I

104TH CONGRESS

1ST SESSION H. R. 1518

To the Internal Revenue Code of 1986 to provide an incremental investment

tax credit to assist defense contractors in converting to nondefense operations.

IN THE HOUSE OF REPRESENTATIVES

APRIL 7, 1995

Ms. WATERS introduced the following bill; which was referred to the

Committee on Ways and Means

A BILL

To the Internal Revenue Code of 1986 to provide an incremental investment tax credit to assist defense contractors

in converting to nondefense operations.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. CONVERSION INVESTMENT CREDIT FOR DE4 FENSE CONTRACTORS.

5 (a) ALLOWANCE OF CREDIT.—Section 46 of the In6 ternal Revenue Code of 1986 (relating to amount of in7 vestment credit) is amended by striking ‘‘and’’ at the end

8 of paragraph (2), by striking the period at the end of para9 graph (3) and inserting ‘‘, and’’, and by adding at the

10 end thereof the following new paragraph:
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1 ‘‘(4) in the case of a defense contractor (as de2 fined in section 48(c)), the defense contractor con3 version credit.’’

4 (b) AMOUNT OF CREDIT.—Section 48 of such Code

5 is amended by adding at the end thereof the following new

6 subsection:

7 ‘‘(c) DEFENSE CONTRACTOR CONVERSION CRED8 IT.—

9 ‘‘(1) IN GENERAL.—For purposes of section 46,

10 in the case of a defense contractor, the defense con11 tractor conversion credit for any taxable year is an

12 amount equal to 15 percent of the sum of—

13 ‘‘(A) the incremental nondefense qualified

14 investment for such taxable year, plus

15 ‘‘(B) the qualified nondefense product ex16 penses paid or incurred by the taxpayer during

17 the taxable year.

18 ‘‘(2) DEFENSE CONTRACTOR.—For purposes of

19 this subsection, the term ‘defense contractor’ means

20 any taxpayer if more than 10 percent of its gross re21 ceipts for the taxable year is derived from defense

22 contracts.

23 ‘‘(3) INCREMENTAL NONDEFENSE QUALIFIED

24 INVESTMENT.—For purposes of paragraph (1), the
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1 incremental nondefense qualified investment for any

2 taxable year is the excess (if any) of—

3 ‘‘(A) the net nondefense qualified invest4 ment for such taxable year, over

5 ‘‘(B) the average of the net nondefense

6 qualified investment for the preceding 3 taxable

7 years.

8 ‘‘(4) NET NONDEFENSE QUALIFIED INVEST9 MENT.—For purposes of paragraph (3), the net

10 nondefense qualified investment for any taxable year

11 is the excess (if any) of—

12 ‘‘(A) the qualified investment in

13 nondefense section 38 property placed in service

14 during such taxable year, over

15 ‘‘(B) the aggregate fair market value of

16 nondefense section 38 property which is dis17 posed of, or otherwise ceases to be such prop18 erty, during such taxable year.

19 ‘‘(5) QUALIFIED INVESTMENT.—

20 ‘‘(A) IN GENERAL.—For purposes of this

21 subsection, the qualified investment for any tax22 able year is the aggregate of—

23 ‘‘(i) the applicable percentage of the

24 basis of each new nondefense section 38
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1 property placed in service by the taxpayer

2 during such taxable year, plus

3 ‘‘(ii) the applicable percentage of the

4 cost of each used nondefense section 38

5 property placed in service by the taxpayer

6 during such taxable year.

7 ‘‘(B) APPLICABLE PERCENTAGE.—For

8 purposes of subparagraph (A), the applicable

9 percentage for any property shall be determined

10 under paragraphs (2) and (7) of section 46(c)

11 (as in effect on the day before the date of the

12 enactment of the Revenue Reconciliation Act of

13 1990).

14 ‘‘(C) CERTAIN RULES MADE APPLICA15 BLE.—The provisions of subsections (b) and (c)

16 of section 48 (as in effect on the day before the

17 date of the enactment of the Revenue Reconcili18 ation Act of 1990) shall apply for purposes of

19 this paragraph.

20 ‘‘(6) NONDEFENSE SECTION 38 PROPERTY.—

21 ‘‘(A) IN GENERAL.—For purposes of this

22 subsection, the term ‘nondefense section 38

23 property’ means section 38 property to be used

24 other than in operations related to any defense

25 contract.
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1 ‘‘(B) DEFENSE CONTRACT.—The term ‘de2 fense contract’ means any contract or sub3 contract entered into (whether or not by the

4 taxpayer) with a defense agency of the United

5 States to provide material or defense-related

6 operations.

7 ‘‘(7) SECTION 38 PROPERTY.—For purposes of

8 this subsection, the term ‘section 38 property’

9 means—

10 ‘‘(A) tangible personal property (other

11 than an air conditioning or heating unit), or

12 ‘‘(B) other tangible property (not including

13 a building and its structural components) but

14 only if such property—

15 ‘‘(i) is used as an integral part of

16 manufacturing, production, or extraction

17 or of furnishing transportation, commu18 nications, electrical energy, gas, water, or

19 sewage disposal services, or

20 ‘‘(ii) constitutes a research facility

21 used in connection with any of the activi22 ties referred to in clause (i), or

23 ‘‘(iii) constitutes a facility used in

24 connection with any of the activities re25 ferred to in clause (i) for the bulk storage
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1 of fungible commodities (including com2 modities in a liquid or gaseous state), or

3 ‘‘(C) elevators and escalators, but only if—

4 ‘‘(i) the construction, reconstruction,

5 or erection of the elevator or escalator is

6 completed by the taxpayer, or

7 ‘‘(ii) the original use of such elevator

8 or escalator commences with the taxpayer,

9 or

10 ‘‘(D) single purpose agricultural or horti11 cultural structures; or

12 ‘‘(E) a storage facility (not including a

13 building and its structural components) used in

14 connection with the distribution of petroleum or

15 any primary product of petroleum.

