79–006 

115TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 115–957 

AMERICAN INNOVATION ACT OF 2018 

SEPTEMBER 24, 2018.—Committed to the Committee of the Whole House on the 

State of the Union and ordered to be printed 

Mr. BRADY of Texas, from the Committee on Ways and Means, 

submitted the following 

R E P O R T 

together with 

DISSENTING VIEWS 

[To accompany H.R. 6756] 

[Including cost estimate of the Congressional Budget Office] 

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

bill (H.R. 6756) to amend the Internal Revenue Code of 1986 to 

promote new business innovation, and for other purposes, having 

considered the same, report favorably thereon with an amendment 

and recommend that the bill as amended do pass. 

CONTENTS 

Page 

I. SUMMARY AND BACKGROUND ............................................................... 5 

A. Purpose and Summary .................................................................... 5 

B. Background and Need for Legislation ............................................ 6 

C. Legislative History ........................................................................... 6 

II. EXPLANATION OF THE BILL ................................................................... 6 

A. Simplification and Expansion of Deduction for Start-Up and 

Organizational Expenditures (sec. 2 of the bill and secs. 195, 

248, and 709 of the Code) .............................................................. 6 

B. Preservation of Start-Up Net Operating Losses and Tax Credits 

After Ownership Change (sec. 3 of the bill and secs. 382 and 

383 of the Code) .............................................................................. 8 

III. VOTES OF THE COMMITTEE .................................................................... 13 

IV. BUDGET EFFECTS OF THE BILL ............................................................ 14 

A. Committee Estimate of Budgetary Effects ..................................... 14 

B. Statement Regarding New Budget Authority and Tax Expenditures Budget Authority .................................................................. 16 

C. Cost Estimate Prepared by the Congressional Budget Office ...... 16 

2 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF 

THE HOUSE .............................................................................................. 20 

A. Committee Oversight Findings and Recommendations ................ 20 

B. Statement of General Performance Goals and Objectives ............ 20 

C. Information Relating to Unfunded Mandates ................................ 21 

D. Applicability of House Rule XXI 5(b) ............................................. 21 

E. Tax Complexity Analysis ................................................................. 21 

F. Congressional Earmarks, Limited Tax Benefits, and Limited 

Tariff Benefits ................................................................................. 21 

G. Duplication of Federal Programs .................................................... 21 

H. Disclosure of Directed Rule Makings ............................................. 22 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED 22 

A. Changes in Existing Law Proposed by the Bill, as Reported ....... 22 

VII. DISSENTING VIEWS ................................................................................... 126 

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘American Innovation Act of 2018’’. 

SEC. 2. SIMPLIFICATION AND EXPANSION OF DEDUCTION FOR START-UP AND ORGANIZATIONAL EXPENDITURES. 

(a) IN GENERAL.—Section 195 of the Internal Revenue Code of 1986 is amended 

by redesignating subsections (c) and (d) as subsections (d) and (e), respectively, and 

by striking all that precedes subsection (d) (as so redesignated) and inserting the 

following: 

‘‘SEC. 195. START-UP AND ORGANIZATIONAL EXPENDITURES. 

‘‘(a) CAPITALIZATION OF EXPENDITURES.—Except as otherwise provided in this section, no deduction shall be allowed for start-up or organizational expenditures. 

‘‘(b) ELECTION TO DEDUCT.— ‘‘(1) IN GENERAL.—If a taxpayer elects the application of this subsection with 

respect to any active trade or business— 

‘‘(A) the taxpayer shall be allowed a deduction for the taxable year in 

which such active trade or business begins in an amount equal to the lesser 

of— 

‘‘(i) the aggregate amount of start-up and organizational expenditures 

paid or incurred in connection with such active trade or business, or ‘‘(ii) $20,000, reduced (but not below zero) by the amount by which such aggregate amount exceeds $120,000, and 

‘‘(B) the remainder of such start-up and organizational expenditures shall 

be charged to capital account and allowed as an amortization deduction determined by amortizing such expenditures ratably over the 180-month period beginning with the month in which the active trade or business begins. 

‘‘(2) APPLICATION TO ORGANIZATIONAL EXPENDITURES.—In the case of organizational expenditures with respect to any corporation or partnership, the active 

trade or business referred to in paragraph (1) means the first active trade or 

business carried on by such corporation or partnership. 

‘‘(3) INFLATION ADJUSTMENT.—In the case of any taxable year beginning after December 31, 2019, the $20,000 and $120,000 amounts in paragraph (1)(A)(ii) 

shall each be increased by an amount equal to— 

‘‘(A) such dollar amount, multiplied by 

‘‘(B) the cost-of-living adjustment determined under section 1(f)(3) for the 

calendar year in which the taxable year begins, determined by substituting 

‘calendar year 2018’ for ‘calendar year 2016’ in subparagraph (A)(ii) thereof. 

If any amount as increased under the preceding sentence is not a multiple of 

$1,000, such amount shall be rounded to the nearest multiple of $1,000. 

‘‘(c) ALLOWANCE OF DEDUCTION UPON LIQUIDATION OR DISPOSITION.— 

‘‘(1) LIQUIDATION OF PARTNERSHIP OR CORPORATION.—If any partnership or 

corporation is completely liquidated by the taxpayer, any start-up or organizational expenditures paid or incurred in connection with such partnership or corporation which were not allowed as a deduction by reason of this section may 

be deducted to the extent allowable under section 165. 

‘‘(2) DISPOSITION OF TRADE OR BUSINESS.—If any trade or business is completely disposed of or discontinued by the taxpayer, any start-up expenditures 

paid or incurred in connection with such trade or business which were not allowed as a deduction by reason of this section (and not taken into account in 

connection with a liquidation to which paragraph (1) applies) may be deducted 

to the extent allowable under section 165. For purposes of this paragraph, in 

3 

the case of any deduction allowed under subsection (b)(1) with respect to both 

start-up and organizational expenditures, the amount treated as so allowed 

with respect to start-up expenditures shall bear the same ratio to such deduction as the start-up expenditures taken into account in determining such deduction bears to the aggregate of the start-up and organizational expenditures so 

taken into account.’’. 

(b) ORGANIZATIONAL EXPENDITURES.—Section 195(d) of such Code, as redesignated 

by subsection (a), is amended by adding at the end the following new paragraphs: 

‘‘(3) ORGANIZATIONAL EXPENDITURES.—The term ‘organizational expenditures’ 

means any expenditure which— 

‘‘(A) is incident to the creation of a corporation or a partnership, 

‘‘(B) is chargeable to capital account, and 

‘‘(C) is of a character which, if expended incident to the creation of a corporation or a partnership having an ascertainable life, would be amortizable over such life. 

‘‘(4) APPLICATION TO CERTAIN DISREGARDED ENTITIES.—In the case of any entity with a single owner that is disregarded as an entity separate from its owner, 

this section shall be applied in the same manner as if such entity were a corporation.’’. 

(c) ELECTION.—Section 195(e)(2) of such Code, as redesignated by subsection (a), 

is amended to read as follows: 

‘‘(2) PARTNERSHIPS AND S CORPORATIONS.—In the case of any partnership or 

S corporation, the election under subsection (b) shall be made (and this section 

shall be applied) at the entity level.’’. 

(d) CONFORMING AMENDMENTS.— 

(1)(A) Part VIII of subchapter B of chapter 1 is amended by striking section 

248 of such Code (and by striking the item relating to such section in the table 

of sections of such part). 

(B) Section 170(b)(2)(D)(ii) of such Code is amended by striking ‘‘(except section 248)’’. 

(C) Section 312(n)(3) of such Code is amended by striking ‘‘Sections 173 and 

248’’ and inserting ‘‘Sections 173 and 195’’. 

(D) Section 535(b)(3) of such Code is amended by striking ‘‘(except section 

248)’’. 

(E) Section 545(b)(3) of such Code is amended by striking ‘‘(except section 

248)’’. 

(F) Section 545(b)(4) of such Code is amended by striking ‘‘(except section 

248)’’. 

(G) Section 834(c)(7) of such Code is amended by striking ‘‘(except section 

248)’’. 

(H) Section 852(b)(2)(C) of such Code is amended by striking ‘‘(except section 

248)’’. 

(I) Section 857(b)(2)(A) of such Code is amended by striking ‘‘(except section 

248)’’. 

(J) Section 1363(b) of such Code is amended by adding ‘‘and’’ at the end of 

paragraph (2), by striking paragraph (3), and by redesignating paragraph (4) as 

paragraph (3). 

(K) Section 1375(b)(1)(B)(i) of such Code is amended by striking ‘‘(other than 

the deduction allowed by section 248, relating to organization expenditures)’’. 

(2)(A) Section 709 of such Code is amended to read as follows: 

‘‘SEC. 709. TREATMENT OF SYNDICATION FEES. 

‘‘No deduction shall be allowed under this chapter to a partnership or to any partner of the partnership for any amounts paid or incurred to promote the sale of (or 

to sell) an interest in the partnership.’’. 

(B) The item relating to section 709 in the table of sections for part I of subchapter K of chapter 1 of such Code is amended to read as follows: 

‘‘Sec. 709. Treatment of syndication fees.’’. 

(3) Section 1202(e)(2)(A) of such Code is amended by striking ‘‘section 

195(c)(1)(A)’’ and inserting ‘‘section 195(d)(1)(A)’’. 

(4) The item relating to section 195 in the table of contents of part VI of subchapter B of chapter 1 of such Code is amended to read as follows: 

‘‘Sec. 195. Start-up and organizational expenditures.’’. 

(e) EFFECTIVE DATE.—The amendments made by this section shall apply to expenditures paid or incurred in connection with active trades or businesses which 

begin in taxable years beginning after December 31, 2018. 

4 

SEC. 3. PRESERVATION OF START-UP NET OPERATING LOSSES AND TAX CREDITS AFTER 

OWNERSHIP CHANGE. 

(a) APPLICATION TO NET OPERATING LOSSES.—Section 382(d) of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph: 

‘‘(4) EXCEPTION FOR START-UP LOSSES.— 

‘‘(A) IN GENERAL.—In the case of any net operating loss carryforward described in paragraph (1)(A) which arose in a start-up period taxable year, 

the amount of such net operating loss carryforward otherwise taken into account under such paragraph shall be reduced by the net start-up loss determined with respect to the trade or business referred to in subparagraph 

(B)(i) for such start-up period taxable year. 

‘‘(B) START-UP PERIOD TAXABLE YEAR.—The term ‘start-up period taxable 

year’ means any taxable year of the old loss corporation which— 

‘‘(i) begins before the close of the 3-year period beginning on the date 

on which any trade or business of such corporation begins as an active 

trade or business (as determined under section 195(d)(2) without regard 

to subparagraph (B) thereof), and 

‘‘(ii) ends after September 10, 2018. 

‘‘(C) NET START-UP LOSS.— 

‘‘(i) IN GENERAL.—The term ‘net start-up loss’ means, with respect to 

any trade or business referred to in subparagraph (B)(i) for any startup period taxable year, the amount which bears the same ratio (but not 

greater than 1) to the net operating loss carryforward which arose in 

such start-up period taxable year as— 

‘‘(I) the net operating loss (if any) which would have been determined for such start-up period taxable year if only items of income, 

gain, deduction, and loss properly allocable to such trade or business were taken into account, bears to 

‘‘(II) the amount of the net operating loss determined for such 

start-up period taxable year. 

‘‘(ii) SPECIAL RULE FOR LAST TAXABLE YEAR IN START-UP PERIOD.—In 

the case of any start-up period taxable year which ends after the close 

of the 3-year period described in subparagraph (B)(i) with respect to 

any trade or business, the net start-up loss with respect to such trade 

or business for such start-up period taxable year shall be the same proportion of such loss (determined without regard to this clause) as the 

proportion of such start-up period taxable year which is on or before 

the last day of such period. 

‘‘(D) APPLICATION TO NET OPERATING LOSS ARISING IN YEAR OF OWNERSHIP

CHANGE.—Subparagraph (A) shall apply to any net operating loss described 

in paragraph (1)(B) in the same manner as such subparagraph applies to 

net operating loss carryforwards described in paragraph (1)(A), but by only 

taking into account the amount of such net operating loss (and the amount 

of the net start-up loss) which is allocable under paragraph (1)(B) to the 

period described in such paragraph. Proper adjustment in the allocation of 

the net start-up loss under the preceding sentence shall be made in the 

case of a taxable year to which subparagraph (C)(ii) applies. 

‘‘(E) APPLICATION TO TAXABLE YEARS WHICH ARE START-UP PERIOD TAXABLE YEARS WITH RESPECT TO MORE THAN 1 TRADE OR BUSINESS.—In the 

case of any net operating loss carryforward which arose in a taxable year 

which is a start-up period taxable year with respect to more than 1 trade 

or business— 

‘‘(i) this paragraph shall be applied separately with respect to each 

such trade or business, and 

‘‘(ii) the aggregate reductions under subparagraph (A) shall not exceed such net operating loss carryforward. 

‘‘(F) CONTINUITY OF BUSINESS REQUIREMENT.—If the new loss corporation 

does not continue the trade or business referred to in subparagraph (B)(i) 

at all times during the 2-year period beginning on the change date, this 

paragraph shall not apply with respect to such trade or business. 

‘‘(G) CERTAIN TITLE 11 OR SIMILAR CASES.— 

‘‘(i) MULTIPLE OWNERSHIP CHANGES.—In the case of a 2nd ownership 

change to which subsection (l)(5)(D) applies, this paragraph shall not 

apply for purposes of determining the pre-change loss with respect to 

such 2nd ownership change. 

‘‘(ii) CERTAIN INSOLVENCY TRANSACTIONS.—If subsection (l)(6) applies 

for purposes of determining the value of the old loss corporation under 

subsection (e), this paragraph shall not apply. 

5 

‘‘(H) NOT APPLICABLE TO DISALLOWED INTEREST.—This paragraph shall 

not apply for purposes of applying the rules of paragraph (1) to the carryover of disallowed interest under paragraph (3). 

‘‘(I) TRANSITION RULE.—This paragraph shall not apply with respect to 

any trade or business if the date on which such trade or business begins 

as an active trade or business (as determined under section 195(d)(2) without regard to subparagraph (B) thereof) is on or before September 10, 

2018.’’. 

(b) APPLICATION TO EXCESS CREDITS.—Section 383 of such Code is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the 

following new subsection: 

‘‘(e) EXCEPTION FOR START-UP EXCESS CREDITS.— 

‘‘(1) IN GENERAL.—In the case of any unused general business credit of the 

corporation under section 39 which arose in a start-up period taxable year, the 

amount of such unused general business credit otherwise taken into account 

under subsection (a)(2)(A) shall be reduced by the start-up excess credit determined with respect to any trade or business referred to in section 382(d)(4)(B)(i) 

for such start-up period taxable year. 

‘‘(2) START-UP PERIOD TAXABLE YEAR.—For purposes of this subsection, the 

term ‘start-up period taxable year’ has the meaning given such term in section 

382(d)(4)(B). 

‘‘(3) START-UP EXCESS CREDIT.—For purposes of this subsection, the term 

‘start-up excess credit’ means, with respect to any trade or business referred to 

in section 382(d)(4)(B)(i) for any start-up period taxable year, the amount which 

bears the same ratio to the unused general business credit which arose in such 

start-up period taxable year as— 

‘‘(A) the amount of the general business credit which would have been determined for such start-up period taxable year if only credits properly allocable to such trade or business were taken into account, bears to 

‘‘(B) the amount of the general business credit determined for such startup period taxable year. 

‘‘(4) APPLICATION OF CERTAIN RULES.—Rules similar to the rules of subparagraphs (C)(ii), (D), (E), and (F) of section 382(d)(4) shall apply for purposes of 

this subsection. 

‘‘(5) TRANSITION RULE.—This subsection shall not apply with respect to any 

trade or business if the date on which such trade or business begins as an active trade or business (as determined under section 195(d)(2) without regard to 

subparagraph (B) thereof) is on or before September 10, 2018.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years ending after September 10, 2018. 

I. SUMMARY AND BACKGROUND 

A. PURPOSE AND SUMMARY

The bill, H.R. 6756, as reported by the Committee on Ways and 

Means, provides that the current law provisions for start-up expenditures and organizational expenditures in the Internal Revenue Code of 1986 are combined into a single provision applicable 

to all businesses. The bill allows a taxpayer to immediately deduct 

up to $20,000 (indexed for inflation) in combined start-up and organizational expenditures. This deduction is phased out to the extent 

that a taxpayer’s start-up and organizational expenditures, in the 

aggregate, exceed $120,000 (indexed for inflation). Expenditures 

above the new increased limit continue to be amortized over a 180- 

month period following the start of the new business. 

Additionally, the bill generally provides that a corporation’s 

start-up losses and start-up credits are not limited in the event 

that the corporation undergoes an ownership change under sections 

382 and 383. Start-up losses and start-up credits are losses and 

credits that are properly allocable to the corporation’s new business 

that arise in any taxable year that begins before the third anniversary of the date on which the business is considered to begin. 

6 

1Sec. 195(b)(1)(A). Unless otherwise stated, all section references are to the Internal Revenue 

Code of 1986, as amended (the ‘‘Code’’). 2Secs. 248(a)(1) and 709(b)(1)(A). 

3Secs. 195(b)(1)(A)(ii), 248(a)(1)(B), and 709(b)(1)(A)(ii). 

B. BACKGROUND AND NEED FOR LEGISLATION

The Committee believes it is important to continually improve 

the tax laws. This bill doubles the amount of start-up and organizational costs that can be expensed in the first year of operations. Additionally, the bill provides start-up businesses more flexibility in 

attracting capital to fund their operations during the start-up 

phase exempting net operating losses and general business credits 

generated in the early years of a start-up business from the limitations on use that otherwise could apply. This bill helps to foster a 

friendlier business climate for entrepreneurs and innovators by reducing tax barriers and allowing start-up businesses to focus on 

growing and innovating. The bill supports entrepreneurship and innovation, helping new businesses expand and create jobs. 

C. LEGISLATIVE HISTORY

Background 

H.R. 6756 was introduced on September 10, 2018, and was referred to the Committee on Ways and Means. 

Committee action 

The Committee on Ways and Means marked up H.R. 6756, the 

‘‘American Innovation Act of 2018,’’ on September 13, 2018, and ordered the bill, as amended, favorably reported (with a quorum 

being present). 

Committee hearings 

Reforms to the rules for expensing business costs were discussed 

at a Full Committee hearing on How Tax Reform Will Grow Our 

Economy and Create Jobs on May 18, 2017 and a Subcommittee on 

Tax Policy hearing on How Tax Reform Will Help America’s Small 

Businesses Grow and Create New Jobs on July 13, 2017. 

II. EXPLANATION OF THE BILL 

A. SIMPLIFICATION AND EXPANSION OF DEDUCTION FOR START-UP

AND ORGANIZATIONAL EXPENDITURES (SEC. 2 OF THE BILL AND

SECS. 195, 248, AND 709 OF THE CODE) 

PRESENT LAW

In the taxable year in which a taxpayer begins an active trade 

or business, the taxpayer may elect to deduct up to $5,000 of startup expenditures.1 In addition, a taxpayer that is a corporation or 

a partnership may separately elect to deduct up to $5,000 of organizational expenditures.2 In each case, however, the $5,000 amount 

is reduced (but not below zero) by the amount by which the cumulative cost of start-up or organizational expenditures exceeds 

$50,000.3 Any remaining start-up expenditures or organizational 

expenditures may be amortized ratably over a period of 180 

months, beginning with the month in which the active trade or 

7 

4Secs. 195(b)(1)(B), 248(a)(2), and 709(b)(1)(B). 

5Treas. Reg. secs. 1.195–1(b), 1.248–1(c), and 1.709–1(b)(2). 

6Secs. 195(b)(2) and 709(b)(2). See also Treas. Reg. sec. 1.709–1(b)(3) and Kingsford Co. v. 

Commissioner, 41 T.C. 646 (1964). 7Sec. 195(c)(1). 

8Secs. 248(b) and 709(b)(3). 

9The definitions of start-up and organizational expenditures are unchanged by the provision, 

as is the requirement to capitalize partnership syndication fees under section 709(a). 10 In the case of a partnership or S corporation, the election is made (and the provision is applied) at the entity level. In the case of a disregarded entity, the provision is applied in the same 

manner as if such disregarded entity were a corporation. 11 In the case of organizational expenditures with respect to any corporation or partnership, 

the term ‘‘active trade or business’’ means the first active trade or business carried on by such 

corporation or partnership. 12For example, assume that Corporation X, a calendar year taxpayer, incurs $100,000 of start-up expenditures and $30,000 of organizational expenditures that relate to an active trade 

or business that begins on July 1, 2019. On its 2019 tax return, Corporation X may elect to 

deduct $10,000 ($20,000 ¥ ($130,000 ¥ $120,000)) plus the portion of the remaining $120,000 that is allocable to July through December of 2019 ($120,000/180 months x 6 months = $4,000). 

Thus, Corporation X’s total deduction under section 195 for 2019, the year in which its active 

trade or business begins, is $14,000 ($10,000 deduction + $4,000 amortization deduction). Corporation X may amortize the remaining $116,000 ratably over the remaining 174 months. 

business begins.4 A taxpayer is deemed to make an election to deduct and amortize start-up or organizational expenditures for the 

applicable taxable year, unless the taxpayer affirmatively elects to 

capitalize such amounts on a timely-filed (including extensions) 

Federal income tax return.5 Capitalized amounts are recovered 

when the business is sold, exchanged, or otherwise disposed of before the end of the 180-month amortization period.6

Start-up expenditures are amounts that would have been deductible as trade or business expenses had they not been paid or incurred before business began.7 Organizational expenditures are expenditures that are incident to the creation of a corporation or the 

organization of a partnership, are chargeable to capital, and would 

be eligible for amortization had they been paid or incurred in connection with the organization of a corporation or partnership with 

a limited or ascertainable life.8

REASONS FOR CHANGE

The Committee believes that increasing the amount of start-up 

and organizational expenditures that a taxpayer may elect to deduct, rather than requiring their amortization, will help facilitate 

the formation of new businesses. The Committee also believes that 

consolidating the rules regarding the treatment of start-up and organizational expenditures into a single provision applicable to all 

business entities (e.g., corporations, partnerships, and sole proprietorships) will simplify tax administration and taxpayer compliance. 

EXPLANATION OF PROVISION

Under the provision, the rules for start-up expenditures (section 

195) and organizational expenditures (sections 248 and 709(b)) are 

consolidated into a single provision.9 A taxpayer may elect 10 to deduct up to $20,000 of the aggregate amount of start-up and organizational expenditures in the taxable year in which the active trade 

or business begins.11 The $20,000 amount is reduced (but not below 

zero) by the amount by which the aggregate amount of start-up 

and organizational expenditures exceeds $120,000.12 The $20,000 

and $120,000 amounts are adjusted for inflation in taxable years 

beginning after 2019. Any remaining start-up and organizational 

8 

13For purposes of the disposition rule, the amount treated as unamortized start-up expenditures equals the aggregate amount of unamortized start-up and organizational expenditures 

multiplied by the ratio that (1) the amount of start-up expenditures taken into account in determining the deduction under section 195(b)(1) bears to (2) the aggregate amount of start-up and 

organizational expenditures so taken into account. For example, continuing the example in footnote 13, assume that on June 30, 2024, Corporation X completely discontinues its initial trade 

or business for purposes of section 165, but remains in existence. Corporation X has $80,000 

of unamortized start-up and organizational expenditures on such date. Corporation X may deduct $61,538 of unamortized start-up expenditures in 2024 ($80,000 x ($100,000/$130,000)), but 

must continue to amortize the remaining $18,462 of unamortized organizational expenditures 

over the remaining 120 months. Thus, Corporation X’s total deduction under section 195 for 

2024, the year in which its trade or business is discontinued, is $66,461 (section 165 loss deduction of $61,538 + amortization deduction of $4,923 (i.e., the $4,000 amortization deduction for 

start-up and organizational expenditures from January 1, 2024, through June 30, 2024, plus the 

$923 amortization deduction for organizational expenditures from July 1, 2024, through December 31, 2024)). 14Sec. 382(a). However, if the new loss corporation does not continue the business enterprise 

of the old loss corporation at all times during the two-year period beginning on the change date, 

the section 382 limitation for any post-change year is generally zero. See sec. 382(c). 15Sec. 382(d)(1). 16Special rules apply to built-in gains and losses and section 338 gains. See sec. 382(h); Notice 

2003–65, 2003–2 C.B. 747; Notice 2018–30, 2018–21 I.R.B. 610. Special rules also apply to financially troubled corporations, discussed below. 

expenditures must be amortized ratably over the 180-month period 

beginning with the month in which the active trade or business begins. 

In the case of any partnership, corporation, or disregarded entity 

that is completely liquidated by the taxpayer before the end of the 

180-month period, any unamortized amounts may be deducted to 

the extent allowable under section 165. In the case of any active 

trade or business which is completely disposed of or discontinued 

by the taxpayer before the end of the 180-month period, any 

unamortized start-up expenditures may be deducted to the extent 

allowable under section 165.13

EFFECTIVE DATE

The provision applies to start-up and organizational expenditures 

paid or incurred in connection with active trades or businesses 

which begin in taxable years beginning after December 31, 2018. 

B. PRESERVATION OF START-UP NET OPERATING LOSSES AND TAX

CREDITS AFTER OWNERSHIP CHANGE (SEC. 3 OF THE BILL AND

SECS. 382 AND 383 OF THE CODE) 

PRESENT LAW

Net operating losses 

Section 382(a) limits the extent to which a corporation that experiences an ownership change may offset taxable income after the 

ownership change with losses attributable to the period before the 

ownership change. Specifically, following an ownership change, a 

new loss corporation’s taxable income may be offset by pre-change 

losses from an old loss corporation only to the extent of the section 

382 limitation (discussed below).14 A pre-change loss is (1) any net 

operating loss carryforward of an old loss corporation to a taxable 

year ending with an ownership change or in which an ownership 

change occurs, and (2) any net operating loss of an old loss corporation for the taxable year in which the ownership change occurs to 

the extent such loss is allocable to the period in such year on or 

before such change date.15 Any loss that is not a pre-change loss 

is not limited by section 382(a).16

9 

17Sec. 382(b)(1). The long-term tax-exempt rate is the highest of the adjusted Federal longterm rates in effect for any month in the three-calendar-month period ending with the calendar 

month in which the change date occurs. Sec. 382(f)(1). 18Sec. 382(b)(2). 19Sec. 382(k)(1). A loss corporation also includes any corporation that entitled to use a 

carryforward of disallowed interest under section 381(c)(20), and generally includes any corporation with a net unrealized built-in loss. Treasury Regulation section 1.382–2(a)(1) contains additional description of when a corporation qualifies as a loss corporation. 20Sec. 382(k)(2). 21Sec. 382(k)(3). 22The term ‘‘5-percent shareholder’’ means any person holding five percent or more of the 

stock of the corporation at any time during the testing period. Sec. 382(k)(7). Determinations 

of the percentage of stock of a corporation held by any person are made on the basis of value. 

Sec. 382(k)(6)(C). 23Sec. 382(g) and (i). 24See Treas. Reg. sec. 1.382–2(a)(4)(i) (providing that, generally, a loss corporation is required 

to determine whether an ownership change has occurred immediately after any owner shift, or 

issuance or transfer of certain options with respect to stock of the loss corporation that are treated as exercised, and defining a ‘‘testing date’’ as ‘‘each date on which a loss corporation is required to make a determination of whether an ownership change has occurred’’). All computations of increases in percentage ownership are to be made as of the close of the testing date. 

Treas. Reg. sec. 1.382–2(a)(4)(i). A loss corporation must include a statement on or with its Federal income tax return for each taxable year that it is a loss corporation in which an event described in Temporary Treasury Regulation section 1.382–2T(a)(2) occurs. Treas. Reg. sec. 1.382– 

11(a). The statement must include: (1) the date(s) of any owner shifts, equity structure shifts, 

or other transactions described in Temporary Treasury Regulation Section 1.382–2T(a)(2)(i), (2) 

the date(s) on which any ownership change(s) occurred, and (3) the amount of any attributes 

described in Treasury Regulation Section 1.382–2(a)(1)(i) that caused the corporation to be a loss 

corporation. Ibid. 

The section 382 limitation is determined by multiplying the 

value of the old loss corporation immediately before the ownership 

change by the long-term tax-exempt interest rate.17 If the section 

382 limitation for a post-change year exceeds the taxable income of 

the new loss corporation for such year which was offset by prechange losses, the section 382 limitation for the next post-change 

year is increased by the amount of such excess.18

A loss corporation is a corporation entitled to use a net operating 

loss carryover or having a net operating loss for the taxable year 

in which an ownership change occurs.19 An old loss corporation is 

a corporation with respect to which there is an ownership change 

and which was a loss corporation before the ownership change.20

A new loss corporation is a corporation which is a loss corporation 

after an ownership change.21

An ownership change generally is defined as an increase by more 

than 50 percentage points in the percentage of stock of a loss corporation that is owned by any one or more five-percent shareholders 22 within a three-year period.23 Treasury regulations generally provide that this measurement is to be made as of any testing date, which is any date on which the ownership by one or more 

persons who were or who become five-percent shareholders 

changes.24

Section 382(l)(5) provides rules that limit section 382’s application to ownership changes that occur in the context of a title 11 or 

similar case. These rules generally provide that the use of prechange losses is not limited by section 382(a) where the old loss 

corporation is under the jurisdiction of a court in a title 11 or similar case immediately before the ownership change and the shareholders and creditors of the old loss corporation immediately before 

the ownership change own (after the ownership change) at least 50 

percent of the total voting power of the stock of the new loss corporation and at least 50 percent of the total value of the stock of 

10 

25Sec. 382(l)(5)(A). 26Sec. 382(l)(5)(D). 27Treas. Reg. sec. 1.383–1(b). 28The section 383 credit limitation is defined as the excess of (1) the new loss corporation’s 

regular tax liability for the post-change year over (2) the new loss corporation’s regular tax liability for the post-change year computed, for this purpose, by allowing as an additional deduction an amount equal to the section 382 limitation remaining after reduction for pre-change 

losses and pre-change capital losses under sections 382 and 383 (and the regulations thereunder). See Treas. Reg. sec. 1.383–1(c)(6); see generally sec. 383(a). 29Treas. Reg. sec. 1.383–1(d)(1). 

the new loss corporation.25 Among other things, these rules provide 

that if, during the two-year period immediately following an ownership change meeting the criteria described in the previous sentence, an ownership change of the new loss corporation occurs, the 

exception described in the previous sentence does not apply and the 

section 382 limitation with respect to the second ownership change 

for any post-change year after the second ownership change is 

zero.26

Section 382(l)(6) provides that in an ownership change involving 

a transfer by a corporation of all or part of its assets to another 

corporation in a title 11 or similar case that fails to meet the criteria described in the previous paragraph, or in an ownership 

change involving an exchange of debt for stock in a title 11 or similar case, the value of the old loss corporation used for purposes of 

calculating the section 382 limitation must reflect any increase in 

value of the old loss corporation resulting from any surrender or 

cancellation of creditors’ claims in the transaction. 

Tax credits 

Section 383 imposes similar limitations to those imposed by section 382(a) on the use of carryforwards of unused general business 

credits, alternative minimum tax credits, foreign tax credits, and 

net capital loss carryforwards. With regard to unused general business credits, section 383 and the regulations thereunder limit the 

amount of regular tax liability that can be offset by excess credits 

(referred to in the Treasury regulations as ‘‘pre-change credits’’) of 

the new loss corporation.27 Use of pre-change credits absorbs the 

section 383 credit limitation.28 Once the section 383 credit limitation has been fully absorbed, no more pre-change credits may be 

used.29 Any unused general business credit that is not a prechange credit is not limited by section 383 or the regulations thereunder. 

REASONS FOR CHANGE

The tax law includes rules that limit the use of tax attributes of 

a corporation, such as net operating loss carryforwards and general 

business credits, following certain ownership change transactions 

in order to prevent abuse, such as trafficking in these attributes. 

The Committee believes that these limits can be unduly restrictive 

when applied to losses and credits attributable to the early years 

of a trade or business. At the start-up stage of a business, when 

income tends to be low or nonexistent, application of the limits can 

prevent the future use of all or almost all of the business’s loss 

carryforwards and unused credits. The Committee believes that excepting such tax attributes from these limitations will better allow 

start-up businesses to raise capital and pursue opportunities to 

grow. 

11 

30 However, the provision does not apply for purposes of including the carryover of disallowed 

business interest in the corporation’s pre-change loss under section 382(d)(1) and (3). 31The beginning of an active trade or business is the same under the provision as under 

present-law section 195(c)(2) without regard to subparagraph (B) thereof. (While section 195 is 

modified elsewhere in the bill, those changes do not affect the meaning of the beginning of active 

trade or business under section 195.) Thus, the three-year period described in the provision begins on the same date that triggers allowance of a deduction under section 195(b)(1)(A). The 

Senate Finance Committee Report describing what ultimately became section 195 defined that 

concept as follows: 

Generally, it is anticipated that the definition of when a business begins is to be made 

in reference to the existing provisions for the amortization of organizational expenditures (Code secs. 248 and 709). Generally, if the activities of the corporation have advanced to the extent necessary to establish the nature of its business operations, it will 

be deemed to have begun business. For example, the acquisition of operating assets 

which are necessary to the type of business contemplated may constitute the beginning 

of business. 

See Senate Finance Committee Report to accompany H.R. 7956, Miscellaneous Revenue Act of 

1980, S. Rep. No. 96–1036 (96th Cong., 2d Sess.), November 25, 1980, p. 14. As the Senate Finance Committee Report states, this is similar to the concept referred to in section 248(a)(2) 

and defined in Treasury regulations as follows: 

The determination of the date the corporation begins business presents a question of 

fact which must be determined in each case in light of all the circumstances of the particular case. The words ‘‘begins business,’’ however, do not have the same meaning as 

‘‘in existence.’’ Ordinarily, a corporation begins business when it starts the business operations for which it was organized; a corporation comes into existence on the date of 

its incorporation. Mere organizational activities, such as the obtaining of the corporate 

charter, are not alone sufficient to show the beginning of business. If the activities of 

the corporation have advanced to the extent necessary to establish the nature of its 

business operations, however, it will be deemed to have begun business. For example, 

the acquisition of operating assets which are necessary to the type of business contemplated may constitute the beginning of business. 

See Treas. Reg. sec. 1.248–1(d); see also Treas. Reg. sec. 1.709–2(c) (echoing the distinctions 

above and explaining that ‘‘[t]he term ‘operating assets’, as used herein, means assets that are 

in a state of readiness to be placed in service within a reasonable period following their acquisition’’); Richmond Television Corp. v. United States, 345 F.2d 901 (4th Cir. 1965) (holding that 

Continued 

EXPLANATION OF PROVISION

The provision amends sections 382 and 383 to permit the prechange net operating loss carryforwards, net operating losses, general business credit carryforwards, and general business credits of 

a start-up business to be available for use in a post-change year 

without limitation by sections 382(a) and 383. 

Start-up losses under section 382 

With regard to section 382, the provision generally reduces a new 

loss corporation’s pre-change losses by the portion of the old loss 

corporation’s net operating loss carryforwards and net operating 

losses that are attributable to a start-up business of the old loss 

corporation.30 Specifically, in the case of any pre-change net operating loss carryforward which arose in any start-up period taxable 

year (defined below), the amount of such net operating loss 

carryforward otherwise taken into account for purposes of calculating the new loss corporation’s pre-change loss is reduced by the 

net start-up loss (defined below) determined with respect to the 

start-up trade or business. In a similar manner, pre-change losses 

are also reduced by any net operating loss incurred in the year of 

the ownership change to the extent such loss is attributable to a 

start-up business in the period on or before the change date. By reducing pre-change losses, the provision reduces the total amount of 

losses that are limited by section 382(a). 

A start-up period taxable year is any taxable year of the old loss 

corporation which (1) begins before the close of the three-year period beginning on the date on which any trade or business of such 

corporation begins as an active trade or business 31 and (2) ends 

12 

trade or business has begun when the taxpayer has ‘‘begun to function as a going concern and 

performed those activities for which it was organized’’). The Internal Revenue Service has cited 

Richmond Television in interpreting the active trade or business requirement under section 195. 

See, e.g., Tech. Adv. Mem. 9310001, November 4, 1992; Tech. Adv. Mem. 9414004, December 

17, 1993. 32 By requiring that the start-up taxable year end after September 10, 2018, the provision does 

not apply to expenses incurred in taxable years ending on or prior to September 10, 2018. 33For example, a taxpayer could have expenses in connection with a trade or business under 

section 174 prior to beginning active trade or business. 34Section 382(d)(1)(B) requires allocation of the net operating loss to the period on or before 

the change date. 

after September 10, 2018.32 Start-up period taxable years may predate the beginning of active trade or business, meaning deductible 

expenditures paid or incurred in connection with a trade or business prior to the beginning of active trade or business may be 

treated as paid or incurred in a start-up period taxable year with 

respect to such trade or business.33

Generally, a net start-up loss is the portion of the old loss corporation’s net operating loss carryforward from a particular year 

that is attributable to activities of a start-up business in that year. 

Specifically, the net start-up loss with respect to a start-up business for any start-up period taxable year is the amount that bears 

the same ratio to the net operating loss carryforward which arose 

in such year as (1) the net operating loss (if any) which would have 

been determined for such taxable year if only items of income, gain, 

deduction, and loss properly allocable to the start-up trade or business were taken into account, bears to (2) the amount of the net 

operating loss determined for such taxable year. If the ratio described in the previous sentence is greater than one, the ratio shall 

be deemed to equal one. 

Any net operating loss incurred prior to the ownership change 

date in the year of change is treated similarly to net operating loss 

carryforwards to the taxable year ending with the ownership 

change or in which the change date occurs, after proper allocation 

of such net operating loss and any net start-up loss to the period 

in such year on or before the change date.34 For example, consider 

Corporation X, which undergoes an ownership change. In the year 

of change (which is also a start-up period taxable year), Corporation X has a net start-up loss of $100, $50 of which is allocable to 

the period on or before the change date. In this example, Corporation X’s pre-change losses subject to limitation under section 382(a) 

would be reduced by $50. 

In the case of any start-up period taxable year which ends after 

the close of the three-year period beginning on the date an active 

trade or business begins, the net start-up loss with respect to such 

trade or business for such year is the same proportion of such loss 

as the proportion of such taxable year on or before the close of such 

period. For example, consider Corporation Y, a calendar year taxpayer that begins an active trade or business on June 30, 2019. If 

Corporation Y has a net start-up loss for tax year 2022 and later 

undergoes an ownership change, Corporation Y’s pre-change losses 

would be reduced by half of the net start-up loss for 2022. 

In the event that the old loss corporation starts more than one 

trade or business in a timeframe that causes a single taxable year 

of the old loss corporation to be a start-up period taxable year with 

respect to more than one trade or business, the provision applies 

separately to each trade or business, and the provision’s aggregate 

13 

35 As described above, the regulations under section 383 use the concept of ‘‘pre-change credits’’ rather than excess credits. The provision alters the Code, and so uses the Code’s approach; 

the intent is that the rule for reducing excess credits should apply to the calculation of prechange credits under Treasury regulation section 1.383–1. 

reduction of pre-change losses for any taxable year of the old loss 

corporation cannot exceed the old loss corporation’s net operating 

loss carryforward with respect to that year. 

If the new loss corporation does not continue the start-up trade 

or business at all times during the two-year period beginning on 

the change date, the provision does not apply with respect to such 

trade or business. 

The provision also provides that it does not apply in the event 

of an ownership change described in section 382(l)(5)(D) (i.e., an 

ownership change that occurs during the two-year period following 

an ownership change in a title 11 or similar case that meets the 

criteria of section 382(l)(5)(A)), nor does it apply to an ownership 

change to which section 382(l)(6) applies (i.e., certain insolvency 

transactions). 

Start-up excess credits under section 383 

The provision generally permits unused general business credits 

earned by a start-up business prior to an ownership change to be 

used in a post-change year without limitation by section 383. Using 

the same definition of a start-up period taxable year as above, the 

provision reduces the amount of excess credits subject to limitation 

under section 383 by the amount of any start-up excess credit 

earned in any start-up period taxable year.35 A start-up excess 

credit with respect to a start-up business for any start-up period 

taxable year is the amount which bears the same ratio to the unused general business credit which arose in such taxable year as 

(1) the amount of the general business credit which would have 

been determined for such taxable year if only credits properly allocable to the start-up trade or business were taken into account, 

bears to (2) the amount of the general business credit determined 

for such taxable year. By reducing excess credits, the provision reduces the total amount of credits that are limited by section 383. 

Rules similar to those provided by the provision under section 

382 apply to (1) the last taxable year in the start-up period, (2) 

credits arising in the year of ownership change, (3) taxable years 

which are start-up period taxable years with respect to more than 

one trade or business, and (4) the two-year continuity of business 

requirement. 

EFFECTIVE DATE

The provision is effective for taxable years ending after September 10, 2018. 

Transition rules provide that the provision does not apply to any 

active trade or business that begins on or before September 10, 

2018. 

III. VOTES OF THE COMMITTEE 

In compliance with clause 3(b) of rule XIII of the House of Representatives, the following statement is made concerning the vote 

of the Committee on Ways and Means during the markup considerVerDate Sep 11 2014 04:56 Sep 25, 2018 Jkt 079006 PO 00000 Frm 00013 Fmt 6659 Sfmt 6602 E:\HR\OC\HR957.XXX HR957
14 

ation of H.R. 6756, the ‘‘American Innovation Act of 2018,’’ on September 13, 2018. 

H.R. 6756 was ordered favorably reported to the House of Representatives as amended by an amendment in the nature of a substitute offered by Chairman Brady by a voice vote (with a quorum 

being present). 

IV. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

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

House of Representatives, the following statement is made concerning the effects on the budget of the bill, H.R. 6756, as reported. 

The bill, as reported, is estimated to have the following effect on 

Federal fiscal year budget receipts for the period 2019–2028: 

15 

FISCAL YEARS 

[Millions of dollars] 

Provision Effective 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019–23 2019–28 

1. Simplification and expansion of deduction for start-up and organizational 

expenditures .................................................................................................. [1] ¥44 ¥109 ¥153 ¥198 ¥246 ¥295 ¥346 ¥399 ¥456 ¥518 ¥750 ¥2,764 

2. Preservation of start-up net operating losses and tax credits after ownership changes ................................................................................................. tyea 9/10/18 ¥17 ¥32 ¥55 ¥90 ¥144 ¥225 ¥329 ¥459 ¥592 ¥709 ¥338 ¥2,652 

NET TOTAL ................................................................................................. ¥61 ¥141 ¥208 ¥288 ¥390 ¥520 ¥675 ¥858 ¥1,048 ¥1,227 ¥1,088 ¥5,416 

Joint Committee on Taxation Note: Details may not add to totals due to rounding. The date of enactment is generally assumed to be October 1, 2018. Legend for ‘‘Effective’’ column: tyea = taxable years ending after [1] Proposal applies to expenditures paid or incurred in connection with active trades or businesses which begin in taxable years beginning after December 31, 2018. 

16 

Pursuant to clause 8 of rule XIII of the Rules of the House of 

Representatives, the following statement is made by the Joint Committee on Taxation with respect to the provisions of the bill amending the Internal Revenue Code of 1986: The gross budgetary effect 

(before incorporating macroeconomic effects) in any fiscal year is 

less than 0.25 percent of the current projected gross domestic product of the United States for that fiscal year; therefore, the bill is 

not ‘‘major legislation’’ for purposes of requiring that the estimate 

include the budgetary effects of changes in economic output, employment, capital stock and other macroeconomic variables. 

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX

EXPENDITURES BUDGET AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee states that the bill involves no new or increased budget authority. The Committee further states that the revenue provisions involve no new tax expenditures. 

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET

OFFICE

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

House of Representatives, requiring a cost estimate prepared by 

the CBO, the following statement by CBO is provided. 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, September 21, 2018. 

Hon. KEVIN BRADY, 

Chairman, Committee on Ways and Means, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 6756, the American Innovation Act of 2018. It contains estimates of tax provisions prepared 

by the staff of the Joint Committee on Taxation. 

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

to provide them. The CBO staff contact is Cecilia Pastrone. 

Sincerely, 

KEITH HALL, Director. 

Enclosure. 

H.R. 6756—American Innovation Act of 2018 

Summary: H.R. 6756, the American Innovation Act of 2018, 

would amend the Internal Revenue Code by modifying the deduction for start-up and organizational expenditures and the treatment of losses, carryforwards and unused pre-change tax credits for 

companies after an ownership change. The bill raises the amount 

which may be deducted for start-up and organizational expenditures. In addition, it removes some limitations on the use of losses, 

carryforwards, and unused pre-change tax credits for new loss corporations that have experienced an ownership change. 

The staff of the Joint Committee on Taxation (JCT) estimates 

that enacting the bill would reduce revenues by $5,416 million over 

17 

the 2019–2028 period. Pay-as-you-go procedures apply because enacting the legislation would affect revenues. 

JCT estimates that enacting the legislation would increase on- budget deficits by more than $5 billion in at least one of the four 

consecutive 10-year periods beginning in 2029. CBO and JCT estimate that enacting the bill would not increase net direct spending 

in any of the four consecutive 10-year periods beginning in 2029. 

JCT has determined that the tax provisions of the bill contain no 

intergovernmental or private sector mandates as defined in the Unfunded Mandates Reform Act (UMRA). 

Estimated cost to the Federal Government: The estimated budgetary effect of H.R. 6756 is shown in the following table. 

18 

By fiscal year, in millions of dollars— 

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019–2023 2019–2028 

CHANGES IN REVENUES 

Simplification and expansion of deduction for start-up and organizational expenditures ............................................................................ 0 ¥44 ¥109 ¥153 ¥198 ¥246 ¥295 ¥346 ¥399 ¥456 ¥518 ¥750 ¥2,764 

Preservation of start-up net operating losses and tax credits after 

ownership changes ........................................................................... 0 ¥17 ¥32 ¥55 ¥90 ¥144 ¥225 ¥329 ¥459 ¥592 ¥709 ¥338 ¥2,652 

Total Estimated Changes in Revenues ........................................ 0 ¥61 ¥141 ¥208 ¥288 ¥390 ¥520 ¥675 ¥858 ¥1,048 ¥1,227 ¥1,088 ¥5,416 

NET INCREASE IN THE DEFICIT FROM DECREASES IN REVENUES 

Effect on Deficit .................................................................................... 0 61 141 208 288 390 520 675 858 1,048 1,227 1,088 5,416 

Source: Staff of the Joint Committee on Taxation. Components may not add to totals due to rounding. 

19 

1For JCT’s description of the bill and estimates of the provisions, which include detail beyond 

the summary presented below, see Joint Committee on Taxation, Description of H.R. 6756, the 

‘‘American Innovation Act of 2018,’’ JCX–76–18, https://www.jct.gov/publications.html?func=startdown&id=5142, and Estimated Revenue Effects of H.R. 6756, the ‘‘American Innovation Act of 2018,’’ JCX–78–18, https://www.jct.gov/publications.html?func=startdown&id=5144. 

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

amended, stipulates that revenue estimates provided by the staff 

of the Joint Committee on Taxation will be the official estimates 

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

legislation. All of the estimates for the provisions of H.R. 6756 were 

provided by JCT.1 The date of enactment is generally assumed to 

be October 1, 2018. 

Simplification and Expansion of Deduction for Start-up and Organizational Expenditures. Under current law, business start-up 

expenditures may be deducted in the amount of $5,000 in the taxable year in which a business or trade was started. Up to $5,000 

of organizational expenditures may also be deducted. The amount 

deducted in both cases is reduced by the amount by which the cumulative cost of start-up and organizational expenditures exceeds 

$50,000. 

H.R. 6756 would raise the amount that could be deducted for 

start-up and organizational expenditures to $20,000 for the combined total of start-up and organizational expenses. This is reduced 

by the amount by which the sum of start-up and organizational expenditures exceeds $120,000. The dollar amounts are adjusted for 

inflation beginning in 2020. H.R. 6756 also allows partnerships or 

corporations liquidated within a 180-month period and disposed or 

discontinued businesses to deduct any unamortized start-up expenses. JCT estimates that the changes in this provision would reduce revenues by $2,764 million from 2019 to 2028. 

Preservation of Start-Up Net Operating Losses and Tax Credits 

after Ownership Changes. Under current law, companies that experience an ownership change may offset taxable income by the prechange net operating losses (NOLs), unused pre-change tax credits, 

and net capital losses of the original corporation subject to certain 

limitations. Pre-change credits from the old loss corporation may 

include unused general business credits, alternative minimum tax 

credits, and foreign tax credits. The pre-change NOL amount that 

can be used to offset taxable income is limited to the value of the 

old loss corporation before the ownership change multiplied by the 

long-term tax-exempt interest rate. Use of pre-change credits and 

net capital losses to offset the tax liability of the new loss corporation are likewise limited. Similarly limited carryforwards of both 

losses and pre-change credits may also be used provided the new 

loss corporation continues the business of the old corporation for a 

two-year period. 

H.R. 6756 generally provides for an exception to the limitations 

for pre-change net operating and capital losses, unused credits, and 

carryforwards in the case of a start-up. The bill would allow the 

new loss firm to fully utilize pre-change losses, unused credits and 

carryforwards identified as accruing to the old loss firm as a result 

of start-up activity. Use of any remaining pre-change losses, unused credits or carryforwards of the old loss firm would then be 

subject to the limitations. Business continuity conditions still apply 

20 

for the use of carryforwards. JCT estimates that this provision 

would reduce revenues by $2,652 million from 2019 to 2028. 

Pay-As-You-Go Considerations: The Statutory Pay-As-You-Go Act 

of 2010 establishes budget-reporting and enforcement procedures 

for legislation affecting direct spending or revenues. The net 

changes in outlays and revenues that are subject to those pay-asyou-go procedures are shown in the following table. Only on-budget 

changes to outlays or revenues are subject to pay-as-you-go procedures. 

CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 6756, AS ORDERED REPORTED BY THE 

HOUSE COMMITTEE ON WAYS AND MEANS ON SEPTEMBER 13, 2018 

By fiscal year, in millions of dollars— 

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019– 

2023 

2019– 

2028 

NET INCREASE IN THE ON-BUDGET DEFICIT 

Statutory Pay-As-YouGo Effects ................ 0 61 141 208 288 390 520 675 858 1,048 1,227 1,088 5,416 

Source: Staff of the Joint Committee on Taxation. 

Components may not add to totals due to rounding. 

Increase in long-term direct spending and deficits: JCT estimates 

that enacting H.R. 6756 would increase on-budget deficits by more 

than $5 billion in at least one of the four 10-year periods beginning 

in 2029. CBO and JCT estimate that enacting the bill would not 

increase net direct spending in any of the four consecutive 10-year 

periods beginning in 2029. 

Mandates: JCT has determined that H.R. 6756 contains no private-sector or intergovernmental mandates as defined by UMRA. 

Estimate prepared by: Staff of the Joint Committee on Taxation 

and Cecilia Pastrone. 

Estimate reviewed by: Joshua Shakin, Chief, Revenue Estimating Unit; John McClelland, Assistant Director for Tax Analysis. 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE 

RULES OF THE HOUSE 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

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

of Representatives, the Committee advises that the findings and 

recommendations of the Committee, based on oversight activities 

under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated into the description portions of this 

report. 

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that the bill contains no measure that authorizes funding, so no statement of general performance goals and objectives for which any measure authorizes funding is required. 

21 

C. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104–4). 

The Committee has determined that the bill does not contain 

Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental 

mandate on State, local, or tribal governments. 

D. APPLICABILITY OF HOUSE RULE XXI 5(b) 

Rule XXI 5(b) of the Rules of the House of Representatives provides, in part, that ‘‘A bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase may not 

be considered as passed or agreed to unless so determined by a 

vote of not less than three-fifths of the Members voting, a quorum 

being present.’’ The Committee has carefully reviewed the bill and 

states that the bill does not involve any Federal income tax rate 

increases within the meaning of the rule. 

E. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Restructuring 

and Reform Act of 1998 (‘‘IRS Reform Act’’) requires the staff of the 

Joint Committee on Taxation (in consultation with the Internal 

Revenue Service and the Treasury Department) to provide a tax 

complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House 

Committee on Ways and Means, or any committee of conference if 

the legislation includes a provision that directly or indirectly 

amends the Internal Revenue Code of 1986 and has widespread applicability to individuals or small businesses. 

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

of Representatives, the staff of the Joint Committee on Taxation 

has determined that a complexity analysis is not required under 

section 4022(b) of the IRS Reform Act because the bill contains no 

provisions that amend the Internal Revenue Code of 1986 and that 

have ‘‘widespread applicability’’ to individuals or small businesses, 

within the meaning of the rule. 

F. CONGRESSIONAL EARMARKS, LIMITED TAX BENEFITS, AND

LIMITED TARIFF BENEFITS

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

of Representatives, the Committee has carefully reviewed the provisions of the bill and states that the provisions of the bill do not 

contain any congressional earmarks, limited tax benefits, or limited 

tariff benefits within the meaning of the rule. 

G. DUPLICATION OF FEDERAL PROGRAMS

In compliance with Sec. 3(c)(5) of rule XIII of the Rules of the 

House of Representatives, the Committee states that no provision 

of the bill establishes or reauthorizes: (1) a program of the Federal 

Government known to be duplicative of another Federal program, 

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

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

22 

the most recent Catalog of Federal Domestic Assistance, published 

pursuant to section 6104 of title 31, United States Code. 

H. DISCLOSURE OF DIRECTED RULE MAKINGS

In compliance with Sec. 3(i) of H. Res. 5 (115th Congress), the 

following statement is made concerning directed rule makings: The 

Committee advises that the bill requires no directed rule makings 

within the meaning of such section. 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

A. CHANGES IN EXISTING LAW PROPOSED BY THE BILL, AS REPORTED

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

House of Representatives, changes in existing law proposed by the 

bill, as reported, are shown as follows (existing law proposed to be 

omitted is enclosed in black brackets, new matter is printed in 

italic, existing law in which no change is proposed is shown in 

roman): 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

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

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

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

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

roman): 

INTERNAL REVENUE CODE OF 1986 

* * * * * * * 

Subtitle A—Income Taxes 

* * * * * * * 

CHAPTER 1—NORMAL TAXES AND SURTAXES 

* * * * * * * 

Subchapter B—Computation of Taxable Income 

* * * * * * * 

PART VI—ITEMIZED DEDUCTIONS FOR INDIVIDUALS 

AND CORPORATIONS 

* * * * * * * 

øSec. 195. Start-up expenditures.¿ 

Sec. 195. Start-up and organizational expenditures. 

* * * * * * * 

SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS. 

(a) ALLOWANCE OF DEDUCTION.— 

23 

(1) GENERAL RULE.—There shall be allowed as a deduction 

any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable 

contribution shall be allowable as a deduction only if verified 

under regulations prescribed by the Secretary. 

(2) CORPORATIONS ON ACCRUAL BASIS.—In the case of a corporation reporting its taxable income on the accrual basis, if— 

(A) the board of directors authorizes a charitable contribution during any taxable year, and 

(B) payment of such contribution is made after the close 

of such taxable year and on or before the 15th day of the 

fourth month following the close of such taxable year, 

then the taxpayer may elect to treat such contribution as paid 

during such taxable year. The election may be made only at 

the time of the filing of the return for such taxable year, and 

shall be signified in such manner as the Secretary shall by regulations prescribe. 

(3) FUTURE INTERESTS IN TANGIBLE PERSONAL PROPERTY.— For purposes of this section, payment of a charitable contribution which consists of a future interest in tangible personal 

property shall be treated as made only when all intervening interests in, and rights to the actual possession or enjoyment of, 

the property have expired or are held by persons other than 

the taxpayer or those standing in a relationship to the taxpayer described in section 267(b) or 707(b). For purposes of the 

preceding sentence, a fixture which is intended to be severed 

from the real property shall be treated as tangible personal 

property. 

(b) PERCENTAGE LIMITATIONS.— 

(1) INDIVIDUALS.—In the case of an individual, the deduction 

provided in subsection (a) shall be limited as provided in the 

succeeding subparagraphs. 

(A) GENERAL RULE.—Any charitable contribution to— 

(i) a church or a convention or association of churches, 

(ii) an educational organization which normally 

maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational 

activities are regularly carried on, 

(iii) an organization the principal purpose or functions of which are the providing of medical or hospital 

care or medical education or medical research, if the 

organization is a hospital, or if the organization is a 

medical research organization directly engaged in the 

continuous active conduct of medical research in conjunction with a hospital, and during the calendar year 

in which the contribution is made such organization is 

committed to spend such contributions for such research before January 1 of the fifth calendar year 

which begins after the date such contribution is made, 

(iv) an organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose 

24 

or function constituting the basis for its exemption 

under section 501(a)) from the United States or any 

State or political subdivision thereof or from direct or 

indirect contributions from the general public, and 

which is organized and operated exclusively to receive, 

hold, invest, and administer property and to make expenditures to or for the benefit of a college or university which is an organization referred to in clause (ii) 

of this subparagraph and which is an agency or instrumentality of a State or political subdivision thereof, or 

which is owned or operated by a State or political subdivision thereof or by an agency or instrumentality of 

one or more States or political subdivisions, 

(v) a governmental unit referred to in subsection 

(c)(1), 

(vi) an organization referred to in subsection (c)(2) 

which normally receives a substantial part of its support (exclusive of income received in the exercise or 

performance by such organization of its charitable, 

educational, or other purpose or function constituting 

the basis for its exemption under section 501(a)) from 

a governmental unit referred to in subsection (c)(1) or 

from direct or indirect contributions from the general 

public, 

(vii) a private foundation described in subparagraph 

(F), 

(viii) an organization described in section 509(a)(2) 

or (3), or 

(ix) an agricultural research organization directly 

engaged in the continuous active conduct of agricultural research (as defined in section 1404 of the National Agricultural Research, Extension, and Teaching 

Policy Act of 1977) in conjunction with a land-grant 

college or university (as defined in such section) or a 

non-land grant college of agriculture (as defined in 

such section), and during the calendar year in which 

the contribution is made such organization is committed to spend such contribution for such research 

before January 1 of the fifth calendar year which begins after the date such contribution is made, 

shall be allowed to the extent that the aggregate of such 

contributions does not exceed 50 percent of the taxpayer’s 

contribution base for the taxable year. 

(B) OTHER CONTRIBUTIONS.—Any charitable contribution 

other than a charitable contribution to which subparagraph (A) applies shall be allowed to the extent that the 

aggregate of such contributions does not exceed the lesser 

of— 

(i) 30 percent of the taxpayer’s contribution base for 

the taxable year, or 

(ii) the excess of 50 percent of the taxpayer’s contribution base for the taxable year over the amount of 

charitable contributions allowable under subparagraph 

(A) (determined without regard to subparagraph (C)). 

25 

If the aggregate of such contributions exceeds the limitation of the preceding sentence, such excess shall be treated 

(in a manner consistent with the rules of subsection (d)(1)) 

as a charitable contribution (to which subparagraph (A) 

does not apply) in each of the 5 succeeding taxable years 

in order of time. 

(C) Special limitation with respect to contributions described in subparagraph (A) of certain capital gain property (i) In the case of charitable contributions described in 

subparagraph (A) of capital gain property to which subsection (e)(1)(B) does not apply, the total amount of contributions of such property which may be taken into account under subsection (a) for any taxable year shall not 

exceed 30 percent of the taxpayer’s contribution base for 

such year. For purposes of this subsection, contributions of 

capital gain property to which this subparagraph applies 

shall be taken into account after all other charitable contributions (other than charitable contributions to which 

subparagraph (D) applies). 

(ii) If charitable contributions described in subparagraph (A) of capital gain property to which clause (i) 

applies exceeds 30 percent of the taxpayer’s contribution base for any taxable year, such excess shall be 

treated, in a manner consistent with the rules of subsection (d)(1), as a charitable contribution of capital 

gain property to which clause (i) applies in each of the 

5 succeeding taxable years in order of time. 

(iii) At the election of the taxpayer (made at such 

time and in such manner as the Secretary prescribes 

by regulations), subsection (e)(1) shall apply to all contributions of capital gain property (to which subsection 

(e)(1)(B) does not otherwise apply) made by the taxpayer during the taxable year. If such an election is 

made, clauses (i) and (ii) shall not apply to contributions of capital gain property made during the taxable 

year, and, in applying subsection (d)(1) for such taxable year with respect to contributions of capital gain 

property made in any prior contribution year for which 

an election was not made under this clause, such contributions shall be reduced as if subsection (e)(1) had 

applied to such contributions in the year in which 

made. 

(iv) For purposes of this paragraph, the term ‘‘capital gain property’’ means, with respect to any contribution, any capital asset the sale of which at its fair 

market value at the time of the contribution would 

have resulted in gain which would have been 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) 

26 

(i) IN GENERAL.—In the case of charitable contributions (other than charitable contributions to which 

subparagraph (A) applies) of capital gain property, the 

total amount of such contributions of such property 

taken into account under subsection (a) for any taxable year shall not exceed the lesser of— 

(I) 20 percent of the taxpayer’s contribution 

base for the taxable year, or 

(II) the excess of 30 percent of the taxpayer’s 

contribution base for the taxable year over the 

amount of the contributions of capital gain property to which subparagraph (C) applies. 

For purposes of this subsection, contributions of capital gain property to which this subparagraph applies 

shall be taken into account after all other charitable 

contributions. 

(ii) CARRYOVER.—If the aggregate amount of contributions described in clause (i) exceeds the limitation 

of clause (i), such excess shall be treated (in a manner 

consistent with the rules of subsection (d)(1)) as a 

charitable contribution of capital gain property to 

which clause (i) applies in each of the 5 succeeding 

taxable years in order of time. 

(E) CONTRIBUTIONS OF QUALIFIED CONSERVATION CON- TRIBUTIONS.— (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 

27 

available for such production) unless such contribution is subject to a restriction that such property remain available for such production. This 

subparagraph shall be applied separately with respect to property to which subclause (I) does not 

apply by reason of the preceding sentence prior to 

its application to property to which subclause (I) 

does apply. 

(v) DEFINITION.—For purposes of clause (iv), the 

term ‘‘qualified farmer or rancher’’ means a taxpayer 

whose gross income from the trade or business of 

farming (within the meaning of section 2032A(e)(5)) is 

greater than 50 percent of the taxpayer’s gross income 

for the taxable year. 

(F) CERTAIN PRIVATE FOUNDATIONS.—The private foundations referred to in subparagraph (A)(vii) and subsection 

(e)(1)(B) are— 

(i) a private operating foundation (as defined in section 4942(j)(3)), 

(ii) any other private foundation (as defined in section 509(a)) which, not later than the 15th day of the 

third month after the close of the foundation’s taxable 

year in which contributions are received, makes qualifying distributions (as defined in section 4942(g), without regard to paragraph (3) thereof), which are treated, after the application of section 4942(g)(3), as distributions out of corpus (in accordance with section 

4942(h)) in an amount equal to 100 percent of such 

contributions, and with respect to which the taxpayer 

obtains adequate records or other sufficient evidence 

from the foundation showing that the foundation made 

such qualifying distributions, and 

(iii) a private foundation all of the contributions to 

which are pooled in a common fund and which would 

be described in section 509(a)(3) but for the right of 

any substantial contributor (hereafter in this clause 

called ‘‘donor’’) or his spouse to designate annually the 

recipients, from among organizations described in 

paragraph (1) of section 509(a), of the income attributable to the donor’s contribution to the fund and to 

direct (by deed or by will) the payment, to an organization described in such paragraph (1), of the corpus 

in the common fund attributable to the donor’s contribution; but this clause shall apply only if all of the 

income of the common fund is required to be (and is) 

distributed to one or more organizations described in 

such paragraph (1) not later than the 15th day of the 

third month after the close of the taxable year in 

which the income is realized by the fund and only if 

all of the corpus attributable to any donor’s contribution to the fund is required to be (and is) distributed 

to one or more of such organizations not later than one 

year after his death or after the death of his surviving 

spouse if she has the right to designate the recipients 

of such corpus. 

28 

(G) INCREASED LIMITATION FOR CASH CONTRIBUTIONS.— (i) IN GENERAL.—In the case of any contribution of 

cash to an organization described in subparagraph (A), 

the total amount of such contributions which may be 

taken into account under subsection (a) for any taxable year beginning after December 31, 2017, and before January 1, 2026, shall not exceed 60 percent of 

the taxpayer’s contribution base for such year. 

(ii) CARRYOVER.—If the aggregate amount of contributions described in clause (i) exceeds the applicable 

limitation under clause (i) for any taxable year described in such clause, such excess shall be treated (in 

a manner consistent with the rules of subsection 

(d)(1)) as a charitable contribution to which clause (i) 

applies in each of the 5 succeeding years in order of 

time. 

(iii) Coordination with subparagraphs (A) and (B) 

(I) IN GENERAL.—Contributions taken into account under this subparagraph shall not be taken 

into account under subparagraph (A). 

(II) LIMITATION REDUCTION.—For each taxable 

year described in clause (i), and each taxable year 

to which any contribution under this subparagraph is carried over under clause (ii), subparagraph (A) shall be applied by reducing (but not 

below zero) the contribution limitation allowed for 

the taxable year under such subparagraph by the 

aggregate contributions allowed under this subparagraph for such taxable year, and subparagraph (B) shall be applied by treating any reference to subparagraph (A) as a reference to both 

subparagraph (A) and this subparagraph. 

(H) CONTRIBUTION BASE DEFINED.—For purposes of this 

section, the term ‘‘contribution base’’ means adjusted gross 

income (computed without regard to any net operating loss 

carryback to the taxable year under section 172). 

(2) CORPORATIONS.—In the case of a corporation— 

(A) IN GENERAL.—The total deductions under subsection 

(a) for any taxable year (other than for contributions to 

which subparagraph (B) or (C) applies) shall not exceed 10 

percent of the taxpayer’s taxable income. 

(B) QUALIFIED CONSERVATION CONTRIBUTIONS BY CERTAIN CORPORATE FARMERS AND RANCHERS.— 

(i) IN GENERAL.—Any qualified conservation contribution (as defined in subsection (h)(1))— 

(I) which is made by a corporation which, for 

the taxable year during which the contribution is 

made, is a qualified farmer or rancher (as defined 

in paragraph (1)(E)(v)) and the stock of which is 

not readily tradable on an established securities 

market at any time during such year, and 

(II) which, in the case of contributions made 

after the date of the enactment of this subparagraph, is a contribution of property which is used 

in agriculture or livestock production (or available 

29 

for such production) and which is subject to a restriction that such property remain available for 

such production, 

shall be allowed to the extent the aggregate of such 

contributions does not exceed the excess of the taxpayer’s taxable income over the amount of charitable 

contributions allowable under subparagraph (A). 

(ii) CARRYOVER.—If the aggregate amount of contributions described in clause (i) exceeds the limitation 

of clause (i), such excess shall be treated (in a manner 

consistent with the rules of subsection (d)(2)) as a 

charitable contribution to which clause (i) applies in 

each of the 15 succeeding taxable years in order of 

time. 

(C) QUALIFIED CONSERVATION CONTRIBUTIONS BY CERTAIN NATIVE CORPORATIONS.— 

(i) IN GENERAL.—Any qualified conservation contribution (as defined in subsection (h)(1)) which— 

(I) is made by a Native Corporation, and 

(II) is a contribution of property which was land 

conveyed under the Alaska Native Claims Settlement Act, 

shall be allowed to the extent that the aggregate 

amount of such contributions does not exceed the excess of the taxpayer’s taxable income over the amount 

of charitable contributions allowable under subparagraph (A). 

(ii) CARRYOVER.—If the aggregate amount of contributions described in clause (i) exceeds the limitation 

of clause (i), such excess shall be treated (in a manner 

consistent with the rules of subsection (d)(2)) as a 

charitable contribution to which clause (i) applies in 

each of the 15 succeeding taxable years in order of 

time. 

(iii) NATIVE CORPORATION.—For purposes of this 

subparagraph, the term ‘‘Native Corporation’’ has the 

meaning given such term by section 3(m) of the Alaska 

Native Claims Settlement Act. 

(D) TAXABLE INCOME.—For purposes of this paragraph, 

taxable income shall be computed without regard to— 

(i) this section, 

(ii) part VIII ø(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. 

30 

(2) A corporation, trust, or community chest, fund, or foundation— 

(A) created or organized in the United States or in any 

possession thereof, or under the law of the United States, 

any State, the District of Columbia, or any possession of 

the United States; 

(B) organized and operated exclusively for religious, 

charitable, scientific, literary, or educational purposes, or 

to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals; 

(C) no part of the net earnings of which inures to the 

benefit of any private shareholder or individual; and 

(D) which is not disqualified for tax exemption under 

section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in 

(including the publishing or distributing of statements), 

any political campaign on behalf of (or in opposition to) 

any candidate for public office. 

A contribution or gift by a corporation to a trust, chest, fund, 

or foundation shall be deductible by reason of this paragraph 

only if it is to be used within the United States or any of its 

possessions exclusively for purposes specified in subparagraph 

(B). Rules similar to the rules of section 501(j) shall apply for 

purposes of this paragraph. 

(3) A post or organization of war veterans, or an auxiliary 

unit or society of, or trust or foundation for, any such post or 

organization— 

(A) organized in the United States or any of its possessions, and 

(B) no part of the net earnings of which inures to the 

benefit of any private shareholder or individual. 

(4) In the case of a contribution or gift by an individual, a 

domestic fraternal society, order, or association, operating 

under the lodge system, but only if such contribution or gift is 

to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty 

to children or animals. 

(5) A cemetery company owned and operated exclusively for 

the benefit of its members, or any corporation chartered solely 

for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily 

incident to that purpose, if such company or corporation is not 

operated for profit and no part of the net earnings of such company or corporation inures to the benefit of any private shareholder or individual. 

For purposes of this section, the term ‘‘charitable contribution’’ also 

means an amount treated under subsection (g) as paid for the use 

of an organization described in paragraph (2), (3), or (4). 

(d) CARRYOVERS OF EXCESS CONTRIBUTIONS.— (1) INDIVIDUALS.— (A) IN GENERAL.—In the case of an individual, if the 

amount of charitable contributions described in subsection 

(b)(1)(A) payment of which is made within a taxable year 

31 

(hereinafter in this paragraph referred to as the ‘‘contribution year’’) exceeds 50 percent of the taxpayer’s contribution base for such year, such excess shall be treated as a 

charitable contribution described in subsection (b)(1)(A) 

paid in each of the 5 succeeding taxable years in order of 

time, but, with respect to any such succeeding taxable 

year, only to the extent of the lesser of the two following 

amounts: 

(i) the amount by which 50 percent of the taxpayer’s 

contribution base for such succeeding taxable year exceeds the sum of the charitable contributions described 

in subsection (b)(1)(A) payment of which is made by 

the taxpayer within such succeeding taxable year (determined without regard to this subparagraph) and 

the charitable contributions described in subsection 

(b)(1)(A) payment of which was made in taxable years 

before the contribution year which are treated under 

this subparagraph as having been paid in such succeeding taxable year; or 

(ii) in the case of the first succeeding taxable year, 

the amount of such excess, and in the case of the second, third, fourth, or fifth succeeding taxable year, the 

portion of such excess not treated under this subparagraph as a charitable contribution described in subsection (b)(1)(A) paid in any taxable year intervening 

between the contribution year and such succeeding 

taxable year. 

(B) SPECIAL RULE FOR NET OPERATING LOSS

CARRYOVERS.—In applying subparagraph (A), the excess 

determined under subparagraph (A) for the contribution 

year shall be reduced to the extent that such excess reduces taxable income (as computed for purposes of the second sentence of section 172(b)(2)) and increases the net operating loss deduction for a taxable year succeeding the 

contribution year. 

(2) CORPORATIONS.— (A) IN GENERAL.—Any contribution made by a corporation in a taxable year (hereinafter in this paragraph referred to as the ‘‘contribution year’’) in excess of the 

amount deductible for such year under subsection (b)(2)(A) 

shall be deductible for each of the 5 succeeding taxable 

years in order of time, but only to the extent of the lesser 

of the two following amounts: (i) the excess of the maximum amount deductible for such succeeding taxable year 

under subsection (b)(2)(A) over the sum of the contributions made in such year plus the aggregate of the excess 

contributions which were made in taxable years before the 

contribution year and which are deductible under this subparagraph for such succeeding taxable year; or (ii) in the 

case of the first succeeding taxable year, the amount of 

such excess contribution, and in the case of the second, 

third, fourth, or fifth succeeding taxable year, the portion 

of such excess contribution not deductible under this subparagraph for any taxable year intervening between the 

contribution year and such succeeding taxable year. 

32 

(B) SPECIAL RULE FOR NET OPERATING LOSS

CARRYOVERS.—For purposes of subparagraph (A), the excess of— 

(i) the contributions made by a corporation in a taxable year to which this section applies, over 

(ii) the amount deductible in such year under the 

limitation in subsection (b)(2)(A), 

shall be reduced to the extent that such excess reduces 

taxable income (as computed for purposes of the second 

sentence of section 172(b)(2)) and increases a net operating 

loss carryover under section 172 to a succeeding taxable 

year. 

(e) CERTAIN CONTRIBUTIONS OF ORDINARY INCOME AND CAPITAL

GAIN PROPERTY.— 

(1) GENERAL RULE.—The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of— 

(A) the amount of gain which would not have been 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). 

33 

For purposes of applying this paragraph (other than in the 

case of gain to which section 617(d)(1), 1245(a), 1250(a), 

1252(a), or 1254(a) applies), property which is property used in 

the trade or business (as defined in section 1231(b)) shall be 

treated as a capital asset. For purposes of applying this paragraph in the case of a charitable contribution of stock in an S 

corporation, rules similar to the rules of section 751 shall apply 

in determining whether gain on such stock would have been 

long-term capital gain if such stock were sold by the taxpayer. 

(2) ALLOCATION OF BASIS.—For purposes of paragraph (1), in 

the case of a charitable contribution of less than the taxpayer’s 

entire interest in the property contributed, the taxpayer’s adjusted basis in such property shall be allocated between the interest contributed and any interest not contributed in accordance with regulations prescribed by the Secretary. 

(3) SPECIAL RULE FOR CERTAIN CONTRIBUTIONS OF INVENTORY

AND OTHER PROPERTY.— 

(A) QUALIFIED CONTRIBUTIONS.—For purposes of this 

paragraph, a qualified contribution shall mean a charitable contribution of property described in paragraph (1) or 

(2) of section 1221(a), by a corporation (other than a corporation which is an S corporation) to an organization 

which is described in section 501(c)(3) and is exempt under 

section 501(a) (other than a private foundation, as defined 

in section 509(a), which is not an operating foundation, as 

defined in section 4942(j)(3)), but only if— 

(i) the use of the property by the donee is related to 

the purpose or function constituting the basis for its 

exemption under section 501 and the property is to be 

used by the donee solely for the care of the ill, the 

needy, or infants; 

(ii) the property is not transferred by the donee in 

exchange for money, other property, or services; 

(iii) the taxpayer receives from the donee a written 

statement representing that its use and disposition of 

the property will be in accordance with the provisions 

of clauses (i) and (ii); and 

(iv) in the case where the property is subject to regulation under the Federal Food, Drug, and Cosmetic 

Act, as amended, such property must fully satisfy the 

applicable requirements of such Act and regulations 

promulgated thereunder on the date of transfer and 

for one hundred and eighty days prior thereto. 

(B) AMOUNT OF REDUCTION.—The reduction under paragraph (1)(A) for any qualified contribution (as defined in 

subparagraph (A)) shall be no greater than the sum of— 

(i) one-half of the amount computed under paragraph (1)(A) (computed without regard to this paragraph), and 

(ii) the amount (if any) by which the charitable contribution deduction under this section for any qualified 

contribution (computed by taking into account the 

amount determined in clause (i), but without regard to 

this clause) exceeds twice the basis of such property. 

34 

(C) SPECIAL RULE FOR CONTRIBUTIONS OF FOOD INVENTORY.— 

(i) GENERAL RULE.—In the case of a charitable contribution of food from any trade or business of the taxpayer, this paragraph shall be applied— 

(I) without regard to whether the contribution is 

made by a C corporation, and 

(II) only to food that is apparently wholesome 

food. 

(ii) LIMITATION.—The aggregate amount of such contributions for any taxable year which may be taken 

into account under this section shall not exceed— 

(I) in the case of any taxpayer other than a C 

corporation, 15 percent of the taxpayer’s aggregate 

net income for such taxable year from all trades 

or businesses from which such contributions were 

made for such year, computed without regard to 

this section, and 

(II) in the case of a C corporation, 15 percent of 

taxable income (as defined in subsection (b)(2)(D)). 

(iii) RULES RELATED TO LIMITATION.— 

(I) CARRYOVER.—If such aggregate amount exceeds the limitation imposed under clause (ii), 

such excess shall be treated (in a manner consistent with the rules of subsection (d)) as a charitable contribution described in clause (i) in each of 

the 5 succeeding taxable years in order of time. 

(II) COORDINATION WITH OVERALL CORPORATE

LIMITATION.—In the case of any charitable contribution which is allowable after the application 

of clause (ii)(II), subsection (b)(2)(A) shall not 

apply to such contribution, but the limitation imposed by such subsection shall be reduced (but not 

below zero) by the aggregate amount of such contributions. For purposes of subsection (b)(2)(B), 

such contributions shall be treated as allowable 

under subsection (b)(2)(A). 

(iv) DETERMINATION OF BASIS FOR CERTAIN TAXPAYERS.—If a taxpayer— 

(I) does not account for inventories under section 471, and 

(II) is not required to capitalize indirect costs 

under section 263A, 

the taxpayer may elect, solely for purposes of subparagraph (B), to treat the basis of any apparently wholesome food as being equal to 25 percent of the fair market value of such food. 

(v) DETERMINATION OF FAIR MARKET VALUE.—In the 

case of any such contribution of apparently wholesome 

food which cannot or will not be sold solely by reason 

of internal standards of the taxpayer, lack of market, 

or similar circumstances, or by reason of being produced by the taxpayer exclusively for the purposes of 

transferring the food to an organization described in 

35 

subparagraph (A), the fair market value of such contribution shall be determined— 

(I) without regard to such internal standards, 

such lack of market, such circumstances, or such 

exclusive purpose, and 

(II) by taking into account the price at which 

the same or substantially the same food items (as 

to both type and quality) are sold by the taxpayer 

at the time of the contribution (or, if not so sold 

at such time, in the recent past). 

(vi) APPARENTLY WHOLESOME FOOD.—For purposes 

of this subparagraph, the term ‘‘apparently wholesome 

food’’ has the meaning given to such term by section 

22(b)(2) of the Bill Emerson Good Samaritan Food Donation Act (42 U.S.C. 1791(b)(2)), as in effect on the 

date of the enactment of this subparagraph. 

(D) This paragraph shall not apply to so much of the 

amount of the gain described in paragraph (1)(A) which 

would be long-term capital gain but for the application of 

sections 617, 1245, 1250, or 1252. 

(4) SPECIAL RULE FOR CONTRIBUTIONS OF SCIENTIFIC PROP- ERTY 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 manVerDate Sep 11 2014 04:56 Sep 25, 2018 Jkt 079006 PO 00000 Frm 00035 Fmt 6659 Sfmt 6601 E:\HR\OC\HR957.XXX HR957
36 

ufactured by the taxpayer or a related person) do not exceed 50 percent of the taxpayer’s basis in such property. 

(D) CORPORATION.—For purposes of this paragraph, the 

term ‘‘corporation’’ shall not include— 

(i) an S corporation, 

(ii) a personal holding company (as defined in section 542), and 

(iii) a service organization (as defined in section 

414(m)(3)). 

(5) SPECIAL RULE FOR CONTRIBUTIONS OF STOCK FOR WHICH

MARKET QUOTATIONS ARE READILY AVAILABLE.— 

(A) IN GENERAL.—Subparagraph (B)(ii) of paragraph (1) 

shall not apply to any contribution of qualified appreciated 

stock. 

(B) QUALIFIED APPRECIATED STOCK.—Except as provided 

in subparagraph (C), for purposes of this paragraph, the 

term ‘‘qualified appreciated stock’’ means any stock of a 

corporation— 

(i) for which (as of the date of the contribution) market quotations are readily available on an established 

securities market, and 

(ii) which is capital gain property (as defined in subsection (b)(1)(C)(iv)). 

(C) DONOR MAY NOT CONTRIBUTE MORE THAN 10 PERCENT

OF STOCK OF CORPORATION.— 

(i) IN GENERAL.—In the case of any donor, the term 

‘‘qualified appreciated stock’’ shall not include any 

stock of a corporation contributed by the donor in a 

contribution to which paragraph (1)(B)(ii) applies (determined without regard to this paragraph) to the extent that the amount of the stock so contributed (when 

increased by the aggregate amount of all prior such 

contributions by the donor of stock in such corporation) exceeds 10 percent (in value) of all of the outstanding stock of such corporation. 

(ii) SPECIAL RULE.—For purposes of clause (i), an individual shall be treated as making all contributions 

made by any member of his family (as defined in section 267(c)(4)). 

(7) RECAPTURE OF DEDUCTION ON CERTAIN DISPOSITIONS OF

EXEMPT USE PROPERTY.— 

(A) IN GENERAL.—In the case of an applicable disposition 

of applicable property, there shall be included in the income of the donor of such property for the taxable year of 

such donor in which the applicable disposition occurs an 

amount equal to the excess (if any) of— 

(i) the amount of the deduction allowed to the donor 

under this section with respect to such property, over 

(ii) the donor’s basis in such property at the time 

such property was contributed. 

(B) APPLICABLE DISPOSITION.—For purposes of this paragraph, the term ‘‘applicable disposition’’ means any sale, 

exchange, or other disposition by the donee of applicable 

property— 

37 

(i) after the last day of the taxable year of the donor 

in which such property was contributed, and 

(ii) before the last day of the 3-year period beginning 

on the date of the contribution of such property, 

unless the donee makes a certification in accordance with 

subparagraph (D). 

(C) APPLICABLE PROPERTY.—For purposes of this paragraph, the term ‘‘applicable property’’ means charitable deduction property (as defined in section 6050L(a)(2)(A))— 

(i) which is tangible personal property the use of 

which is identified by the donee as related to the purpose or function constituting the basis of the donee’s 

exemption under section 501, and 

(ii) for which a deduction in excess of the donor’s 

basis is allowed. 

(D) CERTIFICATION.—A certification meets the requirements of this subparagraph if it is a written statement 

which is signed under penalty of perjury by an officer of 

the donee organization and— 

(i) which— 

(I) certifies that the use of the property by the 

donee was substantial and related to the purpose 

or function constituting the basis for the donee’s 

exemption under section 501, and 

(II) describes how the property was used and 

how such use furthered such purpose or function, 

or 

(ii) which— 

(I) states the intended use of the property by 

the donee at the time of the contribution, and 

(II) certifies that such intended use has become 

impossible or infeasible to implement. 

(f) DISALLOWANCE OF DEDUCTION IN CERTAIN CASES AND SPECIAL

RULES.— 

(1) IN GENERAL.—No deduction shall be allowed under this 

section for a contribution to or for the use of an organization 

or trust described in section 508(d) or 4948(c)(4) subject to the 

conditions specified in such sections. 

(2) CONTRIBUTIONS OF PROPERTY PLACED IN TRUST.— (A) REMAINDER INTEREST.—In the case of property transferred in trust, no deduction shall be allowed under this 

section for the value of a contribution of a remainder interest unless the trust is a charitable remainder annuity 

trust or a charitable remainder unitrust (described in section 664), or a pooled income fund (described in section 

642(c)(5)). 

(B) INCOME INTERESTS, ETC..—No deduction shall be allowed under this section for the value of any interest in 

property (other than a remainder interest) transferred in 

trust unless the interest is in the form of a guaranteed annuity or the trust instrument specifies that the interest is 

a fixed percentage distributed yearly of the fair market 

value of the trust property (to be determined yearly) and 

the grantor is treated as the owner of such interest for 

purposes of applying section 671. If the donor ceases to be 

38 

treated as the owner of such an interest for purposes of applying section 671, at the time the donor ceases to be so 

treated, the donor shall for purposes of this chapter be considered as having received an amount of income equal to 

the amount of any deduction he received under this section 

for the contribution reduced by the discounted value of all 

amounts of income earned by the trust and taxable to him 

before the time at which he ceases to be treated as the 

owner of the interest. Such amounts of income shall be discounted to the date of the contribution. The Secretary shall 

prescribe such regulations as may be necessary to carry 

out the purposes of this subparagraph. 

(C) DENIAL OF DEDUCTION IN CASE OF PAYMENTS BY CERTAIN TRUSTS.—In any case in which a deduction is allowed 

under this section for the value of an interest in property 

described in subparagraph (B), transferred in trust, no deduction shall be allowed under this section to the grantor 

or any other person for the amount of any contribution 

made by the trust with respect to such interest. 

(D) EXCEPTION.—This paragraph shall not apply in a 

case in which the value of all interests in property transferred in trust are deductible under subsection (a). 

(3) DENIAL OF DEDUCTION IN CASE OF CERTAIN CONTRIBUTIONS OF PARTIAL INTERESTS IN PROPERTY.— 

(A) IN GENERAL.—In the case of a contribution (not made 

by a transfer in trust) of an interest in property which consists of less than the taxpayer’s entire interest in such 

property, a deduction shall be allowed under this section 

only to the extent that the value of the interest contributed would be allowable as a deduction under this section 

if such interest had been transferred in trust. For purposes 

of this subparagraph, a contribution by a taxpayer of the 

right to use property shall be treated as a contribution of 

less than the taxpayer’s entire interest in such property. 

(B) EXCEPTIONS.—Subparagraph (A) shall not apply to— 

(i) a contribution of a remainder interest in a personal residence or farm, 

(ii) a contribution of an undivided portion of the taxpayer’s entire interest in property, and 

(iii) a qualified conservation contribution. 

(4) VALUATION OF REMAINDER INTEREST IN REAL PROPERTY.— 

For purposes of this section, in determining the value of a remainder interest in real property, depreciation (computed on 

the straight line method) and depletion of such property shall 

be taken into account, and such value shall be discounted at 

a rate of 6 percent per annum, except that the Secretary may 

prescribe a different rate. 

(5) REDUCTION FOR CERTAIN INTEREST.—If, in connection 

with any charitable contribution, a liability is assumed by the 

recipient or by any other person, or if a charitable contribution 

is of property which is subject to a liability, then, to the extent 

necessary to avoid the duplication of amounts, the amount 

taken into account for purposes of this section as the amount 

of the charitable contribution— 

39 

(A) shall be reduced for interest (i) which has been paid 

(or is to be paid) by the taxpayer, (ii) which is attributable 

to the liability, and (iii) which is attributable to any period 

after the making of the contribution, and 

(B) in the case of a bond, shall be further reduced for interest (i) which has been paid (or is to be paid) by the taxpayer on indebtedness incurred or continued to purchase 

or carry such bond, and (ii) which is attributable to any period before the making of the contribution. 

The reduction pursuant to subparagraph (B) shall not exceed 

the interest (including interest equivalent) on the bond which 

is attributable to any period before the making of the contribution and which is not (under the taxpayer’s method of accounting) includible in the gross income of the taxpayer for any taxable year. For purposes of this paragraph, the term ‘‘bond’’ 

means any bond, debenture, note, or certificate or other evidence of indebtedness. 

(6) DEDUCTIONS FOR OUT-OF-POCKET EXPENDITURES.—No deduction shall be allowed under this section for an out-of-pocket 

expenditure made by any person on behalf of an organization 

described in subsection (c) (other than an organization described in section 501(h)(5) (relating to churches, etc.)) if the 

expenditure is made for the purpose of influencing legislation 

(within the meaning of section 501(c)(3)). 

(7) Reformations to comply with paragraph (2) 

(A) IN GENERAL.—A deduction shall be allowed under 

subsection (a) in respect of any qualified reformation 

(within the meaning of section 2055(e)(3)(B)). 

(B) RULES SIMILAR TO SECTION 2055(E)(3) TO APPLY.—For 

purposes of this paragraph, rules similar to the rules of 

section 2055(e)(3) shall apply. 

(8) SUBSTANTIATION REQUIREMENT FOR CERTAIN CONTRIBUTIONS.— 

(A) GENERAL RULE.—No deduction shall be allowed 

under subsection (a) for any contribution of $250 or more 

unless the taxpayer substantiates the contribution by a 

contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B). 

(B) CONTENT OF ACKNOWLEDGEMENT.—An acknowledgement meets the requirements of this subparagraph if it includes the following information: 

(i) The amount of cash and a description (but not 

value) of any property other than cash contributed. 

(ii) Whether the donee organization provided any 

goods or services in consideration, in whole or in part, 

for any property described in clause (i). 

(iii) A description and good faith estimate of the 

value of any goods or services referred to in clause (ii) 

or, if such goods or services consist solely of intangible 

religious benefits, a statement to that effect. 

For purposes of this subparagraph, the term ‘‘intangible 

religious benefit’’ means any intangible religious benefit 

which is provided by an organization organized exclusively 

40 

for religious purposes and which generally is not sold in a 

commercial transaction outside the donative context. 

(C) CONTEMPORANEOUS.—For purposes of subparagraph 

(A), an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on 

or before the earlier of— 

(i) the date on which the taxpayer files a return for 

the taxable year in which the contribution was made, 

or 

(ii) the due date (including extensions) for filing 

such return. 

(D) REGULATIONS.—The Secretary shall prescribe such 

regulations as may be necessary or appropriate to carry 

out the purposes of this paragraph, including regulations 

that may provide that some or all of the requirements of 

this paragraph do not apply in appropriate cases. 

(9) DENIAL OF DEDUCTION WHERE CONTRIBUTION FOR LOB- BYING ACTIVITIES.—No deduction shall be allowed under this 

section for a contribution to an organization which conducts activities to which section 162(e)(1) applies on matters of direct 

financial interest to the donor’s trade or business, if a principal 

purpose of the contribution was to avoid Federal income tax by 

securing a deduction for such activities under this section 

which would be disallowed by reason of section 162(e) if the 

donor had conducted such activities directly. No deduction 

shall be allowed under section 162(a) for any amount for which 

a deduction is disallowed under the preceding sentence. 

(10) SPLIT-DOLLAR LIFE INSURANCE, ANNUITY, AND ENDOWMENT CONTRACTS.— 

(A) IN GENERAL.—Nothing in this section or in section 

545(b)(2), 642(c), 2055, 2106(a)(2), or 2522 shall be construed to allow a deduction, and no deduction shall be allowed, for any transfer to or for the use of an organization 

described in subsection (c) if in connection with such transfer— 

(i) the organization directly or indirectly pays, or 

has previously paid, any premium on any personal 

benefit contract with respect to the transferor, or 

(ii) there is an understanding or expectation that 

any person will directly or indirectly pay any premium 

on any personal benefit contract with respect to the 

transferor. 

(B) PERSONAL BENEFIT CONTRACT.—For purposes of subparagraph (A), the term ‘‘personal benefit contract’’ means, 

with respect to the transferor, any life insurance, annuity, 

or endowment contract if any direct or indirect beneficiary 

under such contract is the transferor, any member of the 

transferor’s family, or any other person (other than an organization described in subsection (c)) designated by the 

transferor. 

(C) APPLICATION TO CHARITABLE REMAINDER TRUSTS.—In 

the case of a transfer to a trust referred to in subparagraph (E), references in subparagraphs (A) and (F) to an 

organization described in subsection (c) shall be treated as 

a reference to such trust. 

41 

(D) EXCEPTION FOR CERTAIN ANNUITY CONTRACTS.—If, in 

connection with a transfer to or for the use of an organization described in subsection (c), such organization incurs 

an obligation to pay a charitable gift annuity (as defined 

in section 501(m)) and such organization purchases any 

annuity contract to fund such obligation, persons receiving 

payments under the charitable gift annuity shall not be 

treated for purposes of subparagraph (B) as indirect beneficiaries under such contract if— 

(i) such organization possesses all of the incidents of 

ownership under such contract, 

(ii) such organization is entitled to all the payments 

under such contract, and 

(iii) the timing and amount of payments under such 

contract are substantially the same as the timing and 

amount of payments to each such person under such 

obligation (as such obligation is in effect at the time 

of such transfer). 

(E) EXCEPTION FOR CERTAIN CONTRACTS HELD BY CHARITABLE REMAINDER TRUSTS.—A person shall not be treated 

for purposes of subparagraph (B) as an indirect beneficiary 

under any life insurance, annuity, or endowment contract 

held by a charitable remainder annuity trust or a charitable remainder unitrust (as defined in section 664(d)) 

solely by reason of being entitled to any payment referred 

to in paragraph (1)(A) or (2)(A) of section 664(d) if— 

(i) such trust possesses all of the incidents of ownership under such contract, and 

(ii) such trust is entitled to all the payments under 

such contract. 

(F) EXCISE TAX ON PREMIUMS PAID.— (i) IN GENERAL.—There is hereby imposed on any organization described in subsection (c) an excise tax 

equal to the premiums paid by such organization on 

any life insurance, annuity, or endowment contract if 

the payment of premiums on such contract is in connection with a transfer for which a deduction is not allowable under subparagraph (A), determined without 

regard to when such transfer is made. 

(ii) PAYMENTS BY OTHER PERSONS.—For purposes of 

clause (i), payments made by any other person pursuant to an understanding or expectation referred to in 

subparagraph (A) shall be treated as made by the organization. 

(iii) REPORTING.—Any organization on which tax is 

imposed by clause (i) with respect to any premium 

shall file an annual return which includes— 

(I) the amount of such premiums paid during 

the year and the name and TIN of each beneficiary under the contract to which the premium 

relates, and 

(II) such other information as the Secretary may 

require. 

The penalties applicable to returns required under section 6033 shall apply to returns required under this 

42 

clause. Returns required under this clause shall be 

furnished at such time and in such manner as the Secretary shall by forms or regulations require. 

(iv) CERTAIN RULES TO APPLY.—The tax imposed by 

this subparagraph shall be treated as imposed by 

chapter 42 for purposes of this title other than subchapter B of chapter 42. 

(G) SPECIAL RULE WHERE STATE REQUIRES SPECIFICATION

OF CHARITABLE GIFT ANNUITANT IN CONTRACT.—In the case 

of an obligation to pay a charitable gift annuity referred to 

in subparagraph (D) which is entered into under the laws 

of a State which requires, in order for the charitable gift 

annuity to be exempt from insurance regulation by such 

State, that each beneficiary under the charitable gift annuity be named as a beneficiary under an annuity contract 

issued by an insurance company authorized to transact 

business in such State, the requirements of clauses (i) and 

(ii) of subparagraph (D) shall be treated as met if— 

(i) such State law requirement was in effect on February 8, 1999, 

(ii) each such beneficiary under the charitable gift 

annuity is a bona fide resident of such State at the 

time the obligation to pay a charitable gift annuity is 

entered into, and 

(iii) the only persons entitled to payments under 

such contract are persons entitled to payments as 

beneficiaries under such obligation on the date such 

obligation is entered into. 

(H) MEMBER OF FAMILY.—For purposes of this paragraph, an individual’s family consists of the individual’s 

grandparents, the grandparents of such individual’s 

spouse, the lineal descendants of such grandparents, and 

any spouse of such a lineal descendant. 

(I) REGULATIONS.—The Secretary shall prescribe such 

regulations as may be necessary or appropriate to carry 

out the purposes of this paragraph, including regulations 

to prevent the avoidance of such purposes. 

(11) QUALIFIED APPRAISAL AND OTHER DOCUMENTATION FOR

CERTAIN CONTRIBUTIONS.— 

(A) IN GENERAL.— 

(i) DENIAL OF DEDUCTION.—In the case of an individual, partnership, or corporation, no deduction shall 

be allowed under subsection (a) for any contribution of 

property for which a deduction of more than $500 is 

claimed unless such person meets the requirements of 

subparagraphs (B), (C), and (D), as the case may be, 

with respect to such contribution. 

(ii) EXCEPTIONS.— 

(I) READILY VALUED PROPERTY.—Subparagraphs 

(C) and (D) shall not apply to cash, property described in subsection (e)(1)(B)(iii) or section 

1221(a)(1), publicly traded securities (as defined in 

section 6050L(a)(2)(B)), and any qualified vehicle 

described in paragraph (12)(A)(ii) for which an acVerDate Sep 11 2014 04:56 Sep 25, 2018 Jkt 079006 PO 00000 Frm 00042 Fmt 6659 Sfmt 6601 E:\HR\OC\HR957.XXX HR957
43 

knowledgement under paragraph (12)(B)(iii) is 

provided. 

(II) REASONABLE CAUSE.—Clause (i) shall not 

apply if it is shown that the failure to meet such 

requirements is due to reasonable cause and not 

to willful neglect. 

(B) PROPERTY DESCRIPTION FOR CONTRIBUTIONS OF MORE

THAN $500.—In the case of contributions of property for 

which a deduction of more than $500 is claimed, the requirements of this subparagraph are met if the individual, 

partnership or corporation includes with the return for the 

taxable year in which the contribution is made a description of such property and such other information as the 

Secretary may require. The requirements of this subparagraph shall not apply to a C corporation which is not a 

personal service corporation or a closely held C corporation. 

(C) QUALIFIED APPRAISAL FOR CONTRIBUTIONS OF MORE

THAN $5,000.—In the case of contributions of property for 

which a deduction of more than $5,000 is claimed, the requirements of this subparagraph are met if the individual, 

partnership, or corporation obtains a qualified appraisal of 

such property and attaches to the return for the taxable 

year in which such contribution is made such information 

regarding such property and such appraisal as the Secretary may require. 

(D) SUBSTANTIATION FOR CONTRIBUTIONS OF MORE THAN

$500,000.—In the case of contributions of property for which 

a deduction of more than $500,000 is claimed, the requirements of this subparagraph are met if the individual, partnership, or corporation attaches to the return for the taxable year a qualified appraisal of such property. 

(E) QUALIFIED APPRAISAL AND APPRAISER.—For purposes 

of this paragraph— 

(i) QUALIFIED APPRAISAL.—The term ‘‘qualified appraisal’’ means, with respect to any property, an appraisal of such property which— 

(I) is treated for purposes of this paragraph as 

a qualified appraisal under regulations or other 

guidance prescribed by the Secretary, and 

(II) is conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed under subclause (I). 

(ii) QUALIFIED APPRAISER.—Except as provided in 

clause (iii), the term ‘‘qualified appraiser’’ means an 

individual who— 

(I) has earned an appraisal designation from a 

recognized professional appraiser organization or 

has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary, 

(II) regularly performs appraisals for which the 

individual receives compensation, and 

44 

(III) meets such other requirements as may be 

prescribed by the Secretary in regulations or other 

guidance. 

(iii) SPECIFIC APPRAISALS.—An individual shall not 

be treated as a qualified appraiser with respect to any 

specific appraisal unless— 

(I) the individual demonstrates verifiable education and experience in valuing the type of property subject to the appraisal, and 

(II) the individual has not been prohibited from 

practicing before the Internal Revenue Service by 

the Secretary under section 330(c) of title 31, 

United States Code, at any time during the 3-year 

period ending on the date of the appraisal. 

(F) AGGREGATION OF SIMILAR ITEMS OF PROPERTY.—For 

purposes of determining thresholds under this paragraph, 

property and all similar items of property donated to 1 or 

more donees shall be treated as 1 property. 

(G) SPECIAL RULE FOR PASS-THRU ENTITIES.—In the case 

of a partnership or S corporation, this paragraph shall be 

applied at the entity level, except that the deduction shall 

be denied at the partner or shareholder level. 

(H) REGULATIONS.—The Secretary may prescribe such 

regulations as may be necessary or appropriate to carry 

out the purposes of this paragraph, including regulations 

that may provide that some or all of the requirements of 

this paragraph do not apply in appropriate cases. 

(12) CONTRIBUTIONS OF USED MOTOR VEHICLES, BOATS, AND

AIRPLANES.— 

(A) IN GENERAL.—In the case of a contribution of a qualified vehicle the claimed value of which exceeds $500— 

(i) paragraph (8) shall not apply and no deduction 

shall be allowed under subsection (a) for such contribution unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization 

that meets the requirements of subparagraph (B) and 

includes the acknowledgement with the taxpayer’s return of tax which includes the deduction, and 

(ii) if the organization sells the vehicle without any 

significant intervening use or material improvement of 

such vehicle by the organization, the amount of the deduction allowed under subsection (a) shall not exceed 

the gross proceeds received from such sale. 

(B) CONTENT OF ACKNOWLEDGEMENT.—An acknowledgement meets the requirements of this subparagraph if it includes the following information: 

(i) The name and taxpayer identification number of 

the donor. 

(ii) The vehicle identification number or similar 

number. 

(iii) In the case of a qualified vehicle to which subparagraph (A)(ii) applies— 

45 

(I) a certification that the vehicle was sold in an 

arm’s length transaction between unrelated parties, 

(II) the gross proceeds from the sale, and 

(III) a statement that the deductible amount 

may not exceed the amount of such gross proceeds. 

(iv) In the case of a qualified vehicle to which subparagraph (A)(ii) does not apply— 

(I) a certification of the intended use or material 

improvement of the vehicle and the intended duration of such use, and 

(II) a certification that the vehicle would not be 

transferred in exchange for money, other property, 

or services before completion of such use or improvement. 

(v) Whether the donee organization provided any 

goods or services in consideration, in whole or in part, 

for the qualified vehicle. 

(vi) A description and good faith estimate of the 

value of any goods or services referred to in clause (v) 

or, if such goods or services consist solely of intangible 

religious benefits (as defined in paragraph (8)(B)), a 

statement to that effect. 

(C) CONTEMPORANEOUS.—For purposes of subparagraph 

(A), an acknowledgement shall be considered to be contemporaneous if the donee organization provides it within 30 

days of— 

(i) the sale of the qualified vehicle, or 

(ii) in the case of an acknowledgement including a 

certification described in subparagraph (B)(iv), the 

contribution of the qualified vehicle. 

(D) INFORMATION TO SECRETARY.—A donee organization 

required to provide an acknowledgement under this paragraph shall provide to the Secretary the information contained in the acknowledgement. Such information shall be 

provided at such time and in such manner as the Secretary may prescribe. 

(E) QUALIFIED VEHICLE.—For purposes of this paragraph, the term ‘‘qualified vehicle’’ means any— 

(i) motor vehicle manufactured primarily for use on 

public streets, roads, and highways, 

(ii) boat, or 

(iii) airplane. 

Such term shall not include any property which is described in section 1221(a)(1). 

(F) REGULATIONS OR OTHER GUIDANCE.—The Secretary 

shall prescribe such regulations or other guidance as may 

be necessary to carry out the purposes of this paragraph. 

The Secretary may prescribe regulations or other guidance 

which exempts sales by the donee organization which are 

in direct furtherance of such organization’s charitable purpose from the requirements of subparagraphs (A)(ii) and 

(B)(iv)(II). 

46 

(13) CONTRIBUTIONS OF CERTAIN INTERESTS IN BUILDINGS LOCATED IN REGISTERED HISTORIC DISTRICTS.— 

(A) IN GENERAL.—No deduction shall be allowed with respect to any contribution described in subparagraph (B) 

unless the taxpayer includes with the return for the taxable year of the contribution a $500 filing fee. 

(B) CONTRIBUTION DESCRIBED.—A contribution is described in this subparagraph if such contribution is a 

qualified conservation contribution (as defined in subsection (h)) which is a restriction with respect to the exterior of a building described in subsection (h)(4)(C)(ii) and 

for which a deduction is claimed in excess of $10,000. 

(C) DEDICATION OF FEE.—Any fee collected under this 

paragraph shall be used for the enforcement of the provisions of subsection (h). 

(14) REDUCTION FOR AMOUNTS ATTRIBUTABLE TO REHABILITATION CREDIT.—In the case of any qualified conservation contribution (as defined in subsection (h)), the amount of the deduction allowed under this section shall be reduced by an 

amount which bears the same ratio to the fair market value 

of the contribution as— 

(A) the sum of the credits allowed to the taxpayer under 

section 47 for the 5 preceding taxable years with respect 

to any building which is a part of such contribution, bears 

to 

(B) the fair market value of the building on the date of 

the contribution. 

(15) SPECIAL RULE FOR TAXIDERMY PROPERTY.— 

(A) BASIS.—For purposes of this section and notwithstanding section 1012, in the case of a charitable contribution of taxidermy property which is made by the person 

who prepared, stuffed, or mounted the property or by any 

person who paid or incurred the cost of such preparation, 

stuffing, or mounting, only the cost of the preparing, stuffing, or mounting shall be included in the basis of such 

property. 

(B) TAXIDERMY PROPERTY.—For purposes of this section, 

the term ‘‘taxidermy property’’ means any work of art 

which— 

(i) is the reproduction or preservation of an animal, 

in whole or in part, 

(ii) is prepared, stuffed, or mounted for purposes of 

recreating one or more characteristics of such animal, 

and 

(iii) contains a part of the body of the dead animal. 

(16) CONTRIBUTIONS OF CLOTHING AND HOUSEHOLD ITEMS.— 

(A) IN GENERAL.—In the case of an individual, partnership, or corporation, no deduction shall be allowed under 

subsection (a) for any contribution of clothing or a household item unless such clothing or household item is in good 

used condition or better. 

(B) ITEMS OF MINIMAL VALUE.—Notwithstanding subparagraph (A), the Secretary may by regulation deny a deduction under subsection (a) for any contribution of clothVerDate Sep 11 2014 04:56 Sep 25, 2018 Jkt 079006 PO 00000 Frm 00046 Fmt 6659 Sfmt 6601 E:\HR\OC\HR957.XXX HR957
47 

ing or a household item which has minimal monetary 

value. 

(C) EXCEPTION FOR CERTAIN PROPERTY.—Subparagraphs 

(A) and (B) shall not apply to any contribution of a single 

item of clothing or a household item for which a deduction 

of more than $500 is claimed if the taxpayer includes with 

the taxpayer’s return a qualified appraisal with respect to 

the property. 

(D) HOUSEHOLD ITEMS.—For purposes of this paragraph— 

(i) IN GENERAL.—The term ‘‘household items’’ includes furniture, furnishings, electronics, appliances, 

linens, and other similar items. 

(ii) EXCLUDED ITEMS.—Such term does not include— 

(I) food, 

(II) paintings, antiques, and other objects of art, 

(III) jewelry and gems, and 

(IV) collections. 

(E) SPECIAL RULE FOR PASS-THRU ENTITIES.—In the case 

of a partnership or S corporation, this paragraph shall be 

applied at the entity level, except that the deduction shall 

be denied at the partner or shareholder level. 

(17) RECORDKEEPING.—No deduction shall be allowed under 

subsection (a) for any contribution of a cash, check, or other 

monetary gift unless the donor maintains as a record of such 

contribution a bank record or a written communication from 

the donee showing the name of the donee organization, the 

date of the contribution, and the amount of the contribution. 

(18) CONTRIBUTIONS TO DONOR ADVISED FUNDS.—A deduction 

otherwise allowed under subsection (a) for any contribution to 

a donor advised fund (as defined in section 4966(d)(2)) shall 

only be allowed if— 

(A) the sponsoring organization (as defined in section 

4966(d)(1)) with respect to such donor advised fund is 

not— 

(i) described in paragraph (3), (4), or (5) of subsection (c), or 

(ii) a type III supporting organization (as defined in 

section 4943(f)(5)(A)) which is not a functionally integrated type III supporting organization (as defined in 

section 4943(f)(5)(B)), and 

(B) the taxpayer obtains a contemporaneous written acknowledgment (determined under rules similar to the 

rules of paragraph (8)(C)) from the sponsoring organization 

(as so defined) of such donor advised fund that such organization has exclusive legal control over the assets contributed. 

(g) AMOUNTS PAID TO MAINTAIN CERTAIN STUDENTS AS MEMBERS

OF TAXPAYER’S HOUSEHOLD.— (1) IN GENERAL.—Subject to the limitations provided by paragraph (2), amounts paid by the taxpayer to maintain an individual (other than a dependent, as defined in section 152 (determined without regard to subsections (b)(1), (b)(2), and 

(d)(1)(B) thereof), or a relative of the taxpayer) as a member 

of his household during the period that such individual is— 

48 

(A) a member of the taxpayer’s household under a written agreement between the taxpayer and an organization 

described in paragraph (2), (3), or (4) of subsection (c) to 

implement a program of the organization to provide educational opportunities for pupils or students in private 

homes, and 

(B) a full-time pupil or student in the twelfth or any 

lower grade at an educational organization described in 

section 170(b)(1)(A)(ii) located in the United States, shall 

be treated as amounts paid for the use of the organization. 

(2) LIMITATIONS.— (A) AMOUNT.—Paragraph (1) shall apply to amounts 

paid within the taxable year only to the extent that such 

amounts do not exceed $50 multiplied by the number of 

full calendar months during the taxable year which fall 

within the period described in paragraph (1). For purposes 

of the preceding sentence, if 15 or more days of a calendar 

month fall within such period such month shall be considered as a full calendar month. 

(B) COMPENSATION OR REIMBURSEMENT.—Paragraph (1) 

shall not apply to any amount paid by the taxpayer within 

the taxable year if the taxpayer receives any money or 

other property as compensation or reimbursement for 

maintaining the individual in his household during the period described in paragraph (1). 

(3) RELATIVE DEFINED.—For purposes of paragraph (1), the 

term ‘‘relative of the taxpayer’’ means an individual who, with 

respect to the taxpayer, bears any of the relationships described in subparagraphs (A) through (G) of section 152(d)(2). 

(4) NO OTHER AMOUNT ALLOWED AS DEDUCTION.—No deduction shall be allowed under subsection (a) for any amount paid 

by a taxpayer to maintain an individual as a member of his 

household under a program described in paragraph (1)(A) except as provided in this subsection. 

(h) QUALIFIED CONSERVATION CONTRIBUTION.— (1) IN GENERAL.—For purposes of subsection (f)(3)(B)(iii), the 

term ‘‘qualified conservation contribution’’ means a contribution— 

(A) of a qualified real property interest, 

(B) to a qualified organization, 

(C) exclusively for conservation purposes. 

(2) QUALIFIED REAL PROPERTY INTEREST.—For purposes of 

this subsection, the term ‘‘qualified real property interest’’ 

means any of the following interests in real property: 

(A) the entire interest of the donor other than a qualified 

mineral interest, 

(B) a remainder interest, and 

(C) a restriction (granted in perpetuity) on the use which 

may be made of the real property. 

(3) QUALIFIED ORGANIZATION.—For purposes of paragraph 

(1), the term ‘‘qualified organization’’ means an organization 

which— 

(A) is described in clause (v) or (vi) of subsection 

(b)(1)(A), or 

(B) is described in section 501(c)(3) and— 

49 

(i) meets the requirements of section 509(a)(2), or 

(ii) meets the requirements of section 509(a)(3) and 

is controlled by an organization described in subparagraph (A) or in clause (i) of this subparagraph. 

(4) CONSERVATION PURPOSE DEFINED.— 

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

term ‘‘conservation purpose’’ means— 

(i) the preservation of land areas for outdoor recreation by, or the education of, the general public, 

(ii) the protection of a relatively natural habitat of 

fish, wildlife, or plants, or similar ecosystem, 

(iii) the preservation of open space (including farmland and forest land) where such preservation is— 

(I) for the scenic enjoyment of the general public, or 

(II) pursuant to a clearly delineated Federal, 

State, or local governmental conservation policy, 

and will yield a significant public benefit, or 

(iv) the preservation of an historically important 

land area or a certified historic structure. 

(B) SPECIAL RULES WITH RESPECT TO BUILDINGS IN REGISTERED HISTORIC DISTRICTS.—In the case of any contribution of a qualified real property interest which is a restriction with respect to the exterior of a building described in 

subparagraph (C)(ii), such contribution shall not be considered to be exclusively for conservation purposes unless— 

(i) such interest— 

(I) includes a restriction which preserves the entire exterior of the building (including the front, 

sides, rear, and height of the building), and 

(II) prohibits any change in the exterior of the 

building which is inconsistent with the historical 

character of such exterior, 

(ii) the donor and donee enter into a written agreement certifying, under penalty of perjury, that the 

donee— 

(I) is a qualified organization (as defined in 

paragraph (3)) with a purpose of environmental 

protection, land conservation, open space preservation, or historic preservation, and 

(II) has the resources to manage and enforce the 

restriction and a commitment to do so, and 

(iii) in the case of any contribution made in a taxable year beginning after the date of the enactment of 

this subparagraph, the taxpayer includes with the taxpayer’s return for the taxable year of the contribution— 

(I) a qualified appraisal (within the meaning of 

subsection (f)(11)(E)) of the qualified property interest, 

(II) photographs of the entire exterior of the 

building, and 

(III) a description of all restrictions on the development of the building. 

50 

(C) CERTIFIED HISTORIC STRUCTURE.—For purposes of 

subparagraph (A)(iv), the term ‘‘certified historic structure’’ 

means— 

(i) any building, structure, or land area which is listed in the National Register, or 

(ii) any building which is located in a registered historic district (as defined in section 47(c)(3)(B)) and is 

certified by the Secretary of the Interior to the Secretary as being of historic significance to the district. 

A building, structure, or land area satisfies the preceding sentence if it satisfies such sentence either at the time of the 

transfer or on the due date (including extensions) for filing the 

transferor’s return under this chapter for the taxable year in 

which the transfer is made. 

(5) EXCLUSIVELY FOR CONSERVATION PURPOSES.—For purposes of this subsection— 

(A) CONSERVATION PURPOSE MUST BE PROTECTED.—A 

contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity. 

(B) NO SURFACE MINING PERMITTED.— (i) IN GENERAL.—Except as provided in clause (ii), in 

the case of a contribution of any interest where there 

is a retention of a qualified mineral interest, subparagraph (A) shall not be treated as met if at any time 

there may be extraction or removal of minerals by any 

surface mining method. 

(ii) SPECIAL RULE.—With respect to any contribution 

of property in which the ownership of the surface estate and mineral interests has been and remains separated, subparagraph (A) shall be treated as met if the 

probability of surface mining occurring on such property is so remote as to be negligible. 

(6) QUALIFIED MINERAL INTEREST.—For purposes of this subsection, the term ‘‘qualified mineral interest’’ means— 

(A) subsurface oil, gas, or other minerals, and 

(B) the right to access to such minerals. 

(i) STANDARD MILEAGE RATE FOR USE OF PASSENGER 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— 

51 

(i) which is described in subsection (b)(1)(A)(ii), and 

(ii) which is an institution of higher education (as 

defined in section 3304(f)), and 

(B) the taxpayer receives (directly or indirectly) as a result of paying such amount the right to purchase tickets 

for seating at an athletic event in an athletic stadium of 

such institution. 

If any portion of a payment is for the purchase of such tickets, 

such portion and the remaining portion (if any) of such payment shall be treated as separate amounts for purposes of this 

subsection. 

(m) CERTAIN DONEE INCOME FROM INTELLECTUAL PROPERTY

TREATED AS AN ADDITIONAL CHARITABLE CONTRIBUTION.— 

(1) TREATMENT AS ADDITIONAL CONTRIBUTION.—In the case of 

a taxpayer who makes a qualified intellectual property contribution, the deduction allowed under subsection (a) for each 

taxable year of the taxpayer ending on or after the date of such 

contribution shall be increased (subject to the limitations 

under subsection (b)) by the applicable percentage of qualified 

donee income with respect to such contribution which is properly allocable to such year under this subsection. 

(2) REDUCTION IN ADDITIONAL DEDUCTIONS TO EXTENT OF INITIAL DEDUCTION.—With respect to any qualified intellectual 

property contribution, the deduction allowed under subsection 

(a) shall be increased under paragraph (1) only to the extent 

that the aggregate amount of such increases with respect to 

such contribution exceed the amount allowed as a deduction 

under subsection (a) with respect to such contribution determined without regard to this subsection. 

(3) QUALIFIED DONEE INCOME.—For purposes of this subsection, the term ‘‘qualified donee income’’ means any net income received by or accrued to the donee which is properly allocable to the qualified intellectual property. 

(4) ALLOCATION OF QUALIFIED DONEE INCOME TO TAXABLE

YEARS OF DONOR.—For purposes of this subsection, qualified 

donee income shall be treated as properly allocable to a taxable 

year of the donor if such income is received by or accrued to 

the donee for the taxable year of the donee which ends within 

or with such taxable year of the donor. 

(5) 10-YEAR LIMITATION.—Income shall not be treated as 

properly allocable to qualified intellectual property for purposes of this subsection if such income is received by or accrued to the donee after the 10-year period beginning on the 

date of the contribution of such property. 

(6) BENEFIT LIMITED TO LIFE OF INTELLECTUAL PROPERTY.— 

Income shall not be treated as properly allocable to qualified 

intellectual property for purposes of this subsection if such income is received by or accrued to the donee after the expiration 

of the legal life of such property. 

(7) APPLICABLE PERCENTAGE.—For purposes of this subsection, the term ‘‘applicable percentage’’ means the percentage 

determined under the following table which corresponds to a 

taxable year of the donor ending on or after the date of the 

qualified intellectual property contribution: 

52 

Taxable Year of Donor Ending on or After Date of Contribution: Applicable Percentage: 

1st................................... 100 

2nd................................... 100 

3rd................................... 90 

4th................................... 80 

5th................................... 70 

6th................................... 60 

7th................................... 50 

8th................................... 40 

9th................................... 30 

10th.................................. 20 

11th.................................. 10 

12th.................................. 10 

(8) QUALIFIED INTELLECTUAL PROPERTY CONTRIBUTION.—For 

purposes of this subsection, the term ‘‘qualified intellectual 

property contribution’’ means any charitable contribution of 

qualified intellectual property— 

(A) the amount of which taken into account under this 

section is reduced by reason of subsection (e)(1), and 

(B) with respect to which the donor informs the donee at 

the time of such contribution that the donor intends to 

treat such contribution as a qualified intellectual property 

contribution for purposes of this subsection and section 

6050L. 

(9) QUALIFIED INTELLECTUAL PROPERTY.—For purposes of 

this subsection, the term ‘‘qualified intellectual property’’ 

means property described in subsection (e)(1)(B)(iii) (other than 

property contributed to or for the use of an organization described in subsection (e)(1)(B)(ii)). 

(10) OTHER SPECIAL RULES.— (A) APPLICATION OF LIMITATIONS ON CHARITABLE CON- TRIBUTIONS.—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 

53 

purpose or function constituting the basis of the 

donee’s exemption under section 501 (or, in the case of 

a governmental unit, any purpose described in section 

170(c)) and does not possess a right to receive any payment from a third party with respect to such property. 

(n) EXPENSES PAID BY CERTAIN WHALING CAPTAINS IN SUPPORT OF

NATIVE ALASKAN SUBSISTENCE WHALING.— 

(1) IN GENERAL.—In the case of an individual who is recognized by the Alaska Eskimo Whaling Commission as a whaling 

captain charged with the responsibility of maintaining and carrying out sanctioned whaling activities and who engages in 

such activities during the taxable year, the amount described 

in paragraph (2) (to the extent such amount does not exceed 

$10,000 for the taxable year) shall be treated for purposes of 

this section as a charitable contribution. 

(2) AMOUNT DESCRIBED.— 

(A) IN GENERAL.—The amount described in this paragraph is the aggregate of the reasonable and necessary 

whaling expenses paid by the taxpayer during the taxable 

year in carrying out sanctioned whaling activities. 

(B) WHALING EXPENSES.—For purposes of subparagraph 

(A), the term ‘‘whaling expenses’’ includes expenses for— 

(i) the acquisition and maintenance of whaling 

boats, weapons, and gear used in sanctioned whaling 

activities, 

(ii) the supplying of food for the crew and other provisions for carrying out such activities, and 

(iii) storage and distribution of the catch from such 

activities. 

(3) SANCTIONED WHALING ACTIVITIES.—For purposes of this 

subsection, the term ‘‘sanctioned whaling activities’’ means 

subsistence bowhead whale hunting activities conducted pursuant to the management plan of the Alaska Eskimo Whaling 

Commission. 

(4) SUBSTANTIATION OF EXPENSES.—The Secretary shall issue 

guidance requiring that the taxpayer substantiate the whaling 

expenses for which a deduction is claimed under this subsection, including by maintaining appropriate written records 

with respect to the time, place, date, amount, and nature of the 

expense, as well as the taxpayer’s eligibility for such deduction, 

and that (to the extent provided by the Secretary) such substantiation be provided as part of the taxpayer’s return of tax. 

(o) SPECIAL RULES FOR FRACTIONAL GIFTS.— 

(1) DENIAL OF DEDUCTION IN CERTAIN CASES.— 

(A) IN GENERAL.—No deduction shall be allowed for a 

contribution of an undivided portion of a taxpayer’s entire 

interest in tangible personal property unless all interests 

in the property are held immediately before such contribution by— 

(i) the taxpayer, or 

(ii) the taxpayer and the donee. 

(B) EXCEPTIONS.—The Secretary may, by regulation, provide for exceptions to subparagraph (A) in cases where all 

persons who hold an interest in the property make proporVerDate Sep 11 2014 04:56 Sep 25, 2018 Jkt 079006 PO 00000 Frm 00053 Fmt 6659 Sfmt 6601 E:\HR\OC\HR957.XXX HR957
54 

tional contributions of an undivided portion of the entire 

interest held by such persons. 

(2) VALUATION OF SUBSEQUENT GIFTS.—In the case of any additional contribution, the fair market value of such contribution shall be determined by using the lesser of— 

(A) the fair market value of the property at the time of 

the initial fractional contribution, or 

(B) the fair market value of the property at the time of 

the additional contribution. 

(3) RECAPTURE OF DEDUCTION IN CERTAIN CASES; ADDITION TO

TAX.— (A) RECAPTURE.—The Secretary shall provide for the recapture of the amount of any deduction allowed under this 

section (plus interest) with respect to any contribution of 

an undivided portion of a taxpayer’s entire interest in tangible personal property— 

(i) in any case in which the donor does not contribute all of the remaining interests in such property 

to the donee (or, if such donee is no longer in existence, to any person described in section 170(c)) on or 

before the earlier of— 

(I) the date that is 10 years after the date of the 

initial fractional contribution, or 

(II) the date of the death of the donor, and (ii) 

in any case in which the donee has not, during the 

period beginning on the date of the initial fractional contribution and ending on the date described in clause (i)— 

(I) had substantial physical possession of the 

property, and 

(II) used the property in a use which is related 

to a purpose or function constituting the basis for 

the organizations’ exemption under section 501. 

(B) ADDITION TO TAX.—The tax imposed under this chapter for any taxable year for which there is a recapture 

under subparagraph (A) shall be increased by 10 percent 

of the amount so recaptured. 

(4) DEFINITIONS.—For purposes of this subsection— 

(A) ADDITIONAL CONTRIBUTION.—The term ‘‘additional 

contribution’’ means any charitable contribution by the 

taxpayer of any interest in property with respect to which 

the taxpayer has previously made an initial fractional contribution. 

(B) INITIAL FRACTIONAL CONTRIBUTION.—The term ‘‘initial fractional contribution’’ means, with respect to any 

taxpayer, the first charitable contribution of an undivided 

portion of the taxpayer’s entire interest in any tangible 

personal property. 

(p) OTHER CROSS REFERENCES.— (1) For treatment of certain organizations providing child 

care, see section 501(k). 

(2) For charitable contributions of estates and trusts, see section 642(c). 

(3) For nondeductibility of contributions by common trust 

funds, see section 584. 

55 

(4) For charitable contributions of partners, see section 702. 

(5) For charitable contributions of nonresident aliens, see 

section 873. 

(6) For treatment of gifts for benefit of or use in connection 

with the Naval Academy as gifts to or for use of the United 

States, see section 6973 of title 10, United States Code. 

(7) For treatment of gifts accepted by the Secretary of State, 

the Director of the International Communication Agency, or 

the Director of the United States International Development 

Cooperation Agency, as gifts to or for the use of the United 

States, see section 25 of the State Department Basic Authorities Act of 1956. 

(8) For treatment of gifts of money accepted by the Attorney 

General for credit to the ‘‘Commissary Funds Federal Prisons’’ 

as gifts to or for the use of the United States, see section 4043 

of title 18, United States Code. 

(9) For charitable contributions to or for the use of Indian 

tribal governments (or their subdivisions), see section 7871. 

* * * * * * * 

SEC. 195. START-UP øEXPENDITURES¿ AND ORGANIZATIONAL EXPENDITURES. 

ø(a) CAPITALIZATION OF EXPENDITURES.—Except as otherwise provided in this section, no deduction shall be allowed for start-up expenditures. 

ø(b) ELECTION TO DEDUCT.— 

ø(1) ALLOWANCE OF DEDUCTION.—If a taxpayer elects the application of this subsection with respect to any start-up expenditures— 

ø(A) the taxpayer shall be allowed a deduction for the 

taxable year in which the active trade or business begins 

in an amount equal to the lesser of— 

ø(i) the amount of start-up expenditures with respect to the active trade or business, or 

ø(ii) $5,000, reduced (but not below zero) by the 

amount by which such start-up expenditures exceed 

$50,000, and 

ø(B) the remainder of such start-up expenditures shall 

be allowed as a deduction ratably over the 180-month period beginning with the month in which the active trade 

or business begins. 

ø(2) DISPOSITIONS BEFORE CLOSE OF AMORTIZATION PERIOD.— 

In any case in which a trade or business is completely disposed 

of by the taxpayer before the end of the period to which paragraph (1) applies, any deferred expenses attributable to such 

trade or business which were not allowed as a deduction by 

reason of this section may be deducted to the extent allowable 

under section 165. 

ø(3) SPECIAL RULE FOR TAXABLE YEARS BEGINNING IN 2010.— 

In the case of a taxable year beginning in 2010, paragraph 

(1)(A)(ii) shall be applied— 

ø(A) by substituting ‘‘$10,000’’ for ‘‘$5,000’’, and 

ø(B) by substituting ‘‘$60,000’’ for ‘‘$50,000’’.¿ 

56 

(a) CAPITALIZATION OF EXPENDITURES.—Except as otherwise provided in this section, no deduction shall be allowed for start-up or 

organizational expenditures. 

(b) ELECTION TO DEDUCT.— (1) IN GENERAL.—If a taxpayer elects the application of this 

subsection with respect to any active trade or business— 

(A) the taxpayer shall be allowed a deduction for the taxable year in which such active trade or business begins in 

an amount equal to the lesser of— 

(i) the aggregate amount of start-up and organizational expenditures paid or incurred in connection with 

such active trade or business, or 

(ii) $20,000, reduced (but not below zero) by the 

amount by which such aggregate amount exceeds 

$120,000, and 

(B) the remainder of such start-up and organizational expenditures shall be charged to capital account and allowed 

as an amortization deduction determined by amortizing 

such expenditures ratably over the 180-month period beginning with the month in which the active trade or business 

begins. 

(2) APPLICATION TO ORGANIZATIONAL EXPENDITURES.—In the 

case of organizational expenditures with respect to any corporation or partnership, the active trade or business referred to in 

paragraph (1) means the first active trade or business carried 

on by such corporation or partnership. 

(3) INFLATION ADJUSTMENT.—In the case of any taxable year beginning after December 31, 2019, the $20,000 and $120,000 

amounts in paragraph (1)(A)(ii) shall each be increased by an 

amount equal to— 

(A) such dollar amount, multiplied by 

(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year 

begins, determined by substituting ‘‘calendar year 2018’’ for 

‘‘calendar year 2016’’ in subparagraph (A)(ii) thereof. 

If any amount as increased under the preceding sentence is not 

a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000. 

(c) ALLOWANCE OF DEDUCTION UPON LIQUIDATION OR DISPOSI- TION.— 

(1) LIQUIDATION OF PARTNERSHIP OR CORPORATION.—If any 

partnership or corporation is completely liquidated by the taxpayer, any start-up or organizational expenditures paid or incurred in connection with such partnership or corporation 

which were not allowed as a deduction by reason of this section 

may be deducted to the extent allowable under section 165. 

(2) DISPOSITION OF TRADE OR BUSINESS.—If any trade or 

business is completely disposed of or discontinued by the taxpayer, any start-up expenditures paid or incurred in connection 

with such trade or business which were not allowed as a deduction by reason of this section (and not taken into account in 

connection with a liquidation to which paragraph (1) applies) 

may be deducted to the extent allowable under section 165. For 

purposes of this paragraph, in the case of any deduction allowed under subsection (b)(1) with respect to both start-up and 

57 

organizational expenditures, the amount treated as so allowed 

with respect to start-up expenditures shall bear the same ratio 

to such deduction as the start-up expenditures taken into account in determining such deduction bears to the aggregate of 

the start-up and organizational expenditures so taken into account. 

ø(c)¿ (d) DEFINITIONS.—For purposes of this section— 

(1) START-UP EXPENDITURES.—The term ‘‘start-up expenditure’’ means any amount— 

(A) paid or incurred in connection with— 

(i) investigating the creation or acquisition of an active trade or business, or 

(ii) creating an active trade or business, or 

(iii) any activity engaged in for profit and for the 

production of income before the day on which the active trade or business begins, in anticipation of such 

activity becoming an active trade or business, and 

(B) which, if paid or incurred in connection with the operation of an existing active trade or business (in the same 

field as the trade or business referred to in subparagraph 

(A)), would be allowable as a deduction for the taxable 

year in which paid or incurred. 

The term ‘‘start-up expenditure’’ does not include any amount 

with respect to which a deduction is allowable under section 

163(a), 164, or 174. 

(2) BEGINNING OF TRADE OR BUSINESS.— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), the determination of when an active trade or business 

begins shall be made in accordance with such regulations 

as the Secretary may prescribe. 

(B) ACQUIRED TRADE OR BUSINESS.—An acquired active 

trade or business shall be treated as beginning when the 

taxpayer acquires it. 

(3) ORGANIZATIONAL EXPENDITURES.—The term ‘‘organizational expenditures’’ means any expenditure which— 

(A) is incident to the creation of a corporation or a partnership, 

(B) is chargeable to capital account, and 

(C) is of a character which, if expended incident to the 

creation of a corporation or a partnership having an ascertainable life, would be amortizable over such life. 

(4) APPLICATION TO CERTAIN DISREGARDED ENTITIES.—In the 

case of any entity with a single owner that is disregarded as an 

entity separate from its owner, this section shall be applied in 

the same manner as if such entity were a corporation. 

ø(d)¿ (e) ELECTION.— 

(1) TIME FOR MAKING ELECTION.—An election under subsection (b) shall be made not later than the time prescribed by 

law for filing the return for the taxable year in which the trade 

or business begins (including extensions thereof). 

ø(2) SCOPE OF ELECTION.—The period selected under subsection (b) shall be adhered to in computing taxable income for 

the taxable year for which the election is made and all subsequent taxable years.¿ 

58 

(2) PARTNERSHIPS AND S CORPORATIONS.—In the case of any 

partnership or S corporation, the election under subsection (b) 

shall be made (and this section shall be applied) at the entity 

level. 

* * * * * * * 

PART VIII—SPECIAL DEDUCTIONS FOR CORPORATIONS 

øSec. 248. Organizational expenditures.¿ 

* * * * * * * 

øSEC. 248. ORGANIZATIONAL EXPENDITURES. 

ø(a) ELECTION TO DEDUCT.—If a corporation elects the application of this subsection (in accordance with regulations prescribed 

by the Secretary) with respect to any organizational expenditures— 

ø(1) the corporation shall be allowed a deduction for the taxable year in which the corporation begins business in an 

amount equal to the lesser of— 

ø(A) the amount of organizational expenditures with respect to the taxpayer, or 

ø(B) $5,000, reduced (but not below zero) by the amount 

by which such organizational expenditures exceed $50,000, 

and 

ø(2) the remainder of such organizational expenditures shall 

be allowed as a deduction ratably over the 180-month period 

beginning with the month in which the corporation begins 

business. 

ø(b) ORGANIZATIONAL EXPENDITURES DEFINED.—The term ‘‘organizational expenditures’’ means any expenditure which— 

ø(1) is incident to the creation of the corporation; 

ø(2) is chargeable to capital account; and 

ø(3) is of a character which, if expended incident to the creation of a corporation having a limited life, would be amortizable over such life. 

ø(c) TIME FOR AND SCOPE OF ELECTION.—The election provided by 

subsection (a) may be made for any taxable year but only if made 

not later than the time prescribed by law for filing the return for 

such taxable year (including extensions thereof). The period so 

elected shall be adhered to in computing the taxable income of the 

corporation for the taxable year for which the election is made and 

all subsequent taxable years.¿ 

* * * * * * * 

Subchapter C—Corporate Distributions and 

Adjustments 

* * * * * * * 

PART I—DISTRIBUTIONS BY CORPORATIONS 

* * * * * * * 

Subpart B—Effects on Corporation 

* * * * * * * 

59 

SEC. 312. EFFECT ON EARNINGS AND PROFITS. 

(a) GENERAL RULE.—Except as otherwise provided in this section, 

on the distribution of property by a corporation with respect to its 

stock, the earnings and profits of the corporation (to the extent 

thereof) shall be decreased by the sum of— 

(1) the amount of money, 

(2) the principal amount of the obligations of such corporation (or, in the case of obligations having original issue discount, the aggregate issue price of such obligations), and 

(3) the adjusted basis of the other property, so distributed. 

(b) DISTRIBUTIONS OF APPRECIATED PROPERTY.—On the distribution by a corporation, with respect to its stock, of any property 

(other than an obligation of such corporation) the fair market value 

of which exceeds the adjusted basis thereof— 

(1) the earnings and profits of the corporation shall be increased by the amount of such excess, and 

(2) subsection (a)(3) shall be applied by substituting ‘‘fair 

market value’’ for ‘‘adjusted basis’’. 

For purposes of this subsection and subsection (a), the adjusted 

basis of any property is its adjusted basis as determined for purposes of computing earnings and profits. 

(c) ADJUSTMENTS FOR LIABILITIES.—In making the adjustments to 

the earnings and profits of a corporation under subsection (a) or 

(b), proper adjustment shall be made for— 

(1) the amount of any liability to which the property distributed is subject, and 

(2) the amount of any liability of the corporation assumed by 

a shareholder in connection with the distribution. 

(d) CERTAIN DISTRIBUTIONS OF STOCK AND SECURITIES.— 

(1) IN GENERAL.—The distribution to a distributee by or on 

behalf of a corporation of its stock or securities, of stock or securities in another corporation, or of property, in a distribution 

to which this title applies, shall not be considered a distribution of the earnings and profits of any corporation— 

(A) if no gain to such distributee from the receipt of such 

stock or securities, or property, was recognized under this 

title, or 

(B) if the distribution was not subject to tax in the 

hands of such distributee by reason of section 305(a). 

(2) STOCK OR SECURITIES.—For purposes of this subsection, 

the term ‘‘stock or securities’’ includes rights to acquire stock 

or securities. 

(f) EFFECT ON EARNINGS AND PROFITS OF GAIN OR LOSS AND OF

RECEIPT OF TAX-FREE DISTRIBUTIONS.— 

(1) EFFECT ON EARNINGS AND PROFITS OF GAIN OR LOSS.—The 

gain or loss realized from the sale or other disposition (after 

February 28, 1913) of property by a corporation— 

(A) for the purpose of the computation of the earnings 

and profits of the corporation, shall (except as provided in 

subparagraph (B)) be determined by using as the adjusted 

basis the adjusted basis (under the law applicable to the 

year in which the sale or other disposition was made) for 

determining gain, except that no regard shall be had to the 

value of the property as of March 1, 1913; but 

60 

(B) for purposes of the computation of the earnings and 

profits of the corporation for any period beginning after 

February 28, 1913, shall be determined by using as the adjusted basis the adjusted basis (under the law applicable 

to the year in which the sale or other disposition was 

made) for determining gain. 

Gain or loss so realized shall increase or decrease the earnings 

and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing taxable income 

under the law applicable to the year in which such sale or disposition was made. Where, in determining the adjusted basis 

used in computing such realized gain or loss, the adjustment 

to the basis differs from the adjustment proper for the purpose 

of determining earnings and profits, then the latter adjustment 

shall be used in determining the increase or decrease above 

provided. For purposes of this subsection, a loss with respect 

to which a deduction is disallowed under section 1091 (relating 

to wash sales of stock or securities), or the corresponding provision of prior law, shall not be deemed to be recognized. 

(2) EFFECT ON EARNINGS AND PROFITS OF RECEIPT OF TAX- FREE DISTRIBUTIONS.—Where a corporation receives (after February 28, 1913) a distribution from a second corporation which 

(under the law applicable to the year in which the distribution 

was made) was not a taxable dividend to the shareholders of 

the second corporation, the amount of such distribution shall 

not increase the earnings and profits of the first corporation in 

the following cases: 

(A) no such increase shall be made in respect of the part 

of such distribution which (under such law) is directly applied in reduction of the basis of the stock in respect of 

which the distribution was made; and 

(B) no such increase shall be made if (under such law) 

the distribution causes the basis of the stock in respect of 

which the distribution was made to be allocated between 

such stock and the property received (or such basis would, 

but for section 307(b), be so allocated). 

(g) EARNINGS AND PROFITS - INCREASE IN VALUE ACCRUED BEFORE

MARCH 1, 1913.— 

(1) If any increase or decrease in the earnings and profits for 

any period beginning after February 28, 1913, with respect to 

any matter would be different had the adjusted basis of the 

property involved been determined without regard to its March 

1, 1913, value, then, except as provided in paragraph (2), an 

increase (properly reflecting such difference) shall be made in 

that part of the earnings and profits consisting of increase in 

value of property accrued before March 1, 1913. 

(2) If the application of subsection (f) to a sale or other disposition after February 28, 1913, results in a loss which is to 

be applied in decrease of earnings and profits for any period 

beginning after February 28, 1913, then, notwithstanding subsection (f) and in lieu of the rule provided in paragraph (1) of 

this subsection, the amount of such loss so to be applied shall 

be reduced by the amount, if any, by which the adjusted basis 

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61 

erty on March 1, 1913, and if such amount so applied in reduction of the decrease exceeds such loss, the excess over such loss 

shall increase that part of the earnings and profits consisting 

of increase in value of property accrued before March 1, 1913. 

(h) ALLOCATION IN CERTAIN CORPORATE SEPARATIONS AND REOR- GANIZATIONS.— (1) SECTION 355.—In the case of a distribution or exchange to 

which section 355 (or so much of section 356 as relates to section 355) applies, proper allocation with respect to the earnings 

and profits of the distributing corporation and the controlled 

corporation (or corporations) shall be made under regulations 

prescribed by the Secretary. 

(2) SECTION 368(A)(1)(C) OR (D).—In the case of a reorganization described in subparagraph (C) or (D) of section 368(a)(1), 

proper allocation with respect to the earnings and profits of the 

acquired corporation shall, under regulations prescribed by the 

Secretary, be made between the acquiring corporation and the 

acquired corporation (or any corporation which had control of 

the acquired corporation before the reorganization). 

(i) DISTRIBUTION OF PROCEEDS OF LOAN INSURED BY THE UNITED

STATES.—If a corporation distributes property with respect to its 

stock and if, at the time of distribution— 

(1) there is outstanding a loan to such corporation which was 

made, guaranteed, or insured by the United States (or by any 

agency or instrumentality thereof), and 

(2) the amount of such loan so outstanding exceeds the adjusted basis of the property constituting security for such loan, 

then the earnings and profits of the corporation shall be increased 

by the amount of such excess, and (immediately after the distribution) shall be decreased by the amount of such excess. For purposes 

of paragraph (2), the adjusted basis of the property at the time of 

distribution shall be determined without regard to any adjustment 

under section 1016(a)(2) (relating to adjustment for depreciation, 

etc.). For purposes of this subsection, a commitment to make, guarantee, or insure a loan shall be treated as the making, guaranteeing, or insuring of a loan. 

(k) EFFECT OF DEPRECIATION ON EARNINGS AND PROFITS.— (1) GENERAL RULE.—For purposes of computing the earnings 

and profits of a corporation for any taxable year beginning 

after June 30, 1972, the allowance for depreciation (and amortization, if any) shall be deemed to be the amount which would 

be allowable for such year if the straight line method of depreciation had been used for each taxable year beginning after 

June 30, 1972. 

(2) EXCEPTION.—If for any taxable year a method of depreciation was used by the taxpayer which the Secretary has determined results in a reasonable allowance under section 

167(a) and which is the unit-of-production method or other 

method not expressed in a term of years, then the adjustment 

to earnings and profits for depreciation for such year shall be 

determined under the method so used (in lieu of the straight 

line method). 

(3) EXCEPTION FOR TANGIBLE PROPERTY.— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), in the case of tangible property to which section 168 

62 

applies, the adjustment to earnings and profits for depreciation for any taxable year shall be determined under the 

alternative depreciation system (within the meaning of 

section 168(g)(2)). 

(B) TREATMENT OF AMOUNTS DEDUCTIBLE UNDER SECTION

179, 179B, 179C, 179D, OR 179E.—For purposes of computing 

the earnings and profits of a corporation, any amount deductible under section 179, 179B, 179C, 179D, or 179E 

shall be allowed as a deduction ratably over the period of 

5 taxable years (beginning with the taxable year for which 

such amount is deductible under section 179, 179B, 179C, 

179D, or 179E, as the case may be). 

(4) CERTAIN FOREIGN CORPORATIONS.—The provisions of 

paragraph (1) shall not apply in computing the earnings and 

profits of a foreign corporation for any taxable year for which 

less than 20 percent of the gross income from all sources of 

such corporation is derived from sources within the United 

States. 

(5) BASIS ADJUSTMENT NOT TAKEN INTO ACCOUNT.—In computing the earnings and profits of a corporation for any taxable 

year, the allowance for depreciation (and amortization, if any) 

shall be computed without regard to any basis adjustment 

under section 50(c). 

(l) DISCHARGE OF INDEBTEDNESS INCOME.— (1) DOES NOT INCREASE EARNINGS AND PROFITS IF APPLIED TO

REDUCE BASIS.—The earnings and profits of a corporation shall 

not include income from the discharge of indebtedness to the 

extent of the amount applied to reduce basis under section 

1017. 

(2) REDUCTION OF DEFICIT IN EARNINGS AND PROFITS IN CER- TAIN CASES.—If— 

(A) the interest of any shareholder of a corporation is 

terminated or extinguished in a title 11 or similar case 

(within the meaning of section 368(a)(3)(A)), and 

(B) there is a deficit in the earnings and profits of the 

corporation, 

then such deficit shall be reduced by an amount equal to the 

paid-in capital which is allocable to the interest of the shareholder which is so terminated or extinguished. 

(m) NO ADJUSTMENT FOR INTEREST PAID ON CERTAIN REGISTRATION-REQUIRED OBLIGATIONS NOT IN REGISTERED FORM.—The earnings and profits of any corporation shall not be decreased by any 

interest with respect to which a deduction is not or would not be 

allowable by reason of section 163(f), unless at the time of issuance 

the issuer is a foreign corporation that is not a controlled foreign 

corporation (within the meaning of section 957) and the issuance 

did not have as a purpose the avoidance of section 163(f) of this 

subsection 

(n) ADJUSTMENTS TO EARNINGS AND PROFITS TO MORE ACCU- RATELY REFLECT ECONOMIC GAIN AND LOSS.—For purposes of computing the earnings and profits of a corporation, the following adjustments shall be made: 

(1) CONSTRUCTION PERIOD CARRYING CHARGES.— 

(A) IN GENERAL.—In the case of any amount paid or incurred for construction period carrying charges— 

63 

(i) no deduction shall be allowed with respect to 

such amount, and 

(ii) the basis of the property with respect to which 

such charges are allocable shall be increased by such 

amount. 

(B) CONSTRUCTION PERIOD CARRYING CHARGES DE- FINED.—For purposes of this paragraph, the term ‘‘construction period carrying charges’’ means all— 

(i) interest paid or accrued on indebtedness incurred 

or continued to acquire, construct, or carry property, 

(ii) property taxes, and 

(iii) similar carrying charges, to the extent such interest, taxes, or charges are attributable to the construction period for such property and would be allowable as a deduction in determining taxable income 

under this chapter for the taxable year in which paid 

or incurred. 

(C) CONSTRUCTION PERIOD.—The term ‘‘construction period’’ has the meaning given the term production period 

under section 263A(f)(4)(B). 

(2) INTANGIBLE DRILLING COSTS AND MINERAL EXPLORATION

AND DEVELOPMENT COSTS.— (A) INTANGIBLE DRILLING COSTS.—Any amount allowable 

as a deduction under section 263(c) in determining taxable 

income (other than costs incurred in connection with a 

nonproductive well)— 

(i) shall be capitalized, and 

(ii) shall be allowed as a deduction ratably over the 

60-month period beginning with the month in which 

such amount was paid or incurred. 

(B) MINERAL EXPLORATION AND DEVELOPMENT COSTS.— Any amount allowable as a deduction under section 616(a) 

or 617 in determining taxable income— 

(i) shall be capitalized, and 

(ii) shall be allowed as a deduction ratably over the 

120-month period beginning with the later of— 

(I) the month in which production from the deposit begins, or 

(II) the month in which such amount was paid 

or incurred. 

(3) CERTAIN AMORTIZATION PROVISIONS NOT TO APPLY.—øSections 173 and 248¿ Sections 173 and 195 shall not apply. 

(4) LIFO INVENTORY ADJUSTMENTS.— 

(A) IN GENERAL.—Earnings and profits shall be increased or decreased by the amount of any increase or decrease in the LIFO recapture amount as of the close of 

each taxable year; except that any decrease below the 

LIFO recapture amount as of the close of the taxable year 

preceding the 1st taxable year to which this paragraph applies to the taxpayer shall be taken into account only to 

the extent provided in regulations prescribed by the Secretary. 

(B) LIFO RECAPTURE AMOUNT.—For purposes of this 

paragraph, the term ‘‘LIFO recapture amount’’ means the 

amount (if any) by which— 

64 

(i) the inventory amount of the inventory assets 

under the first-in, first-out method authorized by section 471, exceeds 

(ii) the inventory amount of such assets under the 

LIFO method. 

(C) DEFINITIONS.—For purposes of this paragraph— 

(i) LIFO METHOD.—The term ‘‘LIFO method’’ means 

the method authorized by section 472 (relating to lastin, first-out inventories). 

(ii) INVENTORY ASSETS.—The term ‘‘inventory assets’’ 

means stock in trade of the corporation, or other property of a kind which would properly be included in the 

inventory of the corporation if on hand at the close of 

the taxable year. 

(iii) INVENTORY AMOUNT.—The inventory amount of 

assets under the first-in, first-out method authorized 

by section 471 shall be determined— 

(I) if the corporation uses the retail method of 

valuing inventories under section 472, by using 

such method, or 

(II) if subclause (I) does not apply, by using cost 

or market, whichever is lower. 

(5) INSTALLMENT SALES.—In the case of any installment sale, 

earnings and profits shall be computed as if the corporation did 

not use the installment method. 

(6) COMPLETED CONTRACT METHOD OF ACCOUNTING.—In the 

case of a taxpayer who uses the completed contract method of 

accounting, earnings and profits shall be computed as if such 

taxpayer used the percentage of completion method of accounting. 

(7) REDEMPTIONS.—If a corporation distributes amounts in a 

redemption to which section 302(a) or 303 applies, the part of 

such distribution which is properly chargeable to earnings and 

profits shall be an amount which is not in excess of the ratable 

share of the earnings and profits of such corporation accumulated after February 28, 1913, attributable to the stock so redeemed. 

(8) SPECIAL RULE FOR CERTAIN FOREIGN CORPORATIONS.—In 

the case of a foreign corporation described in subsection 

(k)(4)— 

(A) paragraphs (4) and (6) shall apply only in the case 

of taxable years beginning after December 31, 1985, and 

(B) paragraph (5) shall apply only in the case of taxable 

years beginning after December 31, 1987. 

(o) DEFINITION OF ORIGINAL ISSUE DISCOUNT AND ISSUE PRICE FOR

PURPOSES OF SUBSECTION (A)(2).—For purposes of subsection (a)(2), 

the terms ‘‘original issue discount’’ and ‘‘issue price’’ have the same 

respective meanings as when used in subpart A of part V of subchapter P of this chapter. 

* * * * * * * 

PART V—CARRYOVERS 

* * * * * * * 

65 

SEC. 382. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS 

AND CERTAIN BUILT-IN LOSSES FOLLOWING OWNERSHIP 

CHANGE. 

(a) GENERAL RULE.—The amount of the taxable income of any 

new loss corporation for any post-change year which may be offset 

by pre-change losses shall not exceed the section 382 limitation for 

such year. 

(b) SECTION 382 LIMITATION.—For purposes of this section— 

(1) IN GENERAL.—Except as otherwise provided in this section, the section 382 limitation for any post-change year is an 

amount equal to— 

(A) the value of the old loss corporation, multiplied by 

(B) the long-term tax-exempt rate. 

(2) CARRYFORWARD OF UNUSED LIMITATION.—If the section 

382 limitation for any post-change year exceeds the taxable income of the new loss corporation for such year which was offset 

by pre-change losses, the section 382 limitation for the next 

post-change year shall be increased by the amount of such excess. 

(3) SPECIAL RULE FOR POST-CHANGE YEAR WHICH INCLUDES

CHANGE DATE.—In the case of any post-change year which includes the change date— 

(A) LIMITATION DOES NOT APPLY TO TAXABLE INCOME BE- FORE CHANGE.—Subsection (a) shall not apply to the portion of the taxable income for such year which is allocable 

to the period in such year on or before the change date. 

Except as provided in subsection (h)(5) and in regulations, 

taxable income shall be allocated ratably to each day in 

the year. 

(B) LIMITATION FOR PERIOD AFTER CHANGE.—For purposes of applying the limitation of subsection (a) to the remainder of the taxable income for such year, the section 

382 limitation shall be an amount which bears the same 

ratio to such limitation (determined without regard to this 

paragraph) as— 

(i) the number of days in such year after the change 

date, bears to 

(ii) the total number of days in such year. 

(c) CARRYFORWARDS DISALLOWED IF CONTINUITY OF BUSINESS RE- QUIREMENTS NOT MET.— (1) IN GENERAL.—Except as provided in paragraph (2), if the 

new loss corporation does not continue the business enterprise 

of the old loss corporation at all times during the 2-year period 

beginning on the change date, the section 382 limitation for 

any post-change year shall be zero. 

(2) EXCEPTION FOR CERTAIN GAINS.—The section 382 limitation for any post-change year shall not be less than the sum 

of— 

(A) any increase in such limitation under— 

(i) subsection (h)(1)(A) for recognized built-in gains 

for such year, and 

(ii) subsection (h)(1)(C) for gain recognized by reason 

of an election under section 338, plus (B) any increase 

in such limitation under subsection (b)(2) for amounts 

described in subparagraph (A) which are carried forward to such year. 

66 

(d) PRE-CHANGE LOSS AND POST-CHANGE YEAR.—For purposes of 

this section— 

(1) PRE-CHANGE LOSS.—The term ‘‘pre-change loss’’ means— 

(A) any net operating loss carryforward of the old loss 

corporation to the taxable year ending with the ownership 

change or in which the change date occurs, and 

(B) the net operating loss of the old loss corporation for 

the taxable year in which the ownership change occurs to 

the extent such loss is allocable to the period in such year 

on or before the change date. 

Except as provided in subsection (h)(5) and in regulations, the 

net operating loss shall, for purposes of subparagraph (B), be 

allocated ratably to each day in the year. 

(2) POST-CHANGE YEAR.—The term ‘‘post-change year’’ means 

any taxable year ending after the change date. 

(3) APPLICