIN AND PERSONAL

CASUALTY LOSS.—For purposes of this subsection— 

(A) PERSONAL CASUALTY GAIN.—The term ‘‘personal casualty gain’’ means the recognized gain from any involuntary conversion of property which is described in subsection (c)(3) arising from fire, storm, shipwreck, or other 

casualty, or from theft. 

(B) PERSONAL CASUALTY LOSS.—The term ‘‘personal casualty loss’’ means any loss described in subsection (c)(3). 

For purposes of paragraph (2), the amount of any personal 

casualty loss shall be determined after the application of 

paragraph (1). 

(4) SPECIAL RULES.— 

(A) PERSONAL CASUALTY LOSSES ALLOWABLE IN COMPUTING ADJUSTED GROSS INCOME TO THE EXTENT OF PER- SONAL CASUALTY GAINS.—In any case to which paragraph 

(2)(A) applies, the deduction for personal casualty losses 

for any taxable year shall be treated as a deduction allowable in computing adjusted gross income to the extent such 

losses do not exceed the personal casualty gains for the 

taxable year. 

131 

(B) JOINT RETURNS.—For purposes of this subsection, a 

øhusband and wife¿ married couple making a joint return 

for the taxable year shall be treated as 1 individual. 

(C) DETERMINATION OF ADJUSTED GROSS INCOME IN CASE

OF ESTATES AND TRUSTS.—For purposes of paragraph (2), 

the adjusted gross income of an estate or trust shall be 

computed in the same manner as in the case of an individual, except that the deductions for costs paid or incurred in connection with the administration of the estate 

or trust shall be treated as allowable in arriving at adjusted gross income. 

(D) COORDINATION WITH ESTATE TAX.—No loss described 

in subsection (c)(3) shall be allowed if, at the time of filing 

the return, such loss has been claimed for estate tax purposes in the estate tax return. 

(E) CLAIM REQUIRED TO BE FILED IN CERTAIN CASES.— 

Any loss of an individual described in subsection (c)(3) to 

the extent covered by insurance shall be taken into account under this section only if the individual files a timely insurance claim with respect to such loss. 

(5) LIMITATION FOR TAXABLE YEARS 2018 THROUGH 2025.— (A) IN GENERAL.—In the case of an individual, except as 

provided in subparagraph (B), any personal casualty loss 

which (but for this paragraph) would be deductible in a 

taxable year beginning after December 31, 2017, and before January 1, 2026, shall be allowed as a deduction 

under subsection (a) only to the extent it is attributable to 

a Federally declared disaster (as defined in subsection 

(i)(5)). 

(B) EXCEPTION RELATED TO PERSONAL CASUALTY GAINS.— 

If a taxpayer has personal casualty gains for any taxable 

year to which subparagraph (A) applies— 

(i) subparagraph (A) shall not apply to the portion 

of the personal casualty loss not attributable to a Federally declared disaster (as so defined) to the extent 

such loss does not exceed such gains, and 

(ii) in applying paragraph (2) for purposes of subparagraph (A) to the portion of personal casualty loss 

which is so attributable to such a disaster, the amount 

of personal casualty gains taken into account under 

paragraph (2)(A) shall be reduced by the portion of 

such gains taken into account under clause (i). 

(i) DISASTER LOSSES.— 

(1) ELECTION TO TAKE DEDUCTION FOR PRECEDING YEAR.— 

Notwithstanding the provisions of subsection (a), any loss occurring in a disaster area and attributable to a federally declared disaster may, at the election of the taxpayer, be taken 

into account for the taxable year immediately preceding the 

taxable year in which the disaster occurred. 

(2) YEAR OF LOSS.—If an election is made under this subsection, the casualty resulting in the loss shall be treated for 

purposes of this title as having occurred in the taxable year for 

which the deduction is claimed. 

(3) AMOUNT OF LOSS.—The amount of the loss taken into account in the preceding taxable year by reason of paragraph (1) 

132 

shall not exceed the uncompensated amount determined on the 

basis of the facts existing at the date the taxpayer claims the 

loss. 

(4) USE OF DISASTER LOAN APPRAISALS TO ESTABLISH AMOUNT

OF LOSS.—Nothing in this title shall be construed to prohibit 

the Secretary from prescribing regulations or other guidance 

under which an appraisal for the purpose of obtaining a loan 

of Federal funds or a loan guarantee from the Federal Government as a result of a federally declared disaster may be used 

to establish the amount of any loss described in paragraph (1) 

or (2). 

(5) FEDERALLY DECLARED DISASTERS.—For purposes of this 

subsection— 

(A) IN GENERAL.—The term ‘‘Federally declared disaster’’ 

means any disaster subsequently determined by the President of the United States to warrant assistance by the 

Federal Government under the Robert T. Stafford Disaster 

Relief and Emergency Assistance Act. 

(B) DISASTER AREA.—The term ‘‘disaster area’’ means the 

area so determined to warrant such assistance. 

(j) DENIAL OF DEDUCTION FOR LOSSES ON CERTAIN OBLIGATIONS

NOT IN REGISTERED FORM.— (1) IN GENERAL.—Nothing in subsection (a) or in any other 

provision of law shall be construed to provide a deduction for 

any loss sustained on any registration-required obligation unless such obligation is in registered form (or the issuance of 

such obligation was subject to tax under section 4701). 

(2) DEFINITIONS.—For purposes of this subsection— 

(A) REGISTRATION-REQUIRED OBLIGATION.—The term 

‘‘registration-required obligation’’ has the meaning given to 

such term by section 163(f)(2). 

(B) REGISTERED FORM.—The term ‘‘registered form’’ has 

the same meaning as when used in section 163(f). 

(3) EXCEPTIONS.—The Secretary may, by regulations, provide 

that this subsection and section 1287 shall not apply with respect to obligations held by any person if— 

(A) such person holds such obligations in connection 

with a trade or business outside the United States, 

(B) such person holds such obligations as a broker dealer 

(registered under Federal or State law) for sale to customers in the ordinary course of his trade or business, 

(C) such person complies with reporting requirements 

with respect to ownership, transfers, and payments as the 

Secretary may require, or 

(D) such person promptly surrenders the obligation to 

the issuer for the issuance of a new obligation in registered 

form, 

but only if such obligations are held under arrangements provided in regulations or otherwise which are designed to assure 

that such obligations are not delivered to any United States 

person other than a person described in subparagraph (A), (B), 

or (C). 

(k) TREATMENT AS DISASTER LOSS WHERE TAXPAYER ORDERED TO

DEMOLISH OR RELOCATE RESIDENCE IN DISASTER AREA BECAUSE OF

DISASTER.—In the case of a taxpayer whose residence is located in 

133 

an area which has been determined by the President of the United 

States to warrant assistance by the Federal Government under the 

Robert T. Stafford Disaster Relief and Emergency Assistance Act, 

if— 

(1) not later than the 120th day after the date of such determination, the taxpayer is ordered, by the government of the 

State or any political subdivision thereof in which such residence is located, to demolish or relocate such residence, and 

(2) the residence has been rendered unsafe for use as a residence by reason of the disaster, 

any loss attributable to such disaster shall be treated as a loss 

which arises from a casualty and which is described in subsection 

(i). 

(l) TREATMENT OF CERTAIN LOSSES IN INSOLVENT FINANCIAL INSTITUTIONS.— 

(1) IN GENERAL.—If— 

(A) as of the close of the taxable year, it can reasonably 

be estimated that there is a loss on a qualified individual’s 

deposit in a qualified financial institution, and 

(B) such loss is on account of the bankruptcy or insolvency of such institution, 

then the taxpayer may elect to treat the amount so estimated 

as a loss described in subsection (c)(3) incurred during the taxable year. 

(2) QUALIFIED INDIVIDUAL DEFINED.—For purposes of this 

subsection, the term ‘‘qualified individual’’ means any individual, except an individual— 

(A) who owns at least 1 percent in value of the outstanding stock of the qualified financial institution, 

(B) who is an officer of the qualified financial institution, 

(C) who is a sibling (whether by the whole or half blood), 

spouse, aunt, uncle, nephew, niece, ancestor, or lineal descendant of an individual described in subparagraph (A) or 

(B), or 

(D) who otherwise is a related person (as defined in section 267(b)) with respect to an individual described in subparagraph (A) or (B). 

(3) QUALIFIED FINANCIAL INSTITUTION.—For purposes of this 

subsection, the term ‘‘qualified financial institution’’ means— 

(A) any bank (as defined in section 581), 

(B) any institution described in section 591, 

(C) any credit union the deposits or accounts in which 

are insured under Federal or State law or are protected or 

guaranteed under State law, or 

(D) any similar institution chartered and supervised 

under Federal or State law. 

(4) DEPOSIT.—For purposes of this subsection, the term ‘‘deposit’’ means any deposit, withdrawable account, or 

withdrawable or repurchasable share. 

(5) ELECTION TO TREAT AS ORDINARY LOSS.— (A) IN GENERAL.—In lieu of any election under paragraph (1), the taxpayer may elect to treat the amount referred to in paragraph (1) for the taxable year as an ordinary loss described in subsection (c)(2) incurred during the 

taxable year. 

134 

(B) LIMITATIONS.— (i) DEPOSIT MAY NOT BE FEDERALLY INSURED.—No 

election may be made under subparagraph (A) with respect to any loss on a deposit in a qualified financial 

institution if part or all of such deposit is insured 

under Federal law. 

(ii) DOLLAR LIMITATION.—With respect to each financial institution, the aggregate amount of losses attributable to deposits in such financial institution to 

which an election under subparagraph (A) may be 

made by the taxpayer for any taxable year shall not 

exceed $20,000 ($10,000 in the case of a separate return by a married individual). The limitation of the 

preceding sentence shall be reduced by the amount of 

any insurance proceeds under any State law which 

can reasonably be expected to be received with respect 

to losses on deposits in such institution. 

(6) ELECTION.—Any election by the taxpayer under this subsection for any taxable year— 

(A) shall apply to all losses for such taxable year of the 

taxpayer on deposits in the institution with respect to 

which such election was made, and 

(B) may be revoked only with the consent of the Secretary. 

(7) COORDINATION WITH SECTION 166.—Section 166 shall not 

apply to any loss to which an election under this subsection applies. 

(m) CROSS REFERENCES.— (1) For special rule for banks with respect to worthless 

securities, see section 582. 

(2) For disallowance of deduction for worthlessness of securities to which subsection (g)(2)(C) applies, if issued by 

a political party or similar organization, see section 271. 

(3) For special rule for losses on stock in a small business investment company, see section 1242. 

(4) For special rule for losses of a small business investment company, see section 1243. 

(5) For special rule for losses on small business stock, 

see section 1244. 

* * * * * * * 

SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS. 

(a) ALLOWANCE OF DEDUCTION.— 

(1) GENERAL RULE.—There shall be allowed as a deduction 

any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable 

contribution shall be allowable as a deduction only if verified 

under regulations prescribed by the Secretary. 

(2) CORPORATIONS ON ACCRUAL BASIS.—In the case of a corporation reporting its taxable income on the accrual basis, if— 

(A) the board of directors authorizes a charitable contribution during any taxable year, and 

(B) payment of such contribution is made after the close 

of such taxable year and on or before the 15th day of the 

fourth month following the close of such taxable year, 

135 

then the taxpayer may elect to treat such contribution as paid 

during such taxable year. The election may be made only at 

the time of the filing of the return for such taxable year, and 

shall be signified in such manner as the Secretary shall by regulations prescribe. 

(3) FUTURE INTERESTS IN TANGIBLE PERSONAL PROPERTY.— 

For purposes of this section, payment of a charitable contribution which consists of a future interest in tangible personal 

property shall be treated as made only when all intervening interests in, and rights to the actual possession or enjoyment of, 

the property have expired or are held by persons other than 

the taxpayer or those standing in a relationship to the taxpayer described in section 267(b) or 707(b). For purposes of the 

preceding sentence, a fixture which is intended to be severed 

from the real property shall be treated as tangible personal 

property. 

(b) PERCENTAGE LIMITATIONS.— 

(1) INDIVIDUALS.—In the case of an individual, the deduction 

provided in subsection (a) shall be limited as provided in the 

succeeding subparagraphs. 

(A) GENERAL RULE.—Any charitable contribution to— 

(i) a church or a convention or association of churches, 

(ii) an educational organization which normally 

maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational 

activities are regularly carried on, 

(iii) an organization the principal purpose or functions of which are the providing of medical or hospital 

care or medical education or medical research, if the 

organization is a hospital, or if the organization is a 

medical research organization directly engaged in the 

continuous active conduct of medical research in conjunction with a hospital, and during the calendar year 

in which the contribution is made such organization is 

committed to spend such contributions for such research before January 1 of the fifth calendar year 

which begins after the date such contribution is made, 

(iv) an organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose 

or function constituting the basis for its exemption 

under section 501(a)) from the United States or any 

State or political subdivision thereof or from direct or 

indirect contributions from the general public, and 

which is organized and operated exclusively to receive, 

hold, invest, and administer property and to make expenditures to or for the benefit of a college or university which is an organization referred to in clause (ii) 

of this subparagraph and which is an agency or instrumentality of a State or political subdivision thereof, or 

which is owned or operated by a State or political subVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00141 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
136 

division thereof or by an agency or instrumentality of 

one or more States or political subdivisions, 

(v) a governmental unit referred to in subsection 

(c)(1), 

(vi) an organization referred to in subsection (c)(2) 

which normally receives a substantial part of its support (exclusive of income received in the exercise or 

performance by such organization of its charitable, 

educational, or other purpose or function constituting 

the basis for its exemption under section 501(a)) from 

a governmental unit referred to in subsection (c)(1) or 

from direct or indirect contributions from the general 

public, 

(vii) a private foundation described in subparagraph 

(F), 

(viii) an organization described in section 509(a)(2) 

or (3), or 

(ix) an agricultural research organization directly 

engaged in the continuous active conduct of agricultural research (as defined in section 1404 of the National Agricultural Research, Extension, and Teaching 

Policy Act of 1977) in conjunction with a land-grant 

college or university (as defined in such section) or a 

non-land grant college of agriculture (as defined in 

such section), and during the calendar year in which 

the contribution is made such organization is committed to spend such contribution for such research 

before January 1 of the fifth calendar year which begins after the date such contribution is made, 

shall be allowed to the extent that the aggregate of such 

contributions does not exceed 50 percent of the taxpayer’s 

contribution base for the taxable year. 

(B) OTHER CONTRIBUTIONS.—Any charitable contribution 

other than a charitable contribution to which subparagraph (A) applies shall be allowed to the extent that the 

aggregate of such contributions does not exceed the lesser 

of— 

(i) 30 percent of the taxpayer’s contribution base for 

the taxable year, or 

(ii) the excess of 50 percent of the taxpayer’s contribution base for the taxable year over the amount of 

charitable contributions allowable under subparagraph 

(A) (determined without regard to subparagraph (C)). 

If the aggregate of such contributions exceeds the limitation of the preceding sentence, such excess shall be treated 

(in a manner consistent with the rules of subsection (d)(1)) 

as a charitable contribution (to which subparagraph (A) 

does not apply) in each of the 5 succeeding taxable years 

in order of time. 

(C) SPECIAL LIMITATION WITH RESPECT TO CONTRIBU- TIONS DESCRIBED IN SUBPARAGRAPH (A) OF CERTAIN CAPITAL

GAIN PROPERTY.— (i) In the case of charitable contributions described 

in subparagraph (A) of capital gain property to which 

subsection (e)(1)(B) does not apply, the total amount of 

137 

contributions of such property which may be taken 

into account under subsection (a) for any taxable year 

shall not exceed 30 percent of the taxpayer’s contribution base for such year. For purposes of this subsection, contributions of capital gain property to which 

this subparagraph applies shall be taken into account 

after all other charitable contributions (other than 

charitable contributions to which subparagraph (D) 

applies). 

(ii) If charitable contributions described in subparagraph (A) of capital gain property to which clause (i) 

applies exceeds 30 percent of the taxpayer’s contribution base for any taxable year, such excess shall be 

treated, in a manner consistent with the rules of subsection (d)(1), as a charitable contribution of capital 

gain property to which clause (i) applies in each of the 

5 succeeding taxable years in order of time. 

(iii) At the election of the taxpayer (made at such 

time and in such manner as the Secretary prescribes 

by regulations), subsection (e)(1) shall apply to all contributions of capital gain property (to which subsection 

(e)(1)(B) does not otherwise apply) made by the taxpayer during the taxable year. If such an election is 

made, clauses (i) and (ii) shall not apply to contributions of capital gain property made during the taxable 

year, and, in applying subsection (d)(1) for such taxable year with respect to contributions of capital gain 

property made in any prior contribution year for which 

an election was not made under this clause, such contributions shall be reduced as if subsection (e)(1) had 

applied to such contributions in the year in which 

made. 

(iv) For purposes of this paragraph, the term ‘‘capital gain property’’ means, with respect to any contribution, any capital asset the sale of which at its fair 

market value at the time of the contribution would 

have resulted in gain which would have been longterm capital gain. For purposes of the preceding sentence, any property which is property used in the 

trade or business (as defined in section 1231(b)) shall 

be treated as a capital asset. 

(D) SPECIAL LIMITATION WITH RESPECT TO CONTRIBUTIONS OF CAPITAL GAIN PROPERTY TO ORGANIZATIONS NOT

DESCRIBED IN SUBPARAGRAPH (A).— 

(i) IN GENERAL.—In the case of charitable contributions (other than charitable contributions to which 

subparagraph (A) applies) of capital gain property, the 

total amount of such contributions of such property 

taken into account under subsection (a) for any taxable year shall not exceed the lesser of— 

(I) 20 percent of the taxpayer’s contribution 

base for the taxable year, or 

(II) the excess of 30 percent of the taxpayer’s 

contribution base for the taxable year over the 

138 

amount of the contributions of capital gain property to which subparagraph (C) applies. 

For purposes of this subsection, contributions of capital 

gain property to which this subparagraph applies shall be 

taken into account after all other charitable contributions. 

(ii) CARRYOVER.—If the aggregate amount of contributions described in clause (i) exceeds the limitation 

of clause (i), such excess shall be treated (in a manner 

consistent with the rules of subsection (d)(1)) as a 

charitable contribution of capital gain property to 

which clause (i) applies in each of the 5 succeeding 

taxable years in order of time. 

(E) CONTRIBUTIONS OF QUALIFIED CONSERVATION CONTRIBUTIONS.— 

(i) IN GENERAL.—Any qualified conservation contribution (as defined in subsection (h)(1)) shall be allowed to the extent the aggregate of such contributions 

does not exceed the excess of 50 percent of the taxpayer’s contribution base over the amount of all other 

charitable contributions allowable under this paragraph. 

(ii) CARRYOVER.—If the aggregate amount of contributions described in clause (i) exceeds the limitation 

of clause (i), such excess shall be treated (in a manner 

consistent with the rules of subsection (d)(1)) as a 

charitable contribution to which clause (i) applies in 

each of the 15 succeeding years in order of time. 

(iii) COORDINATION WITH OTHER SUBPARAGRAPHS.— For purposes of applying this subsection and subsection (d)(1), contributions described in clause (i) 

shall not be treated as described in subparagraph (A), 

(B), (C), or (D) and such subparagraphs shall apply 

without regard to such contributions. 

(iv) SPECIAL RULE FOR CONTRIBUTION OF PROPERTY

USED IN AGRICULTURE OR LIVESTOCK PRODUCTION.— (I) IN GENERAL.—If the individual is a qualified 

farmer or rancher for the taxable year for which 

the contribution is made, clause (i) shall be applied by substituting ‘‘100 percent’’ for ‘‘50 percent’’. 

(II) EXCEPTION.—Subclause (I) shall not apply 

to any contribution of property made after the 

date of the enactment of this subparagraph which 

is used in agriculture or livestock production (or 

available for such production) unless such contribution is subject to a restriction that such property remain available for such production. This 

subparagraph shall be applied separately with respect to property to which subclause (I) does not 

apply by reason of the preceding sentence prior to 

its application to property to which subclause (I) 

does apply. 

(v) DEFINITION.—For purposes of clause (iv), the 

term ‘‘qualified farmer or rancher’’ means a taxpayer 

whose gross income from the trade or business of 

139 

farming (within the meaning of section 2032A(e)(5)) is 

greater than 50 percent of the taxpayer’s gross income 

for the taxable year. 

(F) CERTAIN PRIVATE FOUNDATIONS.—The private foundations referred to in subparagraph (A)(vii) and subsection 

(e)(1)(B) are— 

(i) a private operating foundation (as defined in section 4942(j)(3)), 

(ii) any other private foundation (as defined in section 509(a)) which, not later than the 15th day of the 

third month after the close of the foundation’s taxable 

year in which contributions are received, makes qualifying distributions (as defined in section 4942(g), without regard to paragraph (3) thereof), which are treated, after the application of section 4942(g)(3), as distributions out of corpus (in accordance with section 

4942(h)) in an amount equal to 100 percent of such 

contributions, and with respect to which the taxpayer 

obtains adequate records or other sufficient evidence 

from the foundation showing that the foundation made 

such qualifying distributions, and 

(iii) a private foundation all of the contributions to 

which are pooled in a common fund and which would 

be described in section 509(a)(3) but for the right of 

any substantial contributor (hereafter in this clause 

called ‘‘donor’’) or øhis spouse¿ the spouse of such 

donor to designate annually the recipients, from 

among organizations described in paragraph (1) of section 509(a), of the income attributable to the donor’s 

contribution to the fund and to direct (by deed or by 

will) the payment, to an organization described in 

such paragraph (1), of the corpus in the common fund 

attributable to the donor’s contribution; but this clause 

shall apply only if all of the income of the common 

fund is required to be (and is) distributed to one or 

more organizations described in such paragraph (1) 

not later than the 15th day of the third month after 

the close of the taxable year in which the income is realized by the fund and only if all of the corpus attributable to any donor’s contribution to the fund is required to be (and is) distributed to one or more of such 

organizations not later than one year after øhis death 

or after the death of his surviving spouse if she¿ the 

death of the donor or after the death of the donor’s surviving spouse if such surviving spouse has the right to 

designate the recipients of such corpus. 

(G) INCREASED LIMITATION FOR CASH CONTRIBUTIONS.— 

(i) IN GENERAL.—In the case of any contribution of 

cash to an organization described in subparagraph (A), 

the total amount of such contributions which may be 

taken into account under subsection (a) for any taxable year beginning after December 31, 2017, and before January 1, 2026, shall not exceed 60 percent of 

the taxpayer’s contribution base for such year. 

140 

(ii) CARRYOVER.—If the aggregate amount of contributions described in clause (i) exceeds the applicable 

limitation under clause (i) for any taxable year described in such clause, such excess shall be treated (in 

a manner consistent with the rules of subsection 

(d)(1)) as a charitable contribution to which clause (i) 

applies in each of the 5 succeeding years in order of 

time. 

(iii) COORDINATION WITH SUBPARAGRAPHS (A) AND

(B).— (I) IN GENERAL.—Contributions taken into account under this subparagraph shall not be taken 

into account under subparagraph (A). 

(II) LIMITATION REDUCTION.—For each taxable 

year described in clause (i), and each taxable year 

to which any contribution under this subparagraph is carried over under clause (ii), subparagraph (A) shall be applied by reducing (but not 

below zero) the contribution limitation allowed for 

the taxable year under such subparagraph by the 

aggregate contributions allowed under this subparagraph for such taxable year, and subparagraph (B) shall be applied by treating any reference to subparagraph (A) as a reference to both 

subparagraph (A) and this subparagraph. 

(H) CONTRIBUTION BASE DEFINED.—For purposes of this 

section, the term ‘‘contribution base’’ means adjusted gross 

income (computed without regard to any net operating loss 

carryback to the taxable year under section 172). 

(2) CORPORATIONS.—In the case of a corporation— 

(A) IN GENERAL.—The total deductions under subsection 

(a) for any taxable year (other than for contributions to 

which subparagraph (B) or (C) applies) shall not exceed 10 

percent of the taxpayer’s taxable income. 

(B) QUALIFIED CONSERVATION CONTRIBUTIONS BY CER- TAIN CORPORATE FARMERS AND RANCHERS.— (i) IN GENERAL.—Any qualified conservation contribution (as defined in subsection (h)(1))— 

(I) which is made by a corporation which, for 

the taxable year during which the contribution is 

made, is a qualified farmer or rancher (as defined 

in paragraph (1)(E)(v)) and the stock of which is 

not readily tradable on an established securities 

market at any time during such year, and 

(II) which, in the case of contributions made 

after the date of the enactment of this subparagraph, is a contribution of property which is used 

in agriculture or livestock production (or available 

for such production) and which is subject to a restriction that such property remain available for 

such production, 

shall be allowed to the extent the aggregate of such contributions does not exceed the excess of the taxpayer’s taxable income over the amount of charitable contributions allowable under subparagraph (A). 

141 

(ii) CARRYOVER.—If the aggregate amount of contributions described in clause (i) exceeds the limitation 

of clause (i), such excess shall be treated (in a manner 

consistent with the rules of subsection (d)(2)) as a 

charitable contribution to which clause (i) applies in 

each of the 15 succeeding taxable years in order of 

time. 

(C) QUALIFIED CONSERVATION CONTRIBUTIONS BY CER- TAIN NATIVE CORPORATIONS.— (i) IN GENERAL.—Any qualified conservation contribution (as defined in subsection (h)(1)) which— 

(I) is made by a Native Corporation, and 

(II) is a contribution of property which was land 

conveyed under the Alaska Native Claims Settlement Act, 

shall be allowed to the extent that the aggregate amount 

of such contributions does not exceed the excess of the taxpayer’s taxable income over the amount of charitable contributions allowable under subparagraph (A). 

(ii) CARRYOVER.—If the aggregate amount of contributions described in clause (i) exceeds the limitation 

of clause (i), such excess shall be treated (in a manner 

consistent with the rules of subsection (d)(2)) as a 

charitable contribution to which clause (i) applies in 

each of the 15 succeeding taxable years in order of 

time. 

(iii) NATIVE CORPORATION.—For purposes of this 

subparagraph, the term ‘‘Native Corporation’’ has the 

meaning given such term by section 3(m) of the Alaska 

Native Claims Settlement Act. 

(D) TAXABLE INCOME.—For purposes of this paragraph, 

taxable income shall be computed without regard to— 

(i) this section, 

(ii) part VIII (except section 248), 

(iii) any net operating loss carryback to the taxable 

year under section 172, 

(iv) any capital loss carryback to the taxable year 

under section 1212(a)(1) 

(v) section 199A(g). 

(c) CHARITABLE CONTRIBUTION DEFINED.—For purposes of this 

section, the term ‘‘charitable contribution’’ means a contribution or 

gift to or for the use of— 

(1) A State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States 

or the District of Columbia, but only if the contribution or gift 

is made for exclusively public purposes. 

(2) A corporation, trust, or community chest, fund, or foundation— 

(A) created or organized in the United States or in any 

possession thereof, or under the law of the United States, 

any State, the District of Columbia, or any possession of 

the United States; 

(B) organized and operated exclusively for religious, 

charitable, scientific, literary, or educational purposes, or 

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142 

tion (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals; 

(C) no part of the net earnings of which inures to the 

benefit of any private shareholder or individual; and 

(D) which is not disqualified for tax exemption under 

section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in 

(including the publishing or distributing of statements), 

any political campaign on behalf of (or in opposition to) 

any candidate for public office. 

A contribution or gift by a corporation to a trust, chest, fund, 

or foundation shall be deductible by reason of this paragraph 

only if it is to be used within the United States or any of its 

possessions exclusively for purposes specified in subparagraph 

(B). Rules similar to the rules of section 501(j) shall apply for 

purposes of this paragraph. 

(3) A post or organization of war veterans, or an auxiliary 

unit or society of, or trust or foundation for, any such post or 

organization— 

(A) organized in the United States or any of its possessions, and 

(B) no part of the net earnings of which inures to the 

benefit of any private shareholder or individual. 

(4) In the case of a contribution or gift by an individual, a 

domestic fraternal society, order, or association, operating 

under the lodge system, but only if such contribution or gift is 

to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty 

to children or animals. 

(5) A cemetery company owned and operated exclusively for 

the benefit of its members, or any corporation chartered solely 

for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily 

incident to that purpose, if such company or corporation is not 

operated for profit and no part of the net earnings of such company or corporation inures to the benefit of any private shareholder or individual. 

For purposes of this section, the term ‘‘charitable contribution’’ also 

means an amount treated under subsection (g) as paid for the use 

of an organization described in paragraph (2), (3), or (4). 

(d) CARRYOVERS OF EXCESS CONTRIBUTIONS.— 

(1) INDIVIDUALS.— 

(A) IN GENERAL.—In the case of an individual, if the 

amount of charitable contributions described in subsection 

(b)(1)(A) payment of which is made within a taxable year 

(hereinafter in this paragraph referred to as the ‘‘contribution year’’) exceeds 50 percent of the taxpayer’s contribution base for such year, such excess shall be treated as a 

charitable contribution described in subsection (b)(1)(A) 

paid in each of the 5 succeeding taxable years in order of 

time, but, with respect to any such succeeding taxable 

year, only to the extent of the lesser of the two following 

amounts: 

143 

(i) the amount by which 50 percent of the taxpayer’s 

contribution base for such succeeding taxable year exceeds the sum of the charitable contributions described 

in subsection (b)(1)(A) payment of which is made by 

the taxpayer within such succeeding taxable year (determined without regard to this subparagraph) and 

the charitable contributions described in subsection 

(b)(1)(A) payment of which was made in taxable years 

before the contribution year which are treated under 

this subparagraph as having been paid in such succeeding taxable year; or 

(ii) in the case of the first succeeding taxable year, 

the amount of such excess, and in the case of the second, third, fourth, or fifth succeeding taxable year, the 

portion of such excess not treated under this subparagraph as a charitable contribution described in subsection (b)(1)(A) paid in any taxable year intervening 

between the contribution year and such succeeding 

taxable year. 

(B) SPECIAL RULE FOR NET OPERATING LOSS

CARRYOVERS.—In applying subparagraph (A), the excess 

determined under subparagraph (A) for the contribution 

year shall be reduced to the extent that such excess reduces taxable income (as computed for purposes of the second sentence of section 172(b)(2)) and increases the net operating loss deduction for a taxable year succeeding the 

contribution year. 

(2) CORPORATIONS.— 

(A) IN GENERAL.—Any contribution made by a corporation in a taxable year (hereinafter in this paragraph referred to as the ‘‘contribution year’’) in excess of the 

amount deductible for such year under subsection (b)(2)(A) 

shall be deductible for each of the 5 succeeding taxable 

years in order of time, but only to the extent of the lesser 

of the two following amounts: (i) the excess of the maximum amount deductible for such succeeding taxable year 

under subsection (b)(2)(A) over the sum of the contributions made in such year plus the aggregate of the excess 

contributions which were made in taxable years before the 

contribution year and which are deductible under this subparagraph for such succeeding taxable year; or (ii) in the 

case of the first succeeding taxable year, the amount of 

such excess contribution, and in the case of the second, 

third, fourth, or fifth succeeding taxable year, the portion 

of such excess contribution not deductible under this subparagraph for any taxable year intervening between the 

contribution year and such succeeding taxable year. 

(B) SPECIAL RULE FOR NET OPERATING LOSS

CARRYOVERS.—For purposes of subparagraph (A), the excess of— 

(i) the contributions made by a corporation in a taxable year to which this section applies, over 

(ii) the amount deductible in such year under the 

limitation in subsection (b)(2)(A), 

144 

shall be reduced to the extent that such excess reduces 

taxable income (as computed for purposes of the second 

sentence of section 172(b)(2)) and increases a net operating 

loss carryover under section 172 to a succeeding taxable 

year. 

(e) CERTAIN CONTRIBUTIONS OF ORDINARY INCOME AND CAPITAL

GAIN PROPERTY.— 

(1) GENERAL RULE.—The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of— 

(A) the amount of gain which would not have been longterm capital gain (determined without regard to section 

1221(b)(3)) if the property contributed had been sold by the 

taxpayer at its fair market value (determined at the time 

of such contribution), and 

(B) in the case of a charitable contribution— 

(i) of tangible personal property— 

(I) if the use by the donee is unrelated to the 

purpose or function constituting the basis for its 

exemption under section 501 (or, in the case of a 

governmental unit, to any purpose or function described in subsection (c)), or 

(II) which is applicable property (as defined in 

paragraph (7)(C), but without regard to clause (ii) 

thereof) which is sold, exchanged, or otherwise 

disposed of by the donee before the last day of the 

taxable year in which the contribution was made 

and with respect to which the donee has not made 

a certification in accordance with paragraph 

(7)(D), 

(ii) to or for the use of a private foundation (as defined in section 509(a)), other than a private foundation described in subsection (b)(1)(F), 

(iii) of any patent, copyright (other than a copyright 

described in section 1221(a)(3) or 1231(b)(1)(C)), trademark, trade name, trade secret, know-how, software 

(other than software described in section 

197(e)(3)(A)(i)), or similar property, or applications or 

registrations of such property, or 

(iv) of any taxidermy property which is contributed 

by the person who prepared, stuffed, or mounted the 

property or by any person who paid or incurred the 

cost of such preparation, stuffing, or mounting, 

the amount of gain which would have been long-term capital gain if the property contributed had been sold by the 

taxpayer at its fair market value (determined at the time 

of such contribution). 

For purposes of applying this paragraph (other than in the 

case of gain to which section 617(d)(1), 1245(a), 1250(a), 

1252(a), or 1254(a) applies), property which is property used in 

the trade or business (as defined in section 1231(b)) shall be 

treated as a capital asset. For purposes of applying this paragraph in the case of a charitable contribution of stock in an S 

corporation, rules similar to the rules of section 751 shall apply 

145 

in determining whether gain on such stock would have been 

long-term capital gain if such stock were sold by the taxpayer. 

(2) ALLOCATION OF BASIS.—For purposes of paragraph (1), in 

the case of a charitable contribution of less than the taxpayer’s 

entire interest in the property contributed, the taxpayer’s adjusted basis in such property shall be allocated between the interest contributed and any interest not contributed in accordance with regulations prescribed by the Secretary. 

(3) SPECIAL RULE FOR CERTAIN CONTRIBUTIONS OF INVENTORY

AND OTHER PROPERTY.— 

(A) QUALIFIED CONTRIBUTIONS.—For purposes of this 

paragraph, a qualified contribution shall mean a charitable contribution of property described in paragraph (1) or 

(2) of section 1221(a), by a corporation (other than a corporation which is an S corporation) to an organization 

which is described in section 501(c)(3) and is exempt under 

section 501(a) (other than a private foundation, as defined 

in section 509(a), which is not an operating foundation, as 

defined in section 4942(j)(3)), but only if— 

(i) the use of the property by the donee is related to 

the purpose or function constituting the basis for its 

exemption under section 501 and the property is to be 

used by the donee solely for the care of the ill, the 

needy, or infants; 

(ii) the property is not transferred by the donee in 

exchange for money, other property, or services; 

(iii) the taxpayer receives from the donee a written 

statement representing that its use and disposition of 

the property will be in accordance with the provisions 

of clauses (i) and (ii); and 

(iv) in the case where the property is subject to regulation under the Federal Food, Drug, and Cosmetic 

Act, as amended, such property must fully satisfy the 

applicable requirements of such Act and regulations 

promulgated thereunder on the date of transfer and 

for one hundred and eighty days prior thereto. 

(B) AMOUNT OF REDUCTION.—The reduction under paragraph (1)(A) for any qualified contribution (as defined in 

subparagraph (A)) shall be no greater than the sum of— 

(i) one-half of the amount computed under paragraph (1)(A) (computed without regard to this paragraph), and 

(ii) the amount (if any) by which the charitable contribution deduction under this section for any qualified 

contribution (computed by taking into account the 

amount determined in clause (i), but without regard to 

this clause) exceeds twice the basis of such property. 

(C) SPECIAL RULE FOR CONTRIBUTIONS OF FOOD INVENTORY.— 

(i) GENERAL RULE.—In the case of a charitable contribution of food from any trade or business of the taxpayer, this paragraph shall be applied— 

(I) without regard to whether the contribution is 

made by a C corporation, and 

146 

(II) only to food that is apparently wholesome 

food. 

(ii) LIMITATION.—The aggregate amount of such contributions for any taxable year which may be taken 

into account under this section shall not exceed— 

(I) in the case of any taxpayer other than a C 

corporation, 15 percent of the taxpayer’s aggregate 

net income for such taxable year from all trades 

or businesses from which such contributions were 

made for such year, computed without regard to 

this section, and 

(II) in the case of a C corporation, 15 percent of 

taxable income (as defined in subsection (b)(2)(D)). 

(iii) RULES RELATED TO LIMITATION.— 

(I) CARRYOVER.—If such aggregate amount exceeds the limitation imposed under clause (ii), 

such excess shall be treated (in a manner consistent with the rules of subsection (d)) as a charitable contribution described in clause (i) in each of 

the 5 succeeding taxable years in order of time. 

(II) COORDINATION WITH OVERALL CORPORATE

LIMITATION.—In the case of any charitable contribution which is allowable after the application 

of clause (ii)(II), subsection (b)(2)(A) shall not 

apply to such contribution, but the limitation imposed by such subsection shall be reduced (but not 

below zero) by the aggregate amount of such contributions. For purposes of subsection (b)(2)(B), 

such contributions shall be treated as allowable 

under subsection (b)(2)(A). 

(iv) DETERMINATION OF BASIS FOR CERTAIN TAXPAYERS.—If a taxpayer— 

(I) does not account for inventories under section 471, and 

(II) is not required to capitalize indirect costs 

under section 263A, 

the taxpayer may elect, solely for purposes of subparagraph (B), to treat the basis of any apparently wholesome 

food as being equal to 25 percent of the fair market value 

of such food. 

(v) DETERMINATION OF FAIR MARKET VALUE.—In the 

case of any such contribution of apparently wholesome 

food which cannot or will not be sold solely by reason 

of internal standards of the taxpayer, lack of market, 

or similar circumstances, or by reason of being produced by the taxpayer exclusively for the purposes of 

transferring the food to an organization described in 

subparagraph (A), the fair market value of such contribution shall be determined— 

(I) without regard to such internal standards, 

such lack of market, such circumstances, or such 

exclusive purpose, and 

(II) by taking into account the price at which 

the same or substantially the same food items (as 

to both type and quality) are sold by the taxpayer 

147 

at the time of the contribution (or, if not so sold 

at such time, in the recent past). 

(vi) APPARENTLY WHOLESOME FOOD.—For purposes 

of this subparagraph, the term ‘‘apparently wholesome 

food’’ has the meaning given to such term by section 

22(b)(2) of the Bill Emerson Good Samaritan Food Donation Act (42 U.S.C. 1791(b)(2)), as in effect on the 

date of the enactment of this subparagraph. 

(D) This paragraph shall not apply to so much of the 

amount of the gain described in paragraph (1)(A) which 

would be long-term capital gain but for the application of 

sections 617, 1245, 1250, or 1252. 

(4) SPECIAL RULE FOR CONTRIBUTIONS OF SCIENTIFIC PROPERTY USED FOR RESEARCH.— 

(A) LIMIT ON REDUCTION.—In the case of a qualified research contribution, the reduction under paragraph (1)(A) 

shall be no greater than the amount determined under 

paragraph (3)(B). 

(B) QUALIFIED RESEARCH CONTRIBUTIONS.—For purposes 

of this paragraph, the term ‘‘qualified research contribution’’ means a charitable contribution by a corporation of 

tangible personal property described in paragraph (1) of 

section 1221(a), but only if— 

(i) the contribution is to an organization described in 

subparagraph (A) or subparagraph (B) of section 

41(e)(6), 

(ii) the property is constructed or assembled by the 

taxpayer, 

(iii) the contribution is made not later than 2 years 

after the date the construction or assembly of the 

property is substantially completed, 

(iv) the original use of the property is by the donee, 

(v) the property is scientific equipment or apparatus 

substantially all of the use of which by the donee is for 

research or experimentation (within the meaning of 

section 174), or for research training, in the United 

States in physical or biological sciences, 

(vi) the property is not transferred by the donee in 

exchange for money, other property, or services, and 

(vii) the taxpayer receives from the donee a written 

statement representing that its use and disposition of 

the property will be in accordance with the provisions 

of clauses (v) and (vi). 

(C) CONSTRUCTION OF PROPERTY BY TAXPAYER.—For purposes of this paragraph, property shall be treated as constructed by the taxpayer only if the cost of the parts used 

in the construction of such property (other than parts manufactured by the taxpayer or a related person) do not exceed 50 percent of the taxpayer’s basis in such property. 

(D) CORPORATION.—For purposes of this paragraph, the 

term ‘‘corporation’’ shall not include— 

(i) an S corporation, 

(ii) a personal holding company (as defined in section 542), and 

148 

(iii) a service organization (as defined in section 

414(m)(3)). 

(5) SPECIAL RULE FOR CONTRIBUTIONS OF STOCK FOR WHICH

MARKET QUOTATIONS ARE READILY AVAILABLE.— 

(A) IN GENERAL.—Subparagraph (B)(ii) of paragraph (1) 

shall not apply to any contribution of qualified appreciated 

stock. 

(B) QUALIFIED APPRECIATED STOCK.—Except as provided 

in subparagraph (C), for purposes of this paragraph, the 

term ‘‘qualified appreciated stock’’ means any stock of a 

corporation— 

(i) for which (as of the date of the contribution) market quotations are readily available on an established 

securities market, and 

(ii) which is capital gain property (as defined in subsection (b)(1)(C)(iv)). 

(C) DONOR MAY NOT CONTRIBUTE MORE THAN 10 PERCENT

OF STOCK OF CORPORATION.— 

(i) IN GENERAL.—In the case of any donor, the term 

‘‘qualified appreciated stock’’ shall not include any 

stock of a corporation contributed by the donor in a 

contribution to which paragraph (1)(B)(ii) applies (determined without regard to this paragraph) to the extent that the amount of the stock so contributed (when 

increased by the aggregate amount of all prior such 

contributions by the donor of stock in such corporation) exceeds 10 percent (in value) of all of the outstanding stock of such corporation. 

(ii) SPECIAL RULE.—For purposes of clause (i), an individual shall be treated as making all contributions 

made by any member of his family (as defined in section 267(c)(4)). 

(7) RECAPTURE OF DEDUCTION ON CERTAIN DISPOSITIONS OF

EXEMPT USE PROPERTY.— 

(A) IN GENERAL.—In the case of an applicable disposition 

of applicable property, there shall be included in the income of the donor of such property for the taxable year of 

such donor in which the applicable disposition occurs an 

amount equal to the excess (if any) of— 

(i) the amount of the deduction allowed to the donor 

under this section with respect to such property, over 

(ii) the donor’s basis in such property at the time 

such property was contributed. 

(B) APPLICABLE DISPOSITION.—For purposes of this paragraph, the term ‘‘applicable disposition’’ means any sale, 

exchange, or other disposition by the donee of applicable 

property— 

(i) after the last day of the taxable year of the donor 

in which such property was contributed, and 

(ii) before the last day of the 3-year period beginning 

on the date of the contribution of such property, 

unless the donee makes a certification in accordance with 

subparagraph (D). 

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(C) APPLICABLE PROPERTY.—For purposes of this paragraph, the term ‘‘applicable property’’ means charitable deduction property (as defined in section 6050L(a)(2)(A))— 

(i) which is tangible personal property the use of 

which is identified by the donee as related to the purpose or function constituting the basis of the donee’s 

exemption under section 501, and 

(ii) for which a deduction in excess of the donor’s 

basis is allowed. 

(D) CERTIFICATION.—A certification meets the requirements of this subparagraph if it is a written statement 

which is signed under penalty of perjury by an officer of 

the donee organization and— 

(i) which— 

(I) certifies that the use of the property by the 

donee was substantial and related to the purpose 

or function constituting the basis for the donee’s 

exemption under section 501, and 

(II) describes how the property was used and 

how such use furthered such purpose or function, 

or 

(ii) which— 

(I) states the intended use of the property by 

the donee at the time of the contribution, and 

(II) certifies that such intended use has become 

impossible or infeasible to implement. 

(f) DISALLOWANCE OF DEDUCTION IN CERTAIN CASES AND SPECIAL

RULES.— 

(1) IN GENERAL.—No deduction shall be allowed under this 

section for a contribution to or for the use of an organization 

or trust described in section 508(d) or 4948(c)(4) subject to the 

conditions specified in such sections. 

(2) CONTRIBUTIONS OF PROPERTY PLACED IN TRUST.— (A) REMAINDER INTEREST.—In the case of property transferred in trust, no deduction shall be allowed under this 

section for the value of a contribution of a remainder interest unless the trust is a charitable remainder annuity 

trust or a charitable remainder unitrust (described in section 664), or a pooled income fund (described in section 

642(c)(5)). 

(B) INCOME INTERESTS, ETC..—No deduction shall be allowed under this section for the value of any interest in 

property (other than a remainder interest) transferred in 

trust unless the interest is in the form of a guaranteed annuity or the trust instrument specifies that the interest is 

a fixed percentage distributed yearly of the fair market 

value of the trust property (to be determined yearly) and 

the grantor is treated as the owner of such interest for 

purposes of applying section 671. If the donor ceases to be 

treated as the owner of such an interest for purposes of applying section 671, at the time the donor ceases to be so 

treated, the donor shall for purposes of this chapter be considered as having received an amount of income equal to 

the amount of any deduction he received under this section 

for the contribution reduced by the discounted value of all 

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amounts of income earned by the trust and taxable to him 

before the time at which he ceases to be treated as the 

owner of the interest. Such amounts of income shall be discounted to the date of the contribution. The Secretary shall 

prescribe such regulations as may be necessary to carry 

out the purposes of this subparagraph. 

(C) DENIAL OF DEDUCTION IN CASE OF PAYMENTS BY CER- TAIN TRUSTS.—In any case in which a deduction is allowed 

under this section for the value of an interest in property 

described in subparagraph (B), transferred in trust, no deduction shall be allowed under this section to the grantor 

or any other person for the amount of any contribution 

made by the trust with respect to such interest. 

(D) EXCEPTION.—This paragraph shall not apply in a 

case in which the value of all interests in property transferred in trust are deductible under subsection (a). 

(3) DENIAL OF DEDUCTION IN CASE OF CERTAIN CONTRIBU- TIONS OF PARTIAL INTERESTS IN PROPERTY.— (A) IN GENERAL.—In the case of a contribution (not made 

by a transfer in trust) of an interest in property which consists of less than the taxpayer’s entire interest in such 

property, a deduction shall be allowed under this section 

only to the extent that the value of the interest contributed would be allowable as a deduction under this section 

if such interest had been transferred in trust. For purposes 

of this subparagraph, a contribution by a taxpayer of the 

right to use property shall be treated as a contribution of 

less than the taxpayer’s entire interest in such property. 

(B) EXCEPTIONS.—Subparagraph (A) shall not apply to— 

(i) a contribution of a remainder interest in a personal residence or farm, 

(ii) a contribution of an undivided portion of the taxpayer’s entire interest in property, and 

(iii) a qualified conservation contribution. 

(4) VALUATION OF REMAINDER INTEREST IN REAL PROPERTY.— For purposes of this section, in determining the value of a remainder interest in real property, depreciation (computed on 

the straight line method) and depletion of such property shall 

be taken into account, and such value shall be discounted at 

a rate of 6 percent per annum, except that the Secretary may 

prescribe a different rate. 

(5) REDUCTION FOR CERTAIN INTEREST.—If, in connection 

with any charitable contribution, a liability is assumed by the 

recipient or by any other person, or if a charitable contribution 

is of property which is subject to a liability, then, to the extent 

necessary to avoid the duplication of amounts, the amount 

taken into account for purposes of this section as the amount 

of the charitable contribution— 

(A) shall be reduced for interest (i) which has been paid 

(or is to be paid) by the taxpayer, (ii) which is attributable 

to the liability, and (iii) which is attributable to any period 

after the making of the contribution, and 

(B) in the case of a bond, shall be further reduced for interest (i) which has been paid (or is to be paid) by the taxpayer on indebtedness incurred or continued to purchase 

151 

or carry such bond, and (ii) which is attributable to any period before the making of the contribution. 

The reduction pursuant to subparagraph (B) shall not exceed 

the interest (including interest equivalent) on the bond which 

is attributable to any period before the making of the contribution and which is not (under the taxpayer’s method of accounting) includible in the gross income of the taxpayer for any taxable year. For purposes of this paragraph, the term ‘‘bond’’ 

means any bond, debenture, note, or certificate or other evidence of indebtedness. 

(6) DEDUCTIONS FOR OUT-OF-POCKET EXPENDITURES.—No deduction shall be allowed under this section for an out-of-pocket 

expenditure made by any person on behalf of an organization 

described in subsection (c) (other than an organization described in section 501(h)(5) (relating to churches, etc.)) if the 

expenditure is made for the purpose of influencing legislation 

(within the meaning of section 501(c)(3)). 

(7) REFORMATIONS TO COMPLY WITH PARAGRAPH (2).— 

(A) IN GENERAL.—A deduction shall be allowed under 

subsection (a) in respect of any qualified reformation 

(within the meaning of section 2055(e)(3)(B)). 

(B) RULES SIMILAR TO SECTION 2055(E)(3) TO APPLY.—For 

purposes of this paragraph, rules similar to the rules of 

section 2055(e)(3) shall apply. 

(8) SUBSTANTIATION REQUIREMENT FOR CERTAIN CONTRIBUTIONS.— 

(A) GENERAL RULE.—No deduction shall be allowed 

under subsection (a) for any contribution of $250 or more 

unless the taxpayer substantiates the contribution by a 

contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B). 

(B) CONTENT OF ACKNOWLEDGEMENT.—An acknowledgement meets the requirements of this subparagraph if it includes the following information: 

(i) The amount of cash and a description (but not 

value) of any property other than cash contributed. 

(ii) Whether the donee organization provided any 

goods or services in consideration, in whole or in part, 

for any property described in clause (i). 

(iii) A description and good faith estimate of the 

value of any goods or services referred to in clause (ii) 

or, if such goods or services consist solely of intangible 

religious benefits, a statement to that effect. 

For purposes of this subparagraph, the term ‘‘intangible 

religious benefit’’ means any intangible religious benefit 

which is provided by an organization organized exclusively 

for religious purposes and which generally is not sold in a 

commercial transaction outside the donative context. 

(C) CONTEMPORANEOUS.—For purposes of subparagraph 

(A), an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on 

or before the earlier of— 

152 

(i) the date on which the taxpayer files a return for 

the taxable year in which the contribution was made, 

or 

(ii) the due date (including extensions) for filing 

such return. 

(D) REGULATIONS.—The Secretary shall prescribe such 

regulations as may be necessary or appropriate to carry 

out the purposes of this paragraph, including regulations 

that may provide that some or all of the requirements of 

this paragraph do not apply in appropriate cases. 

(9) DENIAL OF DEDUCTION WHERE CONTRIBUTION FOR LOBBYING ACTIVITIES.—No deduction shall be allowed under this 

section for a contribution to an organization which conducts activities to which section 162(e)(1) applies on matters of direct 

financial interest to the donor’s trade or business, if a principal 

purpose of the contribution was to avoid Federal income tax by 

securing a deduction for such activities under this section 

which would be disallowed by reason of section 162(e) if the 

donor had conducted such activities directly. No deduction 

shall be allowed under section 162(a) for any amount for which 

a deduction is disallowed under the preceding sentence. 

(10) SPLIT-DOLLAR LIFE INSURANCE, ANNUITY, AND ENDOW- MENT CONTRACTS.— (A) IN GENERAL.—Nothing in this section or in section 

545(b)(2), 642(c), 2055, 2106(a)(2), or 2522 shall be construed to allow a deduction, and no deduction shall be allowed, for any transfer to or for the use of an organization 

described in subsection (c) if in connection with such transfer— 

(i) the organization directly or indirectly pays, or 

has previously paid, any premium on any personal 

benefit contract with respect to the transferor, or 

(ii) there is an understanding or expectation that 

any person will directly or indirectly pay any premium 

on any personal benefit contract with respect to the 

transferor. 

(B) PERSONAL BENEFIT CONTRACT.—For purposes of subparagraph (A), the term ‘‘personal benefit contract’’ means, 

with respect to the transferor, any life insurance, annuity, 

or endowment contract if any direct or indirect beneficiary 

under such contract is the transferor, any member of the 

transferor’s family, or any other person (other than an organization described in subsection (c)) designated by the 

transferor. 

(C) APPLICATION TO CHARITABLE REMAINDER TRUSTS.—In 

the case of a transfer to a trust referred to in subparagraph (E), references in subparagraphs (A) and (F) to an 

organization described in subsection (c) shall be treated as 

a reference to such trust. 

(D) EXCEPTION FOR CERTAIN ANNUITY CONTRACTS.—If, in 

connection with a transfer to or for the use of an organization described in subsection (c), such organization incurs 

an obligation to pay a charitable gift annuity (as defined 

in section 501(m)) and such organization purchases any 

annuity contract to fund such obligation, persons receiving 

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payments under the charitable gift annuity shall not be 

treated for purposes of subparagraph (B) as indirect beneficiaries under such contract if— 

(i) such organization possesses all of the incidents of 

ownership under such contract, 

(ii) such organization is entitled to all the payments 

under such contract, and 

(iii) the timing and amount of payments under such 

contract are substantially the same as the timing and 

amount of payments to each such person under such 

obligation (as such obligation is in effect at the time 

of such transfer). 

(E) EXCEPTION FOR CERTAIN CONTRACTS HELD BY CHARITABLE REMAINDER TRUSTS.—A person shall not be treated 

for purposes of subparagraph (B) as an indirect beneficiary 

under any life insurance, annuity, or endowment contract 

held by a charitable remainder annuity trust or a charitable remainder unitrust (as defined in section 664(d)) 

solely by reason of being entitled to any payment referred 

to in paragraph (1)(A) or (2)(A) of section 664(d) if— 

(i) such trust possesses all of the incidents of ownership under such contract, and 

(ii) such trust is entitled to all the payments under 

such contract. 

(F) EXCISE TAX ON PREMIUMS PAID.— 

(i) IN GENERAL.—There is hereby imposed on any organization described in subsection (c) an excise tax 

equal to the premiums paid by such organization on 

any life insurance, annuity, or endowment contract if 

the payment of premiums on such contract is in connection with a transfer for which a deduction is not allowable under subparagraph (A), determined without 

regard to when such transfer is made. 

(ii) PAYMENTS BY OTHER PERSONS.—For purposes of 

clause (i), payments made by any other person pursuant to an understanding or expectation referred to in 

subparagraph (A) shall be treated as made by the organization. 

(iii) REPORTING.—Any organization on which tax is 

imposed by clause (i) with respect to any premium 

shall file an annual return which includes— 

(I) the amount of such premiums paid during 

the year and the name and TIN of each beneficiary under the contract to which the premium 

relates, and 

(II) such other information as the Secretary may 

require. 

The penalties applicable to returns required under section 

6033 shall apply to returns required under this clause. Returns required under this clause shall be furnished at such 

time and in such manner as the Secretary shall by forms 

or regulations require. 

(iv) CERTAIN RULES TO APPLY.—The tax imposed by 

this subparagraph shall be treated as imposed by 

154 

chapter 42 for purposes of this title other than subchapter B of chapter 42. 

(G) SPECIAL RULE WHERE STATE REQUIRES SPECIFICATION

OF CHARITABLE GIFT ANNUITANT IN CONTRACT.—In the case 

of an obligation to pay a charitable gift annuity referred to 

in subparagraph (D) which is entered into under the laws 

of a State which requires, in order for the charitable gift 

annuity to be exempt from insurance regulation by such 

State, that each beneficiary under the charitable gift annuity be named as a beneficiary under an annuity contract 

issued by an insurance company authorized to transact 

business in such State, the requirements of clauses (i) and 

(ii) of subparagraph (D) shall be treated as met if— 

(i) such State law requirement was in effect on February 8, 1999, 

(ii) each such beneficiary under the charitable gift 

annuity is a bona fide resident of such State at the 

time the obligation to pay a charitable gift annuity is 

entered into, and 

(iii) the only persons entitled to payments under 

such contract are persons entitled to payments as 

beneficiaries under such obligation on the date such 

obligation is entered into. 

(H) MEMBER OF FAMILY.—For purposes of this paragraph, an individual’s family consists of the individual’s 

grandparents, the grandparents of such individual’s 

spouse, the lineal descendants of such grandparents, and 

any spouse of such a lineal descendant. 

(I) REGULATIONS.—The Secretary shall prescribe such 

regulations as may be necessary or appropriate to carry 

out the purposes of this paragraph, including regulations 

to prevent the avoidance of such purposes. 

(11) QUALIFIED APPRAISAL AND OTHER DOCUMENTATION FOR

CERTAIN CONTRIBUTIONS.— 

(A) IN GENERAL.— (i) DENIAL OF DEDUCTION.—In the case of an individual, partnership, or corporation, no deduction shall 

be allowed under subsection (a) for any contribution of 

property for which a deduction of more than $500 is 

claimed unless such person meets the requirements of 

subparagraphs (B), (C), and (D), as the case may be, 

with respect to such contribution. 

(ii) EXCEPTIONS.— 

(I) READILY VALUED PROPERTY.—Subparagraphs 

(C) and (D) shall not apply to cash, property described in subsection (e)(1)(B)(iii) or section 

1221(a)(1), publicly traded securities (as defined in 

section 6050L(a)(2)(B)), and any qualified vehicle 

described in paragraph (12)(A)(ii) for which an acknowledgement under paragraph (12)(B)(iii) is 

provided. 

(II) REASONABLE CAUSE.—Clause (i) shall not 

apply if it is shown that the failure to meet such 

requirements is due to reasonable cause and not 

to willful neglect. 

155 

(B) PROPERTY DESCRIPTION FOR CONTRIBUTIONS OF MORE

THAN $500.—In the case of contributions of property for 

which a deduction of more than $500 is claimed, the requirements of this subparagraph are met if the individual, 

partnership or corporation includes with the return for the 

taxable year in which the contribution is made a description of such property and such other information as the 

Secretary may require. The requirements of this subparagraph shall not apply to a C corporation which is not a 

personal service corporation or a closely held C corporation. 

(C) QUALIFIED APPRAISAL FOR CONTRIBUTIONS OF MORE

THAN $5,000.—In the case of contributions of property for 

which a deduction of more than $5,000 is claimed, the requirements of this subparagraph are met if the individual, 

partnership, or corporation obtains a qualified appraisal of 

such property and attaches to the return for the taxable 

year in which such contribution is made such information 

regarding such property and such appraisal as the Secretary may require. 

(D) SUBSTANTIATION FOR CONTRIBUTIONS OF MORE THAN

$500,000.—In the case of contributions of property for which 

a deduction of more than $500,000 is claimed, the requirements of this subparagraph are met if the individual, partnership, or corporation attaches to the return for the taxable year a qualified appraisal of such property. 

(E) QUALIFIED APPRAISAL AND APPRAISER.—For purposes 

of this paragraph— 

(i) QUALIFIED APPRAISAL.—The term ‘‘qualified appraisal’’ means, with respect to any property, an appraisal of such property which— 

(I) is treated for purposes of this paragraph as 

a qualified appraisal under regulations or other 

guidance prescribed by the Secretary, and 

(II) is conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed under subclause (I). 

(ii) QUALIFIED APPRAISER.—Except as provided in 

clause (iii), the term ‘‘qualified appraiser’’ means an 

individual who— 

(I) has earned an appraisal designation from a 

recognized professional appraiser organization or 

has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary, 

(II) regularly performs appraisals for which the 

individual receives compensation, and 

(III) meets such other requirements as may be 

prescribed by the Secretary in regulations or other 

guidance. 

(iii) SPECIFIC APPRAISALS.—An individual shall not 

be treated as a qualified appraiser with respect to any 

specific appraisal unless— 

156 

(I) the individual demonstrates verifiable education and experience in valuing the type of property subject to the appraisal, and 

(II) the individual has not been prohibited from 

practicing before the Internal Revenue Service by 

the Secretary under section 330(c) of title 31, 

United States Code, at any time during the 3-year 

period ending on the date of the appraisal. 

(F) AGGREGATION OF SIMILAR ITEMS OF PROPERTY.—For 

purposes of determining thresholds under this paragraph, 

property and all similar items of property donated to 1 or 

more donees shall be treated as 1 property. 

(G) SPECIAL RULE FOR PASS-THRU ENTITIES.—In the case 

of a partnership or S corporation, this paragraph shall be 

applied at the entity level, except that the deduction shall 

be denied at the partner or shareholder level. 

(H) REGULATIONS.—The Secretary may prescribe such 

regulations as may be necessary or appropriate to carry 

out the purposes of this paragraph, including regulations 

that may provide that some or all of the requirements of 

this paragraph do not apply in appropriate cases. 

(12) CONTRIBUTIONS OF USED MOTOR VEHICLES, BOATS, AND

AIRPLANES.— 

(A) IN GENERAL.—In the case of a contribution of a qualified vehicle the claimed value of which exceeds $500— 

(i) paragraph (8) shall not apply and no deduction 

shall be allowed under subsection (a) for such contribution unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization 

that meets the requirements of subparagraph (B) and 

includes the acknowledgement with the taxpayer’s return of tax which includes the deduction, and 

(ii) if the organization sells the vehicle without any 

significant intervening use or material improvement of 

such vehicle by the organization, the amount of the deduction allowed under subsection (a) shall not exceed 

the gross proceeds received from such sale. 

(B) CONTENT OF ACKNOWLEDGEMENT.—An acknowledgement meets the requirements of this subparagraph if it includes the following information: 

(i) The name and taxpayer identification number of 

the donor. 

(ii) The vehicle identification number or similar 

number. 

(iii) In the case of a qualified vehicle to which subparagraph (A)(ii) applies— 

(I) a certification that the vehicle was sold in an 

arm’s length transaction between unrelated parties, 

(II) the gross proceeds from the sale, and 

(III) a statement that the deductible amount 

may not exceed the amount of such gross proceeds. 

157 

(iv) In the case of a qualified vehicle to which subparagraph (A)(ii) does not apply— 

(I) a certification of the intended use or material 

improvement of the vehicle and the intended duration of such use, and 

(II) a certification that the vehicle would not be 

transferred in exchange for money, other property, 

or services before completion of such use or improvement. 

(v) Whether the donee organization provided any 

goods or services in consideration, in whole or in part, 

for the qualified vehicle. 

(vi) A description and good faith estimate of the 

value of any goods or services referred to in clause (v) 

or, if such goods or services consist solely of intangible 

religious benefits (as defined in paragraph (8)(B)), a 

statement to that effect. 

(C) CONTEMPORANEOUS.—For purposes of subparagraph 

(A), an acknowledgement shall be considered to be contemporaneous if the donee organization provides it within 30 

days of— 

(i) the sale of the qualified vehicle, or 

(ii) in the case of an acknowledgement including a 

certification described in subparagraph (B)(iv), the 

contribution of the qualified vehicle. 

(D) INFORMATION TO SECRETARY.—A donee organization 

required to provide an acknowledgement under this paragraph shall provide to the Secretary the information contained in the acknowledgement. Such information shall be 

provided at such time and in such manner as the Secretary may prescribe. 

(E) QUALIFIED VEHICLE.—For purposes of this paragraph, the term ‘‘qualified vehicle’’ means any— 

(i) motor vehicle manufactured primarily for use on 

public streets, roads, and highways, 

(ii) boat, or 

(iii) airplane. 

Such term shall not include any property which is described in section 1221(a)(1). 

(F) REGULATIONS OR OTHER GUIDANCE.—The Secretary 

shall prescribe such regulations or other guidance as may 

be necessary to carry out the purposes of this paragraph. 

The Secretary may prescribe regulations or other guidance 

which exempts sales by the donee organization which are 

in direct furtherance of such organization’s charitable purpose from the requirements of subparagraphs (A)(ii) and 

(B)(iv)(II). 

(13) CONTRIBUTIONS OF CERTAIN INTERESTS IN BUILDINGS LOCATED IN REGISTERED HISTORIC DISTRICTS.— (A) IN GENERAL.—No deduction shall be allowed with respect to any contribution described in subparagraph (B) 

unless the taxpayer includes with the return for the taxable year of the contribution a $500 filing fee. 

(B) CONTRIBUTION DESCRIBED.—A contribution is described in this subparagraph if such contribution is a 

158 

qualified conservation contribution (as defined in subsection (h)) which is a restriction with respect to the exterior of a building described in subsection (h)(4)(C)(ii) and 

for which a deduction is claimed in excess of $10,000. 

(C) DEDICATION OF FEE.—Any fee collected under this 

paragraph shall be used for the enforcement of the provisions of subsection (h). 

(14) REDUCTION FOR AMOUNTS ATTRIBUTABLE TO REHABILITA- TION CREDIT.—In the case of any qualified conservation contribution (as defined in subsection (h)), the amount of the deduction allowed under this section shall be reduced by an 

amount which bears the same ratio to the fair market value 

of the contribution as— 

(A) the sum of the credits allowed to the taxpayer under 

section 47 for the 5 preceding taxable years with respect 

to any building which is a part of such contribution, bears 

to 

(B) the fair market value of the building on the date of 

the contribution. 

(15) SPECIAL RULE FOR TAXIDERMY PROPERTY.— 

(A) BASIS.—For purposes of this section and notwithstanding section 1012, in the case of a charitable contribution of taxidermy property which is made by the person 

who prepared, stuffed, or mounted the property or by any 

person who paid or incurred the cost of such preparation, 

stuffing, or mounting, only the cost of the preparing, stuffing, or mounting shall be included in the basis of such 

property. 

(B) TAXIDERMY PROPERTY.—For purposes of this section, 

the term ‘‘taxidermy property’’ means any work of art 

which— 

(i) is the reproduction or preservation of an animal, 

in whole or in part, 

(ii) is prepared, stuffed, or mounted for purposes of 

recreating one or more characteristics of such animal, 

and 

(iii) contains a part of the body of the dead animal. 

(16) CONTRIBUTIONS OF CLOTHING AND HOUSEHOLD ITEMS.— 

(A) IN GENERAL.—In the case of an individual, partnership, or corporation, no deduction shall be allowed under 

subsection (a) for any contribution of clothing or a household item unless such clothing or household item is in good 

used condition or better. 

(B) ITEMS OF MINIMAL VALUE.—Notwithstanding subparagraph (A), the Secretary may by regulation deny a deduction under subsection (a) for any contribution of clothing or a household item which has minimal monetary 

value. 

(C) EXCEPTION FOR CERTAIN PROPERTY.—Subparagraphs 

(A) and (B) shall not apply to any contribution of a single 

item of clothing or a household item for which a deduction 

of more than $500 is claimed if the taxpayer includes with 

the taxpayer’s return a qualified appraisal with respect to 

the property. 

159 

(D) HOUSEHOLD ITEMS.—For purposes of this paragraph— 

(i) IN GENERAL.—The term ‘‘household items’’ includes furniture, furnishings, electronics, appliances, 

linens, and other similar items. 

(ii) EXCLUDED ITEMS.—Such term does not include— 

(I) food, 

(II) paintings, antiques, and other objects of art, 

(III) jewelry and gems, and 

(IV) collections. 

(E) SPECIAL RULE FOR PASS-THRU ENTITIES.—In the case 

of a partnership or S corporation, this paragraph shall be 

applied at the entity level, except that the deduction shall 

be denied at the partner or shareholder level. 

(17) RECORDKEEPING.—No deduction shall be allowed under 

subsection (a) for any contribution of a cash, check, or other 

monetary gift unless the donor maintains as a record of such 

contribution a bank record or a written communication from 

the donee showing the name of the donee organization, the 

date of the contribution, and the amount of the contribution. 

(18) CONTRIBUTIONS TO DONOR ADVISED FUNDS.—A deduction 

otherwise allowed under subsection (a) for any contribution to 

a donor advised fund (as defined in section 4966(d)(2)) shall 

only be allowed if— 

(A) the sponsoring organization (as defined in section 

4966(d)(1)) with respect to such donor advised fund is 

not— 

(i) described in paragraph (3), (4), or (5) of subsection (c), or 

(ii) a type III supporting organization (as defined in 

section 4943(f)(5)(A)) which is not a functionally integrated type III supporting organization (as defined in 

section 4943(f)(5)(B)), and 

(B) the taxpayer obtains a contemporaneous written acknowledgment (determined under rules similar to the 

rules of paragraph (8)(C)) from the sponsoring organization 

(as so defined) of such donor advised fund that such organization has exclusive legal control over the assets contributed. 

(g) AMOUNTS PAID TO MAINTAIN CERTAIN STUDENTS AS MEMBERS

OF TAXPAYER’S HOUSEHOLD.— 

(1) IN GENERAL.—Subject to the limitations provided by paragraph (2), amounts paid by the taxpayer to maintain an individual (other than a dependent, as defined in section 152 (determined without regard to subsections (b)(1), (b)(2), and 

(d)(1)(B) thereof), or a relative of the taxpayer) as a member 

of his household during the period that such individual is— 

(A) a member of the taxpayer’s household under a written agreement between the taxpayer and an organization 

described in paragraph (2), (3), or (4) of subsection (c) to 

implement a program of the organization to provide educational opportunities for pupils or students in private 

homes, and 

160 

(B) a full-time pupil or student in the twelfth or any 

lower grade at an educational organization described in 

section 170(b)(1)(A)(ii) located in the United States, 

shall be treated as amounts paid for the use of the organization. 

(2) LIMITATIONS.— (A) AMOUNT.—Paragraph (1) shall apply to amounts 

paid within the taxable year only to the extent that such 

amounts do not exceed $50 multiplied by the number of 

full calendar months during the taxable year which fall 

within the period described in paragraph (1). For purposes 

of the preceding sentence, if 15 or more days of a calendar 

month fall within such period such month shall be considered as a full calendar month. 

(B) COMPENSATION OR REIMBURSEMENT.—Paragraph (1) 

shall not apply to any amount paid by the taxpayer within 

the taxable year if the taxpayer receives any money or 

other property as compensation or reimbursement for 

maintaining the individual in his household during the period described in paragraph (1). 

(3) RELATIVE DEFINED.—For purposes of paragraph (1), the 

term ‘‘relative of the taxpayer’’ means an individual who, with 

respect to the taxpayer, bears any of the relationships described in subparagraphs (A) through (G) of section 152(d)(2). 

(4) NO OTHER AMOUNT ALLOWED AS DEDUCTION.—No deduction shall be allowed under subsection (a) for any amount paid 

by a taxpayer to maintain an individual as a member of his 

household under a program described in paragraph (1)(A) except as provided in this subsection. 

(h) QUALIFIED CONSERVATION CONTRIBUTION.— 

(1) IN GENERAL.—For purposes of subsection (f)(3)(B)(iii), the 

term ‘‘qualified conservation contribution’’ means a contribution— 

(A) of a qualified real property interest, 

(B) to a qualified organization, 

(C) exclusively for conservation purposes. 

(2) QUALIFIED REAL PROPERTY INTEREST.—For purposes of 

this subsection, the term ‘‘qualified real property interest’’ 

means any of the following interests in real property: 

(A) the entire interest of the donor other than a qualified 

mineral interest, 

(B) a remainder interest, and 

(C) a restriction (granted in perpetuity) on the use which 

may be made of the real property. 

(3) QUALIFIED ORGANIZATION.—For purposes of paragraph 

(1), the term ‘‘qualified organization’’ means an organization 

which— 

(A) is described in clause (v) or (vi) of subsection 

(b)(1)(A), or 

(B) is described in section 501(c)(3) and— 

(i) meets the requirements of section 509(a)(2), or 

(ii) meets the requirements of section 509(a)(3) and 

is controlled by an organization described in subparagraph (A) or in clause (i) of this subparagraph. 

(4) CONSERVATION PURPOSE DEFINED.— 

161 

(A) IN GENERAL.—For purposes of this subsection, the 

term ‘‘conservation purpose’’ means— 

(i) the preservation of land areas for outdoor recreation by, or the education of, the general public, 

(ii) the protection of a relatively natural habitat of 

fish, wildlife, or plants, or similar ecosystem, 

(iii) the preservation of open space (including farmland and forest land) where such preservation is— 

(I) for the scenic enjoyment of the general public, or 

(II) pursuant to a clearly delineated Federal, 

State, or local governmental conservation policy, 

and will yield a significant public benefit, or 

(iv) the preservation of an historically important 

land area or a certified historic structure. 

(B) SPECIAL RULES WITH RESPECT TO BUILDINGS IN REGISTERED HISTORIC DISTRICTS.—In the case of any contribution of a qualified real property interest which is a restriction with respect to the exterior of a building described in 

subparagraph (C)(ii), such contribution shall not be considered to be exclusively for conservation purposes unless— 

(i) such interest— 

(I) includes a restriction which preserves the entire exterior of the building (including the front, 

sides, rear, and height of the building), and 

(II) prohibits any change in the exterior of the 

building which is inconsistent with the historical 

character of such exterior, 

(ii) the donor and donee enter into a written agreement certifying, under penalty of perjury, that the 

donee— 

(I) is a qualified organization (as defined in 

paragraph (3)) with a purpose of environmental 

protection, land conservation, open space preservation, or historic preservation, and 

(II) has the resources to manage and enforce the 

restriction and a commitment to do so, and 

(iii) in the case of any contribution made in a taxable year beginning after the date of the enactment of 

this subparagraph, the taxpayer includes with the taxpayer’s return for the taxable year of the contribution— 

(I) a qualified appraisal (within the meaning of 

subsection (f)(11)(E)) of the qualified property interest, 

(II) photographs of the entire exterior of the 

building, and 

(III) a description of all restrictions on the development of the building. 

(C) CERTIFIED HISTORIC STRUCTURE.—For purposes of 

subparagraph (A)(iv), the term ‘‘certified historic structure’’ 

means— 

(i) any building, structure, or land area which is listed in the National Register, or 

162 

(ii) any building which is located in a registered historic district (as defined in section 47(c)(3)(B)) and is 

certified by the Secretary of the Interior to the Secretary as being of historic significance to the district. 

A building, structure, or land area satisfies the preceding sentence if it satisfies such sentence either at the time of the 

transfer or on the due date (including extensions) for filing the 

transferor’s return under this chapter for the taxable year in 

which the transfer is made. 

(5) EXCLUSIVELY FOR CONSERVATION PURPOSES.—For purposes of this subsection— 

(A) CONSERVATION PURPOSE MUST BE PROTECTED.—A 

contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity. 

(B) NO SURFACE MINING PERMITTED.— 

(i) IN GENERAL.—Except as provided in clause (ii), in 

the case of a contribution of any interest where there 

is a retention of a qualified mineral interest, subparagraph (A) shall not be treated as met if at any time 

there may be extraction or removal of minerals by any 

surface mining method. 

(ii) SPECIAL RULE.—With respect to any contribution 

of property in which the ownership of the surface estate and mineral interests has been and remains separated, subparagraph (A) shall be treated as met if the 

probability of surface mining occurring on such property is so remote as to be negligible. 

(6) QUALIFIED MINERAL INTEREST.—For purposes of this subsection, the term ‘‘qualified mineral interest’’ means— 

(A) subsurface oil, gas, or other minerals, and 

(B) the right to access to such minerals. 

(i) STANDARD MILEAGE RATE FOR USE OF PASSENGER AUTO- MOBILE.—For purposes of computing the deduction under this section for use of a passenger automobile, the standard mileage rate 

shall be 14 cents per mile. 

(j) DENIAL OF DEDUCTION FOR CERTAIN TRAVEL EXPENSES.—No 

deduction shall be allowed under this section for traveling expenses 

(including amounts expended for meals and lodging) while away 

from home, whether paid directly or by reimbursement, unless 

there is no significant element of personal pleasure, recreation, or 

vacation in such travel. 

(l) TREATMENT OF CERTAIN AMOUNTS PAID TO OR FOR THE BENEFIT

OF INSTITUTIONS OF HIGHER EDUCATION.— 

(1) IN GENERAL.—No deduction shall be allowed under this 

section for any amount described in paragraph (2). 

(2) AMOUNT DESCRIBED.—For purposes of paragraph (1), an 

amount is described in this paragraph if— 

(A) the amount is paid by the taxpayer to or for the benefit of an educational organization— 

(i) which is described in subsection (b)(1)(A)(ii), and 

(ii) which is an institution of higher education (as 

defined in section 3304(f)), and 

(B) the taxpayer receives (directly or indirectly) as a result of paying such amount the right to purchase tickets 

163 

for seating at an athletic event in an athletic stadium of 

such institution. 

If any portion of a payment is for the purchase of such tickets, 

such portion and the remaining portion (if any) of such payment shall be treated as separate amounts for purposes of this 

subsection. 

(m) CERTAIN DONEE INCOME FROM INTELLECTUAL PROPERTY

TREATED AS AN ADDITIONAL CHARITABLE CONTRIBUTION.— (1) TREATMENT AS ADDITIONAL CONTRIBUTION.—In the case of 

a taxpayer who makes a qualified intellectual property contribution, the deduction allowed under subsection (a) for each 

taxable year of the taxpayer ending on or after the date of such 

contribution shall be increased (subject to the limitations 

under subsection (b)) by the applicable percentage of qualified 

donee income with respect to such contribution which is properly allocable to such year under this subsection. 

(2) REDUCTION IN ADDITIONAL DEDUCTIONS TO EXTENT OF INI- TIAL DEDUCTION.—With respect to any qualified intellectual 

property contribution, the deduction allowed under subsection 

(a) shall be increased under paragraph (1) only to the extent 

that the aggregate amount of such increases with respect to 

such contribution exceed the amount allowed as a deduction 

under subsection (a) with respect to such contribution determined without regard to this subsection. 

(3) QUALIFIED DONEE INCOME.—For purposes of this subsection, the term ‘‘qualified donee income’’ means any net income received by or accrued to the donee which is properly allocable to the qualified intellectual property. 

(4) ALLOCATION OF QUALIFIED DONEE INCOME TO TAXABLE

YEARS OF DONOR.—For purposes of this subsection, qualified 

donee income shall be treated as properly allocable to a taxable 

year of the donor if such income is received by or accrued to 

the donee for the taxable year of the donee which ends within 

or with such taxable year of the donor. 

(5) 10-YEAR LIMITATION.—Income shall not be treated as 

properly allocable to qualified intellectual property for purposes of this subsection if such income is received by or accrued to the donee after the 10-year period beginning on the 

date of the contribution of such property. 

(6) BENEFIT LIMITED TO LIFE OF INTELLECTUAL PROPERTY.— 

Income shall not be treated as properly allocable to qualified 

intellectual property for purposes of this subsection if such income is received by or accrued to the donee after the expiration 

of the legal life of such property. 

(7) APPLICABLE PERCENTAGE.—For purposes of this subsection, the term ‘‘applicable percentage’’ means the percentage 

determined under the following table which corresponds to a 

taxable year of the donor ending on or after the date of the 

qualified intellectual property contribution: 

(8) QUALIFIED INTELLECTUAL PROPERTY CONTRIBUTION.—For 

purposes of this subsection, the term ‘‘qualified intellectual 

property contribution’’ means any charitable contribution of 

qualified intellectual property— 

(A) the amount of which taken into account under this 

section is reduced by reason of subsection (e)(1), and 

164 

(B) with respect to which the donor informs the donee at 

the time of such contribution that the donor intends to 

treat such contribution as a qualified intellectual property 

contribution for purposes of this subsection and section 

6050L. 

(9) QUALIFIED INTELLECTUAL PROPERTY.—For purposes of 

this subsection, the term ‘‘qualified intellectual property’’ 

means property described in subsection (e)(1)(B)(iii) (other than 

property contributed to or for the use of an organization described in subsection (e)(1)(B)(ii)). 

(10) OTHER SPECIAL RULES.— 

(A) APPLICATION OF LIMITATIONS ON CHARITABLE CONTRIBUTIONS.—Any increase under this subsection of the deduction provided under subsection (a) shall be treated for 

purposes of subsection (b) as a deduction which is attributable to a charitable contribution to the donee to which 

such increase relates. 

(B) NET INCOME DETERMINED BY DONEE.—The net income taken into account under paragraph (3) shall not exceed the amount of such income reported under section 

6050L(b)(1). 

(C) DEDUCTION LIMITED TO 12 TAXABLE YEARS.—Except 

as may be provided under subparagraph (D)(i), this subsection shall not apply with respect to any qualified intellectual property contribution for any taxable year of the 

donor after the 12th taxable year of the donor which ends 

on or after the date of such contribution. 

(D) REGULATIONS.—The Secretary may issue regulations 

or other guidance to carry out the purposes of this subsection, including regulations or guidance— 

(i) modifying the application of this subsection in the 

case of a donor or donee with a short taxable year, and 

(ii) providing for the determination of an amount to 

be treated as net income of the donee which is properly allocable to qualified intellectual property in the 

case of a donee who uses such property to further a 

purpose or function constituting the basis of the 

donee’s exemption under section 501 (or, in the case of 

a governmental unit, any purpose described in section 

170(c)) and does not possess a right to receive any payment from a third party with respect to such property. 

(n) EXPENSES PAID BY CERTAIN WHALING CAPTAINS IN SUPPORT OF

NATIVE ALASKAN SUBSISTENCE WHALING.— 

(1) IN GENERAL.—In the case of an individual who is recognized by the Alaska Eskimo Whaling Commission as a whaling 

captain charged with the responsibility of maintaining and carrying out sanctioned whaling activities and who engages in 

such activities during the taxable year, the amount described 

in paragraph (2) (to the extent such amount does not exceed 

$10,000 for the taxable year) shall be treated for purposes of 

this section as a charitable contribution. 

(2) AMOUNT DESCRIBED.— 

(A) IN GENERAL.—The amount described in this paragraph is the aggregate of the reasonable and necessary 

165 

whaling expenses paid by the taxpayer during the taxable 

year in carrying out sanctioned whaling activities. 

(B) WHALING EXPENSES.—For purposes of subparagraph 

(A), the term ‘‘whaling expenses’’ includes expenses for— 

(i) the acquisition and maintenance of whaling 

boats, weapons, and gear used in sanctioned whaling 

activities, 

(ii) the supplying of food for the crew and other provisions for carrying out such activities, and 

(iii) storage and distribution of the catch from such 

activities. 

(3) SANCTIONED WHALING ACTIVITIES.—For purposes of this 

subsection, the term ‘‘sanctioned whaling activities’’ means 

subsistence bowhead whale hunting activities conducted pursuant to the management plan of the Alaska Eskimo Whaling 

Commission. 

(4) SUBSTANTIATION OF EXPENSES.—The Secretary shall issue 

guidance requiring that the taxpayer substantiate the whaling 

expenses for which a deduction is claimed under this subsection, including by maintaining appropriate written records 

with respect to the time, place, date, amount, and nature of the 

expense, as well as the taxpayer’s eligibility for such deduction, 

and that (to the extent provided by the Secretary) such substantiation be provided as part of the taxpayer’s return of tax. 

(o) SPECIAL RULES FOR FRACTIONAL GIFTS.— (1) DENIAL OF DEDUCTION IN CERTAIN CASES.— (A) IN GENERAL.—No deduction shall be allowed for a 

contribution of an undivided portion of a taxpayer’s entire 

interest in tangible personal property unless all interests 

in the property are held immediately before such contribution by— 

(i) the taxpayer, or 

(ii) the taxpayer and the donee. 

(B) EXCEPTIONS.—The Secretary may, by regulation, provide for exceptions to subparagraph (A) in cases where all 

persons who hold an interest in the property make proportional contributions of an undivided portion of the entire 

interest held by such persons. 

(2) VALUATION OF SUBSEQUENT GIFTS.—In the case of any additional contribution, the fair market value of such contribution shall be determined by using the lesser of— 

(A) the fair market value of the property at the time of 

the initial fractional contribution, or 

(B) the fair market value of the property at the time of 

the additional contribution. 

(3) RECAPTURE OF DEDUCTION IN CERTAIN CASES; ADDITION TO

TAX.— 

(A) RECAPTURE.—The Secretary shall provide for the recapture of the amount of any deduction allowed under this 

section (plus interest) with respect to any contribution of 

an undivided portion of a taxpayer’s entire interest in tangible personal property— 

(i) in any case in which the donor does not contribute all of the remaining interests in such property 

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166 

ence, to any person described in section 170(c)) on or 

before the earlier of— 

(I) the date that is 10 years after the date of the 

initial fractional contribution, or 

(II) the date of the death of the donor, and 

(ii) in any case in which the donee has not, during 

the period beginning on the date of the initial fractional contribution and ending on the date described 

in clause (i)— 

(I) had substantial physical possession of the 

property, and 

(II) used the property in a use which is related 

to a purpose or function constituting the basis for 

the organizations’ exemption under section 501. 

(B) ADDITION TO TAX.—The tax imposed under this chapter for any taxable year for which there is a recapture 

under subparagraph (A) shall be increased by 10 percent 

of the amount so recaptured. 

(4) DEFINITIONS.—For purposes of this subsection— 

(A) ADDITIONAL CONTRIBUTION.—The term ‘‘additional 

contribution’’ means any charitable contribution by the 

taxpayer of any interest in property with respect to which 

the taxpayer has previously made an initial fractional contribution. 

(B) INITIAL FRACTIONAL CONTRIBUTION.—The term ‘‘initial fractional contribution’’ means, with respect to any 

taxpayer, the first charitable contribution of an undivided 

portion of the taxpayer’s entire interest in any tangible 

personal property. 

(p) OTHER CROSS REFERENCES.— 

(1) For treatment of certain organizations providing 

child care, see section 501(k). 

(2) For charitable contributions of estates and trusts, see 

section 642(c). 

(3) For nondeductibility of contributions by common 

trust funds, see section 584. 

(4) For charitable contributions of partners, see section 

702. 

(5) For charitable contributions of nonresident aliens, 

see section 873. 

(6) For treatment of gifts for benefit of or use in connection with the Naval Academy as gifts to or for use of the 

United States, see section 8473 of title 10, United States 

Code. 

(7) For treatment of gifts accepted by the Secretary of 

State, the Director of the International Communication 

Agency, or the Director of the United States International 

Development Cooperation Agency, as gifts to or for the use 

of the United States, see section 25 of the State Department Basic Authorities Act of 1956. 

(8) For treatment of gifts of money accepted by the Attorney General for credit to the ‘‘Commissary Funds Federal Prisons’’ as gifts to or for the use of the United States, 

see section 4043 of title 18, United States Code. 

167 

(9) For charitable contributions to or for the use of Indian tribal governments (or their subdivisions), see section 

7871. 

* * * * * * * 

SEC. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS 

ASSETS. 

(a) TREATMENT AS EXPENSES.—A taxpayer may elect to treat the 

cost of any section 179 property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a 

deduction for the taxable year in which the section 179 property is 

placed in service. 

(b) LIMITATIONS.— 

(1) DOLLAR LIMITATION.—The aggregate cost which may be 

taken into account under subsection (a) for any taxable year 

shall not exceed $1,000,000. 

(2) REDUCTION IN LIMITATION.—The limitation under paragraph (1) for any taxable year shall be reduced (but not below 

zero) by the amount by which the cost of section 179 property 

placed in service during such taxable year exceeds $2,500,000. 

(3) LIMITATION BASED ON INCOME FROM TRADE OR BUSINESS.— 

(A) IN GENERAL.—The amount allowed as a deduction 

under subsection (a) for any taxable year (determined after 

the application of paragraphs (1) and (2)) shall not exceed 

the aggregate amount of taxable income of the taxpayer for 

such taxable year which is derived from the active conduct 

by the taxpayer of any trade or business during such taxable year. 

(B) CARRYOVER OF DISALLOWED DEDUCTION.—The 

amount allowable as a deduction under subsection (a) for 

any taxable year shall be increased by the lesser of— 

(i) the aggregate amount disallowed under subparagraph (A) for all prior taxable years (to the extent not 

previously allowed as a deduction by reason of this 

subparagraph), or 

(ii) the excess (if any) of— 

(I) the limitation of paragraphs (1) and (2) (or if 

lesser, the aggregate amount of taxable income referred to in subparagraph (A)), over 

(II) the amount allowable as a deduction under 

subsection (a) for such taxable year without regard to this subparagraph. 

(C) COMPUTATION OF TAXABLE INCOME.—For purposes of 

this paragraph, taxable income derived from the conduct of 

a trade or business shall be computed without regard to 

the deduction allowable under this section. 

(4) MARRIED INDIVIDUALS FILING SEPARATELY.—In the case of 

øa husband and wife filing¿ individuals married to one another 

who file separate returns for the taxable year— 

(A) such individuals shall be treated as 1 taxpayer for 

purposes of paragraphs (1) and (2), and 

(B) unless such individuals elect otherwise, 50 percent of 

the cost which may be taken into account under subsection 

168 

(a) for such taxable year (before application of paragraph 

(3)) shall be allocated to each such individual. 

(5) LIMITATION ON COST TAKEN INTO ACCOUNT FOR CERTAIN

PASSENGER VEHICLES.— 

(A) IN GENERAL.—The cost of any sport utility vehicle for 

any taxable year which may be taken into account under 

this section shall not exceed $25,000. 

(B) SPORT UTILITY VEHICLE.—For purposes of subparagraph (A)— 

(i) IN GENERAL.—The term ‘‘sport utility vehicle’’ 

means any 4-wheeled vehicle— 

(I) which is primarily designed or which can be 

used to carry passengers over public streets, 

roads, or highways (except any vehicle operated 

exclusively on a rail or rails), 

(II) which is not subject to section 280F, and 

(III) which is rated at not more than 14,000 

pounds gross vehicle weight. 

(ii) CERTAIN VEHICLES EXCLUDED.—Such term does 

not include any vehicle which— 

(I) is designed to have a seating capacity of 

more than 9 persons behind the driver’s seat, 

(II) is equipped with a cargo area of at least 6 

feet in interior length which is an open area or is 

designed for use as an open area but is enclosed 

by a cap and is not readily accessible directly from 

the passenger compartment, or 

(III) has an integral enclosure, fully enclosing 

the driver compartment and load carrying device, 

does not have seating rearward of the driver’s 

seat, and has no body section protruding more 

than 30 inches ahead of the leading edge of the 

windshield. 

(6) INFLATION ADJUSTMENT.— 

(A) IN GENERAL.—In the case of any taxable year beginning after 2018, the dollar amounts in paragraphs (1), (2), 

and (5)(A) shall each be increased by an amount equal to— 

(i) such dollar amount, multiplied by 

(ii) the cost-of-living adjustment determined under 

section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting ‘‘calendar 

year 2017’’ for ‘‘calendar year 2016’’ in subparagraph 

(A)(ii) thereof. 

(B) ROUNDING.—The amount of any increase under subparagraph (A) shall be rounded to the nearest multiple of 

$10,000 ($100 in the case of any increase in the amount 

under paragraph (5)(A)). 

(c) ELECTION.— 

(1) IN GENERAL.—An election under this section for any taxable year shall— 

(A) specify the items of section 179 property to which the 

election applies and the portion of the cost of each of such 

items which is to be taken into account under subsection 

(a), and 

169 

(B) be made on the taxpayer’s return of the tax imposed 

by this chapter for the taxable year. 

Such election shall be made in such manner as the Secretary 

may by regulations prescribe. 

(2) ELECTION.—Any election made under this section, and 

any specification contained in any such election, may be revoked by the taxpayer with respect to any property, and such 

revocation, once made, shall be irrevocable. 

(d) DEFINITIONS AND SPECIAL RULES.— (1) SECTION 179 PROPERTY.—For purposes of this section, the 

term ‘‘section 179 property’’ means property— 

(A) which is— 

(i) tangible property (to which section 168 applies), 

or 

(ii) computer software (as defined in section 

197(e)(3)(B)) which is described in section 

197(e)(3)(A)(i) and to which section 167 applies, 

(B) which is— 

(i) section 1245 property (as defined in section 

1245(a)(3)), or 

(ii) at the election of the taxpayer, qualified real 

property (as defined in subsection (e)), and 

(C) which is acquired by purchase for use in the active 

conduct of a trade or business. 

Such term shall not include any property described in section 

50(b) (other than paragraph (2) thereof). 

(2) PURCHASE DEFINED.—For purposes of paragraph (1), the 

term ‘‘purchase’’ means any acquisition of property, but only 

if— 

(A) the property is not acquired from a person whose relationship to the person acquiring it would result in the 

disallowance of losses under section 267 or 707(b) (but, in 

applying section 267(b) and (c) for purposes of this section, 

paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only 

øhis spouse¿ the individual’s spouse, ancestors, and lineal 

descendants), 

(B) the property is not acquired by one component member of a controlled group from another component member 

of the same controlled group, and 

(C) the basis of the property in the hands of the person 

acquiring it is not determined— 

(i) in whole or in part by reference to the adjusted 

basis of such property in the hands of the person from 

whom acquired, or 

(ii) under section 1014(a) (relating to property acquired from a decedent). 

(3) COST.—For purposes of this section, the cost of property 

does not include so much of the basis of such property as is determined by reference to the basis of other property held at 

any time by the person acquiring such property. 

(4) SECTION NOT TO APPLY TO ESTATES AND TRUSTS.—This 

section shall not apply to estates and trusts. 

(5) SECTION NOT TO APPLY TO CERTAIN NONCORPORATE LESSORS.—This section shall not apply to any section 179 property 

170 

which is purchased by a person who is not a corporation and 

with respect to which such person is the lessor unless— 

(A) the property subject to the lease has been manufactured or produced by the lessor, or 

(B) the term of the lease (taking into account options to 

renew) is less than 50 percent of the class life of the property (as defined in section 168(i)(1)), and for the period 

consisting of the first 12 months after the date on which 

the property is transferred to the lessee the sum of the deductions with respect to such property which are allowable 

to the lessor solely by reason of section 162 (other than 

rents and reimbursed amounts with respect to such property) exceeds 15 percent of the rental income produced by 

such property. 

(6) DOLLAR LIMITATION OF CONTROLLED GROUP.—For purposes of subsection (b) of this section— 

(A) all component members of a controlled group shall be 

treated as one taxpayer, and 

(B) the Secretary shall apportion the dollar limitation 

contained in subsection (b)(1) among the component members of such controlled group in such manner as he shall 

by regulations prescribe. 

(7) CONTROLLED GROUP DEFINED.—For purposes of paragraphs (2) and (6), the term ‘‘controlled group’’ has the meaning assigned to it by section 1563(a), except that, for such purposes, the phrase ‘‘more than 50 percent’’ shall be substituted 

for the phrase ‘‘at least 80 percent’’ each place it appears in 

section 1563(a)(1). 

(8) TREATMENT OF PARTNERSHIPS AND S CORPORATIONS.—In 

the case of a partnership, the limitations of subsection (b) shall 

apply with respect to the partnership and with respect to each 

partner. A similar rule shall apply in the case of an S corporation and its shareholders. 

(9) COORDINATION WITH SECTION 38.—No credit shall be allowed under section 38 with respect to any amount for which 

a deduction is allowed under subsection (a). 

(10) RECAPTURE IN CERTAIN CASES.—The Secretary shall, by 

regulations, provide for recapturing the benefit under any deduction allowable under subsection (a) with respect to any 

property which is not used predominantly in a trade or business at any time. 

(e) QUALIFIED REAL PROPERTY.—For purposes of this section, the 

term ‘‘qualified real property’’ means— 

(1) any qualified improvement property described in section 

168(e)(6), and 

(2) any of the following improvements to nonresidential real 

property placed in service after the date such property was 

first placed in service: 

(A) Roofs. 

(B) Heating, ventilation, and air-conditioning property. 

(C) Fire protection and alarm systems. 

(D) Security systems. 

* * * * * * * 

171 

PART VII—ADDITIONAL ITEMIZED DEDUCTIONS FOR 

INDIVIDUALS 

* * * * * * * 

SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES. 

(a) ALLOWANCE OF DEDUCTION.—There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, øhis spouse¿ the taxpayer’s spouse, or a dependent (as defined in section 152, determined without regard to subsections 

(b)(1), (b)(2), and (d)(1)(B) thereof), to the extent that such expenses 

exceed 10 percent of adjusted gross income. 

(b) LIMITATION WITH RESPECT TO MEDICINE AND DRUGS.—An 

amount paid during the taxable year for medicine or a drug shall 

be taken into account under subsection (a) only if such medicine or 

drug is a prescribed drug or is insulin. 

(c) SPECIAL RULE FOR DECEDENTS.— 

(1) TREATMENT OF EXPENSES PAID AFTER DEATH.—For purposes of subsection (a), expenses for the medical care of the 

taxpayer which are paid out of øhis estate¿ the estate of the 

taxpayer during the 1-year period beginning with the day after 

the date of øhis death¿ the death of the taxpayer shall be treated as paid by the taxpayer at the time incurred. 

(2) LIMITATION.—Paragraph (1) shall not apply if the amount 

paid is allowable under section 2053 as a deduction in computing the taxable estate of the decedent, but this paragraph 

shall not apply if (within the time and in the manner and form 

prescribed by the Secretary) there is filed— 

(A) a statement that such amount has not been allowed 

as a deduction under section 2053, and 

(B) a waiver of the right to have such amount allowed 

at any time as a deduction under section 2053. 

(d) DEFINITIONS.—For purposes of this section— 

(1) The term ‘‘medical care’’ means amounts paid— 

(A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any 

structure or function of the body, 

(B) for transportation primarily for and essential to medical care referred to in subparagraph (A), 

(C) for qualified long-term care services (as defined in 

section 7702B(c)), or 

(D) for insurance (including amounts paid as premiums 

under part B of title XVIII of the Social Security Act, relating to supplementary medical insurance for the aged) covering medical care referred to in subparagraphs (A) and 

(B) or for any qualified long-term care insurance contract 

(as defined in section 7702B(b)). 

In the case of a qualified long-term care insurance contract (as 

defined in section 7702B(b)), only eligible long-term care premiums (as defined in paragraph (10)) shall be taken into account under subparagraph (D). 

(2) AMOUNTS PAID FOR CERTAIN LODGING AWAY FROM HOME

TREATED AS PAID FOR MEDICAL CARE.—Amounts paid for lodging (not lavish or extravagant under the circumstances) while 

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172 

ferred to in paragraph (1)(A) shall be treated as amounts paid 

for medical care if— 

(A) the medical care referred to in paragraph (1)(A) is 

provided by a physician in a licensed hospital (or in a medical care facility which is related to, or the equivalent of, 

a licensed hospital), and 

(B) there is no significant element of personal pleasure, 

recreation, or vacation in the travel away from home. 

The amount taken into account under the preceding sentence 

shall not exceed $50 for each night for each individual. 

(3) PRESCRIBED DRUG.—The term ‘‘prescribed drug’’ means a 

drug or biological which requires a prescription of a physician 

for its use by an individual. 

(4) PHYSICIAN.—The term ‘‘physician’’ has the meaning given 

to such term by section 1861(r) of the Social Security Act (42 

U.S.C. 1395x(r)). 

(5) SPECIAL RULE IN THE CASE OF CHILD OF DIVORCED PAR- ENTS, ETC.—Any child to whom section 152(e) applies shall be 

treated as a dependent of both parents for purposes of this section. 

(6) In the case of an insurance contract under which 

amounts are payable for other than medical care referred to in 

subparagraphs (A), (B), and (C) of paragraph (1)— 

(A) no amount shall be treated as paid for insurance to 

which paragraph (1)(D) applies unless the charge for such 

insurance is either separately stated in the contract, or 

furnished to the policyholder by the insurance company in 

a separate statement, 

(B) the amount taken into account as the amount paid 

for such insurance shall not exceed such charge, and 

(C) no amount shall be treated as paid for such insurance if the amount specified in the contract (or furnished 

to the policyholder by the insurance company in a separate 

statement) as the charge for such insurance is unreasonably large in relation to the total charges under the contract. 

(7) Subject to the limitations of paragraph (6), premiums 

paid during the taxable year by a taxpayer before øhe¿ the taxpayer attains the age of 65 for insurance covering medical care 

(within the meaning of subparagraphs (A), (B), and (C) of paragraph (1)) for the taxpayer, øhis spouse¿ the taxpayer’s spouse, 

or a dependent after the taxpayer attains the age of 65 shall 

be treated as expenses paid during the taxable year for insurance which constitutes medical care if premiums for such insurance are payable (on a level payment basis) under the contract for a period of 10 years or more or until the year in which 

the taxpayer attains the age of 65 (but in no case for a period 

of less than 5 years). 

(8) The determination of whether an individual is married at 

any time during the taxable year shall be made in accordance 

with the provisions of section 6013(d) (relating to determination of østatus as husband and wife¿ marital status). 

(9) COSMETIC SURGERY.— 

(A) IN GENERAL.—The term ‘‘medical care’’ does not include cosmetic surgery or other similar procedures, unless 

173 

the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or 

trauma, or disfiguring disease. 

(B) COSMETIC SURGERY DEFINED.—For purposes of this 

paragraph, the term ‘‘cosmetic surgery’’ means any procedure which is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. 

(10) ELIGIBLE LONG-TERM CARE PREMIUMS.— (A) IN GENERAL.—For purposes of this section, the term 

‘‘eligible long-term care premiums’’ means the amount paid 

during a taxable year for any qualified long-term care insurance contract (as defined in section 7702B(b)) covering 

an individual, to the extent such amount does not exceed 

the limitation determined under the following table: 

(B) INDEXING.— 

(i) IN GENERAL.—In the case of any taxable year beginning in a calendar year after 1997, each dollar 

amount contained in subparagraph (A) shall be increased by the medical care cost adjustment of such 

amount for such calendar year. If any increase determined under the preceding sentence is not a multiple 

of $10, such increase shall be rounded to the nearest 

multiple of $10. 

(ii) MEDICAL CARE COST ADJUSTMENT.—For purposes 

of clause (i), the medical care cost adjustment for any 

calendar year is the percentage (if any) by which— 

(I) the medical care component of the C-CPI-U 

(as defined in section 1(f)(6)) for August of the preceding calendar year, exceeds 

(II) such component of the CPI (as defined in 

section 1(f)(4)) for August of 1996, multiplied by 

the amount determined under section 1(f)(3)(B). 

The Secretary shall, in consultation with the Secretary of 

Health and Human Services, prescribe an adjustment 

which the Secretary determines is more appropriate for 

purposes of this paragraph than the adjustment described 

in the preceding sentence, and the adjustment so prescribed shall apply in lieu of the adjustment described in 

the preceding sentence. 

(11) CERTAIN PAYMENTS TO RELATIVES TREATED AS NOT PAID

FOR MEDICAL CARE.—An amount paid for a qualified long-term 

care service (as defined in section 7702B(c)) provided to an individual shall be treated as not paid for medical care if such 

service is provided— 

(A) by the spouse of the individual or by a relative (directly or through a partnership, corporation, or other entity) unless the service is provided by a licensed professional 

with respect to such service, or 

(B) by a corporation or partnership which is related 

(within the meaning of section 267(b) or 707(b)) to the individual. 

For purposes of this paragraph, the term ‘‘relative’’ means an 

individual bearing a relationship to the individual which is deVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00179 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
174 

scribed in any of subparagraphs (A) through (G) of section 

152(d)(2). This paragraph shall not apply for purposes of section 105(b) with respect to reimbursements through insurance. 

(e) EXCLUSION OF AMOUNTS ALLOWED FOR CARE OF CERTAIN DE- PENDENTS.—Any expense allowed as a credit under section 21 shall 

not be treated as an expense paid for medical care. 

(f) SPECIAL RULES FOR 2013 THROUGH 2018.—In the case of any 

taxable year— 

(1) beginning after December 31, 2012, and ending before 

January 1, 2017, in the case of a taxpayer if such taxpayer or 

such taxpayer’s spouse has attained age 65 before the close of 

such taxable year, and 

(2) beginning after December 31, 2016, and ending before 

January 1, 2019, in the case of any taxpayer, 

subsection (a) shall be applied with respect to a taxpayer by substituting ‘‘7.5 percent’’ for ‘‘10 percent’’. 

* * * * * * * 

SEC. 217. MOVING EXPENSES. 

(a) DEDUCTION ALLOWED.—There shall be allowed as a deduction 

moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of 

work. 

(b) DEFINITION OF MOVING EXPENSES.— (1) IN GENERAL.—For purposes of this section, the term 

‘‘moving expenses’’ means only the reasonable expenses— 

(A) of moving household goods and personal effects from 

the former residence to the new residence, and 

(B) of traveling (including lodging) from the former residence to the new place of residence. 

Such term shall not include any expenses for meals. 

(2) INDIVIDUALS OTHER THAN TAXPAYER.—In the case of any 

individual other than the taxpayer, expenses referred to in 

paragraph (1) shall be taken into account only if such individual has both the former residence and the new residence as 

his principal place of abode and is a member of the taxpayer’s 

household. 

(c) CONDITIONS FOR ALLOWANCE.—No deduction shall be allowed 

under this section unless— 

(1) the taxpayer’s new principal place of work— 

(A) is at least 50 miles farther from his former residence 

than was his former principal place of work, or 

(B) if he had no former principal place of work, is at 

least 50 miles from his former residence, and 

(2) either— 

(A) during the 12-month period immediately following 

his arrival in the general location of his new principal 

place of work, the taxpayer is a full-time employee, in such 

general location, during at least 39 weeks, or 

(B) during the 24-month period immediately following 

his arrival in the general location of his new principal 

place of work, the taxpayer is a full-time employee or performs services as a self-employed individual on a full-time 

basis, in such general location, during at least 78 weeks, 

175 

of which not less than 39 weeks are during the 12-month 

period referred to in subparagraph (A). 

For purposes of paragraph (1), the distance between two points 

shall be the shortest of the more commonly traveled routes between such two points. 

(d) RULES FOR APPLICATION OF SUBSECTION (C)(2).— 

(1) The condition of subsection (c)(2) shall not apply if the 

taxpayer is unable to satisfy such condition by reason of— 

(A) death or disability, or 

(B) involuntary separation (other than for willful misconduct) from the service of, or transfer for the benefit of, 

an employer after obtaining full-time employment in which 

the taxpayer could reasonably have been expected to satisfy such condition. 

(2) If a taxpayer has not satisfied the condition of subsection 

(c)(2) before the time prescribed by law (including extensions 

thereof) for filing the return for the taxable year during which 

he paid or incurred moving expenses which would otherwise be 

deductible under this section, but may still satisfy such condition, then such expenses may (at the election of the taxpayer) 

be deducted for such taxable year notwithstanding subsection 

(c)(2). 

(3) If— 

(A) for any taxable year moving expenses have been deducted in accordance with the rule provided in paragraph 

(2), and 

(B) the condition of subsection (c)(2) cannot be satisfied 

at the close of a subsequent taxable year, 

then an amount equal to the expenses which were so deducted 

shall be included in gross income for the first such subsequent 

taxable year. 

(f) SELF-EMPLOYED INDIVIDUAL.—For purposes of this section, the 

term ‘‘self-employed individual’’ means an individual who performs 

personal services— 

(1) as the owner of the entire interest in an unincorporated 

trade or business, or 

(2) as a partner in a partnership carrying on a trade or business. 

(g) RULES FOR MEMBERS OF THE ARMED FORCES OF THE UNITED

STATES.—In the case of a member of the Armed Forces of the 

United States on active duty who moves pursuant to a military 

order and incident to a permanent change of station— 

(1) the limitations under subsection (c) shall not apply; 

(2) any moving and storage expenses which are furnished in 

kind (or for which reimbursement or an allowance is provided, 

but only to the extent of the expenses paid or incurred) to such 

memberø, his spouse, or his dependents¿ or the spouse or dependents of such member, shall not be includible in gross income, and no reporting with respect to such expenses shall be 

required by the Secretary of Defense or the Secretary of Transportation, as the case may be; and 

(3) if moving and storage expenses are furnished in kind (or 

if reimbursement or an allowance for such expenses is provided) to such member’s spouse and øhis dependents¿ dependents with regard to moving to a location other than the one to 

176 

which such member moves (or from a location other than the 

one from which such member moves), this section shall apply 

with respect to the moving expenses of øhis spouse¿ the member’s spouse and dependents— 

(A) as if øhis spouse¿ the member’s spouse commenced 

work as an employee at a new principal place of work at 

such location; and 

(B) without regard to the limitations under subsection 

(c). 

(h) SPECIAL RULES FOR FOREIGN MOVES.— (1) ALLOWANCE OF CERTAIN STORAGE FEES.—In the case of a 

foreign move, for purposes of this section, the moving expenses 

described in subsection (b)(1)(A) include the reasonable expenses— 

(A) of moving household goods and personal effects to 

and from storage, and 

(B) of storing such goods and effects for part or all of the 

period during which the new place of work continues to be 

the taxpayer’s principal place of work. 

(2) FOREIGN MOVE.—For purposes of this subsection, the 

term ‘‘foreign move’’ means the commencement of work by the 

taxpayer at a new principal place of work located outside the 

United States. 

(3) UNITED STATES DEFINED.—For purposes of this subsection and subsection (i), the term ‘‘United States’’ includes 

the possessions of the United States. 

(i) ALLOWANCE OF DEDUCTIONS IN CASE OF RETIREES OR DECE- DENTS WHO WERE WORKING ABROAD.— (1) IN GENERAL.—In the case of any qualified retiree moving 

expenses or qualified survivor moving expenses— 

(A) this section (other than subsection (h)) shall be applied with respect to such expenses as if they were incurred in connection with the commencement of work by 

the taxpayer as an employee at a new principal place of 

work located within the United States, and 

(B) the limitations of subsection (c)(2) shall not apply. 

(2) QUALIFIED RETIREE MOVING EXPENSES.—For purposes of 

paragraph (1), the term ‘‘qualified retiree moving expenses’’ 

means any moving expenses— 

(A) which are incurred by an individual whose former 

principal place of work and former residence were outside 

the United States, and 

(B) which are incurred for a move to a new residence in 

the United States in connection with the bona fide retirement of the individual. 

(3) QUALIFIED SURVIVOR MOVING EXPENSES.—For purposes of 

paragraph (1), the term ‘‘qualified survivor moving expenses’’ 

means moving expenses— 

(A) which are paid or incurred by the spouse or any dependent of any decedent who (as of the time of øhis¿ 

death) had a principal place of work outside the United 

States, and 

(B) which are incurred for a move which begins within 

6 months after the death of such decedent and which is to 

a residence in the United States from a former residence 

177 

outside the United States which (as of the time of the decedent’s death) was the residence of such decedent and the 

individual paying or incurring the expense. 

(j) REGULATIONS.—The Secretary shall prescribe such regulations 

as may be necessary to carry out the purposes of this section. 

(k) SUSPENSION OF DEDUCTION FOR TAXABLE YEARS 2018 

THROUGH 2025.—Except in the case of an individual to whom subsection (g) applies, this section shall not apply to any taxable year 

beginning after December 31, 2017, and before January 1, 2026. 

* * * * * * * 

SEC. 219. RETIREMENT SAVINGS. 

(a) ALLOWANCE OF DEDUCTION.—In the case of an individual, 

there shall be allowed as a deduction an amount equal to the qualified retirement contributions of the individual for the taxable year. 

(b) MAXIMUM AMOUNT OF DEDUCTION.— (1) IN GENERAL.—The amount allowable as a deduction 

under subsection (a) to any individual for any taxable year 

shall not exceed the lesser of— 

(A) the deductible amount, or 

(B) an amount equal to the compensation includible in 

the individual’s gross income for such taxable year. 

(2) SPECIAL RULE FOR EMPLOYER CONTRIBUTIONS UNDER SIM- PLIFIED EMPLOYEE PENSIONS.—This section shall not apply 

with respect to an employer contribution to a simplified employee pension. 

(3) PLANS UNDER SECTION 501(C)(18).—Notwithstanding paragraph (1), the amount allowable as a deduction under subsection (a) with respect to any contributions on behalf of an 

employee to a plan described in section 501(c)(18) shall not exceed the lesser of— 

(A) $7,000, or 

(B) an amount equal to 25 percent of the compensation 

(as defined in section 415(c)(3)) includible in the individual’s gross income for such taxable year. 

(4) SPECIAL RULE FOR SIMPLE RETIREMENT ACCOUNTS.—This 

section shall not apply with respect to any amount contributed 

to a simple retirement account established under section 

408(p). 

(5) DEDUCTIBLE AMOUNT.—For purposes of paragraph 

(1)(A)— 

(A) IN GENERAL.—The deductible amount is $5,000. 

(B) CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS 50 OR

OLDER.— 

(i) IN GENERAL.—In the case of an individual who 

has attained the age of 50 before the close of the taxable year, the deductible amount for such taxable year 

shall be increased by the applicable amount. 

(ii) APPLICABLE AMOUNT.—For purposes of clause (i), 

the applicable amount is $1,000. 

(C) COST-OF-LIVING ADJUSTMENT.— 

(i) IN GENERAL.—In the case of any taxable year beginning in a calendar year after 2008, the $5,000 

amount under subparagraph (A) shall be increased by 

an amount equal to— 

178 

(I) such dollar amount, multiplied by 

(II) the cost-of-living adjustment determined 

under section 1(f)(3) for the calendar year in 

which the taxable year begins, determined by substituting ‘‘calendar year 2007’’ for ‘‘calendar year 

2016’’ in subparagraph (A)(ii) thereof. 

(ii) ROUNDING RULES.—If any amount after adjust- ment under clause (i) is not a multiple of $500, such 

amount shall be rounded to the next lower multiple of 

$500. 

(c) KAY BAILEY HUTCHISON SPOUSAL IRA.— 

(1) IN GENERAL.—In the case of an individual to whom this 

paragraph applies for the taxable year, the limitation of paragraph (1) of subsection (b) shall be equal to the lesser of— 

(A) the dollar amount in effect under subsection (b)(1)(A) 

for the taxable year, or 

(B) the sum of— 

(i) the compensation includible in such individual’s 

gross income for the taxable year, plus 

(ii) the compensation includible in the gross income 

of such individual’s spouse for the taxable year reduced by— 

(I) the amount allowed as a deduction under 

subsection (a) to such spouse for such taxable 

year, 

(II) the amount of any designated nondeductible 

contribution (as defined in section 408(o)) on behalf of such spouse for such taxable year, and 

(III) the amount of any contribution on behalf of 

such spouse to a Roth IRA under section 408A for 

such taxable year. 

(2) INDIVIDUALS TO WHOM PARAGRAPH (1) APPLIES.—Paragraph (1) shall apply to any individual if— 

(A) such individual files a joint return for the taxable 

year, and 

(B) the amount of compensation (if any) includible in 

such individual’s gross income for the taxable year is less 

than the compensation includible in the gross income of 

such individual’s spouse for the taxable year. 

(d) OTHER LIMITATIONS AND RESTRICTIONS.— 

(1) BENEFICIARY MUST BE UNDER AGE 701/2.—No deduction 

shall be allowed under this section with respect to any qualified retirement contribution for the benefit of an individual if 

such individual has attained age 701/2 before the close of such 

individual’s taxable year for which the contribution was made. 

(2) RECONTRIBUTED AMOUNTS.—No deduction shall be allowed under this section with respect to a rollover contribution 

described in section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 

457(e)(16). 

(3) AMOUNTS CONTRIBUTED UNDER ENDOWMENT CONTRACT.— In the case of an endowment contract described in section 

408(b), no deduction shall be allowed under this section for 

that portion of the amounts paid under the contract for the 

taxable year which is properly allocable, under regulations prescribed by the Secretary, to the cost of life insurance. 

179 

(4) DENIAL OF DEDUCTION FOR AMOUNT CONTRIBUTED TO IN- HERITED ANNUITIES OR ACCOUNTS.—No deduction shall be allowed under this section with respect to any amount paid to 

an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C)(ii)). 

(e) QUALIFIED RETIREMENT CONTRIBUTION.—For purposes of this 

section, the term ‘‘qualified retirement contribution’’ means— 

(1) any amount paid in cash for the taxable year by or on behalf of an individual to an individual retirement plan for such 

individual’s benefit, and 

(2) any amount contributed on behalf of any individual to a 

plan described in section 501(c)(18). 

(f) OTHER DEFINITIONS AND SPECIAL RULES.— 

(1) COMPENSATION.—For purposes of this section, the term 

‘‘compensation’’ includes earned income (as defined in section 

401(c)(2)). The term ‘‘compensation’’ does not include any 

amount received as a pension or annuity and does not include 

any amount received as deferred compensation. For purposes of 

this paragraph, section 401(c)(2) shall be applied as if the term 

trade or business for purposes of section 1402 included service 

described in subsection (c)(6). The term ‘‘compensation’’ includes any differential wage payment (as defined in section 

3401(h)(2)). 

(2) MARRIED INDIVIDUALS.—The maximum deduction under 

subsection (b) shall be computed separately for each individual, 

and this section shall be applied without regard to any community property laws. 

(3) TIME WHEN CONTRIBUTIONS DEEMED MADE.—For purposes 

of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of 

the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time 

prescribed by law for filing the return for such taxable year 

(not including extensions thereof). 

(5) EMPLOYER PAYMENTS.—For purposes of this title, any 

amount paid by an employer to an individual retirement plan 

shall be treated as payment of compensation to the employee 

(other than a self-employed individual who is an employee 

within the meaning of section 401(c)(1)) includible in his gross 

income in the taxable year for which the amount was contributed, whether or not a deduction for such payment is allowable 

under this section to the employee. 

(6) EXCESS CONTRIBUTIONS TREATED AS CONTRIBUTION MADE

DURING SUBSEQUENT YEAR FOR WHICH THERE IS AN UNUSED

LIMITATION.— 

(A) IN GENERAL.—If for the taxable year the maximum 

amount allowable as a deduction under this section for 

contributions to an individual retirement plan exceeds the 

amount contributed, then the taxpayer shall be treated as 

having made an additional contribution for the taxable 

year in an amount equal to the lesser of— 

(i) the amount of such excess, or 

(ii) the amount of the excess contributions for such 

taxable year (determined under section 4973(b)(2) 

without regard to subparagraph (C) thereof). 

180 

(B) AMOUNT CONTRIBUTED.—For purposes of this paragraph, the amount contributed— 

(i) shall be determined without regard to this paragraph, and 

(ii) shall not include any rollover contribution. 

(C) SPECIAL RULE WHERE EXCESS DEDUCTION WAS AL- LOWED FOR CLOSED YEAR.—Proper reduction shall be made 

in the amount allowable as a deduction by reason of this 

paragraph for any amount allowed as a deduction under 

this section for a prior taxable year for which the period 

for assessing deficiency has expired if the amount so allowed exceeds the amount which should have been allowed 

for such prior taxable year. 

(7) SPECIAL RULE FOR COMPENSATION EARNED BY MEMBERS

OF THE ARMED FORCES FOR SERVICE IN A COMBAT ZONE..—For 

purposes of subsections (b)(1)(B) and (c), the amount of compensation includible in an individual’s gross income shall be 

determined without regard to section 112. 

(8) ELECTION NOT TO DEDUCT CONTRIBUTIONS.—For election 

not to deduct contributions to individual retirement plans, see 

section 408(o)(2)(B)(ii). 

(g) LIMITATION ON DEDUCTION FOR ACTIVE PARTICIPANTS IN CER- TAIN PENSION PLANS.— (1) IN GENERAL.—If (for any part of any plan year ending 

with or within a taxable year) an individual or the individual’s 

spouse is an active participant, each of the dollar limitations 

contained in subsections (b)(1)(A) and (c)(1)(A) for such taxable 

year shall be reduced (but not below zero) by the amount determined under paragraph (2). 

(2) AMOUNT OF REDUCTION.— 

(A) IN GENERAL.—The amount determined under this 

paragraph with respect to any dollar limitation shall be 

the amount which bears the same ratio to such limitation 

as— 

(i) the excess of— 

(I) the taxpayer’s adjusted gross income for such 

taxable year, over 

(II) the applicable dollar amount, bears to 

(ii) $10,000 ($20,000 in the case of a joint return). 

(B) NO REDUCTION BELOW $200 UNTIL COMPLETE PHASEOUT.—No dollar limitation shall be reduced below $200 

under paragraph (1) unless (without regard to this subparagraph) such limitation is reduced to zero. 

(C) ROUNDING.—Any amount determined under this 

paragraph which is not a multiple of $10 shall be rounded 

to the next lowest $10. 

(3) ADJUSTED GROSS INCOME; APPLICABLE DOLLAR AMOUNT.— 

For purposes of this subsection— 

(A) ADJUSTED GROSS INCOME.—Adjusted gross income of 

any taxpayer shall be determined— 

(i) after application of sections 86 and 469, and 

(ii) without regard to sections 135, 137, 221, 222, 

and 911 or the deduction allowable under this section. 

(B) APPLICABLE DOLLAR AMOUNT.—The term ‘‘applicable 

dollar amount’’ means the following: 

181 

(i) In the case of a taxpayer filing a joint return, $80,000. 

(ii) In the case of any other taxpayer (other than a married individual filing a separate return), $50,000. 

(iii) In the case of a married individual filing a separate return, zero. 

(4) SPECIAL RULE FOR MARRIED INDIVIDUALS FILING SEPA- RATELY AND LIVING APART.— øA husband and wife¿ Married 

individuals who— 

(A) file separate returns for any taxable year, and 

(B) live apart at all times during such taxable year, 

shall not be treated as married individuals for purposes of this 

subsection. 

(5) ACTIVE PARTICIPANT.—For purposes of this subsection, 

the term ‘‘active participant’’ means, with respect to any plan 

year, an individual— 

(A) who is an active participant in— 

(i) a plan described in section 401(a) which includes 

a trust exempt from tax under section 501(a), 

(ii) an annuity plan described in section 403(a), 

(iii) a plan established for its employees by the 

United States, by a State or political subdivision 

thereof, or by an agency or instrumentality of any of 

the foregoing, 

(iv) an annuity contract described in section 403(b), 

(v) a simplified employee pension (within the meaning of section 408(k)), or 

(vi) any simple retirement account (within the 

meaning of section 408(p)), or 

(B) who makes deductible contributions to a trust described in section 501(c)(18). 

The determination of whether an individual is an active participant shall be made without regard to whether or not such individual’s rights under a plan, trust, or contract are nonforfeitable. An eligible deferred compensation plan (within the meaning of section 457(b)) shall not be treated as a plan described 

in subparagraph (A)(iii). 

(6) CERTAIN INDIVIDUALS NOT TREATED AS ACTIVE PARTICI- PANTS.—For purposes of this subsection, any individual described in any of the following subparagraphs shall not be 

treated as an active participant for any taxable year solely because of any participation so described: 

(A) MEMBERS OF RESERVE COMPONENTS.—Participation 

in a plan described in subparagraph (A)(iii) of paragraph 

(5) by reason of service as a member of a reserve component of the Armed Forces (as defined in section 10101 of 

title 10), unless such individual has served in excess of 90 

days on active duty (other than active duty for training) 

during the year. 

(B) VOLUNTEER FIREFIGHTERS.—A volunteer firefighter— 

(i) who is a participant in a plan described in subparagraph (A)(iii) of paragraph (5) based on his activity as a volunteer firefighter, and 

(ii) whose accrued benefit as of the beginning of the 

taxable year is not more than an annual benefit of 

182 

$1,800 (when expressed as a single life annuity commencing at age 65). 

(7) SPECIAL RULE FOR SPOUSES WHO ARE NOT ACTIVE PARTICI- PANTS.—If this subsection applies to an individual for any taxable year solely because their spouse is an active participant, 

then, in applying this subsection to the individual (but not 

their spouse)— 

(A) the applicable dollar amount under paragraph 

(3)(B)(i) shall be $150,000; and 

(B) the amount applicable under paragraph (2)(A)(ii) shall be $10,000. 

(8) INFLATION ADJUSTMENT.—In the case of any taxable year 

beginning in a calendar year after 2006, each of the dollar 

amounts in paragraphs (3)(B)(i), (3)(B)(ii), and (7)(A) shall be 

be increased by an amount equal to— 

(A) such dollar amount, multiplied by 

(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year 

begins, determined by substituting ‘‘calendar year 2005’’ 

for ‘‘calendar year 2016’’ in subparagraph (A)(ii) thereof. 

Any increase determined under the preceding sentence shall be 

rounded to the nearest multiple of $1,000. 

* * * * * * * 

PART IX—ITEMS NOT DEDUCTIBLE 

* * * * * * * 

SEC. 267. LOSSES, EXPENSES, AND INTEREST WITH RESPECT TO 

TRANSACTIONS BETWEEN RELATED TAXPAYERS. 

(a) IN GENERAL.— (1) DEDUCTION FOR LOSSES DISALLOWED.—No deduction shall 

be allowed in respect of any loss from the sale or exchange of 

property, directly or indirectly, between persons specified in 

any of the paragraphs of subsection (b). The preceding sentence 

shall not apply to any loss of the distributing corporation (or 

the distributee) in the case of a distribution in complete liquidation. 

(2) MATCHING OF DEDUCTION AND PAYEE INCOME ITEM IN THE

CASE OF EXPENSES AND INTEREST.—If— 

(A) by reason of the method of accounting of the person 

to whom the payment is to be made, the amount thereof 

is not (unless paid) includible in the gross income of such 

person, and 

(B) at the close of the taxable year of the taxpayer for 

which (but for this paragraph) the amount would be deductible under this chapter, both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of subsection (b), 

then any deduction allowable under this chapter in respect of 

such amount shall be allowable as of the day as of which such 

amount is includible in the gross income of the person to whom 

the payment is made (or, if later, as of the day on which it 

would be so allowable but for this paragraph). For purposes of 

this paragraph, in the case of a personal service corporation 

(within the meaning of section 441(i)(2)), such corporation and 

183 

any employee-owner (within the meaning of section 269A(b)(2), 

as modified by section 441(i)(2)) shall be treated as persons 

specified in subsection (b). 

(3) PAYMENTS TO FOREIGN PERSONS.— (A) IN GENERAL.—The Secretary shall by regulations 

apply the matching principle of paragraph (2) in cases in 

which the person to whom the payment is to be made is 

not a United States person. 

(B) SPECIAL RULE FOR CERTAIN FOREIGN ENTITIES.— (i) IN GENERAL.—Notwithstanding subparagraph (A), 

in the case of any item payable to a controlled foreign 

corporation (as defined in section 957) or a passive foreign investment company (as defined in section 1297), 

a deduction shall be allowable to the payor with respect to such amount for any taxable year before the 

taxable year in which paid only to the extent that an 

amount attributable to such item is includible (determined without regard to properly allocable deductions 

and qualified deficits under section 952(c)(1)(B)) during such prior taxable year in the gross income of a 

United States person who owns (within the meaning 

of section 958(a)) stock in such corporation. 

(ii) SECRETARIAL AUTHORITY.—The Secretary may by 

regulation exempt transactions from the application of 

clause (i), including any transaction which is entered 

into by a payor in the ordinary course of a trade or 

business in which the payor is predominantly engaged 

and in which the payment of the accrued amounts occurs within 81/2 months after accrual or within such 

other period as the Secretary may prescribe. 

(b) RELATIONSHIPS.—The persons referred to in subsection (a) 

are: 

(1) Members of a family, as defined in subsection (c)(4); 

(2) An individual and a corporation more than 50 percent in 

value of the outstanding stock of which is owned, directly or 

indirectly, by or for such individual; 

(3) Two corporations which are members of the same controlled group (as defined in subsection (f)); 

(4) A grantor and a fiduciary of any trust; 

(5) A fiduciary of a trust and a fiduciary of another trust, if 

the same person is a grantor of both trusts; 

(6) A fiduciary of a trust and a beneficiary of such trust; 

(7) A fiduciary of a trust and a beneficiary of another trust, 

if the same person is a grantor of both trusts; 

(8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person 

who is a grantor of the trust; 

(9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which 

are exempt from tax) applies and which is controlled directly 

or indirectly by such person or (if such person is an individual) 

by members of the family of such individual; 

(10) A corporation and a partnership if the same persons 

own— 

184 

(A) more than 50 percent in value of the outstanding 

stock of the corporation, and 

(B) more than 50 percent of the capital interest, or the 

profits interest, in the partnership; 

(11) An S corporation and another S corporation if the same 

persons own more than 50 percent in value of the outstanding 

stock of each corporation; 

(12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding 

stock of each corporation; or 

(13) Except in the case of a sale or exchange in satisfaction 

of a pecuniary bequest, an executor of an estate and a beneficiary of such estate. 

(c) CONSTRUCTIVE OWNERSHIP OF STOCK.—For purposes of determining, in applying subsection (b), the ownership of stock— 

(1) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being 

owned proportionately by or for its shareholders, partners, or 

beneficiaries; 

(2) An individual shall be considered as owning the stock 

owned, directly or indirectly, by or for øhis¿ the individual’s 

family; 

(3) An individual owning (otherwise than by the application 

of paragraph (2)) any stock in a corporation shall be considered 

as owning the stock owned, directly or indirectly, by or for 

øhis¿ the individual’s partner; 

(4) The family of an individual shall include only øhis¿ the 

individual’s brothers and sisters (whether by the whole or half 

blood), spouse, ancestors, and lineal descendants; and 

(5) Stock constructively owned by a person by reason of the 

application of paragraph (1) shall, for the purpose of applying 

paragraph (1), (2), or (3), be treated as actually owned by such 

person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either 

of such paragraphs in order to make another the constructive 

owner of such stock. 

(d) AMOUNT OF GAIN WHERE LOSS PREVIOUSLY DISALLOWED.— 

(1) IN GENERAL.—If— 

(A) in the case of a sale or exchange of property to the 

taxpayer a loss sustained by the transferor is not allowable 

to the transferor as a deduction by reason of subsection 

(a)(1), and 

(B) the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in the taxpayer’s hands is determined directly or indirectly by reference to such property) at a gain, 

then such gain shall be recognized only to the extent that it 

exceeds so much of such loss as is properly allocable to the 

property sold or otherwise disposed of by the taxpayer. 

(2) EXCEPTION FOR WASH SALES.—Paragraph (1) shall not 

apply if the loss sustained by the transferor is not allowable 

to the transferor as a deduction by reason of section 1091 (relating to wash sales). 

185 

(3) EXCEPTION FOR TRANSFERS FROM TAX INDIFFERENT PARTIES.—Paragraph (1) shall not apply to the extent any loss sustained by the transferor (if allowed) would not be taken into 

account in determining a tax imposed under section 1 or 11 or 

a tax computed as provided by either of such sections. 

(e) SPECIAL RULES FOR PASS-THRU ENTITIES.— 

(1) IN GENERAL.—In the case of any amount paid or incurred 

by, to, or on behalf of, a pass-thru entity, for purposes of applying subsection (a)(2)— 

(A) such entity, 

(B) in the case of— 

(i) a partnership, any person who owns (directly or 

indirectly) any capital interest or profits interest of 

such partnership, or 

(ii) an S corporation, any person who owns (directly 

or indirectly) any of the stock of such corporation, 

(C) any person who owns (directly or indirectly) any capital interest or profits interest of a partnership in which 

such entity owns (directly or indirectly) any capital interest or profits interest, and 

(D) any person related (within the meaning of subsection 

(b) of this section or section 707(b)(1)) to a person described in subparagraph (B) or (C), 

shall be treated as persons specified in a paragraph of subsection (b). Subparagraph (C) shall apply to a transaction only 

if such transaction is related either to the operations of the 

partnership described in such subparagraph or to an interest 

in such partnership. 

(2) PASS-THRU ENTITY.—For purposes of this section, the 

term ‘‘pass-thru entity’’ means— 

(A) a partnership, and 

(B) an S corporation. 

(3) CONSTRUCTIVE OWNERSHIP IN THE CASE OF PARTNERSHIPS.—For purposes of determining ownership of a capital interest or profits interest of a partnership, the principles of subsection (c) shall apply, except that— 

(A) paragraph (3) of subsection (c) shall not apply, and 

(B) interests owned (directly or indirectly) by or for a C 

corporation shall be considered as owned by or for any 

shareholder only if such shareholder owns (directly or indirectly) 5 percent or more in value of the stock of such corporation. 

(4) SUBSECTION (A)(2) NOT TO APPLY TO CERTAIN GUARANTEED

PAYMENTS OF PARTNERSHIPS.—In the case of any amount paid 

or incurred by a partnership, subsection (a)(2) shall not apply 

to the extent that section 707(c) applies to such amount. 

(5) EXCEPTION FOR CERTAIN EXPENSES AND INTEREST OF

PARTNERSHIPS OWNING LOW-INCOME HOUSING.— 

(A) IN GENERAL.—This subsection shall not apply with 

respect to qualified expenses and interest paid or incurred 

by a partnership owning low-income housing to— 

(i) any qualified 5-percent or less partner of such 

partnership, or 

186 

(ii) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to any 

qualified 5-percent or less partner of such partnership. 

(B) QUALIFIED 5-PERCENT OR LESS PARTNER.—For purposes of this paragraph, the term ‘‘qualified 5-percent or 

less partner’’ means any partner who has (directly or indirectly) an interest of 5 percent or less in the aggregate capital and profits interests of the partnership but only if— 

(i) such partner owned the low-income housing at all 

times during the 2-year period ending on the date 

such housing was transferred to the partnership, or 

(ii) such partnership acquired the low-income housing pursuant to a purchase, assignment, or other 

transfer from the Department of Housing and Urban 

Development or any State or local housing authority. 

For purposes of the preceding sentence, a partner shall be 

treated as holding any interest in the partnership which is 

held (directly or indirectly) by any person related (within 

the meaning of subsection (b) of this section or section 

707(b)(1)) to such partner. 

(C) QUALIFIED EXPENSES AND INTEREST.—For purpose of 

this paragraph, the term ‘‘qualified expenses and interest’’ 

means any expense or interest incurred by the partnership 

with respect to low-income housing held by the partnership but— 

(i) only if the amount of such expense or interest (as 

the case may be) is unconditionally required to be paid 

by the partnership not later than 10 years after the 

date such amount was incurred, and 

(ii) in the case of such interest, only if such interest 

is incurred at an annual rate not in excess of 12 percent. 

(D) LOW-INCOME HOUSING.—For purposes of this paragraph, the term ‘‘low-income housing’’ means— 

(i) any interest in property described in clause (i), 

(ii), (iii), or (iv) of section 1250(a)(1)(B), and 

(ii) any interest in a partnership owning such property. 

(6) CROSS REFERENCE.—For additional rules relating to partnerships, see section 707(b). 

(f) CONTROLLED GROUP DEFINED; SPECIAL RULES APPLICABLE TO

CONTROLLED GROUPS.— 

(1) CONTROLLED GROUP DEFINED.—For purposes of this section, the term ‘‘controlled group’’ has the meaning given to 

such term by section 1563(a), except that— 

(A) ‘‘more than 50 percent’’ shall be substituted for ‘‘at 

least 80 percent’’ each place it appears in section 1563(a), 

and 

(B) the determination shall be made without regard to 

subsections (a)(4) and (e)(3)(C) of section 1563. 

(2) DEFERRAL (RATHER THAN DENIAL) OF LOSS FROM SALE OR

EXCHANGE BETWEEN MEMBERS.—In the case of any loss from 

the sale or exchange of property which is between members of 

the same controlled group and to which subsection (a)(1) apVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00192 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
187 

plies (determined without regard to this paragraph but with 

regard to paragraph (3))— 

(A) subsections (a)(1) and (d) shall not apply to such loss, 

but 

(B) such loss shall be deferred until the property is 

transferred outside such controlled group and there would 

be recognition of loss under consolidated return principles 

or until such other time as may be prescribed in regulations. 

(3) LOSS DEFERRAL RULES NOT TO APPLY IN CERTAIN CASES.— 

(A) TRANSFER TO DISC.—For purposes of applying subsection (a)(1), the term ‘‘controlled group’’ shall not include 

a DISC. 

(B) CERTAIN SALES OF INVENTORY.—Except to the extent 

provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to the sale or exchange of 

property between members of the same controlled group 

(or persons described in subsection (b)(10)) if— 

(i) such property in the hands of the transferor is 

property described in section 1221(a)(1), 

(ii) such sale or exchange is in the ordinary course 

of the transferor’s trade or business, 

(iii) such property in the hands of the transferee is 

property described in section 1221(a)(1), and 

(iv) the transferee or the transferor is a foreign corporation. 

(C) CERTAIN FOREIGN CURRENCY LOSSES.—To the extent 

provided in regulations, subsection (a)(1) shall not apply to 

any loss sustained by a member of a controlled group on 

the repayment of a loan made to another member of such 

group if such loan is payable in a foreign currency or is denominated in such a currency and such loss is attributable 

to a reduction in value of such foreign currency. 

(D) REDEMPTIONS BY FUND-OF-FUNDS REGULATED INVESTMENT COMPANIES.—Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall 

not apply to any distribution in redemption of stock of a 

regulated investment company if— 

(i) such company issues only stock which is redeemable upon the demand of the stockholder, and 

(ii) such redemption is upon the demand of another 

regulated investment company. 

(4) DETERMINATION OF RELATIONSHIP RESULTING IN DISALLOWANCE OF LOSS, FOR PURPOSES OF OTHER PROVISIONS.— 

For purposes of any other section of this title which refers to 

a relationship which would result in a disallowance of losses 

under this section, deferral under paragraph (2) shall be treated as disallowance. 

(g) COORDINATION WITH SECTION 1041.—Subsection (a)(1) shall 

not apply to any transfer described in section 1041(a) (relating to 

transfers of property between spouses or incident to divorce). 

* * * * * * * 

188 

SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES. 

(a) ENTERTAINMENT, AMUSEMENT, RECREATION, OR QUALIFIED

TRANSPORTATION FRINGES.— 

(1) IN GENERAL.—No deduction otherwise allowable under 

this chapter shall be allowed for any item— 

(A) ACTIVITY.—With respect to an activity which is of a 

type generally considered to constitute entertainment, 

amusement, or recreation, or 

(B) FACILITY.—With respect to a facility used in connection with an activity referred to in subparagraph (A). 

(2) SPECIAL RULES.—For purposes of applying paragraph 

(1)— 

(A) Dues or fees to any social, athletic, or sporting club 

or organization shall be treated as items with respect to 

facilities. 

(B) An activity described in section 212 shall be treated 

as a trade or business. 

(3) DENIAL OF DEDUCTION FOR CLUB DUES.—Notwithstanding 

the preceding provisions of this subsection, no deduction shall 

be allowed under this chapter for amounts paid or incurred for 

membership in any club organized for business, pleasure, 

recreation, or other social purpose. 

(4) QUALIFIED TRANSPORTATION FRINGES.—No deduction shall 

be allowed under this chapter for the expense of any qualified 

transportation fringe (as defined in section 132(f)) provided to 

an employee of the taxpayer. 

(b) GIFTS.— 

(1) LIMITATION.—No deduction shall be allowed under section 

162 or section 212 for any expense for gifts made directly or 

indirectly to any individual to the extent that such expense, 

when added to prior expenses of the taxpayer for gifts made to 

such individual during the same taxable year, exceeds $25. For 

purposes of this section, the term ‘‘gift’’ means any item excludable from gross income of the recipient under section 102 

which is not excludable from his gross income under any other 

provision of this chapter, but such term does not include— 

(A) an item having a cost to the taxpayer not in excess 

of $4.00 on which the name of the taxpayer is clearly and 

permanently imprinted and which is one of a number of 

identical items distributed generally by the taxpayer, or 

(B) a sign, display rack, or other promotional material to 

be used on the business premises of the recipient. 

(2) SPECIAL RULES.— (A) In the case of a gift by a partnership, the limitation 

contained in paragraph (1) shall apply to the partnership 

as well as to each member thereof. 

(B) For purposes of paragraph (1), a øhusband and wife¿ 

married couple shall be treated as one taxpayer. 

(c) CERTAIN FOREIGN TRAVEL.— 

(1) IN GENERAL.—In the case of any individual who travels 

outside the United States away from home in pursuit of a 

trade or business or in pursuit of an activity described in section 212, no deduction shall be allowed under section 162 or 

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189 

erwise allowable under such section which, under regulations 

prescribed by the Secretary, is not allocable to such trade or 

business or to such activity. 

(2) EXCEPTION.—Paragraph (1) shall not apply to the expenses of any travel outside the United States away from home 

if— 

(A) such travel does not exceed one week, or 

(B) the portion of the time of travel outside the United 

States away from home which is not attributable to the 

pursuit of the taxpayer’s trade or business or an activity 

described in section 212 is less than 25 percent of the total 

time on such travel. 

(3) DOMESTIC TRAVEL EXCLUDED.—For purposes of this subsection, travel outside the United States does not include any 

travel from one point in the United States to another point in 

the United States. 

(d) SUBSTANTIATION REQUIRED.—No deduction or credit shall be 

allowed— 

(1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home), 

(2) for any expense for gifts, or 

(3) with respect to any listed property (as defined in section 

280F(d)(4)), 

unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (A) the 

amount of such expense or other item, (B) the time and place of 

the travel or the date and description of the gift, (C) the business 

purpose of the expense or other item, and (D) the business relationship to the taxpayer of the person receiving the benefit. The Secretary may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an 

expense which does not exceed an amount prescribed pursuant to 

such regulations. This subsection shall not apply to any qualified 

nonpersonal use vehicle (as defined in subsection (i)). 

(e) SPECIFIC EXCEPTIONS TO APPLICATION OF SUBSECTION (A).— 

Subsection (a) shall not apply to— 

(1) FOOD AND BEVERAGES FOR EMPLOYEES.—Expenses for 

food and beverages (and facilities used in connection therewith) 

furnished on the business premises of the taxpayer primarily 

for his employees. 

(2) EXPENSES TREATED AS COMPENSATION.— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), expenses for goods, services, and facilities, to the extent that the expenses are treated by the taxpayer, with 

respect to the recipient of the entertainment, amusement, 

or recreation, as compensation to an employee on the taxpayer’s return of tax under this chapter and as wages to 

such employee for purposes of chapter 24 (relating to withholding of income tax at source on wages). 

(B) SPECIFIED INDIVIDUALS.— (i) IN GENERAL.—In the case of a recipient who is a 

specified individual, subparagraph (A) and paragraph 

(9) shall each be applied by substituting ‘‘to the extent 

that the expenses do not exceed the amount of the expenses which’’ for ‘‘to the extent that the expenses’’. 

190 

(ii) SPECIFIED INDIVIDUAL.—For purposes of clause 

(i), the term ‘‘specified individual’’ means any individual who— 

(I) is subject to the requirements of section 16(a) 

of the Securities Exchange Act of 1934 with respect to the taxpayer or a related party to the taxpayer, or 

(II) would be subject to such requirements if the 

taxpayer (or such related party) were an issuer of 

equity securities referred to in such section. 

For purposes of this clause, a person is a related party 

with respect to another person if such person bears a relationship to such other person described in section 267(b) or 

707(b). 

(3) REIMBURSED EXPENSES.—Expenses paid or incurred by 

the taxpayer, in connection with the performance by him of 

services for another person (whether or not such other person 

is his employer), under a reimbursement or other expense allowance arrangement with such other person, but this paragraph shall apply— 

(A) where the services are performed for an employer, 

only if the employer has not treated such expenses in the 

manner provided in paragraph (2), or 

(B) where the services are performed for a person other 

than an employer, only if the taxpayer accounts (to the extent provided by subsection (d)) to such person. 

(4) RECREATIONAL, ETC., EXPENSES FOR EMPLOYEES.—Expenses for recreational, social, or similar activities (including 

facilities therefor) primarily for the benefit of employees (other 

than employees who are highly compensated employees (within 

the meaning of section 414(q))). For purposes of this paragraph, an individual owning less than a 10-percent interest in 

the taxpayer’s trade or business shall not be considered a 

shareholder or other owner, and for such purposes an individual shall be treated as owning any interest owned by a 

member of his family (within the meaning of section 267(c)(4)). 

This paragraph shall not apply for purposes of subsection 

(a)(3). 

(5) EMPLOYEES, STOCKHOLDER, ETC., BUSINESS MEETINGS.— Expenses incurred by a taxpayer which are directly related to 

business meetings of his employees, stockholders, agents, or directors. 

(6) MEETINGS OF BUSINESS LEAGUES, ETC..—Expenses directly related and necessary to attendance at a business meeting or convention of any organization described in section 

501(c)(6) (relating to business leagues, chambers of commerce, 

real estate boards, and boards of trade) and exempt from taxation under section 501(a). 

(7) ITEMS AVAILABLE TO PUBLIC.—Expenses for goods, services, and facilities made available by the taxpayer to the general public. 

(8) ENTERTAINMENT SOLD TO CUSTOMERS.—Expenses for 

goods or services (including the use of facilities) which are sold 

by the taxpayer in a bona fide transaction for an adequate and 

full consideration in money or money’s worth. 

191 

(9) EXPENSES INCLUDIBLE IN INCOME OF PERSONS WHO ARE

NOT EMPLOYEES.—Expenses paid or incurred by the taxpayer 

for goods, services, and facilities to the extent that the expenses are includible in the gross income of a recipient of the 

entertainment, amusement, or recreation who is not an employee of the taxpayer as compensation for services rendered or 

as a prize or award under section 74. The preceding sentence 

shall not apply to any amount paid or incurred by the taxpayer 

if such amount is required to be included (or would be so required except that the amount is less than $600) in any information return filed by such taxpayer under part III of subchapter A of chapter 61 and is not so included. 

For purposes of this subsection, any item referred to in subsection 

(a) shall be treated as an expense. 

(f) INTEREST, TAXES, CASUALTY LOSSES, ETC..—This section shall 

not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity). In the case of a taxpayer which is not an 

individual, the preceding sentence shall be applied as if it were an 

individual. 

(g) TREATMENT OF ENTERTAINMENT, ETC., TYPE FACILITY.—For 

purposes of this chapter, if deductions are disallowed under subsection (a) with respect to any portion of a facility, such portion 

shall be treated as an asset which is used for personal, living, and 

family purposes (and not as an asset used in the trade or business). 

(h) ATTENDANCE AT CONVENTIONS, ETC..— (1) IN GENERAL.—In the case of any individual who attends 

a convention, seminar, or similar meeting which is held outside 

the North American area, no deduction shall be allowed under 

section 162 for expenses allocable to such meeting unless the 

taxpayer establishes that the meeting is directly related to the 

active conduct of his trade or business and that, after taking 

into account in the manner provided by regulations prescribed 

by the Secretary— 

(A) the purpose of such meeting and the activities taking 

place at such meeting, 

(B) the purposes and activities of the sponsoring organizations or groups, 

(C) the residences of the active members of the sponsoring organization and the places at which other meetings 

of the sponsoring organization or groups have been held or 

will be held, and 

(D) such other relevant factors as the taxpayer may 

present, 

it is as reasonable for the meeting to be held outside the North 

American area as within the North American area. 

(2) CONVENTIONS ON CRUISE SHIPS.—In the case of any individual who attends a convention, seminar, or other meeting 

which is held on any cruise ship, no deduction shall be allowed 

under section 162 for expenses allocable to such meeting, unless the taxpayer meets the requirements of paragraph (5) and 

establishes that the meeting is directly related to the active 

conduct of his trade or business and that— 

(A) the cruise ship is a vessel registered in the United 

States; and 

192 

(B) all ports of call of such cruise ship are located in the 

United States or in possessions of the United States. 

With respect to cruises beginning in any calendar year, not 

more than $2,000 of the expenses attributable to an individual 

attending one or more meetings may be taken into account 

under section 162 by reason of the preceding sentence. 

(3) DEFINITIONS.—For purposes of this subsection— 

(A) NORTH AMERICAN AREA.—The term ‘‘North American 

area’’ means the United States, its possessions, and the 

Trust Territory of the Pacific Islands, and Canada and 

Mexico. 

(B) CRUISE SHIP.—The term ‘‘cruise ship’’ means any 

vessel sailing within or without the territorial waters of 

the United States. 

(4) SUBSECTION TO APPLY TO EMPLOYER AS WELL AS TO TRAVELER.— 

(A) Except as provided in subparagraph (B), this subsection shall apply to deductions otherwise allowable 

under section 162 to any person, whether or not such person is the individual attending the convention, seminar, or 

similar meeting. 

(B) This subsection shall not deny a deduction to any 

person other than the individual attending the convention, 

seminar, or similar meeting with respect to any amount 

paid by such person to or on behalf of such individual if 

includible in the gross income of such individual. The preceding sentence shall not apply if the amount is required 

to be included in any information return filed by such person under part III of subchapter A of chapter 61 and is not 

so included. 

(5) REPORTING REQUIREMENTS.—No deduction shall be allowed under section 162 for expenses allocable to attendance at 

a convention, seminar, or similar meeting on any cruise ship 

unless the taxpayer claiming the deduction attaches to the return of tax on which the deduction is claimed— 

(A) a written statement signed by the individual attending the meeting which includes— 

(i) information with respect to the total days of the 

trip, excluding the days of transportation to and from 

the cruise ship port, and the number of hours of each 

day of the trip which such individual devoted to scheduled business activities, 

(ii) a program of the scheduled business activities of 

the meeting, and 

(iii) such other information as may be required in 

regulations prescribed by the Secretary; and 

(B) a written statement signed by an officer of the organization or group sponsoring the meeting which includes— 

(i) a schedule of the business activities of each day 

of the meeting, 

(ii) the number of hours which the individual attending the meeting attended such scheduled business 

activities, and 

(iii) such other information as may be required in 

regulations prescribed by the Secretary. 

193 

(6) TREATMENT OF CONVENTIONS IN CERTAIN CARIBBEAN

COUNTRIES.— (A) IN GENERAL.—For purposes of this subsection, the 

term ‘‘North American area’’ includes, with respect to any 

convention, seminar, or similar meeting, any beneficiary 

country if (as of the time such meeting begins)— 

(i) there is in effect a bilateral or multilateral agreement described in subparagraph (C) between such 

country and the United States providing for the exchange of information between the United States and 

such country, and 

(ii) there is not in effect a finding by the Secretary 

that the tax laws of such country discriminate against 

conventions held in the United States. 

(B) BENEFICIARY COUNTRY.—For purposes of this paragraph, the term ‘‘beneficiary country’’ has the meaning 

given to such term by section 212(a)(1)(A) of the Caribbean 

Basin Economic Recovery Act; except that such term shall 

include Bermuda. 

(C) AUTHORITY TO CONCLUDE EXCHANGE OF INFORMATION

AGREEMENTS.— (i) IN GENERAL.—The Secretary is authorized to negotiate and conclude an agreement for the exchange of 

information with any beneficiary country. Except as 

provided in clause (ii), an exchange of information 

agreement shall provide for the exchange of such information (not limited to information concerning nationals or residents of the United States or the beneficiary country) as may be necessary or appropriate to 

carry out and enforce the tax laws of the United 

States and the beneficiary country (whether criminal 

or civil proceedings), including information which may 

otherwise be subject to nondisclosure provisions of the 

local law of the beneficiary country such as provisions 

respecting bank secrecy and bearer shares. The exchange of information agreement shall be terminable 

by either country on reasonable notice and shall provide that information received by either country will 

be disclosed only to persons or authorities (including 

courts and administrative bodies) involved in the administration or oversight of, or in the determination of 

appeals in respect of, taxes of the United States or the 

beneficiary country and will be used by such persons 

or authorities only for such purposes. 

(ii) NONDISCLOSURE OF QUALIFIED CONFIDENTIAL INFORMATION SOUGHT FOR CIVIL TAX PURPOSES.—An exchange of information agreement need not provide for 

the exchange of qualified confidential information 

which is sought only for civil tax purposes if— 

(I) the Secretary of the Treasury, after making 

all reasonable efforts to negotiate an agreement 

which includes the exchange of such information, 

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194 

tion and enforcement of the tax laws of the United 

States, and 

(II) the President determines that the agreement as negotiated is in the national security interest of the United States. 

(iii) QUALIFIED CONFIDENTIAL INFORMATION DE- FINED.—For purposes of this subparagraph, the term 

‘‘qualified confidential information’’ means information 

which is subject to the nondisclosure provisions of any 

local law of the beneficiary country regarding bank secrecy or ownership of bearer shares. 

(iv) CIVIL TAX PURPOSES.—For purposes of this subparagraph, the determination of whether information 

is sought only for civil tax purposes shall be made by 

the requesting party. 

(D) COORDINATION WITH OTHER PROVISIONS.—Any exchange of information agreement negotiated under subparagraph (C) shall be treated as an income tax convention for purposes of section 6103(k)(4). The Secretary may 

exercise his authority under subchapter A of chapter 78 to 

carry out any obligation of the United States under an 

agreement referred to in subparagraph (C). 

(E) DETERMINATIONS PUBLISHED IN THE FEDERAL REG- ISTER.—The following shall be published in the Federal 

Register— 

(i) any determination by the President under subparagraph (C)(ii) (including the reasons for such determination), 

(ii) any determination by the Secretary under subparagraph (C)(ii) (including the reasons for such determination), and 

(iii) any finding by the Secretary under subparagraph (A)(ii) (and any termination thereof). 

(7) SEMINARS, ETC. FOR SECTION 212 PURPOSES.—No deduction shall be allowed under section 212 for expenses allocable 

to a convention, seminar, or similar meeting. 

(i) QUALIFIED NONPERSONAL USE VEHICLE.—For purposes of subsection (d), the term ‘‘qualified nonpersonal use vehicle’’ means any 

vehicle which, by reason of its nature, is not likely to be used more 

than a de minimis amount for personal purposes. 

(j) EMPLOYEE ACHIEVEMENT AWARDS.— 

(1) GENERAL RULE.—No deduction shall be allowed under 

section 162 or section 212 for the cost of an employee achievement award except to the extent that such cost does not exceed 

the deduction limitations of paragraph (2). 

(2) DEDUCTION LIMITATIONS.—The deduction for the cost of 

an employee achievement award made by an employer to an 

employee— 

(A) which is not a qualified plan award, when added to 

the cost to the employer for all other employee achievement awards made to such employee during the taxable 

year which are not qualified plan awards, shall not exceed 

$400, and 

(B) which is a qualified plan award, when added to the 

cost to the employer for all other employee achievement 

195 

awards made to such employee during the taxable year 

(including employee achievement awards which are not 

qualified plan awards), shall not exceed $1,600. 

(3) DEFINITIONS.—For purposes of this subsection— 

(A) EMPLOYEE ACHIEVEMENT AWARD.— (i) IN GENERAL.—The term ‘‘employee achievement 

award’’ means an item of tangible personal property 

which is— 

(I) transferred by an employer to an employee 

for length of service achievement or safety 

achievement, 

(II) awarded as part of a meaningful presentation, and 

(III) awarded under conditions and circumstances that do not create a significant likelihood of the payment of disguised compensation. 

(ii) TANGIBLE PERSONAL PROPERTY.—For purposes of 

clause (i), the term ‘‘tangible personal property’’ shall 

not include— 

(I) cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements 

conferring only the right to select and receive tangible personal property from a limited array of 

such items pre-selected or pre-approved by the 

employer), or 

(II) vacations, meals, lodging, tickets to theater 

or sporting events, stocks, bonds, other securities, 

and other similar items. 

(B) QUALIFIED PLAN AWARD.— 

(i) IN GENERAL.—The term ‘‘qualified plan award’’ 

means an employee achievement award awarded as 

part of an established written plan or program of the 

taxpayer which does not discriminate in favor of highly compensated employees (within the meaning of section 414(q)) as to eligibility or benefits. 

(ii) LIMITATION.—An employee achievement award 

shall not be treated as a qualified plan award for any 

taxable year if the average cost of all employee 

achievement awards which are provided by the employer during the year, and which would be qualified 

plan awards but for this subparagraph, exceeds $400. 

For purposes of the preceding sentence, average cost 

shall be determined by including the entire cost of 

qualified plan awards, without taking into account employee achievement awards of nominal value. 

(4) SPECIAL RULES.—For purposes of this subsection— 

(A) PARTNERSHIPS.—In the case of an employee achievement award made by a partnership, the deduction limitations contained in paragraph (2) shall apply to the partnership as well as to each member thereof. 

(B) LENGTH OF SERVICE AWARDS.—An item shall not be 

treated as having been provided for length of service 

achievement if the item is received during the recipient’s 

1st 5 years of employment or if the recipient received a 

length of service achievement award (other than an award 

196 

excludable under section 132(e)(1)) during that year or any 

of the prior 4 years. 

(C) SAFETY ACHIEVEMENT AWARDS.—An item provided by 

an employer to an employee shall not be treated as having 

been provided for safety achievement if— 

(i) during the taxable year, employee achievement 

awards (other than awards excludable under section 

132(e)(1)) for safety achievement have previously been 

awarded by the employer to more than 10 percent of 

the employees of the employer (excluding employees 

described in clause (ii)), or 

(ii) such item is awarded to a manager, administrator, clerical employee, or other professional employee. 

(k) BUSINESS MEALS.— 

(1) IN GENERAL.—No deduction shall be allowed under this 

chapter for the expense of any food or beverages unless— 

(A) such expense is not lavish or extravagant under the 

circumstances, and 

(B) the taxpayer (or an employee of the taxpayer) is 

present at the furnishing of such food or beverages. 

(2) EXCEPTIONS.—Paragraph (1) shall not apply to— 

(A) any expense described in paragraph (2), (3), (4), (7), 

(8), or (9) of subsection (e), and 

(B) any other expense to the extent provided in regulations. 

(l) TRANSPORTATION AND COMMUTING BENEFITS.— 

(1) IN GENERAL.—No deduction shall be allowed under this 

chapter for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of 

the taxpayer in connection with travel between the employee’s 

residence and place of employment, except as necessary for ensuring the safety of the employee. 

(2) EXCEPTION.—In the case of any qualified bicycle commuting reimbursement (as described in section 132(f)(5)(F)), 

this subsection shall not apply for any amounts paid or incurred after December 31, 2017, and before January 1, 2026. 

(m) ADDITIONAL LIMITATIONS ON TRAVEL EXPENSES.— 

(1) LUXURY WATER TRANSPORTATION.— 

(A) IN GENERAL.—No deduction shall be allowed under 

this chapter for expenses incurred for transportation by 

water to the extent such expenses exceed twice the aggregate per diem amounts for days of such transportation. For 

purposes of the preceding sentence, the term ‘‘per diem 

amounts’’ means the highest amount generally allowable 

with respect to a day to employees of the executive branch 

of the Federal Government for per diem while away from 

home but serving in the United States. 

(B) EXCEPTIONS.—Subparagraph (A) shall not apply to— 

(i) any expense allocable to a convention, seminar, 

or other meeting which is held on any cruise ship, and 

(ii) any expense described in paragraph (2), (3), (4), 

(7), (8), or (9) of subsection (e). 

197 

(2) TRAVEL AS FORM OF EDUCATION.—No deduction shall be 

allowed under this chapter for expenses for travel as a form of 

education. 

(3) TRAVEL EXPENSES OF SPOUSE, DEPENDENT, OR OTHERS.— No deduction shall be allowed under this chapter (other than 

section 217) for travel expenses paid or incurred with respect 

to a spouse, dependent, or other individual accompanying the 

taxpayer (or an officer or employee of the taxpayer) on business travel, unless— 

(A) the spouse, dependent, or other individual is an employee of the taxpayer, 

(B) the travel of the spouse, dependent, or other individual is for a bona fide business purpose, and 

(C) such expenses would otherwise be deductible by the 

spouse, dependent, or other individual. 

(n) ONLY 50 PERCENT OF MEAL EXPENSES ALLOWED AS DEDUCTION.— 

(1) IN GENERAL.—The amount allowable as a deduction 

under this chapter for any expense for food or beverages shall 

not exceed 50 percent of the amount of such expense which 

would (but for this paragraph) be allowable as a deduction 

under this chapter. 

(2) EXCEPTIONS.—Paragraph (1) shall not apply to any expense if— 

(A) such expense is described in paragraph (2), (3), (4), 

(7), (8), or (9) of subsection (e), 

(B) in the case of an employer who pays or reimburses 

moving expenses of an employee, such expenses are includible in the income of the employee under section 82, or 

(C) such expense is for food or beverages— 

(i) required by any Federal law to be provided to 

crew members of a commercial vessel, 

(ii) provided to crew members of a commercial vessel— 

(I) which is operating on the Great Lakes, the 

Saint Lawrence Seaway, or any inland waterway 

of the United States, and 

(II) which is of a kind which would be required 

by Federal law to provide food and beverages to 

crew members if it were operated at sea, 

(iii) provided on an oil or gas platform or drilling rig 

if the platform or rig is located offshore, or 

(iv) provided on an oil or gas platform or drilling rig, 

or at a support camp which is in proximity and integral to such platform or rig, if the platform or rig is 

located in the United States north of 54 degrees north 

latitude. 

Clauses (i) and (ii) of subparagraph (C) shall not apply to vessels primarily engaged in providing luxury water transportation (determined under the principles of subsection (m)). In 

the case of the employee, the exception of subparagraph (A) 

shall not apply to expenses described in subparagraph (B). 

(3) SPECIAL RULE FOR INDIVIDUALS SUBJECT TO FEDERAL

HOURS OF SERVICE.—In the case of any expenses for food or 

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198 

ing of section 162(a)(2)) by an individual during, or incident to, 

the period of duty subject to the hours of service limitations of 

the Department of Transportation, paragraph (1) shall be applied by substituting ‘‘80 percent’’ for ‘‘50 percent’’. 

(o) REGULATORY AUTHORITY.—The Secretary shall prescribe such 

regulations as he may deem necessary to carry out the purposes of 

this section, including regulations prescribing whether subsection 

(a) or subsection (b) applies in cases where both such subsections 

would otherwise apply. 

Subchapter C—CORPORATE DISTRIBUTIONS 

AND ADJUSTMENTS 

* * * * * * * 

PART I—DISTRIBUTIONS BY CORPORATIONS 

* * * * * * * 

Subpart C—DEFINITIONS; CONSTRUCTIVE OWNERSHIP 

OF STOCK 

* * * * * * * 

SEC. 318. CONSTRUCTIVE OWNERSHIP OF STOCK. 

(a) GENERAL RULE.—For purposes of those provisions of this subchapter to which the rules contained in this section are expressly 

made applicable— 

(1) MEMBERS OF FAMILY.— (A) IN GENERAL.—An individual shall be considered as 

owning the stock owned, directly or indirectly, by or for— 

(i) øhis spouse¿ the individual’s spouse (other than 

a spouse who is legally separated from the individual 

under a decree of divorce or separate maintenance), 

and 

(ii) øhis¿ the individual’s children, grandchildren, 

and parents. 

(B) EFFECT OF ADOPTION.—For purposes of subparagraph (A)(ii), a legally adopted child of an individual shall 

be treated as a child of such individual by blood. 

(2) ATTRIBUTION FROM PARTNERSHIPS, ESTATES, TRUSTS, AND

CORPORATIONS.— 

(A) FROM PARTNERSHIPS AND ESTATES.—Stock owned, directly or indirectly, by or for a partnership or estate shall 

be considered as owned proportionately by its partners or 

beneficiaries. 

(B) FROM TRUSTS.— 

(i) Stock owned, directly or indirectly, by or for a 

trust (other than an employees’ trust described in section 401(a) which is exempt from tax under section 

501(a)) shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such 

beneficiaries in such trust. 

(ii) Stock owned, directly or indirectly, by or for any 

portion of a trust of which a person is considered the 

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199 

ing to grantors and others treated as substantial owners) shall be considered as owned by such person. 

(C) FROM CORPORATIONS.—If 50 percent or more in value 

of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by 

or for such corporation, in that proportion which the value 

of the stock which such person so owns bears to the value 

of all the stock in such corporation. 

(3) ATTRIBUTION TO PARTNERSHIPS, ESTATES, TRUSTS, AND

CORPORATIONS.— 

(A) TO PARTNERSHIPS AND ESTATES.—Stock owned, directly or indirectly, by or for a partner or a beneficiary of 

an estate shall be considered as owned by the partnership 

or estate. 

(B) TO TRUSTS.— 

(i) Stock owned, directly or indirectly, by or for a 

beneficiary of a trust (other than an employees’ trust 

described in section 401(a) which is exempt from tax 

under section 501(a)) shall be considered as owned by 

the trust, unless such beneficiary’s interest in the 

trust is a remote contingent interest. For purposes of 

this clause, a contingent interest of a beneficiary in a 

trust shall be considered remote if, under the maximum exercise of discretion by the trustee in favor of 

such beneficiary, the value of such interest, computed 

actuarially, is 5 percent or less of the value of the 

trust property. 

(ii) Stock owned, directly or indirectly, by or for a 

person who is considered the owner of any portion of 

a trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial 

owners) shall be considered as owned by the trust. 

(C) TO CORPORATIONS.—If 50 percent or more in value of 

the stock in a corporation is owned, directly or indirectly, 

by or for any person, such corporation shall be considered 

as owning the stock owned, directly or indirectly, by or for 

such person. 

(4) OPTIONS.—If any person has an option to acquire stock, 

such stock shall be considered as owned by such person. For 

purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. 

(5) OPERATING RULES.— 

(A) IN GENERAL.—Except as provided in subparagraphs 

(B) and (C), stock constructively owned by a person by reason of the application of paragraph (1), (2), (3), or (4), 

shall, for purposes of applying paragraphs (1), (2), (3), and 

(4), be considered as actually owned by such person. 

(B) MEMBERS OF FAMILY.—Stock constructively owned by 

an individual by reason of the application of paragraph (1) 

shall not be considered as owned by him for purposes of 

again applying paragraph (1) in order to make another the 

constructive owner of such stock. 

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(C) PARTNERSHIPS, ESTATES, TRUSTS, AND CORPORA- TIONS.—Stock constructively owned by a partnership, estate, trust, or corporation by reason of the application of 

paragraph (3) shall not be considered as owned by it for 

purposes of applying paragraph (2) in order to make another the constructive owner of such stock. 

(D) OPTION RULE IN LIEU OF FAMILY RULE.—For purposes 

of this paragraph, if stock may be considered as owned by 

an individual under paragraph (1) or (4), it shall be considered as owned by him under paragraph (4). 

(E) S CORPORATION TREATED AS PARTNERSHIP.—For purposes of this subsection— 

(i) an S corporation shall be treated as a partnership, and 

(ii) any shareholder of the S corporation shall be 

treated as a partner of such partnership. 

The preceding sentence shall not apply for purposes of determining whether stock in the S corporation is constructively owned by any person. 

(b) CROSS REFERENCES.—For provisions to which the rules contained in subsection (a) apply, see— 

(1) section 302 (relating to redemption of stock); 

(2) section 304 (relating to redemption by related corporations); 

(3) section 306(b)(1)(A) (relating to disposition of section 

306 stock); 

(4) section 338(h)(3) (defining purchase); 

(5) section 382(l)(3) (relating to special limitations on net 

operating loss carryovers); 

(6) section 856(d) (relating to definition of rents from 

real property in the case of real estate investment trusts); 

(7) section 958(b) (relating to constructive ownership 

rules with respect to controlled foreign corporations); and 

(8) section 6038(e)(2) (relating to information with respect to certain foreign corporations). 

Subchapter D—DEFERRED COMPENSATION, 

ETC. 

* * * * * * * 

PART I—PENSION, PROFIT-SHARING, STOCK BONUS 

PLANS, ETC. 

* * * * * * * 

Subpart A—GENERAL RULE 

* * * * * * * 

SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS 

PLANS. 

(a) REQUIREMENTS FOR QUALIFICATION.—A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit 

of his employees or their beneficiaries shall constitute a qualified 

trust under this section— 

201 

(1) if contributions are made to the trust by such employer, 

or employees, or both, or by another employer who is entitled 

to deduct his contributions under section 404(a)(3)(B) (relating 

to deduction for contributions to profit-sharing and stock bonus 

plans), or by a charitable remainder trust pursuant to a qualified gratuitous transfer (as defined in section 664(g)(1)), for the 

purpose of distributing to such employees or their beneficiaries 

the corpus and income of the fund accumulated by the trust in 

accordance with such plan; 

(2) if under the trust instrument it is impossible, at any time 

prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the 

corpus or income to be (within the taxable year or thereafter) 

used for, or diverted to, purposes other than for the exclusive 

benefit of his employees or their beneficiaries (but this paragraph shall not be construed, in the case of a multiemployer 

plan, to prohibit the return of a contribution within 6 months 

after the plan administrator determines that the contribution 

was made by a mistake of fact or law (other than a mistake 

relating to whether the plan is described in section 401(a) or 

the trust which is part of such plan is exempt from taxation 

under section 501(a), or the return of any withdrawal liability 

payment determined to be an overpayment within 6 months of 

such determination)); 

(3) if the plan of which such trust is a part satisfies the requirements of section 410 (relating to minimum participation 

standards); and 

(4) if the contributions or benefits provided under the plan 

do not discriminate in favor of highly compensated employees 

(within the meaning of section 414(q)). For purposes of this 

paragraph, there shall be excluded from consideration employees described in section 410(b)(3)(A) and (C). 

(5) SPECIAL RULES RELATING TO NONDISCRIMINATION RE- QUIREMENTS.— 

(A) SALARIED OR CLERICAL EMPLOYEES.—A classification 

shall not be considered discriminatory within the meaning 

of paragraph (4) or section 410(b)(2)(A)(i) merely because 

it is limited to salaried or clerical employees. 

(B) CONTRIBUTIONS AND BENEFITS MAY BEAR UNIFORM

RELATIONSHIP TO COMPENSATION.—A plan shall not be considered discriminatory within the meaning of paragraph 

(4) merely because the contributions or benefits of, or on 

behalf of, the employees under the plan bear a uniform relationship to the compensation (within the meaning of section 414(s)) of such employees. 

(C) CERTAIN DISPARITY PERMITTED.—A plan shall not be 

considered discriminatory within the meaning of paragraph (4) merely because the contributions or benefits of, 

or on behalf of, the employees under the plan favor highly 

compensated employees (as defined in section 414(q)) in 

the manner permitted under subsection (l). 

(D) INTEGRATED DEFINED BENEFIT PLAN.— (i) IN GENERAL.—A defined benefit plan shall not be 

considered discriminatory within the meaning of paragraph (4) merely because the plan provides that the 

202 

employer-derived accrued retirement benefit for any 

participant under the plan may not exceed the excess 

(if any) of— 

(I) the participant’s final pay with the employer, 

over 

(II) the employer-derived retirement benefit created under Federal law attributable to service by 

the participant with the employer. 

For purposes of this clause, the employer-derived retirement benefit created under Federal law shall be treated as 

accruing ratably over 35 years. 

(ii) FINAL PAY.—For purposes of this subparagraph, 

the participant’s final pay is the compensation (as defined in section 414(q)(4)) paid to the participant by 

the employer for any year— 

(I) which ends during the 5-year period ending 

with the year in which the participant separated 

from service for the employer, and 

(II) for which the participant’s total compensation from the employer was highest. 

(E) 2 OR MORE PLANS TREATED AS SINGLE PLAN.—For 

purposes of determining whether 2 or more plans of an 

employer satisfy the requirements of paragraph (4) when 

considered as a single plan— 

(i) CONTRIBUTIONS.—If the amount of contributions 

on behalf of the employees allowed as a deduction 

under section 404 for the taxable year with respect to 

such plans, taken together, bears a uniform relationship to the compensation (within the meaning of section 414(s)) of such employees, the plans shall not be 

considered discriminatory merely because the rights of 

employees to, or derived from, the employer contributions under the separate plans do not become nonforfeitable at the same rate. 

(ii) BENEFITS.—If the employees’ rights to benefits 

under the separate plans do not become nonforfeitable 

at the same rate, but the levels of benefits provided by 

the separate plans satisfy the requirements of regulations prescribed by the Secretary to take account of 

the differences in such rates, the plans shall not be 

considered discriminatory merely because of the difference in such rates. 

(F) SOCIAL SECURITY RETIREMENT AGE.—For purposes of 

testing for discrimination under paragraph (4)— 

(i) the social security retirement age (as defined in 

section 415(b)(8)) shall be treated as a uniform retirement age, and 

(ii) subsidized early retirement benefits and joint 

and survivor annuities shall not be treated as being 

unavailable to employees on the same terms merely 

because such benefits or annuities are based in whole 

or in part on an employee’s social security retirement 

age (as so defined). 

203 

(G) GOVERNMENTAL PLANS.—Paragraphs (3) and (4) shall 

not apply to a governmental plan (within the meaning of 

section 414(d)). 

(6) A plan shall be considered as meeting the requirements 

of paragraph (3) during the whole of any taxable year of the 

plan if on one day in each quarter it satisfied such requirements. 

(7) A trust shall not constitute a qualified trust under this 

section unless the plan of which such trust is a part satisfies 

the requirements of section 411 (relating to minimum vesting 

standards). 

(8) A trust forming part of a defined benefit plan shall not 

constitute a qualified trust under this section unless the plan 

provides that forfeitures must not be applied to increase the 

benefits any employee would otherwise receive under the plan. 

(9) REQUIRED DISTRIBUTIONS.— 

(A) IN GENERAL.—A trust shall not constitute a qualified 

trust under this subsection unless the plan provides that 

the entire interest of each employee— 

(i) will be distributed to such employee not later 

than the required beginning date, or 

(ii) will be distributed, beginning not later than the 

required beginning date, in accordance with regulations, over the life of such employee or over the lives 

of such employee and a designated beneficiary (or over 

a period not extending beyond the life expectancy of 

such employee or the life expectancy of such employee 

and a designated beneficiary). 

(B) REQUIRED DISTRIBUTION WHERE EMPLOYEE DIES BEFORE ENTIRE INTEREST IS DISTRIBUTED.— 

(i) WHERE DISTRIBUTIONS HAVE BEGUN UNDER SUBPARAGRAPH (A)(II).—A trust shall not constitute a 

qualified trust under this section unless the plan provides that if— 

(I) the distribution of the employee’s interest 

has begun in accordance with subparagraph 

(A)(ii), and 

(II) the employee dies before his entire interest 

has been distributed to him, 

the remaining portion of such interest will be distributed 

at least as rapidly as under the method of distributions 

being used under subparagraph (A)(ii) as of the date of his 

death. 

(ii) 5-YEAR RULE FOR OTHER CASES.—A trust shall 

not constitute a qualified trust under this section unless the plan provides that, if an employee dies before 

the distribution of the employee’s interest has begun 

in accordance with subparagraph (A)(ii), the entire interest of the employee will be distributed within 5 

years after the death of such employee. 

(iii) EXCEPTION TO 5-YEAR RULE FOR CERTAIN

AMOUNTS PAYABLE OVER LIFE OF BENEFICIARY.—If— 

(I) any portion of the employee’s interest is payable to (or for the benefit of) a designated beneficiary, 

204 

(II) such portion will be distributed (in accordance with regulations) over the life of such designated beneficiary (or over a period not extending 

beyond the life expectancy of such beneficiary), 

and 

(III) such distributions begin not later than 1 

year after the date of the employee’s death or such 

later date as the Secretary may by regulations 

prescribe, 

for purposes of clause (ii), the portion referred to in subclause (I) shall be treated as distributed on the date on 

which such distributions begin. 

(iv) SPECIAL RULE FOR SURVIVING SPOUSE OF EMPLOYEE.—If the designated beneficiary referred to in 

clause (iii)(I) is the surviving spouse of the employee— 

(I) the date on which the distributions are required to begin under clause (iii)(III) shall not be 

earlier than the date on which the employee 

would have attained age 701/2, and 

(II) if the surviving spouse dies before the distributions to such spouse begin, this subparagraph 

shall be applied as if the surviving spouse were 

the employee. 

(C) REQUIRED BEGINNING DATE.—For purposes of this 

paragraph— 

(i) IN GENERAL.—The term ‘‘required beginning date’’ 

means April 1 of the calendar year following the later 

of— 

(I) the calendar year in which the employee attains age 701/2, or 

(II) the calendar year in which the employee retires. 

(ii) EXCEPTION.—Subclause (II) of clause (i) shall not 

apply— 

(I) except as provided in section 409(d), in the 

case of an employee who is a 5-percent owner (as 

defined in section 416) with respect to the plan 

year ending in the calendar year in which the employee attains age 701/2, or 

(II) for purposes of section 408(a)(6) or (b)(3). 

(iii) ACTUARIAL ADJUSTMENT.—In the case of an employee to whom clause (i)(II) applies who retires in a 

calendar year after the calendar year in which the employee attains age 701/2, the employee’s accrued benefit shall be actuarially increased to take into account 

the period after age 701/2 in which the employee was 

not receiving any benefits under the plan. 

(iv) EXCEPTION FOR GOVERNMENTAL AND CHURCH

PLANS.—Clauses (ii) and (iii) shall not apply in the 

case of a governmental plan or church plan. For purposes of this clause, the term ‘‘church plan’’ means a 

plan maintained by a church for church employees, 

and the term ‘‘church’’ means any church (as defined 

in section 3121(w)(3)(A)) or qualified church-controlled 

organization (as defined in section 3121(w)(3)(B)). 

205 

(D) LIFE EXPECTANCY.—For purposes of this paragraph, 

the life expectancy of an employee and the employee’s 

spouse (other than in the case of a life annuity) may be redetermined but not more frequently than annually. 

(E) DESIGNATED BENEFICIARY.—For purposes of this 

paragraph, the term ‘‘designated beneficiary’’ means any 

individual designated as a beneficiary by the employee. 

(F) TREATMENT OF PAYMENTS TO CHILDREN.—Under regulations prescribed by the Secretary, for purposes of this 

paragraph, any amount paid to a child shall be treated as 

if it had been paid to the surviving spouse if such amount 

will become payable to the surviving spouse upon such 

child reaching majority (or other designated event permitted under regulations). 

(G) TREATMENT OF INCIDENTAL DEATH BENEFIT DISTRIBUTIONS.—For purposes of this title, any distribution required under the incidental death benefit requirements of 

this subsection shall be treated as a distribution required 

under this paragraph. 

(10) OTHER REQUIREMENTS.— 

(A) PLANS BENEFITING OWNER-EMPLOYEES.—In the case 

of any plan which provides contributions or benefits for 

employees some or all of whom are owner-employees (as 

defined in subsection (c)(3)), a trust forming part of such 

plan shall constitute a qualified trust under this section 

only if the requirements of subsection (d) are also met. 

(B) TOP-HEAVY PLANS.— 

(i) IN GENERAL.—In the case of any top-heavy plan, 

a trust forming part of such plan shall constitute a 

qualified trust under this section only if the requirements of section 416 are met. 

(ii) PLANS WHICH MAY BECOME TOP-HEAVY.—Except 

to the extent provided in regulations, a trust forming 

part of a plan (whether or not a top-heavy plan) shall 

constitute a qualified trust under this section only if 

such plan contains provisions— 

(I) which will take effect if such plan becomes a 

top-heavy plan, and 

(II) which meet the requirements of section 416. 

(iii) EXEMPTION FOR GOVERNMENTAL PLANS.—This 

subparagraph shall not apply to any governmental 

plan. 

(11) REQUIREMENT OF JOINT AND SURVIVOR ANNUITY AND

PRERETIREMENT SURVIVOR ANNUITY.— 

(A) IN GENERAL.—In the case of any plan to which this 

paragraph applies, except as provided in section 417, a 

trust forming part of such plan shall not constitute a 

qualified trust under this section unless— 

(i) in the case of a vested participant who does not 

die before the annuity starting date, the accrued benefit payable to such participant is provided in the form 

of a qualified joint and survivor annuity, and 

(ii) in the case of a vested participant who dies before the annuity starting date and who has a surviving 

206 

spouse, a qualified preretirement survivor annuity is 

provided to the surviving spouse of such participant. 

(B) PLANS TO WHICH PARAGRAPH APPLIES.—This paragraph shall apply to— 

(i) any defined benefit plan, 

(ii) any defined contribution plan which is subject to 

the funding standards of section 412, and 

(iii) any participant under any other defined contribution plan unless— 

(I) such plan provides that the participant’s 

nonforfeitable accrued benefit (reduced by any security interest held by the plan by reason of a 

loan outstanding to such participant) is payable in 

full, on the death of the participant, to the participant’s surviving spouse (or, if there is no surviving spouse or the surviving spouse consents in 

the manner required under section 417(a)(2), to a 

designated beneficiary), 

(II) such participant does not elect a payment of 

benefits in the form of a life annuity, and 

(III) with respect to such participant, such plan 

is not a direct or indirect transferee (in a transfer 

after December 31, 1984) of a plan which is described in clause (i) or (ii) or to which this clause 

applied with respect to the participant. 

Clause (iii)(III) shall apply only with respect to the transferred assets (and income therefrom) if the plan separately 

accounts for such assets and any income therefrom. 

(C) EXCEPTION FOR CERTAIN ESOP BENEFITS.— 

(i) IN GENERAL.—In the case of— 

(I) a tax credit employee stock ownership plan 

(as defined in section 409(a)), or 

(II) an employee stock ownership plan (as defined in section 4975(e)(7)), 

subparagraph (A) shall not apply to that portion of the employee’s accrued benefit to which the requirements of section 409(h) apply. 

(ii) NONFORFEITABLE BENEFIT MUST BE PAID IN FULL, ETC.—In the case of any participant, clause (i) shall 

apply only if the requirements of subclauses (I), (II), 

and (III) of subparagraph (B)(iii) are met with respect 

to such participant. 

(D) SPECIAL RULE WHERE PARTICIPANT AND SPOUSE MARRIED LESS THAN 1 YEAR.—A plan shall not be treated as 

failing to meet the requirements of subparagraphs (B)(iii) 

or (C) merely because the plan provides that benefits will 

not be payable to the surviving spouse of the participant 

unless the participant and such spouse had been married 

throughout the 1-year period ending on the earlier of the 

participant’s annuity starting date or the date of the participant’s death. 

(E) EXCEPTION FOR PLANS DESCRIBED IN SECTION 404(C).— This paragraph shall not apply to a plan which the Secretary has determined is a plan described in section 404(c) 

(or a continuation thereof) in which participation is subVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00212 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
207 

stantially limited to individuals who, before January 1, 

1976, ceased employment covered by the plan. 

(F) CROSS REFERENCE.—For— 

(i) provisions under which participants may elect to 

waive the requirements of this paragraph, and 

(ii) other definitions and special rules for purposes of 

this paragraph, 

see section 417. 

(12) A trust shall not constitute a qualified trust under this 

section unless the plan of which such trust is a part provides 

that in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan after September 2, 

1974, each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the 

benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the plan had then 

terminated). The preceding sentence does not apply to any 

multiemployer plan with respect to any transaction to the extent that participants either before or after the transaction are 

covered under a multiemployer plan to which title IV of the 

Employee Retirement Income Security Act of 1974 applies. 

(13) ASSIGNMENT AND ALIENATION.— 

(A) IN GENERAL.—A trust shall not constitute a qualified 

trust under this section unless the plan of which such 

trust is a part provides that benefits provided under the 

plan may not be assigned or alienated. For purposes of the 

preceding sentence, there shall not be taken into account 

any voluntary and revocable assignment of not to exceed 

10 percent of any benefit payment made by any participant who is receiving benefits under the plan unless the 

assignment or alienation is made for purposes of defraying 

plan administration costs. For purposes of this paragraph 

a loan made to a participant or beneficiary shall not be 

treated as an assignment or alienation if such loan is secured by the participant’s accrued nonforfeitable benefit 

and is exempt from the tax imposed by section 4975 (relating to tax on prohibited transactions) by reason of section 

4975(d)(1). This paragraph shall take effect on January 1, 

1976 and shall not apply to assignments which were irrevocable on September 2, 1974. 

(B) SPECIAL RULES FOR DOMESTIC RELATIONS ORDERS.— 

Subparagraph (A) shall apply to the creation, assignment, 

or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations 

order, except that subparagraph (A) shall not apply if the 

order is determined to be a qualified domestic relations 

order. 

(C) SPECIAL RULE FOR CERTAIN JUDGMENTS AND SETTLEMENTS.—Subparagraph (A) shall not apply to any offset of 

a participant’s benefits provided under a plan against an 

amount that the participant is ordered or required to pay 

to the plan if— 

(i) the order or requirement to pay arises— 

208 

(I) under a judgment of conviction for a crime 

involving such plan, 

(II) under a civil judgment (including a consent 

order or decree) entered by a court in an action 

brought in connection with a violation (or alleged 

violation) of part 4 of subtitle B of title I of the 

Employee Retirement Income Security Act of 

1974, or 

(III) pursuant to a settlement agreement between the Secretary of Labor and the participant, 

or a settlement agreement between the Pension 

Benefit Guaranty Corporation and the participant, 

in connection with a violation (or alleged violation) 

of part 4 of such subtitle by a fiduciary or any 

other person, 

(ii) the judgment, order, decree, or settlement agreement expressly provides for the offset of all or part of 

the amount ordered or required to be paid to the plan 

against the participant’s benefits provided under the 

plan, and 

(iii) in a case in which the survivor annuity requirements of section 401(a)(11) apply with respect to distributions from the plan to the participant, if the participant has a spouse at the time at which the offset 

is to be made— 

(I) either such spouse has consented in writing 

to such offset and such consent is witnessed by a 

notary public or representative of the plan (or it 

is established to the satisfaction of a plan representative that such consent may not be obtained 

by reason of circumstances described in section 

417(a)(2)(B)), or an election to waive the right of 

the spouse to either a qualified joint and survivor 

annuity or a qualified preretirement survivor annuity is in effect in accordance with the requirements of section 417(a), 

(II) such spouse is ordered or required in such 

judgment, order, decree, or settlement to pay an 

amount to the plan in connection with a violation 

of part 4 of such subtitle, or 

(III) in such judgment, order, decree, or settlement, such spouse retains the right to receive the 

survivor annuity under a qualified joint and survivor annuity provided pursuant to section 

401(a)(11)(A)(i) and under a qualified preretirement survivor annuity provided pursuant to section 401(a)(11)(A)(ii), determined in accordance 

with subparagraph (D). 

A plan shall not be treated as failing to meet the requirements of this subsection, subsection (k), section 403(b), or 

section 409(d) solely by reason of an offset described in 

this subparagraph. 

(D) SURVIVOR ANNUITY.— 

(i) IN GENERAL.—The survivor annuity described in 

subparagraph (C)(iii)(III) shall be determined as if— 

209 

(I) the participant terminated employment on 

the date of the offset, 

(II) there was no offset, 

(III) the plan permitted commencement of benefits only on or after normal retirement age, 

(IV) the plan provided only the minimum-required qualified joint and survivor annuity, and 

(V) the amount of the qualified preretirement 

survivor annuity under the plan is equal to the 

amount of the survivor annuity payable under the 

minimum-required qualified joint and survivor annuity. 

(ii) DEFINITION.—For purposes of this subparagraph, 

the term ‘‘minimum-required qualified joint and survivor annuity’’ means the qualified joint and survivor 

annuity which is the actuarial equivalent of the participant’s accrued benefit (within the meaning of section 411(a)(7)) and under which the survivor annuity 

is 50 percent of the amount of the annuity which is 

payable during the joint lives of the participant and 

the spouse. 

(14) A trust shall not constitute a qualified trust under this 

section unless the plan of which such trust is a part provides 

that, unless the participant otherwise elects, the payment of 

benefits under the plan to the participant will begin not later 

than the 60th day after the latest of the close of the plan year 

in which— 

(A) the date on which the participant attains the earlier 

of age 65 or the normal retirement age specified under the 

plan, 

(B) occurs the 10th anniversary of the year in which the 

participant commenced participation in the plan, or 

(C) the participant terminates his service with the employer. 

In the case of a plan which provides for the payment of an 

early retirement benefit, a trust forming a part of such plan 

shall not constitute a qualified trust under this section unless 

a participant who satisfied the service requirements for such 

early retirement benefit, but separated from the service (with 

any nonforfeitable right to an accrued benefit) before satisfying 

the age requirement for such early retirement benefit, is entitled upon satisfaction of such age requirement to receive a benefit not less than the benefit to which he would be entitled at 

the normal retirement age, actuarially, reduced under regulations prescribed by the Secretary. 

(15) A trust shall not constitute a qualified trust under this 

section unless under the plan of which such trust is a part— 

(A) in the case of a participant or beneficiary who is receiving benefits under such plan, or 

(B) in the case of a participant who is separated from 

the service and who has nonforfeitable rights to benefits, 

such benefits are not decreased by reason of any increase in 

the benefit levels payable under title II of the Social Security 

Act or any increase in the wage base under such title II, if 

such increase takes place after September 2, 1974, or (if later) 

210 

the earlier of the date of first receipt of such benefits or the 

date of such separation, as the case may be. 

(16) A trust shall not constitute a qualified trust under this 

section if the plan of which such trust is a part provides for 

benefits or contributions which exceed the limitations of section 415. 

(17) COMPENSATION LIMIT.— (A) IN GENERAL.—A trust shall not constitute a qualified 

trust under this section unless, under the plan of which 

such trust is a part, the annual compensation of each employee taken into account under the plan for any year does 

not exceed $200,000. 

(B) COST-OF-LIVING ADJUSTMENT.—The Secretary shall 

adjust annually the $200,000 amount in subparagraph (A) 

for increases in the cost-of-living at the same time and in 

the same manner as adjustments under section 415(d); except that the base period shall be the calendar quarter beginning July 1, 2001, and any increase which is not a multiple of $5,000 shall be rounded to the next lowest multiple 

of $5,000. 

(19) A trust shall not constitute a qualified trust under this 

section if under the plan of which such trust is a part any part 

of a participant’s accrued benefit derived from employer contributions (whether or not otherwise nonforfeitable), is forfeitable solely because of withdrawal by such participant of any 

amount attributable to the benefit derived from contributions 

made by such participant. The preceding sentence shall not 

apply to the accrued benefit of any participant unless, at the 

time of such withdrawal, such participant has a nonforfeitable 

right to at least 50 percent of such accrued benefit (as determined under section 411). The first sentence of this paragraph 

shall not apply to the extent that an accrued benefit is permitted to be forfeited in accordance with section 

411(a)(3)(D)(iii) (relating to proportional forfeitures of benefits 

accrued before September 2, 1974, in the event of withdrawal 

of certain mandatory contributions). 

(20) A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section 

merely because the pension plan of which such trust is a part 

makes 1 or more distributions within 1 taxable year to a distributee on account of a termination of the plan of which the 

trust is a part, or in the case of a profit-sharing or stock bonus 

plan, a complete discontinuance of contributions under such 

plan. This paragraph shall not apply to a defined benefit plan 

unless the employer maintaining such plan files a notice with 

the Pension Benefit Guaranty Corporation (at the time and in 

the manner prescribed by the Pension Benefit Guaranty Corporation) notifying the Corporation of such payment or distribution and the Corporation has approved such payment or 

distribution or, within 90 days after the date on which such notice was filed, has failed to disapprove such payment or distribution. For purposes of this paragraph, rules similar to the 

rules of section 402(a)(6)(B) (as in effect before its repeal by 

section 521 of the Unemployment Compensation Amendments 

of 1992) shall apply. 

211 

(22) If a defined contribution plan (other than a profit-sharing plan)— 

(A) is established by an employer whose stock is not 

readily tradable on an established market, and 

(B) after acquiring securities of the employer, more than 

10 percent of the total assets of the plan are securities of 

the employer, 

any trust forming part of such plan shall not constitute a 

qualified trust under this section unless the plan meets the requirements of subsection (e) of section 409. The requirements 

of subsection (e) of section 409 shall not apply to any employees of an employer who are participants in any defined contribution plan established and maintained by such employer if 

the stock of such employer is not readily tradable on an established market and the trade or business of such employer consists of publishing on a regular basis a newspaper for general 

circulation. For purposes of the preceding sentence, subsections 

(b), (c), (m), and (o) of section 414 shall not apply except for 

determining whether stock of the employer is not readily 

tradable on an established market. 

(23) A stock bonus plan shall not be treated as meeting the 

requirements of this section unless such plan meets the requirements of subsections (h) and (o) of section 409, except that 

in applying section 409(h) for purposes of this paragraph, the 

term ‘‘employer securities’’ shall include any securities of the 

employer held by the plan. 

(24) Any group trust which otherwise meets the requirements of this section shall not be treated as not meeting such 

requirements on account of the participation or inclusion in 

such trust of the moneys of any plan or governmental unit described in section 818(a)(6). 

(25) REQUIREMENT THAT ACTUARIAL ASSUMPTIONS BE SPECIFIED.—A defined benefit plan shall not be treated as providing 

definitely determinable benefits unless, whenever the amount 

of any benefit is to be determined on the basis of actuarial assumptions, such assumptions are specified in the plan in a way 

which precludes employer discretion. 

(26) ADDITIONAL PARTICIPATION REQUIREMENTS.— (A) IN GENERAL.—In the case of a trust which is a part 

of a defined benefit plan, such trust shall not constitute a 

qualified trust under this subsection unless on each day of 

the plan year such trust benefits at least the lesser of— 

(i) 50 employees of the employer, or 

(ii) the greater of— 

(I) 40 percent of all employees of the employer, 

or 

(II) 2 employees (or if there is only 1 employee, 

such employee). 

(B) TREATMENT OF EXCLUDABLE EMPLOYEES.— (i) IN GENERAL.—A plan may exclude from consideration under this paragraph employees described in 

paragraphs (3) and (4)(A) of section 410(b). 

(ii) SEPARATE APPLICATION FOR CERTAIN EXCLUDABLE

EMPLOYEES.—If employees described in section 

410(b)(4)(B) are covered under a plan which meets the 

212 

requirements of subparagraph (A) separately with respect to such employees, such employees may be excluded from consideration in determining whether any 

plan of the employer meets such requirements if— 

(I) the benefits for such employees are provided 

under the same plan as benefits for other employees, 

(II) the benefits provided to such employees are 

not greater than comparable benefits provided to 

other employees under the plan, and 

(III) no highly compensated employee (within 

the meaning of section 414(q)) is included in the 

group of such employees for more than 1 year. 

(C) SPECIAL RULE FOR COLLECTIVE BARGAINING UNITS.— 

Except to the extent provided in regulations, a plan covering only employees described in section 410(b)(3)(A) may 

exclude from consideration any employees who are not included in the unit or units in which the covered employees 

are included. 

(D) PARAGRAPH NOT TO APPLY TO MULTIEMPLOYER

PLANS.—Except to the extent provided in regulations, this 

paragraph shall not apply to employees in a multiemployer 

plan (within the meaning of section 414(f)) who are covered by collective bargaining agreements. 

(E) SPECIAL RULE FOR CERTAIN DISPOSITIONS OR ACQUISITIONS.—Rules similar to the rules of section 410(b)(6)(C) 

shall apply for purposes of this paragraph. 

(F) SEPARATE LINES OF BUSINESS.—At the election of the 

employer and with the consent of the Secretary, this paragraph may be applied separately with respect to each separate line of business of the employer. For purposes of this 

paragraph, the term ‘‘separate line of business’’ has the 

meaning given such term by section 414(r) (without regard 

to paragraph (2)(A) or (7) thereof). 

(G) EXCEPTION FOR GOVERNMENTAL PLANS.—This paragraph shall not apply to a governmental plan (within the 

meaning of section 414(d)). 

(H) REGULATIONS.—The Secretary may by regulation 

provide that any separate benefit structure, any separate 

trust, or any other separate arrangement is to be treated 

as a separate plan for purposes of applying this paragraph. 

(27) DETERMINATIONS AS TO PROFIT-SHARING PLANS.— 

(A) CONTRIBUTIONS NEED NOT BE BASED ON PROFITS.— 

The determination of whether the plan under which any 

contributions are made is a profit-sharing plan shall be 

made without regard to current or accumulated profits of 

the employer and without regard to whether the employer 

is a tax-exempt organization. 

(B) PLAN MUST DESIGNATE TYPE.—In the case of a plan 

which is intended to be a money purchase pension plan or 

a profit-sharing plan, a trust forming part of such plan 

shall not constitute a qualified trust under this subsection 

unless the plan designates such intent at such time and in 

such manner as the Secretary may prescribe. 

213 

(28) ADDITIONAL REQUIREMENTS RELATING TO EMPLOYEE

STOCK OWNERSHIP PLANS.— (A) IN GENERAL.—In the case of a trust which is part of 

an employee stock ownership plan (within the meaning of 

section 4975(e)(7)) or a plan which meets the requirements 

of section 409(a), such trust shall not constitute a qualified 

trust under this section unless such plan meets the requirements of subparagraphs (B) and (C). 

(B) DIVERSIFICATION OF INVESTMENTS.— (i) IN GENERAL.—A plan meets the requirements of 

this subparagraph if each qualified participant in the 

plan may elect within 90 days after the close of each 

plan year in the qualified election period to direct the 

plan as to the investment of at least 25 percent of the 

participant’s account in the plan (to the extent such 

portion exceeds the amount to which a prior election 

under this subparagraph applies). In the case of the 

election year in which the participant can make his 

last election, the preceding sentence shall be applied 

by substituting ‘‘50 percent’’ for ‘‘25 percent’’. 

(ii) METHOD OF MEETING REQUIREMENTS.—A plan 

shall be treated as meeting the requirements of clause 

(i) if— 

(I) the portion of the participant’s account covered by the election under clause (i) is distributed 

within 90 days after the period during which the 

election may be made, or 

(II) the plan offers at least 3 investment options 

(not inconsistent with regulations prescribed by 

the Secretary) to each participant making an election under clause (i) and within 90 days after the 

period during which the election may be made, 

the plan invests the portion of the participant’s 

account covered by the election in accordance with 

such election. 

(iii) QUALIFIED PARTICIPANT.—For purposes of this 

subparagraph, the term ‘‘qualified participant’’ means 

any employee who has completed at least 10 years of 

participation under the plan and has attained age 55. 

(iv) QUALIFIED ELECTION PERIOD.—For purposes of 

this subparagraph, the term ‘‘qualified election period’’ 

means the 6-plan-year period beginning with the later 

of— 

(I) the 1st plan year in which the individual 

first became a qualified participant, or 

(II) the 1st plan year beginning after December 

31, 1986. 

For purposes of the preceding sentence, an employer may 

elect to treat an individual first becoming a qualified participant in the 1st plan year beginning in 1987 as having 

become a participant in the 1st plan year beginning in 

1988. 

(v) EXCEPTION.—This subparagraph shall not apply 

to an applicable defined contribution plan (as defined 

in paragraph (35)(E)). 

214 

(C) USE OF INDEPENDENT APPRAISER.—A plan meets the 

requirements of this subparagraph if all valuations of employer securities which are not readily tradable on an established securities market with respect to activities carried on by the plan are by an independent appraiser. For 

purposes of the preceding sentence, the term ‘‘independent 

appraiser’’ means any appraiser meeting requirements 

similar to the requirements of the regulations prescribed 

under section 170(a)(1). 

(29) BENEFIT LIMITATIONS.—In the case of a defined benefit 

plan (other than a multiemployer plan or a CSEC plan) to 

which the requirements of section 412 apply, the trust of which 

the plan is a part shall not constitute a qualified trust under 

this subsection unless the plan meets the requirements of section 436. 

(30) LIMITATIONS ON ELECTIVE DEFERRALS.—In the case of a 

trust which is part of a plan under which elective deferrals 

(within the meaning of section 402(g)(3)) may be made with respect to any individual during a calendar year, such trust shall 

not constitute a qualified trust under this subsection unless 

the plan provides that the amount of such deferrals under such 

plan and all other plans, contracts, or arrangements of an employer maintaining such plan may not exceed the amount of 

the limitation in effect under section 402(g)(1)(A) for taxable 

years beginning in such calendar year. 

(31) DIRECT TRANSFER OF ELIGIBLE ROLLOVER DISTRIBU- TIONS.— 

(A) IN GENERAL.—A trust shall not constitute a qualified 

trust under this section unless the plan of which such 

trust is a part provides that if the distributee of any eligible rollover distribution— 

(i) elects to have such distribution paid directly to 

an eligible retirement plan, and 

(ii) specifies the eligible retirement plan to which 

such distribution is to be paid (in such form and at 

such time as the plan administrator may prescribe), 

such distribution shall be made in the form of a direct 

trustee-to-trustee transfer to the eligible retirement plan 

so specified. 

(B) CERTAIN MANDATORY DISTRIBUTIONS.— 

(i) IN GENERAL.—In case of a trust which is part of 

an eligible plan, such trust shall not constitute a 

qualified trust under this section unless the plan of 

which such trust is a part provides that if— 

(I) a distribution described in clause (ii) in excess of $1,000 is made, and 

(II) the distributee does not make an election 

under subparagraph (A) and does not elect to receive the distribution directly, 

the plan administrator shall make such transfer to an individual retirement plan of a designated trustee or issuer 

and shall notify the distributee in writing (either separately or as part of the notice under section 402(f)) that the 

distribution may be transferred to another individual retirement plan. 

215 

(ii) ELIGIBLE PLAN.—For purposes of clause (i), the 

term ‘‘eligible plan’’ means a plan which provides that 

any nonforfeitable accrued benefit for which the 

present value (as determined under section 411(a)(11)) 

does not exceed $5,000 shall be immediately distributed to the participant. 

(C) LIMITATION.—Subparagraphs (A) and (B) shall apply 

only to the extent that the eligible rollover distribution 

would be includible in gross income if not transferred as 

provided in subparagraph (A) (determined without regard 

to sections 402(c), 403(a)(4), 403(b)(8), and 457(e)(16)). The 

preceding sentence shall not apply to such distribution if 

the plan to which such distribution is transferred— 

(i) is a qualified trust which is part of a plan which 

is a defined contribution plan and agrees to separately 

account for amounts so transferred, including separately accounting for the portion of such distribution 

which is includible in gross income and the portion of 

such distribution which is not so includible, or 

(ii) is an eligible retirement plan described in clause 

(i) or (ii) of section 402(c)(8)(B). 

(D) ELIGIBLE ROLLOVER DISTRIBUTION.—For purposes of 

this paragraph, the term ‘‘eligible rollover distribution’’ has 

the meaning given such term by section 402(f)(2)(A). 

(E) ELIGIBLE RETIREMENT PLAN.—For purposes of this 

paragraph, the term ‘‘eligible retirement plan’’ has the 

meaning given such term by section 402(c)(8)(B), except 

that a qualified trust shall be considered an eligible retirement plan only if it is a defined contribution plan, the 

terms of which permit the acceptance of rollover distributions. 

(32) TREATMENT OF FAILURE TO MAKE CERTAIN PAYMENTS IF

PLAN HAS LIQUIDITY SHORTFALL.— (A) IN GENERAL.—A trust forming part of a pension plan 

to which section 430(j)(4) or 433(f)(5) applies shall not be 

treated as failing to constitute a qualified trust under this 

section merely because such plan ceases to make any payment described in subparagraph (B) during any period 

that such plan has a liquidity shortfall (as defined in section 430(j)(4) or 433(f)(5)). 

(B) PAYMENTS DESCRIBED.—A payment is described in 

this subparagraph if such payment is— 

(i) any payment, in excess of the monthly amount 

paid under a single life annuity (plus any social security supplements described in the last sentence of section 411(a)(9)), to a participant or beneficiary whose 

annuity starting date (as defined in section 417(f)(2)) 

occurs during the period referred to in subparagraph 

(A), 

(ii) any payment for the purchase of an irrevocable 

commitment from an insurer to pay benefits, and 

(iii) any other payment specified by the Secretary by 

regulations. 

(C) PERIOD OF SHORTFALL.—For purposes of this paragraph, a plan has a liquidity shortfall during the period 

216 

that there is an underpayment of an installment under 

section 430(j)(3) or 433(f) by reason of section 430(j)(4)(A) 

or 433(f)(5), respectively. 

(33) PROHIBITION ON BENEFIT INCREASES WHILE SPONSOR IS

IN BANKRUPTCY.— (A) IN GENERAL.—A trust which is part of a plan to 

which this paragraph applies shall not constitute a qualified trust under this section if an amendment to such plan 

is adopted while the employer is a debtor in a case under 

title 11, United States Code, or similar Federal or State 

law, if such amendment increases liabilities of the plan by 

reason of— 

(i) any increase in benefits, 

(ii) any change in the accrual of benefits, or 

(iii) any change in the rate at which benefits become 

nonforfeitable under the plan, 

with respect to employees of the debtor, and such amendment is effective prior to the effective date of such employer’s plan of reorganization. 

(B) EXCEPTIONS.—This paragraph shall not apply to any 

plan amendment if— 

(i) the plan, were such amendment to take effect, 

would have a funding target attainment percentage 

(as defined in section 430(d)(2)) of 100 percent or 

more, 

(ii) the Secretary determines that such amendment 

is reasonable and provides for only de minimis increases in the liabilities of the plan with respect to 

employees of the debtor, 

(iii) such amendment only repeals an amendment 

described in section 412(d)(2), or 

(iv) such amendment is required as a condition of 

qualification under this part. 

(C) PLANS TO WHICH THIS PARAGRAPH APPLIES.—This 

paragraph shall apply only to plans (other than multiemployer plans or CSEC plans) covered under section 4021 of 

the Employee Retirement Income Security Act of 1974. 

(D) EMPLOYER.—For purposes of this paragraph, the 

term ‘‘employer’’ means the employer referred to in section 

412(b)(1), without regard to section 412(b)(2). 

(34) BENEFITS OF MISSING PARTICIPANTS ON PLAN TERMINATION.—In the case of a plan covered by title IV of the Employee Retirement Income Security Act of 1974, a trust forming 

part of such plan shall not be treated as failing to constitute 

a qualified trust under this section merely because the pension 

plan of which such trust is a part, upon its termination, transfers benefits of missing participants to the Pension Benefit 

Guaranty Corporation in accordance with section 4050 of such 

Act. 

(35) DIVERSIFICATION REQUIREMENTS FOR CERTAIN DEFINED

CONTRIBUTION PLANS.— (A) IN GENERAL.—A trust which is part of an applicable 

defined contribution plan shall not be treated as a qualified trust unless the plan meets the diversification requirements of subparagraphs (B), (C), and (D). 

217 

(B) EMPLOYEE CONTRIBUTIONS AND ELECTIVE DEFERRALS

INVESTED IN EMPLOYER SECURITIES.—In the case of the 

portion of an applicable individual’s account attributable to 

employee contributions and elective deferrals which is invested in employer securities, a plan meets the requirements of this subparagraph if the applicable individual 

may elect to direct the plan to divest any such securities 

and to reinvest an equivalent amount in other investment 

options meeting the requirements of subparagraph (D). 

(C) EMPLOYER CONTRIBUTIONS INVESTED IN EMPLOYER

SECURITIES.—In the case of the portion of the account attributable to employer contributions other than elective deferrals which is invested in employer securities, a plan 

meets the requirements of this subparagraph if each applicable individual who— 

(i) is a participant who has completed at least 3 

years of service, or 

(ii) is a beneficiary of a participant described in 

clause (i) or of a deceased participant, 

may elect to direct the plan to divest any such securities 

and to reinvest an equivalent amount in other investment 

options meeting the requirements of subparagraph (D). 

(D) INVESTMENT OPTIONS.— (i) IN GENERAL.—The requirements of this subparagraph are met if the plan offers not less than 3 investment options, other than employer securities, to which 

an applicable individual may direct the proceeds from 

the divestment of employer securities pursuant to this 

paragraph, each of which is diversified and has materially different risk and return characteristics. 

(ii) TREATMENT OF CERTAIN RESTRICTIONS AND CONDITIONS.— 

(I) TIME FOR MAKING INVESTMENT CHOICES.—A 

plan shall not be treated as failing to meet the requirements of this subparagraph merely because 

the plan limits the time for divestment and reinvestment to periodic, reasonable opportunities occurring no less frequently than quarterly. 

(II) CERTAIN RESTRICTIONS AND CONDITIONS NOT

ALLOWED.—Except as provided in regulations, a 

plan shall not meet the requirements of this subparagraph if the plan imposes restrictions or conditions with respect to the investment of employer 

securities which are not imposed on the investment of other assets of the plan. This subclause 

shall not apply to any restrictions or conditions 

imposed by reason of the application of securities 

laws. 

(E) APPLICABLE DEFINED CONTRIBUTION PLAN.—For purposes of this paragraph— 

(i) IN GENERAL.—The term ‘‘applicable defined contribution plan’’ means any defined contribution plan 

which holds any publicly traded employer securities. 

(ii) EXCEPTION FOR CERTAIN ESOPS.—Such term does 

not include an employee stock ownership plan if— 

218 

(I) there are no contributions to such plan (or 

earnings thereunder) which are held within such 

plan and are subject to subsection (k) or (m), and 

(II) such plan is a separate plan for purposes of 

section 414(l) with respect to any other defined 

benefit plan or defined contribution plan maintained by the same employer or employers. 

(iii) EXCEPTION FOR ONE PARTICIPANT PLANS.—Such 

term does not include a one-participant retirement 

plan. 

(iv) ONE-PARTICIPANT RETIREMENT PLAN.—For purposes of clause (iii), the term ‘‘one-participant retirement plan’’ means a retirement plan that on the first 

day of the plan year— 

(I) covered only one individual (or the individual 

and the individual’s spouse) and the individual (or 

the individual and the individual’s spouse) owned 

100 percent of the plan sponsor (whether or not 

incorporated), or 

(II) covered only one or more partners (or partners and their spouses) in the plan sponsor. 

(F) CERTAIN PLANS TREATED AS HOLDING PUBLICLY TRADED EMPLOYER SECURITIES.— 

(i) IN GENERAL.—Except as provided in regulations 

or in clause (ii), a plan holding employer securities 

which are not publicly traded employer securities shall 

be treated as holding publicly traded employer securities if any employer corporation, or any member of a 

controlled group of corporations which includes such 

employer corporation, has issued a class of stock which 

is a publicly traded employer security. 

(ii) EXCEPTION FOR CERTAIN CONTROLLED GROUPS

WITH PUBLICLY TRADED SECURITIES.—Clause (i) shall 

not apply to a plan if— 

(I) no employer corporation, or parent corporation of an employer corporation, has issued any 

publicly traded employer security, and 

(II) no employer corporation, or parent corporation of an employer corporation, has issued any 

special class of stock which grants particular 

rights to, or bears particular risks for, the holder 

or issuer with respect to any corporation described 

in clause (i) which has issued any publicly traded 

employer security. 

(iii) DEFINITIONS.—For purposes of this subparagraph, the term— 

(I) ‘‘controlled group of corporations’’ has the 

meaning given such term by section 1563(a), except that ‘‘50 percent’’ shall be substituted for ‘‘80 

percent’’ each place it appears, 

(II) ‘‘employer corporation’’ means a corporation 

which is an employer maintaining the plan, and 

(III) ‘‘parent corporation’’ has the meaning given 

such term by section 424(e). 

219 

(G) OTHER DEFINITIONS.—For purposes of this paragraph— 

(i) APPLICABLE INDIVIDUAL.—The term ‘‘applicable 

individual’’ means— 

(I) any participant in the plan, and 

(II) any beneficiary who has an account under 

the plan with respect to which the beneficiary is 

entitled to exercise the rights of a participant. 

(ii) ELECTIVE DEFERRAL.—The term ‘‘elective deferral’’ means an employer contribution described in section 402(g)(3)(A). 

(iii) EMPLOYER SECURITY.—The term ‘‘employer security’’ has the meaning given such term by section 

407(d)(1) of the Employee Retirement Income Security 

Act of 1974. 

(iv) EMPLOYEE STOCK OWNERSHIP PLAN.—The term 

‘‘employee stock ownership plan’’ has the meaning 

given such term by section 4975(e)(7). 

(v) PUBLICLY TRADED EMPLOYER SECURITIES.—The 

term ‘‘publicly traded employer securities’’ means employer securities which are readily tradable on an established securities market. 

(vi) YEAR OF SERVICE.—The term ‘‘year of service’’ 

has the meaning given such term by section 411(a)(5). 

(H) TRANSITION RULE FOR SECURITIES ATTRIBUTABLE TO

EMPLOYER CONTRIBUTIONS.— (i) RULES PHASED IN OVER 3 YEARS.— (I) IN GENERAL.—In the case of the portion of an 

account to which subparagraph (C) applies and 

which consists of employer securities acquired in 

a plan year beginning before January 1, 2007, 

subparagraph (C) shall only apply to the applicable percentage of such securities. This subparagraph shall be applied separately with respect to 

each class of securities. 

(II) EXCEPTION FOR CERTAIN PARTICIPANTS AGED

55 OR OVER.—Subclause (I) shall not apply to an 

applicable individual who is a participant who has 

attained age 55 and completed at least 3 years of 

service before the first plan year beginning after 

December 31, 2005. 

(ii) APPLICABLE PERCENTAGE.—For purposes of 

clause (i), the applicable percentage shall be determined as follows: 

(36) DISTRIBUTIONS DURING WORKING RETIREMENT.—A trust 

forming part of a pension plan shall not be treated as failing 

to constitute a qualified trust under this section solely because 

the plan provides that a distribution may be made from such 

trust to an employee who has attained age 62 and who is not 

separated from employment at the time of such distribution. 

(37) DEATH BENEFITS UNDER USERRA-QUALIFIED ACTIVE MILI- TARY SERVICE.—A trust shall not constitute a qualified trust 

unless the plan provides that, in the case of a participant who 

dies while performing qualified military service (as defined in 

section 414(u)), the survivors of the participant are entitled to 

220 

any additional benefits (other than benefit accruals relating to 

the period of qualified military service) provided under the 

plan had the participant resumed and then terminated employment on account of death. 

Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall apply only 

in the case of a plan to which section 411 (relating to minimum 

vesting standards) applies without regard to subsection (e)(2) of 

such section. 

(b) CERTAIN RETROACTIVE CHANGES IN PLAN.—A stock bonus, pension, profit-sharing, or annuity plan shall be considered as satisfying the requirements of subsection (a) for the period beginning 

with the date on which it was put into effect, or for the period beginning with the earlier of the date on which there was adopted or 

put into effect any amendment which caused the plan to fail to satisfy such requirements, and ending with the time prescribed by law 

for filing the return of the employer for his taxable year in which 

such plan or amendment was adopted (including extensions thereof) or such later time as the Secretary may designate, if all provisions of the plan which are necessary to satisfy such requirements 

are in effect by the end of such period and have been made effective for all purposes for the whole of such period. 

(c) DEFINITIONS AND RULES RELATING TO SELF-EMPLOYED INDIVID- UALS AND OWNER-EMPLOYEES.—For purposes of this section— 

(1) SELF-EMPLOYED INDIVIDUAL TREATED AS EMPLOYEE.— (A) IN GENERAL.—The term ‘‘employee’’ includes, for any 

taxable year, an individual who is a self-employed individual for such taxable year. 

(B) SELF-EMPLOYED INDIVIDUAL.—The term ‘‘self-employed individual’’ means, with respect to any taxable year, 

an individual who has earned income (as defined in paragraph (2)) for such taxable year. To the extent provided in 

regulations prescribed by the Secretary, such term also includes, for any taxable year— 

(i) an individual who would be a self-employed individual within the meaning of the preceding sentence 

but for the fact that the trade or business carried on 

by such individual did not have net profits for the taxable year, and 

(ii) an individual who has been a self-employed individual within the meaning of the preceding sentence 

for any prior taxable year. 

(2) EARNED INCOME.— 

(A) IN GENERAL.—The term ‘‘earned income’’ means the 

net earnings from self-employment (as defined in section 

1402(a)), but such net earnings shall be determined— 

(i) only with respect to a trade or business in which 

personal services of the taxpayer are a material income-producing factor, 

(ii) without regard to paragraphs (4) and (5) of section 1402(c), 

(iii) in the case of any individual who is treated as 

an employee under subparagraph (A), (C), or (D) of 

section 3121(d)(3), without regard to section 1402(c)(2), 

(iv) without regard to items which are not included 

in gross income for purposes of this chapter, and the 

221 

deductions properly allocable to or chargeable against 

such items, 

(v) with regard to the deductions allowed by section 

404 to the taxpayer, and 

(vi) with regard to the deduction allowed to the taxpayer by section 164(f). 

For purposes of this subparagraph, section 1402, as in effect for a taxable year ending on December 31, 1962, shall 

be treated as having been in effect for all taxable years 

ending before such date. For purposes of this part only 

(other than sections 419 and 419A), this subparagraph 

shall be applied as if the term ‘‘trade or business’’ for purposes of section 1402 included service described in section 

1402(c)(6). 

(C) INCOME FROM DISPOSITION OF CERTAIN PROPERTY.— 

For purposes of this section, the term ‘‘earned income’’ includes gains (other than any gain which is treated under 

any provision of this chapter as gain from the sale or exchange of a capital asset) and net earnings derived from 

the sale or other disposition of, the transfer of any interest 

in, or the licensing of the use of property (other than good 

will) by an individual whose personal efforts created such 

property. 

(3) OWNER-EMPLOYEE.—The term ‘‘owner-employee’’ means 

an employee who— 

(A) owns the entire interest in an unincorporated trade 

or business, or 

(B) in the case of a partnership, is a partner who owns 

more than 10 percent of either the capital interest or the 

profits interest in such partnership. 

To the extent provided in regulations prescribed by the Secretary, such term also means an individual who has been an 

owner-employee within the meaning of the preceding sentence. 

(4) EMPLOYER.—An individual who owns the entire interest 

in an unincorporated trade or business shall be treated as his 

own employer. A partnership shall be treated as the employer 

of each partner who is an employee within the meaning of 

paragraph (1). 

(5) CONTRIBUTIONS ON BEHALF OF OWNER-EMPLOYEES.—The 

term ‘‘contribution on behalf of an owner-employee’’ includes, 

except as the context otherwise requires, a contribution under 

a plan— 

(A) by the employer for an owner-employee, and 

(B) by an owner-employee as an employee. 

(6) SPECIAL RULE FOR CERTAIN FISHERMEN.—For purposes of 

this subsection, the term ‘‘self-employed individual’’ includes 

an individual described in section 3121(b)(20) (relating to certain fishermen). 

(d) CONTRIBUTION LIMIT ON OWNER-EMPLOYEES.—A trust forming 

part of a pension or profit-sharing plan which provides contributions or benefits for employees some or all of whom are owner-employees shall constitute a qualified trust under this section only if, 

in addition to meeting the requirements of subsection (a), the plan 

provides that contributions on behalf of any owner-employee may 

be made only with respect to the earned income of such owner-emVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00227 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
222 

ployee which is derived from the trade or business with respect to 

which such plan is established. 

(f) CERTAIN CUSTODIAL ACCOUNTS AND CONTRACTS.—For purposes 

of this title, a custodial account, an annuity contract, or a contract 

(other than a life, health or accident, property, casualty, or liability 

insurance contract) issued by an insurance company qualified to do 

business in a State shall be treated as a qualified trust under this 

section if— 

(1) the custodial account or contract would, except for the 

fact that it is not a trust, constitute a qualified trust under this 

section, and 

(2) in the case of a custodial account the assets thereof are 

held by a bank (as defined in section 408(n)) or another person 

who demonstrates, to the satisfaction of the Secretary, that the 

manner in which he will hold the assets will be consistent with 

the requirements of this section. 

For purposes of this title, in the case of a custodial account or contract treated as a qualified trust under this section by reason of 

this subsection, the person holding the assets of such account or 

holding such contract shall be treated as the trustee thereof. 

(g) ANNUITY DEFINED.—For purposes of this section and sections 

402, 403, and 404, the term ‘‘annuity’’ includes a face-amount certificate, as defined in section 2(a)(15) of the Investment Company 

Act of 1940 (15 U.S.C., sec. 80a–2); but does not include any contract or certificate issued after December 31, 1962, which is transferable, if any person other than the trustee of a trust described 

in section 401(a) which is exempt from tax under section 501(a) is 

the owner of such contract or certificate. 

(h) MEDICAL, ETC., BENEFITS FOR RETIRED EMPLOYEES AND THEIR

SPOUSES AND DEPENDENTS.—Under regulations prescribed by the 

Secretary, and subject to the provisions of section 420, a pension 

or annuity plan may provide for the payment of benefits for sickness, accident, hospitalization, and medical expenses of retired employees, their spouses and their dependents, but only if— 

(1) such benefits are subordinate to the retirement benefits 

provided by the plan, 

(2) a separate account is established and maintained for such 

benefits, 

(3) the employer’s contributions to such separate account are 

reasonable and ascertainable, 

(4) it is impossible, at any time prior to the satisfaction of 

all liabilities under the plan to provide such benefits, for any 

part of the corpus or income of such separate account to be 

(within the taxable year or thereafter) used for, or diverted to, 

any purpose other than the providing of such benefits, 

(5) notwithstanding the provisions of subsection (a)(2), upon 

the satisfaction of all liabilities under the plan to provide such 

benefits, any amount remaining in such separate account 

must, under the terms of the plan, be returned to the employer, and 

(6) in the case of an employee who is a key employee, a separate account is established and maintained for such benefits 

payable to such employee (and øhis spouse¿ the employee’s 

spouse and dependents) and such benefits (to the extent attributable to plan years beginning after March 31, 1984, for which 

223 

the employee is a key employee) are only payable to such employee (and øhis spouse¿ the employee’s spouse and dependents) from such separate account. 

For purposes of paragraph (6), the term ‘‘key employee’’ means any 

employee, who at any time during the plan year or any preceding 

plan year during which contributions were made on behalf of such 

employee, is or was a key employee as defined in section 416(i). In 

no event shall the requirements of paragraph (1) be treated as met 

if the aggregate actual contributions for medical benefits, when 

added to actual contributions for life insurance protection under 

the plan, exceed 25 percent of the total actual contributions to the 

plan (other than contributions to fund past service credits) after 

the date on which the account is established. For purposes of this 

subsection, the term ‘‘dependent’’ shall include any individual who 

is a child (as defined in section 152(f)(1)) of a retired employee who 

as of the end of the calendar year has not attained age 27. 

(i) CERTAIN UNION-NEGOTIATED PENSION PLANS.—In the case of a 

trust forming part of a pension plan which has been determined by 

the Secretary to constitute a qualified trust under subsection (a) 

and to be exempt from taxation under section 501(a) for a period 

beginning after contributions were first made to or for such trust, 

if it is shown to the satisfaction of the Secretary that— 

(1) such trust was created pursuant to a collective bargaining agreement between employee representatives and one 

or more employers, 

(2) any disbursements of contributions, made to or for such 

trust before the time as of which the Secretary determined 

that the trust constituted a qualified trust, substantially complied with the terms of the trust, and the plan of which the 

trust is a part, as subsequently qualified, and 

(3) before the time as of which the Secretary determined that 

the trust constitutes a qualified trust, the contributions to or 

for such trust were not used in a manner which would jeopardize the interests of its beneficiaries, 

then such trust shall be considered as having constituted a qualified trust under subsection (a) and as having been exempt from 

taxation under section 501(a) for the period beginning on the date 

on which contributions were first made to or for such trust and 

ending on the date such trust first constituted (without regard to 

this subsection) a qualified trust under subsection (a). 

(k) CASH OR DEFERRED ARRANGEMENTS.— 

(1) GENERAL RULE.—A profit-sharing or stock bonus plan, a 

pre-ERISA money purchase plan, or a rural cooperative plan 

shall not be considered as not satisfying the requirements of 

subsection (a) merely because the plan includes a qualified 

cash or deferred arrangement. 

(2) QUALIFIED CASH OR DEFERRED ARRANGEMENT.—A qualified cash or deferred arrangement is any arrangement which 

is part of a profit-sharing or stock bonus plan, a pre-ERISA 

money purchase plan, or a rural cooperative plan which meets 

the requirements of subsection (a)— 

(A) under which a covered employee may elect to have 

the employer make payments as contributions to a trust 

under the plan on behalf of the employee, or to the employee directly in cash; 

224 

(B) under which amounts held by the trust which are attributable to employer contributions made pursuant to the 

employee’s election— 

(i) may not be distributable to participants or other 

beneficiaries earlier than— 

(I) severance from employment, death, or disability, 

(II) an event described in paragraph (10), 

(III) in the case of a profit-sharing or stock 

bonus plan, the attainment of age 591/2, 

(IV) subject to the provisions of paragraph (14), 

upon hardship of the employee, or 

(V) in the case of a qualified reservist distribution (as defined in section 72(t)(2)(G)(iii)), the date 

on which a period referred to in subclause (III) of 

such section begins, and 

(ii) will not be distributable merely by reason of the 

completion of a stated period of participation or the 

lapse of a fixed number of years; 

(C) which provides that an employee’s right to his accrued benefit derived from employer contributions made to 

the trust pursuant to his election is nonforfeitable, and 

(D) which does not require, as a condition of participation in the arrangement, that an employee complete a period of service with the employer (or employers) maintaining the plan extending beyond the period permitted under 

section 410(a)(1) (determined without regard to subparagraph (B)(i) thereof). 

(3) APPLICATION OF PARTICIPATION AND DISCRIMINATION

STANDARDS.— 

(A) A cash or deferred arrangement shall not be treated 

as a qualified cash or deferred arrangement unless— 

(i) those employees eligible to benefit under the arrangement satisfy the provisions of section 410(b)(1), 

and 

(ii) the actual deferral percentage for eligible highly 

compensated employees (as defined in paragraph (5)) 

for the plan year bears a relationship to the actual deferral percentage for all other eligible employees for 

the preceding plan year which meets either of the following tests: 

(I) The actual deferral percentage for the group 

of eligible highly compensated employees is not 

more than the actual deferral percentage of all 

other eligible employees multiplied by 1.25. 

(II) The excess of the actual deferral percentage 

for the group of eligible highly compensated employees over that of all other eligible employees is 

not more than 2 percentage points, and the actual 

deferral percentage for the group of eligible highly 

compensated employees is not more than the actual deferral percentage of all other eligible employees multiplied by 2. 

If 2 or more plans which include cash or deferred arrangements are considered as 1 plan for purposes of section 

225 

401(a)(4) or 410(b), the cash or deferred arrangements included in such plans shall be treated as 1 arrangement for 

purposes of this subparagraph. 

If any highly compensated employee is a participant under 

2 or more cash or deferred arrangements of the employer, 

for purposes of determining the deferral percentage with 

respect to such employee, all such cash or deferred arrangements shall be treated as 1 cash or deferred arrangement. An arrangement may apply clause (ii) by using the 

plan year rather than the preceding plan year if the employer so elects, except that if such an election is made, it 

may not be changed except as provided by the Secretary. 

(B) For purposes of subparagraph (A), the actual deferral 

percentage for a specified group of employees for a plan 

year shall be the average of the ratios (calculated separately for each employee in such group) of— 

(i) the amount of employer contributions actually 

paid over to the trust on behalf of each such employee 

for such plan year, to 

(ii) the employee’s compensation for such plan year. 

(C) A cash or deferred arrangement shall be treated as 

meeting the requirements of subsection (a)(4) with respect 

to contributions if the requirements of subparagraph (A)(ii) 

are met. 

(D) For purposes of subparagraph (B), the employer contributions on behalf of any employee— 

(i) shall include any employer contributions made 

pursuant to the employee’s election under paragraph 

(2), and 

(ii) under such rules as the Secretary may prescribe, 

may, at the election of the employer, include— 

(I) matching contributions (as defined in 

401(m)(4)(A)) which meet the requirements of 

paragraph (2)(B) and (C), and 

(II) qualified nonelective contributions (within 

the meaning of section 401(m)(4)(C)). 

(E) For purposes of this paragraph, in the case of the 

first plan year of any plan (other than a successor plan), 

the amount taken into account as the actual deferral percentage of nonhighly compensated employees for the preceding plan year shall be— 

(i) 3 percent, or 

(ii) if the employer makes an election under this 

subclause, the actual deferral percentage of nonhighly 

compensated employees determined for such first plan 

year. 

(F) SPECIAL RULE FOR EARLY PARTICIPATION.—If an employer elects to apply section 410(b)(4)(B) in determining 

whether a cash or deferred arrangement meets the requirements of subparagraph (A)(i), the employer may, in 

determining whether the arrangement meets the requirements of subparagraph (A)(ii), exclude from consideration 

all eligible employees (other than highly compensated employees) who have not met the minimum age and service 

requirements of section 410(a)(1)(A). 

226 

(G) GOVERNMENTAL PLAN.—A governmental plan (within 

the meaning of section 414(d)) shall be treated as meeting 

the requirements of this paragraph. 

(4) OTHER REQUIREMENTS.— 

(A) BENEFITS (OTHER THAN MATCHING CONTRIBUTIONS)

MUST NOT BE CONTINGENT ON ELECTION TO DEFER.—A cash 

or deferred arrangement of any employer shall not be 

treated as a qualified cash or deferred arrangement if any 

other benefit is conditioned (directly or indirectly) on the 

employee electing to have the employer make or not make 

contributions under the arrangement in lieu of receiving 

cash. The preceding sentence shall not apply to any matching contribution (as defined in section 401(m)) made by 

reason of such an election. 

(B) ELIGIBILITY OF STATE AND LOCAL GOVERNMENTS AND

TAX-EXEMPT ORGANIZATIONS.— 

(i) TAX-EXEMPTS ELIGIBLE.—Except as provided in 

clause (ii), any organization exempt from tax under 

this subtitle may include a qualified cash or deferred 

arrangement as part of a plan maintained by it. 

(ii) GOVERNMENTS INELIGIBLE.—A cash or deferred 

arrangement shall not be treated as a qualified cash 

or deferred arrangement if it is part of a plan maintained by a State or local government or political subdivision thereof, or any agency or instrumentality 

thereof. This clause shall not apply to a rural cooperative plan or to a plan of an employer described in 

clause (iii). 

(iii) TREATMENT OF INDIAN TRIBAL GOVERNMENTS.— 

An employer which is an Indian tribal government (as 

defined in section 7701(a)(40)), a subdivision of an Indian tribal government (determined in accordance 

with section 7871(d)), an agency or instrumentality of 

an Indian tribal government or subdivision thereof, or 

a corporation chartered under Federal, State, or tribal 

law which is owned in whole or in part by any of the 

foregoing may include a qualified cash or deferred arrangement as part of a plan maintained by the employer. 

(C) COORDINATION WITH OTHER PLANS.—Except as provided in section 401(m), any employer contribution made 

pursuant to an employee’s election under a qualified cash 

or deferred arrangement shall not be taken into account 

for purposes of determining whether any other plan meets 

the requirements of section 401(a) or 410(b). This subparagraph shall not apply for purposes of determining whether 

a plan meets the average benefit requirement of section 

410(b)(2)(A)(ii). 

(5) HIGHLY COMPENSATED EMPLOYEE.—For purposes of this 

subsection, the term ‘‘highly compensated employee’’ has the 

meaning given such term by section 414(q). 

(6) PRE-ERISA MONEY PURCHASE PLAN.—For purposes of this 

subsection, the term ‘‘pre-ERISA money purchase plan’’ means 

a pension plan— 

227 

(A) which is a defined contribution plan (as defined in 

section 414(i)), 

(B) which was in existence on June 27, 1974, and which, 

on such date, included a salary reduction arrangement, 

and 

(C) under which neither the employee contributions nor 

the employer contributions may exceed the levels provided 

for by the contribution formula in effect under the plan on 

such date. 

(7) RURAL COOPERATIVE PLAN.—For purposes of this subsection— 

(A) IN GENERAL.—The term ‘‘rural cooperative plan’’ 

means any pension plan— 

(i) which is a defined contribution plan (as defined 

in section 414(i)), and 

(ii) which is established and maintained by a rural 

cooperative. 

(B) RURAL COOPERATIVE DEFINED.—For purposes of subparagraph (A), the term ‘‘rural cooperative’’ means— 

(i) any organization which— 

(I) is engaged primarily in providing electric 

service on a mutual or cooperative basis, or 

(II) is engaged primarily in providing electric 

service to the public in its area of service and 

which is exempt from tax under this subtitle or 

which is a State or local government (or an agency 

or instrumentality thereof), other than a municipality (or an agency or instrumentality thereof), 

(ii) any organization described in paragraph (4) or 

(6) of section 501(c) and at least 80 percent of the 

members of which are organizations described in 

clause (i), 

(iii) a cooperative telephone company described in 

section 501(c)(12), 

(iv) any organization which— 

(I) is a mutual irrigation or ditch company described in section 501(c)(12) (without regard to the 

85 percent requirement thereof), or 

(II) is a district organized under the laws of a 

State as a municipal corporation for the purpose 

of irrigation, water conservation, or drainage, and 

(v) an organization which is a national association of 

organizations described in clause (i), (ii),, (iii), or (iv). 

(C) SPECIAL RULE FOR CERTAIN DISTRIBUTIONS.—A rural 

cooperative plan which includes a qualified cash or deferred arrangement shall not be treated as violating the 

requirements of section 401(a) or of paragraph (2) merely 

by reason of a hardship distribution or a distribution to a 

participant after attainment of age 591/2. For purposes of 

this section, the term ‘‘hardship distribution’’ means a distribution described in paragraph (2)(B)(i)(IV) (without regard to the limitation of its application to profit-sharing or 

stock bonus plans). 

(8) ARRANGEMENT NOT DISQUALIFIED IF EXCESS CONTRIBUTIONS DISTRIBUTED.— 

228 

(A) IN GENERAL.—A cash or deferred arrangement shall 

not be treated as failing to meet the requirements of 

clause (ii) of paragraph (3)(A) for any plan year if, before 

the close of the following plan year— 

(i) the amount of the excess contributions for such 

plan year (and any income allocable to such contributions through the end of such year) is distributed, or 

(ii) to the extent provided in regulations, the employee elects to treat the amount of the excess contributions as an amount distributed to the employee 

and then contributed by the employee to the plan. 

Any distribution of excess contributions (and income) may 

be made without regard to any other provision of law. 

(B) EXCESS CONTRIBUTIONS.—For purposes of subparagraph (A), the term ‘‘excess contributions’’ means, with respect to any plan year, the excess of— 

(i) the aggregate amount of employer contributions 

actually paid over to the trust on behalf of highly compensated employees for such plan year, over 

(ii) the maximum amount of such contributions permitted under the limitations of clause (ii) of paragraph 

(3)(A) (determined by reducing contributions made on 

behalf of highly compensated employees in order of the 

actual deferral percentages beginning with the highest 

of such percentages). 

(C) METHOD OF DISTRIBUTING EXCESS CONTRIBUTIONS.— 

Any distribution of the excess contributions for any plan 

year shall be made to highly compensated employees on 

the basis of the amount of contributions by, or on behalf 

of, each of such employees. 

(D) ADDITIONAL TAX UNDER SECTION 72(T) NOT TO

APPLY.—No tax shall be imposed under section 72(t) on 

any amount required to be distributed under this paragraph. 

(E) TREATMENT OF MATCHING CONTRIBUTIONS FORFEITED

BY REASON OF EXCESS DEFERRAL OR CONTRIBUTION OR PERMISSIBLE WITHDRAWAL.—For purposes of paragraph (2)(C), 

a matching contribution (within the meaning of subsection 

(m)) shall not be treated as forfeitable merely because such 

contribution is forfeitable if the contribution to which the 

matching contribution relates is treated as an excess contribution under subparagraph (B), an excess deferral 

under section 402(g)(2)(A), a permissible withdrawal under 

section 414(w), or an excess aggregate contribution under 

section 401(m)(6)(B). 

(F) CROSS REFERENCE.—For excise tax on certain excess 

contributions, see section 4979. 

(9) COMPENSATION.—For purposes of this subsection, the 

term ‘‘compensation’’ has the meaning given such term by section 414(s). 

(10) DISTRIBUTIONS UPON TERMINATION OF PLAN.— 

(A) IN GENERAL.—An event described in this subparagraph is the termination of the plan without establishment 

or maintenance of another defined contribution plan (other 

229 

than an employee stock ownership plan as defined in section 4975(e)(7)). 

(B) DISTRIBUTIONS MUST BE LUMP SUM DISTRIBUTIONS.— (i) IN GENERAL.—A termination shall not be treated 

as described in subparagraph (A) with respect to any 

employee unless the employee receives a lump sum 

distribution by reason of the termination. 

(ii) LUMP-SUM DISTRIBUTION.—For purposes of this 

subparagraph, the term ‘‘lump-sum distribution’’ has 

the meaning given such term by section 402(e)(4)(D) 

(without regard to subclauses (I), (II), (III), and (IV) of 

clause (i) thereof). Such term includes a distribution of 

an annuity contract from— 

(I) a trust which forms a part of a plan described in section 401(a) and which is exempt 

from tax under section 501(a), or 

(II) an annuity plan described in section 403(a). 

(11) ADOPTION OF SIMPLE PLAN TO MEET NONDISCRIMINATION

TESTS.— 

(A) IN GENERAL.—A cash or deferred arrangement maintained by an eligible employer shall be treated as meeting 

the requirements of paragraph (3)(A)(ii) if such arrangement meets— 

(i) the contribution requirements of subparagraph 

(B), 

(ii) the exclusive plan requirements of subparagraph 

(C), and 

(iii) the vesting requirements of section 408(p)(3). 

(B) CONTRIBUTION REQUIREMENTS.— 

(i) IN GENERAL.—The requirements of this subparagraph are met if, under the arrangement— 

(I) an employee may elect to have the employer 

make elective contributions for the year on behalf 

of the employee to a trust under the plan in an 

amount which is expressed as a percentage of 

compensation of the employee but which in no 

event exceeds the amount in effect under section 

408(p)(2)(A)(ii), 

(II) the employer is required to make a matching contribution to the trust for the year in an 

amount equal to so much of the amount the employee elects under subclause (I) as does not exceed 3 percent of compensation for the year, and 

(III) no other contributions may be made other 

than contributions described in subclause (I) or 

(II). 

(ii) EMPLOYER MAY ELECT 2-PERCENT NONELECTIVE

CONTRIBUTION.—An employer shall be treated as meeting the requirements of clause (i)(II) for any year if, in 

lieu of the contributions described in such clause, the 

employer elects (pursuant to the terms of the arrangement) to make nonelective contributions of 2 percent 

of compensation for each employee who is eligible to 

participate in the arrangement and who has at least 

$5,000 of compensation from the employer for the 

230 

year. If an employer makes an election under this subparagraph for any year, the employer shall notify employees of such election within a reasonable period of 

time before the 60th day before the beginning of such 

year. 

(iii) ADMINISTRATIVE REQUIREMENTS.— 

(I) IN GENERAL.—Rules similar to the rules of 

subparagraphs (B) and (C) of section 408(p)(5) 

shall apply for purposes of this subparagraph. 

(II) NOTICE OF ELECTION PERIOD.—The requirements of this subparagraph shall not be treated as 

met with respect to any year unless the employer 

notifies each employee eligible to participate, 

within a reasonable period of time before the 60th 

day before the beginning of such year (and, for the 

first year the employee is so eligible, the 60th day 

before the first day such employee is so eligible), 

of the rules similar to the rules of section 

408(p)(5)(C) which apply by reason of subclause 

(I). 

(C) EXCLUSIVE PLAN REQUIREMENT.—The requirements 

of this subparagraph are met for any year to which this 

paragraph applies if no contributions were made, or benefits were accrued, for services during such year under any 

qualified plan of the employer on behalf of any employee 

eligible to participate in the cash or deferred arrangement, 

other than contributions described in subparagraph (B). 

(D) DEFINITIONS AND SPECIAL RULE.— 

(i) DEFINITIONS.—For purposes of this paragraph, 

any term used in this paragraph which is also used in 

section 408(p) shall have the meaning given such term 

by such section. 

(ii) COORDINATION WITH TOP-HEAVY RULES.—A plan 

meeting the requirements of this paragraph for any 

year shall not be treated as a top-heavy plan under 

section 416 for such year if such plan allows only contributions required under this paragraph. 

(12) ALTERNATIVE METHODS OF MEETING NONDISCRIMINATION

REQUIREMENTS.— 

(A) IN GENERAL.—A cash or deferred arrangement shall 

be treated as meeting the requirements of paragraph 

(3)(A)(ii) if such arrangement— 

(i) meets the contribution requirements of subparagraph (B) or (C), and 

(ii) meets the notice requirements of subparagraph 

(D). 

(B) MATCHING CONTRIBUTIONS.— 

(i) IN GENERAL.—The requirements of this subparagraph are met if, under the arrangement, the employer makes matching contributions on behalf of each 

employee who is not a highly compensated employee 

in an amount equal to— 

(I) 100 percent of the elective contributions of 

the employee to the extent such elective contribuVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00236 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
231 

tions do not exceed 3 percent of the employee’s 

compensation, and 

(II) 50 percent of the elective contributions of 

the employee to the extent that such elective contributions exceed 3 percent but do not exceed 5 

percent of the employee’s compensation. 

(ii) RATE FOR HIGHLY COMPENSATED EMPLOYEES.— The requirements of this subparagraph are not met if, 

under the arrangement, the rate of matching contribution with respect to any elective contribution of a highly compensated employee at any rate of elective contribution is greater than that with respect to an employee who is not a highly compensated employee. 

(iii) ALTERNATIVE PLAN DESIGNS.—If the rate of any 

matching contribution with respect to any rate of elective contribution is not equal to the percentage required under clause (i), an arrangement shall not be 

treated as failing to meet the requirements of clause 

(i) if— 

(I) the rate of an employer’s matching contribution does not increase as an employee’s rate of 

elective contributions increase, and 

(II) the aggregate amount of matching contributions at such rate of elective contribution is at 

least equal to the aggregate amount of matching 

contributions which would be made if matching 

contributions were made on the basis of the percentages described in clause (i). 

(C) NONELECTIVE CONTRIBUTIONS.—The requirements of 

this subparagraph are met if, under the arrangement, the 

employer is required, without regard to whether the employee makes an elective contribution or employee contribution, to make a contribution to a defined contribution 

plan on behalf of each employee who is not a highly compensated employee and who is eligible to participate in the 

arrangement in an amount equal to at least 3 percent of 

the employee’s compensation. 

(D) NOTICE REQUIREMENT.—An arrangement meets the 

requirements of this paragraph if, under the arrangement, 

each employee eligible to participate is, within a reasonable period before any year, given written notice of the employee’s rights and obligations under the arrangement 

which— 

(i) is sufficiently accurate and comprehensive to apprise the employee of such rights and obligations, and 

(ii) is written in a manner calculated to be understood by the average employee eligible to participate. 

(E) OTHER REQUIREMENTS.— 

(i) WITHDRAWAL AND VESTING RESTRICTIONS.—An arrangement shall not be treated as meeting the requirements of subparagraph (B) or (C) of this paragraph unless the requirements of subparagraphs (B) 

and (C) of paragraph (2) are met with respect to all 

employer contributions (including matching contributions) taken into account in determining whether the 

232 

requirements of subparagraphs (B) and (C) of this 

paragraph are met. 

(ii) SOCIAL SECURITY AND SIMILAR CONTRIBUTIONS

NOT TAKEN INTO ACCOUNT.—An arrangement shall not 

be treated as meeting the requirements of subparagraph (B) or (C) unless such requirements are met 

without regard to subsection (l), and, for purposes of 

subsection (l), employer contributions under subparagraph (B) or (C) shall not be taken into account. 

(F) OTHER PLANS.—An arrangement shall be treated as 

meeting the requirements under subparagraph (A)(i) if any 

other plan maintained by the employer meets such requirements with respect to employees eligible under the 

arrangement. 

(13) ALTERNATIVE METHOD FOR AUTOMATIC CONTRIBUTION ARRANGEMENTS TO MEET NONDISCRIMINATION REQUIREMENTS.— 

(A) IN GENERAL.—A qualified automatic contribution arrangement shall be treated as meeting the requirements of 

paragraph (3)(A)(ii). 

(B) QUALIFIED AUTOMATIC CONTRIBUTION ARRANGE- MENT.—For purposes of this paragraph, the term ‘‘qualified 

automatic contribution arrangement’’ means any cash or 

deferred arrangement which meets the requirements of 

subparagraphs (C) through (E). 

(C) AUTOMATIC DEFERRAL.— (i) IN GENERAL.—The requirements of this subparagraph are met if, under the arrangement, each employee eligible to participate in the arrangement is 

treated as having elected to have the employer make 

elective contributions in an amount equal to a qualified percentage of compensation. 

(ii) ELECTION OUT.—The election treated as having 

been made under clause (i) shall cease to apply with 

respect to any employee if such employee makes an affirmative election— 

(I) to not have such contributions made, or 

(II) to make elective contributions at a level 

specified in such affirmative election. 

(iii) QUALIFIED PERCENTAGE.—For purposes of this 

subparagraph, the term ‘‘qualified percentage’’ means, 

with respect to any employee, any percentage determined under the arrangement if such percentage is 

applied uniformly, does not exceed 10 percent, and is 

at least— 

(I) 3 percent during the period ending on the 

last day of the first plan year which begins after 

the date on which the first elective contribution 

described in clause (i) is made with respect to 

such employee, 

(II) 4 percent during the first plan year following the plan year described in subclause (I), 

(III) 5 percent during the second plan year following the plan year described in subclause (I), 

and 

(IV) 6 percent during any subsequent plan year. 

233 

(iv) AUTOMATIC DEFERRAL FOR CURRENT EMPLOYEES

NOT REQUIRED.—Clause (i) may be applied without 

taking into account any employee who— 

(I) was eligible to participate in the arrangement (or a predecessor arrangement) immediately 

before the date on which such arrangement becomes a qualified automatic contribution arrangement (determined after application of this clause), 

and 

(II) had an election in effect on such date either 

to participate in the arrangement or to not participate in the arrangement. 

(D) MATCHING OR NONELECTIVE CONTRIBUTIONS.— 

(i) IN GENERAL.—The requirements of this subparagraph are met if, under the arrangement, the employer— 

(I) makes matching contributions on behalf of 

each employee who is not a highly compensated 

employee in an amount equal to the sum of 100 

percent of the elective contributions of the employee to the extent that such contributions do not 

exceed 1 percent of compensation plus 50 percent 

of so much of such contributions as exceed 1 percent but do not exceed 6 percent of compensation, 

or 

(II) is required, without regard to whether the 

employee makes an elective contribution or employee contribution, to make a contribution to a 

defined contribution plan on behalf of each employee who is not a highly compensated employee 

and who is eligible to participate in the arrangement in an amount equal to at least 3 percent of 

the employee’s compensation. 

(ii) APPLICATION OF RULES FOR MATCHING CONTRIBUTIONS.—The rules of clauses (ii) and (iii) of paragraph 

(12)(B) shall apply for purposes of clause (i)(I). 

(iii) WITHDRAWAL AND VESTING RESTRICTIONS.—An 

arrangement shall not be treated as meeting the requirements of clause (i) unless, with respect to employer contributions (including matching contributions) taken into account in determining whether the 

requirements of clause (i) are met— 

(I) any employee who has completed at least 2 

years of service (within the meaning of section 

411(a)) has a nonforfeitable right to 100 percent of 

the employee’s accrued benefit derived from such 

employer contributions, and 

(II) the requirements of subparagraph (B) of 

paragraph (2) are met with respect to all such employer contributions. 

(iv) APPLICATION OF CERTAIN OTHER RULES.—The 

rules of subparagraphs (E)(ii) and (F) of paragraph 

(12) shall apply for purposes of subclauses (I) and (II) 

of clause (i). 

(E) NOTICE REQUIREMENTS.— 

234 

(i) IN GENERAL.—The requirements of this subparagraph are met if, within a reasonable period before 

each plan year, each employee eligible to participate in 

the arrangement for such year receives written notice 

of the employee’s rights and obligations under the arrangement which— 

(I) is sufficiently accurate and comprehensive to 

apprise the employee of such rights and obligations, and 

(II) is written in a manner calculated to be understood by the average employee to whom the arrangement applies. 

(ii) TIMING AND CONTENT REQUIREMENTS.—A notice 

shall not be treated as meeting the requirements of 

clause (i) with respect to an employee unless— 

(I) the notice explains the employee’s right 

under the arrangement to elect not to have elective contributions made on the employee’s behalf 

(or to elect to have such contributions made at a 

different percentage), 

(II) in the case of an arrangement under which 

the employee may elect among 2 or more investment options, the notice explains how contributions made under the arrangement will be invested in the absence of any investment election 

by the employee, and 

(III) the employee has a reasonable period of 

time after receipt of the notice described in subclauses (I) and (II) and before the first elective 

contribution is made to make either such election. 

(14) SPECIAL RULES RELATING TO HARDSHIP WITHDRAWALS.— For purposes of paragraph (2)(B)(i)(IV)— 

(A) AMOUNTS WHICH MAY BE WITHDRAWN.—The following 

amounts may be distributed upon hardship of the employee: 

(i) Contributions to a profit-sharing or stock bonus 

plan to which section 402(e)(3) applies. 

(ii) Qualified nonelective contributions (as defined in 

subsection (m)(4)(C)). 

(iii) Qualified matching contributions described in 

paragraph (3)(D)(ii)(I). 

(iv) Earnings on any contributions described in 

clause (i), (ii), or (iii). 

(B) NO REQUIREMENT TO TAKE AVAILABLE LOAN.—A distribution shall not be treated as failing to be made upon 

the hardship of an employee solely because the employee 

does not take any available loan under the plan. 

(l) PERMITTED DISPARITY IN PLAN CONTRIBUTIONS OR BENEFITS.— 

(1) IN GENERAL.—The requirements of this subsection are 

met with respect to a plan if— 

(A) in the case of a defined contribution plan, the requirements of paragraph (2) are met, and 

(B) in the case of a defined benefit plan, the requirements of paragraph (3) are met. 

235 

(2) DEFINED CONTRIBUTION PLAN.— 

(A) IN GENERAL.—A defined contribution plan meets the 

requirements of this paragraph if the excess contribution 

percentage does not exceed the base contribution percentage by more than the lesser of— 

(i) the base contribution percentage, or 

(ii) the greater of— 

(I) 5.7 percentage points, or 

(II) the percentage equal to the portion of the 

rate of tax under section 3111(a) (in effect as of 

the beginning of the year) which is attributable to 

old-age insurance. 

(B) CONTRIBUTION PERCENTAGES.—For purposes of this 

paragraph— 

(i) EXCESS CONTRIBUTION PERCENTAGE.—The term 

‘‘excess contribution percentage’’ means the percentage 

of compensation which is contributed by the employer 

under the plan with respect to that portion of each 

participant’s compensation in excess of the integration 

level. 

(ii) BASE CONTRIBUTION PERCENTAGE.—The term 

‘‘base contribution percentage’’ means the percentage 

of compensation contributed by the employer under 

the plan with respect to that portion of each participant’s compensation not in excess of the integration 

level. 

(3) DEFINED BENEFIT PLAN.—A defined benefit plan meets 

the requirements of this paragraph if— 

(A) EXCESS PLANS.— 

(i) IN GENERAL.—In the case of a plan other than an 

offset plan— 

(I) the excess benefit percentage does not exceed 

the base benefit percentage by more than the 

maximum excess allowance, 

(II) any optional form of benefit, preretirement 

benefit, actuarial factor, or other benefit or feature 

provided with respect to compensation in excess of 

the integration level is provided with respect to 

compensation not in excess of such level, and 

(III) benefits are based on average annual compensation. 

(ii) BENEFIT PERCENTAGES.—For purposes of this 

subparagraph, the excess and base benefit percentages 

shall be computed in the same manner as the excess 

and base contribution percentages under paragraph 

(2)(B), except that such determination shall be made 

on the basis of benefits attributable to employer contributions rather than contributions. 

(B) OFFSET PLANS.—In the case of an offset plan, the 

plan provides that— 

(i) a participant’s accrued benefit attributable to employer contributions (within the meaning of section 

411(c)(1)) may not be reduced (by reason of the offset) 

by more than the maximum offset allowance, and 

236 

(ii) benefits are based on average annual compensation. 

(4) DEFINITIONS RELATING TO PARAGRAPH (3).—For purposes 

of paragraph (3)— 

(A) MAXIMUM EXCESS ALLOWANCE.—The maximum excess allowance is equal to— 

(i) in the case of benefits attributable to any year of 

service with the employer taken into account under 

the plan, 3/4 of a percentage point, and 

(ii) in the case of total benefits, 3/4 of a percentage 

point, multiplied by the participant’s years of service 

(not in excess of 35) with the employer taken into account under the plan. 

In no event shall the maximum excess allowance exceed 

the base benefit percentage. 

(B) MAXIMUM OFFSET ALLOWANCE.—The maximum offset 

allowance is equal to— 

(i) in the case of benefits attributable to any year of 

service with the employer taken into account under 

the plan, 3/4 percent of the participant’s final average 

compensation, and 

(ii) in the case of total benefits, 3/4 percent of the 

participant’s final average compensation, multiplied by 

the participant’s years of service (not in excess of 35) 

with the employer taken into account under the plan. 

In no event shall the maximum offset allowance exceed 50 

percent of the benefit which would have accrued without 

regard to the offset reduction. 

(C) REDUCTIONS.— 

(i) IN GENERAL.—The Secretary shall prescribe regulations requiring the reduction of the 3/4 percentage 

factor under subparagraph (A) or (B)— 

(I) in the case of a plan other than an offset 

plan which has an integration level in excess of 

covered compensation, or 

(II) with respect to any participant in an offset 

plan who has final average compensation in excess of covered compensation. 

(ii) BASIS OF REDUCTIONS.—Any reductions under 

clause (i) shall be based on the percentages of compensation replaced by the employer-derived portions of 

primary insurance amounts under the Social Security 

Act for participants with compensation in excess of 

covered compensation. 

(D) OFFSET PLAN.—The term ‘‘offset plan’’ means any 

plan with respect to which the benefit attributable to employer contributions for each participant is reduced by an 

amount specified in the plan. 

(5) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of 

this subsection— 

(A) INTEGRATION LEVEL.— (i) IN GENERAL.—The term ‘‘integration level’’ means 

the amount of compensation specified under the plan 

(by dollar amount or formula) at or below which the 

rate at which contributions or benefits are provided 

237 

(expressed as a percentage) is less than such rate 

above such amount. 

(ii) LIMITATION.—The integration level for any year 

may not exceed the contribution and benefit base in effect under section 230 of the Social Security Act for 

such year. 

(iii) LEVEL TO APPLY TO ALL PARTICIPANTS.—A plan’s 

integration level shall apply with respect to all participants in the plan. 

(iv) MULTIPLE INTEGRATION LEVELS.—Under rules 

prescribed by the Secretary, a defined benefit plan 

may specify multiple integration levels. 

(B) COMPENSATION.—The term ‘‘compensation’’ has the 

meaning given such term by section 414(s). 

(C) AVERAGE ANNUAL COMPENSATION.—The term ‘‘average annual compensation’’ means the participant’s highest 

average annual compensation for— 

(i) any period of at least 3 consecutive years, or 

(ii) if shorter, the participant’s full period of service. 

(D) FINAL AVERAGE COMPENSATION.— 

(i) IN GENERAL.—The term ‘‘final average compensation’’ means the participant’s average annual compensation for— 

(I) the 3-consecutive year period ending with the 

current year, or 

(II) if shorter, the participant’s full period of 

service. 

(ii) LIMITATION.—A participant’s final average compensation shall be determined by not taking into account in any year compensation in excess of the contribution and benefit base in effect under section 230 

of the Social Security Act for such year. 

(E) COVERED COMPENSATION.— (i) IN GENERAL.—The term ‘‘covered compensation’’ 

means, with respect to an employee, the average of the 

contribution and benefit bases in effect under section 

230 of the Social Security Act for each year in the 35- 

year period ending with the year in which the employee attains the social security retirement age. 

(ii) COMPUTATION FOR ANY YEAR.—For purposes of 

clause (i), the determination for any year preceding 

the year in which the employee attains the social security retirement age shall be made by assuming that 

there is no increase in the bases described in clause (i) 

after the determination year and before the employee 

attains the social security retirement age. 

(iii) SOCIAL SECURITY RETIREMENT AGE.—For purposes of this subparagraph, the term ‘‘social security 

retirement age’’ has the meaning given such term by 

section 415(b)(8). 

(F) REGULATIONS.—The Secretary shall prescribe such 

regulations as are necessary or appropriate to carry out 

the purposes of this subsection, including— 

(i) in the case of a defined benefit plan which provides for unreduced benefits commencing before the 

238 

social security retirement age (as defined in section 

415(b)(8)), rules providing for the reduction of the 

maximum excess allowance and the maximum offset 

allowance, and 

(ii) in the case of an employee covered by 2 or more 

plans of the employer which fail to meet the requirements of subsection (a)(4) (without regard to this subsection), rules preventing the multiple use of the disparity permitted under this subsection with respect to 

any employee. 

For purposes of clause (i), unreduced benefits shall not include benefits for disability (within the meaning of section 

223(d) of the Social Security Act). 

(6) SPECIAL RULE FOR PLAN MAINTAINED BY RAILROADS.—In 

determining whether a plan which includes employees of a 

railroad employer who are entitled to benefits under the Railroad Retirement Act of 1974 meets the requirements of this 

subsection, rules similar to the rules set forth in this subsection shall apply. Such rules shall take into account the employer-derived portion of the employees’ tier 2 railroad retirement benefits and any supplemental annuity under the Railroad Retirement Act of 1974. 

(m) NONDISCRIMINATION TEST FOR MATCHING CONTRIBUTIONS AND

EMPLOYEE CONTRIBUTIONS.— (1) IN GENERAL.—A defined contribution plan shall be treated as meeting the requirements of subsection (a)(4) with respect to the amount of any matching contribution or employee 

contribution for any plan year only if the contribution percentage requirement of paragraph (2) of this subsection is met for 

such plan year. 

(2) REQUIREMENTS.— (A) CONTRIBUTION PERCENTAGE REQUIREMENT.—A plan 

meets the contribution percentage requirement of this 

paragraph for any plan year only if the contribution percentage for eligible highly compensated employees for such 

plan year does not exceed the greater of— 

(i) 125 percent of such percentage for all other eligible employees for the preceding plan year, or 

(ii) the lesser of 200 percent of such percentage for 

all other eligible employees for the preceding plan 

year, or such percentage for all other eligible employees for the preceding plan year plus 2 percentage 

points. 

This subparagraph may be applied by using the plan year 

rather than the preceding plan year if the employer so 

elects, except that if such an election is made, it may not 

be changed except as provided by the Secretary. 

(B) MULTIPLE PLANS TREATED AS A SINGLE PLAN.—If two 

or more plans of an employer to which matching contributions, employee contributions, or elective deferrals are 

made are treated as one plan for purposes of section 

410(b), such plans shall be treated as one plan for purposes of this subsection. If a highly compensated employee 

participates in two or more plans of an employer to which 

contributions to which this subsection applies are made, 

239 

all such contributions shall be aggregated for purposes of 

this subsection. 

(3) CONTRIBUTION PERCENTAGE.—For purposes of paragraph 

(2), the contribution percentage for a specified group of employees for a plan year shall be the average of the ratios (calculated separately for each employee in such group) of— 

(A) the sum of the matching contributions and employee 

contributions paid under the plan on behalf of each such 

employee for such plan year, to 

(B) the employee’s compensation (within the meaning of 

section 414(s)) for such plan year. 

Under regulations, an employer may elect to take into account 

(in computing the contribution percentage) elective deferrals 

and qualified nonelective contributions under the plan or any 

other plan of the employer. If matching contributions are taken 

into account for purposes of subsection (k)(3)(A)(ii) for any plan 

year, such contributions shall not be taken into account under 

subparagraph (A) for such year. Rules similar to the rules of 

subsection (k)(3)(E) shall apply for purposes of this subsection. 

(4) DEFINITIONS.—For purposes of this subsection— 

(A) MATCHING CONTRIBUTION.—The term ‘‘matching contribution’’ means— 

(i) any employer contribution made to a defined contribution plan on behalf of an employee on account of 

an employee contribution made by such employee, and 

(ii) any employer contribution made to a defined 

contribution plan on behalf of an employee on account 

of an employee’s elective deferral. 

(B) ELECTIVE DEFERRAL.—The term ‘‘elective deferral’’ 

means any employer contribution described in section 

402(g)(3). 

(C) QUALIFIED NONELECTIVE CONTRIBUTIONS.—The term 

‘‘qualified nonelective contribution’’ means any employer 

contribution (other than a matching contribution) with respect to which— 

(i) the employee may not elect to have the contribution paid to the employee in cash instead of being contributed to the plan, and 

(ii) the requirements of subparagraphs (B) and (C) of 

subsection (k)(2) are met. 

(5) EMPLOYEES TAKEN INTO CONSIDERATION.— 

(A) IN GENERAL.—Any employee who is eligible to make 

an employee contribution (or, if the employer takes elective 

contributions into account, elective contributions) or to receive a matching contribution under the plan being tested 

under paragraph (1) shall be considered an eligible employee for purposes of this subsection. 

(B) CERTAIN NONPARTICIPANTS.—If an employee contribution is required as a condition of participation in the 

plan, any employee who would be a participant in the plan 

if such employee made such a contribution shall be treated 

as an eligible employee on behalf of whom no employer 

contributions are made. 

(C) SPECIAL RULE FOR EARLY PARTICIPATION.—If an employer elects to apply section 410(b)(4)(B) in determining 

240 

whether a plan meets the requirements of section 410(b), 

the employer may, in determining whether the plan meets 

the requirements of paragraph (2), exclude from consideration all eligible employees (other than highly compensated employees) who have not met the minimum age 

and service requirements of section 410(a)(1)(A). 

(6) PLAN NOT DISQUALIFIED IF EXCESS AGGREGATE CONTRIBUTIONS DISTRIBUTED BEFORE END OF FOLLOWING PLAN YEAR.— 

(A) IN GENERAL.—A plan shall not be treated as failing 

to meet the requirements of paragraph (1) for any plan 

year if, before the close of the following plan year, the 

amount of the excess aggregate contributions for such plan 

year (and any income allocable to such contributions 

through the end of such year) is distributed (or, if forfeitable, is forfeited). Such contributions (and such income) 

may be distributed without regard to any other provision 

of law. 

(B) EXCESS AGGREGATE CONTRIBUTIONS.—For purposes of 

subparagraph (A), the term ‘‘excess aggregate contributions’’ means, with respect to any plan year, the excess 

of— 

(i) the aggregate amount of the matching contributions and employee contributions (and any qualified 

nonelective contribution or elective contribution taken 

into account in computing the contribution percentage) 

actually made on behalf of highly compensated employees for such plan year, over 

(ii) the maximum amount of such contributions permitted under the limitations of paragraph (2)(A) (determined by reducing contributions made on behalf of 

highly compensated employees in order of their contribution percentages beginning with the highest of 

such percentages). 

(C) METHOD OF DISTRIBUTING EXCESS AGGREGATE CONTRIBUTIONS.—Any distribution of the excess aggregate contributions for any plan year shall be made to highly compensated employees on the basis of the amount of contributions on behalf of, or by, each such employee. Forfeitures 

of excess aggregate contributions may not be allocated to 

participants whose contributions are reduced under this 

paragraph. 

(D) COORDINATION WITH SUBSECTION (K) AND 402(G).—The 

determination of the amount of excess aggregate contributions with respect to a plan shall be made after— 

(i) first determining the excess deferrals (within the 

meaning of section 402(g)), and 

(ii) then determining the excess contributions under 

subsection (k). 

(7) TREATMENT OF DISTRIBUTIONS.— 

(A) ADDITIONAL TAX OF SECTION 72(T) NOT APPLICABLE.— 

No tax shall be imposed under section 72(t) on any amount 

required to be distributed under paragraph (6). 

(B) EXCLUSION OF EMPLOYEE CONTRIBUTIONS.—Any distribution attributable to employee contributions shall not 

241 

be included in gross income except to the extent attributable to income on such contributions. 

(8) HIGHLY COMPENSATED EMPLOYEE.—For purposes of this 

subsection, the term ‘‘highly compensated employee’’ has the 

meaning given to such term by section 414(q). 

(9) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this 

subsection and subsection (k), including regulations permitting 

appropriate aggregation of plans and contributions. 

(10) ALTERNATIVE METHOD OF SATISFYING TESTS.—A defined 

contribution plan shall be treated as meeting the requirements 

of paragraph (2) with respect to matching contributions if the 

plan— 

(A) meets the contribution requirements of subparagraph (B) of subsection (k)(11), 

(B) meets the exclusive plan requirements of subsection 

(k)(11)(C), and 

(C) meets the vesting requirements of section 408(p)(3). 

(11) ADDITIONAL ALTERNATIVE METHOD OF SATISFYING

TESTS.— 

(A) IN GENERAL.—A defined contribution plan shall be 

treated as meeting the requirements of paragraph (2) with 

respect to matching contributions if the plan— 

(i) meets the contribution requirements of subparagraph (B) or (C) of subsection (k)(12), 

(ii) meets the notice requirements of subsection 

(k)(12)(D), and 

(iii) meets the requirements of subparagraph (B). 

(B) LIMITATION ON MATCHING CONTRIBUTIONS.—The requirements of this subparagraph are met if— 

(i) matching contributions on behalf of any employee 

may not be made with respect to an employee’s contributions or elective deferrals in excess of 6 percent of 

the employee’s compensation, 

(ii) the rate of an employer’s matching contribution 

does not increase as the rate of an employee’s contributions or elective deferrals increase, and 

(iii) the matching contribution with respect to any 

highly compensated employee at any rate of an employee contribution or rate of elective deferral is not 

greater than that with respect to an employee who is 

not a highly compensated employee. 

(12) ALTERNATIVE METHOD FOR AUTOMATIC CONTRIBUTION ARRANGEMENTS.—A defined contribution plan shall be treated as 

meeting the requirements of paragraph (2) with respect to 

matching contributions if the plan— 

(A) is a qualified automatic contribution arrangement 

(as defined in subsection (k)(13)), and 

(B) meets the requirements of paragraph (11)(B). 

(13) CROSS REFERENCE.—For excise tax on certain excess 

contributions, see section 4979. 

(n) COORDINATION WITH QUALIFIED DOMESTIC RELATIONS OR- DERS.—The Secretary shall prescribe such rules or regulations as 

may be necessary to coordinate the requirements of subsection 

(a)(13)(B) and section 414(p) (and the regulations issued by the SecVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00247 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
242 

retary of Labor thereunder) with the other provisions of this chapter. 

(o) CROSS REFERENCE.—For exemption from tax of a trust qualified under this section, see section 501(a). 

SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES’ TRUST. 

(a) TAXABILITY OF BENEFICIARY OF EXEMPT TRUST.—Except as 

otherwise provided in this section, any amount actually distributed 

to any distributee by any employees’ trust described in section 

401(a) which is exempt from tax under section 501(a) shall be taxable to the distributee, in the taxable year of the distributee in 

which distributed, under section 72 (relating to annuities). 

(b) TAXABILITY OF BENEFICIARY OF NONEXEMPT TRUST.— (1) CONTRIBUTIONS.—Contributions to an employees’ trust 

made by an employer during a taxable year of the employer 

which ends with or within a taxable year of the trust for which 

the trust is not exempt from tax under section 501(a) shall be 

included in the gross income of the employee in accordance 

with section 83 (relating to property transferred in connection 

with performance of services), except that the value of the employee’s interest in the trust shall be substituted for the fair 

market value of the property for purposes of applying such section. 

(2) DISTRIBUTIONS.—The amount actually distributed or 

made available to any distributee by any trust described in 

paragraph (1) shall be taxable to the distributee, in the taxable 

year in which so distributed or made available, under section 

72 (relating to annuities), except that distributions of income 

of such trust before the annuity starting date (as defined in 

section 72(c)(4)) shall be included in the gross income of the 

employee without regard to section 72(e)(5) (relating to 

amounts not received as annuities). 

(3) GRANTOR TRUSTS.—A beneficiary of any trust described in 

paragraph (1) shall not be considered the owner of any portion 

of such trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners). 

(4) FAILURE TO MEET REQUIREMENTS OF SECTION 410(B).— (A) HIGHLY COMPENSATED EMPLOYEES.—If 1 of the reasons a trust is not exempt from tax under section 501(a) 

is the failure of the plan of which it is a part to meet the 

requirements of section 401(a)(26) or 410(b), then a highly 

compensated employee shall, in lieu of the amount determined under paragraph (1) or (2) include in gross income 

for the taxable year with or within which the taxable year 

of the trust ends an amount equal to the vested accrued 

benefit of such employee (other than the employee’s investment in the contract) as of the close of such taxable year 

of the trust. 

(B) FAILURE TO MEET COVERAGE TESTS.—If a trust is not 

exempt from tax under section 501(a) for any taxable year 

solely because such trust is part of a plan which fails to 

meet the requirements of section 401(a)(26) or 410(b), 

paragraphs (1) and (2) shall not apply by reason of such 

failure to any employee who was not a highly compensated 

employee during— 

(i) such taxable year, or 

243 

(ii) any preceding period for which service was creditable to such employee under the plan. 

(C) HIGHLY COMPENSATED EMPLOYEE.—For purposes of 

this paragraph, the term ‘‘highly compensated employee’’ 

has the meaning given such term by section 414(q). 

(c) RULES APPLICABLE TO ROLLOVERS FROM EXEMPT TRUSTS.— (1) EXCLUSION FROM INCOME.—If— 

(A) any portion of the balance to the credit of an employee in a qualified trust is paid to the employee in an 

eligible rollover distribution, 

(B) the distributee transfers any portion of the property 

received in such distribution to an eligible retirement plan, 

and 

(C) in the case of a distribution of property other than 

money, the amount so transferred consists of the property 

distributed, 

then such distribution (to the extent so transferred) shall not 

be includible in gross income for the taxable year in which 

paid. 

(2) MAXIMUM AMOUNT WHICH MAY BE ROLLED OVER.—In the 

case of any eligible rollover distribution, the maximum amount 

transferred to which paragraph (1) applies shall not exceed the 

portion of such distribution which is includible in gross income 

(determined without regard to paragraph (1)). The preceding 

sentence shall not apply to such distribution to the extent— 

(A) such portion is transferred in a direct trustee-totrustee transfer to a qualified trust or to an annuity contract described in section 403(b) and such trust or contract 

provides for separate accounting for amounts so transferred (and earnings thereon), including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible, or 

(B) such portion is transferred to an eligible retirement 

plan described in clause (i) or (ii) of paragraph (8)(B). 

In the case of a transfer described in subparagraph (A) or (B), 

the amount transferred shall be treated as consisting first of 

the portion of such distribution that is includible in gross income (determined without regard to paragraph (1)). 

(3) TIME LIMIT ON TRANSFERS.— 

(A) IN GENERAL.—Except as provided in subparagraphs 

(B) and (C), paragraph (1) shall not apply to any transfer 

of a distribution made after the 60th day following the day 

on which the distributee received the property distributed. 

(B) HARDSHIP EXCEPTION.—The Secretary may waive the 

60-day requirement under subparagraph (A) where the 

failure to waive such requirement would be against equity 

or good conscience, including casualty, disaster, or other 

events beyond the reasonable control of the individual subject to such requirement. 

(C) ROLLOVER OF CERTAIN PLAN LOAN OFFSET

AMOUNTS.— (i) IN GENERAL.—In the case of a qualified plan loan 

offset amount, paragraph (1) shall not apply to any 

transfer of such amount made after the due date (inVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00249 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
244 

cluding extensions) for filing the return of tax for the 

taxable year in which such amount is treated as distributed from a qualified employer plan. 

(ii) QUALIFIED PLAN LOAN OFFSET AMOUNT.—For 

purposes of this subparagraph, the term ‘‘qualified 

plan loan offset amount’’ means a plan loan offset 

amount which is treated as distributed from a qualified employer plan to a participant or beneficiary solely by reason of— 

(I) the termination of the qualified employer 

plan, or 

(II) the failure to meet the repayment terms of 

the loan from such plan because of the severance 

from employment of the participant. 

(iii) PLAN LOAN OFFSET AMOUNT.—For purposes of 

clause (ii), the term ‘‘plan loan offset amount’’ means 

the amount by which the participant’s accrued benefit 

under the plan is reduced in order to repay a loan 

from the plan. 

(iv) LIMITATION.—This subparagraph shall not apply 

to any plan loan offset amount unless such plan loan 

offset amount relates to a loan to which section 

72(p)(1) does not apply by reason of section 72(p)(2). 

(v) QUALIFIED EMPLOYER PLAN.—For purposes of this 

subsection, the term ‘‘qualified employer plan’’ has the 

meaning given such term by section 72(p)(4). 

(4) ELIGIBLE ROLLOVER DISTRIBUTION.—For purposes of this 

subsection, the term ‘‘eligible rollover distribution’’ means any 

distribution to an employee of all or any portion of the balance 

to the credit of the employee in a qualified trust; except that 

such term shall not include— 

(A) any distribution which is one of a series of substantially equal periodic payments (not less frequently than 

annually) made— 

(i) for the life (or life expectancy) of the employee or 

the joint lives (or joint life expectancies) of the employee and the employee’s designated beneficiary, or 

(ii) for a specified period of 10 years or more, 

(B) any distribution to the extent such distribution is required under section 401(a)(9), and 

(C) any distribution which is made upon hardship of the 

employee. 

If all or any portion of a distribution during 2009 is treated as 

an eligible rollover distribution but would not be so treated if 

the minimum distribution requirements under section 401(a)(9) 

had applied during 2009, such distribution shall not be treated 

as an eligible rollover distribution for purposes of section 

401(a)(31) or 3405(c) or subsection (f) of this section. 

(5) TRANSFER TREATED AS ROLLOVER CONTRIBUTION UNDER

SECTION 408.—For purposes of this title, a transfer to an eligible retirement plan described in clause (i) or (ii) of paragraph 

(8)(B) resulting in any portion of a distribution being excluded 

from gross income under paragraph (1) shall be treated as a 

rollover contribution described in section 408(d)(3). 

245 

(6) SALES OF DISTRIBUTED PROPERTY.—For purposes of this 

subsection— 

(A) TRANSFER OF PROCEEDS FROM SALE OF DISTRIBUTED

PROPERTY TREATED AS TRANSFER OF DISTRIBUTED PROPERTY.—The transfer of an amount equal to any portion of 

the proceeds from the sale of property received in the distribution shall be treated as the transfer of property received in the distribution. 

(B) PROCEEDS ATTRIBUTABLE TO INCREASE IN VALUE.— 

The excess of fair market value of property on sale over its 

fair market value on distribution shall be treated as property received in the distribution. 

(C) DESIGNATION WHERE AMOUNT OF DISTRIBUTION EXCEEDS ROLLOVER CONTRIBUTION.—In any case where part 

or all of the distribution consists of property other than 

money— 

(i) the portion of the money or other property which 

is to be treated as attributable to amounts not included in gross income, and 

(ii) the portion of the money or other property which 

is to be treated as included in the rollover contribution, 

shall be determined on a ratable basis unless the taxpayer 

designates otherwise. Any designation under this subparagraph for a taxable year shall be made not later than the 

time prescribed by law for filing the return for such taxable year (including extensions thereof). Any such designation, once made, shall be irrevocable. 

(D) NONRECOGNITION OF GAIN OR LOSS.—No gain or loss 

shall be recognized on any sale described in subparagraph 

(A) to the extent that an amount equal to the proceeds is 

transferred pursuant to paragraph (1). 

(7) SPECIAL RULE FOR FROZEN DEPOSITS.— 

(A) IN GENERAL.—The 60-day period described in paragraph (3) shall not— 

(i) include any period during which the amount 

transferred to the employee is a frozen deposit, or 

(ii) end earlier than 10 days after such amount 

ceases to be a frozen deposit. 

(B) FROZEN DEPOSITS.—For purposes of this subparagraph, the term ‘‘frozen deposit’’ means any deposit which 

may not be withdrawn because of— 

(i) the bankruptcy or insolvency of any financial institution, or 

(ii) any requirement imposed by the State in which 

such institution is located by reason of the bankruptcy 

or insolvency (or threat thereof) of 1 or more financial 

institutions in such State. 

A deposit shall not be treated as a frozen deposit unless 

on at least 1 day during the 60-day period described in 

paragraph (3) (without regard to this paragraph) such deposit is described in the preceding sentence. 

(8) DEFINITIONS.—For purposes of this subsection— 

246 

(A) QUALIFIED TRUST.—The term ‘‘qualified trust’’ means 

an employees’ trust described in section 401(a) which is exempt from tax under section 501(a). 

(B) ELIGIBLE RETIREMENT PLAN.—The term ‘‘eligible retirement plan’’ means— 

(i) an individual retirement account described in section 408(a), 

(ii) an individual retirement annuity described in 

section 408(b) (other than an endowment contract), 

(iii) a qualified trust, 

(iv) an annuity plan described in section 403(a), 

(v) an eligible deferred compensation plan described 

in section 457(b) which is maintained by an eligible 

employer described in section 457(e)(1)(A), and 

(vi) an annuity contract described in section 403(b). 

If any portion of an eligible rollover distribution is attributable to payments or distributions from a designated 

Roth account (as defined in section 402A), an eligible retirement plan with respect to such portion shall include 

only another designated Roth account and a Roth IRA. 

(9) ROLLOVER WHERE SPOUSE RECEIVES DISTRIBUTION AFTER

DEATH OF EMPLOYEE.—If any distribution attributable to an 

employee is paid to the spouse of the employee after the employee’s death, the preceding provisions of this subsection shall 

apply to such distribution in the same manner as if the spouse 

were the employee. 

(10) SEPARATE ACCOUNTING.—Unless a plan described in 

clause (v) of paragraph (8)(B) agrees to separately account for 

amounts rolled into such plan from eligible retirement plans 

not described in such clause, the plan described in such clause 

may not accept transfers or rollovers from such retirement 

plans. 

(11) DISTRIBUTIONS TO INHERITED INDIVIDUAL RETIREMENT

PLAN OF NONSPOUSE BENEFICIARY.— 

(A) IN GENERAL.—If, with respect to any portion of a distribution from an eligible retirement plan described in 

paragraph (8)(B)(iii) of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement 

plan described in clause (i) or (ii) of paragraph (8)(B) established for the purposes of receiving the distribution on 

behalf of an individual who is a designated beneficiary (as 

defined by section 401(a)(9)(E)) of the employee and who is 

not the surviving spouse of the employee— 

(i) the transfer shall be treated as an eligible rollover distribution, 

(ii) the individual retirement plan shall be treated 

as an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C)) for purposes of this title, and 

(iii) section 401(a)(9)(B) (other than clause (iv) thereof) shall apply to such plan. 

(B) CERTAIN TRUSTS TREATED AS BENEFICIARIES.—For 

purposes of this paragraph, to the extent provided in rules 

prescribed by the Secretary, a trust maintained for the 

247 

benefit of one or more designated beneficiaries shall be 

treated in the same manner as a designated beneficiary. 

(d) TAXABILITY OF BENEFICIARY OF CERTAIN FOREIGN SITUS

TRUSTS.—For purposes of subsections (a), (b), and (c), a stock 

bonus, pension, or profit-sharing trust which would qualify for exemption from tax under section 501(a) except for the fact that it 

is a trust created or organized outside the United States shall be 

treated as if it were a trust exempt from tax under section 501(a). 

(e) OTHER RULES APPLICABLE TO EXEMPT TRUSTS.— (1) ALTERNATE PAYEES.— (A) ALTERNATE PAYEE TREATED AS DISTRIBUTEE.—For 

purposes of subsection (a) and section 72, an alternate 

payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distribution 

or payment made to the alternate payee under a qualified 

domestic relations order (as defined in section 414(p)). 

(B) ROLLOVERS.—If any amount is paid or distributed to 

an alternate payee who is the spouse or former spouse of 

the participant by reason of any qualified domestic relations order (within the meaning of section 414(p)), subsection (c) shall apply to such distribution in the same 

manner as if such alternate payee were the employee. 

(2) DISTRIBUTIONS BY UNITED STATES TO NONRESIDENT

ALIENS.—The amount includible under subsection (a) in the 

gross income of a nonresident alien with respect to a distribution made by the United States in respect of services performed by an employee of the United States shall not exceed 

an amount which bears the same ratio to the amount includible in gross income without regard to this paragraph as— 

(A) the aggregate basic pay paid by the United States to 

such employee for such services, reduced by the amount of 

such basic pay which was not includible in gross income by 

reason of being from sources without the United States, 

bears to 

(B) the aggregate basic pay paid by the United States to 

such employee for such services. 

In the case of distributions under the civil service retirement 

laws, the term ‘‘basic pay’’ shall have the meaning provided in 

section 8331(3) of title 5, United States Code. 

(3) CASH OR DEFERRED ARRANGEMENTS.—For purposes of this 

title, contributions made by an employer on behalf of an employee to a trust which is a part of a qualified cash or deferred 

arrangement (as defined in section 401(k)(2)) or which is part 

of a salary reduction agreement under section 403(b) shall not 

be treated as distributed or made available to the employee nor 

as contributions made to the trust by the employee merely because the arrangement includes provisions under which the 

employee has an election whether the contribution will be 

made to the trust or received by the employee in cash. 

(4) NET UNREALIZED APPRECIATION.— (A) AMOUNTS ATTRIBUTABLE TO EMPLOYEE CONTRIBU- TIONS.—For purposes of subsection (a) and section 72, in 

the case of a distribution other than a lump sum distribution, the amount actually distributed to any distributee 

from a trust described in subsection (a) shall not include 

248 

any net unrealized appreciation in securities of the employer corporation attributable to amounts contributed by 

the employee (other than deductible employee contributions within the meaning of section 72(o)(5)). This subparagraph shall not apply to a distribution to which subsection 

(c) applies. 

(B) AMOUNTS ATTRIBUTABLE TO EMPLOYER CONTRIBU- TIONS.—For purposes of subsection (a) and section 72, in 

the case of any lump sum distribution which includes securities of the employer corporation, there shall be excluded 

from gross income the net unrealized appreciation attributable to that part of the distribution which consists of securities of the employer corporation. In accordance with 

rules prescribed by the Secretary, a taxpayer may elect, on 

the return of tax on which a lump sum distribution is required to be included, not to have this subparagraph apply 

to such distribution. 

(C) DETERMINATION OF AMOUNTS AND ADJUSTMENTS.— For purposes of subparagraphs (A) and (B), net unrealized 

appreciation and the resulting adjustments to basis shall 

be determined in accordance with regulations prescribed 

by the Secretary. 

(D) LUMP-SUM DISTRIBUTION.—For purposes of this paragraph— 

(i) IN GENERAL.—The term ‘‘lump-sum distribution’’ 

means the distribution or payment within one taxable 

year of the recipient of the balance to the credit of an 

employee which becomes payable to the recipient— 

(I) on account of the employee’s death, 

(II) after the employee attains age 591/2, 

(III) on account of the employee’s separation 

from service, or 

(IV) after the employee has become disabled 

(within the meaning of section 72(m)(7)), 

from a trust which forms a part of a plan described in section 401(a) and which is exempt from tax under section 

501 or from a plan described in section 403(a). Subclause 

(III) of this clause shall be applied only with respect to an 

individual who is an employee without regard to section 

401(c)(1), and subclause (IV) shall be applied only with respect to an employee within the meaning of section 

401(c)(1). For purposes of this clause, a distribution to two 

or more trusts shall be treated as a distribution to one recipient. For purposes of this paragraph, the balance to the 

credit of the employee does not include the accumulated 

deductible employee contributions under the plan (within 

the meaning of section 72(o)(5)). 

(ii) AGGREGATION OF CERTAIN TRUSTS AND PLANS.— 

For purposes of determining the balance to the credit 

of an employee under clause (i)— 

(I) all trusts which are part of a plan shall be 

treated as a single trust, all pension plans maintained by the employer shall be treated as a single 

plan, all profit-sharing plans maintained by the 

employer shall be treated as a single plan, and all 

249 

stock bonus plans maintained by the employer 

shall be treated as a single plan, and 

(II) trusts which are not qualified trusts under 

section 401(a) and annuity contracts which do not 

satisfy the requirements of section 404(a)(2) shall 

not be taken into account. 

(iii) COMMUNITY PROPERTY LAWS.—The provisions of 

this paragraph shall be applied without regard to community property laws. 

(iv) AMOUNTS SUBJECT TO PENALTY.—This paragraph 

shall not apply to amounts described in subparagraph 

(A) of section 72(m)(5) to the extent that section 

72(m)(5) applies to such amounts. 

(v) BALANCE TO CREDIT OF EMPLOYEE NOT TO INCLUDE AMOUNTS PAYABLE UNDER QUALIFIED DOMESTIC

RELATIONS ORDER.—For purposes of this paragraph, 

the balance to the credit of an employee shall not include any amount payable to an alternate payee under 

a qualified domestic relations order (within the meaning of section 414(p)). 

(vi) TRANSFERS TO COST-OF-LIVING ARRANGEMENT

NOT TREATED AS DISTRIBUTION.—For purposes of this 

paragraph, the balance to the credit of an employee 

under a defined contribution plan shall not include 

any amount transferred from such defined contribution plan to a qualified cost-of-living arrangement 

(within the meaning of section 415(k)(2)) under a defined benefit plan. 

(vii) LUMP-SUM DISTRIBUTIONS OF ALTERNATE PAYEES.—If any distribution or payment of the balance to 

the credit of an employee would be treated as a lumpsum distribution, then, for purposes of this paragraph, 

the payment under a qualified domestic relations 

order (within the meaning of section 414(p)) of the balance to the credit of an alternate payee who is the 

spouse or former spouse of the employee shall be 

treated as a lump-sum distribution. For purposes of 

this clause, the balance to the credit of the alternate 

payee shall not include any amount payable to the employee. 

(E) DEFINITIONS RELATING TO SECURITIES.—For purposes 

of this paragraph— 

(i) SECURITIES.—The term ‘‘securities’’ means only 

shares of stock and bonds or debentures issued by a 

corporation with interest coupons or in registered 

form. 

(ii) SECURITIES OF THE EMPLOYER.—The term ‘‘securities of the employer corporation’’ includes securities 

of a parent or subsidiary corporation (as defined in 

subsections (e) and (f) of section 424) of the employer 

corporation. 

(6) DIRECT TRUSTEE-TO-TRUSTEE TRANSFERS.—Any amount 

transferred in a direct trustee-to-trustee transfer in accordance 

with section 401(a)(31) shall not be includible in gross income 

for the taxable year of such transfer. 

250 

(f) WRITTEN EXPLANATION TO RECIPIENTS OF DISTRIBUTIONS ELIGI- BLE FOR ROLLOVER TREATMENT.— (1) IN GENERAL.—The plan administrator of any plan shall, 

within a reasonable period of time before making an eligible 

rollover distribution, provide a written explanation to the recipient— 

(A) of the provisions under which the recipient may have 

the distribution directly transferred to an eligible retirement plan and that the automatic distribution by direct 

transfer applies to certain distributions in accordance with 

section 401(a)(31)(B), 

(B) of the provision which requires the withholding of 

tax on the distribution if it is not directly transferred to 

an eligible retirement plan, 

(C) of the provisions under which the distribution will 

not be subject to tax if transferred to an eligible retirement 

plan within 60 days after the date on which the recipient 

received the distribution, 

(D) if applicable, of the provisions of subsections (d) and 

(e) of this section, and 

(E) of the provisions under which distributions from the 

eligible retirement plan receiving the distribution may be 

subject to restrictions and tax consequences which are different from those applicable to distributions from the plan 

making such distribution. 

(2) DEFINITIONS.—For purposes of this subsection— 

(A) ELIGIBLE ROLLOVER DISTRIBUTION.—The term ‘‘eligible rollover distribution’’ has the same meaning as when 

used in subsection (c) of this section, paragraph (4) of section 403(a), subparagraph (A) of section 403(b)(8), or subparagraph (A) of section 457(e)(16). Such term shall include any distribution to a designated beneficiary which 

would be treated as an eligible rollover distribution by reason of subsection (c)(11), or section 403(a)(4)(B), 

403(b)(8)(B), or 457(e)(16)(B), if the requirements of subsection (c)(11) were satisfied. 

(B) ELIGIBLE RETIREMENT PLAN.—The term ‘‘eligible retirement plan’’ has the meaning given such term by subsection (c)(8)(B). 

(g) LIMITATION ON EXCLUSION FOR ELECTIVE DEFERRALS.— 

(1) IN GENERAL.— 

(A) LIMITATION.—Notwithstanding subsections (e)(3) and 

(h)(1)(B), the elective deferrals of any individual for any 

taxable year shall be included in such individual’s gross income to the extent the amount of such deferrals for the 

taxable year exceeds the applicable dollar amount. The 

preceding sentence shall not apply to the portion of such 

excess as does not exceed the designated Roth contributions of the individual for the taxable year. 

(B) APPLICABLE DOLLAR AMOUNT.—For purposes of sub- paragraph (A), the applicable dollar amount is $15,000. 

(C) CATCH-UP CONTRIBUTIONS.—In addition to subparagraph (A), in the case of an eligible participant (as defined 

in section 414(v)), gross income shall not include elective 

deferrals in excess of the applicable dollar amount under 

251 

subparagraph (B) to the extent that the amount of such 

elective deferrals does not exceed the applicable dollar 

amount under section 414(v)(2)(B)(i) for the taxable year 

(without regard to the treatment of the elective deferrals 

by an applicable employer plan under section 414(v)). 

(2) DISTRIBUTION OF EXCESS DEFERRALS.— (A) IN GENERAL.—If any amount (hereinafter in this 

paragraph referred to as ‘‘excess deferrals’’) is included in 

the gross income of an individual under paragraph (1) (or 

would be included but for the last sentence thereof) for any 

taxable year— 

(i) not later than the 1st March 1 following the close 

of the taxable year, the individual may allocate the 

amount of such excess deferrals among the plans 

under which the deferrals were made and may notify 

each such plan of the portion allocated to it, and 

(ii) not later than the 1st April 15 following the close 

of the taxable year, each such plan may distribute to 

the individual the amount allocated to it under clause 

(i) (and any income allocable to such amount through 

the end of such taxable year). 

The distribution described in clause (ii) may be made notwithstanding any other provision of law. 

(B) TREATMENT OF DISTRIBUTION UNDER SECTION

401(K).—Except to the extent provided under rules prescribed by the Secretary, notwithstanding the distribution 

of any portion of an excess deferral from a plan under subparagraph (A)(ii), such portion shall, for purposes of applying section 401(k)(3)(A)(ii), be treated as an employer contribution. 

(C) TAXATION OF DISTRIBUTION.—In the case of a distribution to which subparagraph (A) applies— 

(i) except as provided in clause (ii), such distribution 

shall not be included in gross income, and 

(ii) any income on the excess deferral shall, for purposes of this chapter, be treated as earned and received in the taxable year in which such income is distributed. 

No tax shall be imposed under section 72(t) on any distribution described in the preceding sentence. 

(D) PARTIAL DISTRIBUTIONS.—If a plan distributes only a 

portion of any excess deferral and income allocable thereto, 

such portion shall be treated as having been distributed 

ratably from the excess deferral and the income. 

(3) ELECTIVE DEFERRALS.—For purposes of this subsection, 

the term ‘‘elective deferrals’’ means, with respect to any taxable year, the sum of— 

(A) any employer contribution under a qualified cash or 

deferred arrangement (as defined in section 401(k)) to the 

extent not includible in gross income for the taxable year 

under subsection (e)(3) (determined without regard to this 

subsection), 

(B) any employer contribution to the extent not includible in gross income for the taxable year under subsection 

(h)(1)(B) (determined without regard to this subsection), 

252 

(C) any employer contribution to purchase an annuity 

contract under section 403(b) under a salary reduction 

agreement (within the meaning of section 3121(a)(5)(D)), 

and 

(D) any elective employer contribution under section 

408(p)(2)(A)(i). 

An employer contribution shall not be treated as an elective 

deferral described in subparagraph (C) if under the salary reduction agreement such contribution is made pursuant to a 

one-time irrevocable election made by the employee at the time 

of initial eligibility to participate in the agreement or is made 

pursuant to a similar arrangement involving a one-time irrevocable election specified in regulations. 

(4) COST-OF-LIVING ADJUSTMENT.—In the case of taxable 

years beginning after December 31, 2006, the Secretary shall 

adjust the $15,000 amount under paragraph (1)(B) at the same 

time and in the same manner as under section 415(d), except 

that the base period shall be the calendar quarter beginning 

July 1, 2005, and any increase under this paragraph which is 

not a multiple of $500 shall be rounded to the next lowest multiple of $500. 

(5) DISREGARD OF COMMUNITY PROPERTY LAWS.—This subsection shall be applied without regard to community property 

laws. 

(6) COORDINATION WITH SECTION 72.—For purposes of applying section 72, any amount includible in gross income for any 

taxable year under this subsection but which is not distributed 

from the plan during such taxable year shall not be treated as 

investment in the contract. 

(7) SPECIAL RULE FOR CERTAIN ORGANIZATIONS.— 

(A) IN GENERAL.—In the case of a qualified employee of 

a qualified organization, with respect to employer contributions described in paragraph (3)(C) made by such organization, the limitation of paragraph (1) for any taxable year 

shall be increased by whichever of the following is the 

least: 

(i) $3,000, 

(ii) $15,000 reduced by the sum of— 

(I) the amounts not included in gross income for 

prior taxable years by reason of this paragraph, 

plus 

(II) the aggregate amount of designated Roth 

contributions (as defined in section 402A(c)) permitted for prior taxable years by reason of this 

paragraph, or 

(iii) the excess of $5,000 multiplied by the number 

of years of service of the employee with the qualified 

organization over the employer contributions described 

in paragraph (3) made by the organization on behalf 

of such employee for prior taxable years (determined 

in the manner prescribed by the Secretary). 

(B) QUALIFIED ORGANIZATION.—For purposes of this 

paragraph, the term ‘‘qualified organization’’ means any 

educational organization, hospital, home health service 

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253 

vention or association of churches. Such term includes any 

organization described in section 414(e)(3)(B)(ii). Terms 

used in this subparagraph shall have the same meaning as 

when used in section 415(c)(4) (as in effect before the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001). 

(C) QUALIFIED EMPLOYEE.—For purposes of this paragraph, the term ‘‘qualified employee’’ means any employee 

who has completed 15 years of service with the qualified 

organization. 

(D) YEARS OF SERVICE.—For purposes of this paragraph, 

the term ‘‘years of service’’ has the meaning given such 

term by section 403(b). 

(8) MATCHING CONTRIBUTIONS ON BEHALF OF SELF-EMPLOYED

INDIVIDUALS NOT TREATED AS ELECTIVE EMPLOYER CONTRIBUTIONS.—Except as provided in section 401(k)(3)(D)(ii), any 

matching contribution described in section 401(m)(4)(A) which 

is made on behalf of a self-employed individual (as defined in 

section 401(c)) shall not be treated as an elective employer contribution under a qualified cash or deferred arrangement (as 

defined in section 401(k)) for purposes of this title. 

(h) SPECIAL RULES FOR SIMPLIFIED EMPLOYEE PENSIONS.—For 

purposes of this chapter— 

(1) IN GENERAL.—Except as provided in paragraph (2), contributions made by an employer on behalf of an employee to an 

individual retirement plan pursuant to a simplified employee 

pension (as defined in section 408(k))— 

(A) shall not be treated as distributed or made available 

to the employee or as contributions made by the employee, 

and 

(B) if such contributions are made pursuant to an arrangement under section 408(k)(6) under which an employee may elect to have the employer make contributions 

to the simplified employee pension on behalf of the employee, shall not be treated as distributed or made available or as contributions made by the employee merely because the simplified employee pension includes provisions 

for such election. 

(2) LIMITATIONS ON EMPLOYER CONTRIBUTIONS.—Contributions made by an employer to a simplified employee pension 

with respect to an employee for any year shall be treated as 

distributed or made available to such employee and as contributions made by the employee to the extent such contributions exceed the lesser of— 

(A) 25 percent of the compensation (within the meaning 

of section 414(s)) from such employer includible in the employee’s gross income for the year (determined without regard to the employer contributions to the simplified employee pension), or 

(B) the limitation in effect under section 415(c)(1)(A), reduced in the case of any highly compensated employee 

(within the meaning of section 414(q)) by the amount 

taken into account with respect to such employee under 

section 408(k)(3)(D). 

254 

(3) DISTRIBUTIONS.—Any amount paid or distributed out of 

an individual retirement plan pursuant to a simplified employee pension shall be included in gross income by the payee 

or distributee, as the case may be, in accordance with the provisions of section 408(d). 

(i) TREATMENT OF SELF-EMPLOYED INDIVIDUALS.—For purposes of 

this section, except as otherwise provided in subsection (e)(4)(D)(i), 

the term ‘‘employee’’ includes a self-employed individual (as defined 

in section 401(c)(1)(B)) and the employer of such individual shall be 

the person treated as his employer under section 401(c)(4). 

(j) EFFECT OF DISPOSITION OF STOCK BY PLAN ON NET UNREALIZED

APPRECIATION.— 

(1) IN GENERAL.—For purposes of subsection (e)(4), in the 

case of any transaction to which this subsection applies, the 

determination of net unrealized appreciation shall be made 

without regard to such transaction. 

(2) TRANSACTION TO WHICH SUBSECTION APPLIES.—This subsection shall apply to any transaction in which— 

(A) the plan trustee exchanges the plan’s securities of 

the employer corporation for other such securities, or 

(B) the plan trustee disposes of securities of the employer corporation and uses the proceeds of such disposition to acquire securities of the employer corporation within 90 days (or such longer period as the Secretary may 

prescribe), except that this subparagraph shall not apply 

to any employee with respect to whom a distribution of 

money was made during the period after such disposition 

and before such acquisition. 

(k) TREATMENT OF SIMPLE RETIREMENT ACCOUNTS.—Rules similar 

to the rules of paragraphs (1) and (3) of subsection (h) shall apply 

to contributions and distributions with respect to a simple retirement account under section 408(p). 

(l) DISTRIBUTIONS FROM GOVERNMENTAL PLANS FOR HEALTH AND

LONG-TERM CARE INSURANCE.— 

(1) IN GENERAL.—In the case of an employee who is an eligible retired public safety officer who makes the election described in paragraph (6) with respect to any taxable year of 

such employee, gross income of such employee for such taxable 

year does not include any distribution from an eligible retirement plan maintained by the employer described in paragraph 

(4)(B) to the extent that the aggregate amount of such distributions does not exceed the amount paid by such employee for 

qualified health insurance premiums for such taxable year. 

(2) LIMITATION.—The amount which may be excluded from 

gross income for the taxable year by reason of paragraph (1) 

shall not exceed $3,000. 

(3) DISTRIBUTIONS MUST OTHERWISE BE INCLUDIBLE.— 

(A) IN GENERAL.—An amount shall be treated as a distribution for purposes of paragraph (1) only to the extent 

that such amount would be includible in gross income 

without regard to paragraph (1). 

(B) APPLICATION OF SECTION 72.—Notwithstanding section 72, in determining the extent to which an amount is 

treated as a distribution for purposes of subparagraph (A), 

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255 

ment plan in a taxable year (up to the amount excluded 

under paragraph (1)) shall be treated as includible in gross 

income (without regard to subparagraph (A)) to the extent 

that such amount does not exceed the aggregate amount 

which would have been so includible if all amounts to the 

credit of the eligible public safety officer in all eligible retirement plans maintained by the employer described in 

paragraph (4)(B) were distributed during such taxable year 

and all such plans were treated as 1 contract for purposes 

of determining under section 72 the aggregate amount 

which would have been so includible. Proper adjustments 

shall be made in applying section 72 to other distributions 

in such taxable year and subsequent taxable years. 

(4) DEFINITIONS.—For purposes of this subsection— 

(A) ELIGIBLE RETIREMENT PLAN.—For purposes of paragraph (1), the term ‘‘eligible retirement plan’’ means a governmental plan (within the meaning of section 414(d)) 

which is described in clause (iii), (iv), (v), or (vi) of subsection (c)(8)(B). 

(B) ELIGIBLE RETIRED PUBLIC SAFETY OFFICER.—The 

term ‘‘eligible retired public safety officer’’ means an individual who, by reason of disability or attainment of normal 

retirement age, is separated from service as a public safety 

officer with the employer who maintains the eligible retirement plan from which distributions subject to paragraph 

(1) are made. 

(C) PUBLIC SAFETY OFFICER.—The term ‘‘public safety officer’’ shall have the same meaning given such term by 

section 1204(9)(A) of the Omnibus Crime Control and Safe 

Streets Act of 1968 (42 U.S.C. 3796b(9)(A)), as in effect immediately before the enactment of the National Defense 

Authorization Act for Fiscal Year 2013. 

(D) QUALIFIED HEALTH INSURANCE PREMIUMS.—The term 

‘‘qualified health insurance premiums’’ means premiums 

for coverage for the eligible retired public safety officerø, 

his spouse, and dependents¿ and the spouse and dependents of such officer (as defined in section 152), by an accident or health plan or qualified long-term care insurance 

contract (as defined in section 7702B(b)). 

(5) SPECIAL RULES.—For purposes of this subsection— 

(A) DIRECT PAYMENT TO INSURER REQUIRED.—Paragraph 

(1) shall only apply to a distribution if payment of the premiums is made directly to the provider of the accident or 

health plan or qualified long-term care insurance contract 

by deduction from a distribution from the eligible retirement plan. 

(B) RELATED PLANS TREATED AS 1.—All eligible retirement plans of an employer shall be treated as a single 

plan. 

(6) ELECTION DESCRIBED.— 

(A) IN GENERAL.—For purposes of paragraph (1), an election is described in this paragraph if the election is made 

by an employee after separation from service with respect 

to amounts not distributed from an eligible retirement 

256 

plan to have amounts from such plan distributed in order 

to pay for qualified health insurance premiums. 

(B) SPECIAL RULE.—A plan shall not be treated as violating the requirements of section 401, or as engaging in 

a prohibited transaction for purposes of section 503(b), 

merely because it provides for an election with respect to 

amounts that are otherwise distributable under the plan 

or merely because of a distribution made pursuant to an 

election described in subparagraph (A). 

(7) COORDINATION WITH MEDICAL EXPENSE DEDUCTION.—The 

amounts excluded from gross income under paragraph (1) shall 

not be taken into account under section 213. 

(8) COORDINATION WITH DEDUCTION FOR HEALTH INSURANCE

COSTS OF SELF-EMPLOYED INDIVIDUALS.—The amounts excluded 

from gross income under paragraph (1) shall not be taken into 

account under section 162(l). 

* * * * * * * 

SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS. 

(a) INDIVIDUAL RETIREMENT ACCOUNT.—For purposes of this section, the term ‘‘individual retirement account’’ means a trust created or organized in the United States for the exclusive benefit of 

an individual or his beneficiaries, but only if the written governing 

instrument creating the trust meets the following requirements: 

(1) Except in the case of a rollover contribution described in 

subsection (d)(3) or in section 402(c), 403(a)(4), 403(b)(8), or 

457(e)(16), no contribution will be accepted unless it is in cash, 

and contributions will not be accepted for the taxable year on 

behalf of any individual in excess of the amount in effect for 

such taxable year under section 219(b)(1)(A). 

(2) The trustee is a bank (as defined in subsection (n)) or 

such other person who demonstrates to the satisfaction of the 

Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of 

this section. 

(3) No part of the trust funds will be invested in life insurance contracts. 

(4) The interest of an individual in the balance in his account 

is nonforfeitable. 

(5) The assets of the trust will not be commingled with other 

property except in a common trust fund or common investment 

fund. 

(6) Under regulations prescribed by the Secretary, rules 

similar to the rules of section 401(a)(9) and the incidental 

death benefit requirements of section 401(a) shall apply to the 

distribution of the entire interest of an individual for whose 

benefit the trust is maintained. 

(b) INDIVIDUAL RETIREMENT ANNUITY.—For purposes of this section, the term ‘‘individual retirement annuity’’ means an annuity 

contract, or an endowment contract (as determined under regulations prescribed by the Secretary), issued by an insurance company 

which meets the following requirements: 

(1) The contract is not transferable by the owner. 

(2) Under the contract— 

(A) the premiums are not fixed, 

257 

(B) the annual premium on behalf of any individual will 

not exceed the dollar amount in effect under section 

219(b)(1)(A), and 

(C) any refund of premiums will be applied before the 

close of the calendar year following the year of the refund 

toward the payment of future premiums or the purchase of 

additional benefits. 

(3) Under regulations prescribed by the Secretary, rules 

similar to the rules of section 401(a)(9) and the incidental 

death benefit requirements of section 401(a) shall apply to the 

distribution of the entire interest of the owner. 

(4) The entire interest of the owner is nonforfeitable. 

Such term does not include such an annuity contract for any taxable year of the owner in which it is disqualified on the application 

of subsection (e) or for any subsequent taxable year. For purposes 

of this subsection, no contract shall be treated as an endowment 

contract if it matures later than the taxable year in which the individual in whose name such contract is purchased attains age 701/ 

2; if it is not for the exclusive benefit of the individual in whose 

name it is purchased or his beneficiaries; or if the aggregate annual premiums under all such contracts purchased in the name of 

such individual for any taxable year exceed the dollar amount in 

effect under section 219(b)(1)(A). 

(c) ACCOUNTS ESTABLISHED BY EMPLOYERS AND CERTAIN ASSOCIATIONS OF EMPLOYEES.—A trust created or organized in the United 

States by an employer for the exclusive benefit of his employees or 

their beneficiaries, or by an association of employees (which may 

include employees within the meaning of section 401(c)(1)) for the 

exclusive benefit of its members or their beneficiaries, shall be 

treated as an individual retirement account (described in subsection (a)), but only if the written governing instrument creating 

the trust meets the following requirements: 

(1) The trust satisfies the requirements of paragraphs (1) 

through (6) of subsection (a). 

(2) There is a separate accounting for the interest of each 

employee or member (or spouse of an employee or member). 

The assets of the trust may be held in a common fund for the account of all individuals who have an interest in the trust. 

(d) TAX TREATMENT OF DISTRIBUTIONS.— 

(1) IN GENERAL.—Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee 

or distributee, as the case may be, in the manner provided 

under section 72. 

(2) SPECIAL RULES FOR APPLYING SECTION 72.—For purposes 

of applying section 72 to any amount described in paragraph 

(1)— 

(A) all individual retirement plans shall be treated as 1 

contract, 

(B) all distributions during any taxable year shall be 

treated as 1 distribution, and 

(C) the value of the contract, income on the contract, and 

investment in the contract shall be computed as of the 

close of the calendar year in which the taxable year begins. 

258 

For purposes of subparagraph (C), the value of the contract 

shall be increased by the amount of any distributions during 

the calendar year. 

(3) ROLLOVER CONTRIBUTION.—An amount is described in 

this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B). 

(A) IN GENERAL.—Paragraph (1) does not apply to any 

amount paid or distributed out of an individual retirement 

account or individual retirement annuity to the individual 

for whose benefit the account or annuity is maintained if— 

(i) the entire amount received (including money and 

any other property) is paid into an individual retirement account or individual retirement annuity (other 

than an endowment contract) for the benefit of such 

individual not later than the 60th day after the day on 

which he receives the payment or distribution; or 

(ii) the entire amount received (including money and 

any other property) is paid into an eligible retirement 

plan for the benefit of such individual not later than 

the 60th day after the date on which the payment or 

distribution is received, except that the maximum 

amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to 

this paragraph). 

For purposes of clause (ii), the term ‘‘eligible retirement 

plan’’ means an eligible retirement plan described in 

clause (iii), (iv), (v), or (vi) of section 402(c)(8)(B). 

(B) LIMITATION.—This paragraph does not apply to any 

amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year 

period ending on the day of such receipt such individual 

received any other amount described in that subparagraph 

from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph. 

(C) DENIAL OF ROLLOVER TREATMENT FOR INHERITED ACCOUNTS, ETC..— 

(i) IN GENERAL.—In the case of an inherited individual retirement account or individual retirement annuity— 

(I) this paragraph shall not apply to any 

amount received by an individual from such an account or annuity (and no amount transferred from 

such account or annuity to another individual retirement account or annuity shall be excluded 

from gross income by reason of such transfer), and 

(II) such inherited account or annuity shall not 

be treated as an individual retirement account or 

annuity for purposes of determining whether any 

other amount is a rollover contribution. 

(ii) INHERITED INDIVIDUAL RETIREMENT ACCOUNT OR

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259 

vidual retirement annuity shall be treated as inherited 

if— 

(I) the individual for whose benefit the account 

or annuity is maintained acquired such account by 

reason of the death of another individual, and 

(II) such individual was not the surviving 

spouse of such other individual. 

(D) PARTIAL ROLLOVERS PERMITTED.— 

(i) IN GENERAL.—If any amount paid or distributed 

out of an individual retirement account or individual 

retirement annuity would meet the requirements of 

subparagraph (A) but for the fact that the entire 

amount was not paid into an eligible plan as required 

by clause (i) or (ii) of subparagraph (A), such amount 

shall be treated as meeting the requirements of subparagraph (A) to the extent it is paid into an eligible 

plan referred to in such clause not later than the 60th 

day referred to in such clause. 

(ii) ELIGIBLE PLAN.—For purposes of clause (i), the 

term ‘‘eligible plan’’ means any account, annuity, contract, or plan referred to in subparagraph (A). 

(E) DENIAL OF ROLLOVER TREATMENT FOR REQUIRED DISTRIBUTIONS.—This paragraph shall not apply to any 

amount to the extent such amount is required to be distributed under subsection (a)(6) or (b)(3). 

(F) FROZEN DEPOSITS.—For purposes of this paragraph, 

rules similar to the rules of section 402(c)(7) (relating to 

frozen deposits) shall apply. 

(G) SIMPLE RETIREMENT ACCOUNTS.—In the case of any 

payment or distribution out of a simple retirement account 

(as defined in subsection (p)) to which section 72(t)(6) applies, this paragraph shall not apply unless such payment 

or distribution is paid into another simple retirement account. 

(H) APPLICATION OF SECTION 72.— 

(i) IN GENERAL.—If— 

(I) a distribution is made from an individual retirement plan, and 

(II) a rollover contribution is made to an eligible 

retirement plan described in section 

402(c)(8)(B)(iii), (iv), (v), or (vi) with respect to all 

or part of such distribution, 

then, notwithstanding paragraph (2), the rules of clause 

(ii) shall apply for purposes of applying section 72. 

(ii) APPLICABLE RULES.—In the case of a distribution 

described in clause (i)— 

(I) section 72 shall be applied separately to such 

distribution, 

(II) notwithstanding the pro rata allocation of 

income on, and investment in, the contract to distributions under section 72, the portion of such 

distribution rolled over to an eligible retirement 

plan described in clause (i) shall be treated as 

from income on the contract (to the extent of the 

260 

aggregate income on the contract from all individual retirement plans of the distributee), and 

(III) appropriate adjustments shall be made in 

applying section 72 to other distributions in such 

taxable year and subsequent taxable years. 

(I) WAIVER OF 60-DAY REQUIREMENT.—The Secretary may 

waive the 60-day requirement under subparagraphs (A) 

and (D) where the failure to waive such requirement would 

be against equity or good conscience, including casualty, 

disaster, or other events beyond the reasonable control of 

the individual subject to such requirement. 

(4) CONTRIBUTIONS RETURNED BEFORE DUE DATE OF RETURN.—Paragraph (1) does not apply to the distribution of any 

contribution paid during a taxable year to an individual retirement account or for an individual retirement annuity if— 

(A) such distribution is received on or before the day prescribed by law (including extensions of time) for filing such 

individual’s return for such taxable year, 

(B) no deduction is allowed under section 219 with respect to such contribution, and 

(C) such distribution is accompanied by the amount of 

net income attributable to such contribution. 

In the case of such a distribution, for purposes of section 61, 

any net income described in subparagraph (C) shall be deemed 

to have been earned and receivable in the taxable year in 

which such contribution is made. 

(5) DISTRIBUTIONS OF EXCESS CONTRIBUTIONS AFTER DUE

DATE FOR TAXABLE YEAR AND CERTAIN EXCESS ROLLOVER CONTRIBUTIONS.— 

(A) IN GENERAL.—In the case of any individual, if the aggregate contributions (other than rollover contributions) 

paid for any taxable year to an individual retirement account or for an individual retirement annuity do not exceed the dollar amount in effect under section 219(b)(1)(A), 

paragraph (1) shall not apply to the distribution of any 

such contribution to the extent that such contribution exceeds the amount allowable as a deduction under section 

219 for the taxable year for which the contribution was 

paid— 

(i) if such distribution is received after the date described in paragraph (4), 

(ii) but only to the extent that no deduction has been 

allowed under section 219 with respect to such excess 

contribution. 

If employer contributions on behalf of the individual are 

paid for the taxable year to a simplified employee pension, 

the dollar limitation of the preceding sentence shall be increased by the lesser of the amount of such contributions 

or the dollar limitation in effect under section 415(c)(1)(A) 

for such taxable year. 

(B) EXCESS ROLLOVER CONTRIBUTIONS ATTRIBUTABLE TO

ERRONEOUS INFORMATION.—If— 

(i) the taxpayer reasonably relies on information 

supplied pursuant to subtitle F for determining the 

amount of a rollover contribution, but 

261 

(ii) the information was erroneous, 

subparagraph (A) shall be applied by increasing the dollar 

limit set forth therein by that portion of the excess contribution which was attributable to such information. 

For purposes of this paragraph, the amount allowable as a deduction under section 219 shall be computed without regard to 

section 219(g). 

(6) TRANSFER OF ACCOUNT INCIDENT TO DIVORCE.—The transfer of an individual’s interest in an individual retirement account or an individual retirement annuity to øhis spouse¿ the 

individual’s spouse or former spouse under a divorce or separation instrument described in clause (i) of section 121(d)(3)(C) is 

not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and 

such interest at the time of the transfer is to be treated as an 

individual retirement account of such spouse, and not of such 

individual. Thereafter such account or annuity for purposes of 

this subtitle is to be treated as maintained for the benefit of 

such spouse. 

(7) SPECIAL RULES FOR SIMPLIFIED EMPLOYEE PENSIONS OR

SIMPLE RETIREMENT ACCOUNTS.— 

(A) TRANSFER OR ROLLOVER OF CONTRIBUTIONS PROHIBITED UNTIL DEFERRAL TEST MET.—Notwithstanding any 

other provision of this subsection or section 72(t), paragraph (1) and section 72(t)(1) shall apply to the transfer or 

distribution from a simplified employee pension of any contribution under a salary reduction arrangement described 

in subsection (k)(6) (or any income allocable thereto) before 

a determination as to whether the requirements of subsection (k)(6)(A)(iii) are met with respect to such contribution. 

(B) CERTAIN EXCLUSIONS TREATED AS DEDUCTIONS.—For 

purposes of paragraphs (4) and (5) and section 4973, any 

amount excludable or excluded from gross income under 

section 402(h) or 402(k) shall be treated as an amount allowable or allowed as a deduction under section 219. 

(8) DISTRIBUTIONS FOR CHARITABLE PURPOSES.— 

(A) IN GENERAL.—So much of the aggregate amount of 

qualified charitable distributions with respect to a taxpayer made during any taxable year which does not exceed 

$100,000 shall not be includible in gross income of such 

taxpayer for such taxable year. 

(B) QUALIFIED CHARITABLE DISTRIBUTION.—For purposes 

of this paragraph, the term ‘‘qualified charitable distribution’’ means any distribution from an individual retirement 

plan (other than a plan described in subsection (k) or 

(p))— 

(i) which is made directly by the trustee to an organization described in section 170(b)(1)(A) (other than 

any organization described in section 509(a)(3) or any 

fund or account described in section 4966(d)(2)), and 

(ii) which is made on or after the date that the individual for whose benefit the plan is maintained has attained age 701/2. 

262 

A distribution shall be treated as a qualified charitable 

distribution only to the extent that the distribution would 

be includible in gross income without regard to subparagraph (A). 

(C) CONTRIBUTIONS MUST BE OTHERWISE DEDUCTIBLE.— For purposes of this paragraph, a distribution to an organization described in subparagraph (B)(i) shall be treated 

as a qualified charitable distribution only if a deduction for 

the entire distribution would be allowable under section 

170 (determined without regard to subsection (b) thereof 

and this paragraph). 

(D) APPLICATION OF SECTION 72.—Notwithstanding section 72, in determining the extent to which a distribution 

is a qualified charitable distribution, the entire amount of 

the distribution shall be treated as includible in gross income without regard to subparagraph (A) to the extent 

that such amount does not exceed the aggregate amount 

which would have been so includible if all amounts in all 

individual retirement plans of the individual were distributed during such taxable year and all such plans were 

treated as 1 contract for purposes of determining under 

section 72 the aggregate amount which would have been 

so includible. Proper adjustments shall be made in applying section 72 to other distributions in such taxable year 

and subsequent taxable years. 

(E) DENIAL OF DEDUCTION.—Qualified charitable distributions which are not includible in gross income pursuant to subparagraph (A) shall not be taken into account in 

determining the deduction under section 170. 

(9) DISTRIBUTION FOR HEALTH SAVINGS ACCOUNT FUNDING.— 

(A) IN GENERAL.—In the case of an individual who is an 

eligible individual (as defined in section 223(c)) and who 

elects the application of this paragraph for a taxable year, 

gross income of the individual for the taxable year does not 

include a qualified HSA funding distribution to the extent 

such distribution is otherwise includible in gross income. 

(B) QUALIFIED HSA FUNDING DISTRIBUTION.—For purposes of this paragraph, the term ‘‘qualified HSA funding 

distribution’’ means a distribution from an individual retirement plan (other than a plan described in subsection 

(k) or (p)) of the employee to the extent that such distribution is contributed to the health savings account of the individual in a direct trustee-to-trustee transfer. 

(C) LIMITATIONS.— 

(i) MAXIMUM DOLLAR LIMITATION.—The amount excluded from gross income by subparagraph (A) shall 

not exceed the excess of— 

(I) the annual limitation under section 223(b) 

computed on the basis of the type of coverage 

under the high deductible health plan covering 

the individual at the time of the qualified HSA 

funding distribution, over 

(II) in the case of a distribution described in 

clause (ii)(II), the amount of the earlier qualified 

HSA funding distribution. 

263 

(ii) ONE-TIME TRANSFER.— (I) IN GENERAL.—Except as provided in subclause (II), an individual may make an election 

under subparagraph (A) only for one qualified 

HSA funding distribution during the lifetime of 

the individual. Such an election, once made, shall 

be irrevocable. 

(II) CONVERSION FROM SELF-ONLY TO FAMILY

COVERAGE.—If a qualified HSA funding distribution is made during a month in a taxable year 

during which an individual has self-only coverage 

under a high deductible health plan as of the first 

day of the month, the individual may elect to 

make an additional qualified HSA funding distribution during a subsequent month in such taxable year during which the individual has family 

coverage under a high deductible health plan as of 

the first day of the subsequent month. 

(D) FAILURE TO MAINTAIN HIGH DEDUCTIBLE HEALTH

PLAN COVERAGE.— 

(i) IN GENERAL.—If, at any time during the testing 

period, the individual is not an eligible individual, 

then the aggregate amount of all contributions to the 

health savings account of the individual made under 

subparagraph (A)— 

(I) shall be includible in the gross income of the 

individual for the taxable year in which occurs the 

first month in the testing period for which such 

individual is not an eligible individual, and 

(II) the tax imposed by this chapter for any taxable year on the individual shall be increased by 

10 percent of the amount which is so includible. 

(ii) EXCEPTION FOR DISABILITY OR DEATH.—Subclauses (I) and (II) of clause (i) shall not apply if the 

individual ceased to be an eligible individual by reason 

of the death of the individual or the individual becoming disabled (within the meaning of section 72(m)(7)). 

(iii) TESTING PERIOD.—The term ‘‘testing period’’ 

means the period beginning with the month in which 

the qualified HSA funding distribution is contributed 

to a health savings account and ending on the last day 

of the 12th month following such month. 

(E) APPLICATION OF SECTION 72.—Notwithstanding section 72, in determining the extent to which an amount is 

treated as otherwise includible in gross income for purposes of subparagraph (A), the aggregate amount distributed from an individual retirement plan shall be treated 

as includible in gross income to the extent that such 

amount does not exceed the aggregate amount which 

would have been so includible if all amounts from all individual retirement plans were distributed. Proper adjustments shall be made in applying section 72 to other distributions in such taxable year and subsequent taxable 

years. 

(e) TAX TREATMENT OF ACCOUNTS AND ANNUITIES.— 

264 

(1) EXEMPTION FROM TAX.—Any individual retirement account is exempt from taxation under this subtitle unless such 

account has ceased to be an individual retirement account by 

reason of paragraph (2) or (3). Notwithstanding the preceding 

sentence, any such account is subject to the taxes imposed by 

section 511 (relating to imposition of tax on unrelated business 

income of charitable, etc. organizations). 

(2) LOSS OF EXEMPTION OF ACCOUNT WHERE EMPLOYEE EN- GAGES IN PROHIBITED TRANSACTION.— (A) IN GENERAL.—If, during any taxable year of the individual for whose benefit any individual retirement account 

is established, that individual or his beneficiary engages in 

any transaction prohibited by section 4975 with respect to 

such account, such account ceases to be an individual retirement account as of the first day of such taxable year. 

For purposes of this paragraph— 

(i) the individual for whose benefit any account was 

established is treated as the creator of such account, 

and 

(ii) the separate account for any individual within 

an individual retirement account maintained by an 

employer or association of employees is treated as a 

separate individual retirement account. 

(B) ACCOUNT TREATED AS DISTRIBUTING ALL ITS AS- SETS.—In any case in which any account ceases to be an 

individual retirement account by reason of subparagraph 

(A) as of the first day of any taxable year, paragraph (1) 

of subsection (d) applies as if there were a distribution on 

such first day in an amount equal to the fair market value 

(on such first day) of all assets in the account (on such 

first day). 

(3) EFFECT OF BORROWING ON ANNUITY CONTRACT.—If during 

any taxable year the owner of an individual retirement annuity 

borrows any money under or by use of such contract, the contract ceases to be an individual retirement annuity as of the 

first day of such taxable year. Such owner shall include in 

gross income for such year an amount equal to the fair market 

value of such contract as of such first day. 

(4) EFFECT OF PLEDGING ACCOUNT AS SECURITY.—If, during 

any taxable year of the individual for whose benefit an individual retirement account is established, that individual uses 

the account or any portion thereof as security for a loan, the 

portion so used is treated as distributed to that individual. 

(5) PURCHASE OF ENDOWMENT CONTRACT BY INDIVIDUAL RETIREMENT ACCOUNT.—If the assets of an individual retirement 

account or any part of such assets are used to purchase an endowment contract for the benefit of the individual for whose 

benefit the account is established— 

(A) to the extent that the amount of the assets involved 

in the purchase are not attributable to the purchase of life 

insurance, the purchase is treated as a rollover contribution described in subsection (d)(3), and 

(B) to the extent that the amount of the assets involved 

in the purchase are attributable to the purchase of life, 

health, accident, or other insurance, such amounts are 

265 

treated as distributed to that individual (but the provisions of subsection (f) do not apply). 

(6) COMMINGLING INDIVIDUAL RETIREMENT ACCOUNT

AMOUNTS IN CERTAIN COMMON TRUST FUNDS AND COMMON IN- VESTMENT FUNDS.—Any common trust fund or common investment fund of individual retirement account assets which is exempt from taxation under this subtitle does not cease to be exempt on account of the participation or inclusion of assets of 

a trust exempt from taxation under section 501(a) which is described in section 401(a). 

(g) COMMUNITY PROPERTY LAWS.—This section shall be applied 

without regard to any community property laws. 

(h) CUSTODIAL ACCOUNTS.—For purposes of this section, a custodial account shall be treated as a trust if the assets of such account 

are held by a bank (as defined in subsection (n)) or another person 

who demonstrates, to the satisfaction of the Secretary, that the 

manner in which he will administer the account will be consistent 

with the requirements of this section, and if the custodial account 

would, except for the fact that it is not a trust, constitute an individual retirement account described in subsection (a). For purposes 

of this title, in the case of a custodial account treated as a trust 

by reason of the preceding sentence, the custodian of such account 

shall be treated as the trustee thereof. 

(i) REPORTS.—The trustee of an individual retirement account 

and the issuer of an endowment contract described in subsection 

(b) or an individual retirement annuity shall make such reports regarding such account, contract, or annuity to the Secretary and to 

the individuals for whom the account, contract, or annuity is, or is 

to be, maintained with respect to contributions (and the years to 

which they relate), distributions aggregating $10 or more in any 

calendar year, and such other matters as the Secretary may require. The reports required by this subsection— 

(1) shall be filed at such time and in such manner as the 

Secretary prescribes, and 

(2) shall be furnished to individuals— 

(A) not later than January 31 of the calendar year following the calendar year to which such reports relate, and 

(B) in such manner as the Secretary prescribes. 

In the case of a simple retirement account under subsection (p), 

only one report under this subsection shall be required to be submitted each calendar year to the Secretary (at the time provided 

under paragraph (2)) but, in addition to the report under this subsection, there shall be furnished, within 31 days after each calendar year, to the individual on whose behalf the account is maintained a statement with respect to the account balance as of the 

close of, and the account activity during, such calendar year. 

(j) INCREASE IN MAXIMUM LIMITATIONS FOR SIMPLIFIED EMPLOYEE

PENSIONS.—In the case of any simplified employee pension, subsections (a)(1) and (b)(2) of this section shall be applied by increasing the amounts contained therein by the amount of the limitation 

in effect under section 415(c)(1)(A). 

(k) SIMPLIFIED EMPLOYEE PENSION DEFINED.— (1) IN GENERAL.—For purposes of this title, the term ‘‘simplified employee pension’’ means an individual retirement account or individual retirement annuity— 

266 

(A) with respect to which the requirements of paragraphs (2), (3), (4), and (5) of this subsection are met, and 

(B) if such account or annuity is part of a top-heavy plan 

(as defined in section 416), with respect to which the requirements of section 416(c)(2) are met. 

(2) PARTICIPATION REQUIREMENTS.—This paragraph is satisfied with respect to a simplified employee pension for a year 

only if for such year the employer contributes to the simplified 

employee pension of each employee who— 

(A) has attained age 21, 

(B) has performed service for the employer during at 

least 3 of the immediately preceding 5 years, and (C) received at least $450 in compensation (within the 

meaning of section 414(q)(4)) from the employer for the 

year. 

For purposes of this paragraph, there shall be excluded from 

consideration employees described in subparagraph (A) or (C) 

of section 410(b)(3). For purposes of any arrangement described 

in subsection (k)(6), any employee who is eligible to have employer contributions made on the employee’s behalf under such 

arrangement shall be treated as if such a contribution was 

made. 

(3) CONTRIBUTIONS MAY NOT DISCRIMINATE IN FAVOR OF THE

HIGHLY COMPENSATED, ETC..— (A) IN GENERAL.—The requirements of this paragraph 

are met with respect to a simplified employee pension for 

a year if for such year the contributions made by the employer to simplified employee pensions for his employees 

do not discriminate in favor of any highly compensated 

employee (within the meaning of section 414(q)). 

(B) SPECIAL RULES.—For purposes of subparagraph (A), 

there shall be excluded from consideration employees described in subparagraph (A) or (C) of section 410(b)(3). 

(C) CONTRIBUTIONS MUST BEAR UNIFORM RELATIONSHIP

TO TOTAL COMPENSATION.—For purposes of subparagraph 

(A), and except as provided in subparagraph (D), employer 

contributions to simplified employee pensions (other than 

contributions under an arrangement described in paragraph (6)) shall be considered discriminatory unless contributions thereto bear a uniform relationship to the compensation (not in excess of the first $200,000) of each employee maintaining a simplified employee pension. 

(D) PERMITTED DISPARITY.—For purposes of subparagraph (C), the rules of section 401(l)(2) shall apply to contributions to simplified employee pensions (other than contributions under an arrangement described in paragraph 

(6)). 

(4) WITHDRAWALS MUST BE PERMITTED.—A simplified employee pension meets the requirements of this paragraph only 

if— 

(A) employer contributions thereto are not conditioned 

on the retention in such pension of any portion of the 

amount contributed, and 

(B) there is no prohibition imposed by the employer on 

withdrawals from the simplified employee pension. 

267 

(5) CONTRIBUTIONS MUST BE MADE UNDER WRITTEN ALLOCATION FORMULA.—The requirements of this paragraph are met 

with respect to a simplified employee pension only if employer 

contributions to such pension are determined under a definite 

written allocation formula which specifies— 

(A) the requirements which an employee must satisfy to 

share in an allocation, and 

(B) the manner in which the amount allocated is computed. 

(6) EMPLOYEE MAY ELECT SALARY REDUCTION ARRANGEMENT.— 

(A) ARRANGEMENTS WHICH QUALIFY.— 

(i) IN GENERAL.—A simplified employee pension 

shall not fail to meet the requirements of this subsection for a year merely because, under the terms of 

the pension, an employee may elect to have the employer make payments— 

(I) as elective employer contributions to the simplified employee pension on behalf of the employee, or 

(II) to the employee directly in cash. 

(ii) 50 PERCENT OF ELIGIBLE EMPLOYEES MUST

ELECT.—Clause (i) shall not apply to a simplified employee pension unless an election described in clause 

(i)(I) is made or is in effect with respect to not less 

than 50 percent of the employees of the employer eligible to participate. 

(iii) REQUIREMENTS RELATING TO DEFERRAL PERCENTAGE.—Clause (i) shall not apply to a simplified 

employee pension for any year unless the deferral percentage for such year of each highly compensated employee eligible to participate is not more than the 

product of— 

(I) the average of the deferral percentages for 

such year of all employees (other than highly compensated employees) eligible to participate, multiplied by 

(II) 1.25. 

(iv) LIMITATIONS ON ELECTIVE DEFERRALS.—Clause 

(i) shall not apply to a simplified employee pension unless the requirements of section 401(a)(30) are met. 

(B) EXCEPTION WHERE MORE THAN 25 EMPLOYEES.—This 

paragraph shall not apply with respect to any year in the 

case of a simplified employee pension maintained by an 

employer with more than 25 employees who were eligible 

to participate (or would have been required to be eligible 

to participate if a pension was maintained) at any time 

during the preceding year. 

(C) DISTRIBUTIONS OF EXCESS CONTRIBUTIONS.— 

(i) IN GENERAL.—Rules similar to the rules of section 

401(k)(8) shall apply to any excess contribution under 

this paragraph. Any excess contribution under a simplified employee pension shall be treated as an excess 

contribution for purposes of section 4979. 

268 

(ii) EXCESS CONTRIBUTION.—For purposes of clause 

(i), the term ‘‘excess contribution’’ means, with respect 

to a highly compensated employee, the excess of elective employer contributions under this paragraph over 

the maximum amount of such contributions allowable 

under subparagraph (A)(iii). 

(D) DEFERRAL PERCENTAGE.—For purposes of this paragraph, the deferral percentage for an employee for a year 

shall be the ratio of— 

(i) the amount of elective employer contributions actually paid over to the simplified employee pension on 

behalf of the employee for the year, to 

(ii) the employee’s compensation (not in excess of the first $200,000) for the year. 

(E) EXCEPTION FOR STATE AND LOCAL AND TAX-EXEMPT

PENSIONS.—This paragraph shall not apply to a simplified 

employee pension maintained by— 

(i) a State or local government or political subdivision thereof, or any agency or instrumentality thereof, 

or 

(ii) an organization exempt from tax under this title. 

(F) EXCEPTION WHERE PENSION DOES NOT MEET REQUIRE- MENTS NECESSARY TO INSURE DISTRIBUTION OF EXCESS CON- TRIBUTIONS.—This paragraph shall not apply with respect 

to any year for which the simplified employee pension does 

not meet such requirements as the Secretary may prescribe as are necessary to insure that excess contributions 

are distributed in accordance with subparagraph (C), including— 

(i) reporting requirements, and 

(ii) requirements which, notwithstanding paragraph 

(4), provide that contributions (and any income allocable thereto) may not be withdrawn from a simplified 

employee pension until a determination has been 

made that the requirements of subparagraph (A)(iii) 

have been met with respect to such contributions. 

(G) HIGHLY COMPENSATED EMPLOYEE.—For purposes of 

this paragraph, the term ‘‘highly compensated employee’’ 

has the meaning given such term by section 414(q). 

(H) TERMINATION.—This paragraph shall not apply to 

years beginning after December 31, 1996. The preceding 

sentence shall not apply to a simplified employee pension 

of an employer if the terms of simplified employee pensions of such employer, as in effect on December 31, 1996, 

provide that an employee may make the election described 

in subparagraph (A). 

(7) DEFINITIONS.—For purposes of this subsection and subsection (l)— 

(A) EMPLOYEE, EMPLOYER, OR OWNER-EMPLOYEE.—The 

terms ‘‘employee’’, ‘‘employer’’, and ‘‘owner-employee’’ shall 

have the respective meanings given such terms by section 

401(c). 

(B) COMPENSATION.—Except as provided in paragraph 

(2)(C), the term ‘‘compensation’’ has the meaning given 

such term by section 414(s). 

269 

(C) YEAR.—The term ‘‘year’’ means— 

(i) the calendar year, or 

(ii) if the employer elects, subject to such terms and 

conditions as the Secretary may prescribe, to maintain 

the simplified employee pension on the basis of the 

employer’s taxable year. 

(8) COST-OF-LIVING ADJUSTMENT.—The Secretary shall adjust the $450 amount in paragraph (2)(C) at the same time and in 

the same manner as under section 415(d) and shall adjust the 

$200,000 amount in paragraphs (3)(C) and (6)(D)(ii) at the 

same time, and by the same amount, as any adjustment under 

section 401(a)(17)(B); except that any increase in the $450 

amount which is not a multiple of $50 shall be rounded to the 

next lowest multiple of $50. 

(9) CROSS REFERENCE.—For excise tax on certain excess contributions, see section 4979. 

(l) SIMPLIFIED EMPLOYER REPORTS.— 

(1) IN GENERAL.—An employer who makes a contribution on 

behalf of an employee to a simplified employee pension shall 

provide such simplified reports with respect to such contributions as the Secretary may require by regulations. The reports 

required by this subsection shall be filed at such time and in 

such manner, and information with respect to such contributions shall be furnished to the employee at such time and in 

such manner, as may be required by regulations. 

(2) SIMPLE RETIREMENT ACCOUNTS.— (A) NO EMPLOYER REPORTS.—Except as provided in this 

paragraph, no report shall be required under this section 

by an employer maintaining a qualified salary reduction 

arrangement under subsection (p). 

(B) SUMMARY DESCRIPTION.—The trustee of any simple 

retirement account established pursuant to a qualified salary reduction arrangement under subsection (p) and the 

issuer of an annuity established under such an arrangement shall provide to the employer maintaining the arrangement, each year a description containing the following information: 

(i) The name and address of the employer and the 

trustee or issuer. 

(ii) The requirements for eligibility for participation. 

(iii) The benefits provided with respect to the arrangement. 

(iv) The time and method of making elections with 

respect to the arrangement. 

(v) The procedures for, and effects of, withdrawals 

(including rollovers) from the arrangement. 

(C) EMPLOYEE NOTIFICATION.—The employer shall notify 

each employee immediately before the period for which an 

election described in subsection (p)(5)(C) may be made of 

the employee’s opportunity to make such election. Such notice shall include a copy of the description described in 

subparagraph (B). 

(m) INVESTMENT IN COLLECTIBLES TREATED AS DISTRIBUTIONS.— 

(1) IN GENERAL.—The acquisition by an individual retirement 

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270 

scribed in section 401(a) of any collectible shall be treated (for 

purposes of this section and section 402) as a distribution from 

such account in an amount equal to the cost to such account 

of such collectible. 

(2) COLLECTIBLE DEFINED.—For purposes of this subsection, 

the term ‘‘collectible’’ means— 

(A) any work of art, 

(B) any rug or antique, 

(C) any metal or gem, 

(D) any stamp or coin, 

(E) any alcoholic beverage, or 

(F) any other tangible personal property specified by the 

Secretary for purposes of this subsection. 

(3) EXCEPTION FOR CERTAIN COINS AND BULLION.—For purposes of this subsection, the term ‘‘collectible’’ shall not include— 

(A) any coin which is— 

(i) a gold coin described in paragraph (7), (8), (9), or 

(10) of section 5112(a) of title 31, United States Code, 

(ii) a silver coin described in section 5112(e) of title 

31, United States Code, 

(iii) a platinum coin described in section 5112(k) of 

title 31, United States Code, or 

(iv) a coin issued under the laws of any State, or 

(B) any gold, silver, platinum, or palladium bullion of a 

fineness equal to or exceeding the minimum fineness that 

a contract market (as described in section 5 of the Commodity Exchange Act, 7 U.S.C. 7) requires for metals 

which may be delivered in satisfaction of a regulated futures contract, 

if such bullion is in the physical possession of a trustee described under subsection (a) of this section. 

(n) BANK.—For purposes of subsection (a)(2), the term ‘‘bank’’ 

means— 

(1) any bank (as defined in section 581), 

(2) an insured credit union (within the meaning of paragraph 

(6) or (7) of section 101 of the Federal Credit Union Act), and 

(3) a corporation which, under the laws of the State of its incorporation, is subject to supervision and examination by the 

Commissioner of Banking or other officer of such State in 

charge of the administration of the banking laws of such State. 

(o) DEFINITIONS AND RULES RELATING TO NONDEDUCTIBLE CONTRIBUTIONS TO INDIVIDUAL RETIREMENT PLANS.— 

(1) IN GENERAL.—Subject to the provisions of this subsection, 

designated nondeductible contributions may be made on behalf 

of an individual to an individual retirement plan. 

(2) LIMITS ON AMOUNTS WHICH MAY BE CONTRIBUTED.— 

(A) IN GENERAL.—The amount of the designated nondeductible contributions made on behalf of any individual 

for any taxable year shall not exceed the nondeductible 

limit for such taxable year. 

(B) NONDEDUCTIBLE LIMIT.—For purposes of this paragraph— 

(i) IN GENERAL.—The term ‘‘nondeductible limit’’ 

means the excess of— 

271 

(I) the amount allowable as a deduction under 

section 219 (determined without regard to section 

219(g)), over 

(II) the amount allowable as a deduction under 

section 219 (determined with regard to section 

219(g)). 

(ii) TAXPAYER MAY ELECT TO TREAT DEDUCTIBLE CON- TRIBUTIONS AS NONDEDUCTIBLE.—If a taxpayer elects 

not to deduct an amount which (without regard to this 

clause) is allowable as a deduction under section 219 

for any taxable year, the nondeductible limit for such 

taxable year shall be increased by such amount. 

(C) DESIGNATED NONDEDUCTIBLE CONTRIBUTIONS.— 

(i) IN GENERAL.—For purposes of this paragraph, the 

term ‘‘designated nondeductible contribution’’ means 

any contribution to an individual retirement plan for 

the taxable year which is designated (in such manner 

as the Secretary may prescribe) as a contribution for 

which a deduction is not allowable under section 219. 

(ii) DESIGNATION.—Any designation under clause (i) 

shall be made on the return of tax imposed by chapter 

1 for the taxable year. 

(3) TIME WHEN CONTRIBUTIONS MADE.—In determining for 

which taxable year a designated nondeductible contribution is 

made, the rule of section 219(f)(3) shall apply. 

(4) INDIVIDUAL REQUIRED TO REPORT AMOUNT OF DESIGNATED

NONDEDUCTIBLE CONTRIBUTIONS.— (A) IN GENERAL.—Any individual who— 

(i) makes a designated nondeductible contribution to 

any individual retirement plan for any taxable year, or 

(ii) receives any amount from any individual retirement plan for any taxable year, 

shall include on his return of the tax imposed by chapter 

1 for such taxable year and any succeeding taxable year 

(or on such other form as the Secretary may prescribe for 

any such taxable year) information described in subparagraph (B). 

(B) INFORMATION REQUIRED TO BE SUPPLIED.—The following information is described in this subparagraph: 

(i) The amount of designated nondeductible contributions for the taxable year. 

(ii) The amount of distributions from individual retirement plans for the taxable year. 

(iii) The excess (if any) of— 

(I) the aggregate amount of designated nondeductible contributions for all preceding taxable 

years, over 

(II) the aggregate amount of distributions from 

individual retirement plans which was excludable 

from gross income for such taxable years. 

(iv) The aggregate balance of all individual retirement plans of the individual as of the close of the calendar year in which the taxable year begins. 

(v) Such other information as the Secretary may 

prescribe. 

272 

(C) PENALTY FOR REPORTING CONTRIBUTIONS NOT

MADE.—For penalty where individual reports designated 

nondeductible contributions not made, see section 6693(b). 

(p) SIMPLE RETIREMENT ACCOUNTS.— 

(1) IN GENERAL.—For purposes of this title, the term ‘‘simple 

retirement account’’ means an individual retirement plan (as 

defined in section 7701(a)(37))— 

(A) with respect to which the requirements of paragraphs (3), (4), and (5) are met; and 

(B) except in the case of a rollover contribution described 

in subsection (d)(3)(G) or a rollover contribution otherwise 

described in subsection (d)(3) or in section 402(c), 403(a)(4), 

403(b)(8), or 457(e)(16), which is made after the 2-year period described in section 72(t)(6), with respect to which the 

only contributions allowed are contributions under a qualified salary reduction arrangement. 

(2) QUALIFIED SALARY REDUCTION ARRANGEMENT.— 

(A) IN GENERAL.—For purposes of this subsection, the 

term ‘‘qualified salary reduction arrangement’’ means a 

written arrangement of an eligible employer under 

which— 

(i) an employee eligible to participate in the arrangement may elect to have the employer make payments— 

(I) as elective employer contributions to a simple retirement account on behalf of the employee, 

or 

(II) to the employee directly in cash, 

(ii) the amount which an employee may elect under 

clause (i) for any year is required to be expressed as 

a percentage of compensation and may not exceed a 

total of the applicable dollar amount for any year, 

(iii) the employer is required to make a matching 

contribution to the simple retirement account for any 

year in an amount equal to so much of the amount the 

employee elects under clause (i)(I) as does not exceed 

the applicable percentage of compensation for the 

year, and 

(iv) no contributions may be made other than contributions described in clause (i) or (iii). 

(B) EMPLOYER MAY ELECT 2-PERCENT NONELECTIVE CONTRIBUTION.— 

(i) IN GENERAL.—An employer shall be treated as 

meeting the requirements of subparagraph (A)(iii) for 

any year if, in lieu of the contributions described in 

such clause, the employer elects to make nonelective 

contributions of 2 percent of compensation for each 

employee who is eligible to participate in the arrangement and who has at least $5,000 of compensation 

from the employer for the year. If an employer makes 

an election under this subparagraph for any year, the 

employer shall notify employees of such election within a reasonable period of time before the 60-day period 

for such year under paragraph (5)(C). 

273 

(ii) COMPENSATION LIMITATION.—The compensation 

taken into account under clause (i) for any year shall 

not exceed the limitation in effect for such year under 

section 401(a)(17). 

(C) DEFINITIONS.—For purposes of this subsection— 

(i) ELIGIBLE EMPLOYER.— (I) IN GENERAL.—The term ‘‘eligible employer’’ 

means, with respect to any year, an employer 

which had no more than 100 employees who received at least $5,000 of compensation from the 

employer for the preceding year. 

(II) 2-YEAR GRACE PERIOD.—An eligible employer 

who establishes and maintains a plan under this 

subsection for 1 or more years and who fails to be 

an eligible employer for any subsequent year shall 

be treated as an eligible employer for the 2 years 

following the last year the employer was an eligible employer. If such failure is due to any acquisition, disposition, or similar transaction involving 

an eligible employer, the preceding sentence shall 

not apply. 

(ii) APPLICABLE PERCENTAGE.— (I) IN GENERAL.—The term ‘‘applicable percentage’’ means 3 percent. 

(II) ELECTION OF LOWER PERCENTAGE.—An employer may elect to apply a lower percentage (not 

less than 1 percent) for any year for all employees 

eligible to participate in the plan for such year if 

the employer notifies the employees of such lower 

percentage within a reasonable period of time before the 60-day election period for such year under 

paragraph (5)(C). An employer may not elect a 

lower percentage under this subclause for any 

year if that election would result in the applicable 

percentage being lower than 3 percent in more 

than 2 of the years in the 5-year period ending 

with such year. 

(III) SPECIAL RULE FOR YEARS ARRANGEMENT

NOT IN EFFECT.—If any year in the 5-year period 

described in subclause (II) is a year prior to the 

first year for which any qualified salary reduction 

arrangement is in effect with respect to the employer (or any predecessor), the employer shall be 

treated as if the level of the employer matching 

contribution was at 3 percent of compensation for 

such prior year. 

(D) ARRANGEMENT MAY BE ONLY PLAN OF EMPLOYER.— 

(i) IN GENERAL.—An arrangement shall not be treated as a qualified salary reduction arrangement for any 

year if the employer (or any predecessor employer) 

maintained a qualified plan with respect to which contributions were made, or benefits were accrued, for 

service in any year in the period beginning with the 

year such arrangement became effective and ending 

with the year for which the determination is being 

274 

made. If only individuals other than employees described in subparagraph (A) of section 410(b)(3) are eligible to participate in such arrangement, then the 

preceding sentence shall be applied without regard to 

any qualified plan in which only employees so described are eligible to participate. 

(ii) QUALIFIED PLAN.—For purposes of this subparagraph, the term ‘‘qualified plan’’ means a plan, contract, pension, or trust described in subparagraph (A) 

or (B) of section 219(g)(5). 

(E) APPLICABLE DOLLAR AMOUNT; COST-OF-LIVING ADJUSTMENT.— 

(i) IN GENERAL.—For purposes of subparagraph 

(A)(ii), the applicable amount is $10,000. 

(ii) COST-OF-LIVING ADJUSTMENT.—In the case of a 

year beginning after December 31, 2005, the Secretary 

shall adjust the $10,000 amount under clause (i) at 

the same time and in the same manner as under section 415(d), except that the base period taken into account shall be the calendar quarter beginning July 1, 

2004, and any increase under this subparagraph 

which is not a multiple of $500 shall be rounded to the 

next lower multiple of $500. 

(3) VESTING REQUIREMENTS.—The requirements of this paragraph are met with respect to a simple retirement account if 

the employee’s rights to any contribution to the simple retirement account are nonforfeitable. For purposes of this paragraph, rules similar to the rules of subsection (k)(4) shall 

apply. 

(4) PARTICIPATION REQUIREMENTS.— 

(A) IN GENERAL.—The requirements of this paragraph 

are met with respect to any simple retirement account for 

a year only if, under the qualified salary reduction arrangement, all employees of the employer who— 

(i) received at least $5,000 in compensation from the 

employer during any 2 preceding years, and 

(ii) are reasonably expected to receive at least 

$5,000 in compensation during the year, 

are eligible to make the election under paragraph (2)(A)(i) 

or receive the nonelective contribution described in paragraph (2)(B). 

(B) EXCLUDABLE EMPLOYEES.—An employer may elect to 

exclude from the requirement under subparagraph (A) employees described in section 410(b)(3). 

(5) ADMINISTRATIVE REQUIREMENTS.—The requirements of 

this paragraph are met with respect to any simple retirement 

account if, under the qualified salary reduction arrangement— 

(A) an employer must— 

(i) make the elective employer contributions under 

paragraph (2)(A)(i) not later than the close of the 30- 

day period following the last day of the month with respect to which the contributions are to be made, and 

(ii) make the matching contributions under paragraph (2)(A)(iii) or the nonelective contributions under 

275 

paragraph (2)(B) not later than the date described in 

section 404(m)(2)(B), 

(B) an employee may elect to terminate participation in 

such arrangement at any time during the year, except that 

if an employee so terminates, the arrangement may provide that the employee may not elect to resume participation until the beginning of the next year, and 

(C) each employee eligible to participate may elect, during the 60-day period before the beginning of any year 

(and the 60-day period before the first day such employee 

is eligible to participate), to participate in the arrangement, or to modify the amounts subject to such arrangement, for such year. 

(6) DEFINITIONS.—For purposes of this subsection— 

(A) COMPENSATION.— 

(i) IN GENERAL.—The term ‘‘compensation’’ means 

amounts described in paragraphs (3) and (8) of section 

6051(a). For purposes of the preceding sentence, 

amounts described in section 6051(a)(3) shall be determined without regard to section 3401(a)(3). 

(ii) SELF-EMPLOYED.—In the case of an employee described in subparagraph (B), the term ‘‘compensation’’ 

means net earnings from self-employment determined 

under section 1402(a) without regard to any contribution under this subsection. The preceding sentence 

shall be applied as if the term ‘‘trade or business’’ for 

purposes of section 1402 included service described in 

section 1402(c)(6). 

(B) EMPLOYEE.—The term ‘‘employee’’ includes an employee as defined in section 401(c)(1). 

(C) YEAR.—The term ‘‘year’’ means the calendar year. 

(7) USE OF DESIGNATED FINANCIAL INSTITUTION.—A plan 

shall not be treated as failing to satisfy the requirements of 

this subsection or any other provision of this title merely because the employer makes all contributions to the individual 

retirement accounts or annuities of a designated trustee or 

issuer. The preceding sentence shall not apply unless each plan 

participant is notified in writing (either separately or as part 

of the notice under subsection (l)(2)(C)) that the participant’s 

balance may be transferred without cost or penalty to another 

individual account or annuity in accordance with subsection 

(d)(3)(G). 

(8) COORDINATION WITH MAXIMUM LIMITATION UNDER SUBSECTION (A).—In the case of any simple retirement account, 

subsections (a)(1) and (b)(2) shall be applied by substituting 

‘‘the sum of the dollar amount in effect under paragraph 

(2)(A)(ii) of this subsection and the employer contribution required under subparagraph (A)(iii) or (B)(i) of paragraph (2) of 

this subsection, whichever is applicable’’ for ‘‘the dollar amount 

in effect under section 219(b)(1)(A)’’. 

(9) MATCHING CONTRIBUTIONS ON BEHALF OF SELF-EMPLOYED

INDIVIDUALS NOT TREATED AS ELECTIVE EMPLOYER CONTRIBU- TIONS.—Any matching contribution described in paragraph 

(2)(A)(iii) which is made on behalf of a self-employed individual 

(as defined in section 401(c)) shall not be treated as an elective 

276 

employer contribution to a simple retirement account for purposes of this title. 

(10) SPECIAL RULES FOR ACQUISITIONS, DISPOSITIONS, AND

SIMILAR TRANSACTIONS.— (A) IN GENERAL.—An employer which fails to meet any 

applicable requirement by reason of an acquisition, disposition, or similar transaction shall not be treated as failing to meet such requirement during the transition period 

if— 

(i) the employer satisfies requirements similar to the 

requirements of section 410(b)(6)(C)(i)(II); and 

(ii) the qualified salary reduction arrangement 

maintained by the employer would satisfy the requirements of this subsection after the transaction if the 

employer which maintained the arrangement before 

the transaction had remained a separate employer. 

(B) APPLICABLE REQUIREMENT.—For purposes of this 

paragraph, the term ‘‘applicable requirement’’ means— 

(i) the requirement under paragraph (2)(A)(i) that 

an employer be an eligible employer; 

(ii) the requirement under paragraph (2)(D) that an 

arrangement be the only plan of an employer; and 

(iii) the participation requirements under paragraph 

(4). 

(C) TRANSITION PERIOD.—For purposes of this paragraph, the term ‘‘transition period’’ means the period beginning on the date of any transaction described in subparagraph (A) and ending on the last day of the second 

calendar year following the calendar year in which such 

transaction occurs. 

(q) DEEMED IRAS UNDER QUALIFIED EMPLOYER PLANS.— (1) GENERAL RULE.—If— 

(A) a qualified employer plan elects to allow employees 

to make voluntary employee contributions to a separate account or annuity established under the plan, and 

(B) under the terms of the qualified employer plan, such 

account or annuity meets the applicable requirements of 

this section or section 408A for an individual retirement 

account or annuity, 

then such account or annuity shall be treated for purposes of 

this title in the same manner as an individual retirement plan 

and not as a qualified employer plan (and contributions to such 

account or annuity as contributions to an individual retirement 

plan and not to the qualified employer plan). For purposes of 

subparagraph (B), the requirements of subsection (a)(5) shall 

not apply. 

(2) SPECIAL RULES FOR QUALIFIED EMPLOYER PLANS.—For 

purposes of this title, a qualified employer plan shall not fail 

to meet any requirement of this title solely by reason of establishing and maintaining a program described in paragraph (1). 

(3) DEFINITIONS.—For purposes of this subsection— 

(A) QUALIFIED EMPLOYER PLAN.—The term ‘‘qualified 

employer plan’’ has the meaning given such term by section 72(p)(4)(A)(i); except that such term shall also include 

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277 

tion 457(b)) of an eligible employer described in section 

457(e)(1)(A). 

(B) VOLUNTARY EMPLOYEE CONTRIBUTION.—The term 

‘‘voluntary employee contribution’’ means any contribution 

(other than a mandatory contribution within the meaning 

of section 411(c)(2)(C))— 

(i) which is made by an individual as an employee 

under a qualified employer plan which allows employees to elect to make contributions described in paragraph (1), and 

(ii) with respect to which the individual has designated the contribution as a contribution to which 

this subsection applies. 

(r) CROSS REFERENCES.— 

(1) For tax on excess contributions in individual retirement accounts or annuities, see section 4973. 

(2) For tax on certain accumulations in individual retirement accounts or annuities, see section 4974. 

* * * * * * * 

Subpart B—SPECIAL RULES 

* * * * * * * 

SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTION UNDER 

QUALIFIED PLANS. 

(a) GENERAL RULE.— (1) TRUSTS.—A trust which is a part of a pension, 

profitsharing, or stock bonus plan shall not constitute a qualified trust under section 401(a) if— 

(A) in the case of a defined benefit plan, the plan provides for the payment of benefits with respect to a participant which exceed the limitation of subsection (b), or 

(B) in the case of a defined contribution plan, contributions and other additions under the plan with respect to 

any participant for any taxable year exceed the limitation 

of subsection (c). 

(2) SECTION APPLIES TO CERTAIN ANNUITIES AND ACCOUNTS.— In the case of— 

(A) an employee annuity plan described in section 

403(a), 

(B) an annuity contract described in section 403(b), or 

(C) a simplified employee pension described in section 

408(k), 

such a contract, plan, or pension shall not be considered to be 

described in section 403(a), 403(b), or 408(k), as the case may 

be, unless it satisfies the requirements of subparagraph (A) or 

subparagraph (B) of paragraph (1), whichever is appropriate, 

and has not been disqualified under subsection (g). In the case 

of an annuity contract described in section 403(b), the preceding sentence shall apply only to the portion of the annuity 

contract which exceeds the limitation of subsection (b) or the 

limitation of subsection (c), whichever is appropriate. 

(b) LIMITATION FOR DEFINED BENEFIT PLANS.— 

(1) IN GENERAL.—Benefits with respect to a participant exceed the limitation of this subsection if, when expressed as an 

278 

annual benefit (within the meaning of paragraph (2)), such annual benefit is greater than the lesser of— (A) $160,000, or 

(B) 100 percent of the participant’s average compensation for his high 3 years. 

(2) ANNUAL BENEFIT.— (A) IN GENERAL.—For purposes of paragraph (1), the 

term ‘‘annual benefit’’ means a benefit payable annually in 

the form of a straight life annuity (with no ancillary benefits) under a plan to which employees do not contribute 

and under which no rollover contributions (as defined in 

sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3), and 

457(e)(16)) are made. 

(B) ADJUSTMENT FOR CERTAIN OTHER FORMS OF BENEFIT.—If the benefit under the plan is payable in any form 

other than the form described in subparagraph (A), or if 

the employees contribute to the plan or make rollover contributions (as defined in sections 402(c), 403(a)(4), 

403(b)(8), 408(d)(3), and 457(e)(16)), the determinations as 

to whether the limitation described in paragraph (1) has 

been satisfied shall be made, in accordance with regulations prescribed by the Secretary by adjusting such benefit 

so that it is equivalent to the benefit described in subparagraph (A). For purposes of this subparagraph, any ancillary benefit which is not directly related to retirement income benefits shall not be taken into account; and that 

portion of any joint and survivor annuity which constitutes 

a qualified joint and survivor annuity (as defined in section 417) shall not be taken into account. 

(C) ADJUSTMENT TO $160,000 LIMIT WHERE BENEFIT BE- GINS BEFORE AGE 62.—If the retirement income benefit 

under the plan begins before age 62, the determination as 

to whether the $160,000 limitation set forth in paragraph 

(1)(A) has been satisfied shall be made, in accordance with 

regulations prescribed by the Secretary, by reducing the 

limitation of paragraph (1)(A) so that such limitation (as 

so reduced) equals an annual benefit (beginning when such 

retirement income benefit begins) which is equivalent to a 

$160,000 annual benefit beginning at age 62. 

(D) ADJUSTMENT TO $160,000 LIMIT WHERE BENEFIT BEGINS AFTER AGE 65.—If the retirement income benefit 

under the plan begins after age 65, the determination as 

to whether the $160,000 limitation set forth in paragraph 

(1)(A) has been satisfied shall be made, in accordance with 

regulations prescribed by the Secretary, by increasing the 

limitation of paragraph (1)(A) so that such limitation (as 

so increased) equals an annual benefit (beginning when 

such retirement income benefit begins) which is equivalent 

to a $160,000 annual benefit beginning at age 65. 

(E) LIMITATION ON CERTAIN ASSUMPTIONS.—(i) For purposes of adjusting any limitation under subparagraph (C) 

and, except as provided in clause (ii), for purposes of adjusting any benefit under subparagraph (B), the interest 

rate assumption shall not be less than the greater of 5 percent or the rate specified in the plan. 

279 

(ii) For purposes of adjusting any benefit under subparagraph (B) for any form of benefit subject to section 

417(e)(3), the interest rate assumption shall not be less 

than the greatest of— 

(I) 5.5 percent, 

(II) the rate that provides a benefit of not more than 

105 percent of the benefit that would be provided if 

the applicable interest rate (as defined in section 

417(e)(3)) were the interest rate assumption, or 

(III) the rate specified under the plan. 

(iii) For purposes of adjusting any limitation under subparagraph (D), the interest rate assumption shall not be 

greater than the lesser of 5 percent or the rate specified 

in the plan. 

(iv) For purposes of this subsection, no adjustments 

under subsection (d)(1) shall be taken into account before 

the year for which such adjustment first takes effect. 

(v) For purposes of adjusting any benefit or limitation 

under subparagraph (B), (C), or (D), the mortality table 

used shall be the applicable mortality table (within the 

meaning of section 417(e)(3)(B)). 

(vi) In the case of a plan maintained by an eligible employer (as defined in section 408(p)(2)(C)(i)), clause (ii) 

shall be applied without regard to subclause (II) thereof. 

(G) SPECIAL LIMITATION FOR QUALIFIED POLICE OR FIREFIGHTERS.—In the case of a qualified participant, subparagraph (C) of this paragraph shall not apply. 

(H) QUALIFIED PARTICIPANT DEFINED.—For purposes of 

subparagraph (G), the term ‘‘qualified participant’’ means 

a participant— 

(i) in a defined benefit plan which is maintained by 

a State, Indian tribal government (as defined in section 7701(a)(40)), or any political subdivision thereof, 

(ii) with respect to whom the period of service taken 

into account in determining the amount of the benefit 

under such defined benefit plan includes at least 15 

years of service of the participant— 

(I) as a full-time employee of any police department or fire department which is organized and 

operated by the State, Indian tribal government 

(as so defined), or any political subdivision maintaining such defined benefit plan to provide police 

protection, firefighting services, or emergency 

medical services for any area within the jurisdiction of such State, Indian tribal government (as so 

defined), or any political subdivision, or 

(II) as a member of the Armed Forces of the 

United States. 

(I) EXEMPTION FOR SURVIVOR AND DISABILITY BENEFITS

PROVIDED UNDER GOVERNMENTAL PLANS.—Subparagraph 

(C) of this paragraph and paragraph (5) shall not apply 

to— 

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lar allowance as the result of the recipient becoming 

disabled by reason of personal injuries or sickness, or 

(ii) amounts received from a governmental plan by 

the beneficiaries, survivors, or the estate of an employee as the result of the death of the employee. 

(3) AVERAGE COMPENSATION FOR HIGH 3 YEARS.—For purposes of paragraph (1), a participant’s high 3 years shall be the 

period of consecutive calendar years (not more than 3) during 

which the participant had the greatest aggregate compensation 

from the employer. In the case of an employee within the 

meaning of section 401(c)(1), the preceding sentence shall be 

applied by substituting for ‘‘compensation from the employer’’ 

the following: ‘‘the participant’s earned income (within the 

meaning of section 401(c)(2) but determined without regard to 

any exclusion under section 911)’’. 

(4) TOTAL ANNUAL BENEFITS NOT IN EXCESS OF $10,000.—Notwithstanding the preceding provisions of this subsection, the 

benefits payable with respect to a participant under any defined benefit plan shall be deemed not to exceed the limitation 

of this subsection if— 

(A) the retirement benefits payable with respect to such 

participant under such plan and under all other defined 

benefit plans of the employer do not exceed $10,000 for the 

plan year, or for any prior plan year, and 

(B) the employer has not at any time maintained a defined contribution plan in which the participant participated. 

(5) REDUCTION FOR PARTICIPATION OR SERVICE OF LESS THAN

10 YEARS.— 

(A) DOLLAR LIMITATION.—In the case of an employee who 

has less than 10 years of participation in a defined benefit 

plan, the limitation referred to in paragraph (1)(A) shall be 

the limitation determined under such paragraph (without 

regard to this paragraph) multiplied by a fraction— 

(i) the numerator of which is the number of years 

(or part thereof) of participation in the defined benefit 

plan of the employer, and 

(ii) the denominator of which is 10. 

(B) COMPENSATION AND BENEFITS LIMITATIONS.—The 

provisions of subparagraph (A) shall apply to the limitations under paragraphs (1)(B) and (4), except that such 

subparagraph shall be applied with respect to years of 

service with an employer rather than years of participation 

in a plan. 

(C) LIMITATION ON REDUCTION.—In no event shall subparagraph (A) or (B) reduce the limitations referred to in 

paragraphs (1) and (4) to an amount less than ? of such 

limitation (determined without regard to this paragraph). 

(D) APPLICATION TO CHANGES IN BENEFIT STRUCTURE.— 

To the extent provided in regulations, subparagraph (A) 

shall be applied separately with respect to each change in 

the benefit structure of a plan. 

(6) COMPUTATION OF BENEFITS AND CONTRIBUTIONS.—The 

computation of— 

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(A) benefits under a defined contribution plan, for purposes of section 401(a)(4), 

(B) contributions made on behalf of a participant in a defined benefit plan, for purposes of section 401(a)(4), and 

(C) contributions and benefits provided for a participant 

in a plan described in section 414(k), for purposes of this 

section 

shall not be made on a basis inconsistent with regulations prescribed by the Secretary. 

(7) BENEFITS UNDER CERTAIN COLLECTIVELY BARGAINED

PLANS.—For a year, the limitation referred to in paragraph 

(1)(B) shall not apply to benefits with respect to a participant 

under a defined benefit plan (other than a multiemployer 

plan)— 

(A) which is maintained for such year pursuant to a collective bargaining agreement between employee representatives and one or more employers, 

(B) which, at all times during such year, has at least 100 

participants, 

(C) under which benefits are determined solely by reference to length of service, the particular years during 

which service was rendered, age at retirement, and date of 

retirement, 

(D) which provides that an employee who has at least 4 

years of service has a nonforfeitable right to 100 percent 

of his accrued benefit derived from employer contributions, 

and 

(E) which requires, as a condition of participation in the 

plan, that an employee complete a period of not more than 

60 consecutive days of service with the employer or employers maintaining the plan. 

This paragraph shall not apply to a participant whose compensation for any 3 years during the 10-year period immediately preceding the year in which he separates from service 

exceeded the average compensation for such 3 years of all participants in such plan. This paragraph shall not apply to a participant for any period for which he is a participant under another plan to which this section applies which is maintained by 

an employer maintaining this plan. For any year for which the 

paragraph applies to benefits with respect to a participant, 

paragraph (1)(A) and subsection (d)(1)(A) shall be applied with 

respect to such participant by substituting one-half the amount 

otherwise applicable for such year under paragraph (1)(A) for 

‘‘$160,000’’. 

(8) SOCIAL SECURITY RETIREMENT AGE DEFINED.—For purposes of this subsection, the term ‘‘social security retirement 

age’’ means the age used as the retirement age under section 

216(l) of the Social Security Act, except that such section shall 

be applied— 

(A) without regard to the age increase factor, and 

(B) as if the early retirement age under section 216(l)(2) 

of such Act were 62. 

(9) SPECIAL RULE FOR COMMERCIAL AIRLINE PILOTS.— 

(A) IN GENERAL.—Except as provided in subparagraph 

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line pilot, if, as of the time of the participant’s retirement, 

regulations prescribed by the Federal Aviation Administration require an individual to separate from service as a 

commercial airline pilot after attaining any age occurring 

on or after age 60 and before age 62, paragraph (2)(C) 

shall be applied by substituting such age for age 62. 

(B) INDIVIDUALS WHO SEPARATE FROM SERVICE BEFORE

AGE 60.—If a participant described in subparagraph (A) 

separates from service before age 60, the rules of paragraph (2)(C) shall apply. 

(10) SPECIAL RULE FOR STATE, INDIAN TRIBAL, AND LOCAL

GOVERNMENT PLANS.— 

(A) LIMITATION TO EQUAL ACCRUED BENEFIT.—In the 

case of a plan maintained for its employees by any State 

or political subdivision thereof, or by any agency or instrumentality of the foregoing, or a governmental plan described in the last sentence of section 414(d) (relating to 

plans of Indian tribal governments), the limitation with respect to a qualified participant under this subsection shall 

not be less than the accrued benefit of the participant 

under the plan (determined without regard to any amendment of the plan made after October 14, 1987). 

(B) QUALIFIED PARTICIPANT.—For purposes of this paragraph, the term ‘‘qualified participant’’ means a participant who first became a participant in the plan maintained by the employer before January 1, 1990. 

(C) ELECTION.— (i) IN GENERAL.—This paragraph shall not apply to 

any plan unless each employer maintaining the plan 

elects before the close of the 1st plan year beginning 

after December 31, 1989, to have this subsection 

(other than paragraph (2)(G)). 

(ii) REVOCATION OF ELECTION.—An election under 

clause (i) may be revoked not later than the last day 

of the third plan year beginning after the date of the 

enactment of this clause. The revocation shall apply to 

all plan years to which the election applied and to all 

subsequent plan years. Any amount paid by a plan in 

a taxable year ending after the revocation shall be includible in income in such taxable year under the 

rules of this chapter in effect for such taxable year, except that, for purposes of applying the limitations imposed by this section, any portion of such amount 

which is attributable to any taxable year during which 

the election was in effect shall be treated as received 

in such taxable year. 

(11) SPECIAL LIMITATION RULE FOR GOVERNMENTAL AND MUL- TIEMPLOYER PLANS.—In the case of a governmental plan (as defined in section 414(d)) or a multiemployer plan (as defined in 

section 414(f)), subparagraph (B) of paragraph (1) shall not 

apply. Subparagraph (B) of paragraph (1) shall not apply to a 

plan maintained by an organization described in section 

3121(w)(3)(A) except with respect to highly compensated benefits. For purposes of this paragraph, the term ‘‘highly compensated benefits’’ means any benefits accrued for an employee 

283 

in any year on or after the first year in which such employee 

is a highly compensated employee (as defined in section 414(q)) 

of the organization described in section 3121(w)(3)(A). For purposes of applying paragraph (1)(B) to highly compensated benefits, all benefits of the employee otherwise taken into account 

(without regard to this paragraph) shall be taken into account. 

(c) LIMITATION FOR DEFINED CONTRIBUTION PLANS.— (1) IN GENERAL.—Contributions and other additions with respect to a participant exceed the limitation of this subsection 

if, when expressed as an annual addition (within the meaning 

of paragraph (2)) to the participant’s account, such annual addition is greater than the lesser of— (A) $40,000, or 

(B) 100 percent of the participant’s compensation. 

(2) ANNUAL ADDITION.—For purposes of paragraph (1), the 

term ‘‘annual addition’’ means the sum of any year of— 

(A) employer contributions, 

(B) the employee contributions, and 

(C) forfeitures. 

For the purposes of this paragraph, employee contributions 

under subparagraph (B) are determined without regard to any 

rollover contributions (as defined in sections 402(c), 403(a)(4), 

403(b)(8), 408(d)(3), and 457(e)(16)) without regard to employee 

contributions to a simplified employee pension which are excludable from gross income under section 408(k)(6). Subparagraph (B) of paragraph (1) shall not apply to any contribution 

for medical benefits (within the meaning of section 419A(f)(2)) 

after separation from service which is treated as an annual addition. 

(3) PARTICIPANT’S COMPENSATION.—For purposes of paragraph (1)— 

(A) IN GENERAL.—The term ‘‘participant’s compensation’’ 

means the compensation of the participant from the employer for the year. 

(B) SPECIAL RULE FOR SELF-EMPLOYED INDIVIDUALS.—In 

the case of an employee within the meaning of section 

401(c)(1), subparagraph (A) shall be applied by substituting ‘‘the participant’s earned income (within the 

meaning of section 401(c)(2) but determined without regard to any exclusion under section 911)’’ for ‘‘compensation of the participant from the employer’’. 

(C) SPECIAL RULES FOR PERMANENT AND TOTAL DISABILITY.—In the case of a participant in any defined contribution plan— 

(i) who is permanently and totally disabled (as defined in section 22(e)(3)), 

(ii) who is not a highly compensated employee (within the meaning of section 414(q)), and 

(iii) with respect to whom the employer elects, at 

such time and in such manner as the Secretary may 

prescribe, to have this subparagraph apply, 

the term ‘‘participant’s compensation’’ means the compensation the participant would have received for the year 

if the participant was paid at the rate of compensation 

paid immediately before becoming permanently and totally 

284 

disabled. This subparagraph shall apply only if contributions made with respect to amounts treated as compensation under this subparagraph are nonforfeitable when 

made. If a defined contribution plan provides for the continuation of contributions on behalf of all participants described in clause (i) for a fixed or determinable period, this 

subparagraph shall be applied without regard to clauses 

(ii) and (iii). 

(D) CERTAIN DEFERRALS INCLUDED.—The term ‘‘participant’s compensation’’ shall include— 

(i) any elective deferral (as defined in section 

402(g)(3)), and 

(ii) any amount which is contributed or deferred by 

the employer at the election of the employee and 

which is not includible in the gross income of the employee by reason of section 125, 132(f)(4), or 457. 

(E) ANNUITY CONTRACTS.—In the case of an annuity contract described in section 403(b), the term ‘‘participant’s 

compensation’’ means the participant’s includible compensation determined under section 403(b)(3). 

(6) SPECIAL RULE FOR EMPLOYEE STOCK OWNERSHIP PLANS.— If no more than one-third of the employer contributions to an 

employee stock ownership plan (as described in section 

4975(e)(7)) for a year which are deductible under paragraph (9) 

of section 404(a) are allocated to highly compensated employees (within the meaning of section 414(q)), the limitations imposed by this section shall not apply to— 

(A) forfeitures of employer securities (within the meaning of section 409) under such an employee stock ownership plan if such securities were acquired with the proceeds of a loan (as described in section 404(a)(9)(A)), or 

(B) employer contributions to such an employee stock 

ownership plan which are deductible under section 

404(a)(9)(B) and charged against the participant’s account. 

The amount of any qualified gratuitous transfer (as defined in 

section 664(g)(1)) allocated to a participant for any limitation 

year shall not exceed the limitations imposed by this section, 

but such amount shall not be taken into account in determining whether any other amount exceeds the limitations imposed by this section. 

(7) SPECIAL RULES RELATING TO CHURCH PLANS.— 

(A) ALTERNATIVE CONTRIBUTION LIMITATION.— 

(i) IN GENERAL.—Notwithstanding any other provision of this subsection, at the election of a participant 

who is an employee of a church or a convention or association of churches, including an organization described in section 414(e)(3)(B)(ii), contributions and 

other additions for an annuity contract or retirement 

income account described in section 403(b) with respect to such participant, when expressed as an annual addition to such participant’s account, shall be 

treated as not exceeding the limitation of paragraph 

(1) if such annual addition is not in excess of $10,000. 

(ii) $40,000 AGGREGATE LIMITATION.—The total 

amount of additions with respect to any participant 

285 

which may be taken into account for purposes of this 

subparagraph for all years may not exceed $40,000. 

(B) NUMBER OF YEARS OF SERVICE FOR DULY ORDAINED, 

COMMISSIONED, OR LICENSED MINISTERS OR LAY EMPLOYEES.—For purposes of this paragraph— 

(i) all years of service by— 

(I) a duly ordained, commissioned, or licensed 

minister of a church, or 

(II) a lay person, 

as an employee of a church, a convention or association of 

churches, including an organization described in section 

414(e)(3)(B)(ii), shall be considered as years of service for 

1 employer, and 

(ii) all amounts contributed for annuity contracts by 

each such church (or convention or association of 

churches) or such organization during such years for 

such minister or lay person shall be considered to have 

been contributed by 1 employer. 

(C) FOREIGN MISSIONARIES.—In the case of any individual described in subparagraph (B) performing services 

outside the United States, contributions and other additions for an annuity contract or retirement income account 

described in section 403(b) with respect to such employee, 

when expressed as an annual addition to such employee’s 

account, shall not be treated as exceeding the limitation of 

paragraph (1) if such annual addition is not in excess of 

$3,000. This subparagraph shall not apply with respect to 

any taxable year to any individual whose adjusted gross 

income for such taxable year (determined separately and 

without regard to community property laws) exceeds 

$17,000. 

(D) ANNUAL ADDITION.—For purposes of this paragraph, 

the term ‘‘annual addition’’ has the meaning given such 

term by paragraph (2). 

(E) CHURCH, CONVENTION OR ASSOCIATION OF CHURCHES.—For purposes of this paragraph, the terms ‘‘church’’ 

and ‘‘convention or association of churches’’ have the same 

meaning as when used in section 414(e). 

(d) COST-OF-LIVING ADJUSTMENTS.— 

(1) IN GENERAL.—The Secretary shall adjust annually— 

(A) the $160,000 amount in subsection (b)(1)(A), 

(B) in the case of a participant who is separated from 

service, the amount taken into account under subsection 

(b)(1)(B), and 

(C) the $40,000 amount in subsection (c)(1)(A), 

for increases in the cost-of-living in accordance with regulations prescribed by the Secretary. 

(2) METHOD.—The regulations prescribed under paragraph 

(1) shall provide for— 

(A) an adjustment with respect to any calendar year 

based on the increase in the applicable index for the calendar quarter ending September 30 of the preceding calendar year over such index for the base period, and 

286 

(B) adjustment procedures which are similar to the procedures used to adjust benefit amounts under section 

215(i)(2)(A) of the Social Security Act. 

(3) BASE PERIOD.—For purposes of paragraph (2)— (A) $160,000 AMOUNT.—The base period taken into account for purposes of paragraph (1)(A) is the calendar 

quarter beginning July 1, 2001. 

(B) SEPARATIONS AFTER DECEMBER 31, 1994.—The base 

period taken into account for purposes of paragraph (1)(B) 

with respect to individuals separating from service with 

the employer after December 31, 1994, is the calendar 

quarter beginning July 1 of the calendar year preceding 

the calendar year in which such separation occurs. 

(C) SEPARATIONS BEFORE JANUARY 1, 1995.—The base period taken into account for purposes of paragraph (1)(B) 

with respect to individuals separating from service with 

the employer before January 1, 1995, is the calendar quarter beginning October 1 of the calendar year preceding the 

calendar year in which such separation occurs. 

(D) $40,000 AMOUNT.—The base period taken into account for purposes of paragraph (1)(C) is the calendar 

quarter beginning July 1, 2001. 

(4) ROUNDING.— (A) $160,000 AMOUNT.—Any increase under subparagraph (A) of paragraph (1) which is not a multiple of 

$5,000 shall be rounded to the next lowest multiple of 

$5,000. This subparagraph shall also apply for purposes of 

any provision of this title that provides for adjustments in 

accordance with the method contained in this subsection, 

except to the extent provided in such provision. (B) $40,000 AMOUNT.—Any increase under subparagraph (C) of paragraph (1) which is not a multiple of $1,000 shall 

be rounded to the next lowest multiple of $1,000. 

(f) COMBINING OF PLANS.— 

(1) IN GENERAL.—For purposes of applying the limitations of 

subsections (b) and (c)— 

(A) all defined benefit plans (whether or not terminated) 

of an employer are to be treated as one defined benefit 

plan, and 

(B) all defined contribution plans (whether or not terminated) of an employer are to be treated as one defined contribution plan. 

(2) EXCEPTION FOR MULTIEMPLOYER PLANS.—Notwithstanding paragraph (1) and subsection (g), a multiemployer 

plan (as defined in section 414(f)) shall not be combined or aggregated— 

(A) with any other plan which is not a multiemployer 

plan for purposes of applying subsection (b)(1)(B) to such 

other plan, or 

(B) with any other multiemployer plan for purposes of 

applying the limitations established in this section. 

(g) AGGREGATION OF PLANS.—Except as provided in subsection 

(f)(2), the Secretary, in applying the provisions of this section to 

benefits or contributions under more than one plan maintained by 

the same employer, and to any trusts, contracts, accounts, or bonds 

287 

referred to in subsection (a)(2), with respect to which the participant has the control required under section 414(b) or (c), as modified by subsection (h), shall, under regulations prescribed by the 

Secretary, disqualify one or more trusts, plans, contracts, accounts, 

or bonds, or any combination thereof until such benefits or contributions do not exceed the limitations contained in this section. 

In addition to taking into account such other factors as may be necessary to carry out the purposes of subsection (f), the regulations 

prescribed under this paragraph shall provide that no plan which 

has been terminated shall be disqualified until all other trusts, 

plans, contracts, accounts, or bonds have been disqualified. 

(h) 50 PERCENT CONTROL.—For purposes of applying subsections 

(b) and (c) of section 414 to this section, the phrase ‘‘more than 50 

percent’’ shall be substituted for the phrase ‘‘at least 80 percent’’ 

each place it appears in section 1563(a)(1). 

(i) RECORDS NOT AVAILABLE FOR PAST PERIODS.—Where for the 

period before January 1, 1976, or (if later) the first day of the first 

plan year of the plan, the records necessary for the application of 

this section are not available, the Secretary may by regulations 

prescribe alternate methods for determining the amounts to be 

taken into account for such period. 

(j) REGULATIONS; DEFINITION OF YEAR.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including, but not limited to, regulations defining the term ‘‘year’’ for purposes of any provision of this section. 

(k) SPECIAL RULES.— 

(1) DEFINED BENEFIT PLAN AND DEFINED CONTRIBUTION

PLAN.—For purposes of this title, the term ‘‘defined contribution plan’’ or ‘‘defined benefit plan’’ means a defined contribution plan (within the meaning of section 414(i)) or a defined 

benefit plan (within the meaning of section 414(j)), whichever 

applies, which is— 

(A) a plan described in section 401(a) which includes a 

trust which is exempt from tax under section 501(a), 

(B) an annuity plan described in section 403(a), 

(C) an annuity contract described in section 403(b), or 

(D) a simplified employee pension. 

(2) CONTRIBUTIONS TO PROVIDE COST-OF-LIVING PROTECTION

UNDER DEFINED BENEFIT PLANS.— 

(A) IN GENERAL.—In the case of a defined benefit plan 

which maintains a qualified cost-of-living arrangement— 

(i) any contribution made directly by an employee 

under such an arrangement shall not be treated as an 

annual addition for purposes of subsection (c), and 

(ii) any benefit under such arrangement which is allocable to an employer contribution which was transferred from a defined contribution plan and to which 

the requirements of subsection (c) were applied shall, 

for purposes of subsection (b), be treated as a benefit 

derived from an employee contribution (and subsection 

(c) shall not again apply to such contribution by reason of such transfer). 

(B) QUALIFIED COST-OF-LIVING ARRANGEMENT DEFINED.— 

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288 

living arrangement’’ means an arrangement under a defined benefit plan which— 

(i) provides a cost-of-living adjustment to a benefit 

provided under such plan or a separate plan subject to 

the requirements of section 412, and 

(ii) meets the requirements of subparagraphs (C), 

(D), (E), and (F) and such other requirements as the 

Secretary may prescribe. 

(C) DETERMINATION OF AMOUNT OF BENEFIT.—An arrangement meets the requirement of this subparagraph 

only if the cost-of-living adjustment of participants is 

based— 

(i) on increases in the cost-of-living after the annuity 

starting date, and 

(ii) on average cost-of-living increases determined by 

reference to 1 or more indexes prescribed by the Secretary, except that the arrangement may provide that 

the increase for any year will not be less than 3 percent of the retirement benefit (determined without regard to such increase). 

(D) ARRANGEMENT ELECTIVE; TIME FOR ELECTION.—An 

arrangement meets the requirements of this subparagraph 

only if it is elective, it is available under the same terms 

to all participants, and it provides that such election may 

at least be made in the year in which the participant— 

(i) attains the earliest retirement age under the defined benefit plan (determined without regard to any 

requirement of separation from service), or 

(ii) separates from service. 

(E) NONDISCRIMINATION REQUIREMENTS.—An arrangement shall not meet the requirements of this subparagraph if the Secretary finds that a pattern of discrimination exists with respect to participation. 

(F) SPECIAL RULES FOR KEY EMPLOYEES.— 

(i) IN GENERAL.—An arrangement shall not meet the 

requirements of this paragraph if any key employee is 

eligible to participate. 

(ii) KEY EMPLOYEE.—For purposes of this subparagraph, the term ‘‘key employee’’ has the meaning given 

such term by section 416(i)(1), except that in the case 

of a plan other than a top-heavy plan (within the 

meaning of section 416(g)), such term shall not include 

an individual who is a key employee solely by reason 

of section 416(i)(1)(A)(i). 

(3) REPAYMENTS OF CASHOUTS UNDER GOVERNMENTAL

PLANS.—In the case of any repayment of contributions (including interest thereon) to the governmental plan with respect to 

an amount previously refunded upon a forfeiture of service 

credit under the plan or under another governmental plan 

maintained by a State or local government employer within the 

same State, any such repayment shall not be taken into account for purposes of this section. 

(4) SPECIAL RULES FOR SECTIONS 403(B) AND 408.—For purposes of this section, any annuity contract described in section 

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289 

fined contribution plan maintained by each employer with respect to which the participant has the control required under 

subsection (b) or (c) of section 414 (as modified by subsection 

(h)). For purposes of this section, any contribution by an employer to a simplified employee pension plan for an individual 

for a taxable year shall be treated as an employer contribution 

to a defined contribution plan for such individual for such year. 

(l) TREATMENT OF CERTAIN MEDICAL BENEFITS.— (1) IN GENERAL.—For purposes of this section, contributions 

allocated to any individual medical benefit account which is 

part of a pension or annuity plan shall be treated as an annual 

addition to a defined contribution plan for purposes of subsection (c). Subparagraph (B) of subsection (c)(1) shall not 

apply to any amount treated as an annual addition under the 

preceding sentence. 

(2) INDIVIDUAL MEDICAL BENEFIT ACCOUNT.—For purposes of 

paragraph (1), the term ‘‘individual medical benefit account’’ 

means any separate account— 

(A) which is established for a participant under a pension or annuity plan, and 

(B) from which benefits described in section 401(h) are 

payable solely to such participantø, his spouse, or his dependents¿ or the participant’s spouse or dependents. 

(m) TREATMENT OF QUALIFIED GOVERNMENTAL EXCESS BENEFIT

ARRANGEMENTS.— (1) GOVERNMENTAL PLAN NOT AFFECTED.—In determining 

whether a governmental plan (as defined in section 414(d)) 

meets the requirements of this section, benefits provided under 

a qualified governmental excess benefit arrangement shall not 

be taken into account. Income accruing to a governmental plan 

(or to a trust that is maintained solely for the purpose of providing benefits under a qualified governmental excess benefit 

arrangement) in respect of a qualified governmental excess 

benefit arrangement shall constitute income derived from the 

exercise of an essential governmental function upon which 

such governmental plan (or trust) shall be exempt from tax 

under section 115. 

(2) TAXATION OF PARTICIPANT.—For purposes of this chapter— 

(A) the taxable year or years for which amounts in respect of a qualified governmental excess benefit arrangement are includible in gross income by a participant, and 

(B) the treatment of such amounts when so includible by 

the participant, 

shall be determined as if such qualified governmental excess 

benefit arrangement were treated as a plan for the deferral of 

compensation which is maintained by a corporation not exempt 

from tax under this chapter and which does not meet the requirements for qualification under section 401. 

(3) QUALIFIED GOVERNMENTAL EXCESS BENEFIT ARRANGE- MENT.—For purposes of this subsection, the term ‘‘qualified 

governmental excess benefit arrangement’’ means a portion of 

a governmental plan if— 

(A) such portion is maintained solely for the purpose of 

providing to participants in the plan that part of the parVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00295 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
290 

ticipant’s annual benefit otherwise payable under the 

terms of the plan that exceeds the limitations on benefits 

imposed by this section, 

(B) under such portion no election is provided at any 

time to the participant (directly or indirectly) to defer compensation, and 

(C) benefits described in subparagraph (A) are not paid 

from a trust forming a part of such governmental plan unless such trust is maintained solely for the purpose of providing such benefits. 

(n) SPECIAL RULES RELATING TO PURCHASE OF PERMISSIVE SERVICE CREDIT.— 

(1) IN GENERAL.—If a participant makes 1 or more contributions to a defined benefit governmental plan (within the meaning of section 414(d)) to purchase permissive service credit 

under such plan, then the requirements of this section shall be 

treated as met only if— 

(A) the requirements of subsection (b) are met, determined by treating the accrued benefit derived from all 

such contributions as an annual benefit for purposes of 

subsection (b), or 

(B) the requirements of subsection (c) are met, determined by treating all such contributions as annual additions for purposes of subsection (c). 

(2) APPLICATION OF LIMIT.—For purposes of— 

(A) applying paragraph (1)(A), the plan shall not fail to 

meet the reduced limit under subsection (b)(2)(C) solely by 

reason of this subsection, and 

(B) applying paragraph (1)(B), the plan shall not fail to 

meet the percentage limitation under subsection (c)(1)(B) 

solely by reason of this subsection. 

(3) PERMISSIVE SERVICE CREDIT.—For purposes of this subsection— 

(A) IN GENERAL.—The term ‘‘permissive service credit’’ 

means service credit— 

(i) recognized by the governmental plan for purposes 

of calculating a participant’s benefit under the plan, 

(ii) which such participant has not received under 

such governmental plan, and 

(iii) which such participant may receive only by 

making a voluntary additional contribution, in an 

amount determined under such governmental plan, 

which does not exceed the amount necessary to fund 

the benefit attributable to such service credit. 

Such term may include service credit for periods for which 

there is no performance of service, and, notwithstanding 

clause (ii), may include service credited in order to provide 

an increased benefit for service credit which a participant 

is receiving under the plan. 

(B) LIMITATION ON NONQUALIFIED SERVICE CREDIT.—A 

plan shall fail to meet the requirements of this section if— 

(i) more than 5 years of nonqualified service credit 

are taken into account for purposes of this subsection, 

or 

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(ii) any nonqualified service credit is taken into account under this subsection before the employee has at 

least 5 years of participation under the plan. 

(C) NONQUALIFIED SERVICE CREDIT.—For purposes of 

subparagraph (B), the term ‘‘nonqualified service credit’’ 

means permissive service credit other than that allowed 

with respect to— 

(i) service (including parental, medical, sabbatical, 

and similar leave) as an employee of the Government 

of the United States, any State or political subdivision 

thereof, or any agency or instrumentality of any of the 

foregoing (other than military service or service for 

credit which was obtained as a result of a repayment 

described in subsection (k)(3)), 

(ii) service (including parental, medical, sabbatical, 

and similar leave) as an employee (other than as an 

employee described in clause (i)) of an educational organization described in section 170(b)(1)(A)(ii) which is 

a public, private, or sectarian school which provides elementary or secondary education (through grade 12), 

or a comparable level of education, as determined 

under the applicable law of the jurisdiction in which 

the service was performed, 

(iii) service as an employee of an association of employees who are described in clause (i), or 

(iv) military service (other than qualified military 

service under section 414(u)) recognized by such governmental plan. 

In the case of service described in clause (i), (ii), or (iii), 

such service will be nonqualified service if recognition of 

such service would cause a participant to receive a retirement benefit for the same service under more than one 

plan. 

(D) SPECIAL RULES FOR TRUSTEE-TO-TRUSTEE TRANSFERS.—In the case of a trustee-to-trustee transfer to which 

section 403(b)(13)(A) or 457(e)(17)(A) applies (without regard to whether the transfer is made between plans maintained by the same employer)— 

(i) the limitations of subparagraph (B) shall not 

apply in determining whether the transfer is for the 

purchase of permissive service credit, and 

(ii) the distribution rules applicable under this title 

to the defined benefit governmental plan to which any 

amounts are so transferred shall apply to such 

amounts and any benefits attributable to such 

amounts. 

* * * * * * * 

Subpart E—TREATMENT OF TRANSFERS TO RETIREE 

HEALTH ACCOUNTS 

* * * * * * * 

292 

SEC. 420. TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE 

HEALTH ACCOUNTS. 

(a) GENERAL RULE.—If there is a qualified transfer of any excess 

pension assets of a defined benefit plan to a health benefits account, or an applicable life insurance account, which is part of such 

plan— 

(1) a trust which is part of such plan shall not be treated as 

failing to meet the requirements of subsection (a) or (h) of section 401 solely by reason of such transfer (or any other action 

authorized under this section), 

(2) no amount shall be includible in the gross income of the 

employer maintaining the plan solely by reason of such transfer, 

(3) such transfer shall not be treated— 

(A) as an employer reversion for purposes of section 

4980, or 

(B) as a prohibited transaction for purposes of section 

4975, and 

(4) the limitations of subsection (d) shall apply to such employer. 

(b) QUALIFIED TRANSFER.—For purposes of this section— 

(1) IN GENERAL.—The term ‘‘qualified transfer’’ means a 

transfer— 

(A) of excess pension assets of a defined benefit plan to 

a health benefits account, or an applicable life insurance 

account, which is part of such plan, 

(B) which does not contravene any other provision of 

law, and 

(C) with respect to which the following requirements are 

met in connection with the plan— 

(i) the use requirements of subsection (c)(1), 

(ii) the vesting requirements of subsection (c)(2), and 

(iii) the minimum cost requirements of subsection 

(c)(3). 

(2) ONLY 1 TRANSFER PER YEAR.—No more than 1 transfer 

with respect to any plan during a taxable year may be treated 

as a qualified transfer for purposes of this section. If there is 

a transfer from a defined benefit plan to both a health benefits 

account and an applicable life insurance account during any 

taxable year, such transfers shall be treated as 1 transfer for 

purposes of this paragraph. 

(3) LIMITATION ON AMOUNT TRANSFERRED.—The amount of 

excess pension assets which may be transferred to an account 

in a qualified transfer shall not exceed the amount which is 

reasonably estimated to be the amount the employer maintaining the plan will pay (whether directly or through reimbursement) out of such account during the taxable year of the transfer for qualified current retiree liabilities. 

(4) EXPIRATION.—No transfer made after December 31, 2025, 

shall be treated as a qualified transfer. 

(c) REQUIREMENTS OF PLANS TRANSFERRING ASSETS.— 

(1) USE OF TRANSFERRED ASSETS.— 

(A) IN GENERAL.—Any assets transferred to a health 

benefits account, or an applicable life insurance account, in 

a qualified transfer (and any income allocable thereto) 

293 

shall be used only to pay qualified current retiree liabilities (other than liabilities of key employees not taken into 

account under subsection (e)(1)(E)) for the taxable year of 

the transfer (whether directly or through reimbursement). 

In the case of a qualified future transfer or collectively 

bargained transfer to which subsection (f) applies, any assets so transferred may also be used to pay liabilities described in subsection (f)(2)(C). 

(B) AMOUNTS NOT USED TO PAY FOR HEALTH BENEFITS OR

LIFE INSURANCE.— (i) IN GENERAL.—Any assets transferred to a health 

benefits account, or an applicable life insurance account, in a qualified transfer (and any income allocable thereto) which are not used as provided in subparagraph (A) shall be transferred out of the account 

to the transferor plan. 

(ii) TAX TREATMENT OF AMOUNTS.—Any amount 

transferred out of an account under clause (i)— 

(I) shall not be includible in the gross income of 

the employer for such taxable year, but 

(II) shall be treated as an employer reversion 

for purposes of section 4980 (without regard to 

subsection (d) thereof). 

(C) ORDERING RULE.—For purposes of this section, any 

amount paid out of a health benefits account, or an applicable life insurance account, shall be treated as paid first 

out of the assets and income described in subparagraph 

(A). 

(2) REQUIREMENTS RELATING TO PENSION BENEFITS ACCRUING

BEFORE TRANSFER.—The requirements of this paragraph are 

met if the plan provides that the accrued pension benefits of 

any participant or beneficiary under the plan become nonforfeitable in the same manner which would be required if the 

plan had terminated immediately before the qualified transfer 

(or in the case of a participant who separated during the 1- 

year period ending on the date of the transfer, immediately before such separation). 

(3) MINIMUM COST REQUIREMENTS.— (A) IN GENERAL.—The requirements of this paragraph 

are met if each group health plan or arrangement under 

which applicable health benefits are provided, and each 

group-term life insurance plan under which applicable life 

insurance benefits are provided, provides that the applicable employer cost for each taxable year during the cost 

maintenance period shall not be less than the higher of the 

applicable employer costs for each of the 2 taxable years 

immediately preceding the taxable year of the qualified 

transfer or, in the case of a transfer which involves a plan 

maintained by an employer described in subsection 

(f)(2)(E)(i)(III), if the plan meets the requirements of subsection (f)(2)(D)(i)(II). 

(B) APPLICABLE EMPLOYER COST.—For purposes of this 

paragraph, the term ‘‘applicable employer cost’’ means, 

with respect to any taxable year, the amount determined 

by dividing— 

294 

(i) the qualified current retiree liabilities of the employer for such taxable year determined— 

(I) separately with respect to applicable health 

benefits and applicable life insurance benefits, 

(II) without regard to any reduction under subsection (e)(1)(B), and 

(III) in the case of a taxable year in which there 

was no qualified transfer, in the same manner as 

if there had been such a transfer at the end of the 

taxable year, by 

(ii) the number of individuals to whom coverage was 

provided during such taxable year for the benefits 

with respect to which the determination under clause 

(i) is made. 

(C) ELECTION TO COMPUTE COST SEPARATELY.—An employer may elect to have this paragraph applied separately 

for applicable health benefits with respect to individuals 

eligible for benefits under title XVIII of the Social Security 

Act at any time during the taxable year and with respect 

to individuals not so eligible, and separately for applicable 

life insurance benefits with respect to individuals age 65 

or older at any time during the taxable year and with respect to individuals under age 65 during the taxable year. 

(D) COST MAINTENANCE PERIOD.—For purposes of this 

paragraph, the term ‘‘cost maintenance period’’ means the 

period of 5 taxable years beginning with the taxable year 

in which the qualified transfer occurs. If a taxable year is 

in two or more overlapping cost maintenance periods, this 

paragraph shall be applied by taking into account the 

highest applicable employer cost required to be provided 

under subparagraph (A) for such taxable year. 

(E) REGULATIONS.— 

(i) IN GENERAL.—The Secretary shall prescribe such 

regulations as may be necessary to prevent an employer who significantly reduces retiree health coverage or retiree life insurance coverage, as the case 

may be, during the cost maintenance period from 

being treated as satisfying the minimum cost requirement of this subsection. 

(ii) INSIGNIFICANT COST REDUCTIONS FOR RETIREE

HEALTH COVERAGE PERMITTED.— 

(I) IN GENERAL.—An eligible employer shall not 

be treated as failing to meet the requirements of 

this paragraph for any taxable year if, in lieu of 

any reduction of retiree health coverage permitted 

under the regulations prescribed under clause (i), 

the employer reduces applicable employer cost by 

an amount not in excess of the reduction in costs 

which would have occurred if the employer had 

made the maximum permissible reduction in retiree health coverage under such regulations. In 

applying such regulations to any subsequent taxable year, any reduction in applicable employer 

cost under this clause shall be treated as if it were 

an equivalent reduction in retiree health coverage. 

295 

(II) ELIGIBLE EMPLOYER.—For purposes of subclause (I), an employer shall be treated as an eligible employer for any taxable year if, for the preceding taxable year, the qualified current retiree 

liabilities of the employer with respect to applicable health benefits were at least 5 percent of the 

gross receipts of the employer. For purposes of 

this subclause, the rules of paragraphs (2), (3)(B), 

and (3)(C) of section 448(c) shall apply in determining the amount of an employer’s gross receipts. 

(d) LIMITATIONS ON EMPLOYER.—For purposes of this title— 

(1) DEDUCTION LIMITATIONS.—No deduction shall be allowed— 

(A) for the transfer of any amount to a health benefits 

account, or an applicable life insurance account, in a qualified transfer (or any retransfer to the plan under subsection (c)(1)(B)), 

(B) for qualified current retiree liabilities paid out of the 

assets (and income) described in subsection (c)(1), or 

(C) for any amounts to which subparagraph (B) does not 

apply and which are paid for qualified current retiree liabilities for the taxable year to the extent such amounts 

are not greater than the excess (if any) of— 

(i) the amount determined under subparagraph (A) 

(and income allocable thereto), over 

(ii) the amount determined under subparagraph (B). 

(2) NO CONTRIBUTIONS ALLOWED.—An employer may not contribute any amount to a health benefits account or welfare benefit fund (as defined in section 419(e)(1)) with respect to qualified current retiree liabilities for which transferred assets are 

required to be used under subsection (c)(1). 

(e) DEFINITION AND SPECIAL RULES.—For purposes of this section— 

(1) QUALIFIED CURRENT RETIREE LIABILITIES.—For purposes 

of this section— 

(A) IN GENERAL.—The term ‘‘qualified current retiree liabilities’’ means, with respect to any taxable year, the aggregate amounts (including administrative expenses) 

which would have been allowable as a deduction to the employer for such taxable year with respect to applicable 

health benefits and applicable life insurance benefits provided during such taxable year if— 

(i) such benefits were provided directly by the employer, and 

(ii) the employer used the cash receipts and disbursements method of accounting. 

For purposes of the preceding sentence, the rule of section 

419(c)(3)(B) shall apply. 

(B) REDUCTIONS FOR AMOUNTS PREVIOUSLY SET ASIDE.— 

The amount determined under subparagraph (A) shall be 

reduced by the amount (determined separately for applicable health benefits and applicable life insurance benefits) 

which bears the same ratio to such amount as— 

296 

(i) the value (as of the close of the plan year preceding the year of the qualified transfer) of the assets 

in all health benefits accounts or applicable life insurance accounts or welfare benefit funds (as defined in 

section 419(e)(1)) set aside to pay for the qualified current retiree liability, bears to 

(ii) the present value of the qualified current retiree 

liabilities for all plan years (determined without regard to this subparagraph). 

(C) APPLICABLE HEALTH BENEFITS.—The term ‘‘applicable 

health benefits’’ means health benefits or coverage which 

are provided to— 

(i) retired employees who, immediately before the 

qualified transfer, are entitled to receive such benefits 

by reason of retirement and who are entitled to pension benefits under the plan, and 

(ii) their spouses and dependents. 

(D) APPLICABLE LIFE INSURANCE BENEFITS.—The term 

‘‘applicable life insurance benefits’’ means group-term life 

insurance coverage provided to retired employees who, immediately before the qualified transfer, are entitled to receive such coverage by reason of retirement and who are 

entitled to pension benefits under the plan, but only to the 

extent that such coverage is provided under a policy for retired employees and the cost of such coverage is excludable 

from the retired employee’s gross income under section 79. 

(E) KEY EMPLOYEES EXCLUDED.—If an employee is a key 

employee (within the meaning of section 416(i)(1)) with respect to any plan year ending in a taxable year, such employee shall not be taken into account in computing qualified current retiree liabilities for such taxable year or in 

calculating applicable employer cost under subsection 

(c)(3)(B). 

(2) EXCESS PENSION ASSETS.—The term ‘‘excess pension assets’’ means the excess (if any) of— 

(A) the lesser of— 

(i) the fair market value of the plan’s assets (reduced by the prefunding balance and funding standard 

carryover balance determined under section 430(f)), or 

(ii) the value of plan assets as determined under section 430(g)(3) after reduction under section 430(f), over 

(B) 125 percent of the sum of the funding target and the 

target normal cost determined under section 430 for such 

plan year. 

(3) HEALTH BENEFITS ACCOUNT.—The term ‘‘health benefits 

account’’ means an account established and maintained under 

section 401(h). 

(4) APPLICABLE LIFE INSURANCE ACCOUNT.—The term ‘‘applicable life insurance account’’ means a separate account established and maintained for amounts transferred under this section for qualified current retiree liabilities based on premiums 

for applicable life insurance benefits. 

(5) COORDINATION WITH SECTIONS 430 AND 433.—In the case 

of a qualified transfer, any assets so transferred shall not, for 

297 

purposes of this section and sections 430 and 433, be treated 

as assets in the plan. 

(6) APPLICATION TO MULTIEMPLOYER PLANS.—In the case of a 

multiemployer plan, this section shall be applied to any such 

plan— 

(A) by treating any reference in this section to an employer as a reference to all employers maintaining the plan 

(or, if appropriate, the plan sponsor), and 

(B) in accordance with such modifications of this section 

(and the provisions of this title relating to this section) as 

the Secretary determines appropriate to reflect the fact the 

plan is not maintained by a single employer. 

(f) QUALIFIED TRANSFERS TO COVER FUTURE RETIREE COSTS AND

COLLECTIVELY BARGAINED RETIREE BENEFITS.— 

(1) IN GENERAL.—An employer maintaining a defined benefit 

plan (other than a multiemployer plan) may, in lieu of a qualified transfer, elect for any taxable year to have the plan 

make— 

(A) a qualified future transfer, or 

(B) a collectively bargained transfer. 

Except as provided in this subsection, a qualified future transfer and a collectively bargained transfer shall be treated for 

purposes of this title and the Employee Retirement Income Security Act of 1974 as if it were a qualified transfer. 

(2) QUALIFIED FUTURE AND COLLECTIVELY BARGAINED TRANS- FERS.—For purposes of this subsection— 

(A) IN GENERAL.—The terms ‘‘qualified future transfer’’ 

and ‘‘collectively bargained transfer’’ mean a transfer 

which meets all of the requirements for a qualified transfer, except that— 

(i) the determination of excess pension assets shall 

be made under subparagraph (B), 

(ii) the limitation on the amount transferred shall be 

determined under subparagraph (C), 

(iii) the minimum cost requirements of subsection 

(c)(3) shall be modified as provided under subparagraph (D), and 

(iv) in the case of a collectively bargained transfer, 

the requirements of subparagraph (E) shall be met 

with respect to the transfer. 

(B) EXCESS PENSION ASSETS.— 

(i) IN GENERAL.—In determining excess pension assets for purposes of this subsection, subsection (e)(2) 

shall be applied by substituting ‘‘120 percent’’ for ‘‘125 

percent’’. 

(ii) REQUIREMENT TO MAINTAIN FUNDED STATUS.—If, 

as of any valuation date of any plan year in the transfer period, the amount determined under subsection 

(e)(2)(B) (after application of clause (i)) exceeds the 

amount determined under subsection (e)(2)(A), either— 

(I) the employer maintaining the plan shall 

make contributions to the plan in an amount not 

less than the amount required to reduce such excess to zero as of such date, or 

298 

(II) there is transferred from the health benefits 

account or applicable life insurance account, as 

the case may be, to the plan an amount not less 

than the amount required to reduce such excess to 

zero as of such date. 

(C) LIMITATION ON AMOUNT TRANSFERRED.—Notwithstanding subsection (b)(3), the amount of the excess pension assets which may be transferred— 

(i) in the case of a qualified future transfer shall be 

equal to the sum of— 

(I) if the transfer period includes the taxable 

year of the transfer, the amount determined under 

subsection (b)(3) for such taxable year, plus 

(II) in the case of all other taxable years in the 

transfer period, the sum of the qualified current 

retiree liabilities which the plan reasonably estimates, in accordance with guidance issued by the 

Secretary, will be incurred for each of such years, 

and 

(ii) in the case of a collectively bargained transfer, 

shall not exceed the amount which is reasonably estimated, in accordance with the provisions of the collective bargaining agreement and generally accepted accounting principles, to be the amount the employer 

maintaining the plan will pay (whether directly or 

through reimbursement) out of such account during 

the collectively bargained cost maintenance period for 

collectively bargained retiree liabilities. 

(D) MINIMUM COST REQUIREMENTS.— 

(i) IN GENERAL.—The requirements of subsection 

(c)(3) shall be treated as met if— 

(I) in the case of a qualified future transfer, 

each group health plan or arrangement under 

which applicable health benefits are provided, and 

each group-term life insurance plan or arrangement under which applicable life insurance benefits are provided, provides applicable health benefits or applicable life insurance benefits, as the 

case may be, during the period beginning with the 

first year of the transfer period and ending with 

the last day of the 4th year following the transfer 

period such that the annual average amount of 

the applicable employer cost during such period is 

not less than the applicable employer cost determined under subsection (c)(3)(A) with respect to 

the transfer, and 

(II) in the case of a collectively bargained transfer, each collectively bargained plan under which 

collectively bargained health benefits or collectively bargained life insurance benefits are provided provides that the collectively bargained employer cost for each taxable year during the collectively bargained cost maintenance period shall not 

be less than the amount specified by the collective 

bargaining agreement. 

299 

(ii) ELECTION TO MAINTAIN BENEFITS FOR FUTURE

TRANSFERS.—An employer may elect, in lieu of the requirements of clause (i)(I), to meet the requirements of 

subsection (c)(3) with respect to applicable health benefits or applicable life insurance benefits by meeting 

the requirements of such subsection (as in effect before 

the amendments made by section 535 of the Tax Relief 

Extension Act of 1999) for each of the years described 

in the period under clause (i)(I). Such election may be 

made separately with respect to applicable health benefits and applicable life insurance benefits. In the case 

of an election with respect to applicable life insurance 

benefits, the first sentence of this clause shall be applied as if subsection (c)(3) as in effect before the 

amendments made by such Act applied to such benefits. 

(iii) COLLECTIVELY BARGAINED EMPLOYER COST.—For 

purposes of this subparagraph, the term ‘‘collectively 

bargained employer cost’’ means the average cost per 

covered individual of providing collectively bargained 

health benefits, collectively bargained life insurance 

benefits, or both, as the case may be, as determined in 

accordance with the applicable collective bargaining 

agreement. Such agreement may provide for an appropriate reduction in the collectively bargained employer 

cost to take into account any portion of the collectively 

bargained health benefits, collectively bargained life 

insurance benefits, or both, as the case may be, that 

is provided or financed by a government program or 

other source. 

(E) SPECIAL RULES FOR COLLECTIVELY BARGAINED TRANSFERS.— 

(i) IN GENERAL.—A collectively bargained transfer 

shall only include a transfer which— 

(I) is made in accordance with a collective bargaining agreement, 

(II) before the transfer, the employer designates, 

in a written notice delivered to each employee organization that is a party to the collective bargaining agreement, as a collectively bargained 

transfer in accordance with this section, and 

(III) involves a defined benefit plan maintained 

by an employer which, in its taxable year ending 

in 2005, provided health benefits or coverage to 

retirees and their spouses and dependents under 

all of the health benefit plans maintained by the 

employer, but only if the aggregate cost (including 

administrative expenses) of such benefits or coverage which would have been allowable as a deduction to the employer (if such benefits or coverage had been provided directly by the employer 

and the employer used the cash receipts and disbursements method of accounting) is at least 5 

percent of the gross receipts of the employer (determined in accordance with the last sentence of 

300 

subsection (c)(3)(E)(ii)(II)) for such taxable year, or 

a plan maintained by a successor to such employer. 

(ii) USE OF ASSETS.—Any assets transferred to a 

health benefits account, or an applicable life insurance 

account, in a collectively bargained transfer (and any 

income allocable thereto) shall be used only to pay collectively bargained retiree liabilities (other than liabilities of key employees not taken into account under 

paragraph (6)(B)(iii)) for the taxable year of the transfer or for any subsequent taxable year during the collectively bargained cost maintenance period (whether 

directly or through reimbursement). 

(3) COORDINATION WITH OTHER TRANSFERS.—In applying subsection (b)(3) to any subsequent transfer during a taxable year 

in a transfer period or collectively bargained cost maintenance 

period, qualified current retiree liabilities shall be reduced by 

any such liabilities taken into account with respect to the 

qualified future transfer or collectively bargained transfer to 

which such period relates. 

(4) SPECIAL DEDUCTION RULES FOR COLLECTIVELY BARGAINED

TRANSFERS.—In the case of a collectively bargained transfer— 

(A) the limitation under subsection (d)(1)(C) shall not 

apply, and 

(B) notwithstanding subsection (d)(2), an employer may 

contribute an amount to a health benefits account or welfare benefit fund (as defined in section 419(e)(1)) with respect to collectively bargained retiree liabilities for which 

transferred assets are required to be used under subsection (c)(1)(B), and the deductibility of any such contribution shall be governed by the limits applicable to the deductibility of contributions to a welfare benefit fund under 

a collective bargaining agreement (as determined under 

section 419A(f)(5)(A)) without regard to whether such contributions are made to a health benefits account or welfare 

benefit fund and without regard to the provisions of section 404 or the other provisions of this section. 

The Secretary shall provide rules to ensure that the application of this paragraph does not result in a deduction being allowed more than once for the same contribution or for 2 or 

more contributions or expenditures relating to the same collectively bargained retiree liabilities. 

(5) TRANSFER PERIOD.—For purposes of this subsection, the 

term ‘‘transfer period’’ means, with respect to any transfer, a 

period of consecutive taxable years (not less than 2) specified 

in the election under paragraph (1) which begins and ends during the 10-taxable-year period beginning with the taxable year 

of the transfer. 

(6) TERMS RELATING TO COLLECTIVELY BARGAINED TRANS- FERS.—For purposes of this subsection— 

(A) COLLECTIVELY BARGAINED COST MAINTENANCE PE- RIOD.—The term ‘‘collectively bargained cost maintenance 

period’’ means, with respect to each covered retiree and 

øhis covered spouse and dependents¿ the covered spouse 

and dependents of such retiree, the shorter of— 

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(i) the remaining lifetime of such covered retiree 

and, in the case of a transfer to a health benefits account, øhis covered spouse and dependents¿ the covered spouse and dependents of such retiree, or 

(ii) the period of coverage provided by the collectively bargained plan (determined as of the date of the 

collectively bargained transfer) with respect to such 

covered retiree and, in the case of a transfer to a 

health benefits account, øhis covered spouse and dependents¿ the covered spouse and dependents of such 

retiree. (B) COLLECTIVELY BARGAINED RETIREE LIABILITIES.— 

(i) IN GENERAL.—The term ‘‘collectively bargained 

retiree liabilities’’ means the present value, as of the 

beginning of a taxable year and determined in accordance with the applicable collective bargaining agreement, of all collectively bargained health benefits, and 

collectively bargained life insurance benefits, (including administrative expenses) for such taxable year and 

all subsequent taxable years during the collectively 

bargained cost maintenance period. 

(ii) REDUCTION FOR AMOUNTS PREVIOUSLY SET

ASIDE.—The amount determined under clause (i) shall 

be reduced by the value (as of the close of the plan 

year preceding the year of the collectively bargained 

transfer) of the assets in all health benefits accounts, 

applicable life insurance accounts, or welfare benefit 

funds (as defined in section 419(e)(1)) set aside to pay 

for the collectively bargained retiree liabilities. The 

preceding sentence shall be applied separately for collectively bargained health benefits and collectively 

bargained life insurance benefits. 

(iii) KEY EMPLOYEES EXCLUDED.—If an employee is a 

key employee (within the meaning of section 416(i)(1)) 

with respect to any plan year ending in a taxable year, 

such employee shall not be taken into account in computing collectively bargained retiree liabilities for such 

taxable year or in calculating collectively bargained 

employer cost under subsection (c)(3)(C). 

(C) COLLECTIVELY BARGAINED HEALTH BENEFITS.—The 

term ‘‘collectively bargained health benefits’’ means health 

benefits or coverage— 

(i) which are provided to retired employees who, immediately before the collectively bargained transfer, 

are entitled to receive such benefits by reason of retirement and who are entitled to pension benefits 

under the plan, and their spouses and dependents, 

and 

(ii) if specified by the provisions of the collective bargaining agreement governing the collectively bargained transfer, which will be provided at retirement 

to employees who are not retired employees at the 

time of the transfer and who are entitled to receive 

such benefits and who are entitled to pension benefits 

under the plan, and their spouses and dependents. 

302 

(D) COLLECTIVELY BARGAINED LIFE INSURANCE BENEFITS.—The term ‘‘collectively bargained life insurance benefits’’ means, with respect to any collectively bargained 

transfer— 

(i) applicable life insurance benefits which are provided to retired employees who, immediately before 

the transfer, are entitled to receive such benefits by 

reason of retirement, and 

(ii) if specified by the provisions of the collective bargaining agreement governing the transfer, applicable 

life insurance benefits which will be provided at retirement to employees who are not retired employees at 

the time of the transfer. 

(E) COLLECTIVELY BARGAINED PLAN.—The term ‘‘collectively bargained plan’’ means a group health plan or arrangement for retired employees and their spouses and dependents, or a group-term life insurance plan or arrangement for retired employees, that is maintained pursuant to 

1 or more collective bargaining agreements. 

(g) SEGMENT RATES DETERMINED WITHOUT PENSION STABILIZATION.—For purposes of this section, section 430 shall be applied 

without regard to subsection (h)(2)(C)(iv) thereof. 

PART II—CERTAIN STOCK OPTIONS 

* * * * * * * 

SEC. 424. DEFINITIONS AND SPECIAL RULES. 

(a) CORPORATE REORGANIZATIONS, LIQUIDATIONS, ETC..—For purposes of this part, the term ‘‘issuing or assuming a stock option in 

a transaction to which section 424(a) applies’’ means a substitution 

of a new option for the old option, or an assumption of the old option, by an employer corporation, or a parent or subsidiary of such 

corporation, by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation, 

if— 

(1) the excess of the aggregate fair market value of the 

shares subject to the option immediately after the substitution 

or assumption over the aggregate option price of such shares 

is not more than the excess of the aggregate fair market value 

of all shares subject to the option immediately before such substitution or assumption over the aggregate option price of such 

shares, and 

(2) the new option or the assumption of the old option does 

not give the employee additional benefits which he did not 

have under the old option. 

For purposes of this subsection, the parent-subsidiary relationship 

shall be determined at the time of any such transaction under this 

subsection. 

(b) ACQUISITION OF NEW STOCK.—For purposes of this part, if 

stock is received by an individual in a distribution to which section 

305, 354, 355, 356, or 1036 (or so much of section 1031 as relates 

to section 1036) applies, and such distribution was made with respect to stock transferred to him upon his exercise of the option, 

such stock shall be considered as having been transferred to him 

303 

on his exercise of such option. A similar rule shall be applied in the 

case of a series of such distributions. 

(c) DISPOSITION.— (1) IN GENERAL.—Except as provided in paragraphs (2), (3), 

and (4), for purposes of this part, the term ‘‘disposition’’ includes a sale, exchange, gift, or a transfer of legal title, but 

does not include— 

(A) a transfer from a decedent to an estate or a transfer 

by bequest or inheritance; 

(B) an exchange to which section 354, 355, 356, or 1036 

(or so much of section 1031 as relates to section 1036) applies; or 

(C) a mere pledge or hypothecation. 

(2) JOINT TENANCY.—The acquisition of a share of stock in 

the name of the employee and another jointly with the right 

of survivorship or a subsequent transfer of a share of stock into 

such joint ownership shall not be deemed a disposition, but a 

termination of such joint tenancy (except to the extent such 

employee acquires ownership of such stock) shall be treated as 

a disposition by him occurring at the time such joint tenancy 

is terminated. 

(3) SPECIAL RULE WHERE INCENTIVE STOCK IS ACQUIRED

THROUGH USE OF OTHER STATUTORY OPTION STOCK.— (A) NONRECOGNITION SECTIONS NOT TO APPLY.—If— 

(i) there is a transfer of statutory option stock in 

connection with the exercise of any incentive stock option, and 

(ii) the applicable holding period requirements 

(under section 422(a)(1) or 423(a)(1)) are not met before such transfer, 

then no section referred to in subparagraph (B) of paragraph (1) shall apply to such transfer. 

(B) STATUTORY OPTION STOCK.—For purpose of subparagraph (A), the term ‘‘statutory option stock’’ means any 

stock acquired through the exercise of an incentive stock 

option or an option granted under an employee stock purchase plan. 

(4) TRANSFERS BETWEEN SPOUSES OR INCIDENT TO DIVORCE.— In the case of any transfer described in subsection (a) of section 1041— 

(A) such transfer shall not be treated as a disposition for 

purposes of this part, and 

(B) the same tax treatment under this part with respect 

to the transferred property shall apply to the transferee as 

would have applied to the transferor. 

(d) ATTRIBUTION OF STOCK OWNERSHIP.—For purposes of this 

part, in applying the percentage limitations of sections 422(b)(6) 

and 423(b)(3)— 

(1) the individual with respect to whom such limitation is 

being determined shall be considered as owning the stock 

owned, directly or indirectly, by or for øhis¿ the individual’s 

brothers and sisters (whether by the whole or half blood), 

spouse, ancestors, and lineal descendants; and 

(2) stock owned, directly or indirectly, by or for a corporation, 

partnership, estate, or trust, shall be considered as being 

304 

owned proportionately by or for its shareholders, partners, or 

beneficiaries. 

(e) PARENT CORPORATION.—For purposes of this part, the term 

‘‘parent corporation’’ means any corporation (other than the employer corporation) in an unbroken chain of corporations ending 

with the employer corporation if, at the time of the granting of the 

option, each of the corporations other than the employer corporation owns stock possessing 50 percent or more of the total combined 

voting power of all classes of stock in one of the other corporations 

in such chain. 

(f) SUBSIDIARY CORPORATION.—For purposes of this part, the 

term ‘‘subsidiary corporation’’ means any corporation (other than 

the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of the granting of the option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent 

or more of the total combined voting power of all classes of stock 

in one of the other corporations in such chain. 

(g) SPECIAL RULE FOR APPLYING SUBSECTIONS (E) AND (F).—In applying subsections (e) and (f) for purposes of sections 422(a)(2) and 

423(a)(2), there shall be substituted for the term ‘‘employer corporation’’ wherever it appears in subsections (e) and (f) the term 

‘‘grantor corporation’’ or the term ‘‘corporation issuing or assuming 

a stock option in a transaction to which section 424(a) applies’’, as 

the case may be. 

(h) MODIFICATION, EXTENSION, OR RENEWAL OF OPTION.— 

(1) IN GENERAL.—For purposes of this part, if the terms of 

any option to purchase stock are modified, extended, or renewed, such modification, extension, or renewal shall be considered as the granting of a new option. 

(2) SPECIAL RULE FOR SECTION 423 OPTIONS.—In the case of 

the transfer of stock pursuant to the exercise of an option to 

which section 423 applies and which has been so modified, extended, or renewed, the fair market value of such stock at the 

time of the granting of the option shall be considered as whichever of the following is the highest— 

(A) the fair market value of such stock on the date of the 

original granting of the option, 

(B) the fair market value of such stock on the date of the 

making of such modification, extension, or renewal, or 

(C) the fair market value of such stock at the time of the 

making of any intervening modification, extension, or renewal. 

(3) DEFINITION OF MODIFICATION.—The term ‘‘modification’’ 

means any change in the terms of the option which gives the 

employee additional benefits under the option, but such term 

shall not include a change in the terms of the option— 

(A) attributable to the issuance or assumption of an option under subsection (a); 

(B) to permit the option to qualify under section 

423(b)(9); or 

(C) in the case of an option not immediately exercisable 

in full, to accelerate the time at which the option may be 

exercised. 

305 

(i) STOCKHOLDER APPROVAL.—For purposes of this part, if the 

grant of an option is subject to approval by stockholders, the date 

of grant of the option shall be determined as if the option had not 

been subject to such approval. 

(j) CROSS REFERENCES.—For provisions requiring the reporting of 

certain acts with respect to a qualified stock option, an incentive 

stock option, options granted under employer stock purchase plans, 

or a restricted stock option, see section 6039. 

Subchapter E—ACCOUNTING PERIODS AND 

METHODS OF ACCOUNTING 

* * * * * * * 

PART II—METHODS OF ACCOUNTING 

* * * * * * * 

Subpart C—TAXABLE YEAR FOR WHICH DEDUCTIONS 

TAKEN 

* * * * * * * 

SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED. 

(a) DISALLOWANCE.— (1) IN GENERAL.—If for any taxable year the taxpayer is described in paragraph (2), neither— 

(A) the passive activity loss, nor 

(B) the passive activity credit, 

for the taxable year shall be allowed. 

(2) PERSONS DESCRIBED.—The following are described in this 

paragraph: 

(A) any individual, estate, or trust, 

(B) any closely held C corporation, and 

(C) any personal service corporation. 

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

as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as 

a deduction or credit allocable to such activity in the next taxable 

year. 

(c) PASSIVE ACTIVITY DEFINED.—For purposes of this section— 

(1) IN GENERAL.—The term ‘‘passive activity’’ means any activity— 

(A) which involves the conduct of any trade or business, 

and 

(B) in which the taxpayer does not materially participate. 

(2) PASSIVE ACTIVITY INCLUDES ANY RENTAL ACTIVITY.—Except as provided in paragraph (7), the term ‘‘passive activity’’ 

includes any rental activity. 

(3) WORKING INTERESTS IN OIL AND GAS PROPERTY.— (A) IN GENERAL.—The term ‘‘passive activity’’ shall not 

include any working interest in any oil or gas property 

which the taxpayer holds directly or through an entity 

which does not limit the liability of the taxpayer with respect to such interest. 

306 

(B) INCOME IN SUBSEQUENT YEARS.—If any taxpayer has 

any loss for any taxable year from a working interest in 

any oil or gas property which is treated as a loss which is 

not from a passive activity, then any net income from such 

property (or any property the basis of which is determined 

in whole or in part by reference to the basis of such property) for any succeeding taxable year shall be treated as 

income of the taxpayer which is not from a passive activity. If the preceding sentence applies to the net income 

from any property for any taxable year, any credits allowable under subpart B (other than section 27) or D of part 

IV of subchapter A for such taxable year which are attributable to such property shall be treated as credits not from 

a passive activity to the extent the amount of such credits 

does not exceed the regular tax liability of the taxpayer for 

the taxable year which is allocable to such net income. 

(4) MATERIAL PARTICIPATION NOT REQUIRED FOR PARAGRAPHS

(2) AND (3).—Paragraphs (2) and (3) shall be applied without regard to whether or not the taxpayer materially participates in 

the activity. 

(5) TRADE OR BUSINESS INCLUDES RESEARCH AND EXPERIMEN- TATION ACTIVITY.—For purposes of paragraph (1)(A), the term 

‘‘trade or business’’ includes any activity involving research or 

experimentation (within the meaning of section 174). 

(6) ACTIVITY IN CONNECTION WITH TRADE OR BUSINESS OR

PRODUCTION OF INCOME.—To the extent provided in regulations, for purposes of paragraph (1)(A), the term ‘‘trade or business’’ includes— 

(A) any activity in connection with a trade or business, 

or 

(B) any activity with respect to which expenses are allowable as a deduction under section 212. 

(7) SPECIAL RULES FOR TAXPAYERS IN REAL PROPERTY BUSI- NESS.— 

(A) IN GENERAL.—If this paragraph applies to any taxpayer for a taxable year— 

(i) paragraph (2) shall not apply to any rental real 

estate activity of such taxpayer for such taxable year, 

and 

(ii) this section shall be applied as if each interest 

of the taxpayer in rental real estate were a separate 

activity. 

Notwithstanding clause (ii), a taxpayer may elect to treat 

all interests in rental real estate as one activity. Nothing 

in the preceding provisions of this subparagraph shall be 

construed as affecting the determination of whether the 

taxpayer materially participates with respect to any interest in a limited partnership as a limited partner. 

(B) TAXPAYERS TO WHOM PARAGRAPH APPLIES.—This 

paragraph shall apply to a taxpayer for a taxable year if— 

(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during 

such taxable year are performed in real property 

trades or businesses in which the taxpayer materially 

participates, and 

307 

(ii) such taxpayer performs more than 750 hours of 

services during the taxable year in real property 

trades or businesses in which the taxpayer materially 

participates. 

In the case of a joint return, the requirements of the preceding sentence are satisfied if and only if either spouse 

separately satisfies such requirements. For purposes of the 

preceding sentence, activities in which a spouse materially 

participates shall be determined under subsection (h). 

(C) REAL PROPERTY TRADE OR BUSINESS.—For purposes 

of this paragraph, the term ‘‘real property trade or business’’ means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, 

rental, operation, management, leasing, or brokerage trade 

or business. 

(D) SPECIAL RULES FOR SUBPARAGRAPH (B).— 

(i) CLOSELY HELD C CORPORATIONS.—In the case of 

a closely held C corporation, the requirements of subparagraph (B) shall be treated as met for any taxable 

year if more than 50 percent of the gross receipts of 

such corporation for such taxable year are derived 

from real property trades or businesses in which the 

corporation materially participates. 

(ii) PERSONAL SERVICES AS AN EMPLOYEE.—For purposes of subparagraph (B), personal services performed as an employee shall not be treated as performed in real property trades or businesses. The preceding sentence shall not apply if such employee is a 

5-percent owner (as defined in section 416(i)(1)(B)) in 

the employer. 

(d) PASSIVE ACTIVITY LOSS AND CREDIT DEFINED.—For purposes of 

this section— 

(1) PASSIVE ACTIVITY LOSS.—The term ‘‘passive activity loss’’ 

means the amount (if any) by which— 

(A) the aggregate losses from all passive activities for 

the taxable year, exceed 

(B) the aggregate income from all passive activities for 

such year. 

(2) PASSIVE ACTIVITY CREDIT.—The term ‘‘passive activity 

credit’’ means the amount (if any) by which— 

(A) the sum of the credits from all passive activities allowable for the taxable year under— 

(i) subpart D of part IV of subchapter A, or 

(ii) subpart B (other than section 27) of such part 

IV, exceeds 

(B) the regular tax liability of the taxpayer for the taxable year allocable to all passive activities. 

(e) SPECIAL RULES FOR DETERMINING INCOME OR LOSS FROM A

PASSIVE ACTIVITY.—For purposes of this section— 

(1) CERTAIN INCOME NOT TREATED AS INCOME FROM PASSIVE

ACTIVITY.—In determining the income or loss from any activity— 

(A) IN GENERAL.—There shall not be taken into account— 

(i) any— 

308 

(I) gross income from interest, dividends, annuities, or royalties not derived in the ordinary 

course of a trade or business, 

(II) expenses (other than interest) which are 

clearly and directly allocable to such gross income, 

and 

(III) interest expense properly allocable to such 

gross income, and 

(ii) gain or loss not derived in the ordinary course of 

a trade or business which is attributable to the disposition of property— 

(I) producing income of a type described in 

clause (i), or 

(II) held for investment. 

For purposes of clause (ii), any interest in a passive activity shall not be treated as property held for investment. 

(B) RETURN ON WORKING CAPITAL.—For purposes of subparagraph (A), any income, gain, or loss which is attributable to an investment of working capital shall be treated 

as not derived in the ordinary course of a trade or business. 

(2) PASSIVE LOSSES OF CERTAIN CLOSELY HELD CORPORATIONS

MAY OFFSET ACTIVE INCOME.— 

(A) IN GENERAL.—If a closely held C corporation (other 

than a personal service corporation) has net active income 

for any taxable year, the passive activity loss of such taxpayer for such taxable year (determined without regard to 

this paragraph)— 

(i) shall be allowable as a deduction against net active income, and 

(ii) shall not be taken into account under subsection 

(a) to the extent so allowable as a deduction. 

A similar rule shall apply in the case of any passive activity credit of the taxpayer. 

(B) NET ACTIVE INCOME.—For purposes of this paragraph, the term ‘‘net active income’’ means the taxable income of the taxpayer for the taxable year determined without regard to— 

(i) any income or loss from a passive activity, and 

(ii) any item of gross income, expense, gain, or loss 

described in paragraph (1)(A). 

(3) COMPENSATION FOR PERSONAL SERVICES.—Earned income 

(within the meaning of section 911(d)(2)(A)) shall not be taken 

into account in computing the income or loss from a passive activity for any taxable year. 

(4) DIVIDENDS REDUCED BY DIVIDENDS RECEIVED DEDUCTION.—For purposes of paragraphs (1) and (2), income from 

dividends shall be reduced by the amount of any dividends received deduction under section 243 or 245. 

(f) TREATMENT OF FORMER PASSIVE ACTIVITIES.—For purposes of 

this section— 

(1) IN GENERAL.—If an activity is a former passive activity 

for any taxable year— 

309 

(A) any unused deduction allocable to such activity 

under subsection (b) shall be offset against the income 

from such activity for the taxable year, 

(B) any unused credit allocable to such activity under 

subsection (b) shall be offset against the regular tax liability (computed after the application of paragraph (1)) allocable to such activity for the taxable year, and 

(C) any such deduction or credit remaining after the application of subparagraphs (A) and (B) shall continue to be 

treated as arising from a passive activity. 

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

PERSONAL SERVICE CORPORATION.—If a taxpayer ceases for any 

taxable year to be a closely held C corporation or personal 

service corporation, this section shall continue to apply to 

losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer 

continued to be a closely held C corporation or personal service 

corporation, whichever is applicable. 

(3) FORMER PASSIVE ACTIVITY.—The term ‘‘former passive activity’’ means any activity which, with respect to the taxpayer— 

(A) is not a passive activity for the taxable year, but 

(B) was a passive activity for any prior taxable year. 

(g) DISPOSITIONS OF ENTIRE INTEREST IN PASSIVE ACTIVITY.—If 

during the taxable year a taxpayer disposes of his entire interest 

in any passive activity (or former passive activity), the following 

rules shall apply: 

(1) FULLY TAXABLE TRANSACTION.— 

(A) IN GENERAL.—If all gain or loss realized on such disposition is recognized, the excess of— 

(i) any loss from such activity for such taxable year 

(determined after the application of subsection (b)), 

over 

(ii) any net income or gain for such taxable year 

from all other passive activities (determined after the 

application of subsection (b)), 

shall be treated as a loss which is not from a passive activity. 

(B) SUBPARAGRAPH (A) NOT TO APPLY TO DISPOSITION INVOLVING RELATED PARTY.—If the taxpayer and the person 

acquiring the interest bear a relationship to each other described in section 267(b) or section 707(b)(1), then subparagraph (A) shall not apply to any loss of the taxpayer until 

the taxable year in which such interest is acquired (in a 

transaction described in subparagraph (A)) by another person who does not bear such a relationship to the taxpayer. 

(C) INCOME FROM PRIOR YEARS.—To the extent provided 

in regulations, income or gain from the activity for preceding taxable years shall be taken into account under 

subparagraph (A)(ii) for the taxable year to the extent necessary to prevent the avoidance of this section. 

(2) DISPOSITION BY DEATH.—If an interest in the activity is 

transferred by reason of the death of the taxpayer— 

310 

(A) paragraph (1)(A) shall apply to losses described in 

paragraph (1)(A) to the extent such losses are greater than 

the excess (if any) of— 

(i) the basis of such property in the hands of the 

transferee, over 

(ii) the adjusted basis of such property immediately 

before the death of the taxpayer, and 

(B) any losses to the extent of the excess described in 

subparagraph (A) shall not be allowed as a deduction for 

any taxable year. 

(3) INSTALLMENT SALE OF ENTIRE INTEREST.—In the case of 

an installment sale of an entire interest in an activity to which 

section 453 applies, paragraph (1) shall apply to the portion of 

such losses for each taxable year which bears the same ratio 

to all such losses as the gain recognized on such sale during 

such taxable year bears to the gross profit from such sale (realized or to be realized when payment is completed). 

(h) MATERIAL PARTICIPATION DEFINED.—For purposes of this section— 

(1) IN GENERAL.—A taxpayer shall be treated as materially 

participating in an activity only if the taxpayer is involved in 

the operations of the activity on a basis which is— 

(A) regular, 

(B) continuous, and 

(C) substantial. 

(2) INTERESTS IN LIMITED PARTNERSHIPS.—Except as provided 

in regulations, no interest in a limited partnership as a limited 

partner shall be treated as an interest with respect to which 

a taxpayer materially participates. 

(3) TREATMENT OF CERTAIN RETIRED INDIVIDUALS AND SUR- VIVING SPOUSES.—A taxpayer shall be treated as materially 

participating in any farming activity for a taxable year if paragraph (4) or (5) of section 2032A(b) would cause the requirements of section 2032A(b)(1)(C)(ii) to be met with respect to 

real property used in such activity if such taxpayer had died 

during the taxable year. 

(4) CERTAIN CLOSELY HELD C CORPORATIONS AND PERSONAL

SERVICE CORPORATIONS.—A closely held C corporation or personal service corporation shall be treated as materially participating in an activity only if— 

(A) 1 or more shareholders holding stock representing 

more than 50 percent (by value) of the outstanding stock 

of such corporation materially participate in such activity, 

or 

(B) in the case of a closely held C corporation (other 

than a personal service corporation), the requirements of 

section 465(c)(7)(C) (without regard to clause (iv)) are met 

with respect to such activity. 

(5) PARTICIPATION BY SPOUSE.—In determining whether a 

taxpayer materially participates, the participation of the 

spouse of the taxpayer shall be taken into account. (i) $25,000 OFFSET FOR RENTAL REAL ESTATE ACTIVITIES.— (1) IN GENERAL.—In the case of any natural person, subsection (a) shall not apply to that portion of the passive activity 

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311 

section (j)(5)) of the passive activity credit for any taxable year 

which is attributable to all rental real estate activities with respect to which such individual actively participated in such 

taxable year (and if any portion of such loss or credit arose in 

another taxable year, in such other taxable year). 

(2) DOLLAR LIMITATION.—The aggregate amount to which 

paragraph (1) applies for any taxable year shall not exceed 

$25,000. 

(3) PHASE-OUT OF EXEMPTION.— (A) IN GENERAL.—In the case of any taxpayer, the $25,000 amount under paragraph (2) shall be reduced (but 

not below zero) by 50 percent of the amount by which the 

adjusted gross income of the taxpayer for the taxable year 

exceeds $100,000. 

(B) SPECIAL PHASE-OUT OF REHABILITATION CREDIT.—In 

the case of any portion of the passive activity credit for 

any taxable year which is attributable to the rehabilitation 

credit determined under section 47, subparagraph (A) shall 

be applied by substituting ‘‘$200,000’’ for ‘‘$100,000’’. 

(C) EXCEPTION FOR LOW-INCOME HOUSING CREDIT.—Subparagraph (A) shall not apply to any portion of the passive 

activity credit for any taxable year which is attributable to 

any credit determined under section 42. 

(D) ORDERING RULE.—Paragraph (1) shall be applied for 

any taxable year— 

(i) first, to the passive activity loss, 

(ii) second, to the portion of the passive activity 

credit to which subparagraph (B) and (C) does not 

apply, 

(iii) third, to the portion of such credit to which subparagraph (B) applies, and 

(iv) then, to the portion of such credit to which subparagraph (C) applies. 

(E) ADJUSTED GROSS INCOME.—For purposes of this 

paragraph, adjusted gross income shall be determined 

without regard to— 

(i) any amount includible in gross income under section 86, 

(ii) the amounts excludable from gross income under 

sections 135 and 137, 

(iii) the amounts allowable as a deduction under sections 219, 221, 222, and 250, and 

(iv) any passive activity loss or any loss allowable by 

reason of subsection (c)(7). 

(4) SPECIAL RULE FOR ESTATES.— 

(A) IN GENERAL.—In the case of taxable years of an estate ending less than 2 years after the date of the death 

of the decedent, this subsection shall apply to all rental 

real estate activities with respect to which such decedent 

actively participated before his death. 

(B) REDUCTION FOR SURVIVING SPOUSE’S EXEMPTION.— For purposes of subparagraph (A), the $25,000 amount 

under paragraph (2) shall be reduced by the amount of the 

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312 

dent for the taxable year ending with or within the taxable 

year of the estate. 

(5) MARRIED INDIVIDUALS FILING SEPARATELY.— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), in the case of any married individual filing a separate 

return, this subsection shall be applied by substituting— 

(i) ‘‘$12,500’’ for ‘‘$25,000’’ each place it appears, 

(ii) ‘‘$50,000’’ for ‘‘$100,000’’ in paragraph (3)(A), and 

(iii) ‘‘$100,000’’ for ‘‘$200,000’’ in paragraph (3)(B). 

(B) TAXPAYERS NOT LIVING APART.—This subsection shall 

not apply to a taxpayer who— 

(i) is a married individual filing a separate return 

for any taxable year, and 

(ii) does not live apart from øhis spouse¿ the individual’s spouse at all times during such taxable year. 

(6) ACTIVE PARTICIPATION.— 

(A) IN GENERAL.—An individual shall not be treated as 

actively participating with respect to any interest in any 

rental real estate activity for any period if, at any time 

during such period, such interest (including any interest of 

the spouse of the individual) is less than 10 percent (by 

value) of all interests in such activity. 

(B) NO PARTICIPATION REQUIREMENT FOR LOW-INCOME

HOUSING OR REHABILITATION CREDIT.—Paragraphs (1) and 

(4)(A) shall be applied without regard to the active participation requirement in the case of— 

(i) any credit determined under section 42 for any 

taxable year, or 

(ii) any rehabilitation credit determined under section 47, 

(C) INTEREST AS A LIMITED PARTNER.—Except as provided in regulations, no interest as a limited partner in a 

limited partnership shall be treated as an interest with respect to which the taxpayer actively participates. 

(D) PARTICIPATION BY SPOUSE.—In determining whether 

a taxpayer actively participates, the participation of the 

spouse of the taxpayer shall be taken into account. 

(j) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this 

section— 

(1) CLOSELY HELD C CORPORATION.—The term ‘‘closely held 

C corporation’’ means any C corporation described in section 

465(a)(1)(B). 

(2) PERSONAL SERVICE CORPORATION.—The term ‘‘personal 

service corporation’’ has the meaning given such term by section 269A(b)(1), except that section 269A(b)(2) shall be applied— 

(A) by substituting ‘‘any’’ for ‘‘more than 10 percent’’, and 

(B) by substituting ‘‘any’’ for ‘‘50 percent or more in 

value’’ in section 318(a)(2)(C). 

A corporation shall not be treated as a personal service corporation unless more than 10 percent of the stock (by value) 

in such corporation is held by employee-owners (within the 

meaning of section 269A(b)(2), as modified by the preceding 

sentence). 

313 

(3) REGULAR TAX LIABILITY.—The term ‘‘regular tax liability’’ 

has the meaning given such term by section 26(b). 

(4) ALLOCATION OF PASSIVE ACTIVITY LOSS AND CREDIT.—The 

passive activity loss and the passive activity credit (and the 

$25,000 amount under subsection (i)) shall be allocated to activities, and within activities, on a pro rata basis in such manner as the Secretary may prescribe. 

(5) DEDUCTION EQUIVALENT.—The deduction equivalent of 

credits from a passive activity for any taxable year is the 

amount which (if allowed as a deduction) would reduce the regular tax liability for such taxable year by an amount equal to 

such credits. 

(6) SPECIAL RULE FOR GIFTS.—In the case of a disposition of 

any interest in a passive activity by gift— 

(A) the basis of such interest immediately before the 

transfer shall be increased by the amount of any passive 

activity losses allocable to such interest with respect to 

which a deduction has not been allowed by reason of subsection (a), and 

(B) such losses shall not be allowable as a deduction for 

any taxable year. 

(7) QUALIFIED RESIDENCE INTEREST.—The passive activity 

loss of a taxpayer shall be computed without regard to qualified residence interest (within the meaning of section 

163(h)(3)). 

(8) RENTAL ACTIVITY.—The term ‘‘rental activity’’ means any 

activity where payments are principally for the use of tangible 

property. 

(9) ELECTION TO INCREASE BASIS OF PROPERTY BY AMOUNT OF

DISALLOWED CREDIT.—For purposes of determining gain or loss 

from a disposition of any property to which subsection (g)(1) 

applies, the transferor may elect to increase the basis of such 

property immediately before the transfer by an amount equal 

to the portion of any unused credit allowable under this chapter which reduced the basis of such property for the taxable 

year in which such credit arose. If the taxpayer elects the application of this paragraph, such portion of the passive activity 

credit of such taxpayer shall not be allowed for any taxable 

year. 

(10) COORDINATION WITH SECTION 280A.—If a passive activity 

involves the use of a dwelling unit to which section 280A(c)(5) 

applies for any taxable year, any income, deduction, gain, or 

loss allocable to such use shall not be taken into account for 

purposes of this section for such taxable year. 

(11) AGGREGATION OF MEMBERS OF AFFILIATED GROUPS.—Except as provided in regulations, all members of an affiliated 

group which files a consolidated return shall be treated as 1 

corporation. 

(12) SPECIAL RULE FOR DISTRIBUTIONS BY ESTATES OR

TRUSTS.—If any interest in a passive activity is distributed by 

an estate or trust— 

(A) the basis of such interest immediately before such 

distribution shall be increased by the amount of any passive activity losses allocable to such interest, and 

314 

(B) such losses shall not be allowable as a deduction for 

any taxable year. 

(k) SEPARATE APPLICATION OF SECTION IN CASE OF PUBLICLY

TRADED PARTNERSHIPS.— (1) IN GENERAL.—This section shall be applied separately 

with respect to items attributable to each publicly traded partnership (and subsection (i) shall not apply with respect to 

items attributable to any such partnership). The preceding sentence shall not apply to any credit determined under section 

42, or any rehabilitation credit determined under section 47, 

attributable to a publicly traded partnership to the extent the 

amount of any such credits exceeds the regular tax liability attributable to income from such partnership. 

(2) PUBLICLY TRADED PARTNERSHIP.—For purposes of this 

section, the term ‘‘publicly traded partnership’’ means any 

partnership if— 

(A) interests in such partnership are traded on an established securities market, or 

(B) interests in such partnership are readily tradable on 

a secondary market (or the substantial equivalent thereof). 

(3) COORDINATION WITH SUBSECTION (G).—For purposes of 

subsection (g), a taxpayer shall not be treated as having disposed of his entire interest in an activity of a publicly traded 

partnership until he disposes of his entire interest in such 

partnership. 

(4) APPLICATION TO REGULATED INVESTMENT COMPANIES.— For purposes of this section, a regulated investment company 

(as defined in section 851) holding an interest in a qualified 

publicly traded partnership (as defined in section 851(h)) shall 

be treated as a taxpayer described in subsection (a)(2) with respect to items attributable to such interest. 

(l) REGULATIONS.—The Secretary shall prescribe such regulations 

as may be necessary or appropriate to carry out provisions of this 

section, including regulations— 

(1) which specify what constitutes an activity, material participation, or active participation for purposes of this section, 

(2) which provide that certain items of gross income will not 

be taken into account in determining income or loss from any 

activity (and the treatment of expenses allocable to such income), 

(3) requiring net income or gain from a limited partnership 

or other passive activity to be treated as not from a passive activity, 

(4) which provide for the determination of the allocation of 

interest expense for purposes of this section, and 

(5) which deal with changes in marital status and changes 

between joint returns and separate returns. 

Subchapter F—EXEMPT ORGANIZATIONS 

* * * * * * * 

PART II—PRIVATE FOUNDATIONS 

* * * * * * * 

315 

SEC. 507. TERMINATION OF PRIVATE FOUNDATION STATUS. 

(a) GENERAL RULE.—Except as provided in subsection (b), the 

status of any organization as a private foundation shall be terminated only if— 

(1) such organization notifies the Secretary (at such time and 

in such manner as the Secretary may by regulations prescribe) 

of its intent to accomplish such termination, or 

(2)(A) with respect to such organization, there have been either willful repeated acts (or failures to act), or a willful and 

flagrant act (or failure to act), giving rise to liability for tax 

under chapter 42, and 

(B) the Secretary notifies such organization that, by reason 

of subparagraph (A), such organization is liable for the tax imposed by subsection (c), 

and either such organization pays the tax imposed by subsection (c) 

(or any portion not abated under subsection (g)) or the entire 

amount of such tax is abated under subsection (g). 

(b) SPECIAL RULES.— 

(1) TRANSFER TO, OR OPERATION AS, PUBLIC CHARITY.—The 

status as a private foundation of any organization, with respect 

to which there have not been either willful repeated acts (or 

failures to act) or a willful and flagrant act (or failure to act) 

giving rise to liability for tax under chapter 42, shall be terminated if— 

(A) such organization distributes all of its net assets to 

one or more organizations described in section 170(b)(1)(A) 

(other than in clauses (vii) and (viii)) each of which has 

been in existence and so described for a continuous period 

of at least 60 calendar months immediately preceding such 

distribution, or 

(B)(i) such organization meets the requirements of paragraph (1), (2), or (3) of section 509(a) by the end of the 12- 

month period beginning with its first taxable year which 

begins after December 31, 1969, or for a continuous period 

of 60 calendar months beginning with the first day of any 

taxable year which begins after December 31, 1969, 

(ii) such organization notifies the Secretary (in such 

manner as the Secretary may by regulations prescribe) before the commencement of such 12-month or 60-month period (or before the 90th day after the day on which regulations first prescribed under this subsection become final) 

that it is terminating its private foundation status, and 

(iii) such organization establishes to the satisfaction of 

the Secretary (in such manner as the Secretary may by 

regulations prescribe) immediately after the expiration of 

such 12-month or 60-month period that such organization 

has complied with clause (i). 

If an organization gives notice under subparagraph (B)(ii) of 

the commencement of a 60-month period and such organization 

fails to meet the requirements of paragraph (1), (2), or (3) of 

section 509(a) for the entire 60-month period, this part and 

chapter 42 shall not apply to such organization for any taxable 

year within such 60-month period for which it does meet such 

requirements. 

316 

(2) TRANSFEREE FOUNDATIONS.—For purposes of this part, in 

the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, 

redemption, recapitalization, or other adjustment, organization, 

or reorganization, the transferee foundation shall not be treated as a newly created organization. 

(c) IMPOSITION OF TAX.—There is hereby imposed on each organization which is referred to in subsection (a) a tax equal to the 

lower of— 

(1) the amount which the private foundation substantiates 

by adequate records or other corroborating evidence as the aggregate tax benefit resulting from the section 501(c)(3) status 

of such foundation, or 

(2) the value of the net assets of such foundation. 

(d) AGGREGATE TAX BENEFIT.— 

(1) IN GENERAL.—For purposes of subsection (c), the aggregate tax benefit resulting from the section 501(c)(3) status of 

any private foundation is the sum of— 

(A) the aggregate increases in tax under chapters 1, 11, 

and 12 (or the corresponding provisions of prior law) which 

would have been imposed with respect to all substantial 

contributors to the foundation if deductions for all contributions made by such contributors to the foundation 

after February 28, 1913, had been disallowed, and 

(B) the aggregate increases in tax under chapter 1 (or 

the corresponding provisions of prior law) which would 

have been imposed with respect to the income of the private foundation for taxable years beginning after December 31, 1912, if (i) it had not been exempt from tax under 

section 501(a) (or the corresponding provisions of prior 

law), and (ii) in the case of a trust, deductions under section 642(c) (or the corresponding provisions of prior law) 

had been limited to 20 percent of the taxable income of the 

trust (computed without the benefit of section 642(c) but 

with the benefit of section 170(b)(1)(A)), and 

(C) interest on the increases in tax determined under 

subparagraphs (A) and (B) from the first date on which 

each such increase would have been due and payable to 

the date on which the organization ceases to be a private 

foundation. 

(2) SUBSTANTIAL CONTRIBUTOR.— 

(A) DEFINITION.—For purposes of paragraph (1), the 

term ‘‘substantial contributor’’ means any person who contributed or bequeathed an aggregate amount of more than 

$5,000 to the private foundation, if such amount is more 

than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable 

year of the foundation in which the contribution or bequest 

is received by the foundation from such person. In the case 

of a trust, the term ‘‘substantial contributor’’ also means 

the creator of the trust. 

(B) SPECIAL RULES.—For purposes of subparagraph (A)— 

(i) each contribution or bequest shall be valued at 

fair market value on the date it was received, 

317 

(ii) in the case of a foundation which is in existence 

on October 9, 1969, all contributions and bequests received on or before such date shall be treated (except 

for purposes of clause (i)) as if received on such date, 

(iii) an individual shall be treated as making all contributions and bequests made by øhis spouse¿ the individual’s spouse, and 

(iv) any person who is a substantial contributor on 

any date shall remain a substantial contributor for all 

subsequent periods. 

(C) PERSON CEASES TO BE SUBSTANTIAL CONTRIBUTOR IN

CERTAIN CASES.— 

(i) IN GENERAL.—A person shall cease to be treated 

as a substantial contributor with respect to any private foundation as of the close of any taxable year of 

such foundation if— 

(I) during the 10-year period ending at the close 

of such taxable year such person (and all related 

persons) have not made any contribution to such 

private foundation, 

(II) at no time during such 10-year period was 

such person (or any related person) a foundation 

manager of such private foundation, and 

(III) the aggregate contributions made by such 

person (and related persons) are determined by 

the Secretary to be insignificant when compared 

to the aggregate amount of contributions to such 

foundation by one other person. 

For purposes of subclause (III), appreciation on contributions while held by the foundation shall be taken into account. 

(ii) RELATED PERSON.—For purposes of clause (i), the 

term ‘‘related person’’ means, with respect to any person, any other person who would be a disqualified person (within the meaning of section 4946) by reason of 

his relationship to such person. In the case of a contributor which is a corporation, the term also includes 

any officer or director of such corporation. 

(3) REGULATIONS.—For purposes of this section, the determination as to whether and to what extent there would have 

been any increase in tax shall be made in accordance with regulations prescribed by the Secretary. 

(e) VALUE OF ASSETS.—For purposes of subsection (c), the value 

of the net assets shall be determined at whichever time such value 

is higher: (1) the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation, or 

(2) the date on which it ceases to be a private foundation. 

(f) LIABILITY IN CASE OF TRANSFERS OF ASSETS FROM PRIVATE

FOUNDATION.—For purposes of determining liability for the tax imposed by subsection (c) in the case of assets transferred by the private foundation, such tax shall be deemed to have been imposed on 

the first day on which action is taken by the organization which 

culminates in its ceasing to be a private foundation. 

318 

(g) ABATEMENT OF TAXES.—The Secretary may abate the unpaid 

portion of the assessment of any tax imposed by subsection (c), or 

any liability in respect thereof, if— 

(1) the private foundation distributes all of its net assets to 

one or more organizations described in section 170(b)(1)(A) 

(other than in clauses (vii) and (viii)) each of which has been 

in existence and so described for a continuous period of at least 

60 calendar months, or 

(2) following the notification prescribed in section 6104(c) to 

the appropriate State officer, such State officer within one year 

notifies the Secretary, in such manner as the Secretary may by 

regulations prescribe, that corrective action has been initiated 

pursuant to State law to insure that the assets of such private 

foundation are preserved for such charitable or other purposes 

specified in section 501(c)(3) as may be ordered or approved by 

a court of competent jurisdiction, and upon completion of the 

corrective action, the Secretary receives certification from the 

appropriate State officer that such action has resulted in such 

preservation of assets. 

Subchapter G—CORPORATIONS USED TO 

AVOID INCOME TAX ON SHAREHOLDERS 

* * * * * * * 

PART II—PERSONAL HOLDING COMPANIES 

* * * * * * * 

SEC. 544. RULES FOR DETERMINING STOCK OWNERSHIP. 

(a) CONSTRUCTIVE OWNERSHIP.—For purposes of determining 

whether a corporation is a personal holding company, insofar as 

such determination is based on stock ownership under section 

542(a)(2), section 543(a)(7), section 543(a)(6), or section 543(a)(4)— 

(1) STOCK NOT OWNED BY INDIVIDUAL.—Stock owned, directly 

or indirectly, by or for a corporation, partnership, estate, or 

trust shall be considered as being owned proportionately by its 

shareholders, partners, or beneficiaries. 

(2) FAMILY AND PARTNERSHIP OWNERSHIP.—An individual 

shall be considered as owning the stock owned, directly or indirectly, by or for øhis¿ the individual’s family or by or for øhis¿ 

the individual’s partner. For purposes of this paragraph, the 

family of an individual includes only øhis¿ the individual’s 

brothers and sisters (whether by the whole or half blood), 

spouse, ancestors, and lineal descendants. 

(3) OPTIONS.—If any person has an option to acquire stock, 

such stock shall be considered as owned by such person. For 

purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. 

(4) APPLICATION OF FAMILY-PARTNERSHIP AND OPTION

RULES.—Paragraphs (2) and (3) shall be applied— 

(A) for purposes of the stock ownership requirement provided in section 542(a)(2), if, but only if, the effect is to 

make the corporation a personal holding company; 

319 

(B) for purposes of section 543(a)(7) (relating to personal 

service contracts), of section 543(a)(6) (relating to use of 

property by shareholders), or of section 543(a)(4) (relating 

to copyright royalties), if, but only if, the effect is to make 

the amounts therein referred to includible under such 

paragraph as personal holding company income. 

(5) CONSTRUCTIVE OWNERSHIP AS ACTUAL OWNERSHIP.—Stock 

constructively owned by a person by reason of the application 

of paragraph (1) or (3), shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; 

but stock constructively owned by an individual by reason of 

the application of paragraph (2) shall not be treated as owned 

by him for purposes of again applying such paragraph in order 

to make another the constructive owner of such stock. 

(6) OPTION RULE IN LIEU OF FAMILY AND PARTNERSHIP

RULE.—If stock may be considered as owned by an individual 

under either paragraph (2) or (3) it shall be considered as 

owned by him under paragraph (3). 

(b) CONVERTIBLE SECURITIES.—Outstanding securities convertible 

into stock (whether or not convertible during the taxable year) 

shall be considered as outstanding stock— 

(1) for purposes of the stock ownership requirement provided 

in section 542(a)(2), but only if the effect of the inclusion of all 

such securities is to make the corporation a personal holding 

company; 

(2) for purposes of section 543(a)(7) (relating to personal 

service contracts), but only if the effect of the inclusion of all 

such securities is to make the amounts therein referred to includible under such paragraph as personal holding company income; 

(3) for purposes of section 543(a)(6) (relating to the use of 

property by shareholders), but only if the effect of the inclusion 

of all such securities is to make the amounts therein referred 

to includible under such paragraph as personal holding company income; and 

(4) for purposes of section 543(a)(4) (relating to copyright 

royalties), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible 

under such paragraph as personal holding company income. 

The requirement in paragraphs (1), (2), (3), and (4) that all convertible securities must be included if any are to be included shall be 

subject to the exception that, where some of the outstanding securities are convertible only after a later date than in the case of others, the class having the earlier conversion date may be included 

although the others are not included, but no convertible securities 

shall be included unless all outstanding securities having a prior 

conversion date are also included. 

Subchapter I—NATURAL RESOURCES 

* * * * * * * 

PART I—DEDUCTIONS 

* * * * * * * 

320 

SEC. 613A. LIMITATIONS ON PERCENTAGE DEPLETION IN CASE OF OIL 

AND GAS WELLS. 

(a) GENERAL RULE.—Except as otherwise provided in this section, 

the allowance for depletion under section 611 with respect to any 

oil or gas well shall be computed without regard to section 613. 

(b) EXEMPTION FOR CERTAIN DOMESTIC GAS WELLS.— 

(1) IN GENERAL.—The allowance for depletion under section 

611 shall be computed in accordance with section 613 with respect to— 

(A) regulated natural gas, and 

(B) natural gas sold under a fixed contract, 

and 22 percent shall be deemed to be specified in subsection 

(b) of section 613 for purposes of subsection (a) of that section. 

(2) NATURAL GAS FROM GEOPRESSURED BRINE.—The allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to any qualified natural 

gas from geopressured brine, and 10 percent shall be deemed 

to be specified in subsection (b) of section 613 for purposes of 

subsection (a) of such section. 

(3) DEFINITIONS.—For purposes of this subsection— 

(A) NATURAL GAS SOLD UNDER A FIXED CONTRACT.—The 

term ‘‘natural gas sold under a fixed contract’’ means domestic natural gas sold by the producer under a contract, 

in effect on February 1, 1975, and at all times thereafter 

before such sale, under which the price for such gas cannot 

be adjusted to reflect to any extent the increase in liabilities of the seller for tax under this chapter by reason of 

the repeal of percentage depletion for gas. Price increases 

after February 1, 1975, shall be presumed to take increases in tax liabilities into account unless the taxpayer 

demonstrates to the contrary by clear and convincing evidence. 

(B) REGULATED NATURAL GAS.—The term ‘‘regulated natural gas’’ means domestic natural gas produced and sold 

by the producer, before July 1, 1976, subject to the jurisdiction of the Federal Power Commission, the price for 

which has not been adjusted to reflect to any extent the increase in liability of the seller for tax under this chapter 

by reason of the repeal of percentage depletion for gas. 

Price increases after February 1, 1975, shall be presumed 

to take increases in tax liabilities into account unless the 

taxpayer demonstrates the contrary by clear and convincing evidence. 

(C) QUALIFIED NATURAL GAS FROM GEOPRESSURED

BRINE.—The term ‘‘qualified natural gas from geopressured 

brine’’ means any natural gas— 

(i) which is determined in accordance with section 

503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine, and 

(ii) which is produced from any well the drilling of 

which began after September 30, 1978, and before 

January 1, 1984. 

(c) EXEMPTION FOR INDEPENDENT PRODUCERS AND ROYALTY OWNERS.— 

321 

(1) IN GENERAL.—Except as provided in subsection (d), the 

allowance for depletion under section 611 shall be computed in 

accordance with section 613 with respect to— 

(A) so much of the taxpayer’s average daily production 

of domestic crude oil as does not exceed the taxpayer’s depletable oil quantity; and 

(B) so much of the taxpayer’s average daily production 

of domestic natural gas as does not exceed the taxpayer’s 

depletable natural gas quantity; 

and 15 percent shall be deemed to be specified in subsection 

(b) of section 613 for purposes of subsection (a) of that section. 

(2) AVERAGE DAILY PRODUCTION.—For purposes of paragraph 

(1)— 

(A) the taxpayer’s average daily production of domestic 

crude oil or natural gas for any taxable year, shall be determined by dividing his aggregate production of domestic 

crude oil or natural gas, as the case may be, during the 

taxable year by the number of days in such taxable year, 

and 

(B) in the case of a taxpayer holding a partial interest 

in the production from any property (including an interest 

held in a partnership) such taxpayer’s production shall be 

considered to be that amount of such production determined by multiplying the total production of such property 

by the taxpayer’s percentage participation in the revenues 

from such property. 

(3) DEPLETABLE OIL QUANTITY.— 

(A) IN GENERAL.—For purposes of paragraph (1), the taxpayer’s depletable oil quantity shall be equal to— 

(i) the tentative quantity determined under subparagraph (B), reduced (but not below zero) by 

(ii) except in the case of a taxpayer making an election under paragraph (6)(B), the taxpayer’s average 

daily marginal production for the taxable year. 

(B) TENTATIVE QUANTITY.—For purposes of subparagraph (A), the tentative quantity is 1,000 barrels. 

(4) DAILY DEPLETABLE NATURAL GAS QUANTITY.—For purposes of paragraph (1), the depletable natural gas quantity of 

any taxpayer for any taxable year shall be equal to 6,000 cubic 

feet multiplied by the number of barrels of the taxpayer’s depletable oil quantity to which the taxpayer elects to have this 

paragraph apply. The taxpayer’s depletable oil quantity for any 

taxable year shall be reduced by the number of barrels with respect to which an election under this paragraph applies. Such 

election shall be made at such time and in such manner as the 

Secretary shall by regulations prescribe. 

(6) OIL AND NATURAL GAS PRODUCED FROM MARGINAL PROPERTIES.— 

(A) IN GENERAL.—Except as provided in subsection (d) 

and subparagraph (B), the allowance for depletion under 

section 611 shall be computed in accordance with section 

613 with respect to— 

(i) so much of the taxpayer’s average daily marginal 

production of domestic crude oil as does not exceed the 

322 

taxpayer’s depletable oil quantity (determined without 

regard to paragraph (3)(A)(ii)), and 

(ii) so much of the taxpayer’s average daily marginal 

production of domestic natural gas as does not exceed 

the taxpayer’s depletable natural gas quantity (determined without regard to paragraph (3)(A)(ii)), 

and the applicable percentage shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section. 

(B) ELECTION TO HAVE PARAGRAPH APPLY TO PRO RATA

PORTION OF MARGINAL PRODUCTION.—If the taxpayer elects 

to have this subparagraph apply for any taxable year, the 

rules of subparagraph (A) shall apply to the average daily 

marginal production of domestic crude oil or domestic natural gas of the taxpayer to which paragraph (1) would 

have applied without regard to this paragraph. 

(C) APPLICABLE PERCENTAGE.—For purposes of subparagraph (A), the term ‘‘applicable percentage’’ means the percentage (not greater than 25 percent) equal to the sum 

of— 

(i) 15 percent, plus 

(ii) 1 percentage point for each whole dollar by 

which $20 exceeds the reference price for crude oil for 

the calendar year preceding the calendar year in 

which the taxable year begins. 

For purposes of this paragraph, the term ‘‘reference price’’ 

means, with respect to any calendar year, the reference 

price determined for such calendar year under section 

45K(d)(2)(C). 

(D) MARGINAL PRODUCTION.—The term ‘‘marginal production’’ means domestic crude oil or domestic natural gas 

which is produced during any taxable year from a property 

which— 

(i) is a stripper well property for the calendar year 

in which the taxable year begins, or 

(ii) is a property substantially all of the production 

of which during such calendar year is heavy oil. 

(E) STRIPPER WELL PROPERTY.—For purposes of this 

paragraph, the term ‘‘stripper well property’’ means, with 

respect to any calendar year, any property with respect to 

which the amount determined by dividing— 

(i) the average daily production of domestic crude oil 

and domestic natural gas from producing wells on 

such property for such calendar year, by 

(ii) the number of such wells, 

is 15 barrel equivalents or less. 

(F) HEAVY OIL.—For purposes of this paragraph, the 

term ‘‘heavy oil’’ means domestic crude oil produced from 

any property if such crude oil had a weighted average 

gravity of 20 degrees API or less (corrected to 60 degrees 

Fahrenheit). 

(G) AVERAGE DAILY MARGINAL PRODUCTION.—For purposes of this subsection— 

(i) the taxpayer’s average daily marginal production 

of domestic crude oil or natural gas for any taxable 

323 

year shall be determined by dividing the taxpayer’s 

aggregate marginal production of domestic crude oil or 

natural gas, as the case may be, during the taxable 

year by the number of days in such taxable year, and 

(ii) in the case of a taxpayer holding a partial interest in the production from any property (including any 

interest held in any partnership), such taxpayer’s production shall be considered to be that amount of such 

production determined by multiplying the total production of such property by the taxpayer’s percentage 

participation in the revenues from such property. 

(7) SPECIAL RULES.— 

(A) PRODUCTION OF CRUDE OIL IN EXCESS OF DEPLETABLE

OIL QUANTITY.—If the taxpayer’s average daily production 

of domestic crude oil exceeds his depletable oil quantity, 

the allowance under paragraph (1)(A) with respect to oil 

produced during the taxable year from each property in 

the United States shall be that amount which bears the 

same ratio to the amount of depletion which would have 

been allowable under section 613(a) for all of the taxpayer’s oil produced from such property during the taxable 

year (computed as if section 613 applied to all of such production at the rate specified in paragraph (1) or (6), as the 

case may be) as his depletable oil quantity bears to the aggregate number of barrels representing the average daily 

production of domestic crude oil of the taxpayer for such 

year. 

(B) PRODUCTION OF NATURAL GAS IN EXCESS OF DEPLETABLE NATURAL GAS QUANTITY.—If the taxpayer’s average 

daily production of domestic natural gas exceeds his depletable natural gas quantity, the allowance under paragraph (1)(B) with respect to natural gas produced during 

the taxable year from each property in the United States 

shall be that amount which bears the same ratio to the 

amount of depletion which would have been allowable 

under section 613(a) for all of the taxpayer’s natural gas 

produced from such property during the taxable year (computed as if section 613 applied to all of such production at 

the rate specified in paragraph (1) or (6), as the case may 

be) as the amount of his depletable natural gas quantity 

in cubic feet bears to the aggregate number of cubic feet 

representing the average daily production of domestic natural gas of the taxpayer for such year. 

(C) TAXABLE INCOME FROM THE PROPERTY.—If both oil 

and gas are produced from the property during the taxable 

year, for purposes of subparagraphs (A) and (B) the taxable income from the property, in applying the taxable income limitation in section 613(a), shall be allocated between the oil production and the gas production in proportion to the gross income during the taxable year from each. 

(D) PARTNERSHIPS.—In the case of a partnership, the depletion allowance shall be computed separately by the 

partners and not by the partnership. The partnership shall 

allocate to each partner his proportionate share of the adjusted basis of each partnership oil or gas property. The alVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00329 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
324 

location is to be made as of the later of the date of acquisition of the oil or gas property by the partnership, or January 1, 1975. A partner’s proportionate share of the adjusted basis of partnership property shall be determined in 

accordance with his interest in partnership capital or income and, in the case of property contributed to the partnership by a partner, section 704(c) (relating to contributed property) shall apply in determining such share. Each 

partner shall separately keep records of his share of the 

adjusted basis in each oil and gas property of the partnership, adjust such share of the adjusted basis for any depletion taken on such property, and use such adjusted basis 

each year in the computation of his cost depletion or in the 

computation of his gain or loss on the disposition of such 

property by the partnership. For purposes of section 732 

(relating to basis of distributed property other than 

money), the partnership’s adjusted basis in mineral property shall be an amount equal to the sum of the partners’ 

adjusted basis in such property as determined under this 

paragraph. 

(8) BUSINESS UNDER COMMON CONTROL; MEMBERS OF THE

SAME FAMILY.— 

(A) COMPONENT MEMBERS OF CONTROLLED GROUP TREATED AS ONE TAXPAYER.—For purposes of this subsection, 

persons who are members of the same controlled group of 

corporations shall be treated as one taxpayer. 

(B) AGGREGATION OF BUSINESS ENTITIES UNDER COMMON

CONTROL.—If 50 percent or more of the beneficial interest 

in two or more corporations, trusts, or estates is owned by 

the same or related persons (taking into account only persons who own at least 5 percent of such beneficial interest), the tentative quantity determined under paragraph 

(3)(B) shall be allocated among all such entities in proportion to the respective production of domestic crude oil during the period in question by such entities. 

(C) ALLOCATION AMONG MEMBERS OF THE SAME FAMILY.—In the case of individuals who are members of the 

same family, the tentative quantity determined under 

paragraph (3)(B) shall be allocated among such individuals 

in proportion to the respective production of domestic 

crude oil during the period in question by such individuals. 

(D) DEFINITION AND SPECIAL RULES.—For purposes of 

this paragraph— 

(i) the term ‘‘controlled group of corporations’’ has 

the meaning given to such term by section 1563(a), except that section 1563(b)(2) shall not apply and except 

that ‘‘more than 50 percent’’ shall be substituted for 

‘‘at least 80 percent’’ each place it appears in section 

1563(a), 

(ii) a person is a related person to another person if 

such persons are members of the same controlled 

group of corporations or if the relationship between 

such persons would result in a disallowance of losses 

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325 

pose the family of an individual includes only øhis 

spouse¿ the individual’s spouse and minor children. 

(iii) the family of an individual includes only øhis 

spouse¿ the individual’s spouse and minor children, 

and 

(iv) each 6,000 cubic feet of domestic natural gas 

shall be treated as 1 barrel of domestic crude oil. 

(9) SPECIAL RULE FOR FISCAL YEAR TAXPAYERS.—In applying 

this subsection to a taxable year which is not a calendar year, 

each portion of such taxable year which occurs during a single 

calendar year shall be treated as if it were a short taxable 

year. 

(10) CERTAIN PRODUCTION NOT TAKEN INTO ACCOUNT.—In applying this subsection, there shall not be taken into account 

the production of natural gas with respect to which subsection 

(b) applies. 

(11) SUBCHAPTER S CORPORATIONS.— 

(A) COMPUTATION OF DEPLETION ALLOWANCE AT SHAREHOLDER LEVEL.—In the case of an S corporation, the allowance for depletion with respect to any oil or gas property 

shall be computed separately by each shareholder. 

(B) ALLOCATION OF BASIS.—The S corporation shall allocate to each shareholder his pro rata share of the adjusted 

basis of the S corporation in each oil or gas property held 

by the S corporation. The allocation shall be made as of 

the later of the date of acquisition of the property by the 

S corporation, or the first day of the first taxable year of 

the S corporation to which the Subchapter S Revision Act 

of 1982 applies. Each shareholder shall separately keep 

records of his share of the adjusted basis in each oil and 

gas property of the S corporation, adjust such share of the 

adjusted basis for any depletion taken on such property, 

and use such adjusted basis each year in the computation 

of his cost depletion or in the computation of his gain or 

loss on the disposition of such property by the S corporation. In the case of any distribution of oil or gas property 

to its shareholders by the S corporation, the corporation’s 

adjusted basis in the property shall be an amount equal to 

the sum of the shareholders’ adjusted bases in such property, as determined under this subparagraph. 

(d) LIMITATIONS ON APPLICATION OF SUBSECTION (C).— 

(1) LIMITATION BASED ON TAXABLE INCOME.—The deduction 

for the taxable year attributable to the application of subsection (c) shall not exceed 65 percent of the taxpayer’s taxable 

income for the year computed without regard to— 

(A) any depletion on production from an oil or gas property which is subject to the provisions of subsection (c), 

(B) any deduction allowable under section 199A, 

(C) any net operating loss carryback to the taxable year 

under section 172, 

(D) any capital loss carryback to the taxable year under 

section 1212, and 

(E) in the case of a trust, any distributions to its beneficiary, except in the case of any trust where any beneficiary of such trust is a member of the family (as defined 

326 

in section 267(c)(4)) of a settlor who created inter vivos 

and testamentary trusts for members of the family and 

such settlor died within the last six days of the fifth month 

in 1970, and the law in the jurisdiction in which such trust 

was created requires all or a portion of the gross or net 

proceeds of any royalty or other interest in oil, gas, or 

other mineral representing any percentage depletion allowance to be allocated to the principal of the trust. 

If an amount is disallowed as a deduction for the taxable year 

by reason of application of the preceding sentence, the disallowed amount shall be treated as an amount allowable as a 

deduction under subsection (c) for the following taxable year, 

subject to the application of the preceding sentence to such taxable year. For purposes of basis adjustments and determining 

whether cost depletion exceeds percentage depletion with respect to the production from a property, any amount disallowed as a deduction on the application of this paragraph 

shall be allocated to the respective properties from which the 

oil or gas was produced in proportion to the percentage depletion otherwise allowable to such properties under subsection 

(c). 

(2) RETAILERS EXCLUDED.—Subsection (c) shall not apply in 

the case of any taxpayer who directly, or through a related person, sells oil or natural gas (excluding bulk sales of such items 

to commercial or industrial users), or any product derived from 

oil or natural gas (excluding bulk sales of aviation fuels to the 

Department of Defense)— 

(A) through any retail outlet operated by the taxpayer or 

a related person, or 

(B) to any person— 

(i) obligated under an agreement or contract with 

the taxpayer or a related person to use a trademark, 

trade name, or service mark or name owned by such 

taxpayer or a related person, in marketing or distributing oil or natural gas or any product derived from 

oil or natural gas, or 

(ii) given authority, pursuant to an agreement or 

contract with the taxpayer or a related person, to occupy any retail outlet owned, leased, or in any way 

controlled by the taxpayer or a related person. 

Notwithstanding the preceding sentence this paragraph shall 

not apply in any case where the combined gross receipts from 

the sale of such oil, natural gas, or any product derived therefrom, for the taxable year of all retail outlets taken into account for purposes of this paragraph do not exceed $5,000,000. 

For purposes of this paragraph, sales of oil, natural gas, or any 

product derived from oil or natural gas shall not include sales 

made of such items outside the United States, if no domestic 

production of the taxpayer or a related person is exported during the taxable year or the immediately preceding taxable 

year. 

(3) RELATED PERSON.—For purposes of this subsection, a person is a related person with respect to the taxpayer if a significant ownership interest in either the taxpayer or such person 

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327 

ership interest in both the taxpayer and such person. For purposes of the preceding sentence, the term ‘‘significant ownership interest’’ means— 

(A) with respect to any corporation, 5 percent or more in 

value of the outstanding stock of such corporation, 

(B) with respect to a partnership, 5 percent or more interest in the profits or capital of such partnership, and 

(C) with respect to an estate or trust, 5 percent or more 

of the beneficial interests in such estate or trust. 

For purposes of determining a significant ownership interest, 

an interest owned by or for a corporation, partnership, trust, 

or estate shall be considered as owned directly both by itself 

and proportionately by its shareholders, partners, or beneficiaries, as the case may be. 

(4) CERTAIN REFINERS EXCLUDED.—If the taxpayer or one or 

more related persons engages in the refining of crude oil, subsection (c) shall not apply to the taxpayer for a taxable year 

if the average daily refinery runs of the taxpayer and such persons for the taxable year exceed 75,000 barrels. For purposes 

of this paragraph, the average daily refinery runs for any taxable year shall be determined by dividing the aggregate refinery runs for the taxable year by the number of days in the taxable year. 

(5) PERCENTAGE DEPLETION NOT ALLOWED FOR LEASE BO- NUSES, ETC..—In the case of any oil or gas property to which 

subsection (c) applies, for purposes of section 613, the term 

‘‘gross income from the property’’ shall not include any lease 

bonus, advance royalty, or other amount payable without regard to production from property. 

(e) DEFINITIONS.—For purposes of this section— 

(1) CRUDE OIL.—The term ‘‘crude oil’’ includes a natural gas 

liquid recovered from a gas well in lease separators or field facilities. 

(2) NATURAL GAS.—The term ‘‘natural gas’’ means any product (other than crude oil) of an oil or gas well if a deduction 

for depletion is allowable under section 611 with respect to 

such product. 

(3) DOMESTIC.—The term ‘‘domestic’’ refers to production 

from an oil or gas well located in the United States or in a possession of the United States. 

(4) BARREL.—The term ‘‘barrel’’ means 42 United States gallons. 

Subchapter J—ESTATES, TRUSTS, 

BENEFICIARIES, AND DECEDENTS 

* * * * * * * 

PART I—ESTATES, TRUSTS, AND BENEFICIARIES 

* * * * * * * 

Subpart A—GENERAL RULES FOR TAXATION OF 

ESTATES AND TRUSTS 

* * * * * * * 

328 

SEC. 643. DEFINITIONS APPLICABLE TO SUBPARTS A, B, C, AND D. 

(a) DISTRIBUTABLE NET INCOME.—For purposes of this part, the 

term ‘‘distributable net income’’ means, with respect to any taxable 

year, the taxable income of the estate or trust computed with the 

following modifications— 

(1) DEDUCTION FOR DISTRIBUTIONS.—No deduction shall be 

taken under sections 651 and 661 (relating to additional deductions). 

(2) DEDUCTION FOR PERSONAL EXEMPTION.—No deduction 

shall be taken under section 642(b) (relating to deduction for 

personal exemptions). 

(3) CAPITAL GAINS AND LOSSES.—Gains from the sale or exchange of capital assets shall be excluded to the extent that 

such gains are allocated to corpus and are not (A) paid, credited, or required to be distributed to any beneficiary during the 

taxable year, or (B) paid, permanently set aside, or to be used 

for the purposes specified in section 642(c). Losses from the 

sale or exchange of capital assets shall be excluded, except to 

the extent such losses are taken into account in determining 

the amount of gains from the sale or exchange of capital assets 

which are paid, credited, or required to be distributed to any 

beneficiary during the taxable year. The exclusion under section 1202 shall not be taken into account. 

(4) EXTRAORDINARY DIVIDENDS AND TAXABLE STOCK DIVIDENDS.—For purposes only of subpart B (relating to trusts 

which distribute current income only), there shall be excluded 

those items of gross income constituting extraordinary dividends or taxable stock dividends which the fiduciary, acting in 

good faith, does not pay or credit to any beneficiary by reason 

of his determination that such dividends are allocable to corpus 

under the terms of the governing instrument and applicable 

local law. 

(5) TAX-EXEMPT INTEREST.—There shall be included any taxexempt interest to which section 103 applies, reduced by any 

amounts which would be deductible in respect of disbursements allocable to such interest but for the provisions of section 265 (relating to disallowance of certain deductions). 

(6) INCOME OF FOREIGN TRUST.—In the case of a foreign 

trust— 

(A) There shall be included the amounts of gross income 

from sources without the United States, reduced by any 

amounts which would be deductible in respect of disbursements allocable to such income but for the provisions of 

section 265(a)(1) (relating to disallowance of certain deductions). 

(B) Gross income from sources within the United States 

shall be determined without regard to section 894 (relating 

to income exempt under treaty). 

(C) Paragraph (3) shall not apply to a foreign trust. In 

the case of such a trust, there shall be included gains from 

the sale or exchange of capital assets, reduced by losses 

from such sales or exchanges to the extent such losses do 

not exceed gains from such sales or exchanges. 

(7) ABUSIVE TRANSACTIONS.—The Secretary shall prescribe 

such regulations as may be necessary or appropriate to carry 

329 

out the purposes of this part, including regulations to prevent 

avoidance of such purposes. 

If the estate or trust is allowed a deduction under section 642(c), 

the amount of the modifications specified in paragraphs (5) and (6) 

shall be reduced to the extent that the amount of income which is 

paid, permanently set aside, or to be used for the purposes specified in section 642(c) is deemed to consist of items specified in those 

paragraphs. For this purpose, such amount shall (in the absence of 

specific provisions in the governing instrument) be deemed to consist of the same proportion of each class of items of income of the 

estate or trust as the total of each class bears to the total of all 

classes. 

(b) INCOME.—For purposes of this subpart and subparts B, C, 

and D, the term ‘‘income’’, when not preceded by the words ‘‘taxable’’, ‘‘distributable net’’, ‘‘undistributed net’’, or ‘‘gross’’, means the 

amount of income of the estate or trust for the taxable year determined under the terms of the governing instrument and applicable 

local law. Items of gross income constituting extraordinary dividends or taxable stock dividends which the fiduciary, acting in good 

faith, determines to be allocable to corpus under the terms of the 

governing instrument and applicable local law shall not be considered income. 

(c) BENEFICIARY.—For purposes of this part, the term ‘‘beneficiary’’ includes heir, legatee, devisee. 

(d) COORDINATION WITH BACK-UP WITHHOLDING.—Except to the 

extent otherwise provided in regulations, this subchapter shall be 

applied with respect to payments subject to withholding under section 3406— 

(1) by allocating between the estate or trust and its beneficiaries any credit allowable under section 31(c) (on the basis 

of their respective shares of any such payment taken into account under this subchapter), 

(2) by treating each beneficiary to whom such credit is allocated as if an amount equal to such credit has been paid to 

him by the estate or trust, and 

(3) by allowing the estate or trust a deduction in an amount 

equal to the credit so allocated to beneficiaries. 

(e) TREATMENT OF PROPERTY DISTRIBUTED IN KIND.— 

(1) BASIS OF BENEFICIARY.—The basis of any property received by a beneficiary in a distribution from an estate or trust 

shall be— 

(A) the adjusted basis of such property in the hands of 

the estate or trust immediately before the distribution, adjusted for 

(B) any gain or loss recognized to the estate or trust on 

the distribution. 

(2) AMOUNT OF DISTRIBUTION.—In the case of any distribution of property (other than cash), the amount taken into account under sections 661(a)(2) and 662(a)(2) shall be the lesser 

of— 

(A) the basis of such property in the hands of the beneficiary (as determined under paragraph (1)), or 

(B) the fair market value of such property. 

(3) ELECTION TO RECOGNIZE GAIN.— 

330 

(A) IN GENERAL.—In the case of any distribution of property (other than cash) to which an election under this 

paragraph applies— 

(i) paragraph (2) shall not apply, 

(ii) gain or loss shall be recognized by the estate or 

trust in the same manner as if such property had been 

sold to the distributee at its fair market value, and 

(iii) the amount taken into account under sections 

661(a)(2) and 662(a)(2) shall be the fair market value 

of such property. 

(B) ELECTION.—Any election under this paragraph shall 

apply to all distributions made by the estate or trust during a taxable year and shall be made on the return of such 

estate or trust for such taxable year. 

Any such election, once made, may be revoked only with the 

consent of the Secretary. 

(4) EXCEPTION FOR DISTRIBUTIONS DESCRIBED IN SECTION

663(A).—This subsection shall not apply to any distribution described in section 663(a). 

(f) TREATMENT OF MULTIPLE TRUSTS.—For purposes of this subchapter, under regulations prescribed by the Secretary, 2 or more 

trusts shall be treated as 1 trust if— 

(1) such trusts have substantially the same grantor or 

grantors and substantially the same primary beneficiary or 

beneficiaries, and 

(2) a principal purpose of such trusts is the avoidance of the 

tax imposed by this chapter. 

For purposes of the preceding sentence, a øhusband and wife¿ married couple shall be treated as 1 person. 

(g) CERTAIN PAYMENTS OF ESTIMATED TAX TREATED AS PAID BY

BENEFICIARY.— 

(1) IN GENERAL.—In the case of a trust— 

(A) the trustee may elect to treat any portion of a payment of estimated tax made by such trust for any taxable 

year of the trust as a payment made by a beneficiary of 

such trust, 

(B) any amount so treated shall be treated as paid or 

credited to the beneficiary on the last day of such taxable 

year, and 

(C) for purposes of subtitle F, the amount so treated— 

(i) shall not be treated as a payment of estimated 

tax made by the trust, but 

(ii) shall be treated as a payment of estimated tax 

made by such beneficiary on January 15 following the 

taxable year. 

(2) TIME FOR MAKING ELECTION.—An election under paragraph (1) shall be made on or before the 65th day after the 

close of the taxable year of the trust and in such manner as 

the Secretary may prescribe. 

(3) EXTENSION TO LAST YEAR OF ESTATE.—In the case of a 

taxable year reasonably expected to be the last taxable year of 

an estate— 

(A) any reference in this subsection to a trust shall be 

treated as including a reference to an estate, and 

331 

(B) the fiduciary of the estate shall be treated as the 

trustee. 

(h) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS THROUGH NOMI- NEES.—For purposes of this part, any amount paid to a United 

States person which is derived directly or indirectly from a foreign 

trust of which the payor is not the grantor shall be deemed in the 

year of payment to have been directly paid by the foreign trust to 

such United States person. 

(i) LOANS FROM FOREIGN TRUSTS.—For purposes of subparts B, C, 

and D— 

(1) GENERAL RULE.—Except as provided in regulations, if a 

foreign trust makes a loan of cash or marketable securities (or 

permits the use of any other trust property) directly or indirectly to or by— 

(A) any grantor or beneficiary of such trust who is a 

United States person, or 

(B) any United States person not described in subparagraph (A) who is related to such grantor or beneficiary, 

the amount of such loan (or the fair market value of the use 

of such property) shall be treated as a distribution by such 

trust to such grantor or beneficiary (as the case may be). 

(2) DEFINITIONS AND SPECIAL RULES.—For purposes of this 

subsection— 

(A) CASH.—The term ‘‘cash’’ includes foreign currencies 

and cash equivalents. 

(B) RELATED PERSON.— (i) IN GENERAL.—A person is related to another person if the relationship between such persons would result in a disallowance of losses under section 267 or 

707(b). In applying section 267 for purposes of the preceding sentence, section 267(c)(4) shall be applied as if 

the family of an individual includes the spouses of the 

members of the family. 

(ii) ALLOCATION.—If any person described in paragraph (1)(B) is related to more than one person, the 

grantor or beneficiary to whom the treatment under 

this subsection applies shall be determined under regulations prescribed by the Secretary. 

(C) EXCLUSION OF TAX-EXEMPTS.—The term ‘‘United 

States person’’ does not include any entity exempt from tax 

under this chapter. 

(D) TRUST NOT TREATED AS SIMPLE TRUST.—Any trust 

which is treated under this subsection as making a distribution shall be treated as not described in section 651. 

(E) EXCEPTION FOR COMPENSATED USE OF PROPERTY.—In 

the case of the use of any trust property other than a loan 

of cash or marketable securities, paragraph (1) shall not 

apply to the extent that the trust is paid the fair market 

value of such use within a reasonable period of time of 

such use. 

(3) SUBSEQUENT TRANSACTIONS.—If any loan (or use of property) is taken into account under paragraph (1), any subsequent transaction between the trust and the original borrower 

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332 

wise) or the return of such property shall be disregarded for 

purposes of this title. 

* * * * * * * 

Subpart E—GRANTORS AND OTHERS TREATED AS 

SUBSTANTIAL OWNERS 

* * * * * * * 

SEC. 672. DEFINITIONS AND RULES. 

(a) ADVERSE PARTY.—For purposes of this subpart, the term ‘‘adverse party’’ means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the 

trust. A person having a general power of appointment over the 

trust property shall be deemed to have a beneficial interest in the 

trust. 

(b) NONADVERSE PARTY.—For purposes of this subpart, the term 

‘‘nonadverse party’’ means any person who is not an adverse party. 

(c) RELATED OR SUBORDINATE PARTY.—For purposes of this subpart, the term ‘‘related or subordinate party’’ means any nonadverse party who is— 

(1) the grantor’s spouse if living with the grantor; 

(2) any one of the following: The grantor’s father, mother, 

issue, brother or sister; an employee of the grantor; a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control; a subordinate employee of a corporation 

in which the grantor is an executive. 

For purposes of subsection (f) and sections 674 and 675, a related 

or subordinate party shall be presumed to be subservient to the 

grantor in respect of the exercise or nonexercise of the powers conferred on him unless such party is shown not to be subservient by 

a preponderance of the evidence. 

(d) RULE WHERE POWER IS SUBJECT TO CONDITION PRECEDENT.— 

A person shall be considered to have a power described in this subpart even though the exercise of the power is subject to a precedent 

giving of notice or takes effect only on the expiration of a certain 

period after the exercise of the power. 

(e) GRANTOR TREATED AS HOLDING ANY POWER OR INTEREST OF

GRANTOR’S SPOUSE.— 

(1) IN GENERAL.—For purposes of this subpart, a grantor 

shall be treated as holding any power or interest held by— 

(A) any individual who was the spouse of the grantor at 

the time of the creation of such power or interest, or 

(B) any individual who became the spouse of the grantor 

after the creation of such power or interest, but only with 

respect to periods after such individual became the spouse 

of the grantor. 

(2) MARITAL STATUS.—For purposes of paragraph (1)(A), an 

individual legally separated from øhis spouse¿ the individual’s 

spouse under a decree of divorce or of separate maintenance 

shall not be considered as married. 

(f) SUBPART NOT TO RESULT IN FOREIGN OWNERSHIP.— 

(1) IN GENERAL.—Notwithstanding any other provision of 

this subpart, this subpart shall apply only to the extent such 

333 

application results in an amount (if any) being currently taken 

into account (directly or through 1 or more entities) under this 

chapter in computing the income of a citizen or resident of the 

United States or a domestic corporation. 

(2) EXCEPTIONS.— 

(A) CERTAIN REVOCABLE AND IRREVOCABLE TRUSTS.— 

Paragraph (1) shall not apply to any portion of a trust if— 

(i) the power to revest absolutely in the grantor title 

to the trust property to which such portion is attributable is exercisable solely by the grantor without the 

approval or consent of any other person or with the 

consent of a related or subordinate party who is subservient to the grantor, or 

(ii) the only amounts distributable from such portion 

(whether income or corpus) during the lifetime of the 

grantor are amounts distributable to the grantor or 

the spouse of the grantor. 

(B) COMPENSATORY TRUSTS.—Except as provided in regulations, paragraph (1) shall not apply to any portion of a 

trust distributions from which are taxable as compensation 

for services rendered. 

(3) SPECIAL RULES.—Except as otherwise provided in regulations prescribed by the Secretary— 

(A) a controlled foreign corporation (as defined in section 

957) shall be treated as a domestic corporation for purposes of paragraph (1), and 

(B) paragraph (1) shall not apply for purposes of applying section 1297. 

(4) RECHARACTERIZATION OF PURPORTED GIFTS.—In the case 

of any transfer directly or indirectly from a partnership or foreign corporation which the transferee treats as a gift or bequest, the Secretary may recharacterize such transfer in such 

circumstances as the Secretary determines to be appropriate to 

prevent the avoidance of the purposes of this subsection. 

(5) SPECIAL RULE WHERE GRANTOR IS FOREIGN PERSON.—If— 

(A) but for this subsection, a foreign person would be 

treated as the owner of any portion of a trust, and 

(B) such trust has a beneficiary who is a United States 

person, 

such beneficiary shall be treated as the grantor of such portion 

to the extent such beneficiary has made (directly or indirectly) 

transfers of property (other than in a sale for full and adequate 

consideration) to such foreign person. For purposes of the preceding sentence, any gift shall not be taken into account to the 

extent such gift would be excluded from taxable gifts under 

section 2503(b). 

(6) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the 

purposes of this subsection, including regulations providing 

that paragraph (1) shall not apply in appropriate cases. 

Subchapter K—PARTNERS AND PARTNERSHIPS 

* * * * * * * 

334 

PART I—DETERMINATION OF TAX LIABILITY 

* * * * * * * 

SEC. 704. PARTNER’S DISTRIBUTIVE SHARE. 

(a) EFFECT OF PARTNERSHIP AGREEMENT.—A partner’s distributive share of income, gain, loss, deduction, or credit shall, except 

as otherwise provided in this chapter, be determined by the partnership agreement. 

(b) DETERMINATION OF DISTRIBUTIVE SHARE.—A partner’s distributive share of income, gain, loss, deduction, or credit (or item 

thereof) shall be determined in accordance with the partner’s interest in the partnership (determined by taking into account all facts 

and circumstances), if— 

(1) the partnership agreement does not provide as to the 

partner’s distributive share of income, gain, loss, deduction, or 

credit (or item thereof), or 

(2) the allocation to a partner under the agreement of income, gain, loss, deduction, or credit (or item thereof) does not 

have substantial economic effect. 

(c) CONTRIBUTED PROPERTY.— 

(1) IN GENERAL.—Under regulations prescribed by the Secretary— 

(A) income, gain, loss, and deduction with respect to 

property contributed to the partnership by a partner shall 

be shared among the partners so as to take account of the 

variation between the basis of the property to the partnership and its fair market value at the time of contribution, 

(B) if any property so contributed is distributed (directly 

or indirectly) by the partnership (other than to the contributing partner) within 7 years of being contributed— 

(i) the contributing partner shall be treated as recognizing gain or loss (as the case may be) from the 

sale of such property in an amount equal to the gain 

or loss which would have been allocated to such partner under subparagraph (A) by reason of the variation 

described in subparagraph (A) if the property had 

been sold at its fair market value at the time of the 

distribution, 

(ii) the character of such gain or loss shall be determined by reference to the character of the gain or loss 

which would have resulted if such property had been 

sold by the partnership to the distributee, and 

(iii) appropriate adjustments shall be made to the 

adjusted basis of the contributing partner’s interest in 

the partnership and to the adjusted basis of the property distributed to reflect any gain or loss recognized 

under this subparagraph, and 

(C) if any property so contributed has a built-in loss— 

(i) such built-in loss shall be taken into account only 

in determining the amount of items allocated to the 

contributing partner, and 

(ii) except as provided in regulations, in determining 

the amount of items allocated to other partners, the 

basis of the contributed property in the hands of the 

335 

partnership shall be treated as being equal to its fair 

market value at the time of contribution. 

For purposes of subparagraph (C), the term ‘‘built-in loss’’ 

means the excess of the adjusted basis of the property (determined without regard to subparagraph (C)(ii)) over its fair 

market value at the time of contribution. 

(2) SPECIAL RULE FOR DISTRIBUTIONS WHERE GAIN OR LOSS

WOULD NOT BE RECOGNIZED OUTSIDE PARTNERSHIPS.—Under 

regulations prescribed by the Secretary, if— 

(A) property contributed by a partner (hereinafter referred to as the ‘‘contributing partner’’) is distributed by 

the partnership to another partner, and 

(B) other property of a like kind (within the meaning of 

section 1031) is distributed by the partnership to the contributing partner not later than the earlier of— 

(i) the 180th day after the date of the distribution 

described in subparagraph (A), or 

(ii) the due date (determined with regard to extensions) for the contributing partner’s return of the tax 

imposed by this chapter for the taxable year in which 

the distribution described in subparagraph (A) occurs, 

then to the extent of the value of the property described in subparagraph (B), paragraph (1)(B) shall be applied as if the contributing partner had contributed to the partnership the property described in subparagraph (B). 

(3) OTHER RULES.—Under regulations prescribed by the Secretary, rules similar to the rules of paragraph (1) shall apply 

to contributions by a partner (using the cash receipts and disbursements method of accounting) of accounts payable and 

other accrued but unpaid items. Any reference in paragraph (1) 

or (2) to the contributing partner shall be treated as including 

a reference to any successor of such partner. 

(d) LIMITATION ON ALLOWANCE OF LOSSES.— (1) IN GENERAL.—A partner’s distributive share of partnership loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such partner’s interest in the partnership at the end of the partnership year in which such loss 

occurred. 

(2) CARRYOVER.—Any excess of such loss over such basis 

shall be allowed as a deduction at the end of the partnership 

year in which such excess is repaid to the partnership. 

(3) SPECIAL RULES.— 

(A) IN GENERAL.—In determining the amount of any loss 

under paragraph (1), there shall be taken into account the 

partner’s distributive share of amounts described in paragraphs (4) and (6) of section 702(a). 

(B) EXCEPTION.—In the case of a charitable contribution 

of property whose fair market value exceeds its adjusted 

basis, subparagraph (A) shall not apply to the extent of the 

partner’s distributive share of such excess. 

(e) PARTNERSHIP INTERESTS CREATED BY GIFT.— (1) DISTRIBUTIVE SHARE OF DONEE INCLUDIBLE IN GROSS IN- COME.—In the case of any partnership interest created by gift, 

the distributive share of the donee under the partnership 

agreement shall be includible in his gross income, except to the 

336 

extent that such share is determined without allowance of reasonable compensation for services rendered to the partnership 

by the donor, and except to the extent that the portion of such 

share attributable to donated capital is proportionately greater 

than the share of the donor attributable to the donor’s capital. 

The distributive share of a partner in the earnings of the partnership shall not be diminished because of absence due to military service. 

(2) PURCHASE OF INTEREST BY MEMBER OF FAMILY.—For purposes of this subsection, an interest purchased by one member 

of a family from another shall be considered to be created by 

gift from the seller, and the fair market value of the purchased 

interest shall be considered to be donated capital. The ‘‘family’’ 

of any individual shall include only øhis spouse¿ the individual’s spouse, ancestors, and lineal descendants, and any trusts 

for the primary benefit of such persons. 

(f) CROSS REFERENCE.—For rules in the case of the sale, exchange, liquidation, or reduction of a partner’s interest, see section 

706(c)(2). 

* * * * * * * 

PART III—DEFINITIONS 

* * * * * * * 

SEC. 761. TERMS DEFINED. 

(a) PARTNERSHIP.—For purposes of this subtitle, the term ‘‘partnership’’ includes a syndicate, group, pool, joint venture, or other 

unincorporated organization through or by means of which any 

business, financial operation, or venture is carried on, and which 

is not, within the meaning of this title, a corporation or a trust or 

estate. Under regulations the Secretary may, at the election of all 

the members of an unincorporated organization, exclude such organization from the application of all or part of this subchapter, if it 

is availed of— 

(1) for investment purposes only and not for the active conduct of a business, 

(2) for the joint production, extraction, or use of property, but 

not for the purpose of selling services or property produced or 

extracted, or 

(3) by dealers in securities for a short period for the purpose 

of underwriting, selling, or distributing a particular issue of securities, 

if the income of the members of the organization may be adequately determined without the computation of partnership taxable 

income. 

(b) PARTNER.—For purposes of this subtitle, the term ‘‘partner’’ 

means a member of a partnership. In the case of a capital interest 

in a partnership in which capital is a material income-producing 

factor, whether a person is a partner with respect to such interest 

shall be determined without regard to whether such interest was 

derived by gift from any other person. 

(c) PARTNERSHIP AGREEMENT.—For purposes of this subchapter, a 

partnership agreement includes any modifications of the partnership agreement made prior to, or at, the time prescribed by law for 

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337 

ing extensions) which are agreed to by all the partners, or which 

are adopted in such other manner as may be provided by the partnership agreement. 

(d) LIQUIDATION OF A PARTNER’S INTEREST.—For purposes of this 

subchapter, the term ‘‘liquidation of a partner’s interest’’ means the 

termination of a partner’s entire interest in a partnership by 

means of a distribution, or a series of distributions, to the partner 

by the partnership. 

(e) DISTRIBUTIONS OF PARTNERSHIP INTERESTS TREATED AS EX- CHANGES.—Except as otherwise provided in regulations, for purposes of— 

(1) section 708 (relating to continuation of partnership), 

(2) section 743 (relating to optional adjustment to basis of 

partnership property), and 

(3) any other provision of this subchapter specified in regulations prescribed by the Secretary, 

any distribution of an interest in a partnership (not otherwise 

treated as an exchange) shall be treated as an exchange. 

(f) QUALIFIED JOINT VENTURE.— (1) IN GENERAL.—In the case of a qualified joint venture conducted by a øhusband and wife¿ married couple who file a joint 

return for the taxable year, for purposes of this title— 

(A) such joint venture shall not be treated as a partnership, 

(B) all items of income, gain, loss, deduction, and credit 

shall be divided between the spouses in accordance with 

their respective interests in the venture, and 

(C) each spouse shall take into account such spouse’s respective share of such items as if they were attributable to 

a trade or business conducted by such spouse as a sole proprietor. 

(2) QUALIFIED JOINT VENTURE.—For purposes of paragraph 

(1), the term ‘‘qualified joint venture’’ means any joint venture 

involving the conduct of a trade or business if— 

(A) the only members of such joint venture are a øhusband and wife¿ married couple, (B) both spouses materially participate (within the 

meaning of section 469(h) without regard to paragraph (5) 

thereof) in such trade or business, and 

(C) both spouses elect the application of this subsection. 

(g) CROSS REFERENCE.—For rules in the case of the sale, exchange, liquidation, or reduction of a partner’s interest, see sections 

704(b) and 706(c)(2). 

* * * * * * * 

Subchapter N—TAX BASED ON INCOME FROM 

SOURCES WITHIN OR WITHOUT THE UNITED 

STATES 

* * * * * * * 

PART III—INCOME FROM SOURCES WITHOUT THE 

UNITED STATES 

* * * * * * * 

338 

Subpart B—EARNED INCOME OF CITIZENS OR 

RESIDENTS OF UNITED STATES 

* * * * * * * 

SEC. 911. CITIZENS OR RESIDENTS OF THE UNITED STATES LIVING 

ABROAD. 

(a) EXCLUSION FROM GROSS INCOME.—At the election of a qualified individual (made separately with respect to paragraphs (1) and 

(2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year— 

(1) the foreign earned income of such individual, and 

(2) the housing cost amount of such individual. 

(b) FOREIGN EARNED INCOME.— (1) DEFINITION.—For purposes of this section— 

(A) IN GENERAL.—The term ‘‘foreign earned income’’ with 

respect to any individual means the amount received by 

such individual from sources within a foreign country or 

countries which constitute earned income attributable to 

services performed by such individual during the period 

described in subparagraph (A) or (B) of subsection (d)(1), 

whichever is applicable. 

(B) CERTAIN AMOUNTS NOT INCLUDED IN FOREIGN

EARNED INCOME.—The foreign earned income for an individual shall not include amounts— 

(i) received as a pension or annuity, 

(ii) paid by the United States or an agency thereof 

to an employee of the United States or an agency 

thereof, 

(iii) included in gross income by reason of section 

402(b) (relating to taxability of beneficiary of nonexempt trust) or section 403(c) (relating to taxability of 

beneficiary under a nonqualified annuity), or 

(iv) received after the close of the taxable year following the taxable year in which the services to which 

the amounts are attributable are performed. 

(2) LIMITATION ON FOREIGN EARNED INCOME.— 

(A) IN GENERAL.—The foreign earned income of an individual which may be excluded under subsection (a)(1) for 

any taxable year shall not exceed the amount of foreign 

earned income computed on a daily basis at an annual rate 

equal to the exclusion amount for the calendar year in 

which such taxable year begins. 

(B) ATTRIBUTION TO YEAR IN WHICH SERVICES ARE PER- FORMED.—For purposes of applying subparagraph (A), 

amounts received shall be considered received in the taxable year in which the services to which the amounts are 

attributable are performed. 

ø(C) TREATMENT OF COMMUNITY INCOME.—In applying 

subparagraph (A) with respect to amounts received from 

services performed by a husband or wife which are community income under community property laws applicable 

to such income, the aggregate amount which may be excludable from the gross income of such husband and wife 

under subsection (a)(1) for any taxable year shall equal the 

339 

amount which would be so excludable if such amounts did 

not constitute community income.¿ 

(C) TREATMENT OF COMMUNITY INCOME.—In applying 

subparagraph (A) with respect to amounts received from 

services performed by a married individual which are community income under community property laws applicable 

to such income, the aggregate amount which may be excludable from the gross income of such individual and such 

individual’s spouse under subsection (a)(1) for any taxable 

year shall equal the amount which would be so excludable 

if such amounts did not constitute community income. 

(D) EXCLUSION AMOUNT.— 

(i) IN GENERAL.—The exclusion amount for any calendar year is $80,000. 

(ii) INFLATION ADJUSTMENT.—In the case of any taxable year beginning in a calendar year after 2005, the 

$80,000 amount in clause (i) shall be increased by an 

amount equal to the product of— 

(I) such dollar amount, and 

(II) the cost-of-living adjustment determined 

under section 1(f)(3) for the calendar year in 

which the taxable year begins, determined by substituting ‘‘2004’’ for ‘‘2016’’ in subparagraph (A)(ii) 

thereof. 

If any increase determined under the preceding sentence is 

not a multiple of $100, such increase shall be rounded to 

the next lowest multiple of $100. 

(c) HOUSING COST AMOUNT.—For purposes of this section— 

(1) IN GENERAL.—The term ‘‘housing cost amount’’ means an 

amount equal to the excess of— 

(A) the housing expenses of an individual for the taxable 

year to the extent such expenses do not exceed the amount 

determined under paragraph (2), over 

(B) an amount equal to the product of— 

(i) 16 percent of the amount (computed on a daily 

basis) in effect under subsection (b)(2)(D) for the calendar year in which such taxable year begins, multiplied by 

(ii) the number of days of such taxable year within 

the applicable period described in subparagraph (A) or 

(B) of subsection (d)(1). 

(2) LIMITATION.— 

(A) IN GENERAL.—The amount determined under this 

paragraph is an amount equal to the product of— 

(i) 30 percent (adjusted as may be provided under 

subparagraph (B)) of the amount (computed on a daily 

basis) in effect under subsection (b)(2)(D) for the calendar year in which the taxable year of the individual 

begins, multiplied by 

(ii) the number of days of such taxable year within 

the applicable period described in subparagraph (A) or 

(B) of subsection (d)(1). 

(B) REGULATIONS.—The Secretary may issue regulations 

or other guidance providing for the adjustment of the percentage under subparagraph (A)(i) on the basis of geoVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00345 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
340 

graphic differences in housing costs relative to housing 

costs in the United States. 

(3) HOUSING EXPENSES.— (A) IN GENERAL.—The term ‘‘housing expenses’’ means 

the reasonable expenses paid or incurred during the taxable year by or on behalf of an individual for housing for 

the individual (and, if they reside with øhim¿ the individual, for øhis spouse¿ the individual’s spouse and dependents) in a foreign country. The term— 

(i) includes expenses attributable to the housing 

(such as utilities and insurance), but 

(ii) does not include interest and taxes of the kind 

deductible under section 163 or 164 or any amount allowable as a deduction under section 216(a). 

Housing expenses shall not be treated as reasonable to the 

extent such expenses are lavish or extravagant under the 

circumstances. 

(B) SECOND FOREIGN HOUSEHOLD.— (i) IN GENERAL.—Except as provided in clause (ii), 

only housing expenses incurred with respect to that 

abode which bears the closest relationship to the tax 

home of the individual shall be taken into account 

under paragraph (1). 

(ii) SEPARATE HOUSEHOLD FOR SPOUSE AND DEPEND- ENTS.—If an individual maintains a separate abode 

outside the United States for øhis spouse¿ the individual’s spouse and dependents and they do not reside 

with øhim¿ the individual because of living conditions 

which are dangerous, unhealthful, or otherwise adverse, then— 

(I) the words ‘‘if they reside with øhim¿ the individual’’ in subparagraph (A) shall be disregarded, and 

(II) the housing expenses incurred with respect 

to such abode shall be taken into account under 

paragraph (1). 

(4) SPECIAL RULES WHERE HOUSING EXPENSES NOT PROVIDED

BY EMPLOYER.— (A) IN GENERAL.—To the extent the housing cost amount 

of any individual for any taxable year is not attributable 

to employer provided amounts, such amount shall be treated as a deduction allowable in computing adjusted gross 

income to the extent of the limitation of subparagraph (B). 

(B) LIMITATION.—For purposes of subparagraph (A), the 

limitation of this subparagraph is the excess of— 

(i) the foreign earned income of the individual for 

the taxable year, over 

(ii) the amount of such income excluded from gross 

income under subsection (a) for the taxable year. 

(C) 1-YEAR CARRYOVER OF HOUSING AMOUNTS NOT AL- LOWED BY REASON OF SUBPARAGRAPH (B).— (i) IN GENERAL.—The amount not allowable as a deduction for any taxable year under subparagraph (A) 

by reason of the limitation of subparagraph (B) shall 

be treated as a deduction allowable in computing adVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00346 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
341 

justed gross income for the succeeding taxable year 

(and only for the succeeding taxable year) to the extent of the limitation of clause (ii) for such succeeding 

taxable year. 

(ii) LIMITATION.—For purposes of clause (i), the limitation of this clause for any taxable year is the excess 

of— 

(I) the limitation of subparagraph (B) for such 

taxable year, over 

(II) amounts treated as a deduction under subparagraph (A) for such taxable year. 

(D) EMPLOYER PROVIDED AMOUNTS.—For purposes of this 

paragraph, the term ‘‘employer provided amounts’’ means 

any amount paid or incurred on behalf of the individual by 

the individual’s employer which is foreign earned income 

included in the individual’s gross income for the taxable 

year (without regard to this section). 

(E) FOREIGN EARNED INCOME.—For purposes of this 

paragraph, an individual’s foreign earned income for any 

taxable year shall be determined without regard to the 

limitation of subparagraph (A) of subsection (b)(2). 

(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— 

(1) QUALIFIED INDIVIDUAL.—The term ‘‘qualified individual’’ 

means an individual whose tax home is in a foreign country 

and who is— 

(A) a citizen of the United States and establishes to the 

satisfaction of the Secretary that he has been a bona fide 

resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or 

(B) a citizen or resident of the United States and who, 

during any period of 12 consecutive months, is present in 

a foreign country or countries during at least 330 full days 

in such period. 

(2) EARNED INCOME.— (A) IN GENERAL.—The term ‘‘earned income’’ means 

wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation 

derived by the taxpayer for personal services rendered by 

him to a corporation which represents a distribution of 

earnings or profits rather than a reasonable allowance as 

compensation for the personal services actually rendered. 

(B) TAXPAYER ENGAGED IN TRADE OR BUSINESS.—In the 

case of a taxpayer engaged in a trade or business in which 

both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the 

personal services rendered by the taxpayer, not in excess 

of 30 percent of his share of the net profits of such trade 

or business, shall be considered as earned income. 

(3) TAX HOME.—The term ‘‘tax home’’ means, with respect to 

any individual, such individual’s home for purposes of section 

162(a)(2) (relating to traveling expenses while away from 

home). An individual shall not be treated as having a tax home 

342 

in a foreign country for any period for which his abode is within the United States, unless such individual is serving in an 

area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in 

support of the Armed Forces of the United States. 

(4) WAIVER OF PERIOD OF STAY IN FOREIGN COUNTRY.—Notwithstanding paragraph (1), an individual who— 

(A) is a bona fide resident of, or is present in, a foreign 

country for any period, 

(B) leaves such foreign country after August 31, 1978— 

(i) during any period during which the Secretary determines, after consultation with the Secretary of 

State or his delegate, that individuals were required to 

leave such foreign country because of war, civil unrest, 

or similar adverse conditions in such foreign country 

which precluded the normal conduct of business by 

such individuals, and 

(ii) before meeting the requirements of such paragraph (1), and 

(C) establishes to the satisfaction of the Secretary that 

such individual could reasonably have been expected to 

have met such requirements but for the conditions referred 

to in clause (i) of subparagraph (B), 

shall be treated as a qualified individual with respect to the 

period described in subparagraph (A) during which he was a 

bona fide resident of, or was present in, the foreign country, 

and in applying subsections (b)(2)(A), (c)(1)(B)(ii), and 

(c)(2)(A)(ii) with respect to such individual, only the days within such period shall be taken into account. 

(5) TEST OF BONA FIDE RESIDENCE.—If— 

(A) an individual who has earned income from sources 

within a foreign country submits a statement to the authorities of that country that he is not a resident of that 

country, and 

(B) such individual is held not subject as a resident of 

that country to the income tax of that country by its authorities with respect to such earnings, 

then such individual shall not be considered a bona fide resident of that country for purposes of paragraph (1)(A). 

(6) DENIAL OF DOUBLE BENEFITS.—No deduction or exclusion 

from gross income under this subtitle or credit against the tax 

imposed by this chapter (including any credit or deduction for 

the amount of taxes paid or accrued to a foreign country or 

possession of the United States) shall be allowed to the extent 

such deduction, exclusion, or credit is properly allocable to or 

chargeable against amounts excluded from gross income under 

subsection (a). 

(7) AGGREGATE BENEFIT CANNOT EXCEED FOREIGN EARNED INCOME.—The sum of the amount excluded under subsection (a) 

and the amount deducted under subsection (c)(4)(A) for the 

taxable year shall not exceed the individual’s foreign earned income for such year. 

(8) LIMITATION ON INCOME EARNED IN RESTRICTED COUNTRY.— 

343 

(A) IN GENERAL.—If travel (or any transaction in connection with such travel) with respect to any foreign country 

is subject to the regulations described in subparagraph (B) 

during any period— 

(i) the term ‘‘foreign earned income’’ shall not include any income from sources within such country attributable to services performed during such period, 

(ii) the term ‘‘housing expenses’’ shall not include 

any expenses allocable to such period for housing in 

such country or for housing of the spouse or dependents of the taxpayer in another country while the taxpayer is present in such country, and 

(iii) an individual shall not be treated as a bona fide 

resident of, or as present in, a foreign country for any 

day during which such individual was present in such 

country during such period. 

(B) REGULATIONS.—For purposes of this paragraph, regulations are described in this subparagraph if such regulations— 

(i) have been adopted pursuant to the Trading With 

the Enemy Act (50 U.S.C. 4301 et seq.) or the International Emergency Economic Powers Act (50 U.S.C. 

1701 et seq.), and 

(ii) include provisions generally prohibiting citizens 

and residents of the United States from engaging in 

transactions related to travel to, from, or within a foreign country. 

(C) EXCEPTION.—Subparagraph (A) shall not apply to 

any individual during any period in which such individual’s activities are not in violation of the regulations described in subparagraph (B). 

(9) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the 

purposes of this section, including regulations providing 

rules— 

(A) for cases øwhere a husband and wife each have¿ 

where both spouses have earned income from sources outside the United States, and 

(B) for married individuals filing separate returns. 

(e) ELECTION.— 

(1) IN GENERAL.—An election under subsection (a) shall 

apply to the taxable year for which made and to all subsequent 

taxable years unless revoked under paragraph (2). 

(2) REVOCATION.—A taxpayer may revoke an election made 

under paragraph (1) for any taxable year after the taxable year 

for which such election was made. Except with the consent of 

the Secretary, any taxpayer who makes such a revocation for 

any taxable year may not make another election under this 

section for any subsequent taxable year before the 6th taxable 

year after the taxable year for which such revocation was 

made. 

(f) DETERMINATION OF TAX LIABILITY.— (1) IN GENERAL.—If, for any taxable year, any amount is excluded from gross income of a taxpayer under subsection (a), 

then, notwithstanding sections 1 and 55— 

344 

(A) if such taxpayer has taxable income for such taxable 

year, the tax imposed by section 1 for such taxable year 

shall be equal to the excess (if any) of— 

(i) the tax which would be imposed by section 1 for 

such taxable year if the taxpayer’s taxable income 

were increased by the amount excluded under subsection (a) for such taxable year, over 

(ii) the tax which would be imposed by section 1 for 

such taxable year if the taxpayer’s taxable income 

were equal to the amount excluded under subsection 

(a) for such taxable year, and 

(B) if such taxpayer has a taxable excess (as defined in 

section 55(b)(1)(B)) for such taxable year, the amount determined under the first sentence of section 55(b)(1)(A) for 

such taxable year shall be equal to the excess (if any) of— 

(i) the amount which would be determined under 

such sentence for such taxable year (subject to the limitation of section 55(b)(3)) if the taxpayer’s taxable excess (as so defined) were increased by the amount excluded under subsection (a) for such taxable year, over 

(ii) the amount which would be determined under 

such sentence for such taxable year if the taxpayer’s 

taxable excess (as so defined) were equal to the 

amount excluded under subsection (a) for such taxable 

year. 

For purposes of this paragraph, the amount excluded under 

subsection (a) shall be reduced by the aggregate amount of any 

deductions or exclusions disallowed under subsection (d)(6) 

with respect to such excluded amount. 

(2) SPECIAL RULES.— 

(A) REGULAR TAX.—In applying section 1(h) for purposes 

of determining the tax under paragraph (1)(A)(i) for any 

taxable year in which, without regard to this subsection, 

the taxpayer’s net capital gain exceeds taxable income 

(hereafter in this subparagraph referred to as the capital 

gain excess)— 

(i) the taxpayer’s net capital gain (determined without regard to section 1(h)(11)) shall be reduced (but 

not below zero) by such capital gain excess, 

(ii) the taxpayer’s qualified dividend income shall be 

reduced by so much of such capital gain excess as exceeds the taxpayer’s net capital gain (determined without regard to section 1(h)(11) and the reduction under 

clause (i)), and 

(iii) adjusted net capital gain, unrecaptured section 

1250 gain, and 28-percent rate gain shall each be determined after increasing the amount described in section 1(h)(4)(B) by such capital gain excess. 

(B) ALTERNATIVE MINIMUM TAX.—In applying section 

55(b)(3) for purposes of determining the tax under paragraph (1)(B)(i) for any taxable year in which, without regard to this subsection, the taxpayer’s net capital gain exceeds the taxable excess (as defined in section 

55(b)(1)(B))— 

345 

(i) the rules of subparagraph (A) shall apply, except 

that such subparagraph shall be applied by substituting ‘‘the taxable excess (as defined in section 

55(b)(1)(B))’’ for ‘‘taxable income’’, and 

(ii) the reference in section 55(b)(3)(B) to the excess 

described in section 1(h)(1)(B), and the reference in 

section 55(b)(3)(C)(ii) to the excess described in section 

1(h)(1)(C)(ii), shall each be treated as a reference to 

each such excess as determined under the rules of subparagraph (A) for purposes of determining the tax 

under paragraph (1)(A)(i). 

(C) DEFINITIONS.—Terms used in this paragraph which 

are also used in section 1(h) shall have the respective 

meanings given such terms by section 1(h), except that in 

applying subparagraph (B) the adjustments under part VI 

of subchapter A shall be taken into account. 

(g) CROSS REFERENCES.—For administrative and penal provisions 

relating to the exclusions provided for in this section, see sections 

6001, 6011, 6012(c), and the other provisions of subtitle F. 

* * * * * * * 

Subchapter O—GAIN OR LOSS ON DISPOSITION 

OF PROPERTY 

* * * * * * * 

PART II—BASIS RULES OF GENERAL APPLICATION 

* * * * * * * 

SEC. 1015. BASIS OF PROPERTY ACQUIRED BY GIFTS AND TRANSFERS 

IN TRUST. 

(a) GIFTS AFTER DECEMBER 31, 1920.—If the property was acquired by gift after December 31, 1920, the basis shall be the same 

as it would be in the hands of the donor or the last preceding 

owner by whom it was not acquired by gift, except that if such 

basis (adjusted for the period before the date of the gift as provided 

in section 1016) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss 

the basis shall be such fair market value. If the facts necessary to 

determine the basis in the hands of the donor or the last preceding 

owner are unknown to the donee, the Secretary shall, if possible, 

obtain such facts from such donor or last preceding owner, or any 

other person cognizant thereof. If the Secretary finds it impossible 

to obtain such facts, the basis in the hands of such donor or last 

preceding owner shall be the fair market value of such property as 

found by the Secretary as of the date or approximate date at which, 

according to the best information that the Secretary is able to obtain, such property was acquired by such donor or last preceding 

owner. 

(b) TRANSFER IN TRUST AFTER DECEMBER 31, 1920.—If the property was acquired after December 31, 1920, by a transfer in trust 

(other than by a transfer in trust by a gift, bequest, or devise), the 

basis shall be the same as it would be in the hands of the grantor 

increased in the amount of gain or decreased in the amount of loss 

346 

recognized to the grantor on such transfer under the law applicable 

to the year in which the transfer was made. 

(c) GIFT OR TRANSFER IN TRUST BEFORE JANUARY 1, 1921.—If the 

property was acquired by gift or transfer in trust on or before December 31, 1920, the basis shall be the fair market value of such 

property at the time of such acquisition. 

(d) INCREASED BASIS FOR GIFT TAX PAID.— 

(1) IN GENERAL.—If— 

(A) the property is acquired by gift on or after September 2, 1958, the basis shall be the basis determined 

under subsection (a), increased (but not above the fair 

market value of the property at the time of the gift) by the 

amount of gift tax paid with respect to such gift, or 

(B) the property was acquired by gift before September 

2, 1958, and has not been sold, exchanged, or otherwise 

disposed of before such date, the basis of the property shall 

be increased on such date by the amount of gift tax paid 

with respect to such gift, but such increase shall not exceed an amount equal to the amount by which the fair 

market value of the property at the time of the gift exceeded the basis of the property in the hands of the donor at 

the time of the gift. 

(2) AMOUNT OF TAX PAID WITH RESPECT TO GIFT.—For purposes of paragraph (1), the amount of gift tax paid with respect 

to any gift is an amount which bears the same ratio to the 

amount of gift tax paid under chapter 12 with respect to all 

gifts made by the donor for the calendar year (or preceding calendar period) in which such gift is made as the amount of such 

gift bears to the taxable gifts (as defined in section 2503(a) but 

computed without the deduction allowed by section 2521) made 

by the donor during such calendar year or period. For purposes 

of the preceding sentence, the amount of any gift shall be the 

amount included with respect to such gift in determining (for 

the purposes of section 2503(a)) the total amount of gifts made 

during the calendar year or period, reduced by the amount of 

any deduction allowed with respect to such gift under section 

2522 (relating to charitable deduction) or under section 2523 

(relating to marital deduction). 

(3) GIFTS TREATED AS MADE ONE-HALF BY EACH SPOUSE.—For 

purposes of paragraph (1), where the donor and øhis spouse¿ 

the donor’s spouse elected, under section 2513 to have the gift 

considered as made one-half by each, the amount of gift tax 

paid with respect to such gift under chapter 12 shall be the 

sum of the amounts of tax paid with respect to each half of 

such gift (computed in the manner provided in paragraph (2)). 

(4) TREATMENT AS ADJUSTMENT TO BASIS.—For purposes of 

section 1016(b), an increase in basis under paragraph (1) shall 

be treated as an adjustment under section 1016(a). 

(5) APPLICATION TO GIFTS BEFORE 1955.—With respect to any 

property acquired by gift before 1955, references in this subsection to any provision of this title shall be deemed to refer 

to the corresponding provision of the Internal Revenue Code of 

1939 or prior revenue laws which was effective for the year in 

which such gift was made. 

347 

(6) SPECIAL RULE FOR GIFTS MADE AFTER DECEMBER 31, 1976.— (A) IN GENERAL.—In the case of any gift made after December 31, 1976, the increase in basis provided by this 

subsection with respect to any gift for the gift tax paid 

under chapter 12 shall be an amount (not in excess of the 

amount of tax so paid) which bears the same ratio to the 

amount of tax so paid as— 

(i) the net appreciation in value of the gift, bears to 

(ii) the amount of the gift. 

(B) NET APPRECIATION.—For purposes of paragraph (1), 

the net appreciation in value of any gift is the amount by 

which the fair market value of the gift exceeds the donor’s 

adjusted basis immediately before the gift. 

(e) GIFTS BETWEEN SPOUSES.—In the case of any property acquired by gift in a transfer described in section 1041(a), the basis 

of such property in the hands of the transferee shall be determined 

under section 1041(b)(2) and not this section. 

Subchapter P—CAPITAL GAINS AND LOSSES 

* * * * * * * 

PART IV—SPECIAL RULES FOR DETERMINING CAPITAL 

GAINS AND LOSSES 

* * * * * * * 

SEC. 1233. GAINS AND LOSSES FROM SHORT SALES. 

(a) CAPITAL ASSETS.—For purposes of this subtitle, gain or loss 

from the short sale of property shall be considered as gain or loss 

from the sale or exchange of a capital asset to the extent that the 

property, including a commodity future, used to close the short sale 

constitutes a capital asset in the hands of the taxpayer. 

(b) SHORT-TERM GAINS AND HOLDING PERIODS.—If gain or loss 

from a short sale is considered as gain or loss from the sale or exchange of a capital asset under subsection (a) and if on the date 

of such short sale substantially identical property has been held by 

the taxpayer for not more than 1 year (determined without regard 

to the effect, under paragraph (2) of this subsection, of such short 

sale on the holding period), or if substantially identical property is 

acquired by the taxpayer after such short sale and on or before the 

date of the closing thereof— 

(1) any gain on the closing of such short sale shall be considered as a gain on the sale or exchange of a capital asset held 

for not more than 1 year (notwithstanding the period of time 

any property used to close such short sale has been held); and 

(2) the holding period of such substantially identical property 

shall be considered to begin (notwithstanding section 1223, relating to the holding period of property) on the date of the closing of the short sale, or on the date of a sale, gift, or other disposition of such property, whichever date occurs first. This 

paragraph shall apply to such substantially identical property 

in the order of the dates of the acquisition of such property, 

but only to so much of such property as does not exceed the 

quantity sold short. 

348 

For purposes of this subsection, the acquisition of an option to sell 

property at a fixed price shall be considered as a short sale, and 

the exercise or failure to exercise such option shall be considered 

as a closing of such short sale. 

(c) CERTAIN OPTIONS TO SELL.—Subsection (b) shall not include 

an option to sell property at a fixed price acquired on the same day 

on which the property identified as intended to be used in exercising such option is acquired and which, if exercised, is exercised 

through the sale of the property so identified. If the option is not 

exercised, the cost of the option shall be added to the basis of the 

property with which the option is identified. This subsection shall 

apply only to options acquired after August 16, 1954. 

(d) LONG-TERM LOSSES.—If on the date of such short sale substantially identical property has been held by the taxpayer for 

more than 1 year, any loss on the closing of such short sale shall 

be considered as a loss on the sale or exchange of a capital asset 

held for more than 1 year (notwithstanding the period of time any 

property used to close such short sale has been held, and notwithstanding section 1234). 

(e) RULES FOR APPLICATION OF SECTION.—(1) Subsection (b)(1) or 

(d) shall not apply to the gain or loss, respectively, on any quantity 

of property used to close such short sale which is in excess of the 

quantity of the substantially identical property referred to in the 

applicable subsection. 

(2) For purposes of subsections (b) and (d)— 

(A) the term ‘‘property’’ includes only stocks and securities 

(including stocks and securities dealt with on a ‘‘when issued’’ 

basis), and commodity futures, which are capital assets in the 

hands of the taxpayer, but does not include any position to 

which section 1092(b) applies; 

(B) in the case of futures transactions in any commodity on 

or subject to the rules of a board of trade or commodity exchange, a commodity future requiring delivery in 1 calendar 

month shall not be considered as property substantially identical to another commodity future requiring delivery in a different calendar month; 

(C) in the case of a short sale of property by an individual, 

the term ‘‘taxpayer’’, in the application of this subsection and 

subsections (b) and (d), shall be read as ‘‘taxpayer or øhis 

spouse¿ the taxpayer’s spouse’’; but an individual who is legally 

separated from the taxpayer under a decree of divorce or of 

separate maintenance shall not be considered as the spouse of 

the taxpayer; 

(D) a securities futures contract (as defined in section 1234B) 

to acquire substantially identical property shall be treated as 

substantially identical property; and 

(E) entering into a securities futures contract (as so defined) 

to sell shall be considered to be a short sale, and the settlement of such contract shall be considered to be the closing of 

such short sale. 

(3) Where the taxpayer enters into 2 commodity futures transactions on the same day, one requiring delivery by him in one market and the other requiring delivery to him of the same (or substantially identical) commodity in the same calendar month in a 

different market, and the taxpayer subsequently closes both such 

349 

transactions on the same day, subsections (b) and (d) shall have no 

application to so much of the commodity involved in either such 

transaction as does not exceed in quantity the commodity involved 

in the other. 

(4)(A) In the case of a taxpayer who is a dealer in securities 

(within the meaning of section 1236)— 

(i) if, on the date of a short sale of stock, substantially identical property which is a capital asset in the hands of the taxpayer has been held for not more than 1 year, and 

(ii) if such short sale is closed more than 20 days after the 

date on which it was made, 

subsection (b)(2) shall apply in respect of the holding period of such 

substantially identical property. 

(B) For purposes of subparagraph (A)— 

(i) the last sentence of subsection (b) applies; and 

(ii) the term ‘‘stock’’ means any share or certificate of stock 

in a corporation, any bond or other evidence of indebtedness 

which is convertible into any such share or certificate, or any 

evidence of an interest in, or right to subscribe to or purchase, 

any of the foregoing. 

(f) ARBITRAGE OPERATIONS IN SECURITIES.—In the case of a short 

sale which had been entered into as an arbitrage operation, to 

which sale the rule of subsection (b)(2) would apply except as otherwise provided in this subsection— 

(1) subsection (b)(2) shall apply first to substantially identical assets acquired for arbitrage operations held at the close 

of business on the day such sale is made, and only to the extent that the quantity sold short exceeds the substantially 

identical assets acquired for arbitrage operations held at the 

close of business on the day such sale is made, shall the holding period of any other such identical assets held by the taxpayer be affected; 

(2) in the event that assets acquired for arbitrage operations 

are disposed of in such manner as to create a net short position 

in assets acquired for arbitrage operations, such net short position shall be deemed to constitute a short sale made on that 

day; 

(3) for the purpose of paragraphs (1) and (2) of this subsection the taxpayer will be deemed as of the close of any business day to hold property which he is or will be entitled to receive or acquire by virtue of any other asset acquired for arbitrage operations or by virtue of any contract he has entered 

into in an arbitrage operation; and 

(4) for the purpose of this subsection arbitrage operations are 

transactions involving the purchase and sale of assets for the 

purpose of profiting from a current difference between the 

price of the asset purchased and the price of the asset sold, 

and in which the asset purchased, if not identical to the asset 

sold, is such that by virtue thereof the taxpayer is, or will be, 

entitled to acquire assets identical to the assets sold. Such operations must be clearly identified by the taxpayer in his 

records as arbitrage operations on the day of the transaction 

or as soon thereafter as may be practicable. Assets acquired for 

arbitrage operations will include stocks and securities and the 

right to acquire stocks and securities. 

350 

(g) HEDGING TRANSACTIONS.—This section shall not apply in the 

case of a hedging transaction in commodity futures. 

(h) SHORT SALES OF PROPERTY WHICH BECOMES SUBSTANTIALLY

WORTHLESS.— 

(1) IN GENERAL.—If— 

(A) the taxpayer enters into a short sale of property, and 

(B) such property becomes substantially worthless, 

the taxpayer shall recognize gain in the same manner as if the 

short sale were closed when the property becomes substantially 

worthless. To the extent provided in regulations prescribed by 

the Secretary, the preceding sentence also shall apply with respect to any option with respect to property, any offsetting notional principal contract with respect to property, any futures 

or forward contract to deliver any property, and any other 

similar transaction. 

(2) STATUTE OF LIMITATIONS.—If property becomes substantially worthless during a taxable year and any short sale of 

such property remains open at the time such property becomes 

substantially worthless, then— 

(A) the statutory period for the assessment of any deficiency attributable to any part of the gain on such transaction shall not expire before the earlier of— 

(i) the date which is 3 years after the date the Secretary is notified by the taxpayer (in such manner as 

the Secretary may by regulations prescribe) of the substantial worthlessness of such property, or 

(ii) the date which is 6 years after the date the return for such taxable year is filed, and 

(B) such deficiency may be assessed before the date applicable under subparagraph (A) notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment. 

* * * * * * * 

SEC. 1235. SALE OR EXCHANGE OF PATENTS. 

(a) GENERAL.—A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or 

an undivided interest therein which includes a part of all such 

rights, by any holder shall be considered the sale or exchange of 

a capital asset held for more than 1 year, regardless of whether or 

not payments in consideration of such transfer are— 

(1) payable periodically over a period generally coterminous 

with the transferee’s use of the patent, or 

(2) contingent on the productivity, use, or disposition of the 

property transferred. 

(b) ‘‘HOLDER’’ DEFINED.—For purposes of this section, the term 

‘‘holder’’ means— 

(1) any individual whose efforts created such property, or 

(2) any other individual who has acquired his interest in 

such property in exchange for consideration in money or money’s worth paid to such creator prior to actual reduction to 

practice of the invention covered by the patent, if such individual is neither— 

(A) the employer of such creator, nor 

351 

(B) related to such creator (within the meaning of subsection (c)). 

(c) RELATED PERSONS.—Subsection (a) shall not apply to any 

transfer, directly or indirectly, between persons specified within 

any one of the paragraphs of section 267(b) or persons described in 

section 707(b); except that, in applying section 267(b) and (c) and 

section 707(b) for purposes of this section— 

(1) the phrase ‘‘25 percent or more’’ shall be substituted for 

the phrase ‘‘more than 50 percent’’ each place it appears in section 267(b) or 707(b), and 

(2) paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only øhis 

spouse¿ the individual’s spouse, ancestors, and lineal descendants. 

(d) CROSS REFERENCE.—For special rule relating to nonresident 

aliens, see section 871(a). 

* * * * * * * 

SEC. 1239. GAIN FROM SALE OF DEPRECIABLE PROPERTY BETWEEN 

CERTAIN RELATED TAXPAYERS. 

(a) TREATMENT OF GAIN AS ORDINARY INCOME.—In the case of a 

sale or exchange of property, directly or indirectly, between related 

persons, any gain recognized to the transferor shall be treated as 

ordinary income if such property is, in the hands of the transferee, 

of a character which is subject to the allowance for depreciation 

provided in section 167. 

(b) RELATED PERSONS.—For purposes of subsection (a), the term 

‘‘related persons’’ means— 

(1) a person and all entities which are controlled entities 

with respect to such person, 

(2) a taxpayer and any trust in which such taxpayer (or øhis 

spouse¿ the taxpayer’s spouse) is a beneficiary, unless such 

beneficiary’s interest in the trust is a remote contingent interest (within the meaning of section 318(a)(3)(B)(i)), and 

(3) except in the case of a sale or exchange in satisfaction of 

a pecuniary bequest, an executor of an estate and a beneficiary 

of such estate. 

(c) CONTROLLED ENTITY DEFINED.— 

(1) GENERAL RULE.—For purposes of this section, the term 

‘‘controlled entity’’ means, with respect to any person— 

(A) a corporation more than 50 percent of the value of 

the outstanding stock of which is owned (directly or indirectly) by or for such person, 

(B) a partnership more than 50 percent of the capital interest or profits interest in which is owned (directly or indirectly) by or for such person, and 

(C) any entity which is a related person to such person 

under paragraph (3), (10), (11), or (12) of section 267(b). 

(2) CONSTRUCTIVE OWNERSHIP.—For purposes of this section, 

ownership shall be determined in accordance with rules similar 

to the rules under section 267(c) (other than paragraph (3) 

thereof). 

(d) EMPLOYER AND RELATED EMPLOYEE ASSOCIATION.—For purposes of subsection (a), the term ‘‘related person’’ also includes— 

352 

(1) an employer and any person related to the employer 

(within the meaning of subsection (b)), and 

(2) a welfare benefit fund (within the meaning of section 

419(e)) which is controlled directly or indirectly by persons referred to in paragraph (1). 

(e) PATENT APPLICATIONS TREATED AS DEPRECIABLE PROPERTY.— For purposes of this section, a patent application shall be treated 

as property which, in the hands of the transferee, is of a character 

which is subject to the allowance for depreciation provided in section 167. 

* * * * * * * 

SEC. 1244. LOSSES ON SMALL BUSINESS STOCK. 

(a) GENERAL RULE.—In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which 

would (but for this section) be treated as a loss from the sale or 

exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss. 

(b) MAXIMUM AMOUNT FOR ANY TAXABLE YEAR.—For any taxable 

year the aggregate amount treated by the taxpayer by reason of 

this section as an ordinary loss shall not exceed— 

(1) $50,000, or 

(2) $100,000, in the case of øa husband and wife filing¿ a 

joint return for such year under section 6013. 

(c) SECTION 1244 STOCK DEFINED.— (1) IN GENERAL.—For purposes of this section, the term ‘‘section 1244 stock’’ means stock in a domestic corporation if— 

(A) at the time such stock is issued, such corporation 

was a small business corporation, 

(B) such stock was issued by such corporation for money 

or other property (other than stock and securities), and 

(C) such corporation, during the period of its 5 most recent taxable years ending before the date the loss on such 

stock was sustained, derived more than 50 percent of its 

aggregate gross receipts from sources other than royalties, 

rents, dividends, interests, annuities, and sales or exchanges of stocks or securities. 

(2) RULES FOR APPLICATION OF PARAGRAPH (1)(C).— (A) PERIOD TAKEN INTO ACCOUNT WITH RESPECT TO NEW

CORPORATIONS.—For purposes of paragraph (1)(C), if the 

corporation has not been in existence for 5 taxable years 

ending before the date the loss on the stock was sustained, 

there shall be substituted for such 5-year period— 

(i) the period of the corporation’s taxable years ending before such date, or 

(ii) if the corporation has not been in existence for 

1 taxable year ending before such date, the period 

such corporation has been in existence before such 

date. 

(B) GROSS RECEIPTS FROM SALES OF SECURITIES.—For 

purposes of paragraph (1)(C), gross receipts from the sales 

or exchanges of stock or securities shall be taken into account only to the extent of gains therefrom. 

(C) NONAPPLICATION WHERE DEDUCTIONS EXCEED GROSS

INCOME.—Paragraph (1)(C) shall not apply with respect to 

353 

any corporation if, for the period taken into account for 

purposes of paragraph (1)(C), the amount of the deductions 

allowed by this chapter (other than by sections 172, 243, 

and 245) exceeds the amount of gross income. 

(3) SMALL BUSINESS CORPORATION DEFINED.— (A) IN GENERAL.—For purposes of this section, a corporation shall be treated as a small business corporation if the 

aggregate amount of money and other property received by 

the corporation for stock, as a contribution to capital, and 

as paid-in surplus, does not exceed $1,000,000. The determination under the preceding sentence shall be made as of 

the time of the issuance of the stock in question but shall 

include amounts received for such stock and for all stock 

theretofore issued. 

(B) AMOUNT TAKEN INTO ACCOUNT WITH RESPECT TO

PROPERTY.—For purposes of subparagraph (A), the amount 

taken into account with respect to any property other than 

money shall be the amount equal to the adjusted basis to 

the corporation of such property for determining gain, reduced by any liability to which the property was subject or 

which was assumed by the corporation. The determination 

under the preceding sentence shall be made as of the time 

the property was received by the corporation. 

(d) SPECIAL RULES.— (1) LIMITATIONS ON AMOUNT OF ORDINARY LOSS.— (A) CONTRIBUTIONS OF PROPERTY HAVING BASIS IN EX- CESS OF VALUE.—If— 

(i) section 1244 stock was issued in exchange for 

property, 

(ii) the basis of such stock in the hands of the taxpayer is determined by reference to the basis in his 

hands of such property, and 

(iii) the adjusted basis (for determining loss) of such 

property immediately before the exchange exceeded its 

fair market value at such time, 

then in computing the amount of the loss on such stock for 

purposes of this section the basis of such stock shall be reduced by an amount equal to the excess described in 

clause (iii). 

(B) INCREASES IN BASIS.—In computing the amount of 

the loss on stock for purposes of this section, any increase 

in the basis of such stock (through contributions to the 

capital of the corporation, or otherwise) shall be treated as 

allocable to stock which is not section 1244 stock. 

(2) RECAPITALIZATIONS, CHANGES IN NAME, ETC..—To the extent provided in regulations prescribed by the Secretary, stock 

in a corporation, the basis of which (in the hands of a taxpayer) is determined in whole or in part by reference to the 

basis in his hands of stock in such corporation which meets the 

requirements of subsection (c)(1) (other than subparagraph (C) 

thereof), or which is received in a reorganization described in 

section 368(a)(1)(F) in exchange for stock which meets such requirements, shall be treated as meeting such requirements. 

For purposes of paragraphs (1)(C) and (3)(A) of subsection (c), 

a successor corporation in a reorganization described in section 

354 

368(a)(1)(F) shall be treated as the same corporation as its 

predecessor. 

(3) RELATIONSHIP TO NET OPERATING LOSS DEDUCTION.—For 

purposes of section 172 (relating to the net operating loss deduction), any amount of loss treated by reason of this section 

as an ordinary loss shall be treated as attributable to a trade 

or business of the taxpayer. 

(4) INDIVIDUAL DEFINED.—For purposes of this section, the 

term ‘‘individual’’ does not include a trust or estate. 

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

* * * * * * * 

PART V—SPECIAL RULES FOR BONDS AND OTHER DEBT 

INSTRUMENTS 

* * * * * * * 

Subpart A—ORIGINAL ISSUE DISCOUNT 

* * * * * * * 

SEC. 1272. CURRENT INCLUSION IN INCOME OF ORIGINAL ISSUE DISCOUNT. 

(a) ORIGINAL ISSUE DISCOUNT INCLUDED IN INCOME ON BASIS OF

CONSTANT INTEREST RATE.— (1) GENERAL RULE.—For purposes of this title, there shall be 

included in the gross income of the holder of any debt instrument having original issue discount, an amount equal to the 

sum of the daily portions of the original issue discount for each 

day during the taxable year on which such holder held such 

debt instrument. 

(2) EXCEPTIONS.—Paragraph (1) shall not apply to— 

(A) TAX-EXEMPT OBLIGATIONS.—Any tax-exempt obligation. 

(B) UNITED STATES SAVINGS BONDS.—Any United States 

savings bond. 

(C) SHORT-TERM OBLIGATIONS.—Any debt instrument 

which has a fixed maturity date not more than 1 year from 

the date of issue. 

(D) LOANS BETWEEN NATURAL PERSONS.— 

(i) IN GENERAL.—Any loan made by a natural person 

to another natural person if— 

(I) such loan is not made in the course of a 

trade or business of the lender, and 

(II) the amount of such loan (when increased by 

the outstanding amount of prior loans by such 

natural person to such other natural person) does 

not exceed $10,000. 

(ii) CLAUSE (I) NOT TO APPLY WHERE TAX AVOIDANCE

A PRINCIPAL PURPOSE.—Clause (i) shall not apply if the 

loan has as 1 of its principal purposes the avoidance 

of any Federal tax. 

ø(iii) TREATMENT OF HUSBAND AND WIFE.—For purposes of this subparagraph, a husband and wife shall 

be treated as 1 person. The preceding sentence shall 

355 

not apply where the spouses lived apart at all times 

during the taxable year in which the loan is made.¿ 

(iii) TREATMENT OF A MARRIED COUPLE.—For purposes of this subparagraph, a married couple shall be 

treated as 1 person. The preceding sentence shall not 

apply where the spouses lived apart at all times during 

the taxable year in which the loan is made. 

(3) DETERMINATION OF DAILY PORTIONS.—For purposes of 

paragraph (1), the daily portion of the original issue discount 

on any debt instrument shall be determined by allocating to 

each day in any accrual period its ratable portion of the increase during such accrual period in the adjusted issue price 

of the debt instrument. For purposes of the preceding sentence, 

the increase in the adjusted issue price for any accrual period 

shall be an amount equal to the excess (if any) of— 

(A) the product of— 

(i) the adjusted issue price of the debt instrument at 

the beginning of such accrual period, and 

(ii) the yield to maturity (determined on the basis of 

compounding at the close of each accrual period and 

properly adjusted for the length of the accrual period), 

over 

(B) the sum of the amounts payable as interest on such 

debt instrument during such accrual period. 

(4) ADJUSTED ISSUE PRICE.—For purposes of this subsection, 

the adjusted issue price of any debt instrument at the beginning of any accrual period is the sum of— 

(A) the issue price of such debt instrument, plus 

(B) the adjustments under this subsection to such issue 

price for all periods before the first day of such accrual period. 

(5) ACCRUAL PERIOD.—Except as otherwise provided in regulations prescribed by the Secretary, the term ‘‘accrual period’’ 

means a 6-month period (or shorter period from the date of 

original issue of the debt instrument) which ends on a day in 

the calendar year corresponding to the maturity date of the 

debt instrument or the date 6 months before such maturity 

date. 

(6) DETERMINATION OF DAILY PORTIONS WHERE PRINCIPAL

SUBJECT TO ACCELERATION.— 

(A) IN GENERAL.—In the case of any debt instrument to 

which this paragraph applies, the daily portion of the 

original issue discount shall be determined by allocating to 

each day in any accrual period its ratable portion of the 

excess (if any) of— 

(i) the sum of (I) the present value determined 

under subparagraph (B) of all remaining payments 

under the debt instrument as of the close of such period, and (II) the payments during the accrual period 

of amounts included in the stated redemption price of 

the debt instrument, over 

(ii) the adjusted issue price of such debt instrument 

at the beginning of such period. 

356 

(B) DETERMINATION OF PRESENT VALUE.—For purposes of 

subparagraph (A), the present value shall be determined 

on the basis of— 

(i) the original yield to maturity (determined on the 

basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period), 

(ii) events which have occurred before the close of 

the accrual period, and 

(iii) a prepayment assumption determined in the 

manner prescribed by regulations. 

(C) DEBT INSTRUMENTS TO WHICH PARAGRAPH APPLIES.— 

This paragraph applies to— 

(i) any regular interest in a REMIC or qualified 

mortgage held by a REMIC, 

(ii) any other debt instrument if payments under 

such debt instrument may be accelerated by reason of 

prepayments of other obligations securing such debt 

instrument (or, to the extent provided in regulations, 

by reason of other events), or 

(iii) any pool of debt instruments the yield on which 

may be affected by reason of prepayments (or to the 

extent provided in regulations, by reason of other 

events). 

To the extent provided in regulations prescribed by the 

Secretary, in the case of a small business engaged in the 

trade or business of selling tangible personal property at 

retail, clause (iii) shall not apply to debt instruments incurred in the ordinary course of such trade or business 

while held by such business. 

(7) REDUCTION WHERE SUBSEQUENT HOLDER PAYS ACQUISITION PREMIUM.— 

(A) REDUCTION.—For purposes of this subsection, in the 

case of any purchase after its original issue of a debt instrument to which this subsection applies, the daily portion for any day shall be reduced by an amount equal to 

the amount which would be the daily portion for such day 

(without regard to this paragraph) multiplied by the fraction determined under subparagraph (B). 

(B) DETERMINATION OF FRACTION.—For purposes of subparagraph (A), the fraction determined under this subparagraph is a fraction— 

(i) the numerator of which is the excess (if any) of— 

(I) the cost of such debt instrument incurred by 

the purchaser, over 

(II) the issue price of such debt instrument, increased by the portion of original issue discount 

previously includible in the gross income of any 

holder (computed without regard to this paragraph), and 

(ii) the denominator of which is the sum of the daily 

portions for such debt instrument for all days after the 

date of such purchase and ending on the stated maturity date (computed without regard to this paragraph). 

(b) EXCEPTIONS.—This section shall not apply to any holder— 

357 

(1) who has purchased the debt instrument at a premium, or 

(2) which is a life insurance company to which section 811(b) 

applies. 

(c) DEFINITION AND SPECIAL RULE.— (1) PURCHASE DEFINED.—For purposes of this section, the 

term ‘‘purchase’’ means— 

(A) any acquisition of a debt instrument, where 

(B) the basis of the debt instrument is not determined 

in whole or in part by reference to the adjusted basis of 

such debt instrument in the hands of the person from 

whom acquired. 

(2) BASIS ADJUSTMENT.—The basis of any debt instrument in 

the hands of the holder thereof shall be increased by the 

amount included in his gross income pursuant to this section. 

Subchapter Q—READJUSTMENT OF TAX 

BETWEEN YEARS AND SPECIAL LIMITATIONS 

* * * * * * * 

PART II—MITIGATION OF EFFECT OF LIMITATIONS AND 

OTHER PROVISIONS 

* * * * * * * 

SEC. 1313. DEFINITIONS. 

(a) DETERMINATION.—For purposes of this part, the term ‘‘determination’’ means— 

(1) a decision by the Tax Court or a judgment, decree, or 

other order by any court of competent jurisdiction, which has 

become final; 

(2) a closing agreement made under section 7121; 

(3) a final disposition by the Secretary of a claim for refund. 

For purposes of this part, a claim for refund shall be deemed 

finally disposed of by the Secretary— 

(A) as to items with respect to which the claim was allowed, on the date of allowance of refund or credit or on 

the date of mailing notice of disallowance (by reason of offsetting items) of the claim for refund, and 

(B) as to items with respect to which the claim was disallowed, in whole or in part, or as to items applied by the 

Secretary in reduction of the refund or credit, on expiration of the time for instituting suit with respect thereto 

(unless suit is instituted before the expiration of such 

time); or 

(4) under regulations prescribed by the Secretary, an agreement for purposes of this part, signed by the Secretary and by 

any person, relating to the liability of such person (or the person for whom he acts) in respect of a tax under this subtitle 

for any taxable period. 

(b) TAXPAYER.—Notwithstanding section 7701(a)(14), the term 

‘‘taxpayer’’ means any person subject to a tax under the applicable 

revenue law. 

(c) RELATED TAXPAYER.—For purposes of this part, the term ‘‘related taxpayer’’ means a taxpayer who, with the taxpayer with respect to whom a determination is made, stood, in the taxable year 

358 

with respect to which the erroneous inclusion, exclusion, omission, 

allowance, or disallowance was made, in one of the following relationships: 

(1) øhusband and wife¿ spouses , 

(2) grantor and fiduciary, 

(3) grantor and beneficiary, 

(4) fiduciary and beneficiary, legatee, or heir, 

(5) decedent and decedent’s estate, 

(6) partner, or 

(7) member of an affiliated group of corporations (as defined 

in section 1504). 

* * * * * * * 

Subchapter S—TAX TREATMENT OF S 

CORPORATIONS AND THEIR SHAREHOLDERS 

* * * * * * * 

PART I—IN GENERAL 

* * * * * * * 

SEC. 1361. S CORPORATION DEFINED. 

(a) S CORPORATION DEFINED.— 

(1) IN GENERAL.—For purposes of this title, the term ‘‘S corporation’’ means, with respect to any taxable year, a small 

business corporation for which an election under section 

1362(a) is in effect for such year. 

(2) C CORPORATION.—For purposes of this title, the term ‘‘C 

corporation’’ means, with respect to any taxable year, a corporation which is not an S corporation for such year. 

(b) SMALL BUSINESS CORPORATION.— 

(1) IN GENERAL.—For purposes of this subchapter, the term 

‘‘small business corporation’’ means a domestic corporation 

which is not an ineligible corporation and which does not— 

(A) have more than 100 shareholders, 

(B) have as a shareholder a person (other than an estate, a trust described in subsection (c)(2), or an organization described in subsection (c)(6)) who is not an individual, 

(C) have a nonresident alien as a shareholder, and 

(D) have more than 1 class of stock. 

(2) INELIGIBLE CORPORATION DEFINED.—For purposes of paragraph (1), the term ‘‘ineligible corporation’’ means any corporation which is— 

(A) a financial institution which uses the reserve method 

of accounting for bad debts described in section 585, 

(B) an insurance company subject to tax under subchapter L, or 

(C) a DISC or former DISC. 

(3) TREATMENT OF CERTAIN WHOLLY OWNED SUBSIDIARIES.— 

(A) IN GENERAL.—Except as provided in regulations prescribed by the Secretary, for purposes of this title— 

359 

(i) a corporation which is a qualified subchapter S 

subsidiary shall not be treated as a separate corporation, and 

(ii) all assets, liabilities, and items of income, deduction, and credit of a qualified subchapter S subsidiary 

shall be treated as assets, liabilities, and such items 

(as the case may be) of the S corporation. 

(B) QUALIFIED SUBCHAPTER S SUBSIDIARY.—For purposes 

of this paragraph, the term ‘‘qualified subchapter S subsidiary’’ means any domestic corporation which is not an 

ineligible corporation (as defined in paragraph (2)), if— 

(i) 100 percent of the stock of such corporation is 

held by the S corporation, and 

(ii) the S corporation elects to treat such corporation 

as a qualified subchapter S subsidiary. 

(C) TREATMENT OF TERMINATIONS OF QUALIFIED SUBCHAPTER S SUBSIDIARY STATUS.— 

(i) IN GENERAL.—For purposes of this title, if any 

corporation which was a qualified subchapter S subsidiary ceases to meet the requirements of subparagraph (B), such corporation shall be treated as a new 

corporation acquiring all of its assets (and assuming 

all of its liabilities) immediately before such cessation 

from the S corporation in exchange for its stock. 

(ii) TERMINATION BY REASON OF SALE OF STOCK.—If 

the failure to meet the requirements of subparagraph 

(B) is by reason of the sale of stock of a corporation 

which is a qualified subchapter S subsidiary, the sale 

of such stock shall be treated as if— 

(I) the sale were a sale of an undivided interest 

in the assets of such corporation (based on the 

percentage of the corporation’s stock sold), and 

(II) the sale were followed by an acquisition by 

such corporation of all of its assets (and the assumption by such corporation of all of its liabilities) in a transaction to which section 351 applies. 

(D) ELECTION AFTER TERMINATION.—If a corporation’s 

status as a qualified subchapter S subsidiary terminates, 

such corporation (and any successor corporation) shall not 

be eligible to make— 

(i) an election under subparagraph (B)(ii) to be 

treated as a qualified subchapter S subsidiary, or 

(ii) an election under section 1362(a) to be treated as 

an S corporation, 

before its 5th taxable year which begins after the 1st taxable year for which such termination was effective, unless 

the Secretary consents to such election. 

(E) INFORMATION RETURNS.—Except to the extent provided by the Secretary, this paragraph shall not apply to 

part III of subchapter A of chapter 61 (relating to information returns). 

(c) SPECIAL RULES FOR APPLYING SUBSECTION (B).— 

(1) MEMBERS OF A FAMILY TREATED AS 1 SHAREHOLDER.— 

360 

(A) IN GENERAL.—For purposes of subsection (b)(1)(A), 

there shall be treated as one shareholder— 

(i) øa husband and wife¿ a married couple (and 

their estates), and 

(ii) all members of a family (and their estates). 

(B) MEMBERS OF A FAMILY.—For purposes of this paragraph— 

(i) IN GENERAL.—The term ‘‘members of a family’’ 

means a common ancestor, any lineal descendant of 

such common ancestor, and any spouse or former 

spouse of such common ancestor or any such lineal descendant. 

(ii) COMMON ANCESTOR.—An individual shall not be 

considered to be a common ancestor if, on the applicable date, the individual is more than 6 generations removed from the youngest generation of shareholders 

who would (but for this subparagraph) be members of 

the family. For purposes of the preceding sentence, a 

spouse (or former spouse) shall be treated as being of 

the same generation as the individual to whom such 

spouse is (or was) married. 

(iii) APPLICABLE DATE.—The term ‘‘applicable date’’ 

means the latest of— 

(I) the date the election under section 1362(a) is 

made, 

(II) the earliest date that an individual described in clause (i) holds stock in the S corporation, or 

(III) October 22, 2004. 

(C) EFFECT OF ADOPTION, ETC..—Any legally adopted 

child of an individual, any child who is lawfully placed 

with an individual for legal adoption by the individual, and 

any eligible foster child of an individual (within the meaning of section 152(f)(1)(C)), shall be treated as a child of 

such individual by blood. 

(2) CERTAIN TRUSTS PERMITTED AS SHAREHOLDERS.— 

(A) IN GENERAL.—For purposes of subsection (b)(1)(B), 

the following trusts may be shareholders: 

(i) A trust all of which is treated (under subpart E 

of part I of subchapter J of this chapter) as owned by 

an individual who is a citizen or resident of the United 

States. 

(ii) A trust which was described in clause (i) immediately before the death of the deemed owner and 

which continues in existence after such death, but 

only for the 2-year period beginning on the day of the 

deemed owner’s death. 

(iii) A trust with respect to stock transferred to it 

pursuant to the terms of a will, but only for the 2-year 

period beginning on the day on which such stock is 

transferred to it. 

(iv) A trust created primarily to exercise the voting 

power of stock transferred to it. 

(v) An electing small business trust. 

361 

(vi) In the case of a corporation which is a bank (as 

defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), a 

trust which constitutes an individual retirement account under section 408(a), including one designated 

as a Roth IRA under section 408A, but only to the extent of the stock held by such trust in such bank or 

company as of the date of the enactment of this clause. 

This subparagraph shall not apply to any foreign trust. 

(B) TREATMENT AS SHAREHOLDERS.—For purposes of subsection (b)(1)— 

(i) In the case of a trust described in clause (i) of 

subparagraph (A), the deemed owner shall be treated 

as the shareholder. 

(ii) In the case of a trust described in clause (ii) of 

subparagraph (A), the estate of the deemed owner 

shall be treated as the shareholder. 

(iii) In the case of a trust described in clause (iii) of 

subparagraph (A), the estate of the testator shall be 

treated as the shareholder. 

(iv) In the case of a trust described in clause (iv) of 

subparagraph (A), each beneficiary of the trust shall 

be treated as a shareholder. 

(v) In the case of a trust described in clause (v) of 

subparagraph (A), each potential current beneficiary of 

such trust shall be treated as a shareholder; except 

that, if for any period there is no potential current 

beneficiary of such trust, such trust shall be treated as 

the shareholder during such period. This clause shall 

not apply for purposes of subsection (b)(1)(C). 

(vi) In the case of a trust described in clause (vi) of 

subparagraph (A), the individual for whose benefit the 

trust was created shall be treated as the shareholder. 

(3) ESTATE OF INDIVIDUAL IN BANKRUPTCY MAY BE SHAREHOLDER.—For purposes of subsection (b)(1)(B), the term ‘‘estate’’ includes the estate of an individual in a case under title 

11 of the United States Code. 

(4) DIFFERENCES IN COMMON STOCK VOTING RIGHTS DISREGARDED.—For purposes of subsection (b)(1)(D), a corporation 

shall not be treated as having more than 1 class of stock solely 

because there are differences in voting rights among the shares 

of common stock. 

(5) STRAIGHT DEBT SAFE HARBOR.— 

(A) IN GENERAL.—For purposes of subsection (b)(1)(D), 

straight debt shall not be treated as a second class of 

stock. 

(B) STRAIGHT DEBT DEFINED.—For purposes of this paragraph, the term ‘‘straight debt’’ means any written unconditional promise to pay on demand or on a specified date 

a sum certain in money if— 

(i) the interest rate (and interest payment dates) are 

not contingent on profits, the borrower’s discretion, or 

similar factors, 

362 

(ii) there is no convertibility (directly or indirectly) 

into stock, and 

(iii) the creditor is an individual (other than a nonresident alien), an estate, a trust described in paragraph (2), or a person which is actively and regularly 

engaged in the business of lending money. 

(C) REGULATIONS.—The Secretary shall prescribe such 

regulations as may be necessary or appropriate to provide 

for the proper treatment of straight debt under this subchapter and for the coordination of such treatment with 

other provisions of this title. 

(6) CERTAIN EXEMPT ORGANIZATIONS PERMITTED AS SHAREHOLDERS.—For purposes of subsection (b)(1)(B), an organization which is— 

(A) described in section 401(a) or 501(c)(3), and 

(B) exempt from taxation under section 501(a), 

may be a shareholder in an S corporation. 

(d) SPECIAL RULE FOR QUALIFIED SUBCHAPTER S TRUST.— 

(1) IN GENERAL.—In the case of a qualified subchapter S 

trust with respect to which a beneficiary makes an election 

under paragraph (2)— 

(A) such trust shall be treated as a trust described in 

subsection (c)(2)(A)(i), 

(B) for purposes of section 678(a), the beneficiary of such 

trust shall be treated as the owner of that portion of the 

trust which consists of stock in an S corporation with respect to which the election under paragraph (2) is made, 

and 

(C) for purposes of applying sections 465 and 469 to the 

beneficiary of the trust, the disposition of the S corporation 

stock by the trust shall be treated as a disposition by such 

beneficiary. 

(2) ELECTION.— 

(A) IN GENERAL.—A beneficiary of a qualified subchapter 

S trust (or his legal representative) may elect to have this 

subsection apply. 

(B) MANNER AND TIME OF ELECTION.— 

(i) SEPARATE ELECTION WITH RESPECT TO EACH CORPORATION.—An election under this paragraph shall be 

made separately with respect to each corporation the 

stock of which is held by the trust. 

(ii) ELECTIONS WITH RESPECT TO SUCCESSIVE INCOME

BENEFICIARIES.—If there is an election under this 

paragraph with respect to any beneficiary, an election 

under this paragraph shall be treated as made by each 

successive beneficiary unless such beneficiary affirmatively refuses to consent to such election. 

(iii) TIME, MANNER, AND FORM OF ELECTION.—Any 

election, or refusal, under this paragraph shall be 

made in such manner and form, and at such time, as 

the Secretary may prescribe. 

(C) ELECTION IRREVOCABLE.—An election under this 

paragraph, once made, may be revoked only with the consent of the Secretary. 

363 

(D) GRACE PERIOD.—An election under this paragraph 

shall be effective up to 15 days and 2 months before the 

date of the election. 

(3) QUALIFIED SUBCHAPTER S TRUST.—For purposes of this 

subsection, the term ‘‘qualified subchapter S trust’’ means a 

trust— 

(A) the terms of which require that— 

(i) during the life of the current income beneficiary, 

there shall be only 1 income beneficiary of the trust, 

(ii) any corpus distributed during the life of the current income beneficiary may be distributed only to 

such beneficiary, 

(iii) the income interest of the current income beneficiary in the trust shall terminate on the earlier of 

such beneficiary’s death or the termination of the 

trust, and 

(iv) upon the termination of the trust during the life 

of the current income beneficiary, the trust shall distribute all of its assets to such beneficiary, and 

(B) all of the income (within the meaning of section 

643(b)) of which is distributed (or required to be distributed) currently to 1 individual who is a citizen or resident 

of the United States. 

A substantially separate and independent share of a trust 

within the meaning of section 663(c) shall be treated as a separate trust for purposes of this subsection and subsection (c). 

(4) TRUST CEASING TO BE QUALIFIED.— 

(A) FAILURE TO MEET REQUIREMENTS OF PARAGRAPH

(3)(A).—If a qualified subchapter S trust ceases to meet any 

requirement of paragraph (3)(A), the provisions of this subsection shall not apply to such trust as of the date it 

ceases to meet such requirement. 

(B) FAILURE TO MEET REQUIREMENTS OF PARAGRAPH

(3)(B).—If any qualified subchapter S trust ceases to meet 

any requirement of paragraph (3)(B) but continues to meet 

the requirements of paragraph (3)(A), the provisions of this 

subsection shall not apply to such trust as of the first day 

of the first taxable year beginning after the first taxable 

year for which it failed to meet the requirements of paragraph (3)(B). 

(e) ELECTING SMALL BUSINESS TRUST DEFINED.— 

(1) ELECTING SMALL BUSINESS TRUST.—For purposes of this 

section— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), the term ‘‘electing small business trust’’ means any 

trust if— 

(i) such trust does not have as a beneficiary any person other than (I) an individual, (II) an estate, (III) an 

organization described in paragraph (2), (3), (4), or (5) 

of section 170(c), or (IV) an organization described in 

section 170(c)(1) which holds a contingent interest in 

such trust and is not a potential current beneficiary, 

(ii) no interest in such trust was acquired by purchase, and 

364 

(iii) an election under this subsection applies to such 

trust. 

(B) CERTAIN TRUSTS NOT ELIGIBLE.—The term ‘‘electing 

small business trust’’ shall not include— 

(i) any qualified subchapter S trust (as defined in 

subsection (d)(3)) if an election under subsection (d)(2) 

applies to any corporation the stock of which is held 

by such trust, 

(ii) any trust exempt from tax under this subtitle, 

and 

(iii) any charitable remainder annuity trust or charitable remainder unitrust (as defined in section 664(d)). 

(C) PURCHASE.—For purposes of subparagraph (A), the 

term ‘‘purchase’’ means any acquisition if the basis of the 

property acquired is determined under section 1012. 

(2) POTENTIAL CURRENT BENEFICIARY.—For purposes of this 

section, the term ‘‘potential current beneficiary’’ means, with 

respect to any period, any person who at any time during such 

period is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust 

(determined without regard to any power of appointment to the 

extent such power remains unexercised at the end of such period). If a trust disposes of all of the stock which it holds in 

an S corporation, then, with respect to such corporation, the 

term ‘‘potential current beneficiary’’ does not include any person who first met the requirements of the preceding sentence 

during the 1-year period ending on the date of such disposition. 

(3) ELECTION.—An election under this subsection shall be 

made by the trustee. Any such election shall apply to the taxable year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the 

Secretary. 

(4) CROSS REFERENCE.—For special treatment of electing 

small business trusts, see section 641(c). 

(f) RESTRICTED BANK DIRECTOR STOCK.— 

(1) IN GENERAL.—Restricted bank director stock shall not be 

taken into account as outstanding stock of the S corporation in 

applying this subchapter (other than section 1368(f)). 

(2) RESTRICTED BANK DIRECTOR STOCK.—For purposes of this 

subsection, the term ‘‘restricted bank director stock’’ means 

stock in a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the 

Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1))), if such 

stock— 

(A) is required to be held by an individual under applicable Federal or State law in order to permit such individual 

to serve as a director, and 

(B) is subject to an agreement with such bank or company (or a corporation which controls (within the meaning 

of section 368(c)) such bank or company) pursuant to 

which the holder is required to sell back such stock (at the 

same price as the individual acquired such stock) upon 

ceasing to hold the office of director. 

365 

(3) CROSS REFERENCE.—For treatment of certain distributions with respect to restricted bank director stock, see section 

1368(f). 

(g) SPECIAL RULE FOR BANK REQUIRED TO CHANGE FROM THE RE- SERVE METHOD OF ACCOUNTING ON BECOMING S CORPORATION.—In 

the case of a bank which changes from the reserve method of accounting for bad debts described in section 585 or 593 for its first 

taxable year for which an election under section 1362(a) is in effect, 

the bank may elect to take into account any adjustments under section 481 by reason of such change for the taxable year immediately 

preceding such first taxable year. 

* * * * * * * 

CHAPTER 6—CONSOLIDATED RETURNS 

* * * * * * * 

Subchapter B—RELATED RULES 

* * * * * * * 

PART II—CERTAIN CONTROLLED CORPORATIONS 

* * * * * * * 

SEC. 1563. DEFINITIONS AND SPECIAL RULES. 

(a) CONTROLLED GROUP OF CORPORATIONS.—For purposes of this 

part, the term ‘‘controlled group of corporations’’ means any group 

of— 

(1) PARENT-SUBSIDIARY CONTROLLED GROUP.—One or more 

chains of corporations connected through stock ownership with 

a common parent corporation if— 

(A) stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote 

or at least 80 percent of the total value of shares of all 

classes of stock of each of the corporations, except the common parent corporation, is owned (within the meaning of 

subsection (d)(1)) by one or more of the other corporations; 

and 

(B) the common parent corporation owns (within the 

meaning of subsection (d)(1)) stock possessing at least 80 

percent of the total combined voting power of all classes of 

stock entitled to vote or at least 80 percent of the total 

value of shares of all classes of stock of at least one of the 

other corporations, excluding, in computing such voting 

power or value, stock owned directly by such other corporations. 

(2) BROTHER-SISTER CONTROLLED GROUP.—Two or more corporations if 5 or fewer persons who are individuals, estates, or 

trusts own (within the meaning of subsection (d)(2)) stock possessing more than 50 percent of the total combined voting 

power of all classes of stock entitled to vote or more than 50 

percent of the total value of shares of all classes of stock of 

each corporation, taking into account the stock ownership of 

366 

each such person only to the extent such stock ownership is 

identical with respect to each such corporation. 

(3) COMBINED GROUP.—Three or more corporations each of 

which is a member of a group of corporations described in 

paragraph (1) or (2), and one of which— 

(A) is a common parent corporation included in a group 

of corporations described in paragraph (1), and also 

(B) is included in a group of corporations described in 

paragraph (2). 

(4) CERTAIN INSURANCE COMPANIES.—Two or more insurance 

companies subject to taxation under section 801 which are 

members of a controlled group of corporations described in 

paragraph (1), (2), or (3). Such insurance companies shall be 

treated as a controlled group of corporations separate from any 

other corporations which are members of the controlled group 

of corporations described in paragraph (1), (2), or (3). 

(b) COMPONENT MEMBER.— 

(1) GENERAL RULE.—For purposes of this part, a corporation 

is a component member of a controlled group of corporations on 

a December 31 of any taxable year (and with respect to the 

taxable year which includes such December 31) if such corporation— 

(A) is a member of such controlled group of corporations 

on the December 31 included in such year and is not treated as an excluded member under paragraph (2), or 

(B) is not a member of such controlled group of corporations on the December 31 included in such year but is 

treated as an additional member under paragraph (3). 

(2) EXCLUDED MEMBERS.—A corporation which is a member 

of a controlled group of corporations on December 31 of any 

taxable year shall be treated as an excluded member of such 

group for the taxable year including such December 31 if such 

corporation— 

(A) is a member of such group for less than one-half the 

number of days in such taxable year which precede such 

December 31, 

(B) is exempt from taxation under section 501(a) (except 

a corporation which is subject to tax on its unrelated business taxable income under section 511) for such taxable 

year, 

(C) is a foreign corporation subject to tax under section 

881 for such taxable year, 

(D) is an insurance company subject to taxation under 

section 801 (other than an insurance company which is a 

member of a controlled group described in subsection 

(a)(4)), or 

(E) is a franchised corporation, as defined in subsection 

(f)(4). 

(3) ADDITIONAL MEMBERS.—A corporation which— 

(A) was a member of a controlled group of corporations 

at any time during a calendar year, 

(B) is not a member of such group on December 31 of 

such calendar year, and 

(C) is not described, with respect to such group, in subparagraph (B), (C), (D), or (E) of paragraph (2), 

367 

shall be treated as an additional member of such group on December 31 for its taxable year including such December 31 if 

it was a member of such group for one-half (or more) of the 

number of days in such taxable year which precede such December 31. 

(4) OVERLAPPING GROUPS.—If a corporation is a component 

member of more than one controlled group of corporations with 

respect to any taxable year, such corporation shall be treated 

as a component member of only one controlled group. The determination as to the group of which such corporation is a component member shall be made under regulations prescribed by 

the Secretary which are consistent with the purposes of this 

part. 

(c) CERTAIN STOCK EXCLUDED.— 

(1) GENERAL RULE.—For purposes of this part, the term 

‘‘stock’’ does not include— 

(A) nonvoting stock which is limited and preferred as to 

dividends, 

(B) treasury stock, and 

(C) stock which is treated as ‘‘excluded stock’’ under 

paragraph (2). 

(2) STOCK TREATED AS ‘‘EXCLUDED STOCK’’.— 

(A) PARENT-SUBSIDIARY CONTROLLED GROUP.—For purposes of subsection (a)(1), if a corporation (referred to in 

this paragraph as ‘‘parent corporation’’) owns (within the 

meaning of subsections (d)(1) and (e)(4)), 50 percent or 

more of the total combined voting power of all classes of 

stock entitled to vote or 50 percent or more of the total 

value of shares of all classes of stock in another corporation (referred to in this paragraph as ‘‘subsidiary corporation’’), the following stock of the subsidiary corporation 

shall be treated as excluded stock— 

(i) stock in the subsidiary corporation held by a 

trust which is part of a plan of deferred compensation 

for the benefit of the employees of the parent corporation or the subsidiary corporation, 

(ii) stock in the subsidiary corporation owned by an 

individual (within the meaning of subsection (d)(2)) 

who is a principal stockholder or officer of the parent 

corporation. For purposes of this clause, the term 

‘‘principal stockholder’’ of a corporation means an individual who owns (within the meaning of subsection 

(d)(2)) 5 percent or more of the total combined voting 

power of all classes of stock entitled to vote or 5 percent or more of the total value of shares of all classes 

of stock in such corporation, 

(iii) stock in the subsidiary corporation owned (within the meaning of subsection (d)(2)) by an employee of 

the subsidiary corporation if such stock is subject to 

conditions which run in favor of such parent (or subsidiary) corporation and which substantially restrict or 

limit the employee’s right (or if the employee constructively owns such stock, the direct owner’s right) to dispose of such stock, or 

368 

(iv) stock in the subsidiary corporation owned (within the meaning of subsection (d)(2)) by an organization 

(other than the parent corporation) to which section 

501 (relating to certain educational and charitable organizations which are exempt from tax) applies and 

which is controlled directly or indirectly by the parent 

corporation or subsidiary corporation, by an individual, estate, or trust that is a principal stockholder 

(within the meaning of clause (ii)) of the parent corporation, by an officer of the parent corporation, or by 

any combination thereof. 

(B) BROTHER-SISTER CONTROLLED GROUP.—For purposes 

of subsection (a)(2), if 5 or fewer persons who are individuals, estates, or trusts (referred to in this subparagraph as 

‘‘common owners’’) own (within the meaning of subsection 

(d)(2)), 50 percent or more of the total combined voting 

power of all classes of stock entitled to vote or 50 percent 

or more of the total value of shares of all classes of stock 

in a corporation, the following stock of such corporation 

shall be treated as excluded stock— 

(i) stock in such corporation held by an employees’ 

trust described in section 401(a) which is exempt from 

tax under section 501(a), if such trust is for the benefit 

of the employees of such corporation, 

(ii) stock in such corporation owned (within the 

meaning of subsection (d)(2)) by an employee of the 

corporation if such stock is subject to conditions which 

run in favor of any of such common owners (or such 

corporation) and which substantially restrict or limit 

the employee’s right (or if the employee constructively 

owns such stock, the direct owner’s right) to dispose of 

such stock. If a condition which limits or restricts the 

employee’s right (or the direct owner’s right) to dispose 

of such stock also applies to the stock held by any of 

the common owners pursuant to a bona fide reciprocal 

stock purchase arrangement, such condition shall not 

be treated as one which restricts or limits the employee’s right to dispose of such stock, or 

(iii) stock in such corporation owned (within the 

meaning of subsection (d)(2)) by an organization to 

which section 501 (relating to certain educational and 

charitable organizations which are exempt from tax) 

applies and which is controlled directly or indirectly 

by such corporation, by an individual, estate, or trust 

that is a principal stockholder (within the meaning of 

subparagraph (A)(ii)) of such corporation, by an officer 

of such corporation, or by any combination thereof. 

(d) RULES FOR DETERMINING STOCK OWNERSHIP.— 

(1) PARENT-SUBSIDIARY CONTROLLED GROUP.—For purposes of 

determining whether a corporation is a member of a parentsubsidiary controlled group of corporations (within the meaning of subsection (a)(1)), stock owned by a corporation means— 

(A) stock owned directly by such corporation, and 

(B) stock owned with the application of paragraphs (1), 

(2), and (3) of subsection (e). 

369 

(2) BROTHER-SISTER CONTROLLED GROUP.—For purposes of 

determining whether a corporation is a member of a brothersister controlled group of corporations (within the meaning of 

subsection (a)(2)), stock owned by a person who is an individual, estate, or trust means— 

(A) stock owned directly by such person, and 

(B) stock owned with the application of subsection (e). 

(e) CONSTRUCTIVE OWNERSHIP.— (1) OPTIONS.—If any person has an option to acquire stock, 

such stock shall be considered as owned by such person. For 

purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. 

(2) ATTRIBUTION FROM PARTNERSHIPS.—Stock owned, directly 

or indirectly, by or for a partnership shall be considered as 

owned by any partner having an interest of 5 percent or more 

in either the capital or profits of the partnership in proportion 

to his interest in capital or profits, whichever such proportion 

is the greater. 

(3) ATTRIBUTION FROM ESTATES OR TRUSTS.—(A) Stock 

owned, directly or indirectly, by or for an estate or trust shall 

be considered as owned by any beneficiary who has an actuarial interest of 5 percent or more in such stock, to the extent 

of such actuarial interest. For purposes of this subparagraph, 

the actuarial interest of each beneficiary shall be determined 

by assuming the maximum exercise of discretion by the fiduciary in favor of such beneficiary and the maximum use of such 

stock to satisfy his rights as a beneficiary. 

(B) Stock owned, directly or indirectly, by or for any portion 

of a trust of which a person is considered the owner under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners) shall be considered as 

owned by such person. 

(C) This paragraph shall not apply to stock owned by any 

employees’ trust described in section 401(a) which is exempt 

from tax under section 501(a). 

(4) ATTRIBUTION FROM CORPORATIONS.—Stock owned, directly 

or indirectly, by or for a corporation shall be considered as 

owned by any person who owns (within the meaning of subsection (d)) 5 percent or more in value of its stock in that proportion which the value of the stock which such person so owns 

bears to the value of all the stock in such corporation. 

(5) SPOUSE.—An individual shall be considered as owning 

stock in a corporation owned, directly or indirectly, by or for 

øhis spouse¿ the individual’s spouse (other than a spouse who 

is legally separated from the individual under a decree of divorce whether interlocutory or final, or a decree of separate 

maintenance), except in the case of a corporation with respect 

to which each of the following conditions is satisfied for its taxable year— 

(A) The individual does not, at any time during such taxable year, own directly any stock in such corporation; 

(B) The individual is not a director or employee and does 

not participate in the management of such corporation at 

any time during such taxable year; 

370 

(C) Not more than 50 percent of such corporation’s gross 

income for such taxable year was derived from royalties, 

rents, dividends, interest, and annuities; and 

(D) Such stock in such corporation is not, at any time 

during such taxable year, subject to conditions which substantially restrict or limit the spouse’s right to dispose of 

such stock and which run in favor of the individual or øhis 

children¿ the individual’s children who have not attained 

the age of 21 years. 

(6) CHILDREN, GRANDCHILDREN, PARENTS, AND GRAND- PARENTS.— 

(A) MINOR CHILDREN.—An individual shall be considered 

as owning stock owned, directly or indirectly, by or for øhis 

children¿ the individual’s children who have not attained 

the age of 21 years, and, if the individual has not attained 

the age of 21 years, the stock owned, directly or indirectly, 

by or for øhis parents¿ the individual’s parents . 

(B) ADULT CHILDREN AND GRANDCHILDREN.—An individual who owns (within the meaning of subsection (d)(2), 

but without regard to this subparagraph) more than 50 

percent of the total combined voting power of all classes of 

stock entitled to vote or more than 50 percent of the total 

value of shares of all classes of stock in a corporation shall 

be considered as owning the stock in such corporation 

owned, directly or indirectly, by or for øhis parents¿ the individual’s parents , grandparents, grandchildren, and children who have attained the age of 21 years. 

(C) ADOPTED CHILD.—For purposes of this section, a legally adopted child of an individual shall be treated as a 

child of such individual by blood. 

(f) OTHER DEFINITIONS AND RULES.— (1) EMPLOYEE DEFINED.—For purposes of this section the 

term ‘‘employee’’ has the same meaning such term is given by 

paragraphs (1) and (2) of section 3121(d). 

(2) OPERATING RULES.— (A) IN GENERAL.—Except as provided in subparagraph 

(B), stock constructively owned by a person by reason of 

the application of paragraph (1), (2), (3), (4), (5), or (6) of 

subsection (e) shall, for purposes of applying such paragraphs, be treated as actually owned by such person. 

(B) MEMBERS OF FAMILY.—Stock constructively owned by 

an individual by reason of the application of paragraph (5) 

or (6) of subsection (e) shall not be treated as owned by 

øhim¿ the individual for purposes of again applying such 

paragraphs in order to make another the constructive 

owner of such stock. 

(3) SPECIAL RULES.—For purposes of this section— 

(A) If stock may be considered as owned by a person 

under subsection (e)(1) and under any other paragraph of 

subsection (e), it shall be considered as owned by him 

under subsection (e)(1). 

(B) If stock is owned (within the meaning of subsection 

(d)) by two or more persons, such stock shall be considered 

as owned by the person whose ownership of such stock results in the corporation being a component member of a 

371 

controlled group. If by reason of the preceding sentence, a 

corporation would (but for this sentence) become a component member of two controlled groups, it shall be treated 

as a component member of one controlled group. The determination as to the group of which such corporation is 

a component member shall be made under regulations prescribed by the Secretary which are consistent with the purposes of this part. 

(C) If stock is owned by a person within the meaning of 

subsection (d) and such ownership results in the corporation being a component member of a controlled group, such 

stock shall not be treated as excluded stock under subsection (c)(2), if by reason of treating such stock as excluded stock the result is that such corporation is not a 

component member of a controlled group of corporations. 

(4) FRANCHISED CORPORATION.—If— 

(A) a parent corporation (as defined in subsection 

(c)(2)(A)), or a common owner (as defined in subsection 

(c)(2)(B)), of a corporation which is a member of a controlled group of corporations is under a duty (arising out 

of a written agreement) to sell stock of such corporation 

(referred to in this paragraph as ‘‘franchised corporation’’) 

which is franchised to sell the products of another member, or the common owner, of such controlled group; 

(B) such stock is to be sold to an employee (or employees) of such franchised corporation pursuant to a bona fide 

plan designed to eliminate the stock ownership of the parent corporation or of the common owner in the franchised 

corporation; 

(C) such plan— 

(i) provides a reasonable selling price for such stock, 

and 

(ii) requires that a portion of the employee’s share 

of the profits of such corporation (whether received as 

compensation or as a dividend) be applied to the purchase of such stock (or the purchase of notes, bonds, 

debentures or other similar evidence of indebtedness 

of such franchised corporation held by such parent corporation or common owner); 

(D) such employee (or employees) owns directly more 

than 20 percent of the total value of shares of all classes 

of stock in such franchised corporation; 

(E) more than 50 percent of the inventory of such franchised corporation is acquired from members of the controlled group, the common owner, or both; and 

(F) all of the conditions contained in subparagraphs (A), 

(B), (C), (D), and (E) have been met for one-half (or more) 

of the number of days preceding the December 31 included 

within the taxable year (or if the taxable year does not include December 31, the last day of such year) of the franchised corporation, 

then such franchised corporation shall be treated as an excluded member of such group, under subsection (b)(2), for such 

taxable year. 

372 

(5) BROTHER-SISTER CONTROLLED GROUP DEFINITION FOR PRO- VISIONS OTHER THAN THIS PART.— (A) IN GENERAL.—Except as specifically provided in an 

applicable provision, subsection (a)(2) shall be applied to 

an applicable provision as if it read as follows: 

‘‘(2) BROTHER-SISTER CONTROLLED GROUP.—‘‘Two or more corporations if 5 or fewer persons who are individuals, estates, or 

trusts own (within the meaning of subsection (d)(2) stock possessing— 

‘‘(A) at least 80 percent of the total combined voting 

power of all classes of stock entitled to vote, or at least 80 

percent of the total value of shares of all classes of stock, 

of each corporation, and 

‘‘(B) more than 50 percent of the total combined voting 

power of all classes of stock entitled to vote or more than 

50 percent of the total value of shares of all classes of 

stock of each corporation, taking into account the stock 

ownership of each such person only to the extent such 

stock ownership is identical with respect to each such corporation.’’ 

(B) APPLICABLE PROVISION.—For purposes of this paragraph, an applicable provision is any provision of law 

(other than this part) which incorporates the definition of 

controlled group of corporations under subsection (a). 

* * * * * * * 

Subtitle B—Estate and Gift Taxes 

* * * * * * * 

CHAPTER 11—ESTATE TAX 

* * * * * * * 

Subchapter A—ESTATES OF CITIZENS OR 

RESIDENTS 

* * * * * * * 

PART II—CREDITS AGAINST TAX 

* * * * * * * 

SEC. 2012. CREDIT FOR GIFT TAX. 

(a) IN GENERAL.—If a tax on a gift has been paid under chapter 

12 (sec. 2501 and following), or under corresponding provisions of 

prior laws, and thereafter on the death of the donor any amount 

in respect of such gift is required to be included in the value of the 

gross estate of the decedent for purposes of this chapter, then there 

shall be credited against the tax imposed by section 2001 the 

amount of the tax paid on a gift under chapter 12, or under corresponding provisions of prior laws, with respect to so much of the 

property which constituted the gift as is included in the gross estate, except that the amount of such credit shall not exceed an 

amount which bears the same ratio to the tax imposed by section 

373 

2001 (after deducting from such tax the unified credit provided by 

section 2010) as the value (at the time of the gift or at the time 

of the death, whichever is lower) of so much of the property which 

constituted the gift as is included in the gross estate bears to the 

value of the entire gross estate reduced by the aggregate amount 

of the charitable and marital deductions allowed under sections 

2055, 2056, and 2106(a)(2). 

(b) VALUATION REDUCTIONS.—In applying, with respect to any 

gift, the ratio stated in subsection (a), the value at the time of the 

gift or at the time of the death, referred to in such ratio, shall be 

reduced— 

(1) by such amount as will properly reflect the amount of 

such gift which was excluded in determining (for purposes of 

section 2503(a)), or of corresponding provisions of prior laws, 

the total amount of gifts made during the calendar quarter (or 

calendar year if the gift was made before January 1, 1971) in 

which the gift was made; 

(2) if a deduction with respect to such gift is allowed under 

section 2056(a) (relating to marital deduction), then by the 

amount of such value, reduced as provided in paragraph (1); 

and 

(3) if a deduction with respect to such gift is allowed under 

sections 2055 or 2106(a)(2) (relating to charitable deduction), 

then by the amount of such value, reduced as provided in paragraph (1) of this subsection. 

(c) WHERE GIFT CONSIDERED MADE ONE-HALF BY SPOUSE.—Where 

the decedent was the donor of the gift but, under the provisions of 

section 2513, or corresponding provisions of prior laws, the gift was 

considered as made one-half by øhis spouse¿ the decedent’s spouse — (1) the term ‘‘the amount of the tax paid on a gift under 

chapter 12’’, as used in subsection (a), includes the amounts 

paid with respect to each half of such gift, the amount paid 

with respect to each being computed in the manner provided 

in subsection (d); and 

(2) in applying, with respect to such gift, the ratio stated in 

subsection (a), the value at the time of the gift or at the time 

of the death, referred to in such ratio, includes such value with 

respect to each half of such gift, each such value being reduced 

as provided in paragraph (1) of subsection (b). 

(d) COMPUTATION OF AMOUNT OF GIFT TAX PAID.— 

(1) AMOUNT OF TAX.—For purposes of subsection (a), the 

amount of tax paid on a gift under chapter 12, or under corresponding provisions of prior laws, with respect to any gift 

shall be an amount which bears the same ratio to the total tax 

paid for the calendar quarter (or calendar year if the gift was 

made before January 1, 1971) in which the gift was made as 

the amount of such gift bears to the total amount of taxable 

gifts (computed without deduction of the specific exemption) for 

such quarter or year. 

(2) AMOUNT OF GIFT.—For purposes of paragraph (1), the 

‘‘amount of such gift’’ shall be the amount included with respect to such gift in determining (for the purposes of section 

2503(a), or of corresponding provisions of prior laws) the total 

amount of gifts made during such quarter or year, reduced by 

374 

the amount of any deduction allowed with respect to such gift 

under section 2522, or under corresponding provisions of prior 

laws (relating to charitable deduction), or under section 2523 

(relating to marital deduction). 

(e) SECTION INAPPLICABLE TO GIFTS MADE AFTER DECEMBER 31, 

1976.—No credit shall be allowed under this section with respect 

to the amount of any tax paid under chapter 12 on any gift made 

after December 31, 1976. 

* * * * * * * 

PART III—GROSS ESTATE 

* * * * * * * 

SEC. 2032A. VALUATION OF CERTAIN FARM, ETC., REAL PROPERTY. 

(a) VALUE BASED ON USE UNDER WHICH PROPERTY QUALIFIES.— (1) GENERAL RULE.—If— 

(A) the decedent was (at the time of his death) a citizen 

or resident of the United States, and 

(B) the executor elects the application of this section and 

files the agreement referred to in subsection (d)(2), 

then, for purposes of this chapter, the value of qualified real 

property shall be its value for the use under which it qualifies, 

under subsection (b), as qualified real property. 

(2) LIMITATION ON AGGREGATE REDUCTION IN FAIR MARKET

VALUE.—The aggregate decrease in the value of qualified real 

property taken into account for purposes of this chapter which 

results from the application of paragraph (1) with respect to 

any decedent shall not exceed $750,000. 

(3) INFLATION ADJUSTMENT.—In the case of estates of decedents dying in a calendar year after 1998, the $750,000 

amount contained in paragraph (2) shall be increased by an 

amount equal to— (A) $750,000, multiplied by 

(B) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting ‘‘calendar year 1997’’ for ‘‘calendar year 2016’’ in subparagraph 

(A)(ii) thereof. 

If any amount as adjusted under the preceding sentence is not 

a multiple of $10,000, such amount shall be rounded to the 

next lowest multiple of $10,000. 

(b) QUALIFIED REAL PROPERTY.— 

(1) IN GENERAL.—For purposes of this section, the term 

‘‘qualified real property’’ means real property located in the 

United States which was acquired from or passed from the decedent to a qualified heir of the decedent and which, on the 

date of the decedent’s death, was being used for a qualified use 

by the decedent or a member of the decedent’s family, but only 

if— 

(A) 50 percent or more of the adjusted value of the gross 

estate consists of the adjusted value of real or personal 

property which— 

(i) on the date of the decedent’s death, was being 

used for a qualified use by the decedent or a member 

of the decedent’s family, and 

375 

(ii) was acquired from or passed from the decedent 

to a qualified heir of the decedent. 

(B) 25 percent or more of the adjusted value of the gross 

estate consists of the adjusted value of real property which 

meets the requirements of subparagraphs (A)(ii) and (C), 

(C) during the 8-year period ending on the date of the 

decedent’s death there have been periods aggregating 5 

years or more during which— 

(i) such real property was owned by the decedent or 

a member of the decedent’s family and used for a 

qualified use by the decedent or a member of the decedent’s family, and 

(ii) there was material participation by the decedent 

or a member of the decedent’s family in the operation 

of the farm or other business, and 

(D) such real property is designated in the agreement referred to in subsection (d)(2). 

(2) QUALIFIED USE.—For purposes of this section, the term 

‘‘qualified use’’ means the devotion of the property to any of the 

following: 

(A) use as a farm for farming purposes, or 

(B) use in a trade or business other than the trade or 

business of farming. 

(3) ADJUSTED VALUE.—For purposes of paragraph (1), the 

term ‘‘adjusted value’’ means— 

(A) in the case of the gross estate, the value of the gross 

estate for purposes of this chapter (determined without regard to this section), reduced by any amounts allowable as 

a deduction under paragraph (4) of section 2053(a), or 

(B) in the case of any real or personal property, the 

value of such property for purposes of this chapter (determined without regard to this section), reduced by any 

amounts allowable as a deduction in respect of such property under paragraph (4) of section 2053(a). 

(4) DECEDENTS WHO ARE RETIRED OR DISABLED.— (A) IN GENERAL.—If, on the date of the decedent’s death, 

the requirements of paragraph (1)(C)(ii) with respect to the 

decedent for any property are not met, and the decedent— 

(i) was receiving old-age benefits under title II of the 

Social Security Act for a continuous period ending on 

such date, or 

(ii) was disabled for a continuous period ending on 

such date, 

then paragraph (1)(C)(ii) shall be applied with respect to 

such property by substituting ‘‘the date on which the 

longer of such continuous periods began’’ for ‘‘the date of 

the decedent’s death’’ in paragraph (1)(C). 

(B) DISABLED DEFINED.—For purposes of subparagraph 

(A), an individual shall be disabled if such individual has 

a mental or physical impairment which renders him unable to materially participate in the operation of the farm 

or other business. 

(C) COORDINATION WITH RECAPTURE.—For purposes of 

subsection (c)(6)(B)(i), if the requirements of paragraph 

(1)(C)(ii) are met with respect to any decedent by reason 

376 

of subparagraph (A), the period ending on the date on 

which the continuous period taken into account under subparagraph (A) began shall be treated as the period immediately before the decedent’s death. 

(5) SPECIAL RULES FOR SURVIVING SPOUSES.— (A) IN GENERAL.—If property is qualified real property 

with respect to a decedent (hereinafter in this paragraph 

referred to as the ‘‘first decedent’’) and such property was 

acquired from or passed from the first decedent to the surviving spouse of the first decedent, for purposes of applying this subsection and subsection (c) in the case of the estate of such surviving spouse, active management of the 

farm or other business by the surviving spouse shall be 

treated as material participation by such surviving spouse 

in the operation of such farm or business. 

(B) SPECIAL RULE.—For the purposes of subparagraph 

(A), the determination of whether property is qualified real 

property with respect to the first decedent shall be made 

without regard to subparagraph (D) of paragraph (1) and 

without regard to whether an election under this section 

was made. 

(C) COORDINATION WITH PARAGRAPH (4).—In any case in 

which to do so will enable the requirements of paragraph 

(1)(C)(ii) to be met with respect to the surviving spouse, 

this subsection and subsection (c) shall be applied by taking into account any application of paragraph (4). 

(c) TAX TREATMENT OF DISPOSITIONS AND FAILURES TO USE FOR

QUALIFIED USE.— (1) IMPOSITION OF ADDITIONAL ESTATE TAX.—If, within 10 

years after the decedent’s death and before the death of the 

qualified heir— 

(A) the qualified heir disposes of any interest in qualified 

real property (other than by a disposition to a member of 

his family), or 

(B) the qualified heir ceases to use for the qualified use 

the qualified real property which was acquired (or passed) 

from the decedent, 

then, there is hereby imposed an additional estate tax. 

(2) AMOUNT OF ADDITIONAL TAX.— (A) IN GENERAL.—The amount of the additional tax imposed by paragraph (1) with respect to any interest shall 

be the amount equal to the lesser of— 

(i) the adjusted tax difference attributable to such 

interest, or 

(ii) the excess of the amount realized with respect to 

the interest (or, in any case other than a sale or exchange at arm’s length, the fair market value of the 

interest) over the value of the interest determined 

under subsection (a). 

(B) ADJUSTED TAX DIFFERENCE ATTRIBUTABLE TO INTER- EST.—For purposes of subparagraph (A), the adjusted tax 

difference attributable to an interest is the amount which 

bears the same ratio to the adjusted tax difference with respect to the estate (determined under subparagraph (C)) 

as— 

377 

(i) the excess of the value of such interest for purposes of this chapter (determined without regard to 

subsection (a)) over the value of such interest determined under subsection (a), bears to 

(ii) a similar excess determined for all qualified real 

property. 

(C) ADJUSTED TAX DIFFERENCE WITH RESPECT TO THE ES- TATE.—For purposes of subparagraph (B), the term ‘‘adjusted tax difference with respect to the estate’’ means the 

excess of what would have been the estate tax liability but 

for subsection (a) over the estate tax liability. For purposes 

of this subparagraph, the term ‘‘estate tax liability’’ means 

the tax imposed by section 2001 reduced by the credits allowable against such tax. 

(D) PARTIAL DISPOSITIONS.—For purposes of this paragraph, where the qualified heir disposes of a portion of the 

interest acquired by (or passing to) such heir (or a predecessor qualified heir) or there is a cessation of use of such 

a portion— 

(i) the value determined under subsection (a) taken 

into account under subparagraph (A)(ii) with respect 

to such portion shall be its pro rata share of such 

value of such interest, and 

(ii) the adjusted tax difference attributable to the interest taken into account with respect to the transaction involving the second or any succeeding portion 

shall be reduced by the amount of the tax imposed by 

this subsection with respect to all prior transactions 

involving portions of such interest. 

(E) SPECIAL RULE FOR DISPOSITION OF TIMBER.—In the 

case of qualified woodland to which an election under subsection (e)(13)(A) applies, if the qualified heir disposes of 

(or severs) any standing timber on such qualified woodland— 

(i) such disposition (or severance) shall be treated as 

a disposition of a portion of the interest of the qualified heir in such property, and 

(ii) the amount of the additional tax imposed by 

paragraph (1) with respect to such disposition shall be 

an amount equal to the lesser of— 

(I) the amount realized on such disposition (or, 

in any case other than a sale or exchange at arm’s 

length, the fair market value of the portion of the 

interest disposed or severed), or 

(II) the amount of additional tax determined 

under this paragraph (without regard to this subparagraph) if the entire interest of the qualified 

heir in the qualified woodland had been disposed 

of, less the sum of the amount of the additional 

tax imposed with respect to all prior transactions 

involving such woodland to which this subparagraph applied. 

For purposes of the preceding sentence, the disposition of 

a right to sever shall be treated as the disposition of the 

standing timber. The amount of additional tax imposed 

378 

under paragraph (1) in any case in which a qualified heir 

disposes of his entire interest in the qualified woodland 

shall be reduced by any amount determined under this 

subparagraph with respect to such woodland. 

(3) ONLY 1 ADDITIONAL TAX IMPOSED WITH RESPECT TO ANY 1

PORTION.—In the case of an interest acquired from (or passing 

from) any decedent, if subparagraph (A) or (B) of paragraph (1) 

applies to any portion of an interest, subparagraph (B) or (A), 

as the case may be, of paragraph (1) shall not apply with respect to the same portion of such interest. 

(4) DUE DATE.—The additional tax imposed by this subsection shall become due and payable on the day which is 6 

months after the date of the disposition or cessation referred 

to in paragraph (1). 

(5) LIABILITY FOR TAX; FURNISHING OF BOND.—The qualified 

heir shall be personally liable for the additional tax imposed by 

this subsection with respect to his interest unless the heir has 

furnished bond which meets the requirements of subsection 

(e)(11). 

(6) CESSATION OF QUALIFIED USE.—For purposes of paragraph (1)(B), real property shall cease to be used for the qualified use if— 

(A) such property ceases to be used for the qualified use 

set forth in subparagraph (A) or (B) of subsection (b)(2) 

under which the property qualified under subsection (b), or 

(B) during any period of 8 years ending after the date 

of the decedent’s death and before the date of the death of 

the qualified heir, there had been periods aggregating 

more than 3 years during which— 

(i) in the case of periods during which the property 

was held by the decedent, there was no material participation by the decedent or any member of his family 

in the operation of the farm or other business, and 

(ii) in the case of periods during which the property 

was held by any qualified heir, there was no material 

participation by such qualified heir or any member of 

his family in the operation of the farm or other business. 

(7) SPECIAL RULES.— (A) NO TAX IF USE BEGINS WITHIN 2 YEARS.—If the date 

on which the qualified heir begins to use the qualified real 

property (hereinafter in this subparagraph referred to as 

the commencement date) is before the date 2 years after 

the decedent’s death— 

(i) no tax shall be imposed under paragraph (1) by 

reason of the failure by the qualified heir to so use 

such property before the commencement date, and 

(ii) the 10-year period under paragraph (1) shall be 

extended by the period after the decedent’s death and 

before the commencement date. 

(B) ACTIVE MANAGEMENT BY ELIGIBLE QUALIFIED HEIR

TREATED AS MATERIAL PARTICIPATION.—For purposes of 

paragraph (6)(B)(ii), the active management of a farm or 

other business by— 

(i) an eligible qualified heir, or 

379 

(ii) a fiduciary of an eligible qualified heir described 

in clause (ii) or (iii) of subparagraph (C), 

shall be treated as material participation by such eligible 

qualified heir in the operation of such farm or business. In 

the case of an eligible qualified heir described in clause 

(ii), (iii), or (iv) of subparagraph (C), the preceding sentence shall apply only during periods during which such 

heir meets the requirements of such clause. 

(C) ELIGIBLE QUALIFIED HEIR.—For purposes of this 

paragraph, the term ‘‘eligible qualified heir’’ means a 

qualified heir who— 

(i) is the surviving spouse of the decedent, 

(ii) has not attained the age of 21, 

(iii) is disabled (within the meaning of subsection 

(b)(4)(B)), or 

(iv) is a student. 

(D) STUDENT.—For purposes of subparagraph (C), an individual shall be treated as a student with respect to periods during any calendar year if (and only if) such individual is a student (within the meaning of section 

152(f)(2)) for such calendar year. 

(E) CERTAIN RENTS TREATED AS QUALIFIED USE.—For 

purposes of this subsection, a surviving spouse or lineal 

descendant of the decedent shall not be treated as failing 

to use qualified real property in a qualified use solely because such spouse or descendant rents such property to a 

member of the family of such spouse or descendant on a 

net cash basis. For purposes of the preceding sentence, a 

legally adopted child of an individual shall be treated as 

the child of such individual by blood. 

(8) QUALIFIED CONSERVATION CONTRIBUTION IS NOT A DISPOSITION.—A qualified conservation contribution (as defined in 

section 170(h)) by gift or otherwise shall not be deemed a disposition under subsection (c)(1)(A). 

(d) ELECTION; AGREEMENT.— 

(1) ELECTION.—The election under this section shall be made 

on the return of the tax imposed by section 2001. Such election 

shall be made in such manner as the Secretary shall by regulations prescribe. Such an election, once made, shall be irrevocable. 

(2) AGREEMENT.—The agreement referred to in this paragraph is a written agreement signed by each person in being 

who has an interest (whether or not in possession) in any property designated in such agreement consenting to the application of subsection (c) with respect to such property. 

(3) MODIFICATION OF ELECTION AND AGREEMENT TO BE PERMITTED.—The Secretary shall prescribe procedures which provide that in any case in which the executor makes an election 

under paragraph (1) (and submits the agreement referred to in 

paragraph (2)) within the time prescribed therefor, but— 

(A) the notice of election, as filed, does not contain all required information, or 

(B) signatures of 1 or more persons required to enter 

into the agreement described in paragraph (2) are not inVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00385 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
380 

cluded on the agreement as filed, or the agreement does 

not contain all required information, 

the executor will have a reasonable period of time (not exceeding 90 days) after notification of such failures to provide such 

information or signatures. 

(e) DEFINITIONS; SPECIAL RULES.—For purposes of this section— 

(1) QUALIFIED HEIR.—The term ‘‘qualified heir’’ means, with 

respect to any property, a member of the decedent’s family who 

acquired such property (or to whom such property passed) from 

the decedent. If a qualified heir disposes of any interest in 

qualified real property to any member of his family, such member shall thereafter be treated as the qualified heir with respect to such interest. 

(2) MEMBER OF FAMILY.—The term ‘‘member of the family’’ 

means, with respect to any individual, only— 

(A) an ancestor of such individual, 

(B) the spouse of such individual, 

(C) a lineal descendant of such individual, of such individual’s spouse, or of a parent of such individual, or 

(D) the spouse of any lineal descendant described in subparagraph (C). 

For purposes of the preceding sentence, a legally adopted child 

of an individual shall be treated as the child of such individual 

by blood. 

(3) CERTAIN REAL PROPERTY INCLUDED.—In the case of real 

property which meets the requirements of subparagraph (C) of 

subsection (b)(1), residential buildings and related improvements on such real property occupied on a regular basis by the 

owner or lessee of such real property or by persons employed 

by such owner or lessee for the purpose of operating or maintaining such real property, and roads, buildings, and other 

structures and improvements functionally related to the qualified use shall be treated as real property devoted to the qualified use. 

(4) FARM.—The term ‘‘farm’’ includes stock, dairy, poultry, 

fruit, furbearing animal, and truck farms, plantations, ranches, 

nurseries, ranges, greenhouses or other similar structures used 

primarily for the raising of agricultural or horticultural commodities, and orchards and woodlands. 

(5) FARMING PURPOSES.—The term ‘‘farming purposes’’ 

means— 

(A) cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, 

shearing, feeding, caring for, training, and management of 

animals) on a farm; 

(B) handling, drying, packing, grading, or storing on a 

farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of 

the commodity so treated; and 

(C)(i) the planting, cultivating, caring for, or cutting of 

trees, or 

(ii) the preparation (other than milling) of trees for market. 

381 

(6) MATERIAL PARTICIPATION.—Material participation shall 

be determined in a manner similar to the manner used for purposes of paragraph (1) of section 1402(a) (relating to net earnings from self-employment). 

(7) METHOD OF VALUING FARMS.— (A) IN GENERAL.—Except as provided in subparagraph 

(B), the value of a farm for farming purposes shall be determined by dividing— 

(i) the excess of the average annual gross cash rental for comparable land used for farming purposes and 

located in the locality of such farm over the average 

annual State and local real estate taxes for such comparable land, by 

(ii) the average annual effective interest rate for all 

new Federal Land Bank loans. 

For purposes of the preceding sentence, each average annual computation shall be made on the basis of the 5 most 

recent calendar years ending before the date of the decedent’s death. 

(B) VALUE BASED ON NET SHARE RENTAL IN CERTAIN

CASES.— 

(i) IN GENERAL.—If there is no comparable land from 

which the average annual gross cash rental may be 

determined but there is comparable land from which 

the average net share rental may be determined, subparagraph (A)(i) shall be applied by substituting ‘‘average annual net share rental’’ for ‘‘average annual gross 

cash rental’’. 

(ii) NET SHARE RENTAL.—For purposes of this paragraph, the term ‘‘net share rental’’ means the excess 

of— 

(I) the value of the produce received by the lessor of the land on which such produce is grown, 

over 

(II) the cash operating expenses of growing such 

produce which, under the lease, are paid by the 

lessor. 

(C) EXCEPTION.—The formula provided by subparagraph 

(A) shall not be used— 

(i) where it is established that there is no comparable land from which the average annual gross 

cash rental may be determined, or 

(ii) where the executor elects to have the value of 

the farm for farming purposes determined and that 

there is no comparable land from which the average 

net share rental may be determined under paragraph 

(8). 

(8) METHOD OF VALUING CLOSELY HELD BUSINESS INTERESTS, 

ETC..—In any case to which paragraph (7)(A) does not apply, 

the following factors shall apply in determining the value of 

any qualified real property: 

(A) The capitalization of income which the property can 

be expected to yield for farming or closely held business 

purposes over a reasonable period of time under prudent 

management using traditional cropping patterns for the 

382 

area, taking into account soil capacity, terrain configuration, and similar factors, 

(B) The capitalization of the fair rental value of the land 

for farm land or closely held business purposes, 

(C) Assessed land values in a State which provides a differential or use value assessment law for farmland or 

closely held business, 

(D) Comparable sales of other farm or closely held business land in the same geographical area far enough removed from a metropolitan or resort area so that nonagricultural use is not a significant factor in the sales 

price, and 

(E) Any other factor which fairly values the farm or 

closely held business value of the property. 

(9) PROPERTY ACQUIRED FROM DECEDENT.—Property shall be 

considered to have been acquired from or to have passed from 

the decedent if— 

(A) such property is so considered under section 1014(b) 

(relating to basis of property acquired from a decedent), 

(B) such property is acquired by any person from the estate, or 

(C) such property is acquired by any person from a trust 

(to the extent such property is includible in the gross estate of the decedent). 

(10) COMMUNITY PROPERTY.—If the decedent and øhis surviving spouse¿ the decedent’s surviving spouse at any time held 

qualified real property as community property, the interest of 

the surviving spouse in such property shall be taken into account under this section to the extent necessary to provide a 

result under this section with respect to such property which 

is consistent with the result which would have obtained under 

this section if such property had not been community property. 

(11) BOND IN LIEU OF PERSONAL LIABILITY.—If the qualified 

heir makes written application to the Secretary for determination of the maximum amount of the additional tax which may 

be imposed by subsection (c) with respect to the qualified heir’s 

interest, the Secretary (as soon as possible, and in any event 

within 1 year after the making of such application) shall notify 

the heir of such maximum amount. The qualified heir, on furnishing a bond in such amount and for such period as may be 

required, shall be discharged from personal liability for any additional tax imposed by subsection (c) and shall be entitled to 

a receipt or writing showing such discharge. 

(12) ACTIVE MANAGEMENT.—The term ‘‘active management’’ 

means the making of the management decisions of a business 

(other than the daily operating decisions). 

(13) SPECIAL RULES FOR WOODLANDS.— 

(A) IN GENERAL.—In the case of any qualified woodland 

with respect to which the executor elects to have this subparagraph apply, trees growing on such woodland shall not 

be treated as a crop. 

(B) QUALIFIED WOODLAND.—The term ‘‘qualified woodland’’ means any real property which— 

(i) is used in timber operations, and 

383 

(ii) is an identifiable area of land such as an acre or 

other area for which records are normally maintained 

in conducting timber operations. 

(C) TIMBER OPERATIONS.—The term ‘‘timber operations’’ 

means— 

(i) the planting, cultivating, caring for, or cutting of 

trees, or 

(ii) the preparation (other than milling) of trees for 

market. 

(D) ELECTION.—An election under subparagraph (A) 

shall be made on the return of the tax imposed by section 

2001. Such election shall be made in such manner as the 

Secretary shall by regulations prescribe. Such an election, 

once made, shall be irrevocable. 

(14) TREATMENT OF REPLACEMENT PROPERTY ACQUIRED IN

SECTION 1031 OR 1033 TRANSACTIONS.— 

(A) IN GENERAL.—In the case of any qualified replacement property, any period during which there was ownership, qualified use, or material participation with respect 

to the replaced property by the decedent or any member 

of his family shall be treated as a period during which 

there was such ownership, use, or material participation 

(as the case may be) with respect to the qualified replacement property. 

(B) LIMITATION.—Subparagraph (A) shall not apply to 

the extent that the fair market value of the qualified replacement property (as of the date of its acquisition) exceeds the fair market value of the replaced property (as of 

the date of its disposition). 

(C) DEFINITIONS.—For purposes of this paragraph— 

(i) QUALIFIED REPLACEMENT PROPERTY.—The term 

‘‘qualified replacement property’’ means any real property which is— 

(I) acquired in an exchange which qualifies 

under section 1031, or 

(II) the acquisition of which results in the nonrecognition of gain under section 1033. 

Such term shall only include property which is used for 

the same qualified use as the replaced property was being 

used before the exchange. 

(ii) REPLACED PROPERTY.—The term ‘‘replaced property’’ means— 

(I) the property transferred in the exchange 

which qualifies under section 1031, or 

(II) the property compulsorily or involuntarily 

converted (within the meaning of section 1033). 

(f) STATUTE OF LIMITATIONS.—If qualified real property is disposed of or ceases to be used for a qualified use, then— 

(1) the statutory period for the assessment of any additional 

tax under subsection (c) attributable to such disposition or cessation shall not expire before the expiration of 3 years from the 

date the Secretary is notified (in such manner as the Secretary 

may by regulations prescribe) of such disposition or cessation 

(or if later in the case of an involuntary conversion or exchange 

to which subsection (h) or (i) applies, 3 years from the date the 

384 

Secretary is notified of the replacement of the converted property or of an intention not to replace or of the exchange of 

property), and 

(2) such additional tax may be assessed before the expiration 

of such 3-year period notwithstanding the provisions of any 

other law or rule of law which would otherwise prevent such 

assessment. 

(g) APPLICATION OF THIS SECTION AND SECTION 6324B TO INTER- ESTS IN PARTNERSHIPS, CORPORATIONS, AND TRUSTS.—The Secretary 

shall prescribe regulations setting forth the application of this section and section 6324B in the case of an interest in a partnership, 

corporation, or trust which, with respect to the decedent, is an interest in a closely held business (within the meaning of paragraph 

(1) of section 6166(b)). For purposes of the preceding sentence, an 

interest in a discretionary trust all the beneficiaries of which are 

qualified heirs shall be treated as a present interest. 

(h) SPECIAL RULES FOR INVOLUNTARY CONVERSIONS OF QUALIFIED

REAL PROPERTY.— (1) TREATMENT OF CONVERTED PROPERTY.— 

(A) IN GENERAL.—If there is an involuntary conversion of 

an interest in qualified real property— 

(i) no tax shall be imposed by subsection (c) on such 

conversion if the cost of the qualified replacement 

property equals or exceeds the amount realized on 

such conversion, or 

(ii) if clause (i) does not apply, the amount of the tax 

imposed by subsection (c) on such conversion shall be 

the amount determined under subparagraph (B). 

(B) AMOUNT OF TAX WHERE THERE IS NOT COMPLETE REINVESTMENT.—The amount determined under this subparagraph with respect to any involuntary conversion is 

the amount of the tax which (but for this subsection) 

would have been imposed on such conversion reduced by 

an amount which— 

(i) bears the same ratio to such tax, as 

(ii) the cost of the qualified replacement property 

bears to the amount realized on the conversion. 

(2) TREATMENT OF REPLACEMENT PROPERTY.—For purposes of 

subsection (c)— 

(A) any qualified replacement property shall be treated 

in the same manner as if it were a portion of the interest 

in qualified real property which was involuntarily converted; except that with respect to such qualified replacement property the 10-year period under paragraph (1) of 

subsection (c) shall be extended by any period, beyond the 

2-year period referred to in section 1033(a)(2)(B)(i), during 

which the qualified heir was allowed to replace the qualified real property, 

(B) any tax imposed by subsection (c) on the involuntary 

conversion shall be treated as a tax imposed on a partial 

disposition, and 

(C) paragraph (6) of subsection (c) shall be applied— 

(i) by not taking into account periods after the involuntary conversion and before the acquisition of the 

qualified replacement property, and 

385 

(ii) by treating material participation with respect to 

the converted property as material participation with 

respect to the qualified replacement property. 

(3) DEFINITIONS AND SPECIAL RULES.—For purposes of this 

subsection— 

(A) INVOLUNTARY CONVERSION.—The term ‘‘involuntary 

conversion’’ means a compulsory or involuntary conversion 

within the meaning of section 1033. 

(B) QUALIFIED REPLACEMENT PROPERTY.—The term 

‘‘qualified replacement property’’ means— 

(i) in the case of an involuntary conversion described 

in section 1033(a)(1), any real property into which the 

qualified real property is converted, or 

(ii) in the case of an involuntary conversion described in section 1033(a)(2), any real property purchased by the qualified heir during the period specified in section 1033(a)(2)(B) for purposes of replacing 

the qualified real property. 

Such term only includes property which is to be used for the 

qualified use set forth in subparagraph (A) or (B) of subsection 

(b)(2) under which the qualified real property qualified under 

subsection (a). 

(4) CERTAIN RULES MADE APPLICABLE.—The rules of the last 

sentence of section 1033(a)(2)(A) shall apply for purposes of 

paragraph (3)(B)(ii). 

(i) EXCHANGES OF QUALIFIED REAL PROPERTY.— 

(1) TREATMENT OF PROPERTY EXCHANGED.— 

(A) EXCHANGES SOLELY FOR QUALIFIED EXCHANGE PROPERTY.—If an interest in qualified real property is exchanged solely for an interest in qualified exchange property in a transaction which qualifies under section 1031, 

no tax shall be imposed by subsection (c) by reason of such 

exchange. 

(B) EXCHANGES WHERE OTHER PROPERTY RECEIVED.—If 

an interest in qualified real property is exchanged for an 

interest in qualified exchange property and other property 

in a transaction which qualifies under section 1031, the 

amount of the tax imposed by subsection (c) by reason of 

such exchange shall be the amount of tax which (but for 

this subparagraph) would have been imposed on such exchange under subsection (c)(1), reduced by an amount 

which— 

(i) bears the same ratio to such tax, as 

(ii) the fair market value of the qualified exchange 

property bears to the fair market value of the qualified 

real property exchanged. 

For purposes of clause (ii) of the preceding sentence, fair 

market value shall be determined as of the time of the exchange. 

(2) TREATMENT OF QUALIFIED EXCHANGE PROPERTY.—For purposes of subsection (c)— 

(A) any interest in qualified exchange property shall be 

treated in the same manner as if it were a portion of the 

interest in qualified real property which was exchanged, 

386 

(B) any tax imposed by subsection (c) by reason of the 

exchange shall be treated as a tax imposed on a partial 

disposition, and 

(C) paragraph (6) of subsection (c) shall be applied by 

treating material participation with respect to the exchanged property as material participation with respect to 

the qualified exchange property. 

(3) QUALIFIED EXCHANGE PROPERTY.—For purposes of this 

subsection, the term ‘‘qualified exchange property’’ means real 

property which is to be used for the qualified use set forth in 

subparagraph (A) or (B) of subsection (b)(2) under which the 

real property exchanged therefor originally qualified under 

subsection (a). 

* * * * * * * 

SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3 YEARS 

OF DECEDENT’S DEATH. 

(a) INCLUSION OF CERTAIN PROPERTY IN GROSS ESTATE.—If— 

(1) the decedent made a transfer (by trust or otherwise) of 

an interest in any property, or relinquished a power with respect to any property, during the 3-year period ending on the 

date of the decedent’s death, and 

(2) the value of such property (or an interest therein) would 

have been included in the decedent’s gross estate under section 

2036, 2037, 2038, or 2042 if such transferred interest or relinquished power had been retained by the decedent on the date 

of his death, 

the value of the gross estate shall include the value of any property 

(or interest therein) which would have been so included. 

(b) INCLUSION OF GIFT TAX ON GIFTS MADE DURING 3 YEARS BEFORE DECEDENT’S DEATH.—The amount of the gross estate (determined without regard to this subsection) shall be increased by the 

amount of any tax paid under chapter 12 by the decedent or øhis 

estate¿ the decedent’s estate on any gift made by the decedent or 

øhis spouse¿ the decedent’s spouse during the 3-year period ending 

on the date of the decedent’s death. 

(c) OTHER RULES RELATING TO TRANSFERS WITHIN 3 YEARS OF

DEATH.— 

(1) IN GENERAL.—For purposes of— 

(A) section 303(b) (relating to distributions in redemption of stock to pay death taxes), 

(B) section 2032A (relating to special valuation of certain 

farms, etc., real property), and 

(C) subchapter C of chapter 64 (relating to lien for 

taxes), 

the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent 

has at any time made a transfer, by trust or otherwise, during 

the 3-year period ending on the date of the decedent’s death. 

(2) COORDINATION WITH SECTION 6166.—An estate shall be 

treated as meeting the 35 percent of adjusted gross estate requirement of section 6166(a)(1) only if the estate meets such 

requirement both with and without the application of subsection (a). 

387 

(3) MARITAL AND SMALL TRANSFERS.—Paragraph (1) shall not 

apply to any transfer (other than a transfer with respect to a 

life insurance policy) made during a calendar year to any 

donee if the decedent was not required by section 6019 (other 

than by reason of section 6019(2)) to file any gift tax return for 

such year with respect to transfers to such donee. 

(d) EXCEPTION.—Subsection (a) and paragraph (1) of subsection 

(c) shall not apply to any bona fide sale for an adequate and full 

consideration in money or money’s worth. 

(e) TREATMENT OF CERTAIN TRANSFERS FROM REVOCABLE

TRUSTS.—For purposes of this section and section 2038, any transfer from any portion of a trust during any period that such portion 

was treated under section 676 as owned by the decedent by reason 

of a power in the grantor (determined without regard to section 

672(e)) shall be treated as a transfer made directly by the decedent. 

* * * * * * * 

SEC. 2040. JOINT INTERESTS. 

(a) GENERAL RULE.—The value of the gross estate shall include 

the value of all property to the extent of the interest therein held 

as joint tenants with right of survivorship by the decedent and any 

other person, or as tenants by the entirety by the decedent and 

spouse, or deposited, with any person carrying on the banking business, in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged 

to such other person and never to have been received or acquired 

by the latter from the decedent for less than an adequate and full 

consideration in money or money’s worth: Provided, That where 

such property or any part thereof, or part of the consideration with 

which such property was acquired, is shown to have been at any 

time acquired by such other person from the decedent for less than 

an adequate and full consideration in money or money’s worth, 

there shall be excepted only such part of the value of such property 

as is proportionate to the consideration furnished by such other 

person: Provided further, That where any property has been acquired by gift, bequest, devise, or inheritance, as a tenancy by the 

entirety by the decedent and spouse, then to the extent of one-half 

of the value thereof, or, where so acquired by the decedent and any 

other person as joint tenants with right of survivorship and their 

interests are not otherwise specified or fixed by law, then to the extent of the value of a fractional part to be determined by dividing 

the value of the property by the number of joint tenants with right 

of survivorship. 

(b) øCERTAIN JOINT INTERESTS OF HUSBAND AND WIFE¿ CERTAIN

JOINT INTERESTS OF MARRIED COUPLE.— 

(1) INTERESTS OF SPOUSE EXCLUDED FROM GROSS ESTATE.— 

Notwithstanding subsection (a), in the case of any qualified 

joint interest, the value included in the gross estate with respect to such interest by reason of this section is one-half of 

the value of such qualified joint interest. 

(2) QUALIFIED JOINT INTEREST DEFINED.—For purposes of 

paragraph (1), the term ‘‘qualified joint interest’’ means any interest in property held by the decedent and the decedent’s 

spouse as— 

(A) tenants by the entirety, or 

388 

(B) joint tenants with right of survivorship, but only if 

the decedent and the spouse of the decedent are the only 

joint tenants. 

* * * * * * * 

PART IV—TAXABLE ESTATE 

* * * * * * * 

SEC. 2056. BEQUESTS, ETC., TO SURVIVING SPOUSE. 

(a) ALLOWANCE OF MARITAL DEDUCTION.—For purposes of the tax 

imposed by section 2001, the value of the taxable estate shall, except as limited by subsection (b), be determined by deducting from 

the value of the gross estate an amount equal to the value of any 

interest in property which passes or has passed from the decedent 

to øhis¿ surviving spouse, but only to the extent that such interest 

is included in determining the value of the gross estate. 

(b) LIMITATION IN THE CASE OF LIFE ESTATE OR OTHER TER- MINABLE INTEREST.— (1) GENERAL RULE.—Where, on the lapse of time, on the occurrence of an event or contingency, or on the failure of an 

event or contingency to occur, an interest passing to the surviving spouse will terminate or fail, no deduction shall be allowed under this section with respect to such interest— 

(A) if an interest in such property passes or has passed 

(for less than an adequate and full consideration in money 

or money’s worth) from the decedent to any person other 

than such surviving spouse (or the estate of such spouse); 

and 

(B) if by reason of such passing such person (or his heirs 

or assigns) may possess or enjoy any part of such property 

after such termination or failure of the interest so passing 

to the surviving spouse; 

and no deduction shall be allowed with respect to such interest 

(even if such deduction is not disallowed under subparagraphs 

(A) and (B))— 

(C) if such interest is to be acquired for the surviving 

spouse, pursuant to directions of the decedent, by his executor or by the trustee of a trust. 

For purposes of this paragraph, an interest shall not be considered as an interest which will terminate or fail merely because 

it is the ownership of a bond, note, or similar contractual obligation, the discharge of which would not have the effect of an 

annuity for life or for a term. 

(2) INTEREST IN UNIDENTIFIED ASSETS.—Where the assets (included in the decedent’s gross estate) out of which, or the proceeds of which, an interest passing to the surviving spouse may 

be satisfied include a particular asset or assets with respect to 

which no deduction would be allowed if such asset or assets 

passed from the decedent to such spouse, then the value of 

such interest passing to such spouse shall, for purposes of subsection (a), be reduced by the aggregate value of such particular assets. 

(3) INTEREST OF SPOUSE CONDITIONAL ON SURVIVAL FOR LIMITED PERIOD.—For purposes of this subsection, an interest 

passing to the surviving spouse shall not be considered as an 

389 

interest which will terminate or fail on the death of such 

spouse if— 

(A) such death will cause a termination or failure of such 

interest only if it occurs within a period not exceeding 6 

months after the decedent’s death, or only if it occurs as 

a result of a common disaster resulting in the death of the 

decedent and the surviving spouse, or only if it occurs in 

the case of either such event; and 

(B) such termination or failure does not in fact occur. 

(4) VALUATION OF INTEREST PASSING TO SURVIVING SPOUSE.— In determining for purposes of subsection (a) the value of any 

interest in property passing to the surviving spouse for which 

a deduction is allowed by this section— 

(A) there shall be taken into account the effect which the 

tax imposed by section 2001, or any estate, succession, legacy, or inheritance tax, has on the net value to the surviving spouse of such interest; and 

(B) where such interest or property is encumbered in 

any manner, or where the surviving spouse incurs any obligation imposed by the decedent with respect to the passing of such interest, such encumbrance or obligation shall 

be taken into account in the same manner as if the 

amount of a gift to such spouse of such interest were being 

determined. 

(5) LIFE ESTATE WITH POWER OF APPOINTMENT IN SURVIVING

SPOUSE.—In the case of an interest in property passing from 

the decedent, if øhis¿ surviving spouse is entitled for life to all 

the income from the entire interest, or all the income from a 

specific portion thereof, payable annually or at more frequent 

intervals, with power in the surviving spouse to appoint the 

entire interest, or such specific portion (exercisable in favor of 

such surviving spouse, or of the estate of such surviving 

spouse, or in favor of either, whether or not in each case the 

power is exercisable in favor of others), and with no power in 

any other person to appoint any part of the interest, or such 

specific portion, to any person other than the surviving 

spouse— 

(A) the interest or such portion thereof so passing shall, 

for purposes of subsection (a), be considered as passing to 

the surviving spouse, and 

(B) no part of the interest so passing shall, for purposes 

of paragraph (1)(A), be considered as passing to any person 

other than the surviving spouse. 

This paragraph shall apply only if such power in the surviving 

spouse to appoint the entire interest, or such specific portion 

thereof, whether exercisable by will or during life, is exercisable by such spouse alone and in all events. 

(6) LIFE INSURANCE OR ANNUITY PAYMENTS WITH POWER OF

APPOINTMENT IN SURVIVING SPOUSE.—In the case of an interest 

in property passing from the decedent consisting of proceeds 

under a life insurance, endowment, or annuity contract, if 

under the terms of the contract such proceeds are payable in 

installments or are held by the insurer subject to an agreement 

to pay interest thereon (whether the proceeds, on the termination of any interest payments, are payable in a lump sum or 

390 

in annual or more frequent installments), and such installment 

or interest payments are payable annually or at more frequent 

intervals, commencing not later than 13 months after the decedent’s death, and all amounts, or a specific portion of all such 

amounts, payable during the life of the surviving spouse are 

payable only to such spouse, and such spouse has the power 

to appoint all amounts, or such specific portion, payable under 

such contract (exercisable in favor of such surviving spouse, or 

of the estate of such surviving spouse, or in favor of either, 

whether or not in each case the power is exercisable in favor 

of others), with no power in any other person to appoint such 

amounts to any person other than the surviving spouse— 

(A) such amounts shall, for purposes of subsection (a), be 

considered as passing to the surviving spouse, and 

(B) no part of such amounts shall, for purposes of paragraph (1)(A), be considered as passing to any person other 

than the surviving spouse. 

This paragraph shall apply only if, under the terms of the contract, such power in the surviving spouse to appoint such 

amounts, whether exercisable by will or during life, is exercisable by such spouse alone and in all events. 

(7) ELECTION WITH RESPECT TO LIFE ESTATE FOR SURVIVING

SPOUSE.— 

(A) IN GENERAL.—In the case of qualified terminable interest property— 

(i) for purposes of subsection (a), such property shall 

be treated as passing to the surviving spouse, and 

(ii) for purposes of paragraph (1)(A), no part of such 

property shall be treated as passing to any person 

other than the surviving spouse. 

(B) QUALIFIED TERMINABLE INTEREST PROPERTY DEFINED.—For purposes of this paragraph— 

(i) IN GENERAL.—The term ‘‘qualified terminable interest property’’ means property— 

(I) which passes from the decedent, 

(II) in which the surviving spouse has a qualifying income interest for life, and 

(III) to which an election under this paragraph 

applies. 

(ii) QUALIFYING INCOME INTEREST FOR LIFE.—The 

surviving spouse has a qualifying income interest for 

life if— 

(I) the surviving spouse is entitled to all the income from the property, payable annually or at 

more frequent intervals, or has a usufruct interest 

for life in the property, and 

(II) no person has a power to appoint any part 

of the property to any person other than the surviving spouse. 

Subclause (II) shall not apply to a power exercisable only 

at or after the death of the surviving spouse. To the extent 

provided in regulations, an annuity shall be treated in a 

manner similar to an income interest in property (regardless of whether the property from which the annuity is 

payable can be separately identified). 

391 

(iii) PROPERTY INCLUDES INTEREST THEREIN.—The 

term ‘‘property’’ includes an interest in property. 

(iv) SPECIFIC PORTION TREATED AS SEPARATE PROPERTY.—A specific portion of property shall be treated 

as separate property. 

(v) ELECTION.—An election under this paragraph 

with respect to any property shall be made by the executor on the return of tax imposed by section 2001. 

Such an election, once made, shall be irrevocable. 

(C) TREATMENT OF SURVIVOR ANNUITIES.—In the case of 

an annuity included in the gross estate of the decedent 

under section 2039 (or, in the case of an interest in an annuity arising under the community property laws of a 

State, included in the gross estate of the decedent under 

section 2033) where only the surviving spouse has the 

right to receive payments before the death of such surviving spouse— 

(i) the interest of such surviving spouse shall be 

treated as a qualifying income interest for life, and 

(ii) the executor shall be treated as having made an 

election under this subsection with respect to such annuity unless the executor otherwise elects on the return of tax imposed by section 2001. 

An election under clause (ii), once made, shall be irrevocable. 

(8) SPECIAL RULE FOR CHARITABLE REMAINDER TRUSTS.— 

(A) IN GENERAL.—If the surviving spouse of the decedent 

is the only beneficiary of a qualified charitable remainder 

trust who is not a charitable beneficiary nor an ESOP beneficiary, paragraph (1) shall not apply to any interest in 

such trust which passes or has passed from the decedent 

to such surviving spouse. 

(B) DEFINITIONS.—For purposes of subparagraph (A)— 

(i) CHARITABLE BENEFICIARY.—The term ‘‘charitable 

beneficiary’’ means any beneficiary which is an organization described in section 170(c). 

(ii) ESOP BENEFICIARY.—The term ‘‘ESOP beneficiary’’ means any beneficiary which is an employee 

stock ownership plan (as defined in section 4975(e)(7)) 

that holds a remainder interest in qualified employer 

securities (as defined in section 664(g)(4)) to be transferred to such plan in a qualified gratuitous transfer 

(as defined in section 664(g)(1)). 

(iii) QUALIFIED CHARITABLE REMAINDER TRUST.—The 

term ‘‘qualified charitable remainder trust’’ means a 

charitable remainder annuity trust or a charitable remainder unitrust (described in section 664). 

(9) DENIAL OF DOUBLE DEDUCTION.—Nothing in this section 

or any other provision of this chapter shall allow the value of 

any interest in property to be deducted under this chapter 

more than once with respect to the same decedent. 

(10) SPECIFIC PORTION.—For purposes of paragraphs (5), (6), 

and (7)(B)(iv), the term ‘‘specific portion’’ only includes a portion determined on a fractional or percentage basis. 

392 

(c) DEFINITION.—For purposes of this section, an interest in property shall be considered as passing from the decedent to any person 

if and only if— 

(1) such interest is bequeathed or devised to such person by 

the decedent; 

(2) such interest is inherited by such person from the decedent; 

(3) such interest is the dower or curtesy interest (or statutory interest in lieu thereof) of such person as surviving spouse 

of the decedent; 

(4) such interest has been transferred to such person by the 

decedent at any time; 

(5) such interest was, at the time of the decedent’s death, 

held by such person and the decedent (or by them and any 

other person) in joint ownership with right of survivorship; 

(6) the decedent had a power (either alone or in conjunction 

with any person) to appoint such interest and if he appoints or 

has appointed such interest to such person, or if such person 

takes such interest in default on the release or nonexercise of 

such power; or 

(7) such interest consists of proceeds of insurance on the life 

of the decedent receivable by such person. 

Except as provided in paragraph (5) or (6) of subsection (b), where 

at the time of the decedent’s death it is not possible to ascertain 

the particular person or persons to whom an interest in property 

may pass from the decedent, such interest shall, for purposes of 

subparagraphs (A) and (B) of subsection (b)(1), be considered as 

passing from the decedent to a person other than the surviving 

spouse. 

(d) DISALLOWANCE OF MARITAL DEDUCTION WHERE SURVIVING

SPOUSE NOT UNITED STATES CITIZEN.— 

(1) IN GENERAL.—Except as provided in paragraph (2), if the 

surviving spouse of the decedent is not a citizen of the United 

States— 

(A) no deduction shall be allowed under subsection (a), 

and 

(B) section 2040(b) shall not apply. 

(2) MARITAL DEDUCTION ALLOWED FOR CERTAIN TRANSFERS IN

TRUST.— 

(A) IN GENERAL.—Paragraph (1) shall not apply to any 

property passing to the surviving spouse in a qualified domestic trust. 

(B) SPECIAL RULE.—If any property passes from the decedent to the surviving spouse of the decedent, for purposes of subparagraph (A), such property shall be treated 

as passing to such spouse in a qualified domestic trust if— 

(i) such property is transferred to such a trust before 

the date on which the return of the tax imposed by 

this chapter is made, or 

(ii) such property is irrevocably assigned to such a 

trust under an irrevocable assignment made on or before such date which is enforceable under local law. 

(3) ALLOWANCE OF CREDIT TO CERTAIN SPOUSES.—If— 

393 

(A) property passes to the surviving spouse of the decedent (hereinafter in this paragraph referred to as the ‘‘first 

decedent’’), 

(B) without regard to this subsection, a deduction would 

be allowable under subsection (a) with respect to such 

property, and 

(C) such surviving spouse dies and the estate of such 

surviving spouse is subject to the tax imposed by this 

chapter, 

the Federal estate tax paid (or treated as paid under section 

2056A(b)(7)) by the first decedent with respect to such property 

shall be allowed as a credit under section 2013 to the estate 

of such surviving spouse and the amount of such credit shall 

be determined under such section without regard to when the 

first decedent died and without regard to subsection (d)(3) of 

such section. 

(4) SPECIAL RULE WHERE RESIDENT SPOUSE BECOMES CITIZEN.—Paragraph (1) shall not apply if— 

(A) the surviving spouse of the decedent becomes a citizen of the United States before the day on which the return of the tax imposed by this chapter is made, and 

(B) such spouse was a resident of the United States at 

all times after the date of the death of the decedent and 

before becoming a citizen of the United States. 

(5) REFORMATIONS PERMITTED.— 

(A) IN GENERAL.—In the case of any property with respect to which a deduction would be allowable under subsection (a) but for this subsection, the determination of 

whether a trust is a qualified domestic trust shall be 

made— 

(i) as of the date on which the return of the tax imposed by this chapter is made, or 

(ii) if a judicial proceeding is commenced on or before the due date (determined with regard to extensions) for filing such return to change such trust into 

a trust which is a qualified domestic trust, as of the 

time when the changes pursuant to such proceeding 

are made. 

(B) STATUTE OF LIMITATIONS.—If a judicial proceeding 

described in subparagraph (A)(ii) is commenced with respect to any trust, the period for assessing any deficiency 

of tax attributable to any failure of such trust to be a 

qualified domestic trust shall not expire before the date 1 

year after the date on which the Secretary is notified that 

the trust has been changed pursuant to such judicial proceeding or that such proceeding has been terminated. 

* * * * * * * 

CHAPTER 12—GIFT TAX 

* * * * * * * 

394 

Subchapter B—TRANSFERS 

Sec. 2511. Transfers in general. 

* * * * * * * 

øSec. 2513. Gift by husband or wife to third party.¿ 

Sec. 2513. Gift by spouse to third party. 

* * * * * * * 

SEC. 2513. øGIFT BY HUSBAND OR WIFE TO THIRD PARTY¿ GIFT BY 

SPOUSE TO THIRD PARTY. 

(a) CONSIDERED AS MADE ONE-HALF BY EACH.— 

ø(1) IN GENERAL.—A gift made by one spouse to any person 

other than his spouse shall, for the purposes of this chapter, 

be considered as made one-half by him and one-half by his 

spouse, but only if at the time of the gift each spouse is a citizen or resident of the United States. This paragraph shall not 

apply with respect to a gift by a spouse of an interest in property if he creates in his spouse a general power of appointment, as defined in section 2514(c), over such interest. For purposes of this section, an individual shall be considered as the 

spouse of another individual only if he is married to such individual at the time of the gift and does not remarry during the 

remainder of the calendar year.¿ 

(1) IN GENERAL.—A gift made by one individual to any person 

other than such individual’s spouse shall, for the purposes of 

this chapter, be considered as made one-half by the individual 

and one-half by such individual’s spouse, but only if at the time 

of the gift each spouse is a citizen or resident of the United 

States. This paragraph shall not apply with respect to a gift by 

an individual of an interest in property if such individual creates in the individual’s spouse a general power of appointment, 

as defined in section 2514(c), over such interest. For purposes 

of this section, an individual shall be considered as the spouse 

of another only if the individual is married to the individual’s 

spouse at the time of the gift and does not remarry during the 

remainder of the calendar year. 

(2) CONSENT OF BOTH SPOUSES.—Paragraph (1) shall apply 

only if both spouses have signified (under the regulations provided for in subsection (b)) their consent to the application of 

paragraph (1) in the case of all such gifts made during the calendar year by either while married to the other. 

(b) MANNER AND TIME OF SIGNIFYING CONSENT.— 

(1) MANNER.— A consent under this section shall be signified 

in such manner as is provided under regulations prescribed by 

the Secretary. 

(2) TIME.—Such consent may be so signified at any time 

after the close of the calendar year in which the gift was made, 

subject to the following limitations— 

(A) The consent may not be signified after the 15th day 

of April following the close of such year, unless before such 

15th day no return has been filed for such year by either 

spouse, in which case the consent may not be signified 

after a return for such year is filed by either spouse. 

395 

(B) The consent may not be signified after a notice of deficiency with respect to the tax for such year has been sent 

to either spouse in accordance with section 6212(a). 

(c) REVOCATION OF CONSENT.—Revocation of a consent previously 

signified shall be made in such manner as in provided under regulations prescribed by the Secretary, but the right to revoke a consent previously signified with respect to a calendar year— 

(1) shall not exist after the 15th day of April following the 

close of such year if the consent was signified on or before such 

15th day; and 

(2) shall not exist if the consent was not signified until after 

such 15th day. 

(d) JOINT AND SEVERAL LIABILITY FOR TAX.—If the consent required by subsection (a)(2) is signified with respect to a gift made 

in any calendar year, the liability with respect to the entire tax imposed by this chapter of each spouse for such year shall be joint 

and several. 

* * * * * * * 

SEC. 2516. CERTAIN PROPERTY SETTLEMENTS. 

øWhere a husband and wife enter¿ (a) IN GENERAL.— Where a 

married couple enters into a written agreement relative to their 

marital and property rights and divorce occurs within the 3-year 

period beginning on the date 1 year before such agreement is entered into (whether or not such agreement is approved by the divorce decree), any transfers of property or interests in property 

made pursuant to such agreement— 

(1) to either spouse in settlement of his or her marital or 

property rights, or 

(2) to provide a reasonable allowance for the support of issue 

of the marriage during minority, 

shall be deemed to be transfers made for a full and adequate consideration in money or money’s worth. 

(b) SPOUSE.—For purposes of this section, if the spouses referred 

to are divorced, wherever appropriate to the meaning of this section, 

the term ‘‘spouse’’ shall read ‘‘former spouse’’. 

* * * * * * * 

Subchapter C—DEDUCTIONS 

* * * * * * * 

SEC. 2523. GIFT TO SPOUSE. 

(a) ALLOWANCE OF DEDUCTION.—Where a donor transfers during 

the calendar year by gift an interest in property to a donee who 

at the time of the gift is the donor’s spouse, there shall be allowed 

as a deduction in computing taxable gifts for the calendar year an 

amount with respect to such interest equal to its value. 

(b) LIFE ESTATE OR OTHER TERMINABLE INTEREST.—Where, on the 

lapse of time, on the occurrence of an event or contingency, or on 

the failure of an event or contingency to occur, such interest transferred to the spouse will terminate or fail, no deduction shall be allowed with respect to such interest— 

(1) if the donor retains in øhimself¿ the donor’s self , or 

transfers or has transferred (for less than an adequate and full 

396 

consideration in money or money’s worth) to any person other 

than such donee spouse (or the estate of such spouse), an interest in such property, and if by reason of such retention or 

transfer the donor ø(or his heirs or assigns) or such person (or 

his heirs or assigns)¿ (or the donor’s heirs or assigns) or such 

person (or such person’s heirs or assigns) may possess or enjoy 

any part of such property after such termination or failure of 

the interest transferred to the donee spouse; or 

(2) if the donor immediately after the transfer to the donee 

spouse has a power to appoint an interest in such property 

which øhe¿ the donor can exercise (either alone or in conjunction with any person) in such manner that the appointee may 

possess or enjoy any part of such property after such termination or failure of the interest transferred to the donee 

spouse. For purposes of this paragraph, the donor shall be considered as having immediately after the transfer to the donee 

spouse such power to appoint even though such power cannot 

be exercised until after the lapse of time, upon the occurrence 

of an event or contingency, or on the failure of an event or contingency to occur. 

An exercise or release at any time by the donor, either alone or in 

conjunction with any person, of a power to appoint an interest in 

property, even though not otherwise a transfer, shall, for purposes 

of paragraph (1), be considered as a transfer by øhim¿ the donor 

. Except as provided in subsection (e), where at the time of the 

transfer it is impossible to ascertain the particular person or persons who may receive from the donor an interest in property so 

transferred by øhim¿ the donor , such interest shall, for purposes 

of paragraph (1), be considered as transferred to a person other 

than the donee spouse. 

(c) INTEREST IN UNIDENTIFIED ASSETS.—Where the assets out of 

which, or the proceeds of which, the interest transferred to the 

donee spouse may be satisfied include a particular asset or assets 

with respect to which no deduction would be allowed if such asset 

or assets were transferred from the donor to such spouse, then the 

value of the interest transferred to such spouse shall, for purposes 

of subsection (a), be reduced by the aggregate value of such particular assets. 

(d) JOINT INTERESTS.—If the interest is transferred to the donee 

spouse as sole joint tenant with the donor or as tenant by the entirety, the interest of the donor in the property which exists solely 

by reason of the possibility that the donor may survive the donee 

spouse, or that there may occur a severance of the tenancy, shall 

not be considered for purposes of subsection (b) as an interest retained by the donor in øhimself¿ the donor’s self . (e) LIFE ESTATE WITH POWER OF APPOINTMENT IN DONEE

SPOUSE.—Where the donor transfers an interest in property, if by 

such transfer øhis spouse¿ the donor’s spouse is entitled for life to 

all of the income from the entire interest, or all the income from 

a specific portion thereof, payable annually or at more frequent intervals, with power in the donee spouse to appoint the entire interest, or such specific portion (exercisable in favor of such donee 

spouse, or of the estate of such donee spouse, or in favor of either, 

whether or not in each case the power is exercisable in favor of others), and with no power in any other person to appoint any part 

397 

of such interest, or such portion, to any person other than the 

donee spouse— 

(1) the interest, or such portion, so transferred shall, for purposes of subsection (a) be considered as transferred to the 

donee spouse, and 

(2) no part of the interest, or such portion, so transferred 

shall, for purposes of subsection (b)(1), be considered as retained in the donor or transferred to any person other than the 

donee spouse. 

This subsection shall apply only if, by such transfer, such power in 

the donee spouse to appoint the interest, or such portion, whether 

exercisable by will or during life, is exercisable by such spouse 

alone and in all events. For purposes of this subsection, the term 

‘‘specific portion’’ only includes a portion determined on a fractional 

or percentage basis. 

(f) ELECTION WITH RESPECT TO LIFE ESTATE FOR DONEE SPOUSE.— 

(1) IN GENERAL.—In the case of qualified terminable interest 

property— 

(A) for purposes of subsection (a), such property shall be 

treated as transferred to the donee spouse, and 

(B) for purposes of subsection (b)(1), no part of such 

property shall be considered as retained in the donor or 

transferred to any person other than the donee spouse. 

(2) QUALIFIED TERMINABLE INTEREST PROPERTY.—For purposes of this subsection, the term ‘‘qualified terminable interest 

property’’ means any property— 

(A) which is transferred by the donor spouse, 

(B) in which the donee spouse has a qualifying income 

interest for life, and 

(C) to which an election under this subsection applies. 

(3) CERTAIN RULES MADE APPLICABLE.—For purposes of this 

subsection, rules similar to the rules of clauses (ii), (iii), and 

(iv) of section 2056(b)(7)(B) shall apply and the rules of section 

2056(b)(10) shall apply. 

(4) ELECTION.— 

(A) TIME AND MANNER.—An election under this subsection with respect to any property shall be made on or 

before the date prescribed by section 6075(b) for filing a 

gift tax return with respect to the transfer (determined 

without regard to section 6019(2)) and shall be made in 

such manner as the Secretary shall by regulations prescribe. 

(B) ELECTION IRREVOCABLE.—An election under this subsection, once made, shall be irrevocable. 

(5) TREATMENT OF INTEREST RETAINED BY DONOR SPOUSE.— 

(A) IN GENERAL.—In the case of any qualified terminable 

interest property— 

(i) such property shall not be includible in the gross 

estate of the donor spouse, and 

(ii) any subsequent transfer by the donor spouse of 

an interest in such property shall not be treated as a 

transfer for purposes of this chapter. 

398 

(B) SUBPARAGRAPH (A) NOT TO APPLY AFTER TRANSFER BY

DONEE SPOUSE.—Subparagraph (A) shall not apply with respect to any property after the donee spouse is treated as 

having transferred such property under section 2519, or 

such property is includible in the donee spouse’s gross estate under section 2044. 

(6) TREATMENT OF JOINT AND SURVIVOR ANNUITIES.—In the 

case of a joint and survivor annuity where only the donor 

spouse and donee spouse have the right to receive payments 

before the death of the last spouse to die— 

(A) the donee spouse’s interest shall be treated as a 

qualifying income interest for life, 

(B) the donor spouse shall be treated as having made an 

election under this subsection with respect to such annuity 

unless the donor spouse otherwise elects on or before the 

date specified in paragraph (4)(A), 

(C) paragraph (5) and section 2519 shall not apply to the 

donor spouse’s interest in the annuity, and 

(D) if the donee spouse dies before the donor spouse, no 

amount shall be includible in the gross estate of the donee 

spouse under section 2044 with respect to such annuity. 

An election under subparagraph (B), once made, shall be irrevocable. 

(g) SPECIAL RULE FOR CHARITABLE REMAINDER TRUSTS.— 

(1) IN GENERAL.—If, after the transfer, the donee spouse is 

the only beneficiary who is not a charitable beneficiary (other 

than the donor) of a qualified charitable remainder trust, subsection (b) shall not apply to the interest in such trust which 

is transferred to the donee spouse. 

(2) DEFINITIONS.—For purposes of paragraph (1), the term 

‘‘charitable beneficiary’’ and ‘‘qualified charitable remainder 

trust’’ have the meanings given to such terms by section 

2056(b)(8)(B). 

(h) DENIAL OF DOUBLE DEDUCTION.—Nothing in this section or 

any other provision of this chapter shall allow the value of any interest in property to be deducted under this chapter more than 

once with respect to the same donor. 

(i) DISALLOWANCE OF MARITAL DEDUCTION WHERE SPOUSE NOT

CITIZEN.—If the spouse of the donor is not a citizen of the United 

States— 

(1) no deduction shall be allowed under this section, 

(2) section 2503(b) shall be applied with respect to gifts 

which are made by the donor to such spouse and with respect 

to which a deduction would be allowable under this section but 

for paragraph (1) by substituting ‘‘$100,000’’ for ‘‘$10,000’’, and 

(3) the principles of sections 2515 and 2515A (as such sections were in effect before their repeal by the Economic Recovery Tax Act of 1981) shall apply, except that the provisions of 

such section 2515 providing for an election shall not apply. 

This subsection shall not apply to any transfer resulting from the 

acquisition of rights under a joint and survivor annuity described 

in subsection (f)(6). 

* * * * * * * 

399 

Subtitle C—Employment Taxes 

* * * * * * * 

CHAPTER 21—FEDERAL INSURANCE 

CONTRIBUTIONS ACT 

* * * * * * * 

Subchapter C—GENERAL PROVISIONS 

* * * * * * * 

SEC. 3121. DEFINITIONS. 

(a) WAGES.—For purposes of this chapter, the term ‘‘wages’’ 

means all remuneration for employment, including the cash value 

of all remuneration (including benefits) paid in any medium other 

than cash; except that such term shall not include— 

(1) in the case of the taxes imposed by sections 3101(a) and 

3111(a) that part of the remuneration which, after remuneration (other than remuneration referred to in the succeeding 

paragraphs of this subsection) equal to the contribution and 

benefit base (as determined under section 230 of the Social Security Act) with respect to employment has been paid to an individual by an employer during the calendar year with respect 

to which such contribution and benefit base is effective, is paid 

to such individual by such employer during such calendar year. 

If an employer (hereinafter referred to as successor employer) 

during any calendar year acquires substantially all the property used in a trade or business of another employer (hereinafter referred to as a predecessor), or used in a separate unit 

of a trade or business of a predecessor, and immediately after 

the acquisition employs in his trade or business an individual 

who immediately prior to the acquisition was employed in the 

trade or business of such predecessor, then, for the purpose of 

determining whether the successor employer has paid remuneration (other than remuneration referred to in the succeeding paragraphs of this subsection) with respect to employment equal to the contribution and benefit base (as determined 

under section 230 of the Social Security Act) to such individual 

during such calendar year, any remuneration (other than remuneration referred to in the succeeding paragraphs of this 

subsection) with respect to employment paid (or considered 

under this paragraph as having been paid) to such individual 

by such predecessor during such calendar year and prior to 

such acquisition shall be considered as having been paid by 

such successor employer; 

(2) the amount of any payment (including any amount paid 

by an employer for insurance or annuities, or into a fund, to 

provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees 

generally (or for his employees generally and their dependents) 

or for a class or classes of his employees (or for a class or classes of his employees and their dependents), on account of— 

400 

(A) sickness or accident disability (but, in the case of 

payments made to an employee or any of his dependents, 

this subparagraph shall exclude from the term ‘‘wages’’ 

only payments which are received under a workman’s compensation law), or 

(B) medical or hospitalization expenses in connection 

with sickness or accident disability, or 

(C) death, except that this paragraph does not apply to 

a payment for group-term life insurance to the extent that 

such payment is includible in the gross income of the employee; 

(4) any payment on account of sickness or accident disability, 

or medical or hospitalization expenses in connection with sickness or accident disability, made by an employer to, or on behalf of, an employee after the expiration of 6 calendar months 

following the last calendar month in which the employee 

worked for such employer; 

(5) any payment made to, or on behalf of, an employee or his 

beneficiary— 

(A) from or to a trust described in section 401(a) which 

is exempt from tax under section 501(a) at the time of such 

payment unless such payment is made to an employee of 

the trust as remuneration for services rendered as such 

employee and not as a beneficiary of the trust, 

(B) under or to an annuity plan which, at the time of 

such payment, is a plan described in section 403(a), 

(C) under a simplified employee pension (as defined in 

section 408(k)(1)), other than any contributions described 

in section 408(k)(6), 

(D) under or to an annuity contract described in section 

403(b), other than a payment for the purchase of such contract which is made by reason of a salary reduction agreement (whether evidenced by a written instrument or otherwise), 

(E) under or to an exempt governmental deferred compensation plan (as defined in subsection (v)(3)), 

(F) to supplement pension benefits under a plan or trust 

described in any of the foregoing provisions of this paragraph to take into account some portion or all of the increase in the cost of living (as determined by the Secretary 

of Labor) since retirement but only if such supplemental 

payments are under a plan which is treated as a welfare 

plan under section 3(2)(B)(ii) of the Employee Retirement 

Income Security Act of 1974, 

(G) under a cafeteria plan (within the meaning of section 

125) if such payment would not be treated as wages without regard to such plan and it is reasonable to believe that 

(if section 125 applied for purposes of this section) section 

125 would not treat any wages as constructively received, 

(H) under an arrangement to which section 408(p) applies, other than any elective contributions under paragraph (2)(A)(i) thereof, or 

(I) under a plan described in section 457(e)(11)(A)(ii) and 

maintained by an eligible employer (as defined in section 

457(e)(1)); 

401 

(6) the payment by an employer (without deduction from the 

remuneration of the employee)— 

(A) of the tax imposed upon an employee under section 

3101, or 

(B) of any payment required from an employee under a 

State unemployment compensation law, 

with respect to remuneration paid to an employee for domestic 

service in a private home of the employer or for agricultural 

labor; 

(7)(A) remuneration paid in any medium other than cash to 

an employee for service not in the course of the employer’s 

trade or business or for domestic service in a private home of 

the employer; 

(B) cash remuneration paid by an employer in any calendar 

year to an employee for domestic service in a private home of 

the employer (including domestic service on a farm operated 

for profit), if the cash remuneration paid in such year by the 

employer to the employee for such service is less than the applicable dollar threshold (as defined in subsection (x)) for such 

year; 

(C) cash remuneration paid by an employer in any calendar 

year to an employee for service not in the course of the employer’s trade or business, if the cash remuneration paid in such 

year by the employer to the employee for such service is less 

than $100. As used in this subparagraph, the term ‘‘service not 

in the course of the employer’s trade or business’’ does not include domestic service in a private home of the employer and 

does not include service described in subsection (g)(5); 

(8)(A) remuneration paid in any medium other than cash for 

agricultural labor; 

(B) cash remuneration paid by an employer in any calendar 

year to an employee for agricultural labor unless— 

(i) the cash remuneration paid in such year by the em- ployer to the employee for such labor is $150 or more, or 

(ii) the employer’s expenditures for agricultural labor in 

such year equal or exceed $2,500, 

except that clause (ii) shall not apply in determining whether remuneration paid to an employee constitutes ‘‘wages’’ under this section if such employee (I) is employed as a hand harvest laborer and 

is paid on a piece rate basis in an operation which has been, and 

is customarily and generally recognized as having been, paid on a 

piece rate basis in the region of employment, (II) commutes daily 

from his permanent residence to the farm on which he is so employed, and (III) has been employed in agriculture less than 13 

weeks during the preceding calendar year; 

(10) remuneration paid by an employer in any calendar year 

to an employee for service described in subsection (d)(3)(C) (relating to home workers), if the cash remuneration paid in such 

year by the employer to the employee for such service is less 

than $100; 

(11) remuneration paid to or on behalf of an employee if (and 

to the extent that) at the time of the payment of such remuneration it is reasonable to believe that a corresponding deduction is allowable under section 217 (determined without regard 

to section 274(n)); 

402 

(12)(A) tips paid in any medium other than cash; 

(B) cash tips received by an employee in any calendar month 

in the course of his employment by an employer unless the 

amount of such cash tips is $20 or more; 

(13) any payment or series of payments by an employer to 

an employee or any of his dependents which is paid— 

(A) upon or after the termination of an employee’s employment relationship because of (i) death, or (ii) retirement for disability, and 

(B) under a plan established by the employer which 

makes provision for his employees generally or a class or 

classes of his employees (or for such employees or class or 

classes of employees and their dependents), 

other than any such payment or series of payments which 

would have been paid if the employee’s employment relationship had not been so terminated; 

(14) any payment made by an employer to a survivor or the 

estate of a former employee after the calendar year in which 

such employee died; 

(15) any payment made by an employer to an employee, if 

at the time such payment is made such employee is entitled to 

disability insurance benefits under section 223(a) of the Social 

Security Act and such entitlement commenced prior to the calendar year in which such payment is made, and if such employee did not perform any services for such employer during 

the period for which such payment is made; 

(16) remuneration paid by an organization exempt from income tax under section 501(a) (other than an organization described in section 401(a)) or under section 521 in any calendar 

year to an employee for service rendered in the employ of such 

organization, if the remuneration paid in such year by the organization to the employee for such service is less than $100; 

(18) any payment made, or benefit furnished, to or for the 

benefit of an employee if at the time of such payment or such 

furnishing it is reasonable to believe that the employee will be 

able to exclude such payment or benefit from income under 

section 127, 129, 134(b)(4), or 134(b)(5); 

(19) the value of any meals or lodging furnished by or on behalf of the employer if at the time of such furnishing it is reasonable to believe that the employee will be able to exclude 

such items from income under section 119; 

(20) any benefit provided to or on behalf of an employee if 

at the time such benefit is provided it is reasonable to believe 

that the employee will be able to exclude such benefit from income under section 74(c), 108(f)(4), 117, or 132; 

(21) in the case of a member of an Indian tribe, any remuneration on which no tax is imposed by this chapter by reason 

of section 7873 (relating to income derived by Indians from exercise of fishing rights); 

(22) remuneration on account of— 

(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b)) or under an employee stock purchase plan (as defined in section 423(b)), or 

(B) any disposition by the individual of such stock; or 

403 

(23) any benefit or payment which is excludable from the 

gross income of the employee under section 139B(b). 

Nothing in the regulations prescribed for purposes of chapter 24 

(relating to income tax withholding) which provides an exclusion 

from ‘‘wages’’ as used in such chapter shall be construed to require 

a similar exclusion from ‘‘wages’’ in the regulations prescribed for 

purposes of this chapter. Except as otherwise provided in regulations prescribed by the Secretary, any third party which makes a 

payment included in wages solely by reason of the parenthetical 

matter contained in subparagraph (A) of paragraph (2) shall be 

treated for purposes of this chapter and chapter 22 as the employer 

with respect to such wages. 

(b) EMPLOYMENT.—For purposes of this chapter, the term ‘‘employment’’ means any service, of whatever nature, performed (A) by 

an employee for the person employing him, irrespective of the citizenship or residence of either, (i) within the United States, or (ii) 

on or in connection with an American vessel or American aircraft 

under a contract of service which is entered into within the United 

States or during the performance of which and while the employee 

is employed on the vessel or aircraft it touches at a port in the 

United States, if the employee is employed on and in connection 

with such vessel or aircraft when outside the United States, or (B) 

outside the United States by a citizen or resident of the United 

States as an employee for an American employer (as defined in 

subsection (h)), or (C) if it is service, regardless of where or by 

whom performed, which is designated as employment or recognized 

as equivalent to employment under an agreement entered into 

under section 233 of the Social Security Act; except that such term 

shall not include— 

(1) service performed by foreign agricultural workers lawfully admitted to the United States from the Bahamas, Jamaica, and the other British West Indies, or from any other 

foreign country or possession thereof, on a temporary basis to 

perform agricultural labor; 

(2) domestic service performed in a local college club, or local 

chapter of a college fraternity or sorority, by a student who is 

enrolled and is regularly attending classes at a school, college, 

or university; 

(3)(A) service performed by a child under the age of 18 in the 

employ of øhis father¿ the child’s father or mother; 

(B) service not in the course of the employer’s trade or business, or domestic service in a private home of the employer, 

performed by an individual under the age of 21 in the employ 

of øhis father¿ the individual’s father or mother, or performed 

by an individual in the employ of øhis spouse¿ the individual’s 

spouse or son or daughter; except that the provisions of this 

subparagraph shall not be applicable to such domestic service 

performed by an individual in the employ of øhis son¿ the individual’s son or daughter if— 

(i) the employer is a surviving spouse or a divorced individual and has not remarried, or has a spouse living in the 

home who has a mental or physical condition which results 

in such spouse’s being incapable of caring for a son, daughter, stepson, or stepdaughter (referred to in clause (ii)) for 

404 

at least 4 continuous weeks in the calendar quarter in 

which the service is rendered, and 

(ii) a son, daughter, stepson, or stepdaughter of such employer is living in the home, and 

(iii) the son, daughter, stepson, or stepdaughter (referred 

to in clause (ii)) has not attained age 18 or has a mental 

or physical condition which requires the personal care and 

supervision of an adult for at least 4 continuous weeks in 

the calendar quarter in which the service is rendered; 

(4) service performed by an individual on or in connection 

with a vessel not an American vessel, or on or in connection 

with an aircraft not an American aircraft, if (A) the individual 

is employed on and in connection with such vessel or aircraft, 

when outside the United States and (B)(i) such individual is 

not a citizen of the United States or (ii) the employer is not an 

American employer; 

(5) service performed in the employ of the United States or 

any instrumentality of the United States, if such service— 

(A) would be excluded from the term ‘‘employment’’ for 

purposes of this title if the provisions of paragraphs (5) 

and (6) of this subsection as in effect in January 1983 had 

remained in effect, and 

(B) is performed by an individual who— 

(i) has been continuously performing service described in subparagraph (A) since December 31, 1983, 

and for purposes of this clause— 

(I) if an individual performing service described 

in subparagraph (A) returns to the performance of 

such service after being separated therefrom for a 

period of less than 366 consecutive days, regardless of whether the period began before, on, or 

after December 31, 1983, then such service shall 

be considered continuous, 

(II) if an individual performing service described 

in subparagraph (A) returns to the performance of 

such service after being detailed or transferred to 

an international organization as described under 

section 3343 of subchapter III of chapter 33 of 

title 5, United States Code, or under section 3581 

of chapter 35 of such title, then the service performed for that organization shall be considered 

service described in subparagraph (A), 

(III) if an individual performing service described in subparagraph (A) is reemployed or reinstated after being separated from such service for 

the purpose of accepting employment with the 

American Institute in Taiwan as provided under 

section 3310 of chapter 48 of title 22, United 

States Code, then the service performed for that 

Institute shall be considered service described in 

subparagraph (A), 

(IV) if an individual performing service described in subparagraph (A) returns to the performance of such service after performing service 

as a member of a uniformed service (including, for 

405 

purposes of this clause, service in the National 

Guard and temporary service in the Coast Guard 

Reserve) and after exercising restoration or reemployment rights as provided under chapter 43 of 

title 38, United States Code, then the service so 

performed as a member of a uniformed service 

shall be considered service described in subparagraph (A), and 

(V) if an individual performing service described 

in subparagraph (A) returns to the performance of 

such service after employment (by a tribal organization) to which section 104(e)(2) of the Indian 

Self-Determination Act applies, then the service 

performed for that tribal organization shall be 

considered service described in subparagraph (A); 

or 

(ii) is receiving an annuity from the Civil Service 

Retirement and Disability Fund, or benefits (for service as an employee) under another retirement system 

established by a law of the United States for employees of the Federal Government (other than for members of the uniformed service); 

except that this paragraph shall not apply with respect to any 

such service performed on or after any date on which such individual performs— 

(C) service performed as the President or Vice President 

of the United States, 

(D) service performed— 

(i) in a position placed in the Executive Schedule 

under sections 5312 through 5317 of title 5, United 

States Code, 

(ii) as a noncareer appointee in the Senior Executive 

Service or a noncareer member of the Senior Foreign 

Service, or 

(iii) in a position to which the individual is appointed by the President (or his designee) or the Vice 

President under section 105(a)(1), 106(a)(1), or 107 

(a)(1) or (b)(1) of title 3, United States Code, if the 

maximum rate of basic pay for such position is at or 

above the rate for level V of the Executive Schedule, 

(E) service performed as the Chief Justice of the United 

States, an Associate Justice of the Supreme Court, a judge 

of a United States court of appeals, a judge of a United 

States district court (including the district court of a territory), a judge of the United States Court of Federal 

Claims, a judge of the United States Court of International 

Trade, a judge of the United States Tax Court, a United 

States magistrate judge, or a referee in bankruptcy or 

United States bankruptcy judge, 

(F) service performed as a Member, Delegate, or Resident Commissioner of or to the Congress, 

(G) any other service in the legislative branch of the 

Federal Government if such service— 

(i) is performed by an individual who was not subject to subchapter III of chapter 83 of title 5, United 

406 

States Code, or to another retirement system established by a law of the United States for employees of 

the Federal Government (other than for members of 

the uniformed services), on December 31, 1983, or 

(ii) is performed by an individual who has, at any 

time after December 31, 1983, received a lump-sum 

payment under section 8342(a) of title 5, United 

States Code, or under the corresponding provision of 

the law establishing the other retirement system described in clause (i), or 

(iii) is performed by an individual after such individual has otherwise ceased to be subject to subchapter III of chapter 83 of title 5, United States Code 

(without having an application pending for coverage 

under such subchapter), while performing service in 

the legislative branch (determined without regard to 

the provisions of subparagraph (B) relating to continuity of employment), for any period of time after 

December 31, 1983, 

and for purposes of this subparagraph (G) an individual is 

subject to such subchapter III or to any such other retirement system at any time only if (a) such individual’s pay 

is subject to deductions, contributions, or similar payments 

(concurrent with the service being performed at that time) 

under section 8334(a) of such title 5 or the corresponding 

provision of the law establishing such other system, or (in 

a case to which section 8332(k)(1) of such title applies) 

such individual is making payments of amounts equivalent 

to such deductions, contributions, or similar payments 

while on leave without pay, or (b) such individual is receiving an annuity from the Civil Service Retirement and Disability Fund, or is receiving benefits (for service as an employee) under another retirement system established by a 

law of the United States for employees of the Federal Government (other than for members of the uniformed services), or 

(H) service performed by an individual— 

(i) on or after the effective date of an election by 

such individual, under section 301 of the Federal Employees’ Retirement System Act of 1986, section 307 of 

the Central Intelligence Agency Retirement Act (50 

U.S.C. 2157), or the Federal Employees’ Retirement 

System Open Enrollment Act of 1997, to become subject to the Federal Employees’ Retirement System provided in chapter 84 of title 5, United States Code, or 

(ii) on or after the effective date of an election by 

such individual, under regulations issued under section 860 of the Foreign Service Act of 1980, to become 

subject to the Foreign Service Pension System provided in subchapter II of chapter 8 of title I of such 

Act; 

(6) service performed in the employ of the United States or 

any instrumentality of the United States if such service is performed— 

407 

(A) in a penal institution of the United States by an inmate thereof; 

(B) by any individual as an employee included under section 5351(2) of title 5, United States Code (relating to certain interns, student nurses, and other student employees 

of hospitals of the Federal Government), other than as a 

medical or dental intern or a medical or dental resident in 

training; or 

(C) by any individual as an employee serving on a temporary basis in case of fire, storm, earthquake, flood, or 

other similar emergency; 

(7) service performed in the employ of a State, or any political subdivision thereof, or any instrumentality of any one or 

more of the foregoing which is wholly owned thereby, except 

that this paragraph shall not apply in the case of— 

(A) service which, under subsection (j), constitutes covered transportation service, 

(B) service in the employ of the Government of Guam or 

the Government of American Samoa or any political subdivision thereof, or of any instrumentality of any one or 

more of the foregoing which is wholly owned thereby, performed by an officer or employee thereof (including a member of the legislature of any such Government or political 

subdivision), and, for purposes of this title with respect to 

the taxes imposed by this chapter— 

(i) any person whose service as such an officer or 

employee is not covered by a retirement system established by a law of the United States shall not, with respect to such service, be regarded as an employee of 

the United States or any agency or instrumentality 

thereof, and 

(ii) the remuneration for service described in clause 

(i) (including fees paid to a public official) shall be 

deemed to have been paid by the Government of Guam 

or the Government of American Samoa or by a political subdivision thereof or an instrumentality of any 

one or more of the foregoing which is wholly owned 

thereby, whichever is appropriate, 

(C) service performed in the employ of the District of Columbia or any instrumentality which is wholly owned 

thereby, if such service is not covered by a retirement system established by a law of the United States (other than 

the Federal Employees Retirement System provided in 

chapter 84 of title 5, United States Code); except that the 

provisions of this subparagraph shall not be applicable to 

service performed— 

(i) in a hospital or penal institution by a patient or 

inmate thereof; 

(ii) by any individual as an employee included under 

section 5351(2) of title 5, United States Code (relating 

to certain interns, student nurses, and other student 

employees of hospitals of the District of Columbia Government), other than as a medical or dental intern or 

as a medical or dental resident in training; 

408 

(iii) by any individual as an employee serving on a 

temporary basis in case of fire, storm, snow, earthquake, flood or other similar emergency; or 

(iv) by a member of a board, committee, or council 

of the District of Columbia, paid on a per diem, meeting, or other fee basis, 

(D) service performed in the employ of the Government 

of Guam (or any instrumentality which is wholly owned by 

such Government) by an employee properly classified as a 

temporary or intermittent employee, if such service is not 

covered by a retirement system established by a law of 

Guam; except that (i) the provisions of this subparagraph 

shall not be applicable to services performed by an elected 

official or a member of the legislature or in a hospital or 

penal institution by a patient or inmate thereof, and (ii) 

for purposes of this subparagraph, clauses (i) and (ii) of 

subparagraph (B) shall apply, 

(E) service included under an agreement entered into 

pursuant to section 218 of the Social Security Act, or 

(F) service in the employ of a State (other than the District of Columbia, Guam, or American Samoa), of any political subdivision thereof, or of any instrumentality of any 

one or more of the foregoing which is wholly owned thereby, by an individual who is not a member of a retirement 

system of such State, political subdivision, or instrumentality, except that the provisions of this subparagraph 

shall not be applicable to service performed— 

(i) by an individual who is employed to relieve such 

individual from unemployment; 

(ii) in a hospital, home, or other institution by a patient or inmate thereof; 

(iii) by any individual as an employee serving on a 

temporary basis in case of fire, storm, snow, earthquake, flood, or other similar emergency; 

(iv) by an election official or election worker if the 

remuneration paid in a calendar year for such service 

is less than $1,000 with respect to service performed 

during any calendar year commencing on or after January 1, 1995, ending on or before December 31, 1999, 

and the adjusted amount determined under section 

218(c)(8)(B) of the Social Security Act for any calendar 

year commencing on or after January 1, 2000, with respect to service performed during such calendar year; 

or 

(v) by an employee in a position compensated solely 

on a fee basis which is treated pursuant to section 

1402(c)(2)(E) as a trade or business for purposes of inclusion of such fees in net earnings from self-employment; 

for purposes of this subparagraph, except as provided in 

regulations prescribed by the Secretary, the term ‘‘retirement system’’ has the meaning given such term by section 

218(b)(4) of the Social Security Act; 

(8)(A) service performed by a duly ordained, commissioned, 

or licensed minister of a church in the exercise of his ministry 

409 

or by a member of a religious order in the exercise of duties 

required by such order, except that this subparagraph shall not 

apply to service performed by a member of such an order in 

the exercise of such duties, if an election of coverage under 

subsection (r) is in effect with respect to such order, or with respect to the autonomous subdivision thereof to which such 

member belongs; 

(B) service performed in the employ of a church or qualified 

church-controlled organization if such church or organization 

has in effect an election under subsection (w), other than service in an unrelated trade or business (within the meaning of 

section 513(a)); 

(9) service performed by an individual as an employee or employee representative as defined in section 3231; 

(10) service performed in the employ of— 

(A) a school, college, or university, or 

(B) an organization described in section 509(a)(3) if the 

organization is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of a school, college, 

or university and is operated, supervised, or controlled by 

or in connection with such school, college, or university, 

unless it is a school, college, or university of a State or a 

political subdivision thereof and the services performed in 

its employ by a student referred to in section 218(c)(5) of 

the Social Security Act are covered under the agreement 

between the Commissioner of Social Security and such 

State entered into pursuant to section 218 of such Act; 

if such service is performed by a student who is enrolled and 

regularly attending classes at such school, college, or university; 

(11) service performed in the employ of a foreign government 

(including service as a consular or other officer or employee or 

a nondiplomatic representative); 

(12) service performed in the employ of an instrumentality 

wholly owned by a foreign government— 

(A) if the service is of a character similar to that performed in foreign countries by employees of the United 

States Government or of an instrumentality thereof; and 

(B) if the Secretary of State shall certify to the Secretary 

of the Treasury that the foreign government, with respect 

to whose instrumentality and employees thereof exemption 

is claimed, grants an equivalent exemption with respect to 

similar service performed in the foreign country by employees of the United States Government and of instrumentalities thereof; 

(13) service performed as a student nurse in the employ of 

a hospital or a nurses’ training school by an individual who is 

enrolled and is regularly attending classes in a nurses’ training 

school chartered or approved pursuant to State law; 

(14)(A) service performed by an individual under the age of 

18 in the delivery or distribution of newspapers or shopping 

news, not including delivery or distribution to any point for 

subsequent delivery or distribution; 

410 

(B) service performed by an individual in, and at the time of, 

the sale of newspapers or magazines to ultimate consumers, 

under an arrangement under which the newspapers or magazines are to be sold by him at a fixed price, his compensation 

being based on the retention of the excess of such price over 

the amount at which the newspapers or magazines are charged 

to him, whether or not he is guaranteed a minimum amount 

of compensation for such service, or is entitled to be credited 

with the unsold newspapers or magazines turned back; 

(15) service performed in the employ of an international organization, except service which constitutes ‘‘employment’’ 

under subsection (y); 

(16) service performed by an individual under an arrangement with the owner or tenant of land pursuant to which— 

(A) such individual undertakes to produce agricultural 

or horticultural commodities (including livestock, bees, 

poultry, and fur-bearing animals and wildlife) on such 

land, 

(B) the agricultural or horticultural commodities produced by such individual, or the proceeds therefrom, are to 

be divided between such individual and such owner or tenant, and 

(C) the amount of such individual’s share depends on the 

amount of the agricultural or horticultural commodities 

produced; 

(18) service performed in Guam by a resident of the Republic 

of the Philippines while in Guam on a temporary basis as a 

nonimmigrant alien admitted to Guam pursuant to section 

101(a)(15)(H)(ii) of the Immigration and Nationality Act (8 

U.S.C. 1101(a)(15)(H)(ii)); 

(19) Service which is performed by a nonresident alien individual for the period he is temporarily present in the United 

States as a nonimmigrant under subparagraph (F), (J), (M), or 

(Q) of section 101(a)(15) of the Immigration and Nationality 

Act, as amended, and which is performed to carry out the purpose specified in subparagraph (F), (J), (M), or (Q), as the case 

may be; 

(20) service (other than service described in paragraph 

(3)(A)) performed by an individual on a boat engaged in catching fish or other forms of aquatic animal life under an arrangement with the owner or operator of such boat pursuant to 

which— 

(A) such individual does not receive any cash remuneration other than as provided in subparagraph (B) and other 

than cash remuneration— 

(i) which does not exceed $100 per trip; 

(ii) which is contingent on a minimum catch; and 

(iii) which is paid solely for additional duties (such 

as mate, engineer, or cook) for which additional cash 

remuneration is traditional in the industry, 

(B) such individual receives a share of the boat’s (or the 

boats’ in the case of a fishing operation involving more 

than one boat) catch of fish or other forms of aquatic animal life or a share of the proceeds from the sale of such 

catch, and 

411 

(C) the amount of such individual’s share depends on the 

amount of the boat’s (or the boats’ in the case of a fishing 

operation involving more than one boat) catch of fish or 

other forms of aquatic animal life, 

but only if the operating crew of such boat (or each boat from 

which the individual receives a share in the case of a fishing 

operation involving more than one boat) is normally made up 

of fewer than 10 individuals; 

(21) domestic service in a private home of the employer 

which— 

(A) is performed in any year by an individual under the 

age of 18 during any portion of such year; and 

(B) is not the principal occupation of such employee; or 

(22) service performed by members of Indian tribal councils 

as tribal council members in the employ of an Indian tribal 

government, except that this paragraph shall not apply in the 

case of service included under an agreement under section 

218A of the Social Security Act. 

For purposes of paragraph (20), the operating crew of a boat shall 

be treated as normally made up of fewer than 10 individuals if the 

average size of the operating crew on trips made during the preceding 4 calendar quarters consisted of fewer than 10 individuals. 

(c) INCLUDED AND EXCLUDED SERVICE.—For purposes of this 

chapter, if the services performed during one-half or more of any 

pay period by an employee for the person employing him constitute 

employment, all the services of such employee for such period shall 

be deemed to be employment; but if the services performed during 

more than one-half of any such pay period by an employee for the 

person employing him do not constitute employment, then none of 

the services of such employee for such period shall be deemed to 

be employment. As used in this subsection, the term ‘‘pay period’’ 

means a period (of not more than 31 consecutive days) for which 

a payment of remuneration is ordinarily made to the employee by 

the person employing him. This subsection shall not be applicable 

with respect to services performed in a pay period by an employee 

for the person employing him, where any of such service is excepted by subsection (b)(9). 

(d) EMPLOYEE.—For purposes of this chapter, the term ‘‘employee’’ means— 

(1) any officer of a corporation; or 

(2) any individual who, under the usual common law rules 

applicable in determining the employer-employee relationship, 

has the status of an employee; or 

(3) any individual (other than an individual who is an employee under paragraph (1) or (2)) who performs services for remuneration for any person— 

(A) as an agent-driver or commission-driver engaged in 

distributing meat products, vegetable products, fruit products, bakery products, beverages (other than milk), or 

laundry or dry-cleaning services, for his principal; 

(B) as a full-time life insurance salesman; 

(C) as a home worker performing work, according to 

specifications furnished by the person for whom the services are performed, on materials or goods furnished by 

412 

such person which are required to be returned to such person or a person designated by him; or 

(D) as a traveling or city salesman, other than as an 

agent-driver or commission-driver, engaged upon a fulltime basis in the solicitation on behalf of, and the transmission to, his principal (except for side-line sales activities on behalf of some other person) of orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for merchandise 

for resale or supplies for use in their business operations; 

if the contract of service contemplates that substantially all of 

such services are to be performed personally by such individual; except that an individual shall not be included in the 

term ‘‘employee’’ under the provisions of this paragraph if such 

individual has a substantial investment in facilities used in 

connection with the performance of such services (other than 

in facilities for transportation), or if the services are in the nature of a single transaction not part of a continuing relationship with the person for whom the services are performed; or 

(4) any individual who performs services that are included 

under an agreement entered into pursuant to section 218 or 

218A of the Social Security Act. 

(e) STATE, UNITED STATES, AND CITIZEN.—For purposes of this 

chapter— 

(1) STATE.—The term ‘‘State’’ includes the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, 

Guam, and American Samoa. 

(2) UNITED STATES.—The term ‘‘United States’’ when used in 

a geographical sense includes the Commonwealth of Puerto 

Rico, the Virgin Islands, Guam, and American Samoa. 

An individual who is a citizen of the Commonwealth of Puerto Rico 

(but not otherwise a citizen of the United States) shall be considered, for purposes of this section, as a citizen of the United States. 

(f) AMERICAN VESSEL AND AIRCRAFT.—For purposes of this chapter, the term ‘‘American vessel’’ means any vessel documented or 

numbered under the laws of the United States; and includes any 

vessel which is neither documented or numbered under the laws of 

the United States nor documented under the laws of any foreign 

country, if its crew is employed solely by one or more citizens or 

residents of the United States or corporations organized under the 

laws of the United States or of any State; and the term ‘‘American 

aircraft’’ means an aircraft registered under the laws of the United 

States. 

(g) AGRICULTURAL LABOR.—For purposes of this chapter, the term 

‘‘agricultural labor’’ includes all service performed— 

(1) on a farm, in the employ of any person, in connection 

with cultivating the soil, or in connection with raising or harvesting any agricultural or horticultural commodity, including 

the raising, shearing, feeding, caring for, training, and management of livestock, bees, poultry, and fur-bearing animals 

and wildlife; 

(2) in the employ of the owner or tenant or other operator 

of a farm, in connection with the operation, management, conservation, improvement, or maintenance of such farm and its 

tools and equipment, or in salvaging timber or clearing land of 

413 

brush and other debris left by a hurricane, if the major part 

of such service is performed on a farm; 

(3) in connection with the production or harvesting of any 

commodity defined as an agricultural commodity in section 

15(g) of the Agricultural Marketing Act, as amended (12 U.S.C. 

1141j), or in connection with the ginning of cotton, or in connection with the operation or maintenance of ditches, canals, 

reservoirs, or waterways, not owned or operated for profit, used 

exclusively for supplying and storing water for farming purposes; 

(4)(A) in the employ of the operator of a farm in handling, 

planting, drying, packing, packaging, processing, freezing, 

grading, storing, or delivering to storage or to market or to a 

carrier for transportation to market, in its unmanufactured 

state, any agricultural or horticultural commodity; but only if 

such operator produced more than one-half of the commodity 

with respect to which such service is performed; 

(B) in the employ of a group of operators of farms (other 

than a cooperative organization) in the performance of service 

described in subparagraph (A), but only if such operators produced all of the commodity with respect to which such service 

is performed. For purposes of this subparagraph, any unincorporated group of operators shall be deemed a cooperative organization if the number of operators comprising such group is 

more than 20 at any time during the calendar year in which 

such service is performed; 

(C) the provisions of subparagraphs (A) and (B) shall not be 

deemed to be applicable with respect to service performed in 

connection with commercial canning or commercial freezing or 

in connection with any agricultural or horticultural commodity 

after its delivery to a terminal market for distribution for consumption; or 

(5) on a farm operated for profit if such service is not in the 

course of the employer’s trade or business. 

As used in this subsection, the term ‘‘farm’’ includes stock, dairy, 

poultry, fruit, fur-bearing animal, and truck farms, plantations, 

ranches, nurseries, ranges, greenhouses or other similar structures 

used primarily for the raising of agricultural or horticultural commodities, and orchards. 

(h) AMERICAN EMPLOYER.—For purposes of this chapter, the term 

‘‘American employer’’ means an employer which is— 

(1) the United States or any instrumentality thereof, 

(2) an individual who is a resident of the United States, 

(3) a partnership, if two-thirds or more of the partners are 

residents of the United States, 

(4) a trust, if all of the trustees are residents of the United 

States, or 

(5) a corporation organized under the laws of the United 

States or of any State. 

(i) COMPUTATION OF WAGES IN CERTAIN CASES.— (1) DOMESTIC SERVICE.—For purposes of this chapter, in the 

case of domestic service described in subsection (a)(7)(B), any 

payment of cash remuneration for such service which is more 

or less than a whole-dollar amount shall, under such conditions 

and to such extent as may be prescribed by regulations made 

414 

under this chapter, be computed to the nearest dollar. For the 

purpose of the computation to the nearest dollar, the payment 

of a fractional part of a dollar shall be disregarded unless it 

amounts to one-half dollar or more, in which case it shall be 

increased to $1. The amount of any payment of cash remuneration so computed to the nearest dollar shall, in lieu of the 

amount actually paid, be deemed to constitute the amount of 

cash remuneration for purposes of subsection (a)(7)(B). 

(2) SERVICE IN THE UNIFORMED SERVICES.—For purposes of 

this chapter, in the case of an individual performing service, as 

a member of a uniformed service, to which the provisions of 

subsection (m)(1) are applicable, the term ‘‘wages’’ shall, subject to the provisions of subsection (a)(1) of this section, include 

as such individual’s remuneration for such service only (A) his 

basic pay as described in chapter 3 and section 1009 of title 37, 

United States Code, in the case of an individual performing 

service to which subparagraph (A) of such subsection (m)(1) applies, or (B) his compensation for such service as determined 

under section 206(a) of title 37, United States Code, in the case 

of an individual performing service to which subparagraph (B) 

of such subsection (m)(1) applies. 

(3) PEACE CORPS VOLUNTEER SERVICE.—For purposes of this 

chapter, in the case of an individual performing service, as a 

volunteer or volunteer leader within the meaning of the Peace 

Corps Act, to which the provisions of section 3121(p) are applicable, the term ‘‘wages’’ shall, subject to the provisions of subsection (a)(1) of this section, include as such individual’s remuneration for such service only amounts paid pursuant to section 5(c) or 6(1) of the Peace Corps Act. 

(4) SERVICE PERFORMED BY CERTAIN MEMBERS OF RELIGIOUS

ORDERS.—For purposes of this chapter, in any case where an 

individual is a member of a religious order (as defined in subsection (r)(2)) performing service in the exercise of duties required by such order, and an election of coverage under subsection (r) is in effect with respect to such order or with respect 

to the autonomous subdivision thereof to which such member 

belongs, the term ‘‘wages’’ shall, subject to the provisions of 

subsection (a)(1), include as such individual’s remuneration for 

such service the fair market value of any board, lodging, clothing, and other perquisites furnished to such member by such 

order or subdivision thereof or by any other person or organization pursuant to an agreement with such order or subdivision, 

except that the amount included as such individual’s remuneration under this paragraph shall not be less than $100 a 

month. 

(5) SERVICE PERFORMED BY CERTAIN RETIRED JUSTICES AND

JUDGES.—For purposes of this chapter, in the case of an individual performing service under the provisions of section 294 

of title 28, United States Code (relating to assignment of retired justices and judges to active duty), the term ‘‘wages’’ shall 

not include any payment under section 371(b) of such title 28 

which is received during the period of such service. 

(j) COVERED TRANSPORTATION SERVICE.—For purposes of this 

chapter— 

415 

(1) EXISTING TRANSPORTATION SYSTEMS—GENERAL RULE.— Except as provided in paragraph (2), all service performed in 

the employ of a State or political subdivision in connection 

with its operation of a public transportation system shall constitute covered transportation service if any part of the transportation system was acquired from private ownership after 

1936 and prior to 1951. 

(2) EXISTING TRANSPORTATION SYSTEMS—CASES IN WHICH NO

TRANSPORTATION EMPLOYEES, OR ONLY CERTAIN EMPLOYEES, ARE COVERED.—Service performed in the employ of a State or 

political subdivision in connection with the operation of its 

public transportation system shall not constitute covered transportation service if— 

(A) any part of the transportation system was acquired 

from private ownership after 1936 and prior to 1951, and 

substantially all service in connection with the operation of 

the transportation system was, on December 31, 1950, covered under a general retirement system providing benefits 

which, by reason of a provision of the State constitution 

dealing specifically with retirement systems of the State or 

political subdivisions thereof, cannot be diminished or impaired; or 

(B) no part of the transportation system operated by the 

State or political subdivision on December 31, 1950, was 

acquired from private ownership after 1936 and prior to 

1951; 

except that if such State or political subdivision makes an acquisition after 1950 from private ownership of any part of its 

transportation system, then, in the case of any employee who— 

(C) became an employee of such State or political subdivision in connection with and at the time of its acquisition after 1950 of such part, and 

(D) prior to such acquisition rendered service in employment (including as employment service covered by an 

agreement under section 218 of the Social Security Act) in 

connection with the operation of such part of the transportation system acquired by the State or political subdivision, 

the service of such employee in connection with the operation 

of the transportation system shall constitute covered transportation service, commencing with the first day of the third calendar quarter following the calendar quarter in which the acquisition of such part took place, unless on such first day such 

service of such employee is covered by a general retirement 

system which does not, with respect to such employee, contain 

special provisions applicable only to employees described in 

subparagraph (C). 

(3) TRANSPORTATION SYSTEMS ACQUIRED AFTER 1950.—All 

service performed in the employ of a State or political subdivision thereof in connection with its operation of a public transportation system shall constitute covered transportation service if the transportation system was not operated by the State 

or political subdivision prior to 1951 and, at the time of its first 

acquisition (after 1950) from private ownership of any part of 

its transportation system, the State or political subdivision did 

416 

not have a general retirement system covering substantially all 

service performed in connection with the operation of the 

transportation system. 

(4) DEFINITIONS.—For purposes of this subsection— 

(A) The term ‘‘general retirement system’’ means any 

pension, annuity, retirement, or similar fund or system established by a State or by a political subdivision thereof 

for employees of the State, political subdivision, or both; 

but such term shall not include such a fund or system 

which covers only service performed in positions connected 

with the operation of its public transportation system. 

(B) A transportation system or a part thereof shall be 

considered to have been acquired by a State or political 

subdivision from private ownership if prior to the acquisition service performed by employees in connection with the 

operation of the system or part thereof acquired constituted employment under this chapter or subchapter A of 

chapter 9 of the Internal Revenue Code of 1939 or was covered by an agreement made pursuant to section 218 of the 

Social Security Act and some of such employees became 

employees of the State or political subdivision in connection with and at the time of such acquisition. 

(C) The term ‘‘political subdivision’’ includes an instrumentality of— 

(i) a State, 

(ii) one or more political subdivisions of a State, or 

(iii) a State and one or more of its political subdivisions. 

(l) AGREEMENTS ENTERED INTO BY AMERICAN EMPLOYERS WITH

RESPECT TO FOREIGN AFFILIATES.— 

(1) AGREEMENT WITH RESPECT TO CERTAIN EMPLOYEES OF

FOREIGN AFFILIATE.—The Secretary shall, at the American employer’s request, enter into an agreement (in such manner and 

form as may be prescribed by the Secretary) with any American employer (as defined in subsection (h)) who desires to 

have the insurance system established by title II of the Social 

Security Act extended to service performed outside the United 

States in the employ of any 1 or more of such employer’s foreign affiliates (as defined in paragraph (6)) by all employees 

who are citizens or residents of the United States, except that 

the agreement shall not apply to any service performed by, or 

remuneration paid to, an employee if such service or remuneration would be excluded from the term ‘‘employment’’ or 

‘‘wages’’, as defined in this section, had the service been performed in the United States. Such agreement may be amended 

at any time so as to be made applicable, in the same manner 

and under the same conditions, with respect to any other foreign affiliate of such American employer. Such agreement shall 

be applicable with respect to citizens or residents of the United 

States who, on or after the effective date of the agreement, are 

employees of and perform services outside the United States 

for any foreign affiliate specified in the agreement. Such agreement shall provide— 

(A) that the American employer shall pay to the Secretary, at such time or times as the Secretary may by regVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00422 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
417 

ulations prescribe, amounts equivalent to the sum of the 

taxes which would be imposed by sections 3101 and 3111 

(including amounts equivalent to the interest, additions to 

the taxes, additional amounts, and penalties which would 

be applicable) with respect to the remuneration which 

would be wages if the services covered by the agreement 

constituted employment as defined in this section; and 

(B) that the American employer will comply with such 

regulations relating to payments and reports as the Secretary may prescribe to carry out the purposes of this subsection. 

(2) EFFECTIVE PERIOD OF AGREEMENT.—An agreement entered into pursuant to paragraph (1) shall be in effect for the 

period beginning with the first day of the calendar quarter in 

which such agreement is entered into or the first day of the 

succeeding calendar quarter, as may be specified in the agreement; except that in case such agreement is amended to include the services performed for any other affiliate and such 

amendment is executed after the first month following the first 

calendar quarter for which the agreement is in effect, the 

agreement shall be in effect with respect to service performed 

for such other affiliate only after the calendar quarter in which 

such amendment is executed. Notwithstanding any other provision of this subsection, the period for which any such agreement is effective with respect to any foreign entity shall terminate at the end of any calendar quarter in which the foreign 

entity, at any time in such quarter, ceases to be a foreign affiliate as defined in paragraph (6). 

(3) NO TERMINATION OF AGREEMENT.—No agreement under 

this subsection may be terminated, either in its entirety or 

with respect to any foreign affiliate, on or after June 15, 1989. 

(4) DEPOSITS IN TRUST FUNDS.—For purposes of section 201 

of the Social Security Act, relating to appropriations to the 

Federal Old-Age and Survivors Insurance Trust Fund and the 

Federal Disability Insurance Trust Fund, such remuneration— 

(A) paid for services covered by an agreement entered 

into pursuant to paragraph (1) as would be wages if the 

services constituted employment, and 

(B) as is reported to the Secretary pursuant to the provisions of such agreement or of the regulations issued under 

this subsection, 

shall be considered wages subject to the taxes imposed by this 

chapter. 

(5) OVERPAYMENTS AND UNDERPAYMENTS.—(A) If more or less 

than the correct amount due under an agreement entered into 

pursuant to this subsection is paid with respect to any payment of remuneration, proper adjustments with respect to the 

amounts due under such agreement shall be made, without interest, in such manner and at such times as may be required 

by regulations prescribed by the Secretary. 

(B) If an overpayment cannot be adjusted under subparagraph (A), the amount thereof shall be paid by the Secretary, 

through the Fiscal Service of the Treasury Department, but 

only if a claim for such overpayment is filed with the Secretary 

within two years from the time such overpayment was made. 

418 

(6) FOREIGN AFFILIATE DEFINED.—For purposes of this subsection and section 210(a) of the Social Security Act— 

(A) IN GENERAL.—A foreign affiliate of an American employer is any foreign entity in which such American employer has not less than a 10-percent interest. 

(B) DETERMINATION OF 10-PERCENT INTEREST.—For purposes of subparagraph (A), an American employer has a 

10-percent interest in any entity if such employer has such 

an interest directly (or through one or more entities)— 

(i) in the case of a corporation, in the voting stock 

thereof, and 

(ii) in the case of any other entity, in the profits 

thereof. 

(7) AMERICAN EMPLOYER AS SEPARATE ENTITY.—Each American employer which enters into an agreement pursuant to 

paragraph (1) of this subsection shall, for purposes of this subsection and section 6413(c)(2)(C), relating to special refunds in 

the case of employees of certain foreign entities, be considered 

an employer in its capacity as a party to such agreement separate and distinct from its identity as a person employing individuals on its own account. 

(8) REGULATIONS.—Regulations of the Secretary to carry out 

the purposes of this subsection shall be designed to make the 

requirements imposed on American employers with respect to 

services covered by an agreement entered into pursuant to this 

subsection the same, so far as practicable, as those imposed 

upon employers pursuant to this title with respect to the taxes 

imposed by this chapter. 

(m) SERVICE IN THE UNIFORMED SERVICES.—For purposes of this 

chapter— 

(1) INCLUSION OF SERVICE.—The term ‘‘employment’’ shall, 

notwithstanding the provisions of subsection (b) of this section, 

include— 

(A) service performed by an individual as a member of 

a uniformed service on active duty, but such term shall not 

include any such service which is performed while on leave 

without pay, and 

(B) service performed by an individual as a member of 

a uniformed service on inactive duty training. 

(2) ACTIVE DUTY.—The term ‘‘active duty’’ means ‘‘active 

duty’’ as described in paragraph (21) of section 101 of title 38, 

United States Code, except that it shall also include ‘‘active 

duty for training’’ as described in paragraph (22) of such section. 

(3) INACTIVE DUTY TRAINING.—The term ‘‘inactive duty training’’ means ‘‘inactive duty training’’ as described in paragraph 

(23) of such section 101. 

(n) MEMBER OF A UNIFORMED SERVICE.—For purposes of this 

chapter, the term ‘‘member of a uniformed service’’ means any person appointed, enlisted, or inducted in a component of the Army, 

Navy, Air Force, Marine Corps, or Coast Guard (including a reserve component as defined in section 101(27) of title 38, United 

States Code), or in one of those services without specification of 

component, or as a commissioned officer of the Coast and Geodetic 

Survey, the National Oceanic and Atmospheric Administration 

419 

Corps, or the Regular or Reserve Corps of the Public Health Service, and any person serving in the Army or Air Force under call or 

conscription. The term includes— 

(1) a retired member of any of those services; 

(2) a member of the Fleet Reserve or Fleet Marine Corps Reserve; 

(3) a cadet at the United States Military Academy, a midshipman at the United States Naval Academy, and a cadet at 

the United States Coast Guard Academy or United States Air 

Force Academy; 

(4) a member of the Reserve Officers’ Training Corps, the 

Naval Reserve Officers’ Training Corps, or the Air Force Reserve Officers’ Training Corps, when ordered to annual training duty for fourteen days or more, and while performing authorized travel to and from that duty; and 

(5) any person while en route to or from, or at, a place for 

final acceptance or for entry upon active duty in the military, 

naval, or air service— 

(A) who has been provisionally accepted for such duty; or 

(B) who, under the Military Selective Service Act, has 

been selected for active military, naval, or air service; 

and has been ordered or directed to proceed to such place. 

The term does not include a temporary member of the Coast Guard 

Reserve. 

(o) CREW LEADER.—For purposes of this chapter, the term ‘‘crew 

leader’’ means an individual who furnishes individuals to perform 

agricultural labor for another person, if such individual pays (either on his own behalf or on behalf of such person) the individuals 

so furnished by him for the agricultural labor performed by them 

and if such individual has not entered into a written agreement 

with such person whereby such individual has been designated as 

an employee of such person; and such individuals furnished by the 

crew leader to perform agricultural labor for another person shall 

be deemed to be the employees of such crew leader. For purposes 

of this chapter and chapter 2, a crew leader shall, with respect to 

service performed in furnishing individuals to perform agricultural 

labor for another person and service performed as a member of the 

crew, be deemed not to be an employee of such other person. 

(p) PEACE CORPS VOLUNTEER SERVICE.—For purposes of this 

chapter, the term ‘‘employment’’ shall, notwithstanding the provisions of subsection (b) of this section, include service performed by 

an individual as a volunteer or volunteer leader within the meaning of the Peace Corps Act. 

(q) TIPS INCLUDED FOR BOTH EMPLOYEE AND EMPLOYER TAXES.— 

For purposes of this chapter, tips received by an employee in the 

course of his employment shall be considered remuneration for 

such employment (and deemed to have been paid by the employer 

for purposes of subsections (a) and (b) of section 3111). Such remuneration shall be deemed to be paid at the time a written statement including such tips is furnished to the employer pursuant to 

section 6053(a) or (if no statement including such tips is so furnished) at the time received; except that, in determining the employer’s liability in connection with the taxes imposed by section 

3111 with respect to such tips in any case where no statement including such tips was so furnished (or to the extent that the stateVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00425 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
420 

ment so furnished was inaccurate or incomplete), such remuneration shall be deemed for purposes of subtitle F to be paid on the 

date on which notice and demand for such taxes is made to the employer by the Secretary. 

(r) ELECTION OF COVERAGE BY RELIGIOUS ORDERS.— (1) CERTIFICATE OF ELECTION BY ORDER.—A religious order 

whose members are required to take a vow of poverty, or any 

autonomous subdivision of such order, may file a certificate (in 

such form and manner, and with such official, as may be prescribed by regulations under this chapter) electing to have the 

insurance system established by title II of the Social Security 

Act extended to services performed by its members in the exercise of duties required by such order or such subdivision thereof. Such certificate of election shall provide that— 

(A) such election of coverage by such order or subdivision 

shall be irrevocable; 

(B) such election shall apply to all current and future 

members of such order, or in the case of a subdivision 

thereof to all current and future members of such order 

who belong to such subdivision; 

(C) all services performed by a member of such an order 

or subdivision in the exercise of duties required by such 

order or subdivision shall be deemed to have been performed by such member as an employee of such order or 

subdivision; and 

(D) the wages of each member, upon which such order 

or subdivision shall pay the taxes imposed by sections 

3101 and 3111, will be determined as provided in subsection (i)(4). 

(2) DEFINITION OF MEMBER.—For purposes of this subsection, 

a member of a religious order means any individual who is 

subject to a vow of poverty as a member of such order and who 

performs tasks usually required (and to the extent usually required) of an active member of such order and who is not considered retired because of old age or total disability. 

(3) EFFECTIVE DATE FOR ELECTION.—(A) A certificate of election of coverage shall be in effect, for purposes of subsection 

(b)(8) and for purposes of section 210(a)(8) of the Social Security Act, for the period beginning with whichever of the following may be designated by the order or subdivision thereof: 

(i) the first day of the calendar quarter in which the certificate is filed, 

(ii) the first day of the calendar quarter succeeding such 

quarter, or 

(iii) the first day of any calendar quarter preceding the 

calendar quarter in which the certificate is filed, except 

that such date may not be earlier than the first day of the 

twentieth calendar quarter preceding the quarter in which 

such certificate is filed. 

Whenever a date is designated under clause (iii), the election 

shall apply to services performed before the quarter in which 

the certificate is filed only if the member performing such services was a member at the time such services were performed 

and is living on the first day of the quarter in which such certificate is filed. 

421 

(B) If a certificate of election filed pursuant to this subsection is effective for one or more calendar quarters prior to 

the quarter in which such certificate is filed, then— 

(i) for purposes of computing interest and for purposes of 

section 6651 (relating to addition to tax for failure to file 

tax return), the due date for the return and payment of 

the tax for such prior calendar quarters resulting from the 

filing of such certificate shall be the last day of the calendar month following the calendar quarter in which the 

certificate is filed; and 

(ii) the statutory period for the assessment of such tax 

shall not expire before the expiration of 3 years from such 

due date. 

(s) CONCURRENT EMPLOYMENT BY TWO OR MORE EMPLOYERS.—For 

purposes of sections 3102, 3111, and 3121(a)(1), if two or more related corporations concurrently employ the same individual and 

compensate such individual through a common paymaster which is 

one of such corporations, each such corporation shall be considered 

to have paid as remuneration to such individual only the amounts 

actually disbursed by it to such individual and shall not be considered to have paid as remuneration to such individual amounts actually disbursed to such individual by another of such corporations. 

(u) APPLICATION OF HOSPITAL INSURANCE TAX TO FEDERAL, STATE, AND LOCAL EMPLOYMENT.— (1) FEDERAL EMPLOYMENT.—For purposes of the taxes imposed by sections 3101(b) and 3111(b), subsection (b) shall be 

applied without regard to paragraph (5) thereof. 

(2) STATE AND LOCAL EMPLOYMENT.—For purposes of the 

taxes imposed by sections 3101(b) and 3111(b)— 

(A) IN GENERAL.—Except as provided in subparagraphs 

(B) and (C), subsection (b) shall be applied without regard 

to paragraph (7) thereof. 

(B) EXCEPTION FOR CERTAIN SERVICES.—Service shall not 

be treated as employment by reason of subparagraph (A) 

if— 

(i) the service is included under an agreement under 

section 218 of the Social Security Act, or 

(ii) the service is performed— 

(I) by an individual who is employed by a State 

or political subdivision thereof to relieve him from 

unemployment, 

(II) in a hospital, home, or other institution by 

a patient or inmate thereof as an employee of a 

State or political subdivision thereof or of the District of Columbia, 

(III) by an individual, as an employee of a State 

or political subdivision thereof or of the District of 

Columbia, serving on a temporary basis in case of 

fire, storm, snow, earthquake, flood or other similar emergency, 

(IV) by any individual as an employee included 

under section 5351(2) of title 5, United States 

Code (relating to certain interns, student nurses, 

and other student employees of hospitals of the 

District of Columbia Government), other than as a 

422 

medical or dental intern or a medical or dental 

resident in training, 

(V) by an election official or election worker if 

the remuneration paid in a calendar year for such 

service is less than $1,000 with respect to service 

performed during any calendar year commencing 

on or after January 1, 1995, ending on or before 

December 31, 1999, and the adjusted amount determined under section 218(c)(8)(B) of the Social 

Security Act for any calendar year commencing on 

or after January 1, 2000, with respect to service 

performed during such calendar year, or 

(VI) by an individual in a position described in 

section 1402(c)(2)(E). 

As used in this subparagraph, the terms ‘‘State’’ and ‘‘political subdivision’’ have the meanings given those terms in 

section 218(b) of the Social Security Act. 

(C) EXCEPTION FOR CURRENT EMPLOYMENT WHICH CONTINUES.—Service performed for an employer shall not be 

treated as employment by reason of subparagraph (A) if— 

(i) such service would be excluded from the term 

‘‘employment’’ for purposes of this chapter if subparagraph (A) did not apply; 

(ii) such service is performed by an individual— 

(I) who was performing substantial and regular 

service for remuneration for that employer before 

April 1, 1986, 

(II) who is a bona fide employee of that employer on March 31, 1986, and 

(III) whose employment relationship with that 

employer was not entered into for purposes of 

meeting the requirements of this subparagraph; 

and 

(iii) the employment relationship with that employer 

has not been terminated after March 31, 1986. 

(D) TREATMENT OF AGENCIES AND INSTRUMENTALITIES.— 

For purposes of subparagraph (C), under regulations— 

(i) All agencies and instrumentalities of a State (as 

defined in section 218(b) of the Social Security Act) or 

of the District of Columbia shall be treated as a single 

employer. 

(ii) All agencies and instrumentalities of a political 

subdivision of a State (as so defined) shall be treated 

as a single employer and shall not be treated as described in clause (i). 

(3) MEDICARE QUALIFIED GOVERNMENT EMPLOYMENT.—For 

purposes of this chapter, the term ‘‘medicare qualified government employment’’ means service which— 

(A) is employment (as defined in subsection (b)) with the 

application of paragraphs (1) and (2), but 

(B) would not be employment (as so defined) without the 

application of such paragraphs. 

(v) TREATMENT OF CERTAIN DEFERRED COMPENSATION AND SALARY

REDUCTION ARRANGEMENTS.— 

423 

(1) CERTAIN EMPLOYER CONTRIBUTIONS TREATED AS WAGES.— Nothing in any paragraph of subsection (a) (other than paragraph (1)) shall exclude from the term ‘‘wages’’— 

(A) any employer contribution under a qualified cash or 

deferred arrangement (as defined in section 401(k)) to the 

extent not included in gross income by reason of section 

402(e)(3) or consisting of designated Roth contributions (as 

defined in section 402A(c)), or 

(B) any amount treated as an employer contribution 

under section 414(h)(2) where the pickup referred to in 

such section is pursuant to a salary reduction agreement 

(whether evidenced by a written instrument or otherwise). 

(2) TREATMENT OF CERTAIN NONQUALIFIED DEFERRED COMPENSATION PLANS.— 

(A) IN GENERAL.—Any amount deferred under a nonqualified deferred compensation plan shall be taken into 

account for purposes of this chapter as of the later of— 

(i) when the services are performed, or 

(ii) when there is no substantial risk of forfeiture of 

the rights to such amount. 

The preceding sentence shall not apply to any excess parachute payment (as defined in section 280G(b)) or to any 

specified stock compensation (as defined in section 4985) 

on which tax is imposed by section 4985. 

(B) TAXED ONLY ONCE.—Any amount taken into account 

as wages by reason of subparagraph (A) (and the income 

attributable thereto) shall not thereafter be treated as 

wages for purposes of this chapter. 

(C) NONQUALIFIED DEFERRED COMPENSATION PLAN.—For 

purposes of this paragraph, the term ‘‘nonqualified deferred compensation plan’’ means any plan or other arrangement for deferral of compensation other than a plan 

described in subsection (a)(5). 

(3) EXEMPT GOVERNMENTAL DEFERRED COMPENSATION

PLAN.—For purposes of subsection (a)(5), the term ‘‘exempt governmental deferred compensation plan’’ means any plan providing for deferral of compensation established and maintained 

for its employees by the United States, by a State or political 

subdivision thereof, or by an agency or instrumentality of any 

of the foregoing. Such term shall not include— 

(A) any plan to which section 83, 402(b), 403(c), 457(a), 

or 457(f)(1) applies, 

(B) any annuity contract described in section 403(b), and 

(C) the Thrift Savings Fund (within the meaning of subchapter III of chapter 84 of title 5, United States Code). 

(w) EXEMPTION OF CHURCHES AND QUALIFIED CHURCH-CONTROLLED ORGANIZATIONS.— 

(1) GENERAL RULE.—Any church or qualified church-controlled organization (as defined in paragraph (3)) may make an 

election within the time period described in paragraph (2), in 

accordance with such procedures as the Secretary determines 

to be appropriate, that services performed in the employ of 

such church or organization shall be excluded from employment for purposes of title II of the Social Security Act and this 

chapter. An election may be made under this subsection only 

424 

if the church or qualified church-controlled organization states 

that such church or organization is opposed for religious reasons to the payment of the tax imposed under section 3111. 

(2) TIMING AND DURATION OF ELECTION.—An election under 

this subsection must be made prior to the first date, more than 

90 days after July 18, 1984, on which a quarterly employment 

tax return for the tax imposed under section 3111 is due, or 

would be due but for the election, from such church or organization. An election under this subsection shall apply to current 

and future employees, and shall apply to service performed 

after December 31, 1983. The election may be revoked by the 

church or organization under regulations prescribed by the 

Secretary. The election shall be revoked by the Secretary if 

such church or organization fails to furnish the information required under section 6051 to the Secretary for a period of 2 

years or more with respect to remuneration paid for such services by such church or organization, and, upon request by the 

Secretary, fails to furnish all such previously unfurnished information for the period covered by the election. Any revocation 

under the preceding sentence shall apply retroactively to the 

beginning of the 2-year period for which the information was 

not furnished. 

(3) DEFINITIONS.—(A) For purposes of this subsection, the 

term ‘‘church’’ means a church, a convention or association of 

churches, or an elementary or secondary school which is controlled, operated, or principally supported by a church or by a 

convention or association of churches. 

(B) For purposes of this subsection, the term ‘‘qualified 

church-controlled organization’’ means any church-controlled 

tax-exempt organization described in section 501(c)(3), other 

than an organization which— 

(i) offers goods, services, or facilities for sale, other than 

on an incidental basis, to the general public, other than 

goods, services, or facilities which are sold at a nominal 

charge which is substantially less than the cost of providing such goods, services, or facilities; and 

(ii) normally receives more than 25 percent of its support 

from either (I) governmental sources, or (II) receipts from 

admissions, sales of merchandise, performance of services, 

or furnishing of facilities, in activities which are not unrelated trades or businesses, or both. 

(x) APPLICABLE DOLLAR THRESHOLD.—For purposes of subsection 

(a)(7)(B), the term ‘‘applicable dollar threshold’’ means $1,000. In 

the case of calendar years after 1995, the Commissioner of Social 

Security shall adjust such $1,000 amount at the same time and in 

the same manner as under section 215(a)(1)(B)(ii) of the Social Security Act with respect to the amounts referred to in section 

215(a)(1)(B)(i) of such Act, except that, for purposes of this paragraph, 1993 shall be substituted for the calendar year referred to 

in section 215(a)(1)(B)(ii)(II) of such Act. If any amount as adjusted 

under the preceding sentence is not a multiple of $100, such 

amount shall be rounded to the next lowest multiple of $100. 

(y) SERVICE IN THE EMPLOY OF INTERNATIONAL ORGANIZATIONS BY

CERTAIN TRANSFERRED FEDERAL EMPLOYEES.— 

425 

(1) IN GENERAL.—For purposes of this chapter, service performed in the employ of an international organization by an individual pursuant to a transfer of such individual to such 

international organization pursuant to section 3582 of title 5, 

United States Code, shall constitute ‘‘employment’’ if— 

(A) immediately before such transfer, such individual 

performed service with a Federal agency which constituted 

‘‘employment’’ under subsection (b) for purposes of the 

taxes imposed by sections 3101(a) and 3111(a), and 

(B) such individual would be entitled, upon separation 

from such international organization and proper application, to reemployment with such Federal agency under 

such section 3582. 

(2) DEFINITIONS.—For purposes of this subsection— 

(A) FEDERAL AGENCY.—The term ‘‘Federal agency’’ 

means an agency, as defined in section 3581(1) of title 5, 

United States Code. 

(B) INTERNATIONAL ORGANIZATION.—The term ‘‘international organization’’ has the meaning provided such 

term by section 3581(3) of title 5, United States Code. 

(z) TREATMENT OF CERTAIN FOREIGN PERSONS AS AMERICAN EM- PLOYERS.— 

(1) IN GENERAL.—If any employee of a foreign person is performing services in connection with a contract between the 

United States Government (or any instrumentality thereof) 

and any member of any domestically controlled group of entities which includes such foreign person, such foreign person 

shall be treated for purposes of this chapter as an American 

employer with respect to such services performed by such employee. 

(2) DOMESTICALLY CONTROLLED GROUP OF ENTITIES.—For 

purposes of this subsection— 

(A) IN GENERAL.—The term ‘‘domestically controlled 

group of entities’’ means a controlled group of entities the 

common parent of which is a domestic corporation. 

(B) CONTROLLED GROUP OF ENTITIES.—The term ‘‘controlled group of entities’’ means a controlled group of corporations as defined in section 1563(a)(1), except that— 

(i) ‘‘more than 50 percent’’ shall be substituted for 

‘‘at least 80 percent’’ each place it appears therein, and 

(ii) the determination shall be made without regard 

to subsections (a)(4) and (b)(2) of section 1563. 

A partnership or any other entity (other than a corporation) shall be treated as a member of a controlled group of 

entities if such entity is controlled (within the meaning of 

section 954(d)(3)) by members of such group (including any 

entity treated as a member of such group by reason of this 

sentence). 

(3) LIABILITY OF COMMON PARENT.—In the case of a foreign 

person who is a member of any domestically controlled group 

of entities, the common parent of such group shall be jointly 

and severally liable for any tax under this chapter for which 

such foreign person is liable by reason of this subsection, and 

for any penalty imposed on such person by this title with respect to any failure to pay such tax or to file any return or 

426 

statement with respect to such tax or wages subject to such 

tax. No deduction shall be allowed under this title for any liability imposed by the preceding sentence. 

(4) PROVISIONS PREVENTING DOUBLE TAXATION.— (A) AGREEMENTS.—Paragraph (1) shall not apply to any 

services which are covered by an agreement under subsection (l). 

(B) EQUIVALENT FOREIGN TAXATION.—Paragraph (1) 

shall not apply to any services if the employer establishes 

to the satisfaction of the Secretary that the remuneration 

paid by such employer for such services is subject to a tax 

imposed by a foreign country which is substantially equivalent to the taxes imposed by this chapter. 

(5) CROSS REFERENCE.—For relief from taxes in cases covered 

by certain international agreements, see sections 3101(c) and 

3111(c). 

* * * * * * * 

CHAPTER 23—FEDERAL UNEMPLOYMENT TAX 

ACT 

* * * * * * * 

SEC. 3306. DEFINITIONS. 

(a) EMPLOYER.—For purposes of this chapter— 

(1) IN GENERAL.—The term ‘‘employer’’ means, with respect 

to any calendar year, any person who— 

(A) during any calendar quarter in the calendar year or the preceding calendar year paid wages of $1,500 or more, 

or 

(B) on each of some 20 days during the calendar year or 

during the preceding calendar year, each day being in a 

different calendar week, employed at least one individual 

in employment for some portion of the day. 

For purposes of this paragraph, there shall not be taken into 

account any wages paid to, or employment of, an employee performing domestic services referred to in paragraph (3). 

(2) AGRICULTURAL LABOR.—In the case of agricultural labor, 

the term ‘‘employer’’ means, with respect to any calendar year, 

any person who— 

(A) during any calendar quarter in the calendar year or the preceding calendar year paid wages of $20,000 or more 

for agricultural labor, or 

(B) on each of some 20 days during the calendar year or 

during the preceding calendar year, each day being in a 

different calendar week, employed at least 10 individuals 

in employment in agricultural labor for some portion of the 

day. 

(3) DOMESTIC SERVICE.—In the case of domestic service in a 

private home, local college club, or local chapter of a college 

fraternity or sorority, the term ‘‘employer’’ means, with respect 

to any calendar year, any person who during any calendar 

quarter in the calendar year or the preceding calendar year 

paid wages in cash of $1,000 or more for such service. 

427 

(4) SPECIAL RULE.—A person treated as an employer under 

paragraph (3) shall not be treated as an employer with respect 

to wages paid for any service other than domestic service referred to in paragraph (3) unless such person is treated as an 

employer under paragraph (1) or (2) with respect to such other 

service. 

(b) WAGES.—For purposes of this chapter, the term ‘‘wages’’ 

means all remuneration for employment, including the cash value 

of all remuneration (including benefits) paid in any medium other 

than cash; except that such term shall not include— 

(1) that part of the remuneration which, after remuneration 

(other than remuneration referred to in the succeeding paragraphs of this subsection) equal to $7,000 with respect to employment has been paid to an individual by an employer during any calendar year, is paid to such individual by such employer during such calendar year. If an employer (hereinafter 

referred to as successor employer) during any calendar year acquires substantially all the property used in a trade or business of another employer (hereinafter referred to as a predecessor), or used in a separate unit of a trade or business of a 

predecessor, and immediately after the acquisition employs in 

his trade or business an individual who immediately prior to 

the acquisition was employed in the trade or business of such 

predecessor, then, for the purpose of determining whether the 

successor employer has paid remuneration (other than remuneration referred to in the succeeding paragraphs of this subsection) with respect to employment equal to $7,000 to such individual during such calendar year, any remuneration (other 

than remuneration referred to in the succeeding paragraphs of 

this subsection) with respect to employment paid (or considered under this paragraph as having been paid) to such individual by such predecessor during such calendar year and prior 

to such acquisition shall be considered as having been paid by 

such successor employer; 

(2) the amount of any payment (including any amount paid 

by an employer for insurance or annuities, or into a fund, to 

provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees 

generally (or for his employees generally and their dependents) 

or for a class or classes of his employees (or for a class or classes of his employees and their dependents), on account of— 

(A) sickness or accident disability (but, in the case of 

payments made to an employee or any of his dependents, 

this subparagraph shall exclude from the term ‘‘wages’’ 

only payments which are received under a workmen’s compensation law), or 

(B) medical or hospitalization expenses in connection 

with sickness or accident disability, or 

(C) death; 

(4) any payment on account of sickness or accident disability, 

or medical or hospitalization expenses in connection with sickness or accident disability, made by an employer to, or on behalf of, an employee after the expiration of 6 calendar months 

428 

following the last calendar month in which the employee 

worked for such employer; 

(5) any payment made to, or on behalf of, an employee or his 

beneficiary— 

(A) from or to a trust described in section 401(a) which 

is exempt from tax under section 501(a) at the time of such 

payment unless such payment is made to an employee of 

the trust as remuneration for services rendered as such 

employee and not as a beneficiary of the trust, or 

(B) under or to an annuity plan which, at the time of 

such payment, is a plan described in section 403(a), 

(C) under a simplified employee pension (as defined in 

section 408(k)(1)), other than any contributions described 

in section 408(k)(6), 

(D) under or to an annuity contract described in section 

403(b), other than a payment for the purchase of such contract which is made by reason of a salary reduction agreement (whether evidenced by a written instrument or otherwise), 

(E) under or to an exempt governmental deferred compensation plan (as defined in section 3121(v)(3)), 

(F) to supplement pension benefits under a plan or trust 

described in any of the foregoing provisions of this paragraph to take into account some portion or all of the increase in the cost of living (as determined by the Secretary 

of Labor) since retirement but only if such supplemental 

payments are under a plan which is treated as a welfare 

plan under section 3(2)(B)(ii) of the Employee Retirement 

Income Security Act of 1974, 

(G) under a cafeteria plan (within the meaning of section 

125) if such payment would not be treated as wages without regard to such plan and it is reasonable to believe that 

(if section 125 applied for purposes of this section) section 

125 would not treat any wages as constructively received, 

or 

(H) under an arrangement to which section 408(p) applies, other than any elective contributions under paragraph (2)(A)(i) thereof, 

(6) the payment by an employer (without deduction from the 

remuneration of the employee)— 

(A) of the tax imposed upon an employee under section 

3101, or 

(B) of any payment required from an employee under a 

State unemployment compensation law, 

with respect to remuneration paid to an employee for domestic 

service in a private home of the employer or for agricultural 

labor; 

(7) remuneration paid in any medium other than cash to an 

employee for service not in the course of the employer’s trade 

or business; 

(9) remuneration paid to or on behalf of an employee if (and 

to the extent that) at the time of the payment of such remuneration it is reasonable to believe that a corresponding deduction is allowable under section 217 (determined without regard 

to section 274(n)); 

429 

(10) any payment or series of payments by an employer to 

an employee or any of his dependents which is paid— 

(A) upon or after the termination of an employee’s employment relationship because of (i) death, or (ii) retirement for disability, and 

(B) under a plan established by the employer which 

makes provision for his employees generally or a class or 

classes of his employees (or for such employees or class or 

classes of employees and their dependents), 

other than any such payment or series of payments which 

would have been paid if the employee’s employment relationship had not been so terminated; 

(11) remuneration for agricultural labor paid in any medium 

other than cash; 

(13) any payment made, or benefit furnished, to or for the 

benefit of an employee if at the time of such payment or such 

furnishing it is reasonable to believe that the employee will be 

able to exclude such payment or benefit from income under 

section 127, 129, 134(b)(4), or 134(b)(5); 

(14) the value of any meals or lodging furnished by or on behalf of the employer if at the time of such furnishing it is reasonable to believe that the employee will be able to exclude 

such items from income under section 119; 

(15) any payment made by an employer to a survivor or the 

estate of a former employee after the calendar year in which 

such employee died; 

(16) any benefit provided to or on behalf of an employee if 

at the time such benefit is provided it is reasonable to believe 

that the employee will be able to exclude such benefit from income under section 74(c), 108(f)(4), 117, or 132; 

(17) any payment made to or for the benefit of an employee 

if at the time of such payment it is reasonable to believe that 

the employee will be able to exclude such payment from income 

under section 106(b); 

(18) any payment made to or for the benefit of an employee 

if at the time of such payment it is reasonable to believe that 

the employee will be able to exclude such payment from income 

under section 106(d); 

(19) remuneration on account of— 

(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b)) or under an employee stock purchase plan (as defined in section 423(b)), or 

(B) any disposition by the individual of such stock; or 

(20) any benefit or payment which is excludable from the 

gross income of the employee under section 139B(b). 

Except as otherwise provided in regulations prescribed by the Secretary, any third party which makes a payment included in wages 

solely by reason of the parenthetical matter contained in subparagraph (A) of paragraph (2) shall be treated for purposes of this 

chapter and chapter 22 as the employer with respect to such 

wages. Nothing in the regulations prescribed for purposes of chapter 24 (relating to income tax withholding) which provides an exclusion from ‘‘wages’’ as used in such chapter shall be construed to 

430 

require a similar exclusion from ‘‘wages’’ in the regulations prescribed for purposes of this chapter. 

(c) EMPLOYMENT.—For purposes of this chapter, the term ‘‘employment’’ means any service performed prior to 1955, which was 

employment for purposes of subchapter C of chapter 9 of the Internal Revenue Code of 1939 under the law applicable to the period 

in which such service was performed, and (A) any service, of whatever nature, performed after 1954 by an employee for the person 

employing him, irrespective of the citizenship or residence of either, 

(i) within the United States, or (ii) on or in connection with an 

American vessel or American aircraft under a contract of service 

which is entered into within the United States or during the performance of which and while the employee is employed on the vessel or aircraft it touches at a port in the United States, if the employee is employed on and in connection with such vessel or aircraft when outside the United States, and (B) any service, of whatever nature, performed after 1971 outside the United States (except 

in a contiguous country with which the United States has an agreement relating to unemployment compensation) by a citizen of the 

United States as an employee of an American employer (as defined 

in subsection (j)(3)), except— 

(1) agricultural labor (as defined in subsection (k)) unless— 

(A) such labor is performed for a person who— 

(i) during any calendar quarter in the calendar year 

or the preceding calendar year paid remuneration in 

cash of $20,000 or more to individuals employed in agricultural labor (including labor performed by an alien 

referred to in subparagraph (B)), or 

(ii) on each of some 20 days during the calendar 

year or the preceding calendar year, each day being in 

a different calendar week, employed in agricultural 

labor (including labor performed by an alien referred 

to in subparagraph (B)) for some portion of the day 

(whether or not at the same moment of time) 10 or 

more individuals; and 

(B) such labor is not agricultural labor performed by an 

individual who is an alien admitted to the United States 

to perform agricultural labor pursuant to sections 214(c) 

and 101(a)(15)(H) of the Immigration and Nationality Act; 

(2) domestic service in a private home, local college club, or 

local chapter of a college fraternity or sorority unless performed for a person who paid cash remuneration of $1,000 or 

more to individuals employed in such domestic service in any 

calendar quarter in the calendar year or the preceding calendar year; 

(3) service not in the course of the employer’s trade or business performed in any calendar quarter by an employee, unless 

the cash remuneration paid for such service is $50 or more and 

such service is performed by an individual who is regularly employed by such employer to perform such service. For purposes 

of this paragraph, an individual shall be deemed to be regularly employed by an employer during a calendar quarter only 

if— 

(A) on each of some 24 days during such quarter such 

individual performs for such employer for some portion of 

431 

the day service not in the course of the employer’s trade 

or business, or 

(B) such individual was regularly employed (as determined under subparagraph (A)) by such employer in the 

performance of such service during the preceding calendar 

quarter; 

(4) service performed on or in connection with a vessel or aircraft not an American vessel or American aircraft, if the employee is employed on and in connection with such vessel or 

aircraft when outside the United States; 

(5) service performed by an individual in the employ of øhis 

son¿ the individual’s son , daughter, or spouse, and service 

performed by a child under the age of 21 in the employ of øhis 

father¿ the child’s father or mother; 

(6) service performed in the employ of the United States 

Government or of an instrumentality of the United States 

which is— 

(A) wholly or partially owned by the United States, or 

(B) exempt from the tax imposed by section 3301 by virtue of any provision of law which specifically refers to such 

section (or the corresponding section of prior law) in granting such exemption; 

(7) service performed in the employ of a State, or any political subdivision thereof, or in the employ of an Indian tribe, or 

any instrumentality of any one or more of the foregoing which 

is wholly owned by one or more States or political subdivisions 

or Indian tribes; and any service performed in the employ of 

any instrumentality of one or more States or political subdivisions to the extent that the instrumentality is, with respect to 

such service, immune under the Constitution of the United 

States from the tax imposed by section 3301; 

(8) service performed in the employ of a religious, charitable, 

educational, or other organization described in section 501(c)(3) 

which is exempt from income tax under section 501(a); 

(9) service performed by an individual as an employee or employee representative as defined in section 1 of the Railroad 

Unemployment Insurance Act (45 U.S.C. 351); 

(10)(A) service performed in any calendar quarter in the employ of any organization exempt from income tax under section 

501(a) (other than an organization described in section 401(a)) 

or under section 521, if the remuneration for such service is 

less than $50, or 

(B) service performed in the employ of a school, college, or 

university, if such service is performed (i) by a student who is 

enrolled and is regularly attending classes at such school, college, or university, or (ii) by the spouse of such a student, if 

such spouse is advised, at the time such spouse commences to 

perform such service, that (I) the employment of such spouse 

to perform such service is provided under a program to provide 

financial assistance to such student by such school, college, or 

university, and (II) such employment will not be covered by 

any program of unemployment insurance, or 

(C) service performed by an individual who is enrolled at a 

nonprofit or public educational institution which normally 

maintains a regular faculty and curriculum and normally has 

432 

a regularly organized body of students in attendance at the 

place where its educational activities are carried on as a student in a full-time program, taken for credit at such institution, which combines academic instruction with work experience, if such service is an integral part of such program, and 

such institution has so certified to the employer, except that 

this subparagraph shall not apply to service performed in a 

program established for or on behalf of an employer or group 

of employers, or 

(D) service performed in the employ of a hospital, if such 

service is performed by a patient of such hospital; 

(11) service performed in the employ of a foreign government 

(including service as a consular or other officer or employee or 

a nondiplomatic representative); 

(12) service performed in the employ of an instrumentality 

wholly owned by a foreign government— 

(A) if the service is of a character similar to that performed in foreign countries by employees of the United 

States Government or of an instrumentality thereof; and 

(B) if the Secretary of State shall certify to the Secretary 

of the Treasury that the foreign government, with respect 

to whose instrumentality exemption is claimed, grants an 

equivalent exemption with respect to similar service performed in the foreign country by employees of the United 

States Government and of instrumentalities thereof; 

(13) service performed as a student nurse in the employ of 

a hospital or a nurses’ training school by an individual who is 

enrolled and is regularly attending classes in a nurses’ training 

school chartered or approved pursuant to State law; and service performed as an intern in the employ of a hospital by an 

individual who has completed a 4 years’ course in a medical 

school chartered or approved pursuant to State law; 

(14) service performed by an individual for a person as an insurance agent or as an insurance solicitor, if all such service 

performed by such individual for such person is performed for 

remuneration solely by way of commission; 

(15)(A) service performed by an individual under the age of 

18 in the delivery or distribution of newspapers or shopping 

news, not including delivery or distribution to any point for 

subsequent delivery or distribution; 

(B) service performed by an individual in, and at the time of, 

the sale of newspapers or magazines to ultimate consumers, 

under an arrangement under which the newspapers or magazines are to be sold by him at a fixed price, his compensation 

being based on the retention of the excess of such price over 

the amount at which the newspapers or magazines are charged 

to him, whether or not he is guaranteed a minimum amount 

of compensation for such service, or is entitled to be credited 

with the unsold newspapers or magazines turned back; 

(16) service performed in the employ of an international organization; 

(17) service performed by an individual in (or as an officer 

or member of the crew of a vessel while it is engaged in) the 

catching, taking, harvesting, cultivating, or farming of any 

kind of fish, shellfish, crustacea, sponges, seaweeds, or other 

433 

aquatic forms of animal and vegetable life (including service 

performed by any such individual as an ordinary incident to 

any such activity), except— 

(A) service performed in connection with the catching or 

taking of salmon or halibut, for commercial purposes, and 

(B) service performed on or in connection with a vessel 

of more than 10 net tons (determined in the manner provided for determining the register tonnage of merchant 

vessels under the laws of the United States); 

(18) service described in section 3121(b)(20); 

(19) service which is performed by a nonresident alien individual for the period he is temporarily present in the United 

States as a nonimmigrant under subparagraph (F), (J), (M), or 

(Q) of section 101(a)(15) of the Immigration and Nationality 

Act, as amended (8 U.S.C. 1101(a)(15)(F), (J), (M), or (Q)), and 

which is performed to carry out the purpose specified in subparagraph (F), (J), (M), or (Q), as the case may be; 

(20) service performed by a full time student (as defined in 

subsection (q)) in the employ of an organized camp— 

(A) if such camp— 

(i) did not operate for more than 7 months in the 

calendar year and did not operate for more than 7 

months in the preceding calendar year, or 

(ii) had average gross receipts for any 6 months in 

the preceding calendar year which were not more than 

331/3 percent of its average gross receipts for the 

other 6 months in the preceding calendar year; and 

(B) if such full time student performed services in the 

employ of such camp for less than 13 calendar weeks in 

such calendar year; or 

(21) service performed by a person committed to a penal institution. 

(d) INCLUDED AND EXCLUDED SERVICE.—For purposes of this 

chapter, if the services performed during one-half or more of any 

pay period by an employee for the person employing him constitute 

employment, all the services of such employee for such period shall 

be deemed to be employment; but if the services performed during 

more than one-half of any such pay period by an employee for the 

person employing him do not constitute employment, then none of 

the services of such employee for such period shall be deemed to 

be employment. As used in this subsection, the term ‘‘pay period’’ 

means a period (of not more than 31 consecutive days) for which 

a payment of remuneration is ordinarily made to the employee by 

the person employing him. This subsection shall not be applicable 

with respect to services performed in a pay period by an employee 

for the person employing him, where any of such service is excepted by subsection (c)(9). 

(e) STATE AGENCY.—For purposes of this chapter, the term ‘‘State 

agency’’ means any State officer, board, or other authority, designated under a State law to administer the unemployment fund 

in such State. 

(f) UNEMPLOYMENT FUND.—For purposes of this chapter, the 

term ‘‘unemployment fund’’ means a special fund, established 

under a State law and administered by a State agency, for the payment of compensation. Any sums standing to the account of the 

434 

State agency in the Unemployment Trust Fund established by section 904 of the Social Security Act, as amended (42 U.S.C. 1104), 

shall be deemed to be a part of the unemployment fund of the 

State, and no sums paid out of the Unemployment Trust Fund to 

such State agency shall cease to be a part of the unemployment 

fund of the State until expended by such State agency. An unemployment fund shall be deemed to be maintained during a taxable 

year only if throughout such year, or such portion of the year as 

the unemployment fund was in existence, no part of the moneys of 

such fund was expended for any purpose other than the payment 

of compensation (exclusive of expenses of administration) and for 

refunds of sums erroneously paid into such fund and refunds paid 

in accordance with the provisions of section 3305(b); except that— 

(1) an amount equal to the amount of employee payments 

into the unemployment fund of a State may be used in the payment of cash benefits to individuals with respect to their disability, exclusive of expenses of administration; 

(2) the amounts specified by section 903(c)(2) or 903(d)(4) of 

the Social Security Act may, subject to the conditions prescribed in such section, be used for expenses incurred by the 

State for administration of its unemployment compensation 

law and public employment offices, 

(3) nothing in this subsection shall be construed to prohibit 

deducting any amount from unemployment compensation otherwise payable to an individual and using the amount so deducted to pay for health insurance, or the withholding of Federal, State, or local individual income tax, if the individual 

elected to have such deduction made and such deduction was 

made under a program approved by the Secretary of Labor; 

(4) amounts may be deducted from unemployment benefits 

and used to repay overpayments as provided in section 303(g) 

of the Social Security Act; 

(5) amounts may be withdrawn for the payment of short-time 

compensation under a short-time compensation program (as 

defined in subsection (v)); and 

(6) amounts may be withdrawn for the payment of allowances under a self-employment assistance program (as defined 

in subsection (t)). 

(g) CONTRIBUTIONS.—For purposes of this chapter, the term ‘‘contributions’’ means payments required by a State law to be made 

into an unemployment fund by any person on account of having individuals in his employ, to the extent that such payments are made 

by him without being deducted or deductible from the remuneration of individuals in his employ. 

(h) COMPENSATION.—For purposes of this chapter, the term ‘‘compensation’’ means cash benefits payable to individuals with respect 

to their unemployment. 

(i) EMPLOYEE.—For purposes of this chapter, the term ‘‘employee’’ 

has the meaning assigned to such term by section 3121(d), except 

that paragraph (4) and subparagraphs (B) and (C) of paragraph (3) 

shall not apply. 

(j) STATE, UNITED STATES, AND AMERICAN EMPLOYER.—For purposes of this chapter— 

(1) STATE.—The term ‘‘State’’ includes the District of Columbia, the Commonwealth of Puerto Rico, and the Virgin Islands. 

435 

(2) UNITED STATES.—The term ‘‘United States’’ when used in 

a geographical sense includes the States, the District of Columbia, the Commonwealth of Puerto Rico, and the Virgin Islands. 

(3) AMERICAN EMPLOYER.—The term ‘‘American employer’’ 

means a person who is— 

(A) an individual who is a resident of the United States, 

(B) a partnership, if two-thirds or more of the partners 

are residents of the United States, 

(C) a trust, if all of the trustees are residents of the 

United States, or 

(D) a corporation organized under the laws of the United 

States or of any State. 

An individual who is a citizen of the Commonwealth of Puerto Rico 

or the Virgin Islands (but not otherwise a citizen of the United 

States) shall be considered, for purposes of this section, as a citizen 

of the United States. 

(k) AGRICULTURAL LABOR.—For purposes of this chapter, the 

term ‘‘agricultural labor’’ has the meaning assigned to such term by 

subsection (g) of section 3121, except that for purposes of this chapter subparagraph (B) of paragraph (4) of such subsection (g) shall 

be treated as reading: 

‘‘(B) in the employ of a group of operators of farms (or 

a cooperative organization of which such operators are 

members) in the performance of service described in subparagraph (A), but only if such operators produced more 

than one-half of the commodity with respect to which such 

service is performed;’’. 

(m) AMERICAN VESSEL AND AIRCRAFT.—For purposes of this chapter, the term ‘‘American vessel’’ means any vessel documented or 

numbered under the laws of the United States; and includes any 

vessel which is neither documented or numbered under the laws of 

the United States nor documented under the laws of any foreign 

country, if its crew is employed solely by one or more citizens or 

residents of the United States or corporations organized under the 

laws of the United States or of any State; and the term ‘‘American 

aircraft’’ means an aircraft registered under the laws of the United 

States. 

(n) VESSELS OPERATED BY GENERAL AGENTS OF UNITED STATES.— Notwithstanding the provisions of subsection (c)(6), service performed by officers and members of the crew of a vessel which 

would otherwise be included as employment under subsection (c) 

shall not be excluded by reason of the fact that it is performed on 

or in connection with an American vessel— 

(1) owned by or bareboat chartered to the United States and 

(2) whose business is conducted by a general agent of the 

Secretary of Transportation. 

For purposes of this chapter, each such general agent shall be considered a legal entity in his capacity as such general agent, separate and distinct from his identity as a person employing individuals on his own account, and the officers and members of the crew 

of such an American vessel whose business is conducted by a general agent of the Secretary of Transportation shall be deemed to be 

performing services for such general agent rather than the United 

States. Each such general agent who in his capacity as such is an 

436 

employer within the meaning of subsection (a) shall be subject to 

all the requirements imposed upon an employer under this chapter 

with respect to service which constitutes employment by reason of 

this subsection. 

(o) SPECIAL RULE IN CASE OF CERTAIN AGRICULTURAL WORKERS.— 

(1) CREW LEADERS WHO ARE REGISTERED OR PROVIDE SPE- CIALIZED AGRICULTURAL LABOR.—For purposes of this chapter, 

any individual who is a member of a crew furnished by a crew 

leader to perform agricultural labor for any other person shall 

be treated as an employee of such crew leader— 

(A) if— 

(i) such crew leader holds a valid certificate of registration under the Migrant and Seasonal Agricultural 

Worker Protection Act; or 

(ii) substantially all the members of such crew operate or maintain tractors, mechanized harvesting or 

crop-dusting equipment, or any other mechanized 

equipment, which is provided by such crew leader; and 

(B) if such individual is not an employee of such other 

person within the meaning of subsection (i). 

(2) OTHER CREW LEADERS.—For purposes of this chapter, in 

the case of any individual who is furnished by a crew leader 

to perform agricultural labor for any other person and who is 

not treated as an employee of such crew leader under paragraph (1)— 

(A) such other person and not the crew leader shall be 

treated as the employer of such individual; and 

(B) such other person shall be treated as having paid 

cash remuneration to such individual in an amount equal 

to the amount of cash remuneration paid to such individual by the crew leader (either on his behalf or on behalf 

of such other person) for the agricultural labor performed 

for such other person. 

(3) CREW LEADER.—For purposes of this subsection, the term 

‘‘crew leader’’ means an individual who— 

(A) furnishes individuals to perform agricultural labor 

for any other person, 

(B) pays (either on his behalf or on behalf of such other 

person) the individuals so furnished by him for the agricultural labor performed by them, and 

(C) has not entered into a written agreement with such 

other person under which such individual is designated as 

an employee of such other person. 

(p) CONCURRENT EMPLOYMENT BY TWO OR MORE EMPLOYERS.—For 

purposes of sections 3301, 3302, and 3306(b)(1), if two or more related corporations concurrently employ the same individual and 

compensate such individual through a common paymaster which is 

one of such corporations, each such corporation shall be considered 

to have paid as remuneration to such individual only the amounts 

actually disbursed by it to such individual and shall not be considered to have paid as remuneration to such individual amounts actually disbursed to such individual by another of such corporations. 

(q) FULL TIME STUDENT.—For purposes of subsection (c)(20), an 

individual shall be treated as a full time student for any period— 

437 

(1) during which the individual is enrolled as a full time student at an educational institution, or 

(2) which is between academic years or terms if— 

(A) the individual was enrolled as a full time student at 

an educational institution for the immediately preceding 

academic year or term, and 

(B) there is a reasonable assurance that the individual 

will be so enrolled for the immediately succeeding academic year or term after the period described in subparagraph (A). 

(r) TREATMENT OF CERTAIN DEFERRED COMPENSATION AND SALARY

REDUCTION ARRANGEMENTS.— 

(1) CERTAIN EMPLOYER CONTRIBUTIONS TREATED AS WAGES.— 

Nothing in any paragraph of subsection (b) (other than paragraph (1)) shall exclude from the term ‘‘wages’’— 

(A) any employer contribution under a qualified cash or 

deferred arrangement (as defined in section 401(k)) to the 

extent not included in gross income by reason of section 

402(e)(3), or 

(B) any amount treated as an employer contribution 

under section 414(h)(2) where the pickup referred to in 

such section is pursuant to a salary reduction agreement 

(whether evidenced by a written instrument or otherwise). 

(2) TREATMENT OF CERTAIN NONQUALIFIED DEFERRED COMPENSATION PLANS.— 

(A) IN GENERAL.—Any amount deferred under a nonqualified deferred compensation plan shall be taken into 

account for purposes of this chapter as of the later of— 

(i) when the services are performed, or 

(ii) when there is no substantial risk of forfeiture of 

the rights to such amount. 

(B) TAXED ONLY ONCE.—Any amount taken into account 

as wages by reason of subparagraph (A) (and the income 

attributable thereto) shall not thereafter be treated as 

wages for purposes of this chapter. 

(C) NONQUALIFIED DEFERRED COMPENSATION PLAN.—For 

purposes of this paragraph, the term ‘‘nonqualified deferred compensation plan’’ means any plan or other arrangement for deferral of compensation other than a plan 

described in subsection (b)(5). 

(s) TIPS TREATED AS WAGES.—For purposes of this chapter, the 

term ‘‘wages’’ includes tips which are— 

(1) received while performing services which constitute employment, and 

(2) included in a written statement furnished to the employer pursuant to section 6053(a). 

(t) SELF-EMPLOYMENT ASSISTANCE PROGRAM.—For the purposes of 

this chapter, the term ‘‘self-employment assistance program’’ means 

a program under which— 

(1) individuals who meet the requirements described in paragraph (3) are eligible to receive an allowance in lieu of regular 

unemployment compensation under the State law for the purpose of assisting such individuals in establishing a business 

and becoming self-employed; 

438 

(2) the allowance payable to individuals pursuant to paragraph (1) is payable in the same amount, at the same interval, 

on the same terms, and subject to the same conditions, as regular unemployment compensation under the State law, except 

that— 

(A) State requirements relating to availability for work, 

active search for work, and refusal to accept work are not 

applicable to such individuals; 

(B) State requirements relating to disqualifying income 

are not applicable to income earned from self-employment 

by such individuals; and 

(C) such individuals are considered to be unemployed for 

the purposes of Federal and State laws applicable to unemployment compensation, 

as long as such individuals meet the requirements applicable 

under this subsection; 

(3) individuals may receive the allowance described in paragraph (1) if such individuals— 

(A) are eligible to receive regular unemployment compensation under the State law, or would be eligible to receive such compensation except for the requirements described in subparagraph (A) or (B) of paragraph (2); 

(B) are identified pursuant to a State worker profiling 

system as individuals likely to exhaust regular unemployment compensation; and 

(C) are participating in self-employment assistance activities which— 

(i) include entrepreneurial training, business counseling, and technical assistance; and 

(ii) are approved by the State agency; and 

(D) are actively engaged on a full-time basis in activities 

(which may include training) relating to the establishment 

of a business and becoming self-employed; 

(4) the aggregate number of individuals receiving the allowance under the program does not at any time exceed 5 percent 

of the number of individuals receiving regular unemployment 

compensation under the State law at such time; 

(5) the program does not result in any cost to the Unemployment Trust Fund (established by section 904(a) of the Social 

Security Act) in excess of the cost that would be incurred by 

such State and charged to such Fund if the State had not participated in such program; and 

(6) the program meets such other requirements as the Secretary of Labor determines to be appropriate. 

(u) INDIAN TRIBE.—For purposes of this chapter, the term ‘‘Indian 

tribe’’ has the meaning given to such term by section 4(e) of the Indian Self-Determination and Education Assistance Act (25 U.S.C. 

5304(e)), and includes any subdivision, subsidiary, or business enterprise wholly owned by such an Indian tribe. 

(v) SHORT-TIME COMPENSATION PROGRAM.—For purposes of this 

section, the term ‘‘short-time compensation program’’ means a program under which— 

(1) the participation of an employer is voluntary; 

(2) an employer reduces the number of hours worked by employees in lieu of layoffs; 

439 

(3) such employees whose workweeks have been reduced by 

at least 10 percent, and by not more than the percentage, if 

any, that is determined by the State to be appropriate (but in 

no case more than 60 percent), are not disqualified from unemployment compensation; 

(4) the amount of unemployment compensation payable to 

any such employee is a pro rata portion of the unemployment 

compensation which would otherwise be payable to the employee if such employee were unemployed; 

(5) such employees meet the availability for work and work 

search test requirements while collecting short-time compensation benefits, by being available for their workweek as required 

by the State agency; 

(6) eligible employees may participate, as appropriate, in 

training (including employer-sponsored training or worker 

training funded under the Workforce Investment Act of 1998) 

to enhance job skills if such program has been approved by the 

State agency; 

(7) the State agency shall require employers to certify that 

if the employer provides health benefits and retirement benefits under a defined benefit plan (as defined in section 414(j)) 

or contributions under a defined contribution plan (as defined 

in section 414(i)) to any employee whose workweek is reduced 

under the program that such benefits will continue to be provided to employees participating in the short-time compensation program under the same terms and conditions as though 

the workweek of such employee had not been reduced or to the 

same extent as other employees not participating in the shorttime compensation program; 

(8) the State agency shall require an employer to submit a 

written plan describing the manner in which the requirements 

of this subsection will be implemented (including a plan for 

giving advance notice, where feasible, to an employee whose 

workweek is to be reduced) together with an estimate of the 

number of layoffs that would have occurred absent the ability 

to participate in short-time compensation and such other information as the Secretary of Labor determines is appropriate; 

(9) the terms of the employer’s written plan and implementation shall be consistent with employer obligations under applicable Federal and State laws; and 

(10) upon request by the State and approval by the Secretary 

of Labor, only such other provisions are included in the State 

law that are determined to be appropriate for purposes of a 

short-time compensation program. 

* * * * * * * 

CHAPTER 24—COLLECTION OF INCOME TAX 

AT SOURCE ON WAGES 

* * * * * * * 

SEC. 3402. INCOME TAX COLLECTED AT SOURCE. 

(a) REQUIREMENT OF WITHHOLDING.— 

(1) IN GENERAL.—Except as otherwise provided in this section, every employer making payment of wages shall deduct 

440 

and withhold upon such wages a tax determined in accordance 

with tables or computational procedures prescribed by the Secretary. Any tables or procedures prescribed under this paragraph shall— 

(A) apply with respect to the amount of wages paid during such periods as the Secretary may prescribe, and 

(B) be in such form, and provide for such amounts to be 

deducted and withheld, as the Secretary determines to be 

most appropriate to carry out the purposes of this chapter 

and to reflect the provisions of chapter 1 applicable to such 

periods. 

(2) AMOUNT OF WAGES.—For purposes of applying tables or 

procedures prescribed under paragraph (1), the term ‘‘the 

amount of wages’’ means the amount by which the wages exceed the taxpayer’s withholding allowance, prorated to the payroll period. 

(b) PERCENTAGE METHOD OF WITHHOLDING.—(1) If wages are paid 

with respect to a period which is not a payroll period, the withholding allowance allowable with respect to each payment of such 

wages shall be the allowance allowed for a miscellaneous payroll 

period containing a number of days (including Sundays and holidays) equal to the number of days in the period with respect to 

which such wages are paid. 

(2) In any case in which wages are paid by an employer without 

regard to any payroll period or other period, the withholding allowance allowable with respect to each payment of such wages shall 

be the allowance allowed for a miscellaneous payroll period containing a number of days equal to the number of days (including 

Sundays and holidays) which have elapsed since the date of the 

last payment of such wages by such employer during the calendar 

year, or the date of commencement of employment with such employer during such year, or January 1 of such year, whichever is 

the later. 

(3) In any case in which the period, or the time described in 

paragraph (2), in respect of any wages is less than one week, the 

Secretary, under regulations prescribed by him, may authorize an 

employer to compute the tax to be deducted and withheld as if the 

aggregate of the wages paid to the employee during the calendar 

week were paid for a weekly payroll period. 

(4) In determining the amount to be deducted and withheld 

under this subsection, the wages may, at the election of the employer, be computed to the nearest dollar. 

(c) WAGE BRACKET WITHHOLDING.—(1) At the election of the employer with respect to any employee, the employer shall deduct and 

withhold upon the wages paid to such employee a tax (in lieu of 

the tax required to be deducted and withheld under subsection (a)) 

determined in accordance with tables prescribed by the Secretary 

in accordance with paragraph (6). 

(2) If wages are paid with respect to a period which is not a payroll period, the amount to be deducted and withheld shall be that 

applicable in the case of a miscellaneous payroll period containing 

a number of days (including Sundays and holidays) equal to the 

number of days in the period with respect to which such wages are 

paid. 

441 

(3) In any case in which wages are paid by an employer without 

regard to any payroll period or other period, the amount to be deducted and withheld shall be that applicable in the case of a miscellaneous payroll period containing a number of days equal to the 

number of days (including Sundays and holidays) which have 

elapsed since the date of the last payment of such wages by such 

employer during the calendar year, or the date of commencement 

of employment with such employer during such year, or January 

1 of such year, whichever is the later. 

(4) In any case in which the period, or the time described in 

paragraph (3), in respect of any wages is less than one week, the 

Secretary, under regulations prescribed by him, may authorize an 

employer to determine the amount to be deducted and withheld 

under the tables applicable in the case of a weekly payroll period, 

in which case the aggregate of the wages paid to the employee during the calendar week shall be considered the weekly wages. 

(5) If the wages exceed the highest wage bracket, in determining 

the amount to be deducted and withheld under this subsection, the 

wages may, at the election of the employer, be computed to the 

nearest dollar. 

(6) In the case of wages paid after December 31, 1969, the 

amount deducted and withheld under paragraph (1) shall be determined in accordance with tables prescribed by the Secretary. In the 

tables so prescribed, the amounts set forth as amounts of wages 

and amounts of income tax to be deducted and withheld shall be 

computed on the basis of the table for an annual payroll period prescribed pursuant to subsection (a). 

(d) TAX PAID BY RECIPIENT.—If the employer, in violation of the 

provisions of this chapter, fails to deduct and withhold the tax 

under this chapter, and thereafter the tax against which such tax 

may be credited is paid, the tax so required to be deducted and 

withheld shall not be collected from the employer; but this subsection shall in no case relieve the employer from liability for any 

penalties or additions to the tax otherwise applicable in respect of 

such failure to deduct and withhold. 

(e) INCLUDED AND EXCLUDED WAGES.—If the remuneration paid 

by an employer to an employee for services performed during onehalf or more of any payroll period of not more than 31 consecutive 

days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be 

wages; but if the remuneration paid by an employer to an employee 

for services performed during more than one-half of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall 

be deemed to be wages. 

(f) WITHHOLDING ALLOWANCE.— 

(1) IN GENERAL.—Under rules determined by the Secretary, 

an employee receiving wages shall on any day be entitled to a 

withholding allowance determined based on— 

(A) whether the employee is an individual for whom a 

deduction is allowable with respect to another taxpayer 

under section 151; 

(B) if the employee is married, whether the employee’s 

spouse is entitled to an allowance, or would be so entitled 

if such spouse were an employee receiving wages, under 

442 

subparagraph (A) or (D), but only if such spouse does not 

have in effect a withholding allowance certificate claiming 

such allowance; 

(C) the number of individuals with respect to whom, on 

the basis of facts existing at the beginning of such day, 

there may reasonably be expected to be allowable a credit 

under section 24(a) for the taxable year under subtitle A 

in respect of which amounts deducted and withheld under 

this chapter in the calendar year in which such day falls 

are allowed as a credit; 

(D) any additional amounts to which the employee elects 

to take into account under subsection (m), but only if the 

employee’s spouse does not have in effect a withholding allowance certificate making such an election; 

(E) the standard deduction allowable to such employee 

(one-half of such standard deduction in the case of an employee who is married (as determined under section 7703) 

and whose spouse is an employee receiving wages subject 

to withholding); and 

(F) whether the employee has withholding allowance certificates in effect with respect to more than 1 employer. 

(2) ALLOWANCE CERTIFICATES.— (A) ON COMMENCEMENT OF EMPLOYMENT.—On or before 

the date of the commencement of employment with an employer, the employee shall furnish the employer with a 

signed withholding allowance certificate relating to the 

withholding allowance claimed by the employee, which 

shall in no event exceed the amount to which the employee 

is entitled. 

(B) CHANGE OF STATUS.—If, on any day during the calendar year, an employee’s withholding allowance is in excess of the withholding allowance to which the employee 

would be entitled had the employee submitted a true and 

accurate withholding allowance certificate to the employer 

on that day, the employee shall within 10 days thereafter 

furnish the employer with a new withholding allowance 

certificate. If, on any day during the calendar year, an employee’s withholding allowance is greater than the withholding allowance claimed, the employee may furnish the 

employer with a new withholding allowance certificate relating to the withholding allowance to which the employee 

is so entitled, which shall in no event exceed the amount 

to which the employee is entitled on such day. 

(C) CHANGE OF STATUS WHICH AFFECTS NEXT CALENDAR

YEAR.—If on any day during the calendar year the withholding allowance to which the employee will be, or may 

reasonably be expected to be, entitled at the beginning of 

the employee’s next taxable year under subtitle A is different from the allowance to which the employee is entitled on such day, the employee shall, in such cases and at 

such times as the Secretary shall by regulations prescribe, 

furnish the employer with a withholding allowance certificate relating to the withholding allowance which the employee claims with respect to such next taxable year, 

which shall in no event exceed the withholding allowance 

443 

to which the employee will be, or may reasonably be expected to be, so entitled. 

(3) WHEN CERTIFICATE TAKES EFFECT.— (A) FIRST CERTIFICATE FURNISHED.—A withholding allowance certificate furnished the employer in cases in 

which no previous such certificate is in effect shall take effect as of the beginning of the first payroll period ending, 

or the first payment of wages made without regard to a 

payroll period, on or after the date on which such certificate is so furnished. 

(B) FURNISHED TO TAKE PLACE OF EXISTING CERTIFICATE.— 

(i) IN GENERAL.—Except as provided in clauses (ii) 

and (iii), a withholding allowance certificate furnished 

to the employer in cases in which a previous such certificate is in effect shall take effect as of the beginning 

of the 1st payroll period ending (or the 1st payment of 

wages made without regard to a payroll period) on or 

after the 30th day after the day on which such certificate is so furnished. 

(ii) EMPLOYER MAY ELECT EARLIER EFFECTIVE

DATE.—At the election of the employer, a certificate 

described in clause (i) may be made effective beginning with any payment of wages made on or after the 

day on which the certificate is so furnished and before 

the 30th day referred to in clause (i). 

(iii) CHANGE OF STATUS WHICH AFFECTS NEXT

YEAR.—Any certificate furnished pursuant to paragraph (2)(C) shall not take effect, and may not be 

made effective, with respect to any payment of wages 

made in the calendar year in which the certificate is 

furnished. 

(4) PERIOD DURING WHICH CERTIFICATE REMAINS IN EFFECT.— A withholding allowance certificate which takes effect under 

this subsection, or which on December 31, 1954, was in effect 

under the corresponding subsection of prior law, shall continue 

in effect with respect to the employer until another such certificate takes effect under this subsection. 

(5) FORM AND CONTENTS OF CERTIFICATE.—Withholding allowance certificates shall be in such form and contain such information as the Secretary may by regulations prescribe. 

(6) EXEMPTION OF CERTAIN NONRESIDENT ALIENS.—Notwithstanding the provisions of paragraph (1), a nonresident alien 

individual (other than an individual described in section 

3401(a)(6)(A) or (B)) shall be entitled to only one withholding 

exemption. 

(7) ALLOWANCE WHERE CERTIFICATE WITH ANOTHER EM- PLOYER IS IN EFFECT.—If a withholding allowance certificate is 

in effect with respect to one employer, an employee shall not 

be entitled under a certificate in effect with any other employer 

to any withholding allowance which he has claimed under such 

first certificate. 

(g) OVERLAPPING PAY PERIODS, AND PAYMENT BY AGENT OR FIDUCIARY.—If a payment of wages is made to an employee by an employer— 

444 

(1) with respect to a payroll period or other period, any part 

of which is included in a payroll period or other period with respect to which wages are also paid to such employee by such 

employer, or 

(2) without regard to any payroll period or other period, but 

on or prior to the expiration of a payroll period or other period 

with respect to which wages are also paid to such employee by 

such employer, or 

(3) with respect to a period beginning in one and ending in 

another calendar year, or 

(4) through an agent, fiduciary, or other person who also has 

the control, receipt, custody, or disposal of, or pays, the wages 

payable by another employer to such employee, 

the manner of withholding and the amount to be deducted and 

withheld under this chapter shall be determined in accordance with 

regulations prescribed by the Secretary under which the withholding allowance allowed to the employee in any calendar year 

shall approximate the withholding allowance allowable with respect to an annual payroll period. 

(h) ALTERNATIVE METHODS OF COMPUTING AMOUNT TO BE WITHHELD.—The Secretary may, under regulations prescribed by him, 

authorize— 

(1) WITHHOLDING ON BASIS OF AVERAGE WAGES.—An employer— 

(A) to estimate the wages which will be paid to any employee in any quarter of the calendar year, 

(B) to determine the amount to be deducted and withheld upon each payment of wages to such employee during 

such quarter as if the appropriate average of the wages so 

estimated constituted the actual wages paid, and 

(C) to deduct and withhold upon any payment of wages 

to such employee during such quarter (and, in the case of 

tips referred to in subsection (k), within 30 days thereafter) such amount as may be necessary to adjust the 

amount actually deducted and withheld upon the wages of 

such employee during such quarter to the amount required 

to be deducted and withheld during such quarter without 

regard to this subsection. 

(2) WITHHOLDING ON BASIS OF ANNUALIZED WAGES.—An employer to determine the amount of tax to be deducted and withheld upon a payment of wages to an employee for a payroll period by— 

(A) multiplying the amount of an employee’s wages for 

a payroll period by the number of such payroll periods in 

the calendar year, 

(B) determining the amount of tax which would be required to be deducted and withheld upon the amount determined under subparagraph (A) if such amount constituted the actual wages for the calendar year and the 

payroll period of the employee were an annual payroll period, and 

(C) dividing the amount of tax determined under subparagraph (B) by the number of payroll periods (described 

in subparagraph (A)) in the calendar year. 

445 

(3) WITHHOLDING ON BASIS OF CUMULATIVE WAGES.—An employer, in the case of any employee who requests to have the 

amount of tax to be withheld from his wages computed on the 

basis of his cumulative wages, to— 

(A) add the amount of the wages to be paid to the employee for the payroll period to the total amount of wages 

paid by the employer to the employee during the calendar 

year, 

(B) divide the aggregate amount of wages computed 

under subparagraph (A) by the number of payroll periods 

to which such aggregate amount of wages relates, 

(C) compute the total amount of tax that would have 

been required to be deducted and withheld under subsection (a) if the average amount of wages (as computed 

under subparagraph (B)) had been paid to the employee 

for the number of payroll periods to which the aggregate 

amount of wages (computed under subparagraph (A)) relates, 

(D) determine the excess, if any, of the amount of tax 

computed under subparagraph (C) over the total amount of 

tax deducted and withheld by the employer from wages 

paid to the employee during the calendar year, and 

(E) deduct and withhold upon the payment of wages (referred to in subparagraph (A)) to the employee an amount 

equal to the excess (if any) computed under subparagraph 

(D). 

(4) OTHER METHODS.—An employer to determine the amount 

of tax to be deducted and withheld upon the wages paid to an 

employee by any other method which will require the employer 

to deduct and withhold upon such wages substantially the 

same amount as would be required to be deducted and withheld by applying subsection (a) or (c), either with respect to a 

payroll period or with respect to the entire taxable year. 

(i) CHANGES IN WITHHOLDING.— 

(1) IN GENERAL.—The Secretary may by regulations provide 

for increases in the amount of withholding otherwise required 

under this section in cases where the employee requests such 

changes. 

(2) TREATMENT AS TAX.—Any increased withholding under 

paragraph (1) shall for all purposes be considered tax required 

to be deducted and withheld under this chapter. 

(j) NONCASH REMUNERATION TO RETAIL COMMISSION SALESMAN.— 

In the case of remuneration paid in any medium other than cash 

for services performed by an individual as a retail salesman for a 

person, where the service performed by such individual for such 

person is ordinarily performed for remuneration solely by way of 

cash commission an employer shall not be required to deduct or 

withhold any tax under this subchapter with respect to such remuneration, provided that such employer files with the Secretary such 

information with respect to such remuneration as the Secretary 

may by regulation prescribe. 

(k) TIPS.—In the case of tips which constitute wages, subsection 

(a) shall be applicable only to such tips as are included in a written 

statement furnished to the employer pursuant to section 6053(a), 

and only to the extent that the tax can be deducted and withheld 

446 

by the employer, at or after the time such statement is so furnished and before the close of the calendar year in which such 

statement is furnished, from such wages of the employee (excluding 

tips, but including funds turned over by the employee to the employer for the purpose of such deduction and withholding) as are 

under the control of the employer; and an employer who is furnished by an employee a written statement of tips (received in a 

calendar month) pursuant to section 6053(a) to which paragraph 

(16)(B) of section 3401(a) is applicable may deduct and withhold 

the tax with respect to such tips from any wages of the employee 

(excluding tips) under his control, even though at the time such 

statement is furnished the total amount of the tips included in 

statements furnished to the employer as having been received by 

the employee in such calendar month in the course of his employment by such employer is less than $20. Such tax shall not at any 

time be deducted and withheld in an amount which exceeds the aggregate of such wages and funds (including funds turned over 

under section 3102(c)(2) or section 3202(c)(2)) minus any tax required by section 3102(a) or section 3202(a) to be collected from 

such wages and funds. 

(l) DETERMINATION AND DISCLOSURE OF MARITAL STATUS.— (1) DETERMINATION OF STATUS BY EMPLOYER.—For purposes 

of applying the tables in subsections (a) and (c) to a payment 

of wages, the employer shall treat the employee as a single 

person unless there is in effect with respect to such payment 

of wages a withholding allowance certificate furnished to the 

employer by the employee after the date of the enactment of 

this subsection indicating that the employee is married. 

(2) DISCLOSURE OF STATUS BY EMPLOYEE.—An employee shall 

be entitled to furnish the employer with a withholding allowance certificate indicating øhe¿ the employee is married only if, 

on the day of such furnishing, øhe¿ the employee is married 

(determined with the application of the rules in paragraph (3)). 

An employee whose marital status changes from married to 

single shall, at such time as the Secretary may by regulations 

prescribe, furnish the employer with a new withholding allowance certificate. 

(3) DETERMINATION OF MARITAL STATUS.—For purposes of 

paragraph (2), an employee shall on any day be considered— 

(A) as not married, if (i) øhe¿ the employee is legally separated from øhis spouse¿ the employee’s spouse under a decree of divorce or separate maintenance, or (ii) either øhe¿ 

the employee or øhis spouse¿ the employee’s spouse is, or on 

any preceding day within the calendar year was, a nonresident alien; or 

(B) as married, if (i) øhis spouse¿ the employee’s spouse 

(other than a spouse referred to in subparagraph (A)) died 

within the portion of øhis taxable year¿ the employee’s taxable year which precedes such day, or (ii) øhis spouse¿ the 

employee’s spouse died during one of the two taxable years 

immediately preceding the current taxable year and, on 

the basis of facts existing at the beginning of such day, the 

employee reasonably expects, at the close of øhis taxable 

year¿ the employee’s taxable year , to be a surviving spouse 

(as defined in section 2(a)). 

447 

(m) WITHHOLDING ALLOWANCES.—Under regulations prescribed 

by the Secretary, an employee shall be entitled to an additional 

withholding allowance or additional reductions in withholding 

under this subsection. In determining the additional withholding 

allowance or the amount of additional reductions in withholding 

under this subsection, the employee may take into account (to the 

extent and in the manner provided by such regulations)— 

(1) estimated itemized deductions allowable under chapter 1 

and the estimated deduction allowed under section 199A (other 

than the deductions referred to in section 151 and other than 

the deductions required to be taken into account in determining adjusted gross income under section 62(a)), 

(2) estimated tax credits allowable under chapter 1, and 

(3) such additional deductions (including the additional 

standard deduction under section 63(c)(3) for the aged and 

blind) and other items as may be specified by the Secretary in 

regulations. 

(n) EMPLOYEES INCURRING NO INCOME TAX LIABILITY.—Notwithstanding any other provision of this section, an employer shall not 

be required to deduct and withhold any tax under this chapter 

upon a payment of wages to an employee if there is in effect with 

respect to such payment a withholding allowance certificate (in 

such form and containing such other information as the Secretary 

may prescribe) furnished to the employer by the employee certifying that the employee— 

(1) incurred no liability for income tax imposed under subtitle A for his preceding taxable year, and 

(2) anticipates that he will incur no liability for income tax 

imposed under subtitle A for his current taxable year. 

The Secretary shall by regulations provide for the coordination of 

the provisions of this subsection with the provisions of subsection 

(f). 

(o) EXTENSION OF WITHHOLDING TO CERTAIN PAYMENTS OTHER

THAN WAGES.— 

(1) GENERAL RULE.—For purposes of this chapter (and so 

much of subtitle F as relates to this chapter)— 

(A) any supplemental unemployment compensation benefit paid to an individual, 

(B) any payment of an annuity to an individual, if at the 

time the payment is made a request that such annuity be 

subject to withholding under this chapter is in effect, and 

(C) any payment to an individual of sick pay which does 

not constitute wages (determined without regard to this 

subsection), if at the time the payment is made a request 

that such sick pay be subject to withholding under this 

chapter is in effect, 

shall be treated as if it were a payment of wages by an employer to an employee for a payroll period. 

(2) DEFINITIONS.— (A) SUPPLEMENTAL UNEMPLOYMENT COMPENSATION BEN- EFITS.—For purposes of paragraph (1), the term ‘‘supplemental unemployment compensation benefits’’ means 

amounts which are paid to an employee, pursuant to a 

plan to which the employer is a party, because of an employee’s involuntary separation from employment (whether 

448 

or not such separation is temporary), resulting directly 

from a reduction in force, the discontinuance of a plant or 

operation, or other similar conditions, but only to the extent such benefits are includible in the employee’s gross income. 

(B) ANNUITY.—For purposes of this subsection, the term 

‘‘annuity’’ means any amount paid to an individual as a 

pension or annuity. 

(C) SICK PAY.—For purposes of this subsection, the term 

‘‘sick pay’’ means any amount which— 

(i) is paid to an employee pursuant to a plan to 

which the employer is a party, and 

(ii) constitutes remuneration or a payment in lieu of 

remuneration for any period during which the employee is temporarily absent from work on account of 

sickness or personal injuries. 

(3) AMOUNT WITHHELD FROM ANNUITY PAYMENTS OR SICK

PAY.—If a payee makes a request that an annuity or any sick 

pay be subject to withholding under this chapter, the amount 

to be deducted and withheld under this chapter from any payment to which such request applies shall be an amount (not 

less than a minimum amount determined under regulations 

prescribed by the Secretary) specified by the payee in such request. The amount deducted and withheld with respect to a 

payment which is greater or less than a full payment shall 

bear the same relation to the specified amount as such payment bears to a full payment. 

(4) REQUEST FOR WITHHOLDING.—A request that an annuity 

or any sick pay be subject to withholding under this chapter— 

(A) shall be made by the payee in writing to the person 

making the payments and shall contain the social security 

number of the payee, 

(B) shall specify the amount to be deducted and withheld 

from each full payment, and 

(C) shall take effect— 

(i) in the case of sick pay, with respect to payments 

made more than 7 days after the date on which such 

request is furnished to the payor, or 

(ii) in the case of an annuity, at such time (after the 

date on which such request is furnished to the payor) 

as the Secretary shall by regulations prescribe. 

Such a request may be changed or terminated by furnishing to 

the person making the payments a written statement of 

change or termination which shall take effect in the same manner as provided in subparagraph (C). At the election of the 

payor, any such request (or statement of change or revocation) 

may take effect earlier than as provided in subparagraph (C). 

(5) SPECIAL RULE FOR SICK PAY PAID PURSUANT TO CERTAIN

COLLECTIVE-BARGAINING AGREEMENTS.—In the case of any sick 

pay paid pursuant to a collective-bargaining agreement between employee representatives and one or more employers 

which contains a provision specifying that this paragraph is to 

apply to sick pay paid pursuant to such agreement and contains a provision for determining the amount to be deducted 

and withheld from each payment of such sick pay— 

449 

(A) the requirement of paragraph (1)(C) that a request 

for withholding be in effect shall not apply, and 

(B) except as provided in subsection (n), the amounts to 

be deducted and withheld under this chapter shall be determined in accordance with such agreement. 

The preceding sentence shall not apply with respect to sick pay 

paid pursuant to any agreement to any individual unless the 

social security number of such individual is furnished to the 

payor and the payor is furnished with such information as is 

necessary to determine whether the payment is pursuant to 

the agreement and to determine the amount to be deducted 

and withheld. 

(6) COORDINATION WITH WITHHOLDING ON DESIGNATED DISTRIBUTIONS UNDER SECTION 3405.—This subsection shall not 

apply to any amount which is a designated distribution (within 

the meaning of section 3405(e)(1)). 

(p) VOLUNTARY WITHHOLDING AGREEMENTS.— 

(1) CERTAIN FEDERAL PAYMENTS.— (A) IN GENERAL.—If, at the time a specified Federal payment is made to any person, a request by such person is 

in effect that such payment be subject to withholding 

under this chapter, then for purposes of this chapter and 

so much of subtitle F as relates to this chapter, such payment shall be treated as if it were a payment of wages by 

an employer to an employee. 

(B) AMOUNT WITHHELD.—The amount to be deducted 

and withheld under this chapter from any payment to 

which any request under subparagraph (A) applies shall be 

an amount equal to the percentage of such payment specified in such request. Such a request shall apply to any 

payment only if the percentage specified is 7 percent, any 

percentage applicable to any of the 3 lowest income brackets in the table under section 1(c), or such other percentage as is permitted under regulations prescribed by the 

Secretary. 

(C) SPECIFIED FEDERAL PAYMENTS.—For purposes of this 

paragraph, the term ‘‘specified Federal payment’’ means— 

(i) any payment of a social security benefit (as defined in section 86(d)), 

(ii) any payment referred to in the second sentence 

of section 451(d) which is treated as insurance proceeds, 

(iii) any amount which is includible in gross income 

under section 77(a), and 

(iv) any other payment made pursuant to Federal 

law which is specified by the Secretary for purposes of 

this paragraph. 

(D) REQUESTS FOR WITHHOLDING.—Rules similar to the 

rules that apply to annuities under subsection (o)(4) shall 

apply to requests under this paragraph and paragraph (2). 

(2) VOLUNTARY WITHHOLDING ON UNEMPLOYMENT BENE- FITS.—If, at the time a payment of unemployment compensation (as defined in section 85(b)) is made to any person, a request by such person is in effect that such payment be subject 

to withholding under this chapter, then for purposes of this 

450 

chapter and so much of subtitle F as relates to this chapter, 

such payment shall be treated as if it were a payment of wages 

by an employer to an employee. The amount to be deducted 

and withheld under this chapter from any payment to which 

any request under this paragraph applies shall be an amount 

equal to 10 percent of such payment. 

(3) AUTHORITY FOR OTHER VOLUNTARY WITHHOLDING.—The 

Secretary is authorized by regulations to provide for withholding— 

(A) from remuneration for services performed by an employee for the employee’s employer which (without regard 

to this paragraph) does not constitute wages, and 

(B) from any other type of payment with respect to 

which the Secretary finds that withholding would be appropriate under the provisions of this chapter, 

if the employer and employee, or the person making and the 

person receiving such other type of payment, agree to such 

withholding. Such agreement shall be in such form and manner as the Secretary may by regulations prescribe. For purposes of this chapter (and so much of subtitle F as relates to 

this chapter), remuneration or other payments with respect to 

which such agreement is made shall be treated as if they were 

wages paid by an employer to an employee to the extent that 

such remuneration is paid or other payments are made during 

the period for which the agreement is in effect. 

(q) EXTENSION OF WITHHOLDING TO CERTAIN GAMBLING

WINNINGS.— (1) GENERAL RULE.—Every person, including the Government 

of the United States, a State, or a political subdivision thereof, 

or any instrumentalities of the foregoing, making any payment 

of winnings which are subject to withholding shall deduct and 

withhold from such payment a tax in an amount equal to the 

product of the third lowest rate of tax applicable under section 

1(c) and such payment. 

(2) EXEMPTION WHERE TAX OTHERWISE WITHHELD.—In the 

case of any payment of winnings which are subject to withholding made to a nonresident alien individual or a foreign corporation, the tax imposed under paragraph (1) shall not apply 

to any such payment subject to tax under section 1441(a) (relating to withholding on nonresident aliens) or tax under section 1442(a) (relating to withholding on foreign corporations). 

(3) WINNINGS WHICH ARE SUBJECT TO WITHHOLDING.—For 

purposes of this subsection, the term ‘‘winnings which are subject to withholding’’ means proceeds from a wager determined 

in accordance with the following: 

(A) IN GENERAL.—Except as provided in subparagraphs 

(B) and (C), proceeds of more than $5,000 from a wagering 

transaction, if the amount of such proceeds is at least 300 

times as large as the amount wagered. 

(B) STATE-CONDUCTED LOTTERIES.—Proceeds of more 

than $5,000 from a wager placed in a lottery conducted by 

an agency of a State acting under authority of State law, 

but only if such wager is placed with the State agency conducting such lottery, or with its authorized employees or 

agents. 

451 

(C) SWEEPSTAKES, WAGERING POOLS, CERTAIN PARI- MUTUEL POOLS, JAI ALAI, AND LOTTERIES.—Proceeds of 

more than $5,000 from— 

(i) a wager placed in a sweepstakes, wagering pool, 

or lottery (other than a wager described in subparagraph (B)), or 

(ii) a wagering transaction in a parimutuel pool with 

respect to horse races, dog races, or jai alai if the 

amount of such proceeds is at least 300 times as large 

as the amount wagered. 

(4) RULES FOR DETERMINING PROCEEDS FROM A WAGER.—For 

purposes of this subsection— 

(A) proceeds from a wager shall be determined by reducing the amount received by the amount of the wager, and 

(B) proceeds which are not money shall be taken into account at their fair market value. 

(5) EXEMPTION FOR BINGO, KENO, AND SLOT MACHINES.—The 

tax imposed under paragraph (1) shall not apply to winnings 

from a slot machine, keno, and bingo. 

(6) STATEMENT BY RECIPIENT.—Every person who is to receive a payment of winnings which are subject to withholding 

shall furnish the person making such payment a statement, 

made under the penalties of perjury, containing the name, address, and taxpayer identification number of the person receiving the payment and of each person entitled to any portion of 

such payment. 

(7) COORDINATION WITH OTHER SECTIONS.—For purposes of 

sections 3403 and 3404 and for purposes of so much of subtitle 

F (except section 7205) as relates to this chapter, payments to 

any person of winnings which are subject to withholding shall 

be treated as if they were wages paid by an employer to an employee. 

(r) EXTENSION OF WITHHOLDING TO CERTAIN TAXABLE PAYMENTS

OF INDIAN CASINO PROFITS.— 

(1) IN GENERAL.—Every person, including an Indian tribe, 

making a payment to a member of an Indian tribe from the net 

revenues of any class II or class III gaming activity conducted 

or licensed by such tribe shall deduct and withhold from such 

payment a tax in an amount equal to such payment’s proportionate share of the annualized tax. 

(2) EXCEPTION.—The tax imposed by paragraph (1) shall not 

apply to any payment to the extent that the payment, when 

annualized, does not exceed an amount equal to the sum of— 

(A) the basic standard deduction (as defined in section 

63(c)) for an individual to whom section 63(c)(2)(C) applies, 

and 

(B) the exemption amount (as defined in section 151(d)). 

(3) ANNUALIZED TAX.—For purposes of paragraph (1), the 

term ‘‘annualized tax’’ means, with respect to any payment, the 

amount of tax which would be imposed by section 1(c) (determined without regard to any rate of tax in excess of the fourth 

lowest rate of tax applicable under section 1(c)) on an amount 

of taxable income equal to the excess of— 

(A) the annualized amount of such payment, over 

(B) the amount determined under paragraph (2). 

452 

(4) CLASSES OF GAMING ACTIVITIES, ETC..—For purposes of 

this subsection, terms used in paragraph (1) which are defined 

in section 4 of the Indian Gaming Regulatory Act (25 U.S.C. 

2701 et seq.), as in effect on the date of the enactment of this 

subsection, shall have the respective meanings given such 

terms by such section. 

(5) ANNUALIZATION.—Payments shall be placed on an 

annualized basis under regulations prescribed by the Secretary. 

(6) ALTERNATE WITHHOLDING PROCEDURES.—At the election 

of an Indian tribe, the tax imposed by this subsection on any 

payment made by such tribe shall be determined in accordance 

with such tables or computational procedures as may be specified in regulations prescribed by the Secretary (in lieu of in accordance with paragraphs (2) and (3)). 

(7) COORDINATION WITH OTHER SECTIONS.—For purposes of 

this chapter and so much of subtitle F as relates to this chapter, payments to any person which are subject to withholding 

under this subsection shall be treated as if they were wages 

paid by an employer to an employee. 

(s) EXEMPTION FROM WITHHOLDING FOR ANY VEHICLE FRINGE BENEFIT.— 

(1) EMPLOYER ELECTION NOT TO WITHHOLD.—The employer 

may elect not to deduct and withhold any tax under this chapter with respect to any vehicle fringe benefit provided to any 

employee if such employee is notified by the employer of such 

election (at such time and in such manner as the Secretary 

shall by regulations prescribe). The preceding sentence shall 

not apply to any vehicle fringe benefit unless the amount of 

such benefit is included by the employer on a statement timely 

furnished under section 6051. 

(2) EMPLOYER MUST FURNISH W–2.—Any vehicle fringe benefit shall be treated as wages from which amounts are required 

to be deducted and withheld under this chapter for purposes 

of section 6051. 

(3) VEHICLE FRINGE BENEFIT.—For purposes of this subsection, the term ‘‘vehicle fringe benefit’’ means any fringe benefit— 

(A) which constitutes wages (as defined in section 3401), 

and 

(B) which consists of providing a highway motor vehicle 

for the use of the employee. 

(t) RATE OF WITHHOLDING FOR CERTAIN STOCK.—In the case of 

any qualified stock (as defined in section 83(i)(2)) with respect to 

which an election is made under section 83(i)— 

(1) the rate of tax under subsection (a) shall not be less than 

the maximum rate of tax in effect under section 1, and 

(2) such stock shall be treated for purposes of section 3501(b) 

in the same manner as a non-cash fringe benefit. 

* * * * * * * 

Subtitle D—Miscellaneous Excise Taxes 

* * * * * * * 

453 

CHAPTER 40—GENERAL PROVISIONS 

RELATING TO OCCUPATIONAL TAXES 

* * * * * * * 

SEC. 4905. LIABILITY IN CASE OF DEATH OR CHANGE OF LOCATION. 

(a) REQUIREMENTS.—When any person who has paid the special 

tax for any trade or business dies, øhis spouse¿ such person’s 

spouse or child, or executors or administrators or other legal representatives, may occupy the house or premises, and in like manner carry on, for the residue of the term for which the tax is paid, 

the same trade or business as the deceased before carried on, in 

the same house and upon the same premises, without the payment 

of any additional tax. When any person removes from the house or 

premises for which any trade or business was taxed to any other 

place, he may carry on the trade or business specified in the register kept in the office of the official in charge of the internal revenue district at the place to which he removes, without the payment of any additional tax: Provided, That all cases of death, 

change, or removal, as aforesaid, with the name of the successor to 

any person deceased, or of the person making such change or removal, shall be registered with the Secretary, under regulations to 

be prescribed by the Secretary. 

(b) REGISTRATION.—For registration in case of wagering, see section 4412. 

* * * * * * * 

CHAPTER 42—PRIVATE FOUNDATIONS; AND 

CERTAIN OTHER TAX-EXEMPT ORGANIZATIONS 

* * * * * * * 

Subchapter A—PRIVATE FOUNDATIONS 

* * * * * * * 

SEC. 4946. DEFINITIONS AND SPECIAL RULES. 

(a) DISQUALIFIED PERSON.— 

(1) IN GENERAL.—For purposes of this subchapter, the term 

‘‘disqualified person’’ means, with respect to a private foundation, a person who is— 

(A) a substantial contributor to the foundation, 

(B) a foundation manager (within the meaning of subsection (b)(1)), 

(C) an owner of more than 20 percent of— 

(i) the total combined voting power of a corporation, 

(ii) the profits interest of a partnership, or 

(iii) the beneficial interest of a trust or unincorporated enterprise, 

which is a substantial contributor to the foundation, 

(D) a member of the family (as defined in subsection (d)) 

of any individual described in subparagraph (A), (B), or 

(C), 

454 

(E) a corporation of which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the 

total combined voting power, 

(F) a partnership in which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the 

profits interest, 

(G) a trust or estate in which persons described in subparagraph (A), (B), (C), or (D) hold more than 35 percent 

of the beneficial interest, 

(H) only for purposes of section 4943, a private foundation— 

(i) which is effectively controlled (directly or indirectly) by the same person or persons who control the 

private foundation in question, or 

(ii) substantially all of the contributions to which 

were made (directly or indirectly) by the same person 

or persons described in subparagraph (A), (B), or (C), 

or members of their families (within the meaning of 

subsection (d)), who made (directly or indirectly) substantially all of the contributions to the private foundation in question, and 

(I) only for purposes of section 4941, a government official (as defined in subsection (c)). 

(2) SUBSTANTIAL CONTRIBUTORS.—For purposes of paragraph 

(1), the term ‘‘substantial contributor’’ means a person who is 

described in section 507(d)(2). 

(3) STOCKHOLDINGS.—For purposes of paragraphs (1)(C)(i) 

and (1)(E), there shall be taken into account indirect stockholdings which would be taken into account under section 

267(c), except that, for purposes of this paragraph, section 

267(c)(4) shall be treated as providing that the members of the 

family of an individual are the members within the meaning 

of subsection (d). 

(4) PARTNERSHIPS; TRUSTS.—For purposes of paragraphs 

(1)(C)(ii) and (iii), (1)(F), and (1)(G), the ownership of profits or 

beneficial interests shall be determined in accordance with the 

rules for constructive ownership of stock provided in section 

267(c) (other than paragraph (3) thereof), except that section 

267(c)(4) shall be treated as providing that the members of the 

family of an individual are the members within the meaning 

of subsection (d). 

(b) FOUNDATION MANAGER.—For purposes of this subchapter, the 

term ‘‘foundation manager’’ means, with respect to any private 

foundation— 

(1) an officer, director, or trustee of a foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation), and 

(2) with respect to any act (or failure to act), the employees 

of the foundation having authority or responsibility with respect to such act (or failure to act). 

(c) GOVERNMENT OFFICIAL.—For purposes of subsection (a)(1)(I) 

and section 4941, the term ‘‘government official’’ means, with respect to an act of self-dealing described in section 4941, an individual who, at the time of such act, holds any of the following ofVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00460 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
455 

fices or positions (other than as a ‘‘special Government employee’’, 

as defined in section 202(a) of title 18, United States Code): 

(1) an elective public office in the executive or legislative 

branch of the Government of the United States, 

(2) an office in the executive or judicial branch of the Government of the United States, appointment to which was made 

by the President, 

(3) a position in the executive, legislative, or judicial branch 

of the Government of the United States— 

(A) which is listed in schedule C of rule VI of the Civil 

Service Rules, or 

(B) the compensation for which is equal to or greater 

than the lowest rate of basic pay for the Senior Executive 

Service under section 5382 of title 5, United States Code, 

(4) a position under the House of Representatives or the Senate of the United States held by an individual receiving gross 

compensation at an annual rate of $15,000 or more, 

(5) an elective or appointive public office in the executive, 

legislative, or judicial branch of the government of a State, possession of the United States, or political subdivision or other 

area of any of the foregoing, or of the District of Columbia, 

held by an individual receiving gross compensation at an annual rate of $20,000 or more, 

(6) a position as personal or executive assistant or secretary 

to any of the foregoing, or 

(7) a member of the Internal Revenue Service Oversight 

Board. 

(d) MEMBERS OF FAMILY.—For purposes of subsection (a)(1), the 

family of any individual shall include only øhis spouse¿ the individual’s spouse , ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great 

grandchildren. 

* * * * * * * 

CHAPTER 43—QUALIFIED PENSION, ETC., 

PLANS 

* * * * * * * 

SEC. 4975. TAX ON PROHIBITED TRANSACTIONS. 

(a) INITIAL TAXES ON DISQUALIFIED PERSON.—There is hereby imposed a tax on each prohibited transaction. The rate of tax shall 

be equal to 15 percent of the amount involved with respect to the 

prohibited transaction for each year (or part thereof) in the taxable 

period. The tax imposed by this subsection shall be paid by any disqualified person who participates in the prohibited transaction 

(other than a fiduciary acting only as such). 

(b) ADDITIONAL TAXES ON DISQUALIFIED PERSON.—In any case in 

which an initial tax is imposed by subsection (a) on a prohibited 

transaction and the transaction is not corrected within the taxable 

period, there is hereby imposed a tax equal to 100 percent of the 

amount involved. The tax imposed by this subsection shall be paid 

by any disqualified person who participated in the prohibited 

transaction (other than a fiduciary acting only as such). 

(c) PROHIBITED TRANSACTION.— 

456 

(1) GENERAL RULE.—For purposes of this section, the term 

‘‘prohibited transaction’’ means any direct or indirect— 

(A) sale or exchange, or leasing, of any property between 

a plan and a disqualified person; 

(B) lending of money or other extension of credit between a plan and a disqualified person; 

(C) furnishing of goods, services, or facilities between a 

plan and a disqualified person; 

(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan; 

(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own 

interest or for his own account; or 

(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from 

any party dealing with the plan in connection with a 

transaction involving the income or assets of the plan. 

(2) SPECIAL EXEMPTION.—The Secretary shall establish an 

exemption procedure for purposes of this subsection. Pursuant 

to such procedure, he may grant a conditional or unconditional 

exemption of any disqualified person or transaction, orders of 

disqualified persons or transactions, from all or part of the restrictions imposed by paragraph (1) of this subsection. Action 

under this subparagraph may be taken only after consultation 

and coordination with the Secretary of Labor. The Secretary 

may not grant an exemption under this paragraph unless he 

finds that such exemption is— 

(A) administratively feasible, 

(B) in the interests of the plan and of its participants 

and beneficiaries, and 

(C) protective of the rights of participants and beneficiaries of the plan. 

Before granting an exemption under this paragraph, the Secretary shall require adequate notice to be given to interested 

persons and shall publish notice in the Federal Register of the 

pendency of such exemption and shall afford interested persons 

an opportunity to present views. No exemption may be granted 

under this paragraph with respect to a transaction described 

in subparagraph (E) or (F) of paragraph (1) unless the Secretary affords an opportunity for a hearing and makes a determination on the record with respect to the findings required 

under subparagraphs (A), (B), and (C) of this paragraph, except 

that in lieu of such hearing the Secretary may accept any 

record made by the Secretary of Labor with respect to an application for exemption under section 408(a) of title I of the Employee Retirement Income Security Act of 1974. 

(3) SPECIAL RULE FOR INDIVIDUAL RETIREMENT ACCOUNTS.— 

An individual for whose benefit an individual retirement account is established and his beneficiaries shall be exempt from 

the tax imposed by this section with respect to any transaction 

concerning such account (which would otherwise be taxable 

under this section) if, with respect to such transaction, the account ceases to be an individual retirement account by reason 

of the application of section 408(e)(2)(A) or if section 408(e)(4) 

applies to such account. 

457 

(4) SPECIAL RULE FOR ARCHER MSAS.—An individual for 

whose benefit an Archer MSA (within the meaning of section 

220(d)) is established shall be exempt from the tax imposed by 

this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if 

section 220(e)(2) applies to such transaction. 

(5) SPECIAL RULE FOR COVERDELL EDUCATION SAVINGS ACCOUNTS.—An individual for whose benefit a Coverdell education savings account is established and any contributor to 

such account shall be exempt from the tax imposed by this section with respect to any transaction concerning such account 

(which would otherwise be taxable under this section) if section 

530(d) applies with respect to such transaction. 

(6) SPECIAL RULE FOR HEALTH SAVINGS ACCOUNTS.—An individual for whose benefit a health savings account (within the 

meaning of section 223(d)) is established shall be exempt from 

the tax imposed by this section with respect to any transaction 

concerning such account (which would otherwise be taxable 

under this section) if, with respect to such transaction, the account ceases to be a health savings account by reason of the 

application of section 223(e)(2) to such account. 

(d) EXEMPTIONS.—Except as provided in subsection (f)(6), the prohibitions provided in subsection (c) shall not apply to— 

(1) any loan made by the plan to a disqualified person who 

is a participant or beneficiary of the plan if such loan— 

(A) is available to all such participants or beneficiaries 

on a reasonably equivalent basis, 

(B) is not made available to highly compensated employees (within the meaning of section 414(q)) in an amount 

greater than the amount made available to other employees, 

(C) is made in accordance with specific provisions regarding such loans set forth in the plan, 

(D) bears a reasonable rate of interest, and 

(E) is adequately secured; 

(2) any contract, or reasonable arrangement, made with a 

disqualified person for office space, or legal, accounting, or 

other services necessary for the establishment or operation of 

the plan, if no more than reasonable compensation is paid 

therefor; 

(3) any loan to a leveraged employee stock ownership plan 

(as defined in subsection (e)(7)), if— 

(A) such loan is primarily for the benefit of participants 

and beneficiaries of the plan, and 

(B) such loan is at a reasonable rate of interest, and any 

collateral which is given to a disqualified person by the 

plan consists only of qualifying employer securities (as defined in subsection (e)(8)); 

(4) the investment of all or part of a plan’s assets in deposits 

which bear a reasonable interest rate in a bank or similar financial institution supervised by the United States or a State, 

if such bank or other institution is a fiduciary of such plan and 

if— 

458 

(A) the plan covers only employees of such bank or other 

institution and employees of affiliates of such bank or 

other institution, or 

(B) such investment is expressly authorized by a provision of the plan or by a fiduciary (other than such bank 

or institution or affiliates thereof) who is expressly empowered by the plan to so instruct the trustee with respect to 

such investment; 

(5) any contract for life insurance, health insurance, or annuities with one or more insurers which are qualified to do business in a State if the plan pays no more than adequate consideration, and if each such insurer or insurers is— 

(A) the employer maintaining the plan, or 

(B) a disqualified person which is wholly owned (directly 

or indirectly) by the employer establishing the plan, or by 

any person which is a disqualified person with respect to 

the plan, but only if the total premiums and annuity considerations written by such insurers for life insurance, 

health insurance, or annuities for all plans (and their employers) with respect to which such insurers are disqualified persons (not including premiums or annuity considerations written by the employer maintaining the plan) do 

not exceed 5 percent of the total premiums and annuity 

considerations written for all lines of insurance in that 

year by such insurers (not including premiums or annuity 

considerations written by the employer maintaining the 

plan); 

(6) the provision of any ancillary service by a bank or similar 

financial institution supervised by the United States or a 

State, if such service is provided at not more than reasonable 

compensation, if such bank or other institution is a fiduciary 

of such plan, and if— 

(A) such bank or similar financial institution has adopted adequate internal safeguards which assure that the 

provision of such ancillary service is consistent with sound 

banking and financial practice, as determined by Federal 

or State supervisory authority, and 

(B) the extent to which such ancillary service is provided 

is subject to specific guidelines issued by such bank or 

similar financial institution (as determined by the Secretary after consultation with Federal and State supervisory authority), and under such guidelines the bank or 

similar financial institution does not provide such ancillary 

service— 

(i) in an excessive or unreasonable manner, and 

(ii) in a manner that would be inconsistent with the 

best interests of participants and beneficiaries of employee benefit plans; 

(7) the exercise of a privilege to convert securities, to the extent provided in regulations of the Secretary, but only if the 

plan receives no less than adequate consideration pursuant to 

such conversion; 

(8) any transaction between a plan and a common or collective trust fund or pooled investment fund maintained by a disqualified person which is a bank or trust company supervised 

459 

by a State or Federal agency or between a plan and a pooled 

investment fund of an insurance company qualified to do business in a State if— 

(A) the transaction is a sale or purchase of an interest 

in the fund, 

(B) the bank, trust company, or insurance company receives not more than a reasonable compensation, and 

(C) such transaction is expressly permitted by the instrument under which the plan is maintained, or by a fiduciary (other than the bank, trust company, or insurance 

company, or an affiliate thereof) who has authority to 

manage and control the assets of the plan; 

(9) receipt by a disqualified person of any benefit to which 

he may be entitled as a participant or beneficiary in the plan, 

so long as the benefit is computed and paid on a basis which 

is consistent with the terms of the plan as applied to all other 

participants and beneficiaries; 

(10) receipt by a disqualified person of any reasonable compensation for services rendered, or for the reimbursement of 

expenses properly and actually incurred, in the performance of 

his duties with the plan, but no person so serving who already 

receives full-time pay from an employer or an association of 

employers, whose employees are participants in the plan or 

from an employee organization whose members are participants in such plan shall receive compensation from such fund, 

except for reimbursement of expenses properly and actually incurred; 

(11) service by a disqualified person as a fiduciary in addition to being an officer, employee, agent, or other representative of a disqualified person; 

(12) the making by a fiduciary of a distribution of the assets 

of the trust in accordance with the terms of the plan if such 

assets are distributed in the same manner as provided under 

section 4044 of title IV of the Employee Retirement Income Security Act of 1974 (relating to allocation of assets); 

(13) any transaction which is exempt from section 406 of 

such Act by reason of section 408(e) of such Act (or which 

would be so exempt if such section 406 applied to such transaction) or which is exempt from section 406 of such Act by reason of section 408(b)(12) of such Act; 

(14) any transaction required or permitted under part 1 of 

subtitle E of title IV or section 4223 of the Employee Retirement Income Security Act of 1974, but this paragraph shall not 

apply with respect to the application of subsection (c)(1) (E) or 

(F); 

(15) a merger of multiemployer plans, or the transfer of assets or liabilities between multiemployer plans, determined by 

the Pension Benefit Guaranty Corporation to meet the requirements of section 4231 of such Act, but this paragraph shall not 

apply with respect to the application of subsection (c)(1)(E) or 

(F); 

(16) a sale of stock held by a trust which constitutes an individual retirement account under section 408(a) to the individual for whose benefit such account is established if— 

460 

(A) such stock is in a bank (as defined in section 581) 

or a depository institution holding company (as defined in 

section 3(w)(1) of the Federal Deposit Insurance Act (12 

U.S.C. 1813(w)(1))), 

(B) such stock is held by such trust as of the date of the 

enactment of this paragraph, 

(C) such sale is pursuant to an election under section 

1362(a) by such bank or company, 

(D) such sale is for fair market value at the time of sale 

(as established by an independent appraiser) and the 

terms of the sale are otherwise at least as favorable to 

such trust as the terms that would apply on a sale to an 

unrelated party, 

(E) such trust does not pay any commissions, costs, or 

other expenses in connection with the sale, and 

(F) the stock is sold in a single transaction for cash not 

later than 120 days after the S corporation election is 

made; 

(17) any transaction in connection with the provision of investment advice described in subsection (e)(3)(B) to a participant or beneficiary in a plan that permits such participant or 

beneficiary to direct the investment of plan assets in an individual account, if— 

(A) the transaction is— 

(i) the provision of the investment advice to the participant or beneficiary of the plan with respect to a security or other property available as an investment 

under the plan, 

(ii) the acquisition, holding, or sale of a security or 

other property available as an investment under the 

plan pursuant to the investment advice, or 

(iii) the direct or indirect receipt of fees or other 

compensation by the fiduciary adviser or an affiliate 

thereof (or any employee, agent, or registered representative of the fiduciary adviser or affiliate) in connection with the provision of the advice or in connection with an acquisition, holding, or sale of a security 

or other property available as an investment under 

the plan pursuant to the investment advice; and 

(B) the requirements of subsection (f)(8) are met, 

(18) any transaction involving the purchase or sale of securities, or other property (as determined by the Secretary of 

Labor), between a plan and a disqualified person (other than 

a fiduciary described in subsection (e)(3)) with respect to a plan 

if— 

(A) the transaction involves a block trade, 

(B) at the time of the transaction, the interest of the 

plan (together with the interests of any other plans maintained by the same plan sponsor), does not exceed 10 percent of the aggregate size of the block trade, 

(C) the terms of the transaction, including the price, are 

at least as favorable to the plan as an arm’s length transaction, and 

461 

(D) the compensation associated with the purchase and 

sale is not greater than the compensation associated with 

an arm’s length transaction with an unrelated party, 

(19) any transaction involving the purchase or sale of securities, or other property (as determined by the Secretary of 

Labor), between a plan and a disqualified person if— 

(A) the transaction is executed through an electronic 

communication network, alternative trading system, or 

similar execution system or trading venue subject to regulation and oversight by— 

(i) the applicable Federal regulating entity, or 

(ii) such foreign regulatory entity as the Secretary of 

Labor may determine by regulation, 

(B) either— 

(i) the transaction is effected pursuant to rules designed to match purchases and sales at the best price 

available through the execution system in accordance 

with applicable rules of the Securities and Exchange 

Commission or other relevant governmental authority, 

or 

(ii) neither the execution system nor the parties to 

the transaction take into account the identity of the 

parties in the execution of trades, 

(C) the price and compensation associated with the purchase and sale are not greater than the price and compensation associated with an arm’s length transaction with 

an unrelated party, 

(D) if the disqualified person has an ownership interest 

in the system or venue described in subparagraph (A), the 

system or venue has been authorized by the plan sponsor 

or other independent fiduciary for transactions described 

in this paragraph, and 

(E) not less than 30 days prior to the initial transaction 

described in this paragraph executed through any system 

or venue described in subparagraph (A), a plan fiduciary 

is provided written or electronic notice of the execution of 

such transaction through such system or venue, 

(20) transactions described in subparagraphs (A), (B), and 

(D) of subsection (c)(1) between a plan and a person that is a 

disqualified person other than a fiduciary (or an affiliate) who 

has or exercises any discretionary authority or control with respect to the investment of the plan assets involved in the 

transaction or renders investment advice (within the meaning 

of subsection (e)(3)(B)) with respect to those assets, solely by 

reason of providing services to the plan or solely by reason of 

a relationship to such a service provider described in subparagraph (F), (G), (H), or (I) of subsection (e)(2), or both, but only 

if in connection with such transaction the plan receives no less, 

nor pays no more, than adequate consideration, 

(21) any foreign exchange transactions, between a bank or 

broker-dealer (or any affiliate of either) and a plan (as defined 

in this section) with respect to which such bank or broker-dealer (or affiliate) is a trustee, custodian, fiduciary, or other disqualified person, if— 

462 

(A) the transaction is in connection with the purchase, 

holding, or sale of securities or other investment assets 

(other than a foreign exchange transaction unrelated to 

any other investment in securities or other investment assets), 

(B) at the time the foreign exchange transaction is entered into, the terms of the transaction are not less favorable to the plan than the terms generally available in comparable arm’s length foreign exchange transactions between unrelated parties, or the terms afforded by the bank 

or broker-dealer (or any affiliate of either) in comparable 

arm’s-length foreign exchange transactions involving unrelated parties, 

(C) the exchange rate used by such bank or broker-dealer (or affiliate) for a particular foreign exchange transaction does not deviate by more than 3 percent from the 

interbank bid and asked rates for transactions of comparable size and maturity at the time of the transaction as 

displayed on an independent service that reports rates of 

exchange in the foreign currency market for such currency, 

and 

(D) the bank or broker-dealer (or any affiliate of either) 

does not have investment discretion, or provide investment 

advice, with respect to the transaction, 

(22) any transaction described in subsection (c)(1)(A) involving the purchase and sale of a security between a plan and any 

other account managed by the same investment manager, if— 

(A) the transaction is a purchase or sale, for no consideration other than cash payment against prompt delivery of 

a security for which market quotations are readily available, 

(B) the transaction is effected at the independent current 

market price of the security (within the meaning of section 

270.17a–7(b) of title 17, Code of Federal Regulations), 

(C) no brokerage commission, fee (except for customary 

transfer fees, the fact of which is disclosed pursuant to 

subparagraph (D)), or other remuneration is paid in connection with the transaction, 

(D) a fiduciary (other than the investment manager engaging in the cross-trades or any affiliate) for each plan 

participating in the transaction authorizes in advance of 

any cross-trades (in a document that is separate from any 

other written agreement of the parties) the investment 

manager to engage in cross trades at the investment manager’s discretion, after such fiduciary has received disclosure regarding the conditions under which cross trades 

may take place (but only if such disclosure is separate 

from any other agreement or disclosure involving the asset 

management relationship), including the written policies 

and procedures of the investment manager described in 

subparagraph (H), 

(E) each plan participating in the transaction has assets 

of at least $100,000,000, except that if the assets of a plan 

are invested in a master trust containing the assets of 

plans maintained by employers in the same controlled 

463 

group (as defined in section 407(d)(7) of the Employee Retirement Income Security Act of 1974), the master trust 

has assets of at least $100,000,000, 

(F) the investment manager provides to the plan fiduciary who authorized cross trading under subparagraph 

(D) a quarterly report detailing all cross trades executed 

by the investment manager in which the plan participated 

during such quarter, including the following information, 

as applicable: (i) the identity of each security bought or 

sold; (ii) the number of shares or units traded; (iii) the parties involved in the cross-trade; and (iv) trade price and 

the method used to establish the trade price, 

(G) the investment manager does not base its fee schedule on the plan’s consent to cross trading, and no other 

service (other than the investment opportunities and cost 

savings available through a cross trade) is conditioned on 

the plan’s consent to cross trading, 

(H) the investment manager has adopted, and crosstrades are effected in accordance with, written cross-trading policies and procedures that are fair and equitable to 

all accounts participating in the cross-trading program, 

and that include a description of the manager’s pricing 

policies and procedures, and the manager’s policies and 

procedures for allocating cross trades in an objective manner among accounts participating in the cross-trading program, and 

(I) the investment manager has designated an individual 

responsible for periodically reviewing such purchases and 

sales to ensure compliance with the written policies and 

procedures described in subparagraph (H), and following 

such review, the individual shall issue an annual written 

report no later than 90 days following the period to which 

it relates signed under penalty of perjury to the plan fiduciary who authorized cross trading under subparagraph 

(D) describing the steps performed during the course of the 

review, the level of compliance, and any specific instances 

of non-compliance. 

The written report shall also notify the plan fiduciary of the 

plan’s right to terminate participation in the investment manager’s cross-trading program at any time, or 

(23) except as provided in subsection (f)(11), a transaction described in subparagraph (A), (B), (C), or (D) of subsection (c)(1) 

in connection with the acquisition, holding, or disposition of 

any security or commodity, if the transaction is corrected before the end of the correction period. 

(e) DEFINITIONS.— 

(1) PLAN.—For purposes of this section, the term ‘‘plan’’ 

means— 

(A) a trust described in section 401(a) which forms a 

part of a plan, or a plan described in section 403(a), which 

trust or plan is exempt from tax under section 501(a), 

(B) an individual retirement account described in section 

408(a), 

(C) an individual retirement annuity described in section 

408(b), 

464 

(D) an Archer MSA described in section 220(d), 

(E) a health savings account described in section 223(d), 

(F) a Coverdell education savings account described in 

section 530, or 

(G) a trust, plan, account, or annuity which, at any time, 

has been determined by the Secretary to be described in 

any preceding subparagraph of this paragraph. 

(2) DISQUALIFIED PERSON.—For purposes of this section, the 

term ‘‘disqualified person’’ means a person who is— 

(A) a fiduciary; 

(B) a person providing services to the plan; 

(C) an employer any of whose employees are covered by 

the plan; 

(D) an employee organization any of whose members are 

covered by the plan; 

(E) an owner, direct or indirect, of 50 percent or more 

of— 

(i) the combined voting power of all classes of stock 

entitled to vote or the total value of shares of all classes of stock of a corporation, 

(ii) the capital interest or the profits interest of a 

partnership, or 

(iii) the beneficial interest of a trust or unincorporated enterprise, 

which is an employer or an employee organization described in subparagraph (C) or (D); 

(F) a member of the family (as defined in paragraph (6)) 

of any individual described in subparagraph (A), (B), (C), 

or (E); 

(G) a corporation, partnership, or trust or estate of 

which (or in which) 50 percent or more of— 

(i) the combined voting power of all classes of stock 

entitled to vote or the total value of shares of all classes of stock of such corporation, 

(ii) the capital interest or profits interest of such 

partnership, or 

(iii) the beneficial interest of such trust or estate, 

is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or (E); 

(H) an officer, director (or an individual having powers 

or responsibilities similar to those of officers or directors), 

a 10 percent or more shareholder, or a highly compensated 

employee (earning 10 percent or more of the yearly wages 

of an employer) of a person described in subparagraph (C), 

(D), (E), or (G); or 

(I) a 10 percent or more (in capital or profits) partner or 

joint venturer of a person described in subparagraph (C), 

(D), (E), or (G). 

The Secretary, after consultation and coordination with the 

Secretary of Labor or his delegate, may by regulation prescribe 

a percentage lower than 50 percent for subparagraphs (E) and 

(G) and lower than 10 percent for subparagraphs (H) and (I). 

(3) FIDUCIARY.—For purposes of this section, the term ‘‘fiduciary’’ means any person who— 

465 

(A) exercises any discretionary authority or discretionary 

control respecting management of such plan or exercises 

any authority or control respecting management or disposition of its assets, 

(B) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or 

other property of such plan, or has any authority or responsibility to do so, or 

(C) has any discretionary authority or discretionary responsibility in the administration of such plan. 

Such term includes any person designated under section 

405(c)(1)(B) of the Employee Retirement Income Security Act of 

1974. 

(4) STOCKHOLDINGS.—For purposes of paragraphs (2)(E)(i) 

and (G)(i) there shall be taken into account indirect stockholdings which would be taken into account under section 

267(c), except that, for purposes of this paragraph, section 

267(c)(4) shall be treated as providing that the members of the 

family of an individual are the members within the meaning 

of paragraph (6). 

(5) PARTNERSHIPS; TRUSTS.—For purposes of paragraphs 

(2)(E)(ii) and (iii), (G)(ii) and (iii), and (I) the ownership of profits or beneficial interests shall be determined in accordance 

with the rules for constructive ownership of stock provided in 

section 267(c) (other than paragraph (3) thereof), except that 

section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the 

meaning of paragraph (6). 

(6) MEMBER OF FAMILY.—For purposes of paragraph (2)(F), 

the family of any individual shall include øhis spouse¿ the individual’s spouse , ancestor, lineal descendant, and any spouse 

of a lineal descendant. 

(7) EMPLOYEE STOCK OWNERSHIP PLAN.—The term ‘‘employee 

stock ownership plan’’ means a defined contribution plan— 

(A) which is a stock bonus plan which is qualified, or a 

stock bonus and a money purchase plan both of which are 

qualified under section 401(a), and which are designed to 

invest primarily in qualifying employer securities; and 

(B) which is otherwise defined in regulations prescribed 

by the Secretary. 

A plan shall not be treated as an employee stock ownership 

plan unless it meets the requirements of section 409(h), section 

409(o), and, if applicable, section 409(n), section 409(p), and 

section 664(g) and, if the employer has a registration-type class 

of securities (as defined in section 409(e)(4)), it meets the requirements of section 409(e). 

(8) QUALIFYING EMPLOYER SECURITY.—The term ‘‘qualifying 

employer security’’ means any employer security within the 

meaning of section 409(l). If any moneys or other property of 

a plan are invested in shares of an investment company registered under the Investment Company Act of 1940, the investment shall not cause that investment company or that investment company’s investment adviser or principal underwriter to 

be treated as a fiduciary or a disqualified person for purposes 

of this section, except when an investment company or its inVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00471 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
466 

vestment adviser or principal underwriter acts in connection 

with a plan covering employees of the investment company, its 

investment adviser, or its principal underwriter. 

(9) SECTION MADE APPLICABLE TO WITHDRAWAL LIABILITY PAY- MENT FUNDS.—For purposes of this section— 

(A) IN GENERAL.—The term ‘‘plan’’ includes a trust described in section 501(c)(22). 

(B) DISQUALIFIED PERSON.—In the case of any trust to 

which this section applies by reason of subparagraph (A), 

the term ‘‘disqualified person’’ includes any person who is 

a disqualified person with respect to any plan to which 

such trust is permitted to make payments under section 

4223 of the Employee Retirement Income Security Act of 

1974. 

(f) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this 

section— 

(1) JOINT AND SEVERAL LIABILITY.—If more than one person 

is liable under subsection (a) or (b) with respect to any one prohibited transaction, all such persons shall be jointly and severally liable under such subsection with respect to such transaction. 

(2) TAXABLE PERIOD.—The term ‘‘taxable period’’ means, with 

respect to any prohibited transaction, the period beginning 

with the date on which the prohibited transaction occurs and 

ending on the earliest of— 

(A) the date of mailing a notice of deficiency with respect 

to the tax imposed by subsection (a) under section 6212, 

(B) the date on which the tax imposed by subsection (a) 

is assessed, or 

(C) the date on which correction of the prohibited transaction is completed. 

(3) SALE OR EXCHANGE; ENCUMBERED PROPERTY.—A transfer 

or real or personal property by a disqualified person to a plan 

shall be treated as a sale or exchange if the property is subject 

to a mortgage or similar lien which the plan assumes or if it 

is subject to a mortgage or similar lien which a disqualified 

person placed on the property within the 10-year period ending 

on the date of the transfer. 

(4) AMOUNT INVOLVED.—The term ‘‘amount involved’’ means, 

with respect to a prohibited transaction, the greater of the 

amount of money and the fair market value of the other property given or the amount of money and the fair market value 

of the other property received; except that, in the case of services described in paragraphs (2) and (10) of subsection (d) the 

amount involved shall be only the excess compensation. For 

purposes of the preceding sentence, the fair market value— 

(A) in the case of the tax imposed by subsection (a), shall 

be determined as of the date on which the prohibited 

transaction occurs; and 

(B) in the case of the tax imposed by subsection (b), shall 

be the highest fair market value during the taxable period. 

(5) CORRECTION.—The terms ‘‘correction’’ and ‘‘correct’’ mean, 

with respect to a prohibited transaction, undoing the transaction to the extent possible, but in any case placing the plan 

in a financial position not worse than that in which it would 

467 

be if the disqualified person were acting under the highest fiduciary standards. 

(6) EXEMPTIONS NOT TO APPLY TO CERTAIN TRANSACTIONS.— 

(A) IN GENERAL.—In the case of a trust described in section 401(a) which is part of a plan providing contributions 

or benefits for employees some or all of whom are owneremployees (as defined in section 401(c)(3)), the exemptions 

provided by subsection (d) (other than paragraphs (9) and 

(12)) shall not apply to a transaction in which the plan directly or indirectly— 

(i) lends any part of the corpus or income of the plan 

to, 

(ii) pays any compensation for personal services rendered to the plan to, or 

(iii) acquires for the plan any property from, or sells 

any property to, 

any such owner-employee, a member of the family (as defined in section 267(c)(4)) of any such owner-employee, or 

any corporation in which any such owner-employee owns, 

directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote 

or 50 percent or more of the total value of shares of all 

classes of stock of the corporation. 

(B) SPECIAL RULES FOR SHAREHOLDER-EMPLOYEES, ETC..— (i) IN GENERAL.—For purposes of subparagraph (A), 

the following shall be treated as owner-employees: 

(I) A shareholder-employee. 

(II) A participant or beneficiary of an individual 

retirement plan (as defined in section 7701(a)(37)). 

(III) An employer or association of employees 

which establishes such an individual retirement 

plan under section 408(c). 

(ii) EXCEPTION FOR CERTAIN TRANSACTIONS INVOLV- ING SHAREHOLDER-EMPLOYEES.—Subparagraph (A)(iii) 

shall not apply to a transaction which consists of a 

sale of employer securities to an employee stock ownership plan (as defined in subsection (e)(7)) by a shareholder-employee, a member of the family (as defined 

in section 267(c)(4)) of such shareholder-employee, or a 

corporation in which such a shareholder-employee 

owns stock representing a 50 percent or greater interest described in subparagraph (A). 

(iii) LOAN EXCEPTION.—For purposes of subparagraph (A)(i), the term ‘‘owner-employee’’ shall only include a person described in subclause (II) or (III) of 

clause (i). 

(C) SHAREHOLDER-EMPLOYEE.—For purposes of subparagraph (B), the term ‘‘shareholder-employee’’ means an employee or officer of an S corporation who owns (or is considered as owning within the meaning of section 318(a)(1)) 

more than 5 percent of the outstanding stock of the corporation on any day during the taxable year of such corporation. 

468 

(7) S CORPORATION REPAYMENT OF LOANS FOR QUALIFYING

EMPLOYER SECURITIES.—A plan shall not be treated as violating the requirements of section 401 or 409 or subsection 

(e)(7), or as engaging in a prohibited transaction for purposes 

of subsection (d)(3), merely by reason of any distribution (as 

described in section 1368(a)) with respect to S corporation 

stock that constitutes qualifying employer securities, which in 

accordance with the plan provisions is used to make payments 

on a loan described in subsection (d)(3) the proceeds of which 

were used to acquire such qualifying employer securities 

(whether or not allocated to participants). The preceding sentence shall not apply in the case of a distribution which is paid 

with respect to any employer security which is allocated to a 

participant unless the plan provides that employer securities 

with a fair market value of not less than the amount of such 

distribution are allocated to such participant for the year 

which (but for the preceding sentence) such distribution would 

have been allocated to such participant. 

(8) PROVISION OF INVESTMENT ADVICE TO PARTICIPANT AND

BENEFICIARIES.— 

(A) IN GENERAL.—The prohibitions provided in subsection (c) shall not apply to transactions described in subsection (d)(17) if the investment advice provided by a fiduciary adviser is provided under an eligible investment advice arrangement. 

(B) ELIGIBLE INVESTMENT ADVICE ARRANGEMENT.—For 

purposes of this paragraph, the term ‘‘eligible investment 

advice arrangement’’ means an arrangement— 

(i) which either— 

(I) provides that any fees (including any commission or other compensation) received by the fiduciary adviser for investment advice or with respect to the sale, holding, or acquisition of any security or other property for purposes of investment of plan assets do not vary depending on the 

basis of any investment option selected, or 

(II) uses a computer model under an investment 

advice program meeting the requirements of subparagraph (C) in connection with the provision of 

investment advice by a fiduciary adviser to a participant or beneficiary, and 

(ii) with respect to which the requirements of subparagraphs (D), (E), (F), (G), (H), and (I) are met. 

(C) INVESTMENT ADVICE PROGRAM USING COMPUTER

MODEL.— 

(i) IN GENERAL.—An investment advice program 

meets the requirements of this subparagraph if the requirements of clauses (ii), (iii), and (iv) are met. 

(ii) COMPUTER MODEL.—The requirements of this 

clause are met if the investment advice provided 

under the investment advice program is provided pursuant to a computer model that— 

(I) applies generally accepted investment theories that take into account the historic returns of 

469 

different asset classes over defined periods of 

time, 

(II) utilizes relevant information about the participant, which may include age, life expectancy, 

retirement age, risk tolerance, other assets or 

sources of income, and preferences as to certain 

types of investments, 

(III) utilizes prescribed objective criteria to provide asset allocation portfolios comprised of investment options available under the plan, 

(IV) operates in a manner that is not biased in 

favor of investments offered by the fiduciary adviser or a person with a material affiliation or contractual relationship with the fiduciary adviser, 

and 

(V) takes into account all investment options 

under the plan in specifying how a participant’s 

account balance should be invested and is not inappropriately weighted with respect to any investment option. 

(iii) CERTIFICATION.— (I) IN GENERAL.—The requirements of this 

clause are met with respect to any investment advice program if an eligible investment expert certifies, prior to the utilization of the computer 

model and in accordance with rules prescribed by 

the Secretary of Labor, that the computer model 

meets the requirements of clause (ii). 

(II) RENEWAL OF CERTIFICATIONS.—If, as determined under regulations prescribed by the Secretary of Labor, there are material modifications 

to a computer model, the requirements of this 

clause are met only if a certification described in 

subclause (I) is obtained with respect to the computer model as so modified. 

(III) ELIGIBLE INVESTMENT EXPERT.—The term 

‘‘eligible investment expert’’ means any person 

which meets such requirements as the Secretary 

of Labor may provide and which does not bear any 

material affiliation or contractual relationship 

with any investment adviser or a related person 

thereof (or any employee, agent, or registered representative of the investment adviser or related 

person). 

(iv) EXCLUSIVITY OF RECOMMENDATION.—The requirements of this clause are met with respect to any 

investment advice program if— 

(I) the only investment advice provided under 

the program is the advice generated by the computer model described in clause (ii), and 

(II) any transaction described in subsection 

(d)(17)(A)(ii) occurs solely at the direction of the 

participant or beneficiary. 

Nothing in the preceding sentence shall preclude the participant or beneficiary from requesting investment advice 

470 

other than that described in clause (i), but only if such request has not been solicited by any person connected with 

carrying out the arrangement. 

(D) EXPRESS AUTHORIZATION BY SEPARATE FIDUCIARY.— The requirements of this subparagraph are met with respect to an arrangement if the arrangement is expressly 

authorized by a plan fiduciary other than the person offering the investment advice program, any person providing 

investment options under the plan, or any affiliate of either. 

(E) AUDITS.— (i) IN GENERAL.—The requirements of this subparagraph are met if an independent auditor, who has appropriate technical training or experience and proficiency and so represents in writing— 

(I) conducts an annual audit of the arrangement 

for compliance with the requirements of this paragraph, and 

(II) following completion of the annual audit, 

issues a written report to the fiduciary who authorized use of the arrangement which presents 

its specific findings regarding compliance of the 

arrangement with the requirements of this paragraph. 

(ii) SPECIAL RULE FOR INDIVIDUAL RETIREMENT AND

SIMILAR PLANS.—In the case of a plan described in 

subparagraphs (B) through (F) (and so much of subparagraph (G) as relates to such subparagraphs) of 

subsection (e)(1), in lieu of the requirements of clause 

(i), audits of the arrangement shall be conducted at 

such times and in such manner as the Secretary of 

Labor may prescribe. 

(iii) INDEPENDENT AUDITOR.—For purposes of this 

subparagraph, an auditor is considered independent if 

it is not related to the person offering the arrangement to the plan and is not related to any person providing investment options under the plan. 

(F) DISCLOSURE.—The requirements of this subparagraph are met if— 

(i) the fiduciary adviser provides to a participant or 

a beneficiary before the initial provision of the investment advice with regard to any security or other property offered as an investment option, a written notification (which may consist of notification by means of 

electronic communication)— 

(I) of the role of any party that has a material 

affiliation or contractual relationship with the fiduciary adviser in the development of the investment advice program and in the selection of investment options available under the plan, 

(II) of the past performance and historical rates 

of return of the investment options available 

under the plan, 

(III) of all fees or other compensation relating to 

the advice that the fiduciary adviser or any affilVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00476 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
471 

iate thereof is to receive (including compensation 

provided by any third party) in connection with 

the provision of the advice or in connection with 

the sale, acquisition, or holding of the security or 

other property, 

(IV) of any material affiliation or contractual relationship of the fiduciary adviser or affiliates 

thereof in the security or other property, 

(V) of the manner, and under what circumstances, any participant or beneficiary information provided under the arrangement will be 

used or disclosed, 

(VI) of the types of services provided by the fiduciary adviser in connection with the provision of 

investment advice by the fiduciary adviser, 

(VII) that the adviser is acting as a fiduciary of 

the plan in connection with the provision of the 

advice, and 

(VIII) that a recipient of the advice may separately arrange for the provision of advice by another adviser, that could have no material affiliation with and receive no fees or other compensation in connection with the security or other property, and 

(ii) at all times during the provision of advisory 

services to the participant or beneficiary, the fiduciary 

adviser— 

(I) maintains the information described in 

clause (i) in accurate form and in the manner described in subparagraph (H), 

(II) provides, without charge, accurate information to the recipient of the advice no less frequently than annually, 

(III) provides, without charge, accurate information to the recipient of the advice upon request of 

the recipient, and 

(IV) provides, without charge, accurate information to the recipient of the advice concerning any 

material change to the information required to be 

provided to the recipient of the advice at a time 

reasonably contemporaneous to the change in information. 

(G) OTHER CONDITIONS.—The requirements of this subparagraph are met if— 

(i) the fiduciary adviser provides appropriate disclosure, in connection with the sale, acquisition, or holding of the security or other property, in accordance 

with all applicable securities laws, 

(ii) the sale, acquisition, or holding occurs solely at 

the direction of the recipient of the advice, 

(iii) the compensation received by the fiduciary adviser and affiliates thereof in connection with the sale, 

acquisition, or holding of the security or other property 

is reasonable, and 

472 

(iv) the terms of the sale, acquisition, or holding of 

the security or other property are at least as favorable 

to the plan as an arm’s length transaction would be. 

(H) STANDARDS FOR PRESENTATION OF INFORMATION.— 

(i) IN GENERAL.—The requirements of this subparagraph are met if the notification required to be provided to participants and beneficiaries under subparagraph (F)(i) is written in a clear and conspicuous manner and in a manner calculated to be understood by 

the average plan participant and is sufficiently accurate and comprehensive to reasonably apprise such 

participants and beneficiaries of the information required to be provided in the notification. 

(ii) MODEL FORM FOR DISCLOSURE OF FEES AND

OTHER COMPENSATION.—The Secretary of Labor shall 

issue a model form for the disclosure of fees and other 

compensation required in subparagraph (F)(i)(III) 

which meets the requirements of clause (i). 

(I) MAINTENANCE FOR 6 YEARS OF EVIDENCE OF COMPLIANCE.—The requirements of this subparagraph are met if 

a fiduciary adviser who has provided advice referred to in 

subparagraph (A) maintains, for a period of not less than 

6 years after the provision of the advice, any records necessary for determining whether the requirements of the 

preceding provisions of this paragraph and of subsection 

(d)(17) have been met. A transaction prohibited under subsection (c) shall not be considered to have occurred solely 

because the records are lost or destroyed prior to the end 

of the 6-year period due to circumstances beyond the control of the fiduciary adviser. 

(J) DEFINITIONS.—For purposes of this paragraph and 

subsection (d)(17)— 

(i) FIDUCIARY ADVISER.—The term ‘‘fiduciary adviser’’ means, with respect to a plan, a person who is 

a fiduciary of the plan by reason of the provision of investment advice referred to in subsection (e)(3)(B) by 

the person to a participant or beneficiary of the plan 

and who is— 

(I) registered as an investment adviser under 

the Investment Advisers Act of 1940 (15 U.S.C. 

80b–1 et seq.) or under the laws of the State in 

which the fiduciary maintains its principal office 

and place of business, 

(II) a bank or similar financial institution referred to in subsection (d)(4) or a savings association (as defined in section 3(b)(1) of the Federal 

Deposit Insurance Act (12 U.S.C. 1813(b)(1)), but 

only if the advice is provided through a trust department of the bank or similar financial institution or savings association which is subject to 

periodic examination and review by Federal or 

State banking authorities, 

(III) an insurance company qualified to do business under the laws of a State, 

473 

(IV) a person registered as a broker or dealer 

under the Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.), 

(V) an affiliate of a person described in any of 

subclauses (I) through (IV), or 

(VI) an employee, agent, or registered representative of a person described in subclauses (I) 

through (V) who satisfies the requirements of applicable insurance, banking, and securities laws 

relating to the provision of the advice. 

For purposes of this title, a person who develops the computer model described in subparagraph (C)(ii) or markets 

the investment advice program or computer model shall be 

treated as a person who is a fiduciary of the plan by reason of the provision of investment advice referred to in 

subsection (e)(3)(B) to a participant or beneficiary and 

shall be treated as a fiduciary adviser for purposes of this 

paragraph and subsection (d)(17), except that the Secretary of Labor may prescribe rules under which only 1 fiduciary adviser may elect to be treated as a fiduciary with 

respect to the plan. 

(ii) AFFILIATE.—The term ‘‘affiliate’’ of another entity means an affiliated person of the entity (as defined 

in section 2(a)(3) of the Investment Company Act of 

1940 (15 U.S.C. 80a–2(a)(3))). 

(iii) REGISTERED REPRESENTATIVE.—The term ‘‘registered representative’’ of another entity means a person described in section 3(a)(18) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(18)) (substituting 

the entity for the broker or dealer referred to in such 

section) or a person described in section 202(a)(17) of 

the Investment Advisers Act of 1940 (15 U.S.C. 80b– 

2(a)(17)) (substituting the entity for the investment 

adviser referred to in such section). 

(9) BLOCK TRADE.—The term ‘‘block trade’’ means any trade 

of at least 10,000 shares or with a market value of at least 

$200,000 which will be allocated across two or more unrelated 

client accounts of a fiduciary. 

(10) ADEQUATE CONSIDERATION.—The term ‘‘adequate consideration’’ means— 

(A) in the case of a security for which there is a generally recognized market— 

(i) the price of the security prevailing on a national 

securities exchange which is registered under section 

6 of the Securities Exchange Act of 1934, taking into 

account factors such as the size of the transaction and 

marketability of the security, or 

(ii) if the security is not traded on such a national 

securities exchange, a price not less favorable to the 

plan than the offering price for the security as established by the current bid and asked prices quoted by 

persons independent of the issuer and of the party in 

interest, taking into account factors such as the size of 

the transaction and marketability of the security, and 

474 

(B) in the case of an asset other than a security for 

which there is a generally recognized market, the fair market value of the asset as determined in good faith by a fiduciary or fiduciaries in accordance with regulations prescribed by the Secretary of Labor. 

(11) CORRECTION PERIOD.— (A) IN GENERAL.—For purposes of subsection (d)(23), the 

term ‘‘correction period’’ means the 14-day period beginning on the date on which the disqualified person discovers, or reasonably should have discovered, that the 

transaction would (without regard to this paragraph and 

subsection (d)(23)) constitute a prohibited transaction. 

(B) EXCEPTIONS.— 

(i) EMPLOYER SECURITIES.—Subsection (d)(23) does 

not apply to any transaction between a plan and a 

plan sponsor or its affiliates that involves the acquisition or sale of an employer security (as defined in section 407(d)(1) of the Employee Retirement Income Security Act of 1974) or the acquisition, sale, or lease of 

employer real property (as defined in section 407(d)(2) 

of such Act). 

(ii) KNOWING PROHIBITED TRANSACTION.—In the case 

of any disqualified person, subsection (d)(23) does not 

apply to a transaction if, at the time the transaction 

is entered into, the disqualified person knew (or reasonably should have known) that the transaction 

would (without regard to this paragraph) constitute a 

prohibited transaction. 

(C) ABATEMENT OF TAX WHERE THERE IS A CORRECTION.—If a transaction is not treated as a prohibited transaction by reason of subsection (d)(23), then no tax under 

subsections (a) and (b) shall be assessed with respect to 

such transaction, and if assessed the assessment shall be 

abated, and if collected shall be credited or refunded as an 

overpayment. 

(D) DEFINITIONS.—For purposes of this paragraph and 

subsection (d)(23)— 

(i) SECURITY.—The term ‘‘security’’ has the meaning 

given such term by section 475(c)(2) (without regard to 

subparagraph (F)(iii) and the last sentence thereof). 

(ii) COMMODITY.—The term ‘‘commodity’’ has the 

meaning given such term by section 475(e)(2) (without 

regard to subparagraph (D)(iii) thereof). 

(iii) CORRECT.—The term ‘‘correct’’ means, with respect to a transaction— 

(I) to undo the transaction to the extent possible 

and in any case to make good to the plan or affected account any losses resulting from the transaction, and 

(II) to restore to the plan or affected account 

any profits made through the use of assets of the 

plan. 

(g) APPLICATION OF SECTION.—This section shall not apply— 

(1) in the case of a plan to which a guaranteed benefit policy 

(as defined in section 401(b)(2)(B) of the Employee Retirement 

475 

Income Security Act of 1974) is issued, to any assets of the insurance company, insurance service, or insurance organization 

merely because of its issuance of such policy; 

(2) to a governmental plan (within the meaning of section 

414(d)); or 

(3) to a church plan (within the meaning of section 414(e)) 

with respect to which the election provided by section 410(d) 

has not been made. 

In the case of a plan which invests in any security issued by an 

investment company registered under the Investment Company Act 

of 1940, the assets of such plan shall be deemed to include such 

security but shall not, by reason of such investment, be deemed to 

include any assets of such company. 

(h) NOTIFICATION OF SECRETARY OF LABOR.—Before sending a notice of deficiency with respect to the tax imposed by subsection (a) 

or (b), the Secretary shall notify the Secretary of Labor and provide 

him a reasonable opportunity to obtain a correction of the prohibited transaction or to comment on the imposition of such tax. 

(i) CROSS REFERENCE.—For provisions concerning coordination 

procedures between Secretary of Labor and Secretary of the Treasury with respect to application of tax imposed by this section and 

for authority to waive imposition of the tax imposed by subsection 

(b), see section 3003 of the Employee Retirement Income Security 

Act of 1974. 

* * * * * * * 

Subtitle E—Alcohol, Tobacco, and Certain 

Other Excise Taxes 

* * * * * * * 

CHAPTER 52—TOBACCO PRODUCTS AND 

CIGARETTE PAPERS AND TUBES 

* * * * * * * 

Subchapter D—OCCUPATIONAL TAX 

* * * * * * * 

SEC. 5733. PROVISIONS RELATING TO LIABILITY FOR OCCUPATIONAL 

TAXES. 

(a) PARTNERS.—Any number of persons doing business in partnership at any one place shall be required to pay but one special 

tax. 

(b) DIFFERENT BUSINESSES OF SAME OWNERSHIP AND LOCATION.— 

Whenever more than one of the pursuits or occupations described 

in this subchapter are carried on in the same place by the same 

person at the same time, except as otherwise provided in this subchapter, the tax shall be paid for each according to the rates severally prescribed. 

(c) BUSINESSES IN MORE THAN ONE LOCATION.— 

(1) LIABILITY FOR TAX.—The payment of a special tax imposed by this subchapter shall not exempt from an additional 

476 

special tax the person carrying on a trade or business in any 

other place than that stated in the register kept in the office 

of the official in charge of the internal revenue district. 

(2) STORAGE.—Nothing contained in paragraph (1) shall require a special tax for the storage of tobacco products and cigarette papers and tubes at a location other than the place where 

tobacco products and cigarette papers and tubes are sold or offered for sale. 

(3) DEFINITION OF PLACE.—The term ‘‘place’’ as used in this 

section means the entire office, plant or area of the business 

in any one location under the same proprietorship; and passageways, streets, highways, rail crossings, waterways, or partitions dividing the premises, shall not be deemed sufficient 

separation to require additional special tax, if the various divisions are otherwise contiguous. 

(d) DEATH OR CHANGE OF LOCATION.—Certain persons, other than 

the person who has paid the special tax under this subchapter for 

the carrying on of any business at any place, may secure the right 

to carry on, without incurring additional special tax, the same business at the same place for the remainder of the taxable period for 

which the special tax was paid. The persons who may secure such 

right are: 

(1) the surviving spouse or child, or executor or administrator or other legal representative, of a deceased taxpayer; 

(2) a øhusband or wife¿ married individual succeeding to the 

business of his or her living spouse; 

(3) a receiver or trustee in bankruptcy, or an assignee for 

benefit of creditors; and 

(4) the partner or partners remaining after death or withdrawal of a member of a partnership. 

When any person moves to any place other than the place for 

which special tax was paid for the carrying on of any business, he 

may secure the right to carry on, without incurring additional special tax, the same business at his new location for the remainder 

of the taxable period for which the special tax was paid. To secure 

the right to carry on the business without incurring additional special tax, the successor, or the person relocating his business, must 

register the succession or relocation with the Secretary in accordance with regulations prescribed by the Secretary. 

(e) FEDERAL AGENCIES OR INSTRUMENTALITIES.—Any tax imposed 

by this subchapter shall apply to any agency or instrumentality of 

the United States unless such agency or instrumentality is granted 

by statute a specific exemption from such tax. 

* * * * * * * 

Subtitle F—Procedure and Administration 

* * * * * * * 

CHAPTER 61—INFORMATION AND RETURNS 

* * * * * * * 

477 

Subchapter A—RETURNS AND RECORDS 

* * * * * * * 

PART II—TAX RETURNS OR STATEMENTS 

* * * * * * * 

Subpart B—INCOME TAX RETURNS 

Sec 6012. Persons required to make returns of income. 

øSec. 6013. Joint returns of income tax by husband and wife.¿ 

Sec. 6013. Joint returns of income tax by a married couple. 

* * * * * * * 

SEC. 6012. PERSONS REQUIRED TO MAKE RETURNS OF INCOME. 

(a) GENERAL RULE.—Returns with respect to income taxes under 

subtitle A shall be made by the following: 

(1)(A) Every individual having for the taxable year gross income which equals or exceeds the exemption amount, except 

that a return shall not be required of an individual— 

(i) who is not married (determined by applying section 

7703), is not a surviving spouse (as defined in section 2(a)), 

is not a head of a household (as defined in section 2(b)), 

and for the taxable year has gross income of less than the 

sum of the exemption amount plus the basic standard deduction applicable to such an individual, 

(ii) who is a head of a household (as so defined) and for 

the taxable year has gross income of less than the sum of 

the exemption amount plus the basic standard deduction 

applicable to such an individual, 

(iii) who is a surviving spouse (as so defined) and for the 

taxable year has gross income of less than the sum of the 

exemption amount plus the basic standard deduction applicable to such an individual, or 

(iv) who is entitled to make a joint return and whose 

gross income, when combined with the gross income of 

øhis spouse¿ the individual’s spouse , is, for the taxable 

year, less than the sum of twice the exemption amount 

plus the basic standard deduction applicable to a joint return, but only if such individual and øhis spouse¿ the individual’s spouse , at the close of the taxable year, had the 

same household as their home. 

Clause (iv) shall not apply if for the taxable year such spouse 

makes a separate return or any other taxpayer is entitled to 

an exemption for such spouse under section 151(c). 

(B) The amount specified in clause (i), (ii), or (iii) of subparagraph (A) shall be increased by the amount of 1 additional 

standard deduction (within the meaning of section 63(c)(3)) in 

the case of an individual entitled to such deduction by reason 

of section 63(f)(1)(A) (relating to individuals age 65 or more), 

and the amount specified in clause (iv) of subparagraph (A) 

shall be increased by the amount of the additional standard deduction for each additional standard deduction to which the individual or øhis spouse¿ the individual’s spouse is entitled by 

reason of section 63(f)(1). 

478 

(C) The exception under subparagraph (A) shall not apply to 

any individual— 

(i) who is described in section 63(c)(5) and who has— 

(I) income (other than earned income) in excess of 

the sum of the amount in effect under section 

63(c)(5)(A) plus the additional standard deduction (if 

any) to which the individual is entitled, or 

(II) total gross income in excess of the standard deduction, or 

(ii) for whom the standard deduction is zero under section 63(c)(6). 

(D) For purposes of this subsection— 

(i) The terms ‘‘standard deduction’’, ‘‘basic standard deduction’’ and ‘‘additional standard deduction’’ have the respective meanings given such terms by section 63(c). 

(ii) The term ‘‘exemption amount’’ has the meaning given 

such term by section 151(d). In the case of an individual 

described in section 151(d)(2), the exemption amount shall 

be zero. 

(2) Every corporation subject to taxation under subtitle A; 

(3) Every estate the gross income of which for the taxable year is $600 or more; 

(4) Every trust having for the taxable year any taxable in- come, or having gross income of $600 or over, regardless of the 

amount of taxable income; 

(5) Every estate or trust of which any beneficiary is a nonresident alien; 

(6) Every political organization (within the meaning of section 527(e)(1)), and every fund treated under section 527(g) as 

if it constituted a political organization, which has political organization taxable income (within the meaning of section 

527(c)(1)) for the taxable year; 

(7) Every homeowners association (within the meaning of 

section 528(c)(1)) which has homeowners association taxable 

income (within the meaning of section 528(d)) for the taxable 

year; and 

(8) Every estate of an individual under chapter 7 or 11 of 

title 11 of the United States Code (relating to bankruptcy) the 

gross income of which for the taxable year is not less than the 

sum of the exemption amount plus the basic standard deduction under section 63(c)(2)(C); 

except that subject to such conditions, limitations, and exceptions 

and under such regulations as may be prescribed by the Secretary, 

nonresident alien individuals subject to the tax imposed by section 

871 and foreign corporations subject to the tax imposed by section 

881 may be exempted from the requirement of making returns 

under this section. 

(b) RETURNS MADE BY FIDUCIARIES AND RECEIVERS.— 

(1) RETURNS OF DECEDENTS.—If an individual is deceased, 

the return of such individual required under subsection (a) 

shall be made by his executor, administrator, or other person 

charged with the property of such decedent. 

(2) PERSONS UNDER A DISABILITY.—If an individual is unable 

to make a return required under subsection (a), the return of 

such individual shall be made by a duly authorized agent, his 

479 

committee, guardian, fiduciary or other person charged with 

the care of the person or property of such individual. The preceding sentence shall not apply in the case of a receiver appointed by authority of law in possession of only a part of the 

property of an individual. 

(3) RECEIVERS, TRUSTEES AND ASSIGNEES FOR CORPORATIONS.—In a case where a receiver, trustee in a case under 

title 11 of the United States Code, or assignee, by order of a 

court of competent jurisdiction, by operation of law or otherwise, has possession of or holds title to all or substantially all 

the property or business of a corporation, whether or not such 

property or business is being operated, such receiver, trustee, 

or assignee shall make the return of income for such corporation in the same manner and form as corporations are required 

to make such returns. 

(4) RETURNS OF ESTATES AND TRUSTS.—Returns of an estate, 

a trust, or an estate of an individual under chapter 7 or 11 of 

title 11 of the United States Code shall be made by the fiduciary thereof. 

(5) JOINT FIDUCIARIES.—Under such regulations as the Secretary may prescribe, a return made by one of two or more 

joint fiduciaries shall be sufficient compliance with the requirements of this section. A return made pursuant to this paragraph shall contain a statement that the fiduciary has sufficient knowledge of the affairs of the person for whom the return is made to enable him to make the return, and that the 

return is, to the best of his knowledge and belief, true and correct. 

(6) IRA SHARE OF PARTNERSHIP INCOME.—In the case of a 

trust which is exempt from taxation under section 408(e), for 

purposes of this section, the trust’s distributive share of items 

of gross income and gain of any partnership to which subchapter C or D of chapter 63 applies shall be treated as equal 

to the trust’s distributive share of the taxable income of such 

partnership. 

(c) CERTAIN INCOME EARNED ABROAD OR FROM SALE OF RESIDENCE.—For purposes of this section, gross income shall be computed without regard to the exclusion provided for in section 121 

(relating to gain from sale of principal residence) and without regard to the exclusion provided for in section 911 (relating to citizens or residents of the United States living abroad). 

(d) TAX-EXEMPT INTEREST REQUIRED TO BE SHOWN ON RETURN.— 

Every person required to file a return under this section for the 

taxable year shall include on such return the amount of interest received or accrued during the taxable year which is exempt from the 

tax imposed by chapter 1. 

(e) CONSOLIDATED RETURNS.—For provisions relating to consolidated returns by affiliated corporations, see chapter 6. 

(f) SPECIAL RULE FOR TAXABLE YEARS 2018 THROUGH 2025.—In 

the case of a taxable year beginning after December 31, 2017, and 

before January 1, 2026, subsection (a)(1) shall not apply, and every 

individual who has gross income for the taxable year shall be required to make returns with respect to income taxes under subtitle 

A, except that a return shall not be required of— 

480 

(1) an individual who is not married (determined by applying 

section 7703) and who has gross income for the taxable year 

which does not exceed the standard deduction applicable to 

such individual for such taxable year under section 63, or 

(2) an individual entitled to make a joint return if— 

(A) the gross income of such individual, when combined 

with the gross income of such individual’s spouse, for the 

taxable year does not exceed the standard deduction which 

would be applicable to the taxpayer for such taxable year 

under section 63 if such individual and such individual’s 

spouse made a joint return, 

(B) such individual and such individual’s spouse have 

the same household as their home at the close of the taxable year, 

(C) such individual’s spouse does not make a separate 

return, and 

(D) neither such individual nor such individual’s spouse 

is an individual described in section 63(c)(5) who has income (other than earned income) in excess of the amount 

in effect under section 63(c)(5)(A). 

SEC. 6013. øJOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE¿ 

JOINT RETURNS OF INCOME TAX BY A MARRIED COUPLE 

. 

(a) JOINT RETURNS.—A øhusband and wife¿ married couple may 

make a single return jointly of income taxes under subtitle A, even 

though one of the spouses has neither gross income nor deductions, 

except as provided below: 

(1) no joint return shall be made if øeither the husband or 

wife¿ either spouse at any time during the taxable year is a 

nonresident alien; 

(2) no joint return shall be made if the øhusband and wife¿ 

spouses have different taxable years; except that if such taxable years begin on the same day and end on different days because of the death of either or both, then the joint return may 

be made with respect to the taxable year of each. The above 

exception shall not apply if the surviving spouse remarries before the close of øhis taxable year¿ such spouse’s taxable year 

, nor if the taxable year of either spouse is a fractional part 

of a year under section 443(a)(1); 

(3) in the case of death of one spouse or both spouses the 

joint return with respect to the decedent may be made only by 

øhis executor or administrator¿ the decedent’s executor or administrator ; except that in the case of the death of one spouse 

the joint return may be made by the surviving spouse øwith 

respect to both himself and the decedent¿ with respect to both 

the surviving spouse and the decedent if no return for the taxable year has been made by the decedent, no executor or administrator has been appointed, and no executor or administrator is appointed before the last day prescribed by law for filing the return of the surviving spouse. If an executor or administrator of the decedent is appointed after the making of the 

joint return by the surviving spouse, the executor or administrator may disaffirm such joint return by making, within 1 

year after the last day prescribed by law for filing the return 

of the surviving spouse, a separate return for the taxable year 

481 

of the decedent with respect to which the joint return was 

made, in which case the return made by the survivor shall 

øconstitute his separate return¿ constitute the survivor’s separate return . (b) JOINT RETURN AFTER FILING SEPARATE RETURN.— ø(1) IN GENERAL.—Except as provided in paragraph (2), if an 

individual has filed a separate return for a taxable year for 

which a joint return could have been made by him and his 

spouse under subsection (a) and the time prescribed by law for 

filing the return for such taxable year has expired, such individual and his spouse may nevertheless make a joint return for 

such taxable year. A joint return filed by the husband and wife 

under this subsection shall constitute the return of the husband and wife for such taxable year, and all payments, credits, 

refunds, or other repayments made or allowed with respect to 

the separate return of either spouse for such taxable year shall 

be taken into account in determining the extent to which the 

tax based upon the joint return has been paid. If a joint return 

is made under this subsection, any election (other than the 

election to file a separate return) made by either spouse in his 

separate return for such taxable year with respect to the treatment of any income, deduction, or credit of such spouse shall 

not be changed in the making of the joint return where such 

election would have been irrevocable if the joint return had not 

been made. If a joint return is made under this subsection 

after the death of either spouse, such return with respect to 

the decedent can be made only by his executor or administrator.¿ 

(1) IN GENERAL.—Except as provided in paragraph (2), if an 

individual has filed a separate return for a taxable year for 

which a joint return could have been made by the individual 

and the individual’s spouse under subsection (a) and the time 

prescribed by law for filing the return for such taxable year has 

expired, such individual and such spouse may nevertheless 

make a joint return for such taxable year. A joint return filed 

under this subsection shall constitute the return of the individual and the individual’s spouse for such taxable year, and 

all payments, credits, refunds, or other repayments made or allowed with respect to the separate return of either spouse for 

such taxable year shall be taken into account in determining 

the extent to which the tax based upon the joint return has been 

paid. If a joint return is made under this subsection, any election (other than the election to file a separate return) made by 

either spouse in a separate return for such taxable year with respect to the treatment of any income, deduction, or credit of 

such spouse shall not be changed in the making of the joint return where such election would have been irrevocable if the 

joint return had not been made. If a joint return is made under 

this subsection after the death of either spouse, such return with 

respect to the decedent can be made only by the decedent’s executor or administrator. 

(2) LIMITATIONS FOR MAKING OF ELECTION.—The election provided for in paragraph (1) may not be made— 

(A) after the expiration of 3 years from the last date prescribed by law for filing the return for such taxable year 

482 

(determined without regard to any extension of time granted to either spouse); or 

(B) after there has been mailed to either spouse, with respect to such taxable year, a notice of deficiency under section 6212, if the spouse, as to such notice, files a petition 

with the Tax Court within the time prescribed in section 

6213; or 

(C) after either spouse has commenced a suit in any 

court for the recovery of any part of the tax for such taxable year; or 

(D) after either spouse has entered into a closing agreement under section 7121 with respect to such taxable year, 

or after any civil or criminal case arising against either 

spouse with respect to such taxable year has been compromised under section 7122. 

(3) WHEN RETURN DEEMED FILED.— 

(A) ASSESSMENT AND COLLECTION.—For purposes of section 6501 (relating to periods of limitations on assessment 

and collection), and for purposes of section 6651 (relating 

to delinquent returns), a joint return made under this subsection shall be deemed to have been filed— 

(i) Where both spouses filed separate returns prior 

to making the joint return—on the date the last separate return was filed (but not earlier than the last 

date prescribed by law for filing the return of either 

spouse); 

(ii) Where only one spouse filed a separate return 

prior to the making of the joint return, and the other 

spouse had less than the exemption amount of gross 

income for such taxable year—on the date of the filing 

of such separate return (but not earlier than the last 

date prescribed by law for the filing of such separate 

return); or 

(iii) Where only one spouse filed a separate return 

prior to the making of the joint return, and the other 

spouse had gross income of the exemption amount or 

more for such taxable year—on the date of the filing 

of such joint return. 

For purposes of this subparagraph, the term ‘‘exemption 

amount’’ has the meaning given to such term by section 

151(d). For purposes of clauses (ii) and (iii), if the spouse 

whose gross income is being compared to the exemption 

amount is 65 or over, such clauses shall be applied by substituting ‘‘the sum of the exemption amount and the additional standard deduction under section 63(c)(2) by reason 

of section 63(f)(1)(A)’’ for ‘‘the exemption amount’’. 

(B) CREDIT OR REFUND.—For purposes of section 6511, a 

joint return made under this subsection shall be deemed 

to have been filed on the last date prescribed by law for 

filing the return for such taxable year (determined without 

regard to any extension of time granted to either spouse). 

(4) ADDITIONAL TIME FOR ASSESSMENT.—If a joint return is 

made under this subsection, the periods of limitations provided 

in sections 6501 and 6502 on the making of assessments and 

the beginning of levy or a proceeding in court for collection 

483 

shall with respect to such return include one year immediately 

after the date of the filing of such joint return (computed without regard to the provisions of paragraph (3)). 

(5) ADDITIONS TO THE TAX AND PENALTIES.— 

(A) COORDINATION WITH PART II OF SUBCHAPTER A OF

CHAPTER 68.—For purposes of part II of subchapter A of 

chapter 68, where the sum of the amounts shown as tax 

on the separate returns of each spouse is less than the 

amount shown as tax on the joint return made under this 

subsection— 

(i) such sum shall be treated as the amount shown 

on the joint return, 

(ii) any negligence (or disregard of rules or regulations) on either separate return shall be treated as 

negligence (or such disregard) on the joint return, and 

(iii) any fraud on either separate return shall be 

treated as fraud on the joint return. 

(B) CRIMINAL PENALTY.—For purposes of section 7206(1) 

and (2) and section 7207 (relating to criminal penalties in 

the case of fraudulent returns) the term ‘‘return’’ includes 

a separate return filed by a spouse with respect to a taxable year for which a joint return is made under this subsection after the filing of such separate return. 

(c) TREATMENT OF JOINT RETURN AFTER DEATH OF EITHER

SPOUSE.—For purposes of sections 15, 443, and 7851(a)(1)(A), 

where the øhusband and wife¿ spouses have different taxable years 

because of the death of either spouse, the joint return shall be 

treated as if the taxable years of both spouses ended on the date 

of the closing of the surviving spouse’s taxable year. 

(d) SPECIAL RULES.—For purposes of this section— 

(1) the østatus as husband and wife¿ the marital status with 

respect to each other of two individuals having taxable years 

beginning on the same day shall be determined— 

(A) if both have the same taxable year—as of the close 

of such year; or 

(B) if one dies before the close of the taxable year of the 

other—as of the time of such death; 

(2) an individual who is legally separated from øhis spouse¿ 

the spouse of the individual under a decree of divorce or of separate maintenance shall not be considered as married; and 

(3) if a joint return is made, the tax shall be computed on 

the aggregate income and the liability with respect to the tax 

shall be joint and several. 

(f) JOINT RETURN WHERE INDIVIDUAL IS IN MISSING STATUS.—For 

purposes of this section and subtitle A— 

(1) ELECTION BY SPOUSE.—If— 

(A) an individual is in a missing status (within the 

meaning of paragraph (3)) as a result of service in a combat zone (as determined for purposes of section 112), and 

(B) the spouse of such individual is otherwise entitled to 

file a joint return for any taxable year which begins on or 

before the day which is 2 years after the date designated 

under section 112 as the date of termination of combatant 

activities in such zone, 

484 

then such spouse may elect under subsection (a) to file a joint 

return for such taxable year. With respect to service in the 

combat zone designated for purposes of the Vietnam conflict, 

such election may be made for any taxable year while an individual is in missing status. 

(2) EFFECT OF ELECTION.—If the spouse of an individual described in paragraph (1)(A) elects to file a joint return under 

subsection (a) for a taxable year, then, until such election is revoked— 

(A) such election shall be valid even if such individual 

died before the beginning of such year, and 

(B) except for purposes of section 692 (relating to income 

taxes of members of the Armed Forces, astronauts, and 

victims of certain terrorist attacks on death), the income 

tax liability of øsuch individual, his spouse, and his estate 

shall be determined as if he were alive¿ such individual, 

the individual’s spouse, and the individual’s estate shall be 

determined as if the individual were alive throughout the 

taxable year. 

(3) MISSING STATUS.—For purposes of this subsection— 

(A) UNIFORMED SERVICES.—A member of a uniformed 

service (within the meaning of section 101(3) of title 37 of 

the United States Code) is in a missing status for any period øfor which he is entitled¿ for which such member is 

entitled to pay and allowances under section 552 of such 

title 37. 

(B) CIVILIAN EMPLOYEES.—An employee (within the 

meaning of section 5561(2) of title 5 of the United States 

Code) is in a missing status for any period øfor which he 

is entitled¿ for which such employee is entitled to pay and 

allowances under section 5562 of such title 5. 

(4) MAKING OF ELECTION; REVOCATION.—An election described in this subsection with respect to any taxable year may 

be made by filing a joint return in accordance with subsection 

(a) and under such regulations as may be prescribed by the 

Secretary. Such an election may be revoked by either spouse 

on or before the due date (including extensions) for such taxable year, and, in the case of an executor or administrator, 

may be revoked by disaffirming as provided in the last sentence of subsection (a)(3). 

(g) ELECTION TO TREAT NONRESIDENT ALIEN INDIVIDUAL AS RESIDENT OF THE UNITED STATES.— 

(1) IN GENERAL.—A nonresident alien individual with respect 

to whom this subsection is in effect for the taxable year shall 

be treated as a resident of the United States— 

(A) for purposes of chapter 1 for all of such taxable year, 

and 

(B) for purposes of chapter 24 (relating to wage withholding) for payments of wages made during such taxable 

year. 

(2) INDIVIDUALS WITH RESPECT TO WHOM THIS SUBSECTION IS

IN EFFECT.—This subsection shall be in effect with respect to 

any individual who, at the close of the taxable year for which 

an election under this subsection was made, was a nonresident 

alien individual married to a citizen or resident of the United 

485 

States, if both of them made such election to have the benefits 

of this subsection apply to them. 

(3) DURATION OF ELECTION.—An election under this subsection shall apply to the taxable year for which made and to 

all subsequent taxable years until terminated under paragraph 

(4) or (5); except that any such election shall not apply for any 

taxable year if neither spouse is a citizen or resident of the 

United States at any time during such year. 

(4) TERMINATION OF ELECTION.—An election under this subsection shall terminate at the earliest of the following times: 

(A) REVOCATION BY TAXPAYERS.—If either taxpayer revokes the election, as of the first taxable year for which 

the last day prescribed by law for filing the return of tax 

under chapter 1 has not yet occurred. 

(B) DEATH.—In the case of the death of either spouse, as 

of the beginning of the first taxable year of the spouse who 

survives following the taxable year in which such death occurred; except that if the spouse who survives is a citizen 

or resident of the United States who is a surviving spouse 

entitled to the benefits of section 2, the time provided by 

this subparagraph shall be as of the close of the last taxable year for which such individual is entitled to the benefits of section 2. 

(C) LEGAL SEPARATION.—In the case of the legal separation of the couple under a decree of divorce or of separate 

maintenance, as of the beginning of the taxable year in 

which such legal separation occurs. 

(D) TERMINATION BY SECRETARY.—At the time provided 

in paragraph (5). 

(5) TERMINATION BY SECRETARY.—The Secretary may terminate any election under this subsection for any taxable year if 

he determines that either spouse has failed— 

(A) to keep such books and records, 

(B) to grant such access to such books and records, or 

(C) to supply such other information, 

as may be reasonably necessary to ascertain the amount of liability for taxes under chapter 1 of either spouse for such taxable year. 

(6) ONLY ONE ELECTION.—If any election under this subsection for any two individuals is terminated under paragraph 

(4) or (5) for any taxable year, such two individuals shall be 

ineligible to make an election under this subsection for any 

subsequent taxable year. 

(h) JOINT RETURN, ETC., FOR YEAR IN WHICH NONRESIDENT ALIEN

BECOMES RESIDENT OF UNITED STATES.— 

(1) IN GENERAL.—If— 

(A) any individual is a nonresident alien individual at 

the beginning of any taxable year but is a resident of the 

United States at the close of such taxable year, 

(B) at the close of such taxable year, such individual is 

married to a citizen or resident of the United States, and 

(C) both individuals elect the benefits of this subsection 

at the time and in the manner prescribed by the Secretary 

by regulation, 

486 

then the individual referred to in subparagraph (A) shall be 

treated as a resident of the United States for purposes of chapter 1 for all of such taxable year, and for purposes of chapter 

24 (relating to wage withholding) for payments of wages made 

during such taxable year. 

(2) ONLY ONE ELECTION.—If any election under this subsection applies for any 2 individuals for any taxable year, such 

2 individuals shall be ineligible to make an election under this 

subsection for any subsequent taxable year. 

SEC. 6014. INCOME TAX RETURN—TAX NOT COMPUTED BY TAXPAYER. 

(a) ELECTION BY TAXPAYER.—An individual who does not itemize 

his deductions and who is not described in section 6012(a)(1)(C)(i), 

whose gross income is less than $10,000 and includes no income 

other than remuneration for services performed by him as an employee, dividends or interest, and whose gross income other than 

wages, as defined in section 3401(a), does not exceed $100, shall at 

his election not be required to show on the return the tax imposed 

by section 1. Such election shall be made by using the form prescribed for purposes of this section. In such case the tax shall be 

computed by the Secretary who shall mail to the taxpayer a notice 

stating the amount determined as payable. 

(b) REGULATIONS.—The Secretary shall prescribe regulations for 

carrying out this section, and such regulations may provide for the 

application of the rules of this section— 

(1) to cases where the gross income includes items other 

than those enumerated by subsection (a), 

(2) to cases where the gross income from sources other than 

wages on which the tax has been withheld at the source is 

more than $100, 

(3) to cases where the gross income is $10,000 or more, or 

(4) to cases where the taxpayer itemizes his deductions or 

where the taxpayer claims a reduced standard deduction by 

reason of section 63(c)(5). 

Such regulations shall provide for the application of this section in 

the case of øhusband and wife¿ a married couple , including provisions determining when a joint return under this section may be 

permitted or required, whether the liability shall be joint and several, and whether one spouse may make return under this section 

and the other without regard to this section. 

* * * * * * * 

SEC. 6017. SELF-EMPLOYMENT TAX RETURNS. 

Every individual (other than a nonresident alien individual) having net earnings from self-employment of $400 or more for the taxable year shall make a return with respect to the self-employment 

tax imposed by chapter 2. In the case of a øhusband and wife¿ 

married couple filing a joint return under section 6013, the tax imposed by chapter 2 shall not be computed on the aggregate income 

but shall be the sum of the taxes computed under such chapter on 

the separate self-employment income of each spouse. 

* * * * * * * 

PART III—INFORMATION RETURNS 

* * * * * * * 

487 

Subpart B—INFORMATION CONCERNING TRANSACTIONS 

WITH OTHER PERSONS 

* * * * * * * 

SEC. 6046. RETURNS AS TO ORGANIZATION OR REORGANIZATION OF 

FOREIGN CORPORATIONS AND AS TO ACQUISITIONS OF 

THEIR STOCK. 

(a) REQUIREMENT OF RETURN.— (1) IN GENERAL.—A return complying with the requirements 

of subsection (b) shall be made by— 

(A) each United States citizen or resident who becomes 

an officer or director of a foreign corporation if a United 

States person (as defined in section 7701(a)(30)) meets the 

stock ownership requirements of paragraph (2) with respect to such corporation, 

(B) each United States person— 

(i) who acquires stock which, when added to any 

stock owned on the date of such acquisition, meets the 

stock ownership requirements of paragraph (2) with 

respect to a foreign corporation, or 

(ii) who acquires stock which, without regard to 

stock owned on the date of such acquisition, meets the 

stock ownership requirements of paragraph (2) with 

respect to a foreign corporation, 

(C) each person (not described in subparagraph (B)) who 

is treated as a United States shareholder under section 

953(c) with respect to a foreign corporation, and 

(D) each person who becomes a United States person 

while meeting the stock ownership requirements of paragraph (2) with respect to stock of a foreign corporation. 

In the case of a foreign corporation with respect to which any 

person is treated as a United States shareholder under section 

953(c), subparagraph (A) shall be treated as including a reference to each United States person who is an officer or director of such corporation. 

(2) STOCK OWNERSHIP REQUIREMENTS.—A person meets the 

stock ownership requirements of this paragraph with respect 

to any corporation if such person owns 10 percent or more of— 

(A) the total combined voting power of all classes of 

stock of such corporation entitled to vote, or 

(B) the total value of the stock of such corporation. 

(b) FORM AND CONTENTS OF RETURNS.—The returns required by 

subsection (a) shall be in such form and shall set forth, in respect 

of the foreign corporation, such information as the Secretary prescribes by forms or regulations as necessary for carrying out the 

provisions of the income tax laws, except that in the case of persons described only in subsection (a)(1)(A) the information required 

shall be limited to the names and addresses of persons described 

in subparagraph (B) or (C) of subsection (a)(1). 

(c) OWNERSHIP OF STOCK.—For purposes of subsection (a), stock 

owned directly or indirectly by a person (including, in the case of 

an individual, stock owned by members of øhis¿ the individual’s 

family) shall be taken into account. For purposes of the preceding 

sentence, the family of an individual shall be considered as including only øhis¿ the individual’s brothers and sisters (whether by the 

whole or half blood), spouse, ancestors, and lineal descendants. 

488 

(d) TIME FOR FILING.—Any return required by subsection (a) shall 

be filed on or before the 90th day after the day on which, under 

any provision of subsection (a), the United States citizen, resident, 

or person becomes liable to file such return (or on or before such 

later day as the Secretary may by forms or regulations prescribe). 

(e) LIMITATION.—No information shall be required to be furnished under this section with respect to any foreign corporation 

unless such information was required to be furnished under regulations which have been in effect for at least 90 days before the date 

on which the United States citizen, resident, or person becomes liable to file a return required under subsection (a). 

(f) CROSS REFERENCE.—For provisions relating to penalties for 

violations of this section, sections 6679 and 7203. 

* * * * * * * 

PART VIII—DESIGNATION OF INCOME TAX PAYMENTS 

TO PRESIDENTIAL ELECTION CAMPAIGN FUND 

* * * * * * * 

SEC. 6096. DESIGNATION BY INDIVIDUALS. 

(a) IN GENERAL.—Every individual (other than a nonresident 

alien) whose income tax liability for the taxable year is $3 or more 

may designate that $3 shall be paid over to the Presidential Election Campaign Fund in accordance with the provisions of section 

9006(a). In the case of a joint return øof husband and wife having¿ 

reporting an income tax liability of $6 or more, each spouse may 

designate that $3 shall be paid to the fund. 

(b) INCOME TAX LIABILITY.—For purposes of subsection (a), the income tax liability of an individual for any taxable year is the 

amount of the tax imposed by chapter 1 on such individual for such 

taxable year (as shown on his return), reduced by the sum of the 

credits (as shown in his return) allowable under part IV of subchapter A of chapter 1 (other than subpart C thereof). 

(c) MANNER AND TIME OF DESIGNATION.—A designation under 

subsection (a) may be made with respect to any taxable year— 

(1) at the time of filing the return of the tax imposed by 

chapter 1 for such taxable year, or 

(2) at any other time (after the time of filing the return of 

the tax imposed by chapter 1 for such taxable year) specified 

in regulations prescribed by the Secretary. 

Such designation shall be made in such manner as the Secretary 

prescribes by regulations except that, if such designation is made 

at the time of filing the return of the tax imposed by chapter 1 for 

such taxable year, such designation shall be made either on the 

first page of the return or on the page bearing the taxpayer’s signature. 

* * * * * * * 

Subchapter B—MISCELLANEOUS PROVISIONS 

* * * * * * * 

489 

SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN INFORMATION. 

(a) GENERAL RULE.—Returns and return information shall be 

confidential, and except as authorized by this title— 

(1) no officer or employee of the United States, 

(2) no officer or employee of any State, any local law enforcement agency receiving information under subsection (i)(1)(C) or 

(7)(A), any local child support enforcement agency, or any local 

agency administering a program listed in subsection (l)(7)(D) 

who has or had access to returns or return information under 

this section or section 6104(c), and 

(3) no other person (or officer or employee thereof) who has 

or had access to returns or return information under subsection (e)(1)(D)(iii), subsection (k)(10), paragraph (6), (10), 

(12), (16), (19), (20), or (21) of subsection (l), paragraph (2) or 

(4)(B) of subsection (m), or subsection (n), 

shall disclose any return or return information obtained by him in 

any manner in connection with his service as such an officer or an 

employee or otherwise or under the provisions of this section. For 

purposes of this subsection, the term ‘‘officer or employee’’ includes 

a former officer or employee. 

(b) DEFINITIONS.—For purposes of this section— 

(1) RETURN.—The term ‘‘return’’ means any tax or information return, declaration of estimated tax, or claim for refund 

required by, or provided for or permitted under, the provisions 

of this title which is filed with the Secretary by, on behalf of, 

or with respect to any person, and any amendment or supplement thereto, including supporting schedules, attachments, or 

lists which are supplemental to, or part of, the return so filed. 

(2) RETURN INFORMATION.—The term ‘‘return information’’ 

means— 

(A) a taxpayer’s identity, the nature, source, or amount 

of his income, payments, receipts, deductions, exemptions, 

credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, 

whether the taxpayer’s return was, is being, or will be examined or subject to other investigation or processing, or 

any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a 

return or with respect to the determination of the existence, or possible existence, of liability (or the amount 

thereof) of any person under this title for any tax, penalty, 

interest, fine, forfeiture, or other imposition, or offense, 

(B) any part of any written determination or any background file document relating to such written determination (as such terms are defined in section 6110(b)) which 

is not open to public inspection under section 6110, 

(C) any advance pricing agreement entered into by a taxpayer and the Secretary and any background information 

related to such agreement or any application for an advance pricing agreement, and 

(D) any agreement under section 7121, and any similar 

agreement, and any background information related to 

such an agreement or request for such an agreement, 

490 

but such term does not include data in a form which cannot 

be associated with, or otherwise identify, directly or indirectly, 

a particular taxpayer. Nothing in the preceding sentence, or in 

any other provision of law, shall be construed to require the 

disclosure of standards used or to be used for the selection of 

returns for examination, or data used or to be used for determining such standards, if the Secretary determines that such 

disclosure will seriously impair assessment, collection, or enforcement under the internal revenue laws. 

(3) TAXPAYER RETURN INFORMATION.—The term ‘‘taxpayer return information’’ means return information as defined in 

paragraph (2) which is filed with, or furnished to, the Secretary by or on behalf of the taxpayer to whom such return information relates. 

(4) TAX ADMINISTRATION.—The term ‘‘tax administration’’— 

(A) means— 

(i) the administration, management, conduct, direction, and supervision of the execution and application 

of the internal revenue laws or related statutes (or 

equivalent laws and statutes of a State) and tax conventions to which the United States is a party, and 

(ii) the development and formulation of Federal tax 

policy relating to existing or proposed internal revenue 

laws, related statutes, and tax conventions, and 

(B) includes assessment, collection, enforcement, litigation, publication, and statistical gathering functions under 

such laws, statutes, or conventions. 

(5) STATE.— (A) IN GENERAL.—The term ‘‘State’’ means— 

(i) any of the 50 States, the District of Columbia, the 

Commonwealth of Puerto Rico, the Virgin Islands, 

Guam, American Samoa, and the Commonwealth of 

the Northern Mariana Islands, 

(ii) for purposes of subsections (a)(2), (b)(4), (d)(1), 

(h)(4), and (p), any municipality— 

(I) with a population in excess of 250,000 (as determined under the most recent decennial United 

States census data available), 

(II) which imposes a tax on income or wages, 

and 

(III) with which the Secretary (in his sole discretion) has entered into an agreement regarding 

disclosure, and 

(iii) for purposes of subsections (a)(2), (b)(4), (d)(1), 

(h)(4), and (p), any governmental entity— 

(I) which is formed and operated by a qualified 

group of municipalities, and 

(II) with which the Secretary (in his sole discretion) has entered into an agreement regarding disclosure. 

(B) REGIONAL INCOME TAX AGENCIES.—For purposes of 

subparagraph (A)(iii)— 

(i) QUALIFIED GROUP OF MUNICIPALITIES.—The term 

‘‘qualified group of municipalities’’ means, with respect 

to any governmental entity, 2 or more municipalities— 

491 

(I) each of which imposes a tax on income or 

wages, 

(II) each of which, under the authority of a 

State statute, administers the laws relating to the 

imposition of such taxes through such entity, and 

(III) which collectively have a population in excess of 250,000 (as determined under the most recent decennial United States census data available). 

(ii) REFERENCES TO STATE LAW, ETC..—For purposes 

of applying subparagraph (A)(iii) to the subsections referred to in such subparagraph, any reference in such 

subsections to State law, proceedings, or tax returns 

shall be treated as references to the law, proceedings, 

or tax returns, as the case may be, of the municipalities which form and operate the governmental entity 

referred to in such subparagraph. 

(iii) DISCLOSURE TO CONTRACTORS AND OTHER

AGENTS.—Notwithstanding any other provision of this 

section, no return or return information shall be disclosed to any contractor or other agent of a governmental entity referred to in subparagraph (A)(iii) unless such entity, to the satisfaction of the Secretary— 

(I) has requirements in effect which require 

each such contractor or other agent which would 

have access to returns or return information to 

provide safeguards (within the meaning of subsection (p)(4)) to protect the confidentiality of such 

returns or return information, 

(II) agrees to conduct an on-site review every 3 

years (or a mid-point review in the case of contracts or agreements of less than 3 years in duration) of each contractor or other agent to determine compliance with such requirements, 

(III) submits the findings of the most recent review conducted under subclause (II) to the Secretary as part of the report required by subsection 

(p)(4)(E), and 

(IV) certifies to the Secretary for the most recent annual period that such contractor or other 

agent is in compliance with all such requirements. 

The certification required by subclause (IV) shall include 

the name and address of each contractor and other agent, 

a description of the contract or agreement with such contractor or other agent, and the duration of such contract 

or agreement. The requirements of this clause shall not 

apply to disclosures pursuant to subsection (n) for purposes of Federal tax administration and a rule similar to 

the rule of subsection (p)(8)(B) shall apply for purposes of 

this clause. 

(6) TAXPAYER IDENTITY.—The term ‘‘taxpayer identity’’ 

means the name of a person with respect to whom a return is 

filed, his mailing address, his taxpayer identifying number (as 

described in section 6109), or a combination thereof. 

492 

(7) INSPECTION.—The terms ‘‘inspected’’ and ‘‘inspection’’ 

mean any examination of a return or return information. 

(8) DISCLOSURE.—The term ‘‘disclosure’’ means the making 

known to any person in any manner whatever a return or return information. 

(9) FEDERAL AGENCY.—The term ‘‘Federal agency’’ means an 

agency within the meaning of section 551(1) of title 5, United 

States Code. 

(10) CHIEF EXECUTIVE OFFICER.—The term ‘‘chief executive 

officer’’ means, with respect to any municipality, any elected official and the chief official (even if not elected) of such municipality. 

(11) TERRORIST INCIDENT, THREAT, OR ACTIVITY.—The term 

‘‘terrorist incident, threat, or activity’’ means an incident, 

threat, or activity involving an act of domestic terrorism (as defined in section 2331(5) of title 18, United States Code) or 

international terrorism (as defined in section 2331(1) of such 

title). 

(c) DISCLOSURE OF RETURNS AND RETURN INFORMATION TO DESIGNEE OF TAXPAYER.—The Secretary may, subject to such requirements and conditions as he may prescribe by regulations, disclose 

the return of any taxpayer, or return information with respect to 

such taxpayer, to such person or persons as the taxpayer may designate in a request for or consent to such disclosure, or to any other 

person at the taxpayer’s request to the extent necessary to comply 

with a request for information or assistance made by the taxpayer 

to such other person. However, return information shall not be disclosed to such person or persons if the Secretary determines that 

such disclosure would seriously impair Federal tax administration. 

(d) DISCLOSURE TO STATE TAX OFFICIALS AND STATE AND LOCAL

LAW ENFORCEMENT AGENCIES.— (1) IN GENERAL.—Returns and return information with respect to taxes imposed by chapters 1, 2, 6, 11, 12, 21, 23, 24, 

31, 32, 44, 51, and 52 and subchapter D of chapter 36 shall be 

open to inspection by, or disclosure to, any State agency, body, 

or commission, or its legal representative, which is charged 

under the laws of such State with responsibility for the administration of State tax laws for the purpose of, and only to the 

extent necessary in, the administration of such laws, including 

any procedures with respect to locating any person who may 

be entitled to a refund. Such inspection shall be permitted, or 

such disclosure made, only upon written request by the head 

of such agency, body, or commission, and only to the representatives of such agency, body, or commission designated in such 

written request as the individuals who are to inspect or to receive the returns or return information on behalf of such agency, body, or commission. Such representatives shall not include 

any individual who is the chief executive officer of such State 

or who is neither an employee or legal representative of such 

agency, body, or commission nor a person described in subsection (n). However, such return information shall not be disclosed to the extent that the Secretary determines that such 

disclosure would identify a confidential informant or seriously 

impair any civil or criminal tax investigation. 

(2) DISCLOSURE TO STATE AUDIT AGENCIES.— 

493 

(A) IN GENERAL.—Any returns or return information obtained under paragraph (1) by any State agency, body, or 

commission may be open to inspection by, or disclosure to, 

officers and employees of the State audit agency for the 

purpose of, and only to the extent necessary in, making an 

audit of the State agency, body, or commission referred to 

in paragraph (1). 

(B) STATE AUDIT AGENCY.—For purposes of subparagraph (A), the term ‘‘State audit agency’’ means any State 

agency, body, or commission which is charged under the 

laws of the State with the responsibility of auditing State 

revenues and programs. 

(3) EXCEPTION FOR REIMBURSEMENT UNDER SECTION 7624.— 

Nothing in this section shall be construed to prevent the Secretary from disclosing to any State or local law enforcement 

agency which may receive a payment under section 7624 the 

amount of the recovered taxes with respect to which such a 

payment may be made. 

(4) AVAILABILITY AND USE OF DEATH INFORMATION.— 

(A) IN GENERAL.—No returns or return information may 

be disclosed under paragraph (1) to any agency, body, or 

commission of any State (or any legal representative thereof) during any period during which a contract meeting the 

requirements of subparagraph (B) is not in effect between 

such State and the Secretary of Health and Human Services. 

(B) CONTRACTUAL REQUIREMENTS.—A contract meets the 

requirements of this subparagraph if— 

(i) such contract requires the State to furnish the 

Secretary of Health and Human Services information 

concerning individuals with respect to whom death 

certificates (or equivalent documents maintained by 

the State or any subdivision thereof) have been officially filed with it, and 

(ii) such contract does not include any restriction on 

the use of information obtained by such Secretary pursuant to such contract, except that such contract may 

provide that such information is only to be used by the 

Secretary (or any other Federal agency) for purposes 

of ensuring that Federal benefits or other payments 

are not erroneously paid to deceased individuals. 

Any information obtained by the Secretary of Health and 

Human Services under such a contract shall be exempt 

from disclosure under section 552 of title 5, United States 

Code, and from the requirements of section 552a of such 

title 5. 

(C) SPECIAL EXCEPTION.—The provisions of subparagraph (A) shall not apply to any State which on July 1, 

1993, was not, pursuant to a contract, furnishing the Secretary of Health and Human Services information concerning individuals with respect to whom death certificates 

(or equivalent documents maintained by the State or any 

subdivision thereof) have been officially filed with it. 

(5) DISCLOSURE FOR COMBINED EMPLOYMENT TAX REPORTING.— 

494 

(A) IN GENERAL.—The Secretary may disclose taxpayer 

identity information and signatures to any agency, body, 

or commission of any State for the purpose of carrying out 

with such agency, body, or commission a combined Federal 

and State employment tax reporting program approved by 

the Secretary. Subsections (a)(2) and (p)(4) and sections 

7213 and 7213A shall not apply with respect to disclosures 

or inspections made pursuant to this paragraph. 

(B) TERMINATION.—The Secretary may not make any 

disclosure under this paragraph after December 31, 2007. 

(6) LIMITATION ON DISCLOSURE REGARDING REGIONAL INCOME

TAX AGENCIES TREATED AS STATES.—For purposes of paragraph 

(1), inspection by or disclosure to an entity described in subsection (b)(5)(A)(iii) shall be for the purpose of, and only to the 

extent necessary in, the administration of the laws of the member municipalities in such entity relating to the imposition of 

a tax on income or wages. Such entity may not redisclose any 

return or return information received pursuant to paragraph 

(1) to any such member municipality. 

(e) DISCLOSURE TO PERSONS HAVING MATERIAL INTEREST.— 

(1) IN GENERAL.—The return of a person shall, upon written 

request, be open to inspection by or disclosure to— 

(A) in the case of the return of an individual— 

(i) that individual, 

(ii) the spouse of that individual if the individual 

and such spouse have signified their consent to consider a gift reported on such return as made one-half 

by øhim¿ the individual and one-half by the spouse 

pursuant to the provisions of section 2513; or 

(iii) the child of that individual (or such child’s legal 

representative) to the extent necessary to comply with 

the provisions of section 1(g); 

(B) in the case of an income tax return filed jointly, either of the individuals with respect to whom the return is 

filed; 

(C) in the case of the return of a partnership, any person 

who was a member of such partnership during any part of 

the period covered by the return; 

(D) in the case of the return of a corporation or a subsidiary thereof— 

(i) any person designated by resolution of its board 

of directors or other similar governing body, 

(ii) any officer or employee of such corporation upon 

written request signed by any principal officer and attested to by the secretary or other officer, 

(iii) any bona fide shareholder of record owning 1 

percent or more of the outstanding stock of such corporation, 

(iv) if the corporation was an S corporation, any person who was a shareholder during any part of the period covered by such return during which an election 

under section 1362(a) was in effect, or 

(v) if the corporation has been dissolved, any person 

authorized by applicable State law to act for the corporation or any person who the Secretary finds to 

495 

have a material interest which will be affected by information contained therein; 

(E) in the case of the return of an estate— 

(i) the administrator, executor, or trustee of such estate, and 

(ii) any heir at law, next of kin, or beneficiary under 

the will, of the decedent, but only if the Secretary 

finds that such heir at law, next of kin, or beneficiary 

has a material interest which will be affected by information contained therein; and 

(F) in the case of the return of a trust— 

(i) the trustee or trustees, jointly or separately, and 

(ii) any beneficiary of such trust, but only if the Secretary finds that such beneficiary has a material interest which will be affected by information contained 

therein. 

(2) INCOMPETENCY.—If an individual described in paragraph 

(1) is legally incompetent, the applicable return shall, upon 

written request, be open to inspection by or disclosure to the 

committee, trustee, or guardian of his estate. 

(3) DECEASED INDIVIDUALS.—The return of a decedent shall, 

upon written request, be open to inspection by or disclosure 

to— 

(A) the administrator, executor, or trustee of his estate, 

and 

(B) any heir at law, next of kin, or beneficiary under the 

will, of such decedent, or a donee of property, but only if 

the Secretary finds that such heir at law, next of kin, beneficiary, or donee has a material interest which will be affected by information contained therein. 

(4) TITLE 11 CASES AND RECEIVERSHIP PROCEEDINGS.—If— 

(A) there is a trustee in a title 11 case in which the debtor is the person with respect to whom the return is filed, 

or 

(B) substantially all of the property of the person with 

respect to whom the return is filed is in the hands of a receiver, 

such return or returns for prior years of such person shall, 

upon written request, be open to inspection by or disclosure to 

such trustee or receiver, but only if the Secretary finds that 

such trustee or receiver, in his fiduciary capacity, has a material interest which will be affected by information contained 

therein. 

(5) INDIVIDUAL’S TITLE 11 CASE.— 

(A) IN GENERAL.—In any case to which section 1398 applies (determined without regard to section 1398(b)(1)), 

any return of the debtor for the taxable year in which the 

case commenced or any preceding taxable year shall, upon 

written request, be open to inspection by or disclosure to 

the trustee in such case. 

(B) RETURN OF ESTATE AVAILABLE TO DEBTOR.—Any return of an estate in a case to which section 1398 applies 

shall, upon written request, be open to inspection by or 

disclosure to the debtor in such case. 

496 

(C) SPECIAL RULE FOR INVOLUNTARY CASES.—In an involuntary case, no disclosure shall be made under subparagraph (A) until the order for relief has been entered by the 

court having jurisdiction of such case unless such court 

finds that such disclosure is appropriate for purposes of 

determining whether an order for relief should be entered. 

(6) ATTORNEY IN FACT.—Any return to which this subsection 

applies shall, upon written request, also be open to inspection 

by or disclosure to the attorney in fact duly authorized in writing by any of the persons described in paragraph (1), (2), (3), 

(4), (5), (8), or (9) to inspect the return or receive the information on his behalf, subject to the conditions provided in such 

paragraphs. 

(7) RETURN INFORMATION.—Return information with respect 

to any taxpayer may be open to inspection by or disclosure to 

any person authorized by this subsection to inspect any return 

of such taxpayer if the Secretary determines that such disclosure would not seriously impair Federal tax administration. 

(8) DISCLOSURE OF COLLECTION ACTIVITIES WITH RESPECT TO

JOINT RETURN.—If any deficiency of tax with respect to a joint 

return is assessed and the individuals filing such return are no 

longer married or no longer reside in the same household, upon 

request in writing by either of such individuals, the Secretary 

shall disclose in writing to the individual making the request 

whether the Secretary has attempted to collect such deficiency 

from such other individual, the general nature of such collection activities, and the amount collected. The preceding sentence shall not apply to any deficiency which may not be collected by reason of section 6502. 

(9) DISCLOSURE OF CERTAIN INFORMATION WHERE MORE THAN

1 PERSON SUBJECT TO PENALTY UNDER SECTION 6672.—If the 

Secretary determines that a person is liable for a penalty 

under section 6672(a) with respect to any failure, upon request 

in writing of such person, the Secretary shall disclose in writing to such person— 

(A) the name of any other person whom the Secretary 

has determined to be liable for such penalty with respect 

to such failure, and 

(B) whether the Secretary has attempted to collect such 

penalty from such other person, the general nature of such 

collection activities, and the amount collected. 

(10) LIMITATION ON CERTAIN DISCLOSURES UNDER THIS SUBSECTION.—In the case of an inspection or disclosure under this 

subsection relating to the return of a partnership, S corporation, trust, or an estate, the information inspected or disclosed 

shall not include any supporting schedule, attachment, or list 

which includes the taxpayer identity information of a person 

other than the entity making the return or the person conducting the inspection or to whom the disclosure is made. 

(11) DISCLOSURE OF INFORMATION REGARDING STATUS OF IN- VESTIGATION OF VIOLATION OF THIS SECTION.—In the case of a 

person who provides to the Secretary information indicating a 

violation of section 7213, 7213A, or 7214 with respect to any 

return or return information of such person, the Secretary may 

disclose to such person (or such person’s designee)— 

497 

(A) whether an investigation based on the person’s provision of such information has been initiated and whether it 

is open or closed, 

(B) whether any such investigation substantiated such a 

violation by any individual, and 

(C) whether any action has been taken with respect to 

such individual (including whether a referral has been 

made for prosecution of such individual). 

(f) DISCLOSURE TO COMMITTEES OF CONGRESS.— (1) COMMITTEE ON WAYS AND MEANS, COMMITTEE ON FI- NANCE, AND JOINT COMMITTEE ON TAXATION.—Upon written 

request from the chairman of the Committee on Ways and 

Means of the House of Representatives, the chairman of the 

Committee on Finance of the Senate, or the chairman of the 

Joint Committee on Taxation, the Secretary shall furnish such 

committee with any return or return information specified in 

such request, except that any return or return information 

which can be associated with, or otherwise identify, directly or 

indirectly, a particular taxpayer shall be furnished to such 

committee only when sitting in closed executive session unless 

such taxpayer otherwise consents in writing to such disclosure. 

(2) CHIEF OF STAFF OF JOINT COMMITTEE ON TAXATION.— Upon written request by the Chief of Staff of the Joint Committee on Taxation, the Secretary shall furnish him with any 

return or return information specified in such request. Such 

Chief of Staff may submit such return or return information to 

any committee described in paragraph (1), except that any return or return information which can be associated with, or 

otherwise identify, directly or indirectly, a particular taxpayer 

shall be furnished to such committee only when sitting in 

closed executive session unless such taxpayer otherwise consents in writing to such disclosure. 

(3) OTHER COMMITTEES.—Pursuant to an action by, and upon 

written request by the chairman of, a committee of the Senate 

or the House of Representatives (other than a committee specified in paragraph (1)) specially authorized to inspect any return or return information by a resolution of the Senate or the 

House of Representatives or, in the case of a joint committee 

(other than the joint committee specified in paragraph (1)) by 

concurrent resolution, the Secretary shall furnish such committee, or a duly authorized and designated subcommittee 

thereof, sitting in closed executive session, with any return or 

return information which such resolution authorizes the committee or subcommittee to inspect. Any resolution described in 

this paragraph shall specify the purpose for which the return 

or return information is to be furnished and that such information cannot reasonably be obtained from any other source. 

(4) AGENTS OF COMMITTEES AND SUBMISSION OF INFORMATION

TO SENATE OR HOUSE OF REPRESENTATIVES.— (A) COMMITTEES DESCRIBED IN PARAGRAPH (1).—Any committee described in paragraph (1) or the Chief of Staff of 

the Joint Committee on Taxation shall have the authority, 

acting directly, or by or through such examiners or agents 

as the chairman of such committee or such chief of staff 

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formation at such time and in such manner as may be determined by such chairman or chief of staff. Any return or 

return information obtained by or on behalf of such committee pursuant to the provisions of this subsection may 

be submitted by the committee to the Senate or the House 

of Representatives, or to both. The Joint Committee on 

Taxation may also submit such return or return information to any other committee described in paragraph (1), except that any return or return information which can be 

associated with, or otherwise identify, directly or indirectly, a particular taxpayer shall be furnished to such 

committee only when sitting in closed executive session 

unless such taxpayer otherwise consents in writing to such 

disclosure. 

(B) OTHER COMMITTEES.—Any committee or subcommittee described in paragraph (3) shall have the right, 

acting directly, or by or through no more than four examiners or agents, designated or appointed in writing in 

equal numbers by the chairman and ranking minority 

member of such committee or subcommittee, to inspect returns and return information at such time and in such 

manner as may be determined by such chairman and 

ranking minority member. Any return or return information obtained by or on behalf of such committee or subcommittee pursuant to the provisions of this subsection 

may be submitted by the committee to the Senate or the 

House of Representatives, or to both, except that any return or return information which can be associated with, 

or otherwise identify, directly or indirectly, a particular 

taxpayer, shall be furnished to the Senate or the House of 

Representatives only when sitting in closed executive session unless such taxpayer otherwise consents in writing to 

such disclosure. 

(5) DISCLOSURE BY WHISTLEBLOWER.—Any person who otherwise has or had access to any return or return information 

under this section may disclose such return or return information to a committee referred to in paragraph (1) or any individual authorized to receive or inspect information under paragraph (4)(A) if such person believes such return or return information may relate to possible misconduct, maladministration, 

or taxpayer abuse. 

(g) DISCLOSURE TO PRESIDENT AND CERTAIN OTHER PERSONS.— 

(1) IN GENERAL.—Upon written request by the President, 

signed by him personally, the Secretary shall furnish to the 

President, or to such employee or employees of the White 

House Office as the President may designate by name in such 

request, a return or return information with respect to any 

taxpayer named in such request. Any such request shall 

state— 

(A) the name and address of the taxpayer whose return 

or return information is to be disclosed, 

(B) the kind of return or return information which is to 

be disclosed, 

(C) the taxable period or periods covered by such return 

or return information, and 

499 

(D) the specific reason why the inspection or disclosure 

is requested. 

(2) DISCLOSURE OF RETURN INFORMATION AS TO PRESI- DENTIAL APPOINTEES AND CERTAIN OTHER FEDERAL GOVERN- MENT APPOINTEES.—The Secretary may disclose to a duly authorized representative of the Executive Office of the President 

or to the head of any Federal agency, upon written request by 

the President or head of such agency, or to the Federal Bureau 

of Investigation on behalf of and upon written request by the 

President or such head, return information with respect to an 

individual who is designated as being under consideration for 

appointment to a position in the executive or judicial branch 

of the Federal Government. Such return information shall be 

limited to whether such individual— 

(A) has filed returns with respect to the taxes imposed 

under chapter 1 for not more than the immediately preceding 3 years; 

(B) has failed to pay any tax within 10 days after notice 

and demand, or has been assessed any penalty under this 

title for negligence, in the current year or immediately preceding 3 years; 

(C) has been or is under investigation for possible criminal offenses under the internal revenue laws and the results of any such investigation; or 

(D) has been assessed any civil penalty under this title 

for fraud. 

Within 3 days of the receipt of any request for any return information with respect to any individual under this paragraph, 

the Secretary shall notify such individual in writing that such 

information has been requested under the provisions of this 

paragraph. 

(3) RESTRICTION ON DISCLOSURE.—The employees to whom 

returns and return information are disclosed under this subsection shall not disclose such returns and return information 

to any other person except the President or the head of such 

agency without the personal written direction of the President 

or the head of such agency. 

(4) RESTRICTION ON DISCLOSURE TO CERTAIN EMPLOYEES.— Disclosure of returns and return information under this subsection shall not be made to any employee whose annual rate 

of basic pay is less than the annual rate of basic pay specified 

for positions subject to section 5316 of title 5, United States 

Code. 

(5) REPORTING REQUIREMENTS.—Within 30 days after the 

close of each calendar quarter, the President and the head of 

any agency requesting returns and return information under 

this subsection shall each file a report with the Joint Committee on Taxation setting forth the taxpayers with respect to 

whom such requests were made during such quarter under this 

subsection, the returns or return information involved, and the 

reasons for such requests. The President shall not be required 

to report on any request for returns and return information 

pertaining to an individual who was an officer or employee of 

the executive branch of the Federal Government at the time 

such request was made. Reports filed pursuant to this paraVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00505 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
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graph shall not be disclosed unless the Joint Committee on 

Taxation determines that disclosure thereof (including identifying details) would be in the national interest. Such reports 

shall be maintained by the Joint Committee on Taxation for a 

period not exceeding 2 years unless, within such period, the 

Joint Committee on Taxation determines that a disclosure to 

the Congress is necessary. 

(h) DISCLOSURE TO CERTAIN FEDERAL OFFICERS AND EMPLOYEES

FOR PURPOSES OF TAX ADMINISTRATION, ETC..— (1) DEPARTMENT OF THE TREASURY.—Returns and return information shall, without written request, be open to inspection 

by or disclosure to officers and employees of the Department 

of the Treasury whose official duties require such inspection or 

disclosure for tax administration purposes. 

(2) DEPARTMENT OF JUSTICE.—In a matter involving tax administration, a return or return information shall be open to 

inspection by or disclosure to officers and employees of the Department of Justice (including United States attorneys) personally and directly engaged in, and solely for their use in, any 

proceeding before a Federal grand jury or preparation for any 

proceeding (or investigation which may result in such a proceeding) before a Federal grand jury or any Federal or State 

court, but only if— 

(A) the taxpayer is or may be a party to the proceeding, 

or the proceeding arose out of, or in connection with, determining the taxpayer’s civil or criminal liability, or the collection of such civil liability in respect of any tax imposed 

under this title; 

(B) the treatment of an item reflected on such return is 

or may be related to the resolution of an issue in the proceeding or investigation; or 

(C) such return or return information relates or may relate to a transactional relationship between a person who 

is or may be a party to the proceeding and the taxpayer 

which affects, or may affect, the resolution of an issue in 

such proceeding or investigation. 

(3) FORM OF REQUEST.—In any case in which the Secretary 

is authorized to disclose a return or return information to the 

Department of Justice pursuant to the provisions of this subsection— 

(A) if the Secretary has referred the case to the Department of Justice, or if the proceeding is authorized by subchapter B of chapter 76, the Secretary may make such disclosure on his own motion, or 

(B) if the Secretary receives a written request from the 

Attorney General, the Deputy Attorney General, or an Assistant Attorney General for a return of, or return information relating to, a person named in such request and 

setting forth the need for the disclosure, the Secretary 

shall disclose return or return the information so requested. 

(4) DISCLOSURE IN JUDICIAL AND ADMINISTRATIVE TAX PRO- CEEDINGS.—A return or return information may be disclosed in 

a Federal or State judicial or administrative proceeding pertaining to tax administration, but only— 

501 

(A) if the taxpayer is a party to the proceeding, or the 

proceeding arose out of, or in connection with, determining 

the taxpayer’s civil or criminal liability, or the collection of 

such civil liability, in respect of any tax imposed under 

this title; 

(B) if the treatment of an item reflected on such return 

is directly related to the resolution of an issue in the proceeding; 

(C) if such return or return information directly relates 

to a transactional relationship between a person who is a 

party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding; or 

(D) to the extent required by order of a court pursuant 

to section 3500 of title 18, United States Code, or rule 16 

of the Federal Rules of Criminal Procedure, such court 

being authorized in the issuance of such order to give due 

consideration to congressional policy favoring the confidentiality of returns and return information as set forth in 

this title. 

However, such return or return information shall not be disclosed as provided in subparagraph (A), (B), or (C) if the Secretary determines that such disclosure would identify a confidential informant or seriously impair a civil or criminal tax 

investigation. 

(5) WITHHOLDING OF TAX FROM SOCIAL SECURITY BENEFITS.— Upon written request of the payor agency, the Secretary may 

disclose available return information from the master files of 

the Internal Revenue Service with respect to the address and 

status of an individual as a nonresident alien or as a citizen 

or resident of the United States to the Social Security Administration or the Railroad Retirement Board (whichever is appropriate) for purposes of carrying out its responsibilities for withholding tax under section 1441 from social security benefits (as 

defined in section 86(d)). 

(6) INTERNAL REVENUE SERVICE OVERSIGHT BOARD.— (A) IN GENERAL.—Notwithstanding paragraph (1), and 

except as provided in subparagraph (B), no return or return information may be disclosed to any member of the 

Oversight Board described in subparagraph (A) or (D) of 

section 7802(b)(1) or to any employee or detailee of such 

Board by reason of their service with the Board. Any request for information not permitted to be disclosed under 

the preceding sentence, and any contact relating to a specific taxpayer, made by any such individual to an officer or 

employee of the Internal Revenue Service shall be reported 

by such officer or employee to the Secretary, the Treasury 

Inspector General for Tax Administration, and the Joint 

Committee on Taxation. 

(B) EXCEPTION FOR REPORTS TO THE BOARD.—If— 

(i) the Commissioner or the Treasury Inspector General for Tax Administration prepares any report or 

other matter for the Oversight Board in order to assist 

the Board in carrying out its duties; and 

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502 

turn information in such report or other matter to enable the Board to carry out such duties, 

such return or return information (other than information 

regarding taxpayer identity) may be disclosed to members, 

employees, or detailees of the Board solely for the purpose 

of carrying out such duties. 

(i) DISCLOSURE TO FEDERAL OFFICERS OR EMPLOYEES FOR ADMIN- ISTRATION OF FEDERAL LAWS NOT RELATING TO TAX ADMINISTRA- TION.— 

(1) DISCLOSURE OF RETURNS AND RETURN INFORMATION FOR

USE IN CRIMINAL INVESTIGATIONS.— (A) IN GENERAL.—Except as provided in paragraph (6), 

any return or return information with respect to any specified taxable period or periods shall, pursuant to and upon 

the grant of an ex parte order by a Federal district court 

judge or magistrate judge under subparagraph (B), be open 

(but only to the extent necessary as provided in such 

order) to inspection by, or disclosure to, officers and employees of any Federal agency who are personally and directly engaged in— 

(i) preparation for any judicial or administrative 

proceeding pertaining to the enforcement of a specifically designated Federal criminal statute (not involving tax administration) to which the United States or 

such agency is or may be a party, or pertaining to the 

case of a missing or exploited child, 

(ii) any investigation which may result in such a 

proceeding, or 

(iii) any Federal grand jury proceeding pertaining to 

enforcement of such a criminal statute to which the 

United States or such agency is or may be a party, or 

to such a case of a missing or exploited child, 

solely for the use of such officers and employees in such 

preparation, investigation, or grand jury proceeding. 

(B) APPLICATION FOR ORDER.—The Attorney General, the 

Deputy Attorney General, the Associate Attorney General, 

any Assistant Attorney General, any United States attorney, any special prosecutor appointed under section 593 of 

title 28, United States Code, or any attorney in charge of 

a criminal division organized crime strike force established 

pursuant to section 510 of title 28, United States Code, 

may authorize an application to a Federal district court 

judge or magistrate judge for the order referred to in subparagraph (A). Upon such application, such judge or magistrate judge may grant such order if he determines on the 

basis of the facts submitted by the applicant that— 

(i) there is reasonable cause to believe, based upon 

information believed to be reliable, that a specific 

criminal act has been committed, 

(ii) there is reasonable cause to believe that the return or return information is or may be relevant to a 

matter relating to the commission of such act, and 

(iii) the return or return information is sought exclusively for use in a Federal criminal investigation or 

proceeding concerning such act (or any criminal invesVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00508 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
503 

tigation or proceeding, in the case of a matter relating 

to a missing or exploited child), and the information 

sought to be disclosed cannot reasonably be obtained, 

under the circumstances, from another source. 

(C) DISCLOSURE TO STATE AND LOCAL LAW ENFORCEMENT

AGENCIES IN THE CASE OF MATTERS PERTAINING TO A MISS- ING OR EXPLOITED CHILD.— (i) IN GENERAL.—In the case of an investigation pertaining to a missing or exploited child, the head of any 

Federal agency, or his designee, may disclose any return or return information obtained under subparagraph (A) to officers and employees of any State or 

local law enforcement agency, but only if— 

(I) such State or local law enforcement agency is 

part of a team with the Federal agency in such investigation, and 

(II) such information is disclosed only to such officers and employees who are personally and directly engaged in such investigation. 

(ii) LIMITATION ON USE OF INFORMATION.—Information disclosed under this subparagraph shall be solely 

for the use of such officers and employees in locating 

the missing child, in a grand jury proceeding, or in 

any preparation for, or investigation which may result 

in, a judicial or administrative proceeding. 

(iii) MISSING CHILD.—For purposes of this subparagraph, the term ‘‘missing child’’ shall have the meaning given such term by section 403 of the Missing 

Children’s Assistance Act (42 U.S.C. 5772). 

(iv) EXPLOITED CHILD.—For purposes of this subparagraph, the term ‘‘exploited child’’ means a minor 

with respect to whom there is reason to believe that 

a specified offense against a minor (as defined by section 111(7) of the Sex Offender Registration and Notification Act (42 U.S.C. 16911(7))) has or is occurring. 

(2) DISCLOSURE OF RETURN INFORMATION OTHER THAN TAX- PAYER RETURN INFORMATION FOR USE IN CRIMINAL INVESTIGA- TIONS.— 

(A) IN GENERAL.—Except as provided in paragraph (6), 

upon receipt by the Secretary of a request which meets the 

requirements of subparagraph (B) from the head of any 

Federal agency or the Inspector General thereof, or, in the 

case of the Department of Justice, the Attorney General, 

the Deputy Attorney General, the Associate Attorney General, any Assistant Attorney General, the Director of the 

Federal Bureau of Investigation, the Administrator of the 

Drug Enforcement Administration, any United States attorney, any special prosecutor appointed under section 593 

of title 28, United States Code, or any attorney in charge 

of a criminal division organized crime strike force established pursuant to section 510 of title 28, United States 

Code, the Secretary shall disclose return information 

(other than taxpayer return information) to officers and 

employees of such agency who are personally and directly 

engaged in— 

504 

(i) preparation for any judicial or administrative 

proceeding described in paragraph (1)(A)(i), 

(ii) any investigation which may result in such a 

proceeding, or 

(iii) any grand jury proceeding described in paragraph (1)(A)(iii), 

solely for the use of such officers and employees in such 

preparation, investigation, or grand jury proceeding. 

(B) REQUIREMENTS.—A request meets the requirements 

of this subparagraph if the request is in writing and sets 

forth— 

(i) the name and address of the taxpayer with respect to whom the requested return information relates; 

(ii) the taxable period or periods to which such return information relates; 

(iii) the statutory authority under which the proceeding or investigation described in subparagraph (A) 

is being conducted; and 

(iv) the specific reason or reasons why such disclosure is, or may be, relevant to such proceeding or investigation. 

(C) TAXPAYER IDENTITY.—For purposes of this paragraph, a taxpayer’s identity shall not be treated as taxpayer return information. 

(3) DISCLOSURE OF RETURN INFORMATION TO APPRISE APPROPRIATE OFFICIALS OF CRIMINAL OR TERRORIST ACTIVITIES OR

EMERGENCY CIRCUMSTANCES.— 

(A) POSSIBLE VIOLATIONS OF FEDERAL CRIMINAL LAW.— 

(i) IN GENERAL.—Except as provided in paragraph 

(6), the Secretary may disclose in writing return information (other than taxpayer return information) 

which may constitute evidence of a violation of any 

Federal criminal law (not involving tax administration) to the extent necessary to apprise the head of the 

appropriate Federal agency charged with the responsibility of enforcing such law. The head of such agency 

may disclose such return information to officers and 

employees of such agency to the extent necessary to 

enforce such law. 

(ii) TAXPAYER IDENTITY.—If there is return information (other than taxpayer return information) which 

may constitute evidence of a violation by any taxpayer 

of any Federal criminal law (not involving tax administration), such taxpayer’s identity may also be disclosed under clause (i). 

(B) EMERGENCY CIRCUMSTANCES.— 

(i) DANGER OF DEATH OR PHYSICAL INJURY.—Under 

circumstances involving an imminent danger of death 

or physical injury to any individual, the Secretary may 

disclose return information to the extent necessary to 

apprise appropriate officers or employees of any Federal or State law enforcement agency of such circumstances. 

505 

(ii) FLIGHT FROM FEDERAL PROSECUTION.—Under 

circumstances involving the imminent flight of any individual from Federal prosecution, the Secretary may 

disclose return information to the extent necessary to 

apprise appropriate officers or employees of any Federal law enforcement agency of such circumstances. 

(C) TERRORIST ACTIVITIES, ETC..— (i) IN GENERAL.—Except as provided in paragraph 

(6), the Secretary may disclose in writing return information (other than taxpayer return information) that 

may be related to a terrorist incident, threat, or activity to the extent necessary to apprise the head of the 

appropriate Federal law enforcement agency responsible for investigating or responding to such terrorist 

incident, threat, or activity. The head of the agency 

may disclose such return information to officers and 

employees of such agency to the extent necessary to 

investigate or respond to such terrorist incident, 

threat, or activity. 

(ii) DISCLOSURE TO THE DEPARTMENT OF JUSTICE.— 

Returns and taxpayer return information may also be 

disclosed to the Attorney General under clause (i) to 

the extent necessary for, and solely for use in preparing, an application under paragraph (7)(D). 

(iii) TAXPAYER IDENTITY.—For purposes of this subparagraph, a taxpayer’s identity shall not be treated 

as taxpayer return information. 

(4) USE OF CERTAIN DISCLOSED RETURNS AND RETURN INFORMATION IN JUDICIAL OR ADMINISTRATIVE PROCEEDINGS.— 

(A) RETURNS AND TAXPAYER RETURN INFORMATION.—Except as provided in subparagraph (C), any return or taxpayer return information obtained under paragraph (1) or 

(7)(C) may be disclosed in any judicial or administrative 

proceeding pertaining to enforcement of a specifically designated Federal criminal statute or related civil forfeiture 

(not involving tax administration) to which the United 

States or a Federal agency is a party— 

(i) if the court finds that such return or taxpayer return information is probative of a matter in issue relevant in establishing the commission of a crime or the 

guilt or liability of a party, or 

(ii) to the extent required by order of the court pursuant to section 3500 of title 18, United States Code, 

or rule 16 of the Federal Rules of Criminal Procedure. 

(B) RETURN INFORMATION (OTHER THAN TAXPAYER RETURN INFORMATION).—Except as provided in subparagraph 

(C), any return information (other than taxpayer return information) obtained under paragraph (1), (2), (3)(A) or (C), 

or (7) may be disclosed in any judicial or administrative 

proceeding pertaining to enforcement of a specifically designated Federal criminal statute or related civil forfeiture 

(not involving tax administration) to which the United 

States or a Federal agency is a party. 

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506 

mitted into evidence under subparagraph (A)(i) or (B) if 

the Secretary determines and notifies the Attorney General or his delegate or the head of the Federal agency that 

such admission would identify a confidential informant or 

seriously impair a civil or criminal tax investigation. 

(D) CONSIDERATION OF CONFIDENTIALITY POLICY.—In ruling upon the admissibility of returns or return information, and in the issuance of an order under subparagraph 

(A)(ii), the court shall give due consideration to congressional policy favoring the confidentiality of returns and return information as set forth in this title. 

(E) REVERSIBLE ERROR.—The admission into evidence of 

any return or return information contrary to the provisions 

of this paragraph shall not, as such, constitute reversible 

error upon appeal of a judgment in the proceeding. 

(5) DISCLOSURE TO LOCATE FUGITIVES FROM JUSTICE.— 

(A) IN GENERAL.—Except as provided in paragraph (6), 

the return of an individual or return information with respect to such individual shall, pursuant to and upon the 

grant of an ex parte order by a Federal district court judge 

or magistrate judge under subparagraph (B), be open (but 

only to the extent necessary as provided in such order) to 

inspection by, or disclosure to, officers and employees of 

any Federal agency exclusively for use in locating such individual. 

(B) APPLICATION FOR ORDER.—Any person described in 

paragraph (1)(B) may authorize an application to a Federal district court judge or magistrate judge for an order 

referred to in subparagraph (A). Upon such application, 

such judge or magistrate judge may grant such order if he 

determines on the basis of the facts submitted by the applicant that— 

(i) a Federal arrest warrant relating to the commission of a Federal felony offense has been issued for an 

individual who is a fugitive from justice, 

(ii) the return of such individual or return information with respect to such individual is sought exclusively for use in locating such individual, and 

(iii) there is reasonable cause to believe that such 

return or return information may be relevant in determining the location of such individual. 

(6) CONFIDENTIAL INFORMANTS; IMPAIRMENT OF INVESTIGATIONS.—The Secretary shall not disclose any return or return 

information under paragraph (1), (2), (3)(A) or (C), (5), (7), or 

(8) if the Secretary determines (and, in the case of a request 

for disclosure pursuant to a court order described in paragraph 

(1)(B) or (5)(B), certifies to the court) that such disclosure 

would identify a confidential informant or seriously impair a 

civil or criminal tax investigation. 

(7) DISCLOSURE UPON REQUEST OF INFORMATION RELATING TO

TERRORIST ACTIVITIES, ETC..— (A) DISCLOSURE TO LAW ENFORCEMENT AGENCIES.— (i) IN GENERAL.—Except as provided in paragraph 

(6), upon receipt by the Secretary of a written request 

which meets the requirements of clause (iii), the SecVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00512 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
507 

retary may disclose return information (other than 

taxpayer return information) to officers and employees 

of any Federal law enforcement agency who are personally and directly engaged in the response to or investigation of any terrorist incident, threat, or activity. 

(ii) DISCLOSURE TO STATE AND LOCAL LAW ENFORCE- MENT AGENCIES.—The head of any Federal law enforcement agency may disclose return information obtained under clause (i) to officers and employees of any 

State or local law enforcement agency but only if such 

agency is part of a team with the Federal law enforcement agency in such response or investigation and 

such information is disclosed only to officers and employees who are personally and directly engaged in 

such response or investigation. 

(iii) REQUIREMENTS.—A request meets the requirements of this clause if— 

(I) the request is made by the head of any Federal law enforcement agency (or his delegate) involved in the response to or investigation of any 

terrorist incident, threat, or activity, and 

(II) the request sets forth the specific reason or 

reasons why such disclosure may be relevant to a 

terrorist incident, threat, or activity. 

(iv) LIMITATION ON USE OF INFORMATION.—Information disclosed under this subparagraph shall be solely 

for the use of the officers and employees to whom such 

information is disclosed in such response or investigation. 

(v) TAXPAYER IDENTITY.—For purposes of this subparagraph, a taxpayer’s identity shall not be treated 

as taxpayer return information. 

(B) DISCLOSURE TO INTELLIGENCE AGENCIES.— (i) IN GENERAL.—Except as provided in paragraph 

(6), upon receipt by the Secretary of a written request 

which meets the requirements of clause (ii), the Secretary may disclose return information (other than 

taxpayer return information) to those officers and employees of the Department of Justice, the Department 

of the Treasury, and other Federal intelligence agencies who are personally and directly engaged in the 

collection or analysis of intelligence and counterintelligence information or investigation concerning any 

terrorist incident, threat, or activity. For purposes of 

the preceding sentence, the information disclosed 

under the preceding sentence shall be solely for the 

use of such officers and employees in such investigation, collection, or analysis. 

(ii) REQUIREMENTS.—A request meets the requirements of this subparagraph if the request— 

(I) is made by an individual described in clause 

(iii), and 

(II) sets forth the specific reason or reasons why 

such disclosure may be relevant to a terrorist incident, threat, or activity. 

508 

(iii) REQUESTING INDIVIDUALS.—An individual described in this subparagraph is an individual— 

(I) who is an officer or employee of the Department of Justice or the Department of the Treasury 

who is appointed by the President with the advice 

and consent of the Senate or who is the Director 

of the United States Secret Service, and 

(II) who is responsible for the collection and 

analysis of intelligence and counterintelligence information concerning any terrorist incident, 

threat, or activity. 

(iv) TAXPAYER IDENTITY.—For purposes of this subparagraph, a taxpayer’s identity shall not be treated 

as taxpayer return information. 

(C) DISCLOSURE UNDER EX PARTE ORDERS.— 

(i) IN GENERAL.—Except as provided in paragraph 

(6), any return or return information with respect to 

any specified taxable period or periods shall, pursuant 

to and upon the grant of an ex parte order by a Federal district court judge or magistrate under clause 

(ii), be open (but only to the extent necessary as provided in such order) to inspection by, or disclosure to, 

officers and employees of any Federal law enforcement 

agency or Federal intelligence agency who are personally and directly engaged in any investigation, response to, or analysis of intelligence and counterintelligence information concerning any terrorist incident, 

threat, or activity. Return or return information 

opened to inspection or disclosure pursuant to the preceding sentence shall be solely for the use of such officers and employees in the investigation, response, or 

analysis, and in any judicial, administrative, or grand 

jury proceedings, pertaining to such terrorist incident, 

threat, or activity. 

(ii) APPLICATION FOR ORDER.—The Attorney General, 

the Deputy Attorney General, the Associate Attorney 

General, any Assistant Attorney General, or any 

United States attorney may authorize an application 

to a Federal district court judge or magistrate for the 

order referred to in clause (i). Upon such application, 

such judge or magistrate may grant such order if he 

determines on the basis of the facts submitted by the 

applicant that— 

(I) there is reasonable cause to believe, based 

upon information believed to be reliable, that the 

return or return information may be relevant to a 

matter relating to such terrorist incident, threat, 

or activity, and 

(II) the return or return information is sought 

exclusively for use in a Federal investigation, 

analysis, or proceeding concerning any terrorist 

incident, threat, or activity. 

(D) SPECIAL RULE FOR EX PARTE DISCLOSURE BY THE

IRS.— 

509 

(i) IN GENERAL.—Except as provided in paragraph 

(6), the Secretary may authorize an application to a 

Federal district court judge or magistrate for the order 

referred to in subparagraph (C)(i). Upon such application, such judge or magistrate may grant such order if 

he determines on the basis of the facts submitted by 

the applicant that the requirements of subparagraph 

(C)(ii)(I) are met. 

(ii) LIMITATION ON USE OF INFORMATION.—Information disclosed under clause (i)— 

(I) may be disclosed only to the extent necessary 

to apprise the head of the appropriate Federal law 

enforcement agency responsible for investigating 

or responding to a terrorist incident, threat, or activity, and 

(II) shall be solely for use in a Federal investigation, analysis, or proceeding concerning any 

terrorist incident, threat, or activity. 

The head of such Federal agency may disclose such information to officers and employees of such agency to the extent necessary to investigate or respond to such terrorist 

incident, threat, or activity. 

(8) COMPTROLLER GENERAL.— (A) RETURNS AVAILABLE FOR INSPECTION.—Except as 

provided in subparagraph (C), upon written request by the 

Comptroller General of the United States, returns and return information shall be open to inspection by, or disclosure to, officers and employees of the Government Accountability Office for the purpose of, and to the extent 

necessary in, making— 

(i) an audit of the Internal Revenue Service, the Bureau of Alcohol, Tobacco, Firearms, and Explosives, 

Department of Justice, or the Tax and Trade Bureau, 

Department of the Treasury, which may be required 

by section 713 of title 31, United States Code, or 

(ii) any audit authorized by subsection (p)(6), 

except that no such officer or employee shall, except to the 

extent authorized by subsection (f) or (p)(6), disclose to any 

person, other than another officer or employee of such office whose official duties require such disclosure, any return or return information described in section 4424(a) in 

a form which can be associated with, or otherwise identify, 

directly or indirectly, a particular taxpayer, nor shall such 

officer or employee disclose any other return or return information, except as otherwise expressly provided by law, 

to any person other than such other officer or employee of 

such office in a form which can be associated with, or otherwise identify, directly or indirectly, a particular taxpayer. 

(B) AUDITS OF OTHER AGENCIES.— (i) IN GENERAL.—Nothing in this section shall prohibit any return or return information obtained under 

this title by any Federal agency (other than an agency 

referred to in subparagraph (A)) or by a Trustee as defined in the District of Columbia Retirement ProtecVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00515 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
510 

tion Act of 1997, for use in any program or activity 

from being open to inspection by, or disclosure to, officers and employees of the Government Accountability 

Office if such inspection or disclosure is— 

(I) for purposes of, and to the extent necessary 

in, making an audit authorized by law of such 

program or activity, and 

(II) pursuant to a written request by the Comptroller General of the United States to the head of 

such Federal agency. 

(ii) INFORMATION FROM SECRETARY.—If the Comptroller General of the United States determines that 

the returns or return information available under 

clause (i) are not sufficient for purposes of making an 

audit of any program or activity of a Federal agency 

(other than an agency referred to in subparagraph 

(A)), upon written request by the Comptroller General 

to the Secretary, returns and return information (of 

the type authorized by subsection (l) or (m) to be made 

available to the Federal agency for use in such program or activity) shall be open to inspection by, or disclosure to, officers and employees of the Government 

Accountability Office for the purpose of, and to the extent necessary in, making such audit. 

(iii) REQUIREMENT OF NOTIFICATION UPON COMPLE- TION OF AUDIT.—Within 90 days after the completion 

of an audit with respect to which returns or return information were opened to inspection or disclosed under 

clause (i) or (ii), the Comptroller General of the United 

States shall notify in writing the Joint Committee on 

Taxation of such completion. Such notice shall include— 

(I) a description of the use of the returns and return information by the Federal agency involved, 

(II) such recommendations with respect to the 

use of returns and return information by such 

Federal agency as the Comptroller General deems 

appropriate, and 

(III) a statement on the impact of any such recommendations on confidentiality of returns and 

return information and the administration of this 

title. 

(iv) CERTAIN RESTRICTIONS MADE APPLICABLE.—The 

restrictions contained in subparagraph (A) on the disclosure of any returns or return information open to 

inspection or disclosed under such subparagraph shall 

also apply to returns and return information open to 

inspection or disclosed under this subparagraph. 

(C) DISAPPROVAL BY JOINT COMMITTEE ON TAXATION.— Returns and return information shall not be open to inspection or disclosed under subparagraph (A) or (B) with 

respect to an audit— 

(i) unless the Comptroller General of the United 

States notifies in writing the Joint Committee on Taxation of such audit, and 

511 

(ii) if the Joint Committee on Taxation disapproves 

such audit by a vote of at least two-thirds of its members within the 30-day period beginning on the day 

the Joint Committee on Taxation receives such notice. 

(j) STATISTICAL USE.— (1) DEPARTMENT OF COMMERCE.—Upon request in writing by 

the Secretary of Commerce, the Secretary shall furnish— 

(A) such returns, or return information reflected thereon, 

to officers and employees of the Bureau of the Census, and 

(B) such return information reflected on returns of corporations to officers and employees of the Bureau of Economic Analysis, 

as the Secretary may prescribe by regulation for the purpose 

of, but only to the extent necessary in, the structuring of censuses and national economic accounts and conducting related 

statistical activities authorized by law. 

(2) FEDERAL TRADE COMMISSION.—Upon request in writing 

by the Chairman of the Federal Trade Commission, the Secretary shall furnish such return information reflected on any 

return of a corporation with respect to the tax imposed by 

chapter 1 to officers and employees of the Division of Financial 

Statistics of the Bureau of Economics of such commission as 

the Secretary may prescribe by regulation for the purpose of, 

but only to the extent necessary in, administration by such division of legally authorized economic surveys of corporations. 

(3) DEPARTMENT OF TREASURY.—Returns and return information shall be open to inspection by or disclosure to officers 

and employees of the Department of the Treasury whose official duties require such inspection or disclosure for the purpose 

of, but only to the extent necessary in, preparing economic or 

financial forecasts, projections, analyses, and statistical studies 

and conducting related activities. Such inspection or disclosure 

shall be permitted only upon written request which sets forth 

the specific reason or reasons why such inspection or disclosure 

is necessary and which is signed by the head of the bureau or 

office of the Department of the Treasury requesting the inspection or disclosure. 

(4) ANONYMOUS FORM.—No person who receives a return or 

return information under this subsection shall disclose such return or return information to any person other than the taxpayer to whom it relates except in a form which cannot be associated with, or otherwise identify, directly or indirectly, a 

particular taxpayer. 

(5) DEPARTMENT OF AGRICULTURE.—Upon request in writing 

by the Secretary of Agriculture, the Secretary shall furnish 

such returns, or return information reflected thereon, as the 

Secretary may prescribe by regulation to officers and employees of the Department of Agriculture whose official duties require access to such returns or information for the purpose of, 

but only to the extent necessary in, structuring, preparing, and 

conducting the census of agriculture pursuant to the Census of 

Agriculture Act of 1997 (Public Law 105–113). 

(6) CONGRESSIONAL BUDGET OFFICE.—Upon written request 

by the Director of the Congressional Budget Office, the Secretary shall furnish to officers and employees of the CongresVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00517 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
512 

sional Budget Office return information for the purpose of, but 

only to the extent necessary for, long-term models of the social 

security and medicare programs. 

(k) DISCLOSURE OF CERTAIN RETURNS AND RETURN INFORMATION

FOR TAX ADMINISTRATION PURPOSES.— (1) DISCLOSURE OF ACCEPTED OFFERS-IN-COMPROMISE.—Return information shall be disclosed to members of the general 

public to the extent necessary to permit inspection of any accepted offer-in-compromise under section 7122 relating to the 

liability for a tax imposed by this title. 

(2) DISCLOSURE OF AMOUNT OF OUTSTANDING LIEN.—If a notice of lien has been filed pursuant to section 6323(f), the 

amount of the outstanding obligation secured by such lien may 

be disclosed to any person who furnishes satisfactory written 

evidence that he has a right in the property subject to such 

lien or intends to obtain a right in such property. 

(3) DISCLOSURE OF RETURN INFORMATION TO CORRECT

MISSTATEMENTS OF FACT.—The Secretary may, but only following approval by the Joint Committee on Taxation, disclose 

such return information or any other information with respect 

to any specific taxpayer to the extent necessary for tax administration purposes to correct a misstatement of fact published 

or disclosed with respect to such taxpayer’s return or any 

transaction of the taxpayer with the Internal Revenue Service. 

(4) DISCLOSURE TO COMPETENT AUTHORITY UNDER TAX CON- VENTION.—A return or return information may be disclosed to 

a competent authority of a foreign government which has an 

income tax or gift and estate tax convention, or other convention or bilateral agreement relating to the exchange of tax information, with the United States but only to the extent provided in, and subject to the terms and conditions of, such convention or bilateral agreement. 

(5) STATE AGENCIES REGULATING TAX RETURN PREPARERS.— Taxpayer identity information with respect to any tax return 

preparer, and information as to whether or not any penalty 

has been assessed against such tax return preparer under section 6694, 6695, or 7216, may be furnished to any agency, 

body, or commission lawfully charged under any State or local 

law with the licensing, registration, or regulation of tax return 

preparers. Such information may be furnished only upon written request by the head of such agency, body, or commission 

designating the officers or employees to whom such information is to be furnished. Information may be furnished and used 

under this paragraph only for purposes of the licensing, registration, or regulation of tax return preparers. 

(6) DISCLOSURE BY CERTAIN OFFICERS AND EMPLOYEES FOR

INVESTIGATIVE PURPOSES.—An internal revenue officer or employee and an officer or employee of the Office of Treasury Inspector General for Tax Administration may, in connection 

with his official duties relating to any audit, collection activity, 

or civil or criminal tax investigation or any other offense under 

the internal revenue laws, disclose return information to the 

extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably available, with respect 

to the correct determination of tax, liability for tax, or the 

513 

amount to be collected or with respect to the enforcement of 

any other provision of this title. Such disclosures shall be made 

only in such situations and under such conditions as the Secretary may prescribe by regulation. 

(7) DISCLOSURE OF EXCISE TAX REGISTRATION INFORMATION.— 

To the extent the Secretary determines that disclosure is necessary to permit the effective administration of subtitle D, the 

Secretary may disclose— 

(A) the name, address, and registration number of each 

person who is registered under any provision of subtitle D 

(and, in the case of a registered terminal operator, the address of each terminal operated by such operator), and 

(B) the registration status of any person. 

(8) LEVIES ON CERTAIN GOVERNMENT PAYMENTS.— 

(A) DISCLOSURE OF RETURN INFORMATION IN LEVIES ON

FINANCIAL MANAGEMENT SERVICE.—In serving a notice of 

levy, or release of such levy, with respect to any applicable 

government payment, the Secretary may disclose to officers and employees of the Financial Management Service— 

(i) return information, including taxpayer identity 

information, 

(ii) the amount of any unpaid liability under this 

title (including penalties and interest), and 

(iii) the type of tax and tax period to which such unpaid liability relates. 

(B) RESTRICTION ON USE OF DISCLOSED INFORMATION.— 

Return information disclosed under subparagraph (A) may 

be used by officers and employees of the Financial Management Service only for the purpose of, and to the extent 

necessary in, transferring levied funds in satisfaction of 

the levy, maintaining appropriate agency records in regard 

to such levy or the release thereof, notifying the taxpayer 

and the agency certifying such payment that the levy has 

been honored, or in the defense of any litigation ensuing 

from the honor of such levy. 

(C) APPLICABLE GOVERNMENT PAYMENT.—For purposes of 

this paragraph, the term ‘‘applicable government payment’’ 

means— 

(i) any Federal payment (other than a payment for 

which eligibility is based on the income or assets (or 

both) of a payee) certified to the Financial Management Service for disbursement, and 

(ii) any other payment which is certified to the Financial Management Service for disbursement and 

which the Secretary designates by published notice. 

(9) DISCLOSURE OF INFORMATION TO ADMINISTER SECTION

6311.—The Secretary may disclose returns or return information to financial institutions and others to the extent the Secretary deems necessary for the administration of section 6311. 

Disclosures of information for purposes other than to accept 

payments by checks or money orders shall be made only to the 

extent authorized by written procedures promulgated by the 

Secretary. 

514 

(10) DISCLOSURE OF CERTAIN RETURNS AND RETURN INFORMA- TION TO CERTAIN PRISON OFFICIALS.— (A) IN GENERAL.—Under such procedures as the Secretary may prescribe, the Secretary may disclose to officers 

and employees of the Federal Bureau of Prisons and of any 

State agency charged with the responsibility for administration of prisons any returns or return information with 

respect to individuals incarcerated in Federal or State 

prison systems whom the Secretary has determined may 

have filed or facilitated the filing of a false or fraudulent 

return to the extent that the Secretary determines that 

such disclosure is necessary to permit effective Federal tax 

administration. 

(B) DISCLOSURE TO CONTRACTOR-RUN PRISONS.—Under 

such procedures as the Secretary may prescribe, the disclosures authorized by subparagraph (A) may be made to contractors responsible for the operation of a Federal or State 

prison on behalf of such Bureau or agency. 

(C) RESTRICTIONS ON USE OF DISCLOSED INFORMATION.— 

Any return or return information received under this paragraph shall be used only for the purposes of and to the extent necessary in taking administrative action to prevent 

the filing of false and fraudulent returns, including administrative actions to address possible violations of administrative rules and regulations of the prison facility and in 

administrative and judicial proceedings arising from such 

administrative actions. 

(D) RESTRICTIONS ON REDISCLOSURE AND DISCLOSURE TO

LEGAL REPRESENTATIVES.—Notwithstanding subsection 

(h)— 

(i) RESTRICTIONS ON REDISCLOSURE.—Except as provided in clause (ii), any officer, employee, or contractor 

of the Federal Bureau of Prisons or of any State agency charged with the responsibility for administration 

of prisons shall not disclose any information obtained 

under this paragraph to any person other than an officer or employee or contractor of such Bureau or agency personally and directly engaged in the administration of prison facilities on behalf of such Bureau or 

agency. 

(ii) DISCLOSURE TO LEGAL REPRESENTATIVES.—The 

returns and return information disclosed under this 

paragraph may be disclosed to the duly authorized 

legal representative of the Federal Bureau of Prisons, 

State agency, or contractor charged with the responsibility for administration of prisons, or of the incarcerated individual accused of filing the false or fraudulent 

return who is a party to an action or proceeding described in subparagraph (C), solely in preparation for, 

or for use in, such action or proceeding. 

(11) DISCLOSURE OF RETURN INFORMATION TO DEPARTMENT

OF STATE FOR PURPOSES OF PASSPORT REVOCATION UNDER SEC- TION 7345.— 

(A) IN GENERAL.—The Secretary shall, upon receiving a 

certification described in section 7345, disclose to the SecVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00520 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
515 

retary of State return information with respect to a taxpayer who has a seriously delinquent tax debt described in 

such section. Such return information shall be limited to— 

(i) the taxpayer identity information with respect to 

such taxpayer, and 

(ii) the amount of such seriously delinquent tax 

debt. 

(B) RESTRICTION ON DISCLOSURE.—Return information 

disclosed under subparagraph (A) may be used by officers 

and employees of the Department of State for the purposes 

of, and to the extent necessary in, carrying out the requirements of section 32101 of the FAST Act. 

(12) QUALIFIED TAX COLLECTION CONTRACTORS.—Persons providing services pursuant to a qualified tax collection contract 

under section 6306 may, if speaking to a person who has identified himself or herself as having the name of the taxpayer to 

which a tax receivable (within the meaning of such section) relates, identify themselves as contractors of the Internal Revenue Service and disclose the business name of the contractor, 

and the nature, subject, and reason for the contact. Disclosures 

under this paragraph shall be made only in such situations 

and under such conditions as have been approved by the Secretary. 

(l) DISCLOSURE OF RETURNS AND RETURN INFORMATION FOR PUR- POSES OTHER THAN TAX ADMINISTRATION.— (1) DISCLOSURE OF CERTAIN RETURNS AND RETURN INFORMA- TION TO SOCIAL SECURITY ADMINISTRATION AND RAILROAD RE- TIREMENT BOARD.—The Secretary may, upon written request, 

disclose returns and return information with respect to— 

(A) taxes imposed by chapters 2, 21, and 24, to the Social Security Administration for purposes of its administration of the Social Security Act; 

(B) a plan to which part I of subchapter D of chapter 1 

applies, to the Social Security Administration for purposes 

of carrying out its responsibility under section 1131 of the 

Social Security Act, limited, however to return information 

described in section 6057(d); and 

(C) taxes imposed by chapter 22, to the Railroad Retirement Board for purposes of its administration of the Railroad Retirement Act. 

(2) DISCLOSURE OF RETURNS AND RETURN INFORMATION TO

THE DEPARTMENT OF LABOR AND PENSION BENEFIT GUARANTY

CORPORATION.—The Secretary may, upon written request, furnish returns and return information to the proper officers and 

employees of the Department of Labor and the Pension Benefit 

Guaranty Corporation for purposes of, but only to the extent 

necessary in, the administration of titles I and IV of the Employee Retirement Income Security Act of 1974. 

(3) DISCLOSURE THAT APPLICANT FOR FEDERAL LOAN HAS TAX

DELINQUENT ACCOUNT.— (A) IN GENERAL.—Upon written request, the Secretary 

may disclose to the head of the Federal agency administering any included Federal loan program whether or not 

an applicant for a loan under such program has a tax delinquent account. 

516 

(B) RESTRICTION ON DISCLOSURE.—Any disclosure under 

subparagraph (A) shall be made only for the purpose of, 

and to the extent necessary in, determining the creditworthiness of the applicant for the loan in question. 

(C) INCLUDED FEDERAL LOAN PROGRAM DEFINED.—For 

purposes of this paragraph, the term ‘‘included Federal 

loan program’’ means any program under which the 

United States or a Federal agency makes, guarantees, or 

insures loans. 

(4) DISCLOSURE OF RETURNS AND RETURN INFORMATION FOR

USE IN PERSONNEL OR CLAIMANT REPRESENTATIVE MATTERS.— The Secretary may disclose returns and return information— 

(A) upon written request— 

(i) to an employee or former employee of the Department of the Treasury, or to the duly authorized legal 

representative of such employee or former employee, 

who is or may be a party to any administrative action 

or proceeding affecting the personnel rights of such 

employee or former employee; or 

(ii) to any person, or to the duly authorized legal 

representative of such person, whose rights are or may 

be affected by an administrative action or proceeding 

under section 330 of title 31, United States Code, 

solely for use in the action or proceeding, or in preparation 

for the action or proceeding, but only to the extent that the 

Secretary determines that such returns or return information is or may be relevant and material to the action or 

proceeding; or 

(B) to officers and employees of the Department of the 

Treasury for use in any action or proceeding described in 

subparagraph (A), or in preparation for such action or proceeding, to the extent necessary to advance or protect the 

interests of the United States. 

(5) SOCIAL SECURITY ADMINISTRATION.—Upon written request by the Commissioner of Social Security, the Secretary 

may disclose information returns filed pursuant to part III of 

subchapter A of chapter 61 of this subtitle for the purpose of— 

(A) carrying out, in accordance with an agreement entered into pursuant to section 232 of the Social Security 

Act, an effective return processing program; or 

(B) providing information regarding the mortality status 

of individuals for epidemiological and similar research in 

accordance with section 1106(d) of the Social Security Act. 

(6) DISCLOSURE OF RETURN INFORMATION TO FEDERAL, STATE, 

AND LOCAL CHILD SUPPORT ENFORCEMENT AGENCIES.— 

(A) RETURN INFORMATION FROM INTERNAL REVENUE

SERVICE.—The Secretary may, upon written request, disclose to the appropriate Federal, State, or local child support enforcement agency— 

(i) available return information from the master files 

of the Internal Revenue Service relating to the social 

security account number (or numbers, if the individual 

involved has more than one such number), address, filing status, amounts and nature of income, and the 

number of dependents reported on any return filed by, 

517 

or with respect to, any individual with respect to 

whom child support obligations are sought to be established or enforced pursuant to the provisions of part D 

of title IV of the Social Security Act and with respect 

to any individual to whom such support obligations 

are owing, and 

(ii) available return information reflected on any return filed by, or with respect to, any individual described in clause (i) relating to the amount of such individual’s gross income (as defined in section 61) or 

consisting of the names and addresses of payors of 

such income and the names of any dependents reported on such return, but only if such return information is not reasonably available from any other source. 

(B) DISCLOSURE TO CERTAIN AGENTS.—The following information disclosed to any child support enforcement agency under subparagraph (A) with respect to any individual 

with respect to whom child support obligations are sought 

to be established or enforced may be disclosed by such 

agency to any agent of such agency which is under contract with such agency to carry out the purposes described 

in subparagraph (C): 

(i) The address and social security account number 

(or numbers) of such individual. 

(ii) The amount of any reduction under section 

6402(c) (relating to offset of past-due support against 

overpayments) in any overpayment otherwise payable 

to such individual. 

(C) RESTRICTION ON DISCLOSURE.—Information may be 

disclosed under this paragraph only for purposes of, and to 

the extent necessary in, establishing and collecting child 

support obligations from, and locating, individuals owing 

such obligations. 

(7) DISCLOSURE OF RETURN INFORMATION TO FEDERAL, STATE, 

AND LOCAL AGENCIES ADMINISTERING CERTAIN PROGRAMS

UNDER THE SOCIAL SECURITY ACT, THE FOOD AND NUTRITION

ACT OF 2008, OR TITLE 38, UNITED STATES CODE, OR CERTAIN

HOUSING ASSISTANCE PROGRAMS.— 

(A) RETURN INFORMATION FROM SOCIAL SECURITY ADMINISTRATION.—The Commissioner of Social Security shall, 

upon written request, disclose return information from returns with respect to net earnings from self-employment 

(as defined in section 1402), wages (as defined in section 

3121(a) or 3401(a)), and payments of retirement income, 

which have been disclosed to the Social Security Administration as provided by paragraph (1) or (5) of this subsection, to any Federal, State, or local agency administering a program listed in subparagraph (D). 

(B) RETURN INFORMATION FROM INTERNAL REVENUE

SERVICE.—The Secretary shall, upon written request, disclose current return information from returns with respect 

to unearned income from the Internal Revenue Service 

files to any Federal, State, or local agency administering 

a program listed in subparagraph (D). 

518 

(C) RESTRICTION ON DISCLOSURE.—The Commissioner of 

Social Security and the Secretary shall disclose return information under subparagraphs (A) and (B) only for purposes of, and to the extent necessary in, determining eligibility for, or the correct amount of, benefits under a program listed in subparagraph (D). 

(D) PROGRAMS TO WHICH RULE APPLIES.—The programs 

to which this paragraph applies are: 

(i) a State program funded under part A of title IV 

of the Social Security Act; 

(ii) medical assistance provided under a State plan 

approved under title XIX of the Social Security Act or 

subsidies provided under section 1860D–14 of such 

Act; 

(iii) supplemental security income benefits provided 

under title XVI of the Social Security Act, and federally administered supplementary payments of the type 

described in section 1616(a) of such Act (including payments pursuant to an agreement entered into under 

section 212(a) of Public Law 93–66); 

(iv) any benefits provided under a State plan approved under title I, X, XIV, or XVI of the Social Security Act (as those titles apply to Puerto Rico, Guam, 

and the Virgin Islands); 

(v) unemployment compensation provided under a 

State law described in section 3304 of this title; 

(vi) assistance provided under the Food and Nutrition Act of 2008; 

(vii) State-administered supplementary payments of 

the type described in section 1616(a) of the Social Security Act (including payments pursuant to an agreement entered into under section 212(a) of Public Law 

93–66); 

(viii)(I) any needs-based pension provided under 

chapter 15 of title 38, United States Code, or under 

any other law administered by the Secretary of Veterans Affairs; 

(II) parents’ dependency and indemnity compensation provided under section 1315 of title 38, United 

States Code; 

(III) health-care services furnished under sections 

1710(a)(2)(G), 1710(a)(3), and 1710(b) of such title; and 

(IV) compensation paid under chapter 11 of title 38, 

United States Code, at the 100 percent rate based 

solely on unemployability and without regard to the 

fact that the disability or disabilities are not rated as 

100 percent disabling under the rating schedule; and 

(ix) any housing assistance program administered by 

the Department of Housing and Urban Development 

that involves initial and periodic review of an applicant’s or participant’s income, except that return information may be disclosed under this clause only on 

written request by the Secretary of Housing and 

Urban Development and only for use by officers and 

employees of the Department of Housing and Urban 

519 

Development with respect to applicants for and participants in such programs. 

Only return information from returns with respect to net 

earnings from self-employment and wages may be disclosed under this paragraph for use with respect to any 

program described in clause (viii)(IV). 

(8) DISCLOSURE OF CERTAIN RETURN INFORMATION BY SOCIAL

SECURITY ADMINISTRATION TO FEDERAL, STATE, AND LOCAL

CHILD SUPPORT ENFORCEMENT AGENCIES.— (A) IN GENERAL.—Upon written request, the Commissioner of Social Security shall disclose directly to officers 

and employees of a Federal or State or local child support 

enforcement agency return information from returns with 

respect to social security account numbers, net earnings 

from self-employment (as defined in section 1402), wages 

(as defined in section 3121(a) or 3401(a)), and payments of 

retirement income which have been disclosed to the Social 

Security Administration as provided by paragraph (1) or 

(5) of this subsection. 

(B) RESTRICTION ON DISCLOSURE.—The Commissioner of 

Social Security shall disclose return information under 

subparagraph (A) only for purposes of, and to the extent 

necessary in, establishing and collecting child support obligations from, and locating, individuals owing such obligations. For purposes of the preceding sentence, the term 

‘‘child support obligations’’ only includes obligations which 

are being enforced pursuant to a plan described in section 

454 of the Social Security Act which has been approved by 

the Secretary of Health and Human Services under part D 

of title IV of such Act. 

(C) STATE OR LOCAL CHILD SUPPORT ENFORCEMENT AGENCY.—For purposes of this paragraph, the term ‘‘State or 

local child support enforcement agency’’ means any agency 

of a State or political subdivision thereof operating pursuant to a plan described in subparagraph (B). 

(9) DISCLOSURE OF ALCOHOL FUEL PRODUCERS TO ADMINIS- TRATORS OF STATE ALCOHOL LAWS.—Notwithstanding any other 

provision of this section, the Secretary may disclose— 

(A) the name and address of any person who is qualified 

to produce alcohol for fuel use under section 5181, and 

(B) the location of any premises to be used by such person in producing alcohol for fuel, 

to any State agency, body, or commission, or its legal representative, which is charged under the laws of such State 

with responsibility for administration of State alcohol laws 

solely for use in the administration of such laws. 

(10) DISCLOSURE OF CERTAIN INFORMATION TO AGENCIES RE- QUESTING A REDUCTION UNDER SUBSECTION (C), (D), (E), OR (F) OF

SECTION 6402.— (A) RETURN INFORMATION FROM INTERNAL REVENUE

SERVICE.—The Secretary may, upon receiving a written request, disclose to officers and employees of any agency 

seeking a reduction under subsection (c), (d), (e), or (f) of 

section 6402, to officers and employees of the Department 

of Labor for purposes of facilitating the exchange of data 

520 

in connection with a notice submitted under subsection 

(f)(5)(C) of section 6402, and to officers and employees of 

the Department of the Treasury in connection with such 

reduction— 

(i) taxpayer identity information with respect to the 

taxpayer against whom such a reduction was made or 

not made and with respect to any other person filing 

a joint return with such taxpayer, 

(ii) the fact that a reduction has been made or has 

not been made under such subsection with respect to 

such taxpayer, 

(iii) the amount of such reduction, 

(iv) whether such taxpayer filed a joint return, and 

(v) the fact that a payment was made (and the 

amount of the payment) to the spouse of the taxpayer 

on the basis of a joint return. 

(B) RESTRICTION ON USE OF DISCLOSED INFORMATION.— 

(i) Any officers and employees of an agency receiving return information under subparagraph (A) shall use such 

information only for the purposes of, and to the extent necessary in, establishing appropriate agency records, locating 

any person with respect to whom a reduction under subsection (c), (d), (e), or (f) of section 6402 is sought for purposes of collecting the debt with respect to which the reduction is sought, or in the defense of any litigation or administrative procedure ensuing from a reduction made 

under subsection (c), (d), (e), or (f) of section 6402. 

(ii) Notwithstanding clause (i), return information disclosed to officers and employees of the Department of 

Labor may be accessed by agents who maintain and provide technological support to the Department of Labor’s 

Interstate Connection Network (ICON) solely for the purpose of providing such maintenance and support. 

(11) DISCLOSURE OF RETURN INFORMATION TO CARRY OUT

FEDERAL EMPLOYEES’ RETIREMENT SYSTEM.— (A) IN GENERAL.—The Commissioner of Social Security 

shall, on written request, disclose to the Office of Personnel Management return information from returns with 

respect to net earnings from self-employment (as defined 

in section 1402), wages (as defined in section 3121(a) or 

3401(a)), and payments of retirement income, which have 

been disclosed to the Social Security Administration as 

provided by paragraph (1) or (5). 

(B) RESTRICTION ON DISCLOSURE.—The Commissioner of 

Social Security shall disclose return information under 

subparagraph (A) only for purposes of, and to the extent 

necessary in, the administration of chapters 83 and 84 of 

title 5, United States Code. 

(12) DISCLOSURE OF CERTAIN TAXPAYER IDENTITY INFORMA- TION FOR VERIFICATION OF EMPLOYMENT STATUS OF MEDICARE

BENEFICIARY AND SPOUSE OF MEDICARE BENEFICIARY.— (A) RETURN INFORMATION FROM INTERNAL REVENUE

SERVICE.—The Secretary shall, upon written request from 

the Commissioner of Social Security, disclose to the Commissioner available filing status and taxpayer identity inVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00526 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
521 

formation from the individual master files of the Internal 

Revenue Service relating to whether any medicare beneficiary identified by the Commissioner was a married individual (as defined in section 7703) for any specified year 

after 1986, and, if so, the name of the spouse of such individual and such spouse’s TIN. 

(B) RETURN INFORMATION FROM SOCIAL SECURITY AD- MINISTRATION.—The Commissioner of Social Security shall, 

upon written request from the Administrator of the Centers for Medicare & Medicaid Services, disclose to the Administrator the following information: 

(i) The name and TIN of each medicare beneficiary 

who is identified as having received wages (as defined 

in section 3401(a)), above an amount (if any) specified 

by the Secretary of Health and Human Services, from 

a qualified employer in a previous year. 

(ii) For each medicare beneficiary who was identified 

as married under subparagraph (A) and whose spouse 

is identified as having received wages, above an 

amount (if any) specified by the Secretary of Health 

and Human Services, from a qualified employer in a 

previous year— 

(I) the name and TIN of the medicare beneficiary, and 

(II) the name and TIN of the spouse. 

(iii) With respect to each such qualified employer, 

the name, address, and TIN of the employer and the 

number of individuals with respect to whom written 

statements were furnished under section 6051 by the 

employer with respect to such previous year. 

(C) DISCLOSURE BY CENTERS FOR MEDICARE & MEDICAID

SERVICES.—With respect to the information disclosed 

under subparagraph (B), the Administrator of the Centers 

for Medicare & Medicaid Services may disclose— 

(i) to the qualified employer referred to in such subparagraph the name and TIN of each individual identified under such subparagraph as having received 

wages from the employer (hereinafter in this subparagraph referred to as the ‘‘employee’’) for purposes of 

determining during what period such employee or the 

employee’s spouse may be (or have been) covered 

under a group health plan of the employer and what 

benefits are or were covered under the plan (including 

the name, address, and identifying number of the 

plan), 

(ii) to any group health plan which provides or provided coverage to such an employee or spouse, the 

name of such employee and the employee’s spouse (if 

the spouse is a medicare beneficiary) and the name 

and address of the employer, and, for the purpose of 

presenting a claim to the plan— 

(I) the TIN of such employee if benefits were 

paid under title XVIII of the Social Security Act 

with respect to the employee during a period in 

which the plan was a primary plan (as defined in 

522 

section 1862(b)(2)(A) of the Social Security Act), 

and 

(II) the TIN of such spouse if benefits were paid 

under such title with respect to the spouse during 

such period, and 

(iii) to any agent of such Administrator the information referred to in subparagraph (B) for purposes of 

carrying out clauses (i) and (ii) on behalf of such Administrator. 

(D) SPECIAL RULES.— 

(i) RESTRICTIONS ON DISCLOSURE.—Information may 

be disclosed under this paragraph only for purposes of, 

and to the extent necessary in, determining the extent 

to which any medicare beneficiary is covered under 

any group health plan. 

(ii) TIMELY RESPONSE TO REQUESTS.—Any request 

made under subparagraph (A) or (B) shall be complied 

with as soon as possible but in no event later than 120 

days after the date the request was made. 

(E) DEFINITIONS.—For purposes of this paragraph— 

(i) MEDICARE BENEFICIARY.—The term ‘‘medicare 

beneficiary’’ means an individual entitled to benefits 

under part A, or enrolled under part B, of title XVIII 

of the Social Security Act, but does not include such 

an individual enrolled in part A under section 1818. 

(ii) GROUP HEALTH PLAN.—The term ‘‘group health 

plan’’ means any group health plan (as defined in section 5000(b)(1)). 

(iii) QUALIFIED EMPLOYER.—The term ‘‘qualified employer’’ means, for a calendar year, an employer which 

has furnished written statements under section 6051 

with respect to at least 20 individuals for wages paid 

in the year. 

(13) DISCLOSURE OF RETURN INFORMATION TO CARRY OUT INCOME CONTINGENT REPAYMENT OF STUDENT LOANS.— 

(A) IN GENERAL.—The Secretary may, upon written request from the Secretary of Education, disclose to officers 

and employees of the Department of Education return information with respect to a taxpayer who has received an 

applicable student loan and whose loan repayment 

amounts are based in whole or in part on the taxpayer’s 

income. Such return information shall be limited to— 

(i) taxpayer identity information with respect to 

such taxpayer, 

(ii) the filing status of such taxpayer, and 

(iii) the adjusted gross income of such taxpayer. 

(B) RESTRICTION ON USE OF DISCLOSED INFORMATION.— 

Return information disclosed under subparagraph (A) may 

be used by officers and employees of the Department of 

Education only for the purposes of, and to the extent necessary in, establishing the appropriate income contingent 

repayment amount for an applicable student loan. 

(C) APPLICABLE STUDENT LOAN.—For purposes of this 

paragraph, the term ‘‘applicable student loan’’ means— 

523 

(i) any loan made under the program authorized 

under part D of title IV of the Higher Education Act 

of 1965, and 

(ii) any loan made under part B or E of title IV of 

the Higher Education Act of 1965 which is in default 

and has been assigned to the Department of Education. 

(D) TERMINATION.—This paragraph shall not apply to 

any request made after December 31, 2007. 

(14) DISCLOSURE OF RETURN INFORMATION TO UNITED STATES

CUSTOMS SERVICE.—The Secretary may, upon written request 

from the Commissioner of the United States Customs Service, 

disclose to officers and employees of the Department of the 

Treasury such return information with respect to taxes imposed by chapters 1 and 6 as the Secretary may prescribe by 

regulations, solely for the purpose of, and only to the extent 

necessary in— 

(A) ascertaining the correctness of any entry in audits as 

provided for in section 509 of the Tariff Act of 1930 (19 

U.S.C. 1509), or 

(B) other actions to recover any loss of revenue, or to collect duties, taxes, and fees, determined to be due and 

owing pursuant to such audits. 

(15) DISCLOSURE OF RETURNS FILED UNDER SECTION 6050I.— 

The Secretary may, upon written request, disclose to officers 

and employees of— 

(A) any Federal agency, 

(B) any agency of a State or local government, or 

(C) any agency of the government of a foreign country, 

information contained on returns filed under section 6050I. 

Any such disclosure shall be made on the same basis, and subject to the same conditions, as apply to disclosures of information on reports filed under section 5313 of title 31, United 

States Code; except that no disclosure under this paragraph 

shall be made for purposes of the administration of any tax 

law. 

(16) DISCLOSURE OF RETURN INFORMATION FOR PURPOSES OF

ADMINISTERING THE DISTRICT OF COLUMBIA RETIREMENT PRO- TECTION ACT OF 1997.— (A) IN GENERAL.—Upon written request available return 

information (including such information disclosed to the 

Social Security Administration under paragraph (1) or (5) 

of this subsection), relating to the amount of wage income 

(as defined in section 3121(a) or 3401(a)), the name, address, and identifying number assigned under section 

6109, of payors of wage income, taxpayer identity (as defined in section 6103(b)(6)), and the occupational status reflected on any return filed by, or with respect to, any individual with respect to whom eligibility for, or the correct 

amount of, benefits under the District of Columbia Retirement Protection Act of 1997, is sought to be determined, 

shall be disclosed by the Commissioner of Social Security, 

or to the extent not available from the Social Security Administration, by the Secretary, to any duly authorized officer or employee of the Department of the Treasury, or a 

524 

Trustee or any designated officer or employee of a Trustee 

(as defined in the District of Columbia Retirement Protection Act of 1997), or any actuary engaged by a Trustee 

under the terms of the District of Columbia Retirement 

Protection Act of 1997, whose official duties require such 

disclosure, solely for the purpose of, and to the extent necessary in, determining an individual’s eligibility for, or the 

correct amount of, benefits under the District of Columbia 

Retirement Protection Act of 1997. 

(B) DISCLOSURE FOR USE IN JUDICIAL OR ADMINISTRATIVE

PROCEEDINGS.—Return information disclosed to any person 

under this paragraph may be disclosed in a judicial or administrative proceeding relating to the determination of an 

individual’s eligibility for, or the correct amount of, benefits under the District of Columbia Retirement Protection 

Act of 1997. 

(17) DISCLOSURE TO NATIONAL ARCHIVES AND RECORDS AD- MINISTRATION.—The Secretary shall, upon written request from 

the Archivist of the United States, disclose or authorize the 

disclosure of returns and return information to officers and employees of the National Archives and Records Administration 

for purposes of, and only to the extent necessary in, the appraisal of records for destruction or retention. No such officer 

or employee shall, except to the extent authorized by subsection (f), (i)(8), or (p), disclose any return or return information disclosed under the preceding sentence to any person 

other than to the Secretary, or to another officer or employee 

of the National Archives and Records Administration whose official duties require such disclosure for purposes of such appraisal. 

(18) DISCLOSURE OF RETURN INFORMATION FOR PURPOSES OF

CARRYING OUT A PROGRAM FOR ADVANCE PAYMENT OF CREDIT

FOR HEALTH INSURANCE COSTS OF ELIGIBLE INDIVIDUALS.—The 

Secretary may disclose to providers of health insurance for any 

certified individual (as defined in section 7527(c)) return information with respect to such certified individual only to the extent necessary to carry out the program established by section 

7527 (relating to advance payment of credit for health insurance costs of eligible individuals). 

(19) DISCLOSURE OF RETURN INFORMATION FOR PURPOSES OF

PROVIDING TRANSITIONAL ASSISTANCE UNDER MEDICARE DISCOUNT CARD PROGRAM.— 

(A) IN GENERAL.—The Secretary, upon written request 

from the Secretary of Health and Human Services pursuant to carrying out section 1860D–31 of the Social Security 

Act, shall disclose to officers, employees, and contractors of 

the Department of Health and Human Services with respect to a taxpayer for the applicable year— 

(i)(I) whether the adjusted gross income, as modified 

in accordance with specifications of the Secretary of 

Health and Human Services for purposes of carrying 

out such section, of such taxpayer and, if applicable, 

such taxpayer’s spouse, for the applicable year, exceeds the amounts specified by the Secretary of Health 

and Human Services in order to apply the 100 and 135 

525 

percent of the poverty lines under such section, (II) 

whether the return was a joint return, and (III) the 

applicable year, or 

(ii) if applicable, the fact that there is no return filed 

for such taxpayer for the applicable year. 

(B) DEFINITION OF APPLICABLE YEAR.—For the purposes 

of this subsection, the term ‘‘applicable year’’ means the 

most recent taxable year for which information is available 

in the Internal Revenue Service’s taxpayer data information systems, or, if there is no return filed for such taxpayer for such year, the prior taxable year. 

(C) RESTRICTION ON USE OF DISCLOSED INFORMATION.— 

Return information disclosed under this paragraph may be 

used only for the purposes of determining eligibility for 

and administering transitional assistance under section 

1860D–31 of the Social Security Act. 

(20) DISCLOSURE OF RETURN INFORMATION TO CARRY OUT

MEDICARE PART B PREMIUM SUBSIDY ADJUSTMENT AND PART D 

BASE BENEFICIARY PREMIUM INCREASE.— 

(A) IN GENERAL.—The Secretary shall, upon written request from the Commissioner of Social Security, disclose to 

officers, employees, and contractors of the Social Security 

Administration return information of a taxpayer whose 

premium (according to the records of the Secretary) may 

be subject to adjustment under section 1839(i) or increase 

under section 1860D–13(a)(7) of the Social Security Act. 

Such return information shall be limited to— 

(i) taxpayer identity information with respect to 

such taxpayer, 

(ii) the filing status of such taxpayer, 

(iii) the adjusted gross income of such taxpayer, 

(iv) the amounts excluded from such taxpayer’s 

gross income under sections 135 and 911 to the extent 

such information is available, 

(v) the interest received or accrued during the taxable year which is exempt from the tax imposed by 

chapter 1 to the extent such information is available, 

(vi) the amounts excluded from such taxpayer’s 

gross income by sections 931 and 933 to the extent 

such information is available, 

(vii) such other information relating to the liability 

of the taxpayer as is prescribed by the Secretary by 

regulation as might indicate in the case of a taxpayer 

who is an individual described in subsection 

(i)(4)(B)(iii) of section 1839 of the Social Security Act 

that the amount of the premium of the taxpayer under 

such section may be subject to adjustment under subsection (i) of such section or increase under section 

1860D–13(a)(7) of such Act and the amount of such 

adjustment, and 

(viii) the taxable year with respect to which the preceding information relates. 

(B) RESTRICTION ON USE OF DISCLOSED INFORMATION.— 

526 

(i) IN GENERAL.—Return information disclosed under 

subparagraph (A) may be used by officers, employees, 

and contractors of the Social Security Administration 

only for the purposes of, and to the extent necessary 

in, establishing the appropriate amount of any premium adjustment under such section 1839(i) or increase under such section 1860D–13(a)(7) or for the 

purpose of resolving taxpayer appeals with respect to 

any such premium adjustment or increase. 

(ii) DISCLOSURE TO OTHER AGENCIES.—Officers, employees, and contractors of the Social Security Administration may disclose— 

(I) the taxpayer identity information and the 

amount of the premium subsidy adjustment or 

premium increase with respect to a taxpayer described in subparagraph (A) to officers, employees, 

and contractors of the Centers for Medicare and 

Medicaid Services, to the extent that such disclosure is necessary for the collection of the premium 

subsidy amount or the increased premium 

amount, 

(II) the taxpayer identity information and the 

amount of the premium subsidy adjustment or the 

increased premium amount with respect to a taxpayer described in subparagraph (A) to officers 

and employees of the Office of Personnel Management and the Railroad Retirement Board, to the 

extent that such disclosure is necessary for the 

collection of the premium subsidy amount or the 

increased premium amount, 

(III) return information with respect to a taxpayer described in subparagraph (A) to officers 

and employees of the Department of Health and 

Human Services to the extent necessary to resolve 

administrative appeals of such premium subsidy 

adjustment or increased premium, and 

(IV) return information with respect to a taxpayer described in subparagraph (A) to officers 

and employees of the Department of Justice for 

use in judicial proceedings to the extent necessary 

to carry out the purposes described in clause (i). 

(21) DISCLOSURE OF RETURN INFORMATION TO CARRY OUT ELIGIBILITY REQUIREMENTS FOR CERTAIN PROGRAMS.— 

(A) IN GENERAL.—The Secretary, upon written request 

from the Secretary of Health and Human Services, shall 

disclose to officers, employees, and contractors of the Department of Health and Human Services return information of any taxpayer whose income is relevant in determining any premium tax credit under section 36B or any 

cost-sharing reduction under section 1402 of the Patient 

Protection and Affordable Care Act or eligibility for participation in a State medicaid program under title XIX of the 

Social Security Act, a State’s children’s health insurance 

program under title XXI of the Social Security Act, or a 

basic health program under section 1331 of Patient ProtecVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00532 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
527 

tion and Affordable Care Act. Such return information 

shall be limited to— 

(i) taxpayer identity information with respect to 

such taxpayer, 

(ii) the filing status of such taxpayer, 

(iii) the number of individuals for whom a deduction 

is allowed under section 151 with respect to the taxpayer (including the taxpayer and the taxpayer’s 

spouse), 

(iv) the modified adjusted gross income (as defined 

in section 36B) of such taxpayer and each of the other 

individuals included under clause (iii) who are required to file a return of tax imposed by chapter 1 for 

the taxable year, 

(v) such other information as is prescribed by the 

Secretary by regulation as might indicate whether the 

taxpayer is eligible for such credit or reduction (and 

the amount thereof), and 

(vi) the taxable year with respect to which the preceding information relates or, if applicable, the fact 

that such information is not available. 

(B) INFORMATION TO EXCHANGE AND STATE AGENCIES.— 

The Secretary of Health and Human Services may disclose 

to an Exchange established under the Patient Protection 

and Affordable Care Act or its contractors, or to a State 

agency administering a State program described in subparagraph (A) or its contractors, any inconsistency between the information provided by the Exchange or State 

agency to the Secretary and the information provided to 

the Secretary under subparagraph (A). 

(C) RESTRICTION ON USE OF DISCLOSED INFORMATION.— 

Return information disclosed under subparagraph (A) or 

(B) may be used by officers, employees, and contractors of 

the Department of Health and Human Services, an Exchange, or a State agency only for the purposes of, and to 

the extent necessary in— 

(i) establishing eligibility for participation in the Exchange, and verifying the appropriate amount of, any 

credit or reduction described in subparagraph (A), 

(ii) determining eligibility for participation in the 

State programs described in subparagraph (A). 

(22) DISCLOSURE OF RETURN INFORMATION TO DEPARTMENT

OF HEALTH AND HUMAN SERVICES FOR PURPOSES OF ENHANCING MEDICARE PROGRAM INTEGRITY.— 

(A) IN GENERAL.—The Secretary shall, upon written request from the Secretary of Health and Human Services, 

disclose to officers and employees of the Department of 

Health and Human Services return information with respect to a taxpayer who has applied to enroll, or reenroll, 

as a provider of services or supplier under the Medicare 

program under title XVIII of the Social Security Act. Such 

return information shall be limited to— 

(i) the taxpayer identity information with respect to 

such taxpayer; 

528 

(ii) the amount of the delinquent tax debt owed by 

that taxpayer; and 

(iii) the taxable year to which the delinquent tax 

debt pertains. 

(B) RESTRICTION ON DISCLOSURE.—Return information 

disclosed under subparagraph (A) may be used by officers 

and employees of the Department of Health and Human 

Services for the purposes of, and to the extent necessary 

in, establishing the taxpayer’s eligibility for enrollment or 

reenrollment in the Medicare program, or in any administrative or judicial proceeding relating to, or arising from, 

a denial of such enrollment or reenrollment, or in determining the level of enhanced oversight to be applied with 

respect to such taxpayer pursuant to section 1866(j)(3) of 

the Social Security Act. 

(C) DELINQUENT TAX DEBT.—For purposes of this paragraph, the term ‘‘delinquent tax debt’’ means an outstanding debt under this title for which a notice of lien has 

been filed pursuant to section 6323, but the term does not 

include a debt that is being paid in a timely manner pursuant to an agreement under section 6159 or 7122, or a 

debt with respect to which a collection due process hearing 

under section 6330 is requested, pending, or completed and 

no payment is required. 

(m) DISCLOSURE OF TAXPAYER IDENTITY INFORMATION.— 

(1) TAX REFUNDS.—The Secretary may disclose taxpayer 

identity information to the press and other media for purposes 

of notifying persons entitled to tax refunds when the Secretary, 

after reasonable effort and lapse of time, has been unable to 

locate such persons. 

(2) FEDERAL CLAIMS.— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), the Secretary may, upon written request, disclose the 

mailing address of a taxpayer for use by officers, employees, or agents of a Federal agency for purposes of locating 

such taxpayer to collect or compromise a Federal claim 

against the taxpayer in accordance with sections 3711, 

3717, and 3718 of title 31. 

(B) SPECIAL RULE FOR CONSUMER REPORTING AGENCY.— 

In the case of an agent of a Federal agency which is a consumer reporting agency (within the meaning of section 

603(f) of the Fair Credit Reporting Act (15 U.S.C. 

1681a(f))), the mailing address of a taxpayer may be disclosed to such agent under subparagraph (A) only for the 

purpose of allowing such agent to prepare a commercial 

credit report on the taxpayer for use by such Federal agency in accordance with sections 3711, 3717, and 3718 of title 

31. 

(3) NATIONAL INSTITUTE FOR OCCUPATIONAL SAFETY AND

HEALTH.—Upon written request, the Secretary may disclose 

the mailing address of taxpayers to officers and employees of 

the National Institute for Occupational Safety and Health solely for the purpose of locating individuals who are, or may have 

been, exposed to occupational hazards in order to determine 

529 

the status of their health or to inform them of the possible 

need for medical care and treatment. 

(4) INDIVIDUALS WHO OWE AN OVERPAYMENT OF FEDERAL

PELL GRANTS OR WHO HAVE DEFAULTED ON STUDENT LOANS AD- MINISTERED BY THE DEPARTMENT OF EDUCATION.— (A) IN GENERAL.—Upon written request by the Secretary 

of Education, the Secretary may disclose the mailing address of any taxpayer— 

(i) who owes an overpayment of a grant awarded to 

such taxpayer under subpart 1 of part A of title IV of 

the Higher Education Act of 1965, or 

(ii) who has defaulted on a loan— 

(I) made under part B, D, or E of title IV of the 

Higher Education Act of 1965, or 

(II) made pursuant to section 3(a)(1) of the Migration and Refugee Assistance Act of 1962 to a 

student at an institution of higher education, 

for use only by officers, employees, or agents of the Department of Education for purposes of locating such taxpayer 

for purposes of collecting such overpayment or loan. 

(B) DISCLOSURE TO EDUCATIONAL INSTITUTIONS, ETC..— Any mailing address disclosed under subparagraph (A)(i) 

may be disclosed by the Secretary of Education to— 

(i) any lender, or any State or nonprofit guarantee 

agency, which is participating under part B or D of 

title IV of the Higher Education Act of 1965, or 

(ii) any educational institution with which the Secretary of Education has an agreement under subpart 

1 of part A, or part D or E, of title IV of such Act, 

for use only by officers, employees, or agents of such lender, guarantee agency, or institution whose duties relate to 

the collection of student loans for purposes of locating individuals who have defaulted on student loans made under 

such loan programs for purposes of collecting such loans. 

(5) INDIVIDUALS WHO HAVE DEFAULTED ON STUDENT LOANS

ADMINISTERED BY THE DEPARTMENT OF HEALTH AND HUMAN

SERVICES.— (A) IN GENERAL.—Upon written request by the Secretary 

of Health and Human Services, the Secretary may disclose 

the mailing address of any taxpayer who has defaulted on 

a loan made under part C of title VII of the Public Health 

Service Act or under subpart II of part B of title VIII of 

such Act, for use only by officers, employees, or agents of 

the Department of Health and Human Services for purposes of locating such taxpayer for purposes of collecting 

such loan. 

(B) DISCLOSURE TO SCHOOLS AND ELIGIBLE LENDERS.— 

Any mailing address disclosed under subparagraph (A) 

may be disclosed by the Secretary of Health and Human 

Services to— 

(i) any school with which the Secretary of Health 

and Human Services has an agreement under subpart 

II of part C of title VII of the Public Health Service 

Act or subpart II of part B of title VIII of such Act, 

or 

530 

(ii) any eligible lender (within the meaning of section 737(4) of such Act) participating under subpart I 

of part C of title VII of such Act, 

for use only by officers, employees, or agents of such school 

or eligible lender whose duties relate to the collection of 

student loans for purposes of locating individuals who have 

defaulted on student loans made under such subparts for 

the purposes of collecting such loans. 

(6) BLOOD DONOR LOCATOR SERVICE.— 

(A) IN GENERAL.—Upon written request pursuant to section 1141 of the Social Security Act, the Secretary shall 

disclose the mailing address of taxpayers to officers and 

employees of the Blood Donor Locator Service in the Department of Health and Human Services. 

(B) RESTRICTION ON DISCLOSURE.—The Secretary shall 

disclose return information under subparagraph (A) only 

for purposes of, and to the extent necessary in, assisting 

under the Blood Donor Locator Service authorized persons 

(as defined in section 1141(h)(1) of the Social Security Act) 

in locating blood donors who, as indicated by donated blood 

or products derived therefrom or by the history of the subsequent use of such blood or blood products, have or may 

have the virus for acquired immune deficiency syndrome, 

in order to inform such donors of the possible need for 

medical care and treatment. 

(C) SAFEGUARDS.—The Secretary shall destroy all related blood donor records (as defined in section 1141(h)(2) 

of the Social Security Act) in the possession of the Department of the Treasury upon completion of their use in making the disclosure required under subparagraph (A), so as 

to make such records undisclosable. 

(7) SOCIAL SECURITY ACCOUNT STATEMENT FURNISHED BY SOCIAL SECURITY ADMINISTRATION.—Upon written request by the 

Commissioner of Social Security, the Secretary may disclose 

the mailing address of any taxpayer who is entitled to receive 

a social security account statement pursuant to section 1143(c) 

of the Social Security Act, for use only by officers, employees 

or agents of the Social Security Administration for purposes of 

mailing such statement to such taxpayer. 

(n) CERTAIN OTHER PERSONS.—Pursuant to regulations prescribed 

by the Secretary, returns and return information may be disclosed 

to any person, including any person described in section 7513(a), to 

the extent necessary in connection with the processing, storage, 

transmission, and reproduction of such returns and return information, the programming, maintenance, repair, testing, and procurement of equipment, and the providing of other services, for purposes of tax administration. 

(o) DISCLOSURE OF RETURNS AND RETURN INFORMATION WITH RESPECT TO CERTAIN TAXES.— 

(1) TAXES IMPOSED BY SUBTITLE E.— 

(A) IN GENERAL.—Returns and return information with 

respect to taxes imposed by subtitle E (relating to taxes on 

alcohol, tobacco, and firearms) shall be open to inspection 

by or disclosure to officers and employees of a Federal 

531 

agency whose official duties require such inspection or disclosure. 

(B) USE IN CERTAIN PROCEEDINGS.—Returns and return 

information disclosed to a Federal agency under subparagraph (A) may be used in an action or proceeding (or in 

preparation for such action or proceeding) brought under 

section 625 of the American Jobs Creation Act of 2004 for 

the collection of any unpaid assessment or penalty arising 

under such Act. 

(2) TAXES IMPOSED BY CHAPTER 35.—Returns and return information with respect to taxes imposed by chapter 35 (relating 

to taxes on wagering) shall, notwithstanding any other provision of this section, be open to inspection by or disclosure only 

to such person or persons and for such purpose or purposes as 

are prescribed by section 4424. 

(p) PROCEDURE AND RECORDKEEPING.— 

(1) MANNER, TIME, AND PLACE OF INSPECTIONS.—Requests for 

the inspection or disclosure of a return or return information 

and such inspection or disclosure shall be made in such manner and at such time and place as shall be prescribed by the 

Secretary. 

(2) PROCEDURE.— (A) REPRODUCTION OF RETURNS.—A reproduction or certified reproduction of a return shall, upon written request, 

be furnished to any person to whom disclosure or inspection of such return is authorized under this section. A reasonable fee may be prescribed for furnishing such reproduction or certified reproduction. 

(B) DISCLOSURE OF RETURN INFORMATION.—Return information disclosed to any person under the provisions of this 

title may be provided in the form of written documents, reproductions of such documents, films or photoimpressions, 

or electronically produced tapes, disks, or records, or by 

any other mode or means which the Secretary determines 

necessary or appropriate. A reasonable fee may be prescribed for furnishing such return information. 

(C) USE OF REPRODUCTIONS.—Any reproduction of any 

return, document, or other matter made in accordance 

with this paragraph shall have the same legal status as 

the original, and any such reproduction shall, if properly 

authenticated, be admissible in evidence in any judicial or 

administrative proceeding as if it were the original, whether or not the original is in existence. 

(3) RECORDS OF INSPECTION AND DISCLOSURE.— 

(A) SYSTEM OF RECORDKEEPING.—Except as otherwise 

provided by this paragraph, the Secretary shall maintain 

a permanent system of standardized records or accountings of all requests for inspection or disclosure of returns 

and return information (including the reasons for and 

dates of such requests) and of returns and return information inspected or disclosed under this section and section 

6104(c). Notwithstanding the provisions of section 552a(c) 

of title 5, United States Code, the Secretary shall not be 

required to maintain a record or accounting of requests for 

inspection or disclosure of returns and return information, 

532 

or of returns and return information inspected or disclosed, under the authority of subsection (c), (e), (f)(5), 

(h)(1), (3)(A), or (4), (i)(4), or (8)(A)(ii), (k)(1), (2), (6), (8), 

or (9), (l)(1), (4)(B), (5), (7), (8), (9), (10), (11), (12), (13), 

(14), (15), (16), (17), or (18), (m), or (n). The records or accountings required to be maintained under this paragraph 

shall be available for examination by the Joint Committee 

on Taxation or the Chief of Staff of such joint committee. 

Such record or accounting shall also be available for examination by such person or persons as may be, but only to 

the extent, authorized to make such examination under 

section 552a(c)(3) of title 5, United States Code. 

(B) REPORT BY THE SECRETARY.—The Secretary shall, 

within 90 days after the close of each calendar year, furnish to the Joint Committee on Taxation a report with respect to, or summary of, the records or accountings described in subparagraph (A) in such form and containing 

such information as such joint committee or the Chief of 

Staff of such joint committee may designate. Such report 

or summary shall not, however, include a record or accounting of any request by the President under subsection 

(g) for, or the disclosure in response to such request of, any 

return or return information with respect to any individual 

who, at the time of such request, was an officer or employee of the executive branch of the Federal Government. 

Such report or summary, or any part thereof, may be disclosed by such joint committee to such persons and for 

such purposes as the joint committee may, by record vote 

of a majority of the members of the joint committee, determine. 

(C) PUBLIC REPORT ON DISCLOSURES.—The Secretary 

shall, within 90 days after the close of each calendar year, 

furnish to the Joint Committee on Taxation for disclosure 

to the public a report with respect to the records or accountings described in subparagraph (A) which— 

(i) provides with respect to each Federal agency, 

each agency, body, or commission described in subsection (d), (i)(3)(B)(i) or (7)(A)(ii), or (l)(6), and the 

Government Accountability Office the number of— 

(I) requests for disclosure of returns and return 

information, 

(II) instances in which returns and return information were disclosed pursuant to such requests 

or otherwise, 

(III) taxpayers whose returns, or return information with respect to whom, were disclosed pursuant to such requests, and 

(ii) describes the general purposes for which such requests were made. 

(4) SAFEGUARDS.—Any Federal agency described in subsection (h)(2), (h)(5), (i)(1), (2), (3), (5), or (7), (j)(1), (2), or (5), 

(k)(8), (10), or (11), (l)(1), (2), (3), (5), (10), (11), (13), (14), (17), 

or (22) or (o)(1)(A), the Government Accountability Office, the 

Congressional Budget Office, or any agency, body, or commission described in subsection (d), (i)(1)(C), (3)(B)(i), or (7)(A)(ii), 

533 

or (k)(10), (l)(6), (7), (8), (9), (12), (15), or (16), any appropriate 

State officer (as defined in section 6104(c)), or any other person 

described in subsection (k)(10), subsection (l)(10), (16), (18), 

(19), or (20), or any entity described in subsection (l)(21), shall, 

as a condition for receiving returns or return information— 

(A) establish and maintain, to the satisfaction of the Secretary, a permanent system of standardized records with 

respect to any request, the reason for such request, and 

the date of such request made by or of it and any disclosure of return or return information made by or to it; 

(B) establish and maintain, to the satisfaction of the Secretary, a secure area or place in which such returns or return information shall be stored; 

(C) restrict, to the satisfaction of the Secretary, access to 

the returns or return information only to persons whose 

duties or responsibilities require access and to whom disclosure may be made under the provisions of this title; 

(D) provide such other safeguards which the Secretary 

determines (and which he prescribes in regulations) to be 

necessary or appropriate to protect the confidentiality of 

the returns or return information; 

(E) furnish a report to the Secretary, at such time and 

containing such information as the Secretary may prescribe, which describes the procedures established and utilized by such agency, body, or commission, the Government Accountability Office, or the Congressional Budget 

Office for ensuring the confidentiality of returns and return information required by this paragraph; and 

(F) upon completion of use of such returns or return information— 

(i) in the case of an agency, body, or commission described in subsection (d), (i)(3)(B)(i), (k)(10), or (l)(6), 

(7), (8), (9), or (16), any appropriate State officer (as 

defined in section 6104(c)), or any other person described in subsection (k)(10) or subsection (l)(10), (16), 

(18), (19), or (20) return to the Secretary such returns 

or return information (along with any copies made 

therefrom) or make such returns or return information 

undisclosable in any manner and furnish a written report to the Secretary describing such manner, 

(ii) in the case of an agency described in subsection 

(h)(2), (h)(5), (i)(1), (2), (3), (5) or (7), (j)(1), (2), or (5), 

(k)(8), (10), or (11), (l)(1), (2), (3), (5), (10), (11), (12), 

(13), (14), (15), (17), or (22), or (o)(1)(A) or any entity 

described in subsection (l)(21), the Government Accountability Office, or the Congressional Budget Office, 

either— 

(I) return to the Secretary such returns or return information (along with any copies made 

therefrom), 

(II) otherwise make such returns or return information undisclosable, or 

(III) to the extent not so returned or made 

undisclosable, ensure that the conditions of subparagraphs (A), (B), (C), (D), and (E) of this paraVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00539 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
534 

graph continue to be met with respect to such returns or return information, and 

(iii) in the case of the Department of Health and 

Human Services for purposes of subsection (m)(6), destroy all such return information upon completion of 

its use in providing the notification for which the information was obtained, so as to make such information undisclosable; 

except that the conditions of subparagraphs (A), (B), (C), (D), 

and (E) shall cease to apply with respect to any return or return information if, and to the extent that, such return or return information is disclosed in the course of any judicial or 

administrative proceeding and made a part of the public record 

thereof. If the Secretary determines that any such agency, 

body, or commission, including an agency, an appropriate State 

officer (as defined in section 6104(c)), or any other person described in subsection (k)(10) or subsection (l)(10), (16), (18), 

(19), or (20) or any entity described in subsection (l)(21), or the 

Government Accountability Office or the Congressional Budget 

Office, has failed to, or does not, meet the requirements of this 

paragraph, he may, after any proceedings for review established under paragraph (7), take such actions as are necessary 

to ensure such requirements are met, including refusing to disclose returns or return information to such agency, body, or 

commission, including an agency, an appropriate State officer 

(as defined in section 6104(c)), or any other person described 

in subsection (k)(10) or subsection (l)(10), (16), (18), (19), or 

(20) or any entity described in subsection (l)(21), or the Government Accountability Office or the Congressional Budget Office, until he determines that such requirements have been or 

will be met. In the case of any agency which receives any mailing address under paragraph (2), (4), (6), or (7) of subsection 

(m) and which discloses any such mailing address to any agent 

or which receives any information under paragraph (6)(A), (10), 

(12)(B), or (16) of subsection (l) and which discloses any such 

information to any agent, or any person including an agent described in subsection (l)(10) or (16), this paragraph shall apply 

to such agency and each such agent or other person (except 

that, in the case of an agent, or any person including an agent 

described in subsection (l)(10) or (16), any report to the Secretary or other action with respect to the Secretary shall be 

made or taken through such agency). For purposes of applying 

this paragraph in any case to which subsection (m)(6) applies, 

the term ‘‘return information’’ includes related blood donor 

records (as defined in section 1141(h)(2) of the Social Security 

Act). 

(5) REPORT ON PROCEDURES AND SAFEGUARDS.—After the 

close of each calendar year, the Secretary shall furnish to each 

committee described in subsection (f)(1) a report which describes the procedures and safeguards established and utilized 

by such agencies, bodies, or commissions, the Government Accountability Office, and the Congressional Budget Office for ensuring the confidentiality of returns and return information as 

required by this subsection. Such report shall also describe inVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00540 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
535 

stances of deficiencies in, and failure to establish or utilize, 

such procedures. 

(6) AUDIT OF PROCEDURES AND SAFEGUARDS.— 

(A) AUDIT BY COMPTROLLER GENERAL.—The Comptroller 

General may audit the procedures and safeguards established by such agencies, bodies, or commissions and the 

Congressional Budget Office pursuant to this subsection to 

determine whether such safeguards and procedures meet 

the requirements of this subsection and ensure the confidentiality of returns and return information. The Comptroller General shall notify the Secretary before any such 

audit is conducted. 

(B) RECORDS OF INSPECTION AND REPORTS BY THE COMPTROLLER GENERAL.—The Comptroller General shall— 

(i) maintain a permanent system of standardized 

records and accountings of returns and return information inspected by officers and employees of the Government Accountability Office under subsection 

(i)(8)(A)(ii) and shall, within 90 days after the close of 

each calendar year, furnish to the Secretary a report 

with respect to, or summary of, such records or accountings in such form and containing such information as the Secretary may prescribe, and 

(ii) furnish an annual report to each committee described in subsection (f) and to the Secretary setting 

forth his findings with respect to any audit conducted 

pursuant to subparagraph (A). 

The Secretary may disclose to the Joint Committee any report furnished to him under clause (i). 

(7) ADMINISTRATIVE REVIEW.—The Secretary shall by regulations prescribe procedures which provide for administrative review of any determination under paragraph (4) that any agency, body, or commission described in subsection (d) has failed 

to meet the requirements of such paragraph. 

(8) STATE LAW REQUIREMENTS.— 

(A) SAFEGUARDS.—Notwithstanding any other provision 

of this section, no return or return information shall be 

disclosed after December 31, 1978, to any officer or employee of any State which requires a taxpayer to attach to, 

or include in, any State tax return a copy of any portion 

of his Federal return, or information reflected on such Federal return, unless such State adopts provisions of law 

which protect the confidentiality of the copy of the Federal 

return (or portion thereof) attached to, or the Federal return information reflected on, such State tax return. 

(B) DISCLOSURE OF RETURNS OR RETURN INFORMATION IN

STATE RETURNS.—Nothing in subparagraph (A) shall be 

construed to prohibit the disclosure by an officer or employee of any State of any copy of any portion of a Federal 

return or any information on a Federal return which is required to be attached or included in a State return to another officer or employee of such State (or political subdivision of such State) if such disclosure is specifically authorized by State law. 

536 

(q) REGULATIONS.—The Secretary is authorized to prescribe such 

other regulations as are necessary to carry out the provisions of 

this section. 

* * * * * * * 

CHAPTER 62—TIME AND PLACE FOR PAYING 

TAX 

* * * * * * * 

Subchapter B—EXTENSIONS OF TIME FOR 

PAYMENT 

* * * * * * * 

SEC. 6166. EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX WHERE 

ESTATE CONSISTS LARGELY OF INTEREST IN CLOSELY 

HELD BUSINESS. 

(a) 5-YEAR DEFERRAL; 10-YEAR INSTALLMENT PAYMENT.— (1) IN GENERAL.—If the value of an interest in a closely held 

business which is included in determining the gross estate of 

a decedent who was (at the date of his death) a citizen or resident of the United States exceeds 35 percent of the adjusted 

gross estate, the executor may elect to pay part or all of the 

tax imposed by section 2001 in 2 or more (but not exceeding 

10) equal installments. 

(2) LIMITATION.—The maximum amount of tax which may be 

paid in installments under this subsection shall be an amount 

which bears the same ratio to the tax imposed by section 2001 

(reduced by the credits against such tax) as— 

(A) the closely held business amount, bears to 

(B) the amount of the adjusted gross estate. 

(3) DATE FOR PAYMENT OF INSTALLMENTS.—If an election is 

made under paragraph (1), the first installment shall be paid 

on or before the date selected by the executor which is not 

more than 5 years after the date prescribed by section 6151(a) 

for payment of the tax, and each succeeding installment shall 

be paid on or before the date which is 1 year after the date 

prescribed by this paragraph for payment of the preceding installment. 

(b) DEFINITIONS AND SPECIAL RULES.— 

(1) INTEREST IN CLOSELY HELD BUSINESS.—For purposes of 

this section, the term ‘‘interest in a closely held business’’ 

means— 

(A) an interest as a proprietor in a trade or business carried on as a proprietorship; 

(B) an interest as a partner in a partnership carrying on 

a trade or business, if— 

(i) 20 percent or more of the total capital interest in 

such partnership is included in determining the gross 

estate of the decedent, or 

(ii) such partnership had 45 or fewer partners; or 

(C) stock in a corporation carrying on a trade or business 

if— 

537 

(i) 20 percent or more in value of the voting stock 

of such corporation is included in determining the 

gross estate of the decedent, or 

(ii) such corporation had 45 or fewer shareholders. 

(2) RULES FOR APPLYING PARAGRAPH (1).—For purposes of 

paragraph (1)— 

(A) TIME FOR TESTING.—Determinations shall be made 

as of the time immediately before the decedent’s death. 

ø(B) CERTAIN INTERESTS HELD BY HUSBAND AND WIFE.— Stock or a partnership interest which— 

ø(i) is community property of a husband and wife (or 

the income from which is community income) under 

the applicable community property law of a State, or 

ø(ii) is held by a husband and wife as joint tenants, 

tenants by the entirety, or tenants in common, 

shall be treated as owned by one shareholder or one partner, as the case may be.¿ 

(B) CERTAIN INTERESTS HELD BY MARRIED COUPLE.— Stock or a partnership interest which— 

(i) is community property of a married couple (or the 

income from which is community income) under the 

applicable community property law of a State, or 

(ii) is held by a married couple as joint tenants, tenants by the entirety, or tenants in common, 

shall be treated as owned by 1 shareholder or 1 partner, as 

the case may be. 

(C) INDIRECT OWNERSHIP.—Property owned, directly or 

indirectly, by or for a corporation, partnership, estate, or 

trust shall be considered as being owned proportionately 

by or for its shareholders, partners, or beneficiaries. For 

purposes of the preceding sentence, a person shall be treated as a beneficiary of any trust only if such person has a 

present interest in the trust. 

(D) CERTAIN INTERESTS HELD BY MEMBERS OF DECEDENT’S FAMILY.—All stock and all partnership interests 

held by the decedent or by any member of his family (within the meaning of section 267(c)(4)) shall be treated as 

owned by the decedent. 

(3) FARMHOUSES AND CERTAIN OTHER STRUCTURES TAKEN

INTO ACCOUNT.—For purposes of the 35-percent requirement of 

subsection (a)(1), an interest in a closely held business which 

is the business of farming includes an interest in residential 

buildings and related improvements on the farm which are occupied on a regular basis by the owner or lessee of the farm 

or by persons employed by such owner or lessee for purposes 

of operating or maintaining the farm. 

(4) VALUE.—For purposes of this section, value shall be value 

determined for purposes of chapter 11 (relating to estate tax). 

(5) CLOSELY HELD BUSINESS AMOUNT.—For purposes of this 

section, the term ‘‘closely held business amount’’ means the 

value of the interest in a closely held business which qualifies 

under subsection (a)(1). 

(6) ADJUSTED GROSS ESTATE.—For purposes of this section, 

the term, ‘‘adjusted gross estate’’ means the value of the gross 

estate reduced by the sum of the amounts allowable as a deVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00543 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
538 

duction under section 2053 or 2054. Such sum shall be determined on the basis of the facts and circumstances in existence 

on the date (including extensions) for filing the return of tax 

imposed by section 2001 (or, if earlier, the date on which such 

return is filed). 

(7) PARTNERSHIP INTERESTS AND STOCK WHICH IS NOT READ- ILY TRADABLE.— (A) IN GENERAL.—If the executor elects the benefits of 

this paragraph (at such time and in such manner as the 

Secretary shall by regulations prescribe), then— 

(i) for purposes of paragraph (1)(B)(i) or (1)(C)(i) 

(whichever is appropriate) and for purposes of subsection (c), any capital interest in a partnership and 

any non-readily-tradable stock which (after the application of paragraph (2)) is treated as owned by the decedent shall be treated as included in determining the 

value of the decedent’s gross estate, 

(ii) the executor shall be treated as having selected 

under subsection (a)(3) the date prescribed by section 

6151(a), and 

(iii) for purposes of applying section 6601(j), the 2- 

percent portion (as defined in such section) shall be 

treated as being zero. 

(B) NON-READILY-TRADABLE STOCK DEFINED.—For purposes of this paragraph, the term ‘‘non-readily-tradable 

stock’’ means stock for which, at the time of the decedent’s 

death, there was no market on a stock exchange or in an 

over-the-counter market. 

(8) STOCK IN HOLDING COMPANY TREATED AS BUSINESS COMPANY STOCK IN CERTAIN CASES.— 

(A) IN GENERAL.—If the executor elects the benefits of 

this paragraph, then— 

(i) HOLDING COMPANY STOCK TREATED AS BUSINESS

COMPANY STOCK.—For purposes of this section, the 

portion of the stock of any holding company which represents direct ownership (or indirect ownership 

through 1 or more other holding companies) by such 

company in a business company shall be deemed to be 

stock in such business company. 

(ii) 5-YEAR DEFERRAL FOR PRINCIPAL NOT TO APPLY.— 

The executor shall be treated as having selected under 

subsection (a)(3) the date prescribed by section 

6151(a). 

(iii) 2-PERCENT INTEREST RATE NOT TO APPLY.—For 

purposes of applying section 6601(j), the 2-percent portion (as defined in such section) shall be treated as 

being zero. 

(B) ALL STOCK MUST BE NON-READILY-TRADABLE STOCK.— 

(i) IN GENERAL.—No stock shall be taken into account for purposes of applying this paragraph unless 

it is non-readily-tradable stock (within the meaning of 

paragraph (7)(B)). 

(ii) SPECIAL APPLICATION WHERE ONLY HOLDING COMPANY STOCK IS NON-READILY-TRADABLE STOCK.—If the 

539 

requirements of clause (i) are not met, but all of the 

stock of each holding company taken into account is 

non-readily-tradable, then this paragraph shall apply, 

but subsection (a)(1) shall be applied by substituting 

‘‘5’’ for ‘‘10’’. 

(C) APPLICATION OF VOTING STOCK REQUIREMENT OF

PARAGRAPH (1)(C)(I).—For purposes of clause (i) of paragraph (1)(C), the deemed stock resulting from the application of subparagraph (A) shall be treated as voting stock 

to the extent that voting stock in the holding company 

owns directly (or through the voting stock of 1 or more 

other holding companies) voting stock in the business company. 

(D) DEFINITIONS.—For purposes of this paragraph— 

(i) HOLDING COMPANY.—The term ‘‘holding company’’ 

means any corporation holding stock in another corporation. 

(ii) BUSINESS COMPANY.—The term ‘‘business company’’ means any corporation carrying on a trade or 

business. 

(9) DEFERRAL NOT AVAILABLE FOR PASSIVE ASSETS.— (A) IN GENERAL.—For purposes of subsection (a)(1) and 

determining the closely held business amount (but not for 

purposes of subsection (g)), the value of any interest in a 

closely held business shall not include the value of that 

portion of such interest which is attributable to passive assets held by the business. 

(B) PASSIVE ASSET DEFINED.—For purposes of this paragraph— 

(i) IN GENERAL.—The term ‘‘passive asset’’ means 

any asset other than an asset used in carrying on a 

trade or business. 

(ii) STOCK TREATED AS PASSIVE ASSET.—The term 

‘‘passive asset’’ includes any stock in another corporation unless— 

(I) such stock is treated as held by the decedent 

by reason of an election under paragraph (8), and 

(II) such stock qualified under subsection (a)(1). 

(iii) EXCEPTION FOR ACTIVE CORPORATIONS.—If— 

(I) a corporation owns 20 percent or more in 

value of the voting stock of another corporation, or 

such other corporation has 45 or fewer shareholders, and 

(II) 80 percent or more of the value of the assets 

of each such corporation is attributable to assets 

used in carrying on a trade or business, 

then such corporations shall be treated as 1 corporation for 

purposes of clause (ii). For purposes of applying subclause 

(II) to the corporation holding the stock of the other corporation, such stock shall not be taken into account. 

(10) STOCK IN QUALIFYING LENDING AND FINANCE BUSINESS

TREATED AS STOCK IN AN ACTIVE TRADE OR BUSINESS COM- PANY.— 

(A) IN GENERAL.—If the executor elects the benefits of 

this paragraph, then— 

540 

(i) STOCK IN QUALIFYING LENDING AND FINANCE BUSI- NESS TREATED AS STOCK IN AN ACTIVE TRADE OR BUSI- NESS COMPANY.—For purposes of this section, any 

asset used in a qualifying lending and finance business shall be treated as an asset which is used in carrying on a trade or business. 

(ii) 5-YEAR DEFERRAL FOR PRINCIPAL NOT TO APPLY.— The executor shall be treated as having selected under 

subsection (a)(3) the date prescribed by section 

6151(a). 

(iii) 5 EQUAL INSTALLMENTS ALLOWED.—For purposes 

of applying subsection (a)(1), ‘‘5’’ shall be substituted 

for ‘‘10’’. 

(B) DEFINITIONS.—For purposes of this paragraph— 

(i) QUALIFYING LENDING AND FINANCE BUSINESS.— 

The term ‘‘qualifying lending and finance business’’ 

means a lending and finance business, if— 

(I) based on all the facts and circumstances immediately before the date of the decedent’s death, 

there was substantial activity with respect to the 

lending and finance business, or 

(II) during at least 3 of the 5 taxable years ending before the date of the decedent’s death, such 

business had at least 1 full-time employee substantially all of whose services were the active 

management of such business, 10 full-time, nonowner employees substantially all of whose services were directly related to such business, and 

$5,000,000 in gross receipts from activities described in clause (ii). 

(ii) LENDING AND FINANCE BUSINESS.—The term 

‘‘lending and finance business’’ means a trade or business of— 

(I) making loans, 

(II) purchasing or discounting accounts receivable, notes, or installment obligations, 

(III) engaging in rental and leasing of real and 

tangible personal property, including entering into 

leases and purchasing, servicing, and disposing of 

leases and leased assets, 

(IV) rendering services or making facilities 

available in the ordinary course of a lending or finance business, and 

(V) rendering services or making facilities available in connection with activities described in subclauses (I) through (IV) carried on by the corporation rendering services or making facilities available, or another corporation which is a member of 

the same affiliated group (as defined in section 

1504 without regard to section 1504(b)(3)). 

(iii) LIMITATION.—The term ‘‘qualifying lending and 

finance business’’ shall not include any interest in an 

entity, if the stock or debt of such entity or a controlled group (as defined in section 267(f)(1)) of which 

such entity was a member was readily tradable on an 

541 

established securities market or secondary market (as 

defined by the Secretary) at any time within 3 years 

before the date of the decedent’s death. 

(c) SPECIAL RULE FOR INTEREST IN 2 OR MORE CLOSELY HELD

BUSINESSES.—For purposes of this section, interest in 2 or more 

closely held businesses, with respect to each of which there is included in determining the value of the decedent’s gross estate 20 

percent or more of the total value of each such business, shall be 

treated as an interest in a single closely held business. For purposes of the 20-percent requirement of the preceding sentence, an 

interest in a closely held business which represents the surviving 

spouse’s interest in property held by the decedent and the surviving spouse as community property or as joint tenants, tenants 

by the entirety, or tenants in common shall be treated as having 

been included in determining the value of the decedent’s gross estate. 

(d) ELECTION.—Any election under subsection (a) shall be made 

not later than the time prescribed by section 6075(a) for filing the 

return of tax imposed by section 2001 (including extensions thereof), and shall be made in such manner as the Secretary shall by 

regulations prescribe. If an election under subsection (a) is made, 

the provisions of this subtitle shall apply as though the Secretary 

were extending the time for payment of the tax. 

(e) PRORATION OF DEFICIENCY TO INSTALLMENTS.—If an election 

is made under subsection (a) to pay any part of the tax imposed 

by section 2001 in installments and a deficiency has been assessed, 

the deficiency shall (subject to the limitation provided by subsection (a)(2)) be prorated to the installments payable under subsection (a). The part of the deficiency so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as a part of, such installment. The 

part of the deficiency so prorated to any installment the date for 

payment of which has arrived shall be paid upon notice and demand from the Secretary. This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and 

regulations, or to fraud with intent to evade tax. 

(f) TIME FOR PAYMENT OF INTEREST.—If the time for payment of 

any amount of tax has been extended under this section— 

(1) INTEREST FOR FIRST 5 YEARS.—Interest payable under section 6601 of any unpaid portion of such amount attributable to 

the first 5 years after the date prescribed by section 6151(a) for 

payment of the tax shall be paid annually. 

(2) INTEREST FOR PERIODS AFTER FIRST 5 YEARS.—Interest 

payable under section 6601 on any unpaid portion of such 

amount attributable to any period after the 5-year period referred to in paragraph (1) shall be paid annually at the same 

time as, and as a part of, each installment payment of the tax. 

(3) INTEREST IN THE CASE OF CERTAIN DEFICIENCIES.—In the 

case of a deficiency to which subsection (e) applies which is assessed after the close of the 5-year period referred to in paragraph (1), interest attributable to such 5-year period, and interest assigned under paragraph (2) to any installment the 

date for payment of which has arrived on or before the date of 

the assessment of the deficiency, shall be paid upon notice and 

demand from the Secretary. 

542 

(4) SELECTION OF SHORTER PERIOD.—If the executor has selected a period shorter than 5 years under subsection (a)(3), 

such shorter period shall be substituted for 5 years in paragraphs (1), (2), and (3) of this subsection. 

(g) ACCELERATION OF PAYMENT.— 

(1) DISPOSITION OF INTEREST; WITHDRAWAL OF FUNDS FROM

BUSINESS.— 

(A) If— 

(i)(I) any portion of an interest in a closely held 

business which qualifies under subsection (a)(1) is distributed, sold, exchanged, or otherwise disposed of, or 

(II) money and other property attributable to such 

an interest is withdrawn from such trade or business, 

and 

(ii) the aggregate of such distributions, sales, exchanges, or other dispositions and withdrawals equals 

or exceeds 50 percent of the value of such interest, 

then the extension of time for payment of tax provided in 

subsection (a) shall cease to apply, and the unpaid portion 

of the tax payable in installments shall be paid upon notice and demand from the Secretary. 

(B) In the case of a distribution in redemption of stock 

to which section 303 (or so much of section 304 as relates 

to section 303) applies— 

(i) the redemption of such stock, and the withdrawal 

of money and other property distributed in such redemption, shall not be treated as a distribution or 

withdrawal for purposes of subparagraph (A), and 

(ii) for purposes of subparagraph (A), the value of 

the interest in the closely held business shall be considered to be such value reduced by the value of the 

stock redeemed. 

This subparagraph shall apply only if, on or before the 

date prescribed by subsection (a)(3) for the payment of the 

first installment which becomes due after the date of the 

distribution (or, if earlier, on or before the day which is 1 

year after the date of the distribution), there is paid an 

amount of the tax imposed by section 2001 not less than 

the amount of money and other property distributed. 

(C) Subparagraph (A)(i) does not apply to an exchange of 

stock pursuant to a plan of reorganization described in 

subparagraph (D), (E), or (F) of section 368(a)(1) nor to an 

exchange to which section 355 (or so much of section 356 

as relates to section 355) applies; but any stock received in 

such an exchange shall be treated for purposes of subparagraph (A)(i) as an interest qualifying under subsection 

(a)(1). 

(D) Subparagraph (A)(i) does not apply to a transfer of 

property of the decedent to a person entitled by reason of 

the decedent’s death to receive such property under the decedent’s will, the applicable law of descent and distribution, or a trust created by the decedent. A similar rule 

shall apply in the case of a series of subsequent transfers 

of the property by reason of death so long as each transfer 

543 

is to a member of the family (within the meaning of section 267(c)(4)) of the transferor in such transfer. 

(E) CHANGES IN INTEREST IN HOLDING COMPANY.—If any 

stock in a holding company is treated as stock in a business company by reason of subsection (b)(8)(A)— 

(i) any disposition of any interest in such stock in 

such holding company which was included in determining the gross estate of the decedent, or 

(ii) any withdrawal of any money or other property 

from such holding company attributable to any interest included in determining the gross estate of the decedent, 

shall be treated for purposes of subparagraph (A) as a disposition of (or a withdrawal with respect to) the stock 

qualifying under subsection (a)(1). 

(F) CHANGES IN INTEREST IN BUSINESS COMPANY.—If any 

stock in a holding company is treated as stock in a business company by reason of subsection (b)(8)(A)— 

(i) any disposition of any interest in such stock in 

the business company by such holding company, or 

(ii) any withdrawal of any money or other property 

from such business company attributable to such stock 

by such holding company owning such stock, 

shall be treated for purposes of subparagraph (A) as a disposition of (or a withdrawal with respect to) the stock 

qualifying under subsection (a)(1). 

(2) UNDISTRIBUTED INCOME OF ESTATE.— (A) If an election is made under this section and the estate has undistributed net income for any taxable year 

ending on or after the due date for the first installment, 

the executor shall, on or before the date prescribed by law 

for filing the income tax return for such taxable year (including extensions thereof), pay an amount equal to such 

undistributed net income in liquidation of the unpaid portion of the tax payable in installments. 

(B) For purposes of subparagraph (A), the undistributed 

net income of the estate for any taxable year is the amount 

by which the distributable net income of the estate for 

such taxable year (as defined in section 643) exceeds the 

sum of— 

(i) the amounts for such taxable year specified in 

paragraphs (1) and (2) of section 661(a) (relating to deductions for distributions, etc.); 

(ii) the amount of tax imposed for the taxable year 

on the estate under chapter 1; and 

(iii) the amount of the tax imposed by section 2001 

(including interest) paid by the executor during the 

taxable year (other than any amount paid pursuant to 

this paragraph). 

(C) For purposes of this paragraph, if any stock in a corporation is treated as stock in another corporation by reason of subsection (b)(8)(A), any dividends paid by such 

other corporation to the corporation shall be treated as 

paid to the estate of the decedent to the extent attributable to the stock qualifying under subsection (a)(1). 

544 

(3) FAILURE TO MAKE PAYMENT OF PRINCIPAL OR INTEREST.— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), if any payment of principal or interest under this section is not paid on or before the date fixed for its payment 

by this section (including any extension of time), the unpaid portion of the tax payable in installments shall be 

paid upon notice and demand from the Secretary. 

(B) PAYMENT WITHIN 6 MONTHS.—If any payment of principal or interest under this section is not paid on or before 

the date determined under subparagraph (A) but is paid 

within 6 months of such date— 

(i) the provisions of subparagraph (A) shall not 

apply with respect to such payment, 

(ii) the provisions of section 6601(j) shall not apply 

with respect to the determination of interest on such 

payment, and 

(iii) there is imposed a penalty in an amount equal 

to the product of— 

(I) 5 percent of the amount of such payment, 

multiplied by 

(II) the number of months (or fractions thereof) 

after such date and before payment is made. 

The penalty imposed under clause (iii) shall be treated in 

the same manner as a penalty imposed under subchapter 

B of chapter 68. 

(h) ELECTION IN CASE OF CERTAIN DEFICIENCIES.— 

(1) IN GENERAL.—If— 

(A) a deficiency in the tax imposed by section 2001 is assessed, 

(B) the estate qualifies under subsection (a)(1), and 

(C) the executor has not made an election under subsection (a), 

the executor may elect to pay the deficiency in installments. 

This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to 

fraud with intent to evade tax. 

(2) TIME OF ELECTION.—An election under this subsection 

shall be made not later than 60 days after issuance of notice 

and demand by the Secretary for the payment of the deficiency, 

and shall be made in such manner as the Secretary shall by 

regulations prescribe. 

(3) EFFECT OF ELECTION ON PAYMENT.—If an election is made 

under this subsection, the deficiency shall (subject to the limitation provided by subsection (a)(2)) be prorated to the installments which would have been due if an election had been timely made under subsection (a) at the time the estate tax return 

was filed. The part of the deficiency so prorated to any installment the date for payment of which would have arrived shall 

be paid at the time of the making of the election under this 

subsection. The portion of the deficiency so prorated to installments the date for payment of which would not have so arrived 

shall be paid at the time such installments would have been 

due if such an election had been made. 

545 

(i) SPECIAL RULE FOR CERTAIN DIRECT SKIPS.—To the extent that 

an interest in a closely held business is the subject of a direct skip 

(within the meaning of section 2612(c)) occurring at the same time 

as and as a result of the decedent’s death, then for purposes of this 

section any tax imposed by section 2601 on the transfer of such interest shall be treated as if it were additional tax imposed by section 2001. 

(j) REGULATIONS.—The Secretary shall prescribe such regulations 

as may be necessary to the application of this section. 

(k) CROSS REFERENCES.— (1) SECURITY.—For authority of the Secretary to require security in the case of an extension under this section, see section 6165. 

(2) LIEN.—For special lien (in lieu of bond) in the case of an 

extension under this section, see section 6324A. 

(3) PERIOD OF LIMITATION.—For extension of the period of 

limitation in the case of an extension under this section, see 

section 6503(d). 

(4) INTEREST.—For provisions relating to interest on tax payable in installments under this section, see subsection (j) of 

section 6601. 

(5) TRANSFERS WITHIN 3 YEARS OF DEATH.—For special rule 

for qualifying an estate under this section where property has 

been transferred within 3 years of decedent’s death, see section 

2035(c)(2). 

* * * * * * * 

CHAPTER 63—ASSESSMENT 

* * * * * * * 

Subchapter B—DEFICIENCY PROCEDURES IN 

THE CASE OF INCOME, ESTATE, GIFT, AND 

CERTAIN EXCISE TAXES 

* * * * * * * 

SEC. 6212. NOTICE OF DEFICIENCY. 

(a) IN GENERAL.—If the Secretary determines that there is a deficiency in respect of any tax imposed by subtitles A or B or chapter 

41, 42, 43, or 44 he is authorized to send notice of such deficiency 

to the taxpayer by certified mail or registered mail. Such notice 

shall include a notice to the taxpayer of the taxpayer’s right to contact a local office of the taxpayer advocate and the location and 

phone number of the appropriate office. 

(b) ADDRESS FOR NOTICE OF DEFICIENCY.— 

(1) INCOME AND GIFT TAXES AND CERTAIN EXCISE TAXES.—In 

the absence of notice to the Secretary under section 6903 of the 

existence of a fiduciary relationship, notice of a deficiency in 

respect of a tax imposed by subtitle A, chapter 12, chapter 41, 

chapter 42, chapter 43, or chapter 44 if mailed to the taxpayer 

at his last known address, shall be sufficient for purposes of 

subtitle A, chapter 12, chapter 41, chapter 42, chapter 43, 

chapter 44, and this chapter even if such taxpayer is deceased, 

546 

or is under a legal disability, or, in the case of a corporation, 

has terminated its existence. 

(2) JOINT INCOME TAX RETURN.—In the case of a joint income 

tax øreturn filed by husband and wife¿ return , such notice of 

deficiency may be a single joint notice, except that if the Secretary has been notified by either spouse that separate residences have been established, then, in lieu of the single joint 

notice, a duplicate original of the joint notice shall be sent by 

certified mail or registered mail to each spouse at øhis last 

known address¿ the last known address of such spouse . (3) ESTATE TAX.—In the absence of notice to the Secretary 

under section 6903 of the existence of a fiduciary relationship, 

notice of a deficiency in respect of a tax imposed by chapter 11, 

if addressed in the name of the decedent or other person subject to liability and mailed to his last known address, shall be 

sufficient for purposes of chapter 11 and of this chapter. 

(c) FURTHER DEFICIENCY LETTERS RESTRICTED.— 

(1) GENERAL RULE.—If the Secretary has mailed to the taxpayer a notice of deficiency as provided in subsection (a), and 

the taxpayer files a petition with the Tax Court within the 

time prescribed in section 6213(a), the Secretary shall have no 

right to determine any additional deficiency of income tax for 

the same taxable year, of gift tax for the same calendar year, 

of estate tax in respect of the taxable estate of the same decedent, of chapter 41 tax for the same taxable year, of chapter 

43 tax for the same taxable year, of chapter 44 tax for the 

same taxable year, of section 4940 tax for the same taxable 

year, or of chapter 42 tax, (other than under section 4940) with 

respect to any act (or failure to act) to which such petition relates, except in the case of fraud, and except as provided in 

section 6214(a) (relating to assertion of greater deficiencies before the Tax Court), in section 6213(b)(1) (relating to mathematical or clerical errors), in section 6851 or 6852 (relating to 

termination assessments), or in section 6861(c) (relating to the 

making of jeopardy assessments). 

(2) CROSS REFERENCES.—For assessment as a deficiency notwithstanding the prohibition of further deficiency letters, in 

the case of— 

(A) Deficiency attributable to change of treatment 

with respect to itemized deductions, see section 

63(e)(3). 

(B) Deficiency attributable to gain on involuntary 

conversion, see section 1033(a)(2)(C) and (D). 

(C) Deficiency attributable to activities not engaged 

in for profit, see section 183(e)(4). 

For provisions allowing determination of tax in title 11 cases, 

see section 505(a) of title 11 of the United States Code. 

(d) AUTHORITY TO RESCIND NOTICE OF DEFICIENCY WITH TAXPAYER’S CONSENT.—The Secretary may, with the consent of the taxpayer, rescind any notice of deficiency mailed to the taxpayer. Any 

notice so rescinded shall not be treated as a notice of deficiency for 

purposes of subsection (c)(1) (relating to further deficiency letters 

restricted), section 6213(a) (relating to restrictions applicable to deficiencies; petition to Tax Court), and section 6512(a) (relating to 

limitations in case of petition to Tax Court), and the taxpayer shall 

547 

have no right to file a petition with the Tax Court based on such 

notice. Nothing in this subsection shall affect any suspension of the 

running of any period of limitations during any period during 

which the rescinded notice was outstanding. 

* * * * * * * 

CHAPTER 66—LIMITATIONS 

* * * * * * * 

Subchapter A—LIMITATIONS ON ASSESSMENT 

AND COLLECTION 

* * * * * * * 

SEC. 6504. CROSS REFERENCES. 

For limitation period in case of— 

(1) Adjustments to accrued foreign taxes, see section 905(c). 

(2) Change of treatment with respect to itemized deductions 

where taxpayer and øhis spouse¿ the taxpayer’s spouse make 

separate returns, see section 63(e)(3). 

(3) Involuntary conversion of property, see section 

1033(a)(2)(C) and (D). 

(4) Application by fiduciary for discharge from personal liability for estate tax, see section 2204. 

(5) Insolvent banks and trust companies, see section 7507. 

(6) Service in a combat zone, etc., see section 7508. 

(7) Claims against transferees and fiduciaries, see chapter 

71. 

(8) Assessments to recover excessive amounts paid under 

section 6420 (relating to gasoline used on farms), 6421 (relating to gasoline used for certain nonhighway purposes or by 

local transit systems), or 6427 (relating to fuels not used for 

taxable purposes) and assessments of civil penalties under section 6675 for excessive claims under section 6420, 6421, or 

6427, see section 6206. 

(9) Assessment and collection of interest, see section 6601(g). 

(10) Assessment of civil penalties under section 6694 or 

6695, see section 6696(d)(1). 

* * * * * * * 

CHAPTER 76—JUDICIAL PROCEEDINGS 

* * * * * * * 

Subchapter B—PROCEEDINGS BY TAXPAYERS 

AND THIRD PARTIES 

* * * * * * * 

SEC. 7428. DECLARATORY JUDGMENTS RELATING TO STATUS AND 

CLASSIFICATION OF ORGANIZATIONS UNDER SECTION 

501(C)(3), ETC. 

(a) CREATION OF REMEDY.—In a case of actual controversy involving— 

548 

(1) a determination by the Secretary— 

(A) with respect to the initial qualification or continuing 

qualification of an organization as an organization described in section 501(c)(3) which is exempt from tax under 

section 501(a) or as an organization described in section 

170(c)(2), 

(B) with respect to the initial classification or continuing 

classification of an organization as a private foundation (as 

defined in section 509(a)), 

(C) with respect to the initial classification or continuing 

classification of an organization as a private operating 

foundation (as defined in section 4942(j)(3)), 

(D) with respect to the initial classification or continuing 

classification of a cooperative as an organization described 

in section 521(b) which is exempt from tax under section 

521(a), or 

(E) with respect to the initial qualification or continuing 

qualification of an organization as an organization described in section 501(c) (other than paragraph (3)) or 

501(d) and exempt from tax under section 501(a), or 

(2) a failure by the Secretary to make a determination with 

respect to an issue referred to in paragraph (1), 

upon the filing of an appropriate pleading, the United States Tax 

Court, the United States Court of Federal Claims, or the district 

court of the United States for the District of Columbia may make 

a declaration with respect to such initial qualification or continuing 

qualification or with respect to such initial classification or continuing classification. Any such declaration shall have the force and 

effect of a decision of the Tax Court or a final judgment or decree 

of the district court or the Court of Federal Claims, as the case 

may be, and shall be reviewable as such. For purposes of this section, a determination with respect to a continuing qualification or 

continuing classification includes any revocation of or other change 

in a qualification or classification. 

(b) LIMITATIONS.— (1) PETITIONER.—A pleading may be filed under this section 

only by the organization the qualification or classification of 

which is at issue. 

(2) EXHAUSTION OF ADMINISTRATIVE REMEDIES.—A declaratory judgment or decree under this section shall not be issued 

in any proceeding unless the Tax Court, the Court of Federal 

Claims, or the district court of the United States for the District of Columbia determines that the organization involved 

has exhausted administrative remedies available to it within 

the Internal Revenue Service. An organization requesting the 

determination of an issue referred to in subsection (a)(1) shall 

be deemed to have exhausted its administrative remedies with 

respect to a failure by the Secretary to make a determination 

with respect to such issue at the expiration of 270 days after 

the date on which the request for such determination was 

made if the organization has taken, in a timely manner, all 

reasonable steps to secure such determination. 

(3) TIME FOR BRINGING ACTION.—If the Secretary sends by 

certified or registered mail notice of his determination with respect to an issue referred to in subsection (a)(1) to the organiVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00554 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
549 

zation referred to in paragraph (1), no proceeding may be initiated under this section by such organization unless the pleading is filed before the 91st day after the date of such mailing. 

(4) NONAPPLICATION FOR CERTAIN REVOCATIONS.—No action 

may be brought under this section with respect to any revocation of status described in section 6033(j)(1). 

(c) VALIDATION OF CERTAIN CONTRIBUTIONS MADE DURING PENDENCY OF PROCEEDINGS.— 

(1) IN GENERAL.—If— 

(A) the issue referred to in subsection (a)(1) involves the 

revocation of a determination that the organization is described in section 170(c)(2), 

(B) a proceeding under this section is initiated within 

the time provided by subsection (b)(3), and 

(C) either— 

(i) a decision of the Tax Court has become final 

(within the meaning of section 7481), or 

(ii) a judgment of the district court of the United 

States for the District of Columbia has been entered, 

or 

(iii) a judgment of the Court of Federal Claims has 

been entered, 

and such decision or judgment, as the case may be, determines that the organization was not described in section 

170(c)(2), 

then, notwithstanding such decision or judgment, such organization shall be treated as having been described in section 

170(c)(2) for purposes of section 170 for the period beginning 

on the date on which the notice of the revocation was published and ending on the date on which the court first determined in such proceeding that the organization was not described in section 170(c)(2). 

(2) LIMITATION.—Paragraph (1) shall apply only— 

(A) with respect to individuals, and only to the extent 

that the aggregate of the contributions made by any individual to or for the use of the organization during the period specified in paragraph (1) does not exceed $1,000 (for 

this purpose treating a øhusband and wife¿ married couple 

as one contributor), and 

(B) with respect to organizations described in section 

170(c)(2) which are exempt from tax under section 501(a) 

(for this purpose excluding any such organization with respect to which there is pending a proceeding to revoke the 

determination under section 170(c)(2)). 

(3) EXCEPTION.—This subsection shall not apply to any individual who was responsible, in whole or in part, for the activities (or failures to act) on the part of the organization which 

were the basis for the revocation. 

(d) SUBPOENA POWER FOR DISTRICT COURT FOR DISTRICT OF CO- LUMBIA.—In any action brought under this section in the district 

court of the United States for the District of Columbia, a subpoena 

requiring the attendance of a witness at a trial or hearing may be 

served at any place in the United States. 

* * * * * * * 

550 

Subchapter C—THE TAX COURT 

* * * * * * * 

PART I—ORGANIZATION AND JURISDICTION 

* * * * * * * 

SEC. 7448. ANNUITIES TO SURVIVING SPOUSES AND DEPENDENT 

CHILDREN OF JUDGES AND SPECIAL TRIAL JUDGES. 

(a) DEFINITIONS.—For purposes of this section— 

(1) The term ‘‘Tax Court’’ means the United States Tax 

Court. 

(2) The term ‘‘judge’’ means the chief judge or a judge of the 

Tax Court, including any individual receiving retired pay (or 

compensation in lieu of retired pay) under section 7447 whether or not performing judicial duties pursuant to section 7447(c). 

(3) The term ‘‘chief judge’’ means the chief judge of the Tax 

Court. 

(4) The term ‘‘judge’s salary’’ means the salary of a judge received under section 7443(c), retired pay received under section 

7447(d), and compensation (in lieu of retired pay) received 

under section 7447(c). 

(5) The term ‘‘special trial judge’’ means a judicial officer appointed pursuant to section 7443A, including any individual receiving an annuity under chapter 83 or 84 of title 5, United 

States Code. 

(6) The term ‘‘special trial judge’s salary’’ means the salary 

of a special trial judge received under section 7443A(d), any 

amount received as an annuity under chapter 83 or 84 of title 

5, United States Code. 

(7) The term ‘‘survivors annuity fund’’ means the Tax Court 

judges survivors annuity fund established by this section. 

(8) The term ‘‘surviving spouse’’ means a surviving spouse of 

an individual, who either (A) shall have been married to such 

individual for at least 2 years immediately preceding øhis 

death¿ the individual’s death or (B) is a parent of issue by such 

marriage, and who has not remarried. 

(9) The term ‘‘dependent child’’ means an unmarried child, 

including a dependent stepchild or an adopted child, who is 

under the age of 18 years or who because of physical or mental 

disability is incapable of self-support. 

(b) ELECTION.— 

(1) JUDGES.—Any judge may by written election filed while 

he is a judge (except that in the case of an individual who is 

not reappointed following expiration of his term of office, it 

may be made at any time before the day after the day on 

which his successor takes office) bring himself within the purview of this section. In the case of any judge other than the 

chief judge the election shall be filed with the chief judge; in 

the case of the chief judge the election shall be filed as prescribed by the Tax Court. 

(2) SPECIAL TRIAL JUDGES.—Any special trial judge may by 

written election filed with the chief judge bring himself or herself within the purview of this section. Such election shall be 

filed not later than the later of 6 months after— 

551 

(A) 6 months after the date of the enactment of this 

paragraph, 

(B) the date the judge takes office, or 

(C) the date the judge marries. 

(c) SURVIVORS ANNUITY FUND.— 

(1) SALARY DEDUCTIONS.—There shall be deducted and withheld from the salary of each judge or special trial judge electing under subsection (b) a sum equal to 3.5 percent of such 

judge’s or special trial judge’s salary. The amounts so deducted 

and withheld from such judge’s or special trial judge’s salary 

shall, in accordance with such procedure as may be prescribed 

by the Comptroller General of the United States, be deposited 

in the Treasury of the United States to the credit of a fund to 

be known as the ‘‘Tax Court judicial officers survivors annuity 

fund’’ and said fund is appropriated for the payment of annuities, refunds, and allowances as provided by this section. Each 

judge or special trial judge electing under subsection (b) shall 

be deemed thereby to consent and agree to the deductions from 

his salary as provided in this subsection, and payment less 

such deductions shall be a full and complete discharge and acquittance of all claims and demands whatsoever for all judicial 

services rendered by such judge or special trial judge during 

the period covered by such payment, except the right to the 

benefits to which he or his survivors shall be entitled under 

the provisions of this section. 

(2) APPROPRIATIONS WHERE UNFUNDED LIABILITY.— 

(A) IN GENERAL.—Not later than the close of each fiscal 

year, there shall be deposited in the Treasury of the 

United States to the credit of the survivors annuity fund, 

in accordance with such procedures as may be prescribed 

by the Comptroller General of the United States, amounts 

required to reduce to zero the unfunded liability (if any) of 

such fund. Subject to appropriation Acts, such deposits 

shall be taken from sums available for such fiscal year for 

the payment of amounts described in subsection (a)(4) and 

section 7443A(d), and shall immediately become an integrated part of such fund. 

(B) EXCEPTION.—The amount required by subparagraph 

(A) to be deposited in any fiscal year shall not exceed an 

amount equal to 11 percent of the aggregate amounts described in subsection (a)(4) and (a)(6) paid during such fiscal year. 

(C) UNFUNDED LIABILITY DEFINED.—For purposes of subparagraph (A), the term ‘‘unfunded liability’’ means the 

amount estimated by the Secretary to be equal to the excess (as of the close of the fiscal year involved) of— 

(i) the present value of all benefits payable from the 

survivors annuity fund (determined on an annual 

basis in accordance with section 9503 of title 31, 

United States Code), over 

(ii) the sum of— 

(I) the present values of future deductions under 

subsection (c) and future deposits under subsection (d), plus 

552 

(II) the balance in such fund as of the close of 

such fiscal year. 

(D) AMOUNTS NOT CREDITED TO INDIVIDUAL ACCOUNTS.— Amounts appropriated pursuant to this paragraph shall 

not be credited to the account of any individual for purposes of subsection (g). 

(d) DEPOSITS IN SURVIVORS ANNUITY FUND.—Each judge or special trial judge electing under subsection (b) shall deposit, with interest at 3 percent per annum, compounded on December 31 of 

each year, to the credit of the survivors annuity fund, a sum equal 

to 3.5 percent of øhis¿ the individual’s judge’s or special trial 

judge’s salary and of øhis¿ the individual’s basic salary, pay, or 

compensation for service as a Senator, Representative, Delegate, or 

Resident Commissioner in Congress, and for any other civilian 

service within the purview of section 8332 of title 5 of the United 

States Code. Each such judge or special trial judge may elect to 

make such deposits in installments during the continuance of øhis¿ 

the individual’s service as a judge or special trial judge in such 

amount and under such conditions as may be determined in each 

instance by the chief judge. Notwithstanding the failure of a judge 

or special trial judge to make such deposit, credit shall be allowed 

for the service rendered, but the annuity of the surviving spouse 

of such judge or special trial judge shall be reduced by an amount 

equal to 10 percent of the amount of such deposit, computed as of 

the date of the death of such judge or special trial judge, unless 

such surviving spouse shall elect to eliminate such service entirely 

from credit under subsection (n), except that no deposit shall be required from a judge or special trial judge for any year with respect 

to which deductions from øhis¿ the individual’s salary were actually made under the civil service retirement laws and no deposit 

shall be required for any honorable service in the Army, Navy, Air 

Force, Marine Corps, or Coast Guard of the United States. 

(e) INVESTMENT OF SURVIVORS ANNUITY FUND.—The Secretary of 

the Treasury shall invest from time to time, in interest-bearing securities of the United States or Federal farm loan bonds, such portions of the survivors annuity fund as in his judgment may not be 

immediately required for the payment of the annuities, refunds, 

and allowances as provided in this section. The income derived 

from such investments shall constitute a part of said fund for the 

purpose of paying annuities and of carrying out the provisions of 

subsections (g), (h), and (j). 

(f) CREDITING OF DEPOSITS.—The amount deposited by or deducted and withheld from the salary of each judge or special trial 

judge electing to bring himself within the purview of this section 

for credit to the survivors annuity fund shall be credited to an individual account of such judge or special trial judge. 

(g) TERMINATION.—If the service of any judge or special trial 

judge electing under subsection (b) terminates other than pursuant 

to the provisions of section 7447 or if any judge or special trial 

judge ceases to be married after making the election under subsection (b) and revokes (in a writing filed as provided in subsection 

(b)) such election, the amount credited to his individual account, together with interest at 3 percent per annum, compounded on December 31 of each year, to the date of his relinquishment of office, 

shall be returned to him. For the purpose of this section, the servVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00558 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
553 

ice of any judge or special trial judge electing under subsection (b) 

who is not reappointed following expiration of his term but who, at 

the time of such expiration, is eligible for and elects to receive retired pay under section 7447 shall be deemed to have terminated 

pursuant to said section. 

(h) ENTITLEMENT TO ANNUITY.—In case any judge or special trial 

judge electing under subsection (b) shall die while a judge or special trial judge after having rendered at least 5 years of civilian 

service computed as prescribed in subsection (n), for the last 5 

years of which the salary deductions provided for by subsection 

(c)(1) or the deposits required by subsection (d) have actually been 

made or the salary deductions required by the civil service retirement laws have actually been made— 

(1) if such judge or special trial judge is survived by a surviving spouse but not by a dependent child, there shall be paid 

to such surviving spouse an annuity beginning with the day of 

the death of the judge or special trial judge or following the 

surviving spouse’s attainment of the age of 50 years, whichever 

is the later, in an amount computed as provided in subsection 

(m); or 

(2) if such judge or special trial judge is survived by a surviving spouse and a dependent child or children, there shall be 

paid to such surviving spouse an immediate annuity in an 

amount computed as provided in subsection (m), and there 

shall also be paid to or on behalf of each such child an immediate annuity equal to the lesser of— 

(A) 10 percent of the average annual salary of such 

judge or special trial judge (determined in accordance with 

subsection (m)), or 

(B) 20 percent of such average annual salary, divided by 

the number of such children; or 

(3) if such judge or special trial judge leaves no surviving 

spouse but leaves a surviving dependent child or children, 

there shall be paid to or on behalf of each such child an immediate annuity equal to the lesser of— 

(A) 20 percent of the average annual salary of such 

judge or special trial judge (determined in accordance with 

subsection (m)), or 

(B) 40 percent of such average annual salary, divided by 

the number of such children. 

The annuity payable to a surviving spouse under this subsection 

shall be terminable upon such surviving spouse’s death or such 

surviving spouse’s remarriage before attaining age 55. The annuity 

payable to a child under this subsection shall be terminable upon 

(A) his attaining the age of 18 years, (B) his marriage, or (C) his 

death, whichever first occurs, except that if such child is incapable 

of self-support by reason of mental or physical disability his annuity shall be terminable only upon death, marriage, or recovery from 

such disability. In case of the death of a surviving spouse of a judge 

or special trial judge leaving a dependent child or children of the 

judge or special trial judge surviving such spouse, the annuity of 

such child or children shall be recomputed and paid as provided in 

paragraph (3) of this subsection. In any case in which the annuity 

of a dependent child is terminated under this subsection, the annuities of any remaining dependent child or children, based upon the 

554 

service of the same judge or special trial judge, shall be recomputed 

and paid as though the child whose annuity was so terminated had 

not survived such judge or special trial judge. 

(i) DETERMINATION OF DEPENDENCY AND DISABILITY.—Questions 

of dependency and disability arising under this section shall be determined by the chief judge subject to review only by the Tax 

Court, the decision of which shall be final and conclusive. The chief 

judge may order or direct at any time such medical or other examinations as he shall deem necessary to determine the facts relative 

to the nature and degree of disability of any dependent child who 

is an annuitant or applicant for annuity under this section, and 

may suspend or deny any such annuity for failure to submit to any 

examination so ordered or directed. 

(j) PAYMENTS IN CERTAIN CASES.—(1) In any case in which— 

(A) a judge or special trial judge electing under subsection 

(b) shall die while in office (whether in regular active service, 

retired from such service under section 7447, or receiving any 

annuity under chapter 83 or 84 of title 5, United States Code), 

before having rendered 5 years of civilian service computed as 

prescribed in subsection (n), or after having rendered 5 years 

of such civilian service but without a survivor or survivors entitled to annuity benefits provided by subsection (h), or 

(B) the right of all persons entitled to annuity under subsection (h) based on the service of such judge or special trial 

judge shall terminate before a valid claim therefor shall have 

been established, 

the total amount credited to the individual account of such judge 

or special trial judge, with interest at 3 percent per annum, compounded on December 31 of each year, to the date of the death of 

such judge or special trial judge, shall be paid, upon the establishment of a valid claim therefor, to the person or persons surviving 

at the date title to the payment arises, in the following order of 

precedence, and such payment shall be a bar to recovery by any 

other person: 

(i) to the beneficiary or beneficiaries whom the judge or special trial judge may have designated by a writing filed prior to 

his death with the chief judge, except that in the case of the 

chief judge such designation shall be by a writing filed by him, 

prior to his death, as prescribed by the Tax Court; 

(ii) if there be no such beneficiary, to the surviving spouse 

of such judge or special trial judge; 

(iii) if none of the above, to the child or children of such 

judge or special trial judge and the descendants of any deceased children by representation; 

(iv) if none of the above, to the parents of such judge or special trial judge or the survivor of them; 

(v) if none of the above, to the duly appointed executor or administrator of the estate of such judge or special trial judge; 

and 

(vi) if none of the above, to such other next of kin of such 

judge or special trial judge as may be determined by the chief 

judge to be entitled under the laws of the domicile of such 

judge or special trial judge at the time of his death. 

Determination as to the surviving spouse, child, or parent of a 

judge or special trial judge for the purposes of this paragraph shall 

555 

be made by the chief judge without regard to the definitions in 

paragraphs (8) and (9) of subsection (a). 

(2) In any case in which the annuities of all persons entitled to 

annuity based upon the service of a judge or special trial judge 

shall terminate before the aggregate amount of annuity paid equals 

the total amount credited to the individual account of such judge 

or special trial judge, with interest at 3 percent per annum, compounded on December 31 of each year, to the date of the death of 

such judge or special trial judge, the difference shall be paid, upon 

establishment of a valid claim therefor, in the order of precedence 

prescribed in paragraph (1). 

(3) Any accrued annuity remaining unpaid upon the termination 

(other than by death) of the annuity of any person based upon the 

service of a judge or special trial judge shall be paid to such person. 

Any accrued annuity remaining unpaid upon the death of any person receiving annuity based upon the service of a judge or special 

trial judge shall be paid, upon the establishment of a valid claim 

therefor, in the following order of precedence: 

(A) to the duly appointed executor or administrator of the estate of such person; 

(B) if there is no such executor or administrator payment 

may be made, after the expiration of thirty days from the date 

of the death of such person, to such individual or individuals 

as may appear in the judgment of the chief judge to be legally 

entitled thereto, and such payment shall be a bar to recovery 

by any other individual. 

(k) PAYMENTS TO PERSONS UNDER LEGAL DISABILITY.—Where any 

payment under this section is to be made to a minor, or to a person 

mentally incompetent or under other legal disability adjudged by a 

court of competent jurisdiction, such payment may be made to the 

person who is constituted guardian or other fiduciary by the law 

of the State of residence of such claimant or is otherwise legally 

vested with the care of the claimant or his estate. Where no guardian or other fiduciary of the person under legal disability has been 

appointed under the laws of the State of residence of the claimant, 

the chief judge shall determine the person who is otherwise legally 

vested with the care of the claimant or his estate. 

(l) METHOD OF PAYMENT OF ANNUITIES.—Annuities granted under 

the terms of this section shall accrue monthly and shall be due and 

payable in monthly installments on the first business day of the 

month following the month or other period for which the annuity 

shall have accrued. None of the moneys mentioned in this section 

shall be assignable, either in law or in equity, or subject to execution, levy, attachment, garnishment, or other legal process. 

(m) COMPUTATION OF ANNUITIES.—The annuity of the surviving 

spouse of a judge or special trial judge electing under subsection 

(b) shall be an amount equal to the sum of (1) 1.5 percent of the 

average annual salary (whether judge’s or special trial judge’s salary or compensation for other allowable service) received by such 

judge or special trial judge for judicial service (including periods in 

which øhe¿ such judge or special trial judge received retired pay 

under section 7447(d) or any annuity under chapter 83 or 84 of 

title 5, United States Code) or for any other prior allowable service 

during the period of 3 consecutive years in which øhe¿ such judge 

or special trial judge received the largest such average annual salVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00561 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
556 

ary, multiplied by the sum of øhis¿ the individual’s years of such 

judicial service, øhis¿ the individual’s years of prior allowable service as a Senator, Representative, Delegate, or Resident Commissioner in Congress, øhis¿ the individual’s years of prior allowable 

service performed as a member of the Armed Forces of the United 

States, and øhis¿ the individual’s years, not exceeding 15, of prior 

allowable service performed as a congressional employee (as defined in section 2107 of title 5 of the United States Code), and (2) 

three-fourths of 1 percent of such average annual salary multiplied 

by øhis¿ the individual’s years of any other prior allowable service, 

except that such annuity shall not exceed an amount equal to 50 

percent of such average annual salary, nor be less than an amount 

equal to 25 percent of such average annual salary, and shall be further reduced in accordance with subsection (d) (if applicable). In determining the period of 3 consecutive years referred to in the preceding sentence, there may not be taken into account any period 

for which an election under section 7447(f)(4) is in effect. 

(n) INCLUDIBLE SERVICE.—Subject to the provisions of subsection 

(d), the years of service of a judge or special trial judge which are 

allowable as the basis for calculating the amount of the annuity of 

øhis¿ the individual’s surviving spouse shall include øhis¿ the individual’s years of service as a member of the United States Board 

of Tax Appeals, as a judge or special trial judge of the Tax Court 

of the United States, and as a judge or special trial judge of the 

Tax Court, øhis¿ the individual’s years of service pursuant to any 

appointment under section 7443A, øhis¿ the individual’s years of 

service as a Senator, Representative, Delegate, or Resident Commissioner in Congress, øhis¿ the individual’s years of active service 

as a member of the Armed Forces of the United States not exceeding 5 years in the aggregate and not including any such service for 

which credit is allowed for the purposes of retirement or retired 

pay under any other provision of law, and øhis¿ the individual’s 

years of any other civilian service within the purview of section 

8332 of title 5 of the United States Code. 

(o) SIMULTANEOUS ENTITLEMENT.—Nothing contained in this section shall be construed to prevent a surviving spouse eligible therefor from simultaneously receiving an annuity under this section 

and any annuity to which such spouse would otherwise be entitled 

under any other law without regard to this section, but in computing such other annuity service used in the computation of such 

spouse’s annuity under this section shall not be credited. 

(p) ESTIMATES OF EXPENDITURES.—The chief judge shall submit 

to the President annual estimates of the expenditures and appropriations necessary for the maintenance and operation of the survivors annuity fund, and such supplemental and deficiency estimates as may be required from time to time for the same purposes, 

according to law. The chief judge shall cause periodic examinations 

of the survivors annuity fund to be made by an actuary, who may 

be an actuary employed by another department of the Government 

temporarily assigned for the purpose, and whose findings and recommendations shall be transmitted by the chief judge to the Tax 

Court. 

(q) TRANSITIONAL PROVISION.—In the case of a judge who dies 

within 6 months after the date of enactment of this section after 

having rendered at least 5 years of civilian service computed as 

557 

prescribed in subsection (n), but without having made an election 

as provided in subsection (b), an annuity shall be paid to øhis¿ 

such judge’s surviving spouse and surviving dependents as is provided in this section, as if such judge had elected on the day of 

øhis¿ such judge’s death øto bring himself¿ to come within the purview of this section but had not made the deposit provided for by 

subsection (d). An annuity shall be payable under this section computed upon the basis of the actual length of service as a judge and 

other allowable service of the judge and subject to the reduction required by subsection (d) even though no deposit has been made, as 

required by subsection (h) with respect to any of such service. 

(r) WAIVER OF CIVIL SERVICE BENEFITS.—Any judge electing 

under subsection (b) shall, at the time of such election, waive all 

benefits under the civil service retirement laws. Such a waiver 

shall be made in the same manner and shall have the same force 

and effect as an election filed under section 7447(e). 

(s) INCREASES IN SURVIVOR ANNUITIES.—Each time that an increase is made under section 8340(b) of title 5, United States Code, 

in annuities payable under subchapter III of chapter 83 of that 

title, each annuity payable from the survivors annuity fund under 

this section shall be increased at the same time by the same percentage by which annuities are increased under such section 

8340(b). 

(t) AUTHORIZATION OF APPROPRIATION.—Funds necessary to carry 

out the provisions of this section may be appropriated out of any 

money in the Treasury not otherwise appropriated. 

* * * * * * * 

CHAPTER 79—DEFINITIONS 

* * * * * * * 

SEC. 7701. DEFINITIONS. 

(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof— 

(1) PERSON.—The term ‘‘person’’ shall be construed to mean 

and include an individual, a trust, estate, partnership, association, company or corporation. 

(2) PARTNERSHIP AND PARTNER.—The term ‘‘partnership’’ includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which 

is not, within the meaning of this title, a trust or estate or a 

corporation; and the term ‘‘partner’’ includes a member in such 

a syndicate, group, pool, joint venture, or organization. 

(3) CORPORATION.—The term ‘‘corporation’’ includes associations, joint-stock companies, and insurance companies. 

(4) DOMESTIC.—The term ‘‘domestic’’ when applied to a corporation or partnership means created or organized in the 

United States or under the law of the United States or of any 

State unless, in the case of a partnership, the Secretary provides otherwise by regulations. 

(5) FOREIGN.—The term ‘‘foreign’’ when applied to a corporation or partnership means a corporation or partnership which 

is not domestic. 

558 

(6) FIDUCIARY.—The term ‘‘fiduciary’’ means a guardian, 

trustee, executor, administrator, receiver, conservator, or any 

person acting in any fiduciary capacity for any person. 

(7) STOCK.—The term ‘‘stock’’ includes shares in an association, joint-stock company, or insurance company. 

(8) SHAREHOLDER.—The term ‘‘shareholder’’ includes a member in an association, joint-stock company, or insurance company. 

(9) UNITED STATES.—The term ‘‘United States’’ when used in 

a geographical sense includes only the States and the District 

of Columbia. 

(10) STATE.—The term ‘‘State’’ shall be construed to include 

the District of Columbia, where such construction is necessary 

to carry out provisions of this title. 

(11) SECRETARY OF THE TREASURY AND SECRETARY.— 

(A) SECRETARY OF THE TREASURY.—The term ‘‘Secretary 

of the Treasury’’ means the Secretary of the Treasury, personally, and shall not include any delegate of his. 

(B) SECRETARY.—The term ‘‘Secretary’’ means the Secretary of the Treasury or his delegate. 

(12) DELEGATE.— 

(A) IN GENERAL.—The term ‘‘or his delegate’’— 

(i) when used with reference to the Secretary of the 

Treasury, means any officer, employee, or agency of 

the Treasury Department duly authorized by the Secretary of the Treasury directly, or indirectly by one or 

more redelegations of authority, to perform the function mentioned or described in the context; and 

(ii) when used with reference to any other official of 

the United States, shall be similarly construed. 

(B) PERFORMANCE OF CERTAIN FUNCTIONS IN GUAM OR

AMERICAN SAMOA.—The term ‘‘delegate,’’ in relation to the 

performance of functions in Guam or American Samoa 

with respect to the taxes imposed by chapters 1, 2, and 21, 

also includes any officer or employee of any other department or agency of the United States, or of any possession 

thereof, duly authorized by the Secretary (directly, or indirectly by one or more redelegations of authority) to perform such functions. 

(13) COMMISSIONER.—The term ‘‘Commissioner’’ means the 

Commissioner of Internal Revenue. 

(14) TAXPAYER.—The term ‘‘taxpayer’’ means any person subject to any internal revenue tax. 

(15) MILITARY OR NAVAL FORCES AND ARMED FORCES OF THE

UNITED STATES.—The term ‘‘military or naval forces of the 

United States’’ and the term ‘‘Armed Forces of the United 

States’’ each includes all regular and reserve components of the 

uniformed services which are subject to the jurisdiction of the 

Secretary of Defense, the Secretary of the Army, the Secretary 

of the Navy, or the Secretary of the Air Force, and each term 

also includes the Coast Guard. The members of such forces include commissioned officers and personnel below the grade of 

commissioned officers in such forces. 

559 

(16) WITHHOLDING AGENT.—The term ‘‘withholding agent’’ 

means any person required to deduct and withhold any tax 

under the provisions of section 1441, 1442, 1443, or 1461. 

ø(17) HUSBAND AND WIFE.—As used in section 2516, if the 

husband and wife therein referred to are divorced, wherever 

appropriate to the meaning of such section, the term ‘‘wife’’ 

shall be read ‘‘former wife’’ and the term ‘‘husband’’ shall be 

read ‘‘former husband’’; and, if the payments described in such 

section are made by or on behalf of the wife or former wife to 

the husband or former husband instead of vice versa, wherever 

appropriate to the meaning of such section, the term ‘‘husband’’ 

shall be read ‘‘wife’’ and the term ‘‘wife’’ shall be read ‘‘husband.’’¿ 

(18) INTERNATIONAL ORGANIZATION.—The term ‘‘international 

organization’’ means a public international organization entitled to enjoy privileges, exemptions, and immunities as an 

international organization under the International Organizations Immunities Act (22 U.S.C. 288–288f). 

(19) DOMESTIC BUILDING AND LOAN ASSOCIATION.—The term 

‘‘domestic building and loan association’’ means a domestic 

building and loan association, a domestic savings and loan association, and a Federal savings and loan association— 

(A) which is subject by law to supervision and examination by State or Federal authority having supervision over 

such associations; 

(B) the business of which consists principally of acquiring the savings of the public and investing in loans; and 

(C) at least 60 percent of the amount of the total assets 

of which (at the close of the taxable year) consists of— 

(i) cash, 

(ii) obligations of the United States or of a State or 

political subdivision thereof, and stock or obligations 

of a corporation which is an instrumentality of the 

United States or of a State or political subdivision 

thereof, but not including obligations the interest on 

which is excludable from gross income under section 

103, 

(iii) certificates of deposit in, or obligations of, a corporation organized under a State law which specifically authorizes such corporation to insure the deposits or share accounts of member associations, 

(iv) loans secured by a deposit or share of a member, 

(v) loans (including redeemable ground rents, as defined in section 1055) secured by an interest in real 

property which is (or, from the proceeds of the loan, 

will become) residential real property or real property 

used primarily for church purposes, loans made for the 

improvement of residential real property or real property used primarily for church purposes, provided that 

for purposes of this clause, residential real property 

shall include single or multifamily dwellings, facilities 

in residential developments dedicated to public use or 

property used on a nonprofit basis for residents, and 

mobile homes not used on a transient basis, 

560 

(vi) loans secured by an interest in real property located within an urban renewal area to be developed 

for predominantly residential use under an urban renewal plan approved by the Secretary of Housing and 

Urban Development under part A or part B of title I 

of the Housing Act of 1949, as amended, or located 

within any area covered by a program eligible for assistance under section 103 of the Demonstration Cities 

and Metropolitan Development Act of 1966, as amended, and loans made for the improvement of any such 

real property, 

(vii) loans secured by an interest in educational, 

health, or welfare institutions or facilities, including 

structures designed or used primarily for residential 

purposes for students, residents, and persons under 

care, employees, or members of the staff of such institutions or facilities, 

(viii) property acquired through the liquidation of 

defaulted loans described in clause (v), (vi), or (vii), 

(ix) loans made for the payment of expenses of college or university education or vocational training, in 

accordance with such regulations as may be prescribed 

by the Secretary, 

(x) property used by the association in the conduct 

of the business described in subparagraph (B), and 

(xi) any regular or residual interest in a REMIC, but 

only in the proportion which the assets of such REMIC 

consist of property described in any of the preceding 

clauses of this subparagraph; except that if 95 percent 

or more of the assets of such REMIC are assets described in clauses (i) through (x), the entire interest in 

the REMIC shall qualify. 

At the election of the taxpayer, the percentage specified in 

this subparagraph shall be applied on the basis of the average assets outstanding during the taxable year, in lieu 

of the close of the taxable year, computed under regulations prescribed by the Secretary. For purposes of clause 

(v), if a multifamily structure securing a loan is used in 

part for nonresidential purposes, the entire loan is deemed 

a residential real property loan if the planned residential 

use exceeds 80 percent of the property’s planned use (determined as of the time the loan is made). For purposes of 

clause (v), loans made to finance the acquisition or development of land shall be deemed to be loans secured by an 

interest in residential real property if, under regulations 

prescribed by the Secretary, there is reasonable assurance 

that the property will become residential real property 

within a period of 3 years from the date of acquisition of 

such land; but this sentence shall not apply for any taxable year unless, within such 3-year period, such land becomes residential real property. For purposes of determining whether any interest in a REMIC qualifies under 

clause (xi), any regular interest in another REMIC held by 

such REMIC shall be treated as a loan described in a preceding clause under principles similar to the principles of 

561 

clause (xi); except that, if such REMIC’s are part of a 

tiered structure, they shall be treated as 1 REMIC for purposes of clause (xi). 

(20) EMPLOYEE.—For the purpose of applying the provisions 

of section 79 with respect to group-term life insurance purchased for employees, for the purpose of applying the provisions of sections 104, 105, and 106 with respect to accident and 

health insurance or accident and health plans, and for the purpose of applying the provisions of subtitle A with respect to 

contributions to or under a stock bonus, pension, profit-sharing, or annuity plan, and with respect to distributions under 

such a plan, or by a trust forming part of such a plan, and for 

purposes of applying section 125 with respect to cafeteria 

plans, the term ‘‘employee’’ shall include a full-time life insurance salesman who is considered an employee for the purpose 

of chapter 21. 

(21) LEVY.—The term ‘‘levy’’ includes the power of distraint 

and seizure by any means. 

(22) ATTORNEY GENERAL.—The term ‘‘Attorney General’’ 

means the Attorney General of the United States. 

(23) TAXABLE YEAR.—The term ‘‘taxable year’’ means the calendar year, or the fiscal year ending during such calendar 

year, upon the basis of which the taxable income is computed 

under subtitle A. ‘‘Taxable year’’ means, in the case of a return 

made for a fractional part of a year under the provisions of 

subtitle A or under regulations prescribed by the Secretary, the 

period for which such return is made. 

(24) FISCAL YEAR.—The term ‘‘fiscal year’’ means an accounting period of 12 months ending on the last day of any month 

other than December. 

(25) PAID OR INCURRED, PAID OR ACCRUED.—The terms ‘‘paid 

or incurred’’ and ‘‘paid or accrued’’ shall be construed according 

to the method of accounting upon the basis of which the taxable income is computed under subtitle A. 

(26) TRADE OR BUSINESS.—The term ‘‘trade or business’’ includes the performance of the functions of a public office. 

(27) TAX COURT.—The term ‘‘Tax Court’’ means the United 

States Tax Court. 

(28) OTHER TERMS.—Any term used in this subtitle with respect to the application of, or in connection with, the provisions 

of any other subtitle of this title shall have the same meaning 

as in such provisions. 

(29) INTERNAL REVENUE CODE.—The term ‘‘Internal Revenue 

Code of 1986’’ means this title, and the term ‘‘Internal Revenue 

Code of 1939’’ means the Internal Revenue Code enacted February 10, 1939, as amended. 

(30) UNITED STATES PERSON.—The term ‘‘United States person’’ means— 

(A) a citizen or resident of the United States, 

(B) a domestic partnership, 

(C) a domestic corporation, 

(D) any estate (other than a foreign estate, within the 

meaning of paragraph (31)), and 

(E) any trust if— 

562 

(i) a court within the United States is able to exercise primary supervision over the administration of 

the trust, and 

(ii) one or more United States persons have the authority to control all substantial decisions of the trust. 

(31) FOREIGN ESTATE OR TRUST.— (A) FOREIGN ESTATE.—The term ‘‘foreign estate’’ means 

an estate the income of which, from sources without the 

United States which is not effectively connected with the 

conduct of a trade or business within the United States, is 

not includible in gross income under subtitle A. 

(B) FOREIGN TRUST.—The term ‘‘foreign trust’’ means 

any trust other than a trust described in subparagraph (E) 

of paragraph (30). 

(32) COOPERATIVE BANK.—The term ‘‘cooperative bank’’ 

means an institution without capital stock organized and operated for mutual purposes and without profit, which— 

(A) is subject by law to supervision and examination by 

State or Federal authority having supervision over such 

institutions, and 

(B) meets the requirements of subparagraphs (B) and (C) 

of paragraph (19) of this subsection (relating to definition 

of domestic building and loan association). 

In determining whether an institution meets the requirements 

referred to in subparagraph (B) of this paragraph, any reference to an association or to a domestic building and loan association contained in paragraph (19) shall be deemed to be a 

reference to such institution. 

(33) REGULATED PUBLIC UTILITY.—The term ‘‘regulated public 

utility’’ means— 

(A) A corporation engaged in the furnishing or sale of— 

(i) electric energy, gas, water, or sewerage disposal 

services, or 

(ii) transportation (not included in subparagraph 

(C)) on an intrastate, suburban, municipal, or interurban electric railroad, on an intrastate, municipal, or 

suburban trackless trolley system, or on a municipal 

or suburban bus system, or 

(iii) transportation (not included in clause (ii)) by 

motor vehicle— 

if the rates for such furnishing or sale, as the case may be, 

have been established or approved by a State or political 

subdivision thereof, by an agency or instrumentality of the 

United States, by a public service or public utility commission or other similar body of the District of Columbia or of 

any State or political subdivision thereof, or by a foreign 

country or an agency or instrumentality or political subdivision thereof. 

(B) A corporation engaged as a common carrier in the 

furnishing or sale of transportation of gas by pipe line, if 

subject to the jurisdiction of the Federal Energy Regulatory Commission. 

(C) A corporation engaged as a common carrier (i) in the 

furnishing or sale of transportation by railroad, if subject 

to the jurisdiction of the Surface Transportation Board, or 

563 

(ii) in the furnishing or sale of transportation of oil or 

other petroleum products (including shale oil) by pipe line, 

if subject to the jurisdiction of the Federal Energy Regulatory Commission or if the rates for such furnishing or 

sale are subject to the jurisdiction of a public service or 

public utility commission or other similar body of the District of Columbia or of any State. 

(D) A corporation engaged in the furnishing or sale of 

telephone or telegraph service, if the rates for such furnishing or sale meet the requirements of subparagraph 

(A). 

(E) A corporation engaged in the furnishing or sale of 

transportation as a common carrier by air, subject to the 

jurisdiction of the Secretary of Transportation. 

(F) A corporation engaged in the furnishing or sale of 

transportation by a water carrier subject to jurisdiction 

under subchapter II of chapter 135 of title 49. 

(G) A rail carrier subject to part A of subtitle IV of title 

49, if (i) substantially all of its railroad properties have 

been leased to another such railroad corporation or corporations by an agreement or agreements entered into before January 1, 1954, (ii) each lease is for a term of more 

than 20 years, and (iii) at least 80 percent or more of its 

gross income (computed without regard to dividends and 

capital gains and losses) for the taxable year is derived 

from such leases and from sources described in subparagraphs (A) through (F), inclusive. For purposes of the preceding sentence, an agreement for lease of railroad properties entered into before January 1, 1954, shall be considered to be a lease including such term as the total number 

of years of such agreement may, unless sooner terminated, 

be renewed or continued under the terms of the agreement, and any such renewal or continuance under such 

agreement shall be considered part of the lease entered 

into before January 1, 1954. 

(H) A common parent corporation which is a common 

carrier by railroad subject to part A of subtitle IV of title 

49 if at least 80 percent of its gross income (computed 

without regard to capital gains or losses) is derived directly or indirectly from sources described in subparagraphs (A) through (F), inclusive. For purposes of the preceding sentence, dividends and interest, and income from 

leases described in subparagraph (G), received from a regulated public utility shall be considered as derived from 

sources described in subparagraphs (A) through (F), inclusive, if the regulated public utility is a member of an affiliated group (as defined in section 1504) which includes the 

common parent corporation. 

The term ‘‘regulated public utility’’ does not (except as provided 

in subparagraphs (G) and (H)) include a corporation described 

in subparagraphs (A) through (F), inclusive, unless 80 percent 

or more of its gross income (computed without regard to dividends and capital gains and losses) for the taxable year is derived from sources described in subparagraphs (A) through (F), 

inclusive. If the taxpayer establishes to the satisfaction of the 

564 

Secretary that (i) its revenue from regulated rates described in 

subparagraph (A) or (D) and its revenue derived from unregulated rates are derived from the operation of a single interconnected and coordinated system or from the operation of 

more than one such system, and (ii) the unregulated rates have 

been and are substantially as favorable to users and consumers 

as are the regulated rates, then such revenue from such unregulated rates shall be considered, for purposes of the preceding sentence, as income derived from sources described in 

subparagraph (A) or (D). 

(35) ENROLLED ACTUARY.—The term ‘‘enrolled actuary’’ 

means a person who is enrolled by the Joint Board for the Enrollment of Actuaries established under subtitle C of the title 

III of the Employee Retirement Income Security Act of 1974. 

(36) TAX RETURN PREPARER.— 

(A) IN GENERAL.—The term ‘‘tax return preparer’’ means 

any person who prepares for compensation, or who employs one or more persons to prepare for compensation, 

any return of tax imposed by this title or any claim for refund of tax imposed by this title. For purposes of the preceding sentence, the preparation of a substantial portion of 

a return or claim for refund shall be treated as if it were 

the preparation of such return or claim for refund. 

(B) EXCEPTIONS.—A person shall not be a ‘‘tax return 

preparer’’ merely because such person— 

(i) furnishes typing, reproducing, or other mechanical assistance, 

(ii) prepares a return or claim for refund of the employer (or of an officer or employee of the employer) by 

whom he is regularly and continuously employed, 

(iii) prepares as a fiduciary a return or claim for refund for any person, or 

(iv) prepares a claim for refund for a taxpayer in response to any notice of deficiency issued to such taxpayer or in response to any waiver of restriction after 

the commencement of an audit of such taxpayer or another taxpayer if a determination in such audit of such 

other taxpayer directly or indirectly affects the tax liability of such taxpayer. 

(37) INDIVIDUAL RETIREMENT PLAN.—The term ‘‘individual retirement plan’’ means— 

(A) an individual retirement account described in section 

408(a), and 

(B) an individual retirement annuity described in section 

408(b). 

(38) JOINT RETURN.—The term ‘‘joint return’’ means a single 

return made jointly under section 6013 by a øhusband and 

wife¿ married couple . 

(39) PERSONS RESIDING OUTSIDE UNITED STATES.—If any citizen or resident of the United States does not reside in (and 

is not found in) any United States judicial district, such citizen 

or resident shall be treated as residing in the District of Columbia for purposes of any provision of this title relating to— 

(A) jurisdiction of courts, or 

(B) enforcement of summons. 

565 

(40) INDIAN TRIBAL GOVERNMENT.— (A) IN GENERAL.—The term ‘‘Indian tribal government’’ 

means the governing body of any tribe, band, community, 

village, or group of Indians, or (if applicable) Alaska Natives, which is determined by the Secretary, after consultation with the Secretary of the Interior, to exercise governmental functions. 

(B) SPECIAL RULE FOR ALASKA NATIVES.—No determination under subparagraph (A) with respect to Alaska Natives shall grant or defer any status or powers other than 

those enumerated in section 7871. Nothing in the Indian 

Tribal Governmental Tax Status Act of 1982, or in the 

amendments made thereby, shall validate or invalidate 

any claim by Alaska Natives of sovereign authority over 

lands or people. 

(41) TIN.—The term ‘‘TIN’’ means the identifying number 

assigned to a person under section 6109. 

(42) SUBSTITUTED BASIS PROPERTY.—The term ‘‘substituted 

basis property’’ means property which is— 

(A) transferred basis property, or 

(B) exchanged basis property. 

(43) TRANSFERRED BASIS PROPERTY.—The term ‘‘transferred 

basis property’’ means property having a basis determined 

under any provision of subtitle A (or under any corresponding 

provision of prior income tax law) providing that the basis 

shall be determined in whole or in part by reference to the 

basis in the hands of the donor, grantor, or other transferor. 

(44) EXCHANGED BASIS PROPERTY.—The term ‘‘exchanged 

basis property’’ means property having a basis determined 

under any provision of subtitle A (or under any corresponding 

provision of prior income tax law) providing that the basis 

shall be determined in whole or in part by reference to other 

property held at any time by the person for whom the basis is 

to be determined. 

(45) NONRECOGNITION TRANSACTION.—The term ‘‘nonrecognition transaction’’ means any disposition of property in a transaction in which gain or loss is not recognized in whole or in 

part for purposes of subtitle A. 

(46) DETERMINATION OF WHETHER THERE IS A COLLECTIVE

BARGAINING AGREEMENT.—In determining whether there is a 

collective bargaining agreement between employee representatives and 1 or more employers, the term ‘‘employee representatives’’ shall not include any organization more than one-half of 

the members of which are employees who are owners, officers, 

or executives of the employer. An agreement shall not be treated as a collective bargaining agreement unless it is a bona fide 

agreement between bona fide employee representatives and 1 

or more employers. 

(48) OFF-HIGHWAY VEHICLES.— (A) OFF-HIGHWAY TRANSPORTATION VEHICLES.— (i) IN GENERAL.—A vehicle shall not be treated as a 

highway vehicle if such vehicle is specially designed 

for the primary function of transporting a particular 

type of load other than over the public highway and 

because of this special design such vehicle’s capability 

566 

to transport a load over the public highway is substantially limited or impaired. 

(ii) DETERMINATION OF VEHICLE’S DESIGN.—For purposes of clause (i), a vehicle’s design is determined 

solely on the basis of its physical characteristics. 

(iii) DETERMINATION OF SUBSTANTIAL LIMITATION OR

IMPAIRMENT.—For purposes of clause (i), in determining whether substantial limitation or impairment 

exists, account may be taken of factors such as the 

size of the vehicle, whether such vehicle is subject to 

the licensing, safety, and other requirements applicable to highway vehicles, and whether such vehicle can 

transport a load at a sustained speed of at least 25 

miles per hour. It is immaterial that a vehicle can 

transport a greater load off the public highway than 

such vehicle is permitted to transport over the public 

highway. 

(B) NONTRANSPORTATION TRAILERS AND SEMITRAILERS.— A trailer or semitrailer shall not be treated as a highway 

vehicle if it is specially designed to function only as an enclosed stationary shelter for the carrying on of an off-highway function at an off-highway site. 

(49) QUALIFIED BLOOD COLLECTOR ORGANIZATION.—The term 

‘‘qualified blood collector organization’’ means an organization 

which is— 

(A) described in section 501(c)(3) and exempt from tax 

under section 501(a), 

(B) primarily engaged in the activity of the collection of 

human blood, 

(C) registered with the Secretary for purposes of excise 

tax exemptions, and 

(D) registered by the Food and Drug Administration to 

collect blood. 

(50) TERMINATION OF UNITED STATES CITIZENSHIP.— 

(A) IN GENERAL.—An individual shall not cease to be 

treated as a United States citizen before the date on which 

the individual’s citizenship is treated as relinquished 

under section 877A(g)(4). 

(B) DUAL CITIZENS.—Under regulations prescribed by the 

Secretary, subparagraph (A) shall not apply to an individual who became at birth a citizen of the United States 

and a citizen of another country. 

(b) DEFINITION OF RESIDENT ALIEN AND NONRESIDENT ALIEN.— 

(1) IN GENERAL.—For purposes of this title (other than subtitle B)— 

(A) RESIDENT ALIEN.—An alien individual shall be treated as a resident of the United States with respect to any 

calendar year if (and only if) such individual meets the requirements of clause (i), (ii), or (iii): 

(i) LAWFULLY ADMITTED FOR PERMANENT RESI- DENCE.—Such individual is a lawful permanent resident of the United States at any time during such calendar year. 

(ii) SUBSTANTIAL PRESENCE TEST.—Such individual 

meets the substantial presence test of paragraph (3). 

567 

(iii) FIRST YEAR ELECTION.—Such individual makes 

the election provided in paragraph (4). 

(B) NONRESIDENT ALIEN.—An individual is a nonresident 

alien if such individual is neither a citizen of the United 

States nor a resident of the United States (within the 

meaning of subparagraph (A)). 

(2) SPECIAL RULES FOR FIRST AND LAST YEAR OF RESIDENCY.— 

(A) FIRST YEAR OF RESIDENCY.— 

(i) IN GENERAL.—If an alien individual is a resident 

of the United States under paragraph (1)(A) with respect to any calendar year, but was not a resident of 

the United States at any time during the preceding 

calendar year, such alien individual shall be treated as 

a resident of the United States only for the portion of 

such calendar year which begins on the residency 

starting date. 

(ii) RESIDENCY STARTING DATE FOR INDIVIDUALS LAWFULLY ADMITTED FOR PERMANENT RESIDENCE.—In the 

case of an individual who is a lawfully permanent resident of the United States at any time during the calendar year, but does not meet the substantial presence 

test of paragraph (3), the residency starting date shall 

be the first day in such calendar year on which he was 

present in the United States while a lawful permanent 

resident of the United States. 

(iii) RESIDENCY STARTING DATE FOR INDIVIDUALS

MEETING SUBSTANTIAL PRESENCE TEST.—In the case of 

an individual who meets the substantial presence test 

of paragraph (3) with respect to any calendar year, the 

residency starting date shall be the first day during 

such calendar year on which the individual is present 

in the United States. 

(iv) RESIDENCY STARTING DATE FOR INDIVIDUALS

MAKING FIRST YEAR ELECTION.—In the case of an individual who makes the election provided by paragraph 

(4) with respect to any calendar year, the residency 

starting date shall be the 1st day during such calendar year on which the individual is treated as a 

resident of the United States under that paragraph. 

(B) LAST YEAR OF RESIDENCY.—An alien individual shall 

not be treated as a resident of the United States during a 

portion of any calendar year if— 

(i) such portion is after the last day in such calendar 

year on which the individual was present in the 

United States (or, in the case of an individual described in paragraph (1)(A)(i), the last day on which he 

was so described), 

(ii) during such portion the individual has a closer 

connection to a foreign country than to the United 

States, and 

(iii) the individual is not a resident of the United 

States at any time during the next calendar year. 

(C) CERTAIN NOMINAL PRESENCE DISREGARDED.— 

568 

(i) IN GENERAL.—For purposes of subparagraphs 

(A)(iii) and (B), an individual shall not be treated as 

present in the United States during any period for 

which the individual establishes that he has a closer 

connection to a foreign country than to the United 

States. 

(ii) NOT MORE THAN 10 DAYS DISREGARDED.—Clause 

(i) shall not apply to more than 10 days on which the 

individual is present in the United States. 

(3) SUBSTANTIAL PRESENCE TEST.— 

(A) IN GENERAL.—Except as otherwise provided in this 

paragraph, an individual meets the substantial presence 

test of this paragraph with respect to any calendar year 

(hereinafter in this subsection referred to as the ‘‘current 

year’’) if— 

(i) such individual was present in the United States 

on at least 31 days during the calendar year, and 

(ii) the sum of the number of days on which such individual was present in the United States during the 

current year and the 2 preceding calendar years (when 

multiplied by the applicable multiplier determined 

under the following table) equals or exceeds 183 days: 

(B) EXCEPTION WHERE INDIVIDUAL IS PRESENT IN THE

UNITED STATES DURING LESS THAN ONE-HALF OF CURRENT

YEAR AND CLOSER CONNECTION TO FOREIGN COUNTRY IS ESTABLISHED.—An individual shall not be treated as meeting 

the substantial presence test of this paragraph with respect to any current year if— 

(i) such individual is present in the United States on 

fewer than 183 days during the current year, and 

(ii) it is established that for the current year such 

individual has a tax home (as defined in section 

911(d)(3) without regard to the second sentence thereof) in a foreign country and has a closer connection to 

such foreign country than to the United States. 

(C) SUBPARAGRAPH (B) NOT TO APPLY IN CERTAIN

CASES.—Subparagraph (B) shall not apply to any individual with respect to any current year if at any time during such year— 

(i) such individual had an application for adjustment 

of status pending, or 

(ii) such individual took other steps to apply for status as a lawful permanent resident of the United 

States. 

(D) EXCEPTION FOR EXEMPT INDIVIDUALS OR FOR CERTAIN

MEDICAL CONDITIONS.—An individual shall not be treated 

as being present in the United States on any day if— 

(i) such individual is an exempt individual for such 

day, or 

(ii) such individual was unable to leave the United 

States on such day because of a medical condition 

which arose while such individual was present in the 

United States. 

569 

(4) FIRST-YEAR ELECTION.—(A) An alien individual shall be 

deemed to meet the requirements of this subparagraph if such 

individual— 

(i) is not a resident of the United States under clause (i) 

or (ii) of paragraph (1)(A) with respect to a calendar year 

(hereinafter referred to as the ‘‘election year’’), 

(ii) was not a resident of the United States under paragraph (1)(A) with respect to the calendar year immediately 

preceding the election year, 

(iii) is a resident of the United States under clause (ii) 

of paragraph (1)(A) with respect to the calendar year immediately following the election year, and 

(iv) is both— 

(I) present in the United States for a period of at 

least 31 consecutive days in the election year, and 

(II) present in the United States during the period 

beginning with the first day of such 31-day period and 

ending with the last day of the election year (hereinafter referred to as the ‘‘testing period’’) for a number 

of days equal to or exceeding 75 percent of the number 

of days in the testing period (provided that an individual shall be treated for purposes of this subclause 

as present in the United States for a number of days 

during the testing period not exceeding 5 days in the 

aggregate, notwithstanding his absence from the 

United States on such days). 

(B) An alien individual who meets the requirements of subparagraph (A) shall, if he so elects, be treated as a resident of 

the United States with respect to the election year. 

(C) An alien individual who makes the election provided by 

subparagraph (B) shall be treated as a resident of the United 

States for the portion of the election year which begins on the 

1st day of the earliest testing period during such year with respect to which the individual meets the requirements of clause 

(iv) of subparagraph (A). 

(D) The rules of subparagraph (D)(i) of paragraph (3) shall 

apply for purposes of determining an individual’s presence in 

the United States under this paragraph. 

(E) An election under subparagraph (B) shall be made on the 

individual’s tax return for the election year, provided that such 

election may not be made before the individual has met the 

substantial presence test of paragraph (3) with respect to the 

calendar year immediately following the election year. 

(F) An election once made under subparagraph (B) remains 

in effect for the election year, unless revoked with the consent 

of the Secretary. 

(5) EXEMPT INDIVIDUAL DEFINED.—For purposes of this subsection— 

(A) IN GENERAL.—An individual is an exempt individual 

for any day if, for such day, such individual is— 

(i) a foreign government-related individual, 

(ii) a teacher or trainee, 

(iii) a student, or 

(iv) a professional athlete who is temporarily in the 

United States to compete in a sports event— 

570 

(I) which is organized for the primary purpose of 

benefiting an organization which is described in 

section 501(c)(3) and exempt from tax under section 501(a), 

(II) all of the net proceeds of which are contributed to such organization, and, 

(III) which utilizes volunteers for substantially 

all of the work performed in carrying out such 

event. 

(B) FOREIGN GOVERNMENT-RELATED INDIVIDUAL.—The 

term ‘‘foreign government-related individual’’ means any 

individual temporarily present in the United States by reason of— 

(i) diplomatic status, or a visa which the Secretary 

(after consultation with the Secretary of State) determines represents full-time diplomatic or consular status for purposes of this subsection, 

(ii) being a full-time employee of an international organization, or 

(iii) being a member of the immediate family of an 

individual described in clause (i) or (ii). 

(C) TEACHER OR TRAINEE.—The term ‘‘teacher or trainee’’ 

means any individual— 

(i) who is temporarily present in the United States 

under subparagraph (J) or (Q) of section 101(15) of the 

Immigration and Nationality Act (other than as a student), and 

(ii) who substantially complies with the requirements for being so present. 

(D) STUDENT.—The term ‘‘student’’ means any individual— 

(i) who is temporarily present in the United States— 

(I) under subparagraph (F) or (M) of section 

101(15) of the Immigration and Nationality Act, or 

(II) as a student under subparagraph (J) or (Q) 

of such section 101(15), and 

(ii) who substantially complies with the requirements for being so present. 

(E) SPECIAL RULES FOR TEACHERS, TRAINEES, AND STU- DENTS.— 

(i) LIMITATION ON TEACHERS AND TRAINEES.—An individual shall not be treated as an exempt individual 

by reason of clause (ii) of subparagraph (A) for the current year if, for any 2 calendar years during the preceding 6 calendar years, such person was an exempt 

person under clause (ii) or (iii) of subparagraph (A). In 

the case of an individual all of whose compensation is 

described in section 872(b)(3), the preceding sentence 

shall be applied by substituting ‘‘4 calendar years’’ for 

‘‘2 calendar years’’. 

(ii) LIMITATION ON STUDENTS.—For any calendar 

year after the 5th calendar year for which an individual was an exempt individual under clause (ii) or 

(iii) of subparagraph (A), such individual shall not be 

treated as an exempt individual by reason of clause 

571 

(iii) of subparagraph (A), unless such individual establishes to the satisfaction of the Secretary that such individual does not intend to permanently reside in the 

United States and that such individual meets the requirements of subparagraph (D)(ii). 

(6) LAWFUL PERMANENT RESIDENT.—For purposes of this subsection, an individual is a lawful permanent resident of the 

United States at any time if— 

(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the 

United States as an immigrant in accordance with the immigration laws, and 

(B) such status has not been revoked (and has not been 

administratively or judicially determined to have been 

abandoned). 

An individual shall cease to be treated as a lawful permanent 

resident of the United States if such individual commences to 

be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign 

country, does not waive the benefits of such treaty applicable 

to residents of the foreign country, and notifies the Secretary 

of the commencement of such treatment. 

(7) PRESENCE IN THE UNITED STATES.—For purposes of this 

subsection— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), (C), or (D), an individual shall be treated as present 

in the United States on any day if such individual is physically present in the United States at any time during such 

day. 

(B) COMMUTERS FROM CANADA OR MEXICO.—If an individual regularly commutes to employment (or self-employment) in the United States from a place of residence in 

Canada or Mexico, such individual shall not be treated as 

present in the United States on any day during which he 

so commutes. 

(C) TRANSIT BETWEEN 2 FOREIGN POINTS.—If an individual, who is in transit between 2 points outside the 

United States, is physically present in the United States 

for less than 24 hours, such individual shall not be treated 

as present in the United States on any day during such 

transit. 

(D) CREW MEMBERS TEMPORARILY PRESENT.—An individual who is temporarily present in the United States on 

any day as a regular member of the crew of a foreign vessel engaged in transportation between the United States 

and a foreign country or a possession of the United States 

shall not be treated as present in the United States on 

such day unless such individual otherwise engages in any 

trade or business in the United States on such day. 

(8) ANNUAL STATEMENTS.—The Secretary may prescribe regulations under which an individual who (but for subparagraph 

(B) or (D) of paragraph (3)) would meet the substantial presence test of paragraph (3) is required to submit an annual 

statement setting forth the basis on which such individual 

572 

claims the benefits of subparagraph (B) or (D) of paragraph (3), 

as the case may be. 

(9) TAXABLE YEAR.— (A) IN GENERAL.—For purposes of this title, an alien individual who has not established a taxable year for any 

prior period shall be treated as having a taxable year 

which is the calendar year. 

(B) FISCAL YEAR TAXPAYER.—If— 

(i) an individual is treated under paragraph (1) as a 

resident of the United States for any calendar year, 

and 

(ii) after the application of subparagraph (A), such 

individual has a taxable year other than a calendar 

year, 

he shall be treated as a resident of the United States with 

respect to any portion of a taxable year which is within 

such calendar year. 

(10) COORDINATION WITH SECTION 877.—If— 

(A) an alien individual was treated as a resident of the 

United States during any period which includes at least 3 

consecutive calendar years (hereinafter referred to as the 

‘‘initial residency period’’), and 

(B) such individual ceases to be treated as a resident of 

the United States but subsequently becomes a resident of 

the United States before the close of the 3rd calendar year 

beginning after the close of the initial residency period, 

such individual shall be taxable for the period after the close 

of the initial residency period and before the day on which he 

subsequently became a resident of the United States in the 

manner provided in section 877(b). The preceding sentence 

shall apply only if the tax imposed pursuant to section 877(b) 

exceeds the tax which, without regard to this paragraph, is imposed pursuant to section 871. 

(11) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the 

purposes of this subsection. 

(c) INCLUDES AND INCLUDING.—The terms ‘‘includes’’ and ‘‘including’’ when used in a definition contained in this title shall not be 

deemed to exclude other things otherwise within the meaning of 

the term defined. 

(d) COMMONWEALTH OF PUERTO RICO.—Where not otherwise distinctly expressed or manifestly incompatible with the intent thereof, references in this title to possessions of the United States shall 

be treated as also referring to the Commonwealth of Puerto Rico. 

(e) TREATMENT OF CERTAIN CONTRACTS FOR PROVIDING SERVICES, 

ETC..—For purposes of chapter 1— 

(1) IN GENERAL.—A contract which purports to be a service 

contract shall be treated as a lease of property if such contract 

is properly treated as a lease of property, taking into account 

all relevant factors including whether or not— 

(A) the service recipient is in physical possession of the 

property, 

(B) the service recipient controls the property, 

(C) the service recipient has a significant economic or 

possessory interest in the property, 

573 

(D) the service provider does not bear any risk of substantially diminished receipts or substantially increased 

expenditures if there is nonperformance under the contract, 

(E) the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient, and 

(F) the total contract price does not substantially exceed 

the rental value of the property for the contract period. 

(2) OTHER ARRANGEMENTS.—An arrangement (including a 

partnership or other pass-thru entity) which is not described in 

paragraph (1) shall be treated as a lease if such arrangement 

is properly treated as a lease, taking into account all relevant 

factors including factors similar to those set forth in paragraph 

(1). 

(3) SPECIAL RULES FOR CONTRACTS OR ARRANGEMENTS INVOLVING SOLID WASTE DISPOSAL, ENERGY, AND CLEAN WATER FACILITIES.— 

(A) IN GENERAL.—Notwithstanding paragraphs (1) and 

(2), and except as provided in paragraph (4), any contract 

or arrangement between a service provider and a service 

recipient— 

(i) with respect to— 

(I) the operation of a qualified solid waste disposal facility, 

(II) the sale to the service recipient of electrical 

or thermal energy produced at a cogeneration or 

alternative energy facility, or 

(III) the operation of a water treatment works 

facility, and 

(ii) which purports to be a service contract, 

shall be treated as a service contract. 

(B) QUALIFIED SOLID WASTE DISPOSAL FACILITY.—For 

purposes of subparagraph (A), the term ‘‘qualified solid 

waste disposal facility’’ means any facility if such facility 

provides solid waste disposal services for residents of part 

or all of 1 or more governmental units and substantially 

all of the solid waste processed at such facility is collected 

from the general public. 

(C) COGENERATION FACILITY.—For purposes of subparagraph (A), the term ‘‘cogeneration facility’’ means a facility 

which uses the same energy source for the sequential generation of electrical or mechanical power in combination 

with steam, heat, or other forms of useful energy. 

(D) ALTERNATIVE ENERGY FACILITY.—For purposes of 

subparagraph (A), the term ‘‘alternative energy facility’’ 

means a facility for producing electrical or thermal energy 

if the primary energy source for the facility is not oil, natural gas, coal, or nuclear power. 

(E) WATER TREATMENT WORKS FACILITY.—For purposes 

of subparagraph (A), the term ‘‘water treatment works facility’’ means any treatment works within the meaning of 

section 212(2) of the Federal Water Pollution Control Act. 

(4) PARAGRAPH (3) NOT TO APPLY IN CERTAIN CASES.— 

574 

(A) IN GENERAL.—Paragraph (3) shall not apply to any 

qualified solid waste disposal facility, cogeneration facility, 

alternative energy facility, or water treatment works facility used under a contract or arrangement if— 

(i) the service recipient (or a related entity) operates 

such facility, 

(ii) the service recipient (or a related entity) bears 

any significant financial burden if there is nonperformance under the contract or arrangement (other 

than for reasons beyond the control of the service provider), 

(iii) the service recipient (or a related entity) receives any significant financial benefit if the operating 

costs of such facility are less than the standards of 

performance or operation under the contract or arrangement, or 

(iv) the service recipient (or a related entity) has an 

option to purchase, or may be required to purchase, all 

or a part of such facility at a fixed and determinable 

price (other than for fair market value). 

For purposes of this paragraph, the term ‘‘related entity’’ 

has the same meaning as when used in section 168(h). 

(B) SPECIAL RULES FOR APPLICATION OF SUBPARAGRAPH

(A) WITH RESPECT TO CERTAIN RIGHTS AND ALLOCATIONS

UNDER THE CONTRACT.—For purposes of subparagraph (A), 

there shall not be taken into account— 

(i) any right of a service recipient to inspect any facility, to exercise any sovereign power the service recipient may possess, or to act in the event of a breach 

of contract by the service provider, or 

(ii) any allocation of any financial burden or benefits 

in the event of any change in any law. 

(C) SPECIAL RULES FOR APPLICATION OF SUBPARAGRAPH

(A) IN THE CASE OF CERTAIN EVENTS.— 

(i) TEMPORARY SHUT-DOWNS, ETC..—For purposes of 

clause (ii) of subparagraph (A), there shall not be 

taken into account any temporary shut-down of the facility for repairs, maintenance, or capital improvements, or any financial burden caused by the bankruptcy or similar financial difficulty of the service provider. 

(ii) REDUCED COSTS.—For purposes of clause (iii) of 

subparagraph (A), there shall not be taken into account any significant financial benefit merely because 

payments by the service recipient under the contract 

or arrangement are decreased by reason of increased 

production or efficiency or the recovery of energy or 

other products. 

(5) EXCEPTION FOR CERTAIN LOW-INCOME HOUSING.—This 

subsection shall not apply to any property described in clause 

(i), (ii), (iii), or (iv) of section 1250(a)(1)(B) (relating to low-income housing) if— 

(A) such property is operated by or for an organization 

described in paragraph (3) or (4) of section 501(c), and 

575 

(B) at least 80 percent of the units in such property are 

leased to low-income tenants (within the meaning of section 167(k)(3)(B)) (as in effect on the day before the date 

of the enactment of the Revenue Reconciliation Act of 

1990). 

(6) REGULATIONS.—The Secretary may prescribe such regulations as may be necessary or appropriate to carry out the provisions of this subsection. 

(f) USE OF RELATED PERSONS OR PASS-THRU ENTITIES.—The Secretary shall prescribe such regulations as may be necessary or appropriate to prevent the avoidance of those provisions of this title 

which deal with— 

(1) the linking of borrowing to investment, or 

(2) diminishing risks, 

through the use of related persons, pass-thru entities, or other 

intermediaries. 

(g) CLARIFICATION OF FAIR MARKET VALUE IN THE CASE OF NON- RECOURSE INDEBTEDNESS.—For purposes of subtitle A, in determining the amount of gain or loss (or deemed gain or loss) with respect to any property, the fair market value of such property shall 

be treated as being not less than the amount of any nonrecourse 

indebtedness to which such property is subject. 

(h) MOTOR VEHICLE OPERATING LEASES.— (1) IN GENERAL.—For purposes of this title, in the case of a 

qualified motor vehicle operating agreement which contains a 

terminal rental adjustment clause— 

(A) such agreement shall be treated as a lease if (but for 

such terminal rental adjustment clause) such agreement 

would be treated as a lease under this title, and 

(B) the lessee shall not be treated as the owner of the 

property subject to an agreement during any period such 

agreement is in effect. 

(2) QUALIFIED MOTOR VEHICLE OPERATING AGREEMENT DE- FINED.—For purposes of this subsection— 

(A) IN GENERAL.—The term ‘‘qualified motor vehicle operating agreement’’ means any agreement with respect to 

a motor vehicle (including a trailer) which meets the requirements of subparagraphs (B), (C), and (D) of this paragraph. 

(B) MINIMUM LIABILITY OF LESSOR.—An agreement 

meets the requirements of this subparagraph if under such 

agreement the sum of— 

(i) the amount the lessor is personally liable to 

repay, and 

(ii) the net fair market value of the lessor’s interest 

in any property pledged as security for property subject to the agreement, 

equals or exceeds all amounts borrowed to finance the acquisition of property subject to the agreement. There shall 

not be taken into account under clause (ii) any property 

pledged which is property subject to the agreement or 

property directly or indirectly financed by indebtedness secured by property subject to the agreement. 

(C) CERTIFICATION BY LESSEE; NOTICE OF TAX OWNERSHIP.—An agreement meets the requirements of this subVerDate Sep 11 2014 11:09 Jul 19, 2019 Jkt 037115 PO 00000 Frm 00581 Fmt 6659 Sfmt 6601 E:\HR\OC\HR161.XXX HR161
576 

paragraph if such agreement contains a separate written 

statement separately signed by the lessee— 

(i) under which the lessee certifies, under penalty of 

perjury, that it intends that more than 50 percent of 

the use of the property subject to such agreement is to 

be in a trade or business of the lessee, and 

(ii) which clearly and legibly states that the lessee 

has been advised that it will not be treated as the 

owner of the property subject to the agreement for 

Federal income tax purposes. 

(D) LESSOR MUST HAVE NO KNOWLEDGE THAT CERTIFICATION IS FALSE.—An agreement meets the requirements 

of this subparagraph if the lessor does not know that the 

certification described in subparagraph (C)(i) is false. 

(3) TERMINAL RENTAL ADJUSTMENT CLAUSE DEFINED.— 

(A) IN GENERAL.—For purposes of this subsection, the 

term ‘‘terminal rental adjustment clause’’ means a provision of an agreement which permits or requires the rental 

price to be adjusted upward or downward by reference to 

the amount realized by the lessor under the agreement 

upon sale or other disposition of such property. 

(B) SPECIAL RULE FOR LESSEE DEALERS.—The term ‘‘terminal rental adjustment clause’’ also includes a provision 

of an agreement which requires a lessee who is a dealer 

in motor vehicles to purchase the motor vehicle for a predetermined price and then resell such vehicle where such 

provision achieves substantially the same results as a provision described in subparagraph (A). 

(i) TAXABLE MORTGAGE POOLS.— 

(1) TREATED AS SEPARATE CORPORATIONS.—A taxable mortgage pool shall be treated as a separate corporation which may 

not be treated as an includible corporation with any other corporation for purposes of section 1501. 

(2) TAXABLE MORTGAGE POOL DEFINED.—For purposes of this 

title— 

(A) IN GENERAL.—Except as otherwise provided in this 

paragraph, a taxable mortgage pool is any entity (other 

than a REMIC) if— 

(i) substantially all of the assets of such entity consists of debt obligations (or interests therein) and more 

than 50 percent of such debt obligations (or interests) 

consists of real estate mortgages (or interests therein), 

(ii) such entity is the obligor under debt obligations 

with 2 or more maturities, and 

(iii) under the terms of the debt obligations referred 

to in clause (ii) (or underlying arrangement), payments on such debt obligations bear a relationship to 

payments on the debt obligations (or interests) referred to in clause (i). 

(B) PORTION OF ENTITIES TREATED AS POOLS.—Any portion of an entity which meets the definition of subparagraph (A) shall be treated as a taxable mortgage pool. 

(C) EXCEPTION FOR DOMESTIC BUILDING AND LOAN.— 

Nothing in this subsection shall be construed to treat any 

577 

domestic building and loan association (or portion thereof) 

as a taxable mortgage pool. 

(D) TREATMENT OF CERTAIN EQUITY INTERESTS.—To the 

extent provided in regulations, equity interest of varying 

classes which correspond to maturity classes of debt shall 

be treated as debt for purposes of this subsection. 

(3) TREATMENT OF CERTAIN REIT’S.—If— 

(A) a real estate investment trust is a taxable mortgage 

pool, or 

(B) a qualified REIT subsidiary (as defined in section 

856(i)(2)) of a real estate investment trust is a taxable 

mortgage pool, 

under regulations prescribed by the Secretary, adjustments 

similar to the adjustments provided in section 860E(d) shall 

apply to the shareholders of such real estate investment trust. 

(j) TAX TREATMENT OF FEDERAL THRIFT SAVINGS FUND.— 

(1) IN GENERAL.—For purposes of this title— 

(A) the Thrift Savings Fund shall be treated as a trust 

described in section 401(a) which is exempt from taxation 

under section 501(a); 

(B) any contribution to, or distribution from, the Thrift 

Savings Fund shall be treated in the same manner as contributions to or distributions from such a trust; and 

(C) subject to section 401(k)(4)(B) and any dollar limitation on the application of section 402(e)(3), contributions to 

the Thrift Savings Fund shall not be treated as distributed 

or made available to an employee or Member nor as a contribution made to the Fund by an employee or Member 

merely because the employee or Member has, under the 

provisions of subchapter III of chapter 84 of title 5, United 

States Code, and section 8351 of such title 5, an election 

whether the contribution will be made to the Thrift Savings Fund or received by the employee or Member in cash. 

(2) NONDISCRIMINATION REQUIREMENTS.—Notwithstanding 

any other provision of law, the Thrift Savings Fund is not subject to the nondiscrimination requirements applicable to arrangements described in section 401(k) or to matching contributions (as described in section 401(m)), so long as it meets 

the requirements of this section. 

(3) COORDINATION WITH SOCIAL SECURITY ACT.—Paragraph 

(1) shall not be construed to provide that any amount of the 

employee’s or Member’s basic pay which is contributed to the 

Thrift Savings Fund shall not be included in the term ‘‘wages’’ 

for the purposes of section 209 of the Social Security Act or section 3121(a) of this title. 

(4) DEFINITIONS.—For purposes of this subsection, the terms 

‘‘Member’’, ‘‘employee’’, and ‘‘Thrift Savings Fund’’ shall have 

the same respective meanings as when used in subchapter III 

of chapter 84 of title 5, United States Code. 

(5) COORDINATION WITH OTHER PROVISIONS OF LAW.—No provision of law not contained in this title shall apply for purposes 

of determining the treatment under this title of the Thrift Savings Fund or any contribution to, or distribution from, such 

Fund. 

578 

(k) TREATMENT OF CERTAIN AMOUNTS PAID TO CHARITY.—In the 

case of any payment which, except for section 501(b) of the Ethics 

in Government Act of 1978, might be made to any officer or employee of the Federal Government but which is made instead on behalf of such officer or employee to an organization described in section 170(c)— 

(1) such payment shall not be treated as received by such officer or employee for all purposes of this title and for all purposes of any tax law of a State or political subdivision thereof, 

and 

(2) no deduction shall be allowed under any provision of this 

title (or of any tax law of a State or political subdivision thereof) to such officer or employee by reason of having such payment made to such organization. 

For purposes of this subsection, a Senator, a Representative in, or 

a Delegate or Resident Commissioner to, the Congress shall be 

treated as an officer or employee of the Federal Government. 

(l) REGULATIONS RELATING TO CONDUIT ARRANGEMENTS.—The 

Secretary may prescribe regulations recharacterizing any multipleparty financing transaction as a transaction directly among any 2 

or more of such parties where the Secretary determines that such 

recharacterization is appropriate to prevent avoidance of any tax 

imposed by this title. 

(m) DESIGNATION OF CONTRACT MARKETS.—Any designation by 

the Commodity Futures Trading Commission of a contract market 

which could not have been made under the law in effect on the day 

before the date of the enactment of the Commodity Futures Modernization Act of 2000 shall apply for purposes of this title except 

to the extent provided in regulations prescribed by the Secretary. 

(n) CONVENTION OR ASSOCIATION OF CHURCHES.—For purposes of 

this title, any organization which is otherwise a convention or association of churches shall not fail to so qualify merely because the 

membership of such organization includes individuals as well as 

churches or because individuals have voting rights in such organization. 

(o) CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.— 

(1) APPLICATION OF DOCTRINE.—In the case of any transaction to which the economic substance doctrine is relevant, 

such transaction shall be treated as having economic substance 

only if— 

(A) the transaction changes in a meaningful way (apart 

from Federal income tax effects) the taxpayer’s economic 

position, and 

(B) the taxpayer has a substantial purpose (apart from 

Federal income tax effects) for entering into such transaction. 

(2) SPECIAL RULE WHERE TAXPAYER RELIES ON PROFIT POTENTIAL.— 

(A) IN GENERAL.—The potential for profit of a transaction shall be taken into account in determining whether 

the requirements of subparagraphs (A) and (B) of paragraph (1) are met with respect to the transaction only if 

the present value of the reasonably expected pre-tax profit 

from the transaction is substantial in relation to the 

579 

present value of the expected net tax benefits that would 

be allowed if the transaction were respected. 

(B) TREATMENT OF FEES AND FOREIGN TAXES.—Fees and 

other transaction expenses shall be taken into account as 

expenses in determining pre-tax profit under subparagraph (A). The Secretary shall issue regulations requiring 

foreign taxes to be treated as expenses in determining pretax profit in appropriate cases. 

(3) STATE AND LOCAL TAX BENEFITS.—For purposes of paragraph (1), any State or local income tax effect which is related 

to a Federal income tax effect shall be treated in the same 

manner as a Federal income tax effect. 

(4) FINANCIAL ACCOUNTING BENEFITS.—For purposes of paragraph (1)(B), achieving a financial accounting benefit shall not 

be taken into account as a purpose for entering into a transaction if the origin of such financial accounting benefit is a reduction of Federal income tax. 

(5) DEFINITIONS AND SPECIAL RULES.—For purposes of this 

subsection— 

(A) ECONOMIC SUBSTANCE DOCTRINE.—The term ‘‘economic substance doctrine’’ means the common law doctrine 

under which tax benefits under subtitle A with respect to 

a transaction are not allowable if the transaction does not 

have economic substance or lacks a business purpose. 

(B) EXCEPTION FOR PERSONAL TRANSACTIONS OF INDIVID- UALS.—In the case of an individual, paragraph (1) shall 

apply only to transactions entered into in connection with 

a trade or business or an activity engaged in for the production of income. 

(C) DETERMINATION OF APPLICATION OF DOCTRINE NOT

AFFECTED.—The determination of whether the economic 

substance doctrine is relevant to a transaction shall be 

made in the same manner as if this subsection had never 

been enacted. 

(D) TRANSACTION.—The term ‘‘transaction’’ includes a series of transactions. 

(p) CROSS REFERENCES.— 

(1) OTHER DEFINITIONS.—For other definitions, see the following sections of Title 1 of the United States Code: 

(1) Singular as including plural, section 1. 

(2) Plural as including singular, section 1. 

(3) Masculine as including feminine, section 1. 

(4) Officer, section 1. 

(5) Oath as including affirmation, section 1. 

(6) County as including parish, section 2. 

(7) Vessel as including all means of water transportation, section 3. 

(8) Vehicle as including all means of land transportation, section 4. 

(9) Company or association as including successors 

and assigns, section 5. 

(2) EFFECT OF CROSS REFERENCES.—For effect of cross references in this title, see section 7806(a). 

* * * * * * * 

580 

SEC. 7703. DETERMINATION OF MARITAL STATUS. 

(a) GENERAL RULE.—For purposes of part V of subchapter B of 

chapter 1 and those provisions of this title which refer to this subsection— 

(1) the determination of whether an individual is married 

shall be made as of the close of øhis taxable year¿ the individual’s taxable year ; except that if øhis spouse¿ the individual’s 

spouse dies during øhis taxable year¿ the individual’s taxable 

year such determination shall be made as of the time of such 

death; and 

(2) an individual legally separated from øhis spouse¿ the individual’s spouse under a decree of divorce or of separate maintenance shall not be considered as married. 

(b) CERTAIN MARRIED INDIVIDUALS LIVING APART.—For purposes 

of those provisions of this title which refer to this subsection, if— 

(1) an individual who is married (within the meaning of subsection (a)) and who files a separate return maintains as øhis 

home¿ the individual’s home a household which constitutes for 

more than one-half of the taxable year the principal place of 

abode of a child (within the meaning of section 152(f)(1)) with 

respect to whom such individual is entitled to a deduction for 

the taxable year under section 151 (or would be so entitled but 

for section 152(e)), 

(2) such individual furnishes over one-half of the cost of 

maintaining such household during the taxable year, and 

(3) during the last 6 months of the taxable year, such individual’s spouse is not a member of such household, 

such individual shall not be considered as married. 

* * * * * * * 

CHAPTER 80—GENERAL RULES 

* * * * * * * 

Subchapter C—PROVISIONS AFFECTING MORE 

THAN ONE SUBTITLE 

* * * * * * * 

SEC. 7872. TREATMENT OF LOANS WITH BELOW-MARKET INTEREST 

RATES. 

(a) TREATMENT OF GIFT LOANS AND DEMAND LOANS.— 

(1) IN GENERAL.—For purposes of this title, in the case of any 

below-market loan to which this section applies and which is 

a gift loan or a demand loan, the forgone interest shall be 

treated as— 

(A) transferred from the lender to the borrower, and 

(B) retransferred by the borrower to the lender as interest. 

(2) TIME WHEN TRANSFERS MADE.—Except as otherwise provided in regulations prescribed by the Secretary, any forgone 

interest attributable to periods during any calendar year shall 

be treated as transferred (and retransferred) under paragraph 

(1) on the last day of such calendar year. 

(b) TREATMENT OF OTHER BELOW-MARKET LOANS.— 

581 

(1) IN GENERAL.—For purposes of this title, in the case of any 

below-market loan to which this section applies and to which 

subsection (a)(1) does not apply, the lender shall be treated as 

having transferred on the date the loan was made (or, if later, 

on the first day on which this section applies to such loan), and 

the borrower shall be treated as having received on such date, 

cash in an amount equal to the excess of— 

(A) the amount loaned, over 

(B) the present value of all payments which are required 

to be made under the terms of the loan. 

(2) OBLIGATION TREATED AS HAVING ORIGINAL ISSUE DISCOUNT.—For purposes of this title— 

(A) IN GENERAL.—Any below-market loan to which paragraph (1) applies shall be treated as having original issue 

discount in an amount equal to the excess described in 

paragraph (1). 

(B) AMOUNT IN ADDITION TO OTHER ORIGINAL ISSUE DIS- COUNT.—Any original issue discount which a loan is treated as having by reason of subparagraph (A) shall be in addition to any other original issue discount on such loan 

(determined without regard to subparagraph (A)). 

(c) BELOW-MARKET LOANS TO WHICH SECTION APPLIES.— (1) IN GENERAL.—Except as otherwise provided in this subsection and subsection (g), this section shall apply to— 

(A) GIFTS.—Any below-market loan which is a gift loan. 

(B) COMPENSATION-RELATED LOANS.—Any below-market 

loan directly or indirectly between— 

(i) an employer and an employee, or 

(ii) an independent contractor and a person for 

whom such independent contractor provides services. 

(C) CORPORATION-SHAREHOLDER LOANS.—Any belowmarket loan directly or indirectly between a corporation 

and any shareholder of such corporation. 

(D) TAX AVOIDANCE LOANS.—Any below-market loan 1 of 

the principal purposes of the interest arrangements of 

which is the avoidance of any Federal tax. 

(E) OTHER BELOW-MARKET LOANS.—To the extent provided in regulations, any below-market loan which is not 

described in subparagraph (A), (B), (C), or (F) if the interest arrangements of such loan have a significant effect on 

any Federal tax liability of the lender or the borrower. 

(F) LOANS TO QUALIFIED CONTINUING CARE FACILITIES.— 

Any loan to any qualified continuing care facility pursuant 

to a continuing care contract. 

(2) $10,000 DE MINIMIS EXCEPTION FOR GIFT LOANS BETWEEN

INDIVIDUALS.— 

(A) IN GENERAL.—In the case of any gift loan directly between individuals, this section shall not apply to any day 

on which the aggregate outstanding amount of loans between such individuals does not exceed $10,000. 

(B) DE MINIMIS EXCEPTION NOT TO APPLY TO LOANS AT- TRIBUTABLE TO ACQUISITION OF INCOME-PRODUCING AS- SETS.—Subparagraph (A) shall not apply to any gift loan 

directly attributable to the purchase or carrying of incomeproducing assets. 

582 

(C) CROSS REFERENCE.—For limitation on amount treated as interest where loans do not exceed $100,000, see subsection (d)(1). 

(3) $10,000 DE MINIMIS EXCEPTION FOR COMPENSATION-RE- LATED AND CORPORATE-SHAREHOLDER LOANS.— (A) IN GENERAL.—In the case of any loan described in 

subparagraph (B) or (C) of paragraph (1), this section shall 

not apply to any day on which the aggregate outstanding 

amount of loans between the borrower and lender does not 

exceed $10,000. 

(B) EXCEPTION NOT TO APPLY WHERE 1 OF PRINCIPAL PURPOSES IS TAX AVOIDANCE.—Subparagraph (A) shall not 

apply to any loan the interest arrangements of which have 

as 1 of their principal purposes the avoidance of any Federal tax. 

(d) SPECIAL RULES FOR GIFT LOANS.— 

(1) LIMITATION ON INTEREST ACCRUAL FOR PURPOSES OF IN- COME TAXES WHERE LOANS DO NOT EXCEED $100,000.— (A) IN GENERAL.—For purposes of subtitle A, in the case 

of a gift loan directly between individuals, the amount 

treated as retransferred by the borrower to the lender as 

of the close of any year shall not exceed the borrower’s net 

investment income for such year. 

(B) LIMITATION NOT TO APPLY WHERE 1 OF PRINCIPAL

PURPOSES IS TAX AVOIDANCE.—Subparagraph (A) shall not 

apply to any loan the interest arrangements of which have 

as 1 of their principal purposes the avoidance of any Federal tax. 

(C) SPECIAL RULE WHERE MORE THAN 1 GIFT LOAN OUTSTANDING.—For purposes of subparagraph (A), in any case 

in which a borrower has outstanding more than 1 gift loan, 

the net investment income of such borrower shall be allocated among such loans in proportion to the respective 

amounts which would be treated as retransferred by the 

borrower without regard to this paragraph. 

(D) LIMITATION NOT TO APPLY WHERE AGGREGATE

AMOUNT OF LOANS EXCEED $100,000.—This paragraph shall 

not apply to any loan made by a lender to a borrower for 

any day on which the aggregate outstanding amount of 

loans between the borrower and lender exceeds $100,000. 

(E) NET INVESTMENT INCOME.—For purposes of this 

paragraph— 

(i) IN GENERAL.—The term ‘‘net investment income’’ 

has the meaning given such term by section 163(d)(4). 

(ii) DE MINIMIS RULE.—If the net investment income 

of any borrower for any year does not exceed $1,000, 

the net investment income of such borrower for such 

year shall be treated as zero. 

(iii) ADDITIONAL AMOUNTS TREATED AS INTEREST.—In 

determining the net investment income of a person for 

any year, any amount which would be included in the 

gross income of such person for such year by reason of 

section 1272 if such section applied to all deferred payment obligations shall be treated as interest received 

by such person for such year. 

583 

(iv) DEFERRED PAYMENT OBLIGATIONS.—The term 

‘‘deferred payment obligation’’ includes any market 

discount bond, short-term obligation, United States 

savings bond, annuity, or similar obligation. 

(2) SPECIAL RULE FOR GIFT TAX.—In the case of any gift loan 

which is a term loan, subsection (b)(1) (and not subsection (a)) 

shall apply for purposes of chapter 12. 

(e) DEFINITIONS OF BELOW-MARKET LOAN AND FORGONE INTER- EST.—For purposes of this section— 

(1) BELOW-MARKET LOAN.—The term ‘‘below-market loan’’ 

means any loan if— 

(A) in the case of a demand loan, interest is payable on 

the loan at a rate less than the applicable Federal rate, or 

(B) in the case of a term loan, the amount loaned exceeds the present value of all payments due under the 

loan. 

(2) FORGONE INTEREST.—The term ‘‘forgone interest’’ means, 

with respect to any period during which the loan is outstanding, the excess of— 

(A) the amount of interest which would have been payable on the loan for the period if interest accrued on the 

loan at the applicable Federal rate and were payable annually on the day referred to in subsection (a)(2), over 

(B) any interest payable on the loan properly allocable to 

such period. 

(f) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this 

section— 

(1) PRESENT VALUE.—The present value of any payment shall 

be determined in the manner provided by regulations prescribed by the Secretary— 

(A) as of the date of the loan, and 

(B) by using a discount rate equal to the applicable Federal rate. 

(2) APPLICABLE FEDERAL RATE.— 

(A) TERM LOANS.—In the case of any term loan, the applicable Federal rate shall be the applicable Federal rate 

in effect under section 1274(d) (as of the day on which the 

loan was made), compounded semiannually. 

(B) DEMAND LOANS.—In the case of a demand loan, the 

applicable Federal rate shall be the Federal short-term 

rate in effect under section 1274(d) for the period for which 

the amount of forgone interest is being determined, compounded semiannually. 

(3) GIFT LOAN.—The term ‘‘gift loan’’ means any below-market loan where the forgoing of interest is in the nature of a 

gift. 

(4) AMOUNT LOANED.—The term ‘‘amount loaned’’ means the 

amount received by the borrower. 

(5) DEMAND LOAN.—The term ‘‘demand loan’’ means any loan 

which is payable in full at any time on the demand of the lender. Such term also includes (for purposes other than determining the applicable Federal rate under paragraph (2)) any 

loan if the benefits of the interest arrangements of such loan 

are not transferable and are conditioned on the future performance of substantial services by an individual. To the extent 

584 

provided in regulations, such term also includes any loan with 

an indefinite maturity. 

(6) TERM LOAN.—The term ‘‘term loan’’ means any loan 

which is not a demand loan. 

ø(7) HUSBAND AND WIFE TREATED AS 1 PERSON.—A husband 

and wife shall be treated as 1 person.¿ 

(7) MARRIED COUPLE TREATED AS 1 PERSON.—A married couple shall be treated as 1 person. 

(8) LOANS TO WHICH SECTION 483, 643(I), OR 1274 APPLIES.— 

This section shall not apply to any loan to which section 483, 

643(i), or 1274 applies. 

(9) NO WITHHOLDING.—No amount shall be withheld under 

chapter 24 with respect to— 

(A) any amount treated as transferred or retransferred 

under subsection (a), and 

(B) any amount treated as received under subsection (b). 

(10) SPECIAL RULE FOR TERM LOANS.—If this section applies 

to any term loan on any day, this section shall continue to 

apply to such loan notwithstanding paragraphs (2) and (3) of 

subsection (c). In the case of a gift loan, the preceding sentence 

shall only apply for purposes of chapter 12. 

(11) TIME FOR DETERMINING RATE APPLICABLE TO EMPLOYEE

RELOCATION LOANS.— 

(A) IN GENERAL.—In the case of any term loan made by 

an employer to an employee the proceeds of which are 

used by the employee to purchase a principal residence 

(within the meaning of section 121), the determination of 

the applicable Federal rate shall be made as of the date 

the written contract to purchase such residence was entered into. 

(B) PARAGRAPH ONLY TO APPLY TO CASES TO WHICH SECTION 217 APPLIES.—Subparagraph (A) shall only apply to 

the purchase of a principal residence in connection with 

the commencement of work by an employee or a change in 

the principal place of work of an employee to which section 

217 applies. 

(g) EXCEPTION FOR CERTAIN LOANS TO QUALIFIED CONTINUING

CARE FACILITIES.— 

(1) IN GENERAL.—This section shall not apply for any calendar year to any below-market loan made by a lender to a 

qualified continuing care facility pursuant to a continuing care 

contract if the lender (or the lender’s spouse) attains age 65 before the close of such year. 

(2) $90,000 LIMIT.—Paragraph (1) shall apply only to the extent that the aggregate outstanding amount of any loan to 

which such paragraph applies (determined without regard to 

this paragraph), when added to the aggregate outstanding 

amount of all other previous loans between the lender (or the 

lender’s spouse) and any qualified continuing care facility to 

which paragraph (1) applies, does not exceed $90,000. 

(3) CONTINUING CARE CONTRACT.—For purposes of this section, the term ‘‘continuing care contract’’ means a written contract between an individual and a qualified continuing care facility under which— 

585 

(A) the individual or individual’s spouse may use a 

qualified continuing care facility for their life or lives, 

(B) the individual or individual’s spouse— 

(i) will first— 

(I) reside in a separate, independent living unit 

with additional facilities outside such unit for the 

providing of meals and other personal care, and 

(II) not require long-term nursing care, and 

(ii) then will be provided long-term and skilled nursing care as the health of such individual or individual’s spouse requires, and 

(C) no additional substantial payment is required if such 

individual or individual’s spouse requires increased personal care services or long-term and skilled nursing care. 

(4) QUALIFIED CONTINUING CARE FACILITY.— 

(A) IN GENERAL.—For purposes of this section, the term 

‘‘qualified continuing care facility’’ means 1 or more facilities— 

(i) which are designed to provide services under continuing care contracts, and 

(ii) substantially all of the residents of which are 

covered by continuing care contracts. 

(B) SUBSTANTIALLY ALL FACILITIES MUST BE OWNED OR

OPERATED BY BORROWER.—A facility shall not be treated as 

a qualified continuing care facility unless substantially all 

facilities which are used to provide services which are required to be provided under a continuing care contract are 

owned or operated by the borrower. 

(C) NURSING HOMES EXCLUDED.—The term ‘‘qualified 

continuing care facility’’ shall not include any facility 

which is of a type which is traditionally considered a nursing home. 

(5) ADJUSTMENT OF LIMIT FOR INFLATION.—In the case of any 

loan made during any calendar year after 1986, the dollar 

amount in paragraph (2) shall be increased by an amount 

equal to— 

(A) such amount, multiplied by 

(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year 

begins, by substituting ‘‘calendar year 1985’’ for ‘‘calendar 

year 2016’’ in subparagraph (A)(ii) thereof. 

Any increase under the preceding sentence shall be rounded to 

the nearest multiple of $100 (or, if such increase is a multiple 

of $50, such increase shall be increased to the nearest multiple 

of $100). 

(6) SUSPENSION OF APPLICATION.—Paragraph (1) shall not 

apply for any calendar year to which subsection (h) applies. 

(h) EXCEPTION FOR LOANS TO QUALIFIED CONTINUING CARE FACILITIES.— (1) IN GENERAL.—This section shall not apply for any calendar year to any below-market loan owed by a facility which 

on the last day of such year is a qualified continuing care facility, if such loan was made pursuant to a continuing care contract and if the lender (or the lender’s spouse) attains age 62 

before the close of such year. 

586 

(2) CONTINUING CARE CONTRACT.—For purposes of this section, the term ‘‘continuing care contract’’ means a written contract between an individual and a qualified continuing care facility under which— 

(A) the individual or individual’s spouse may use a 

qualified continuing care facility for their life or lives, 

(B) the individual or individual’s spouse will be provided 

with housing, as appropriate for the health of such individual or individual’s spouse— 

(i) in an independent living unit (which has additional available facilities outside such unit for the provision of meals and other personal care), and 

(ii) in an assisted living facility or a nursing facility, 

as is available in the continuing care facility, and 

(C) the individual or individual’s spouse will be provided 

assisted living or nursing care as the health of such individual or individual’s spouse requires, and as is available 

in the continuing care facility. 

The Secretary shall issue guidance which limits such term to 

contracts which provide only facilities, care, and services described in this paragraph. 

(3) QUALIFIED CONTINUING CARE FACILITY.— (A) IN GENERAL.—For purposes of this section, the term 

‘‘qualified continuing care facility’’ means 1 or more facilities— 

(i) which are designed to provide services under continuing care contracts, 

(ii) which include an independent living unit, plus 

an assisted living or nursing facility, or both, and 

(iii) substantially all of the independent living unit 

residents of which are covered by continuing care contracts. 

(B) NURSING HOMES EXCLUDED.—The term ‘‘qualified 

continuing care facility’’ shall not include any facility 

which is of a type which is traditionally considered a nursing home. 

(i) REGULATIONS.— (1) IN GENERAL.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including— 

(A) regulations providing that where, by reason of varying rates of interest, conditional interest payments, waivers of interest, disposition of the lender’s or borrower’s interest in the loan, or other circumstances, the provisions of 

this section do not carry out the purposes of this section, 

adjustments to the provisions of this section will be made 

to the extent necessary to carry out the purposes of this 

section, 

(B) regulations for the purpose of assuring that the positions of the borrower and lender are consistent as to the 

application (or nonapplication) of this section, and 

(C) regulations exempting from the application of this 

section any class of transactions the interest arrangements 

of which have no significant effect on any Federal tax liability of the lender or the borrower. 

587 

(2) ESTATE TAX COORDINATION.—Under regulations prescribed by the Secretary, any loan which is made with donative 

intent and which is a term loan shall be taken into account for 

purposes of chapter 11 in a manner consistent with the provisions of subsection (b). 

* * * * * * * 

(588) 

VII. MINORITY VIEWS 

Committee Republicans would like to point out a few administrative concerns with this legislation in its current form. 

In 2013, the Supreme Court in United States v. Windsor, 570 

U.S. 744 (2013) ruled that same-sex married couples cannot be denied Federal benefits, including tax benefits, available to other 

married couples. Previously, the Defense of Marriage Act had prohibited Government entities, including the Internal Revenue Service (the ‘‘IRS’’), from recognizing or extending Federal benefits 

based on a same-sex marriage. After the Windsor holding, the 

Obama Treasury Department issued guidance in 2013 that clarified 

that the IRS will recognize same-sex marriage for federal tax purposes and allowed taxpayers to file amended returns to claim credits or refunds based on marital status. The Internal Revenue Code, 

however, generally limits the time period for filing amended returns to three years after the original return was filed. Generally, 

at the time this allowed taxpayers to file amended returns based 

on marital status back to the 2010 tax year, as long as the couple 

was married in a State that recognized the marriage. 

There are sound policy reasons for the current three-year limitation for filing amended returns. In particular, as time passes, it becomes increasingly difficult for both taxpayers and the IRS to locate all the records that can substantiate a taxpayer’s claims. This 

challenge is only exacerbated by the IRS’s policy of routinely destroying taxpayer information. This legislation would allow certain 

taxpayers to file amended returns dating back to the 2004 tax year. 

These amended returns filed by taxpayers under this legislation 

would be subject to IRS audits; however, the ability of the IRS to 

conduct accurate, thorough audits of amended returns for taxable 

years of more than 10 years ago is questionable. 

Additionally, the IRS would find calculating credit interest a 

challenge under the legislation in its current form. The legislation 

does not specify which date should be used for the purposes of calculating interest—the date of the original filing, the date of enactment, etc.—nor does it specify which date from the two original tax 

returns should be used under that calculation method. 

Unfortunately, this bill does not adequately address these significant administrative concerns. 

KEVIN BRADY, 

Republican Leader, Committee on Ways and 

Means.