16 Such term includes only property to which section

17 168 applies without regard to any useful life and

18 any other property with respect to which deprecia19 tion (or amortization in lieu of depreciation) is al20 lowable and having a useful life (determined as of

21 the time such property is placed in service) of 3

22 years or more.

23 ‘‘(8) QUALIFIED NONDEFENSE PRODUCT EX24 PENSES.—For purposes of this subsection, the term

25 ‘qualified nondefense product expenses’ means the
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1 following expenses to the extent incurred in connec2 tion with any product or service not related to any

3 defense contract: expenses for research, design, com4 mercial cost, quality control, and marketing. Such

5 term shall not include any expense attributable to a

6 product produced or service provided before the date

7 of the enactment of this subsection.

8 ‘‘(9) COORDINATION WITH OTHER CREDITS.—

9 This subsection shall not apply to any property to

10 which the energy credit or rehabilitation credit

11 would apply unless the taxpayer elects to waive the

12 application of such credits to such property.

13 ‘‘(10) CERTAIN PROGRESS EXPENDITURE

14 RULES MADE APPLICABLE.—Rules similar to rules

15 of subsection (c)(4) and (d) of section 46 (as in ef16 fect on the day before the date of the enactment of

17 the Revenue Reconciliation Act of 1990) shall apply

18 for purposes of this subsection.

19 ‘‘(11) ALLOCATION OF BASIS ADJUSTMENT.—

20 The reduction required by section 50(c) for any tax21 able year shall be allocated among the nondefense

22 section 38 property placed in service by the taxpayer

23 during such year in proportion to the respective

24 bases of such property.
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1 ‘‘(12) RECAPTURE.—In applying section 50(a)

2 to any property which ceases to be nondefense sec3 tion 38 property, the credit determined under this

4 section with respect to such property shall be treated

5 as being equal to 15 percent of the lesser of—

6 ‘‘(A) the excess referred to in paragraph

7 (1) for the taxable year in which such property

8 was placed in service, or

9 ‘‘(B) the qualified investment in such prop10 erty which was taken into account under sub11 section (a).

12 ‘‘(13) CONTROLLED GROUPS.—Rules similar to

13 the rules of paragraph (1) of section 41(f) shall

14 apply for purposes of this subsection.

15 ‘‘(14) INCLUSION OF LEASED PROPERTY.—The

16 Secretary shall prescribe regulations which require

17 leased property to be taken into account in deter18 mining the incremental nondefense qualified invest19 ment for any taxable year and which allow the credit

20 under paragraph (1)(A) attributable to such prop21 erty to be allowed to the lessor or lessee of such

22 property.

23 ‘‘(15) APPLICATION OF SUBSECTION.—This

24 subsection shall apply to the 5-period beginning on

25 January 1, 1993, under rules similar to the rules of
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1 section 48(m) (as in effect on the day before the

2 date of the enactment of the Revenue Reconciliation

3 Act of 1990).’’

4 (c) TECHNICAL AMENDMENTS.—

5 (1) Subparagraph (C) of section 49(a)(1) of

6 such Code is amended by striking ‘‘and’’ at the end

7 of clause (ii), by striking the period at the end of

8 clause (iii) and inserting ‘‘, and’’, and by adding at

9 the end thereof the following new clause:

10 ‘‘(iv) the basis of any new nondefense

11 section 38 property and the cost of any

12 used nondefense section 38 property.’’

13 (2) Subparagraph (E) of section 50(a)(2) of

14 such Code is amended by inserting ‘‘or 48(c)(5)’’ be15 fore the period at the end thereof.

16 (3) Paragraph (5) of section 50(a) of such Code

17 is amended by adding at the end thereof the follow18 ing new subparagraph:

19 ‘‘(D) SPECIAL RULES FOR CERTAIN PROP20 ERTY.—In the case of any nondefense section

21 38 property which is 3-year property (within

22 the meaning of section 168(e))—

23 ‘‘(i) the percentage set forth in clause

24 (ii) of the table contained in paragraph

25 (1)(B) shall be 66 percent,
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1 ‘‘(ii) the percentage set forth in clause

2 (iii) of such table shall be 33 percent, and

3 ‘‘(iii) clauses (iv) and (v) of such table

4 shall not apply.’’

5 (4) Section 280C of such Code is amended by

6 adding at the end thereof the following new sub7 section:

8 ‘‘(d) CREDIT FOR CERTAIN EXPENSES OF DEFENSE

9 CONTRACTORS.—No deduction shall be allowed for that

10 portion of the qualified nondefense product expenses (as

11 defined in section 48(c)(8)) otherwise allowable as a de12 duction for the taxable year which is equal to the amount

13 of the credit determined for such taxable year under sec14 tion 48(c) with respect to such expenses. Rules similar to

15 the rules of paragraphs (2) and (3) of subsection (b) shall

16 apply for purposes of this subsection.’’

17 (5)(A) The section heading for section 48 of

18 such Code is amended to read as follows:

19 ‘‘SEC. 48. OTHER CREDITS.’’

20 (B) The table of sections for subpart E of part

21 IV of subchapter A of chapter 1 of such Code is

22 amended by striking the item relating to section 48

23 and inserting the following:

‘‘Sec. 48. Other credits.’’
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1 (d) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years ending after

3 December 31, 1994.

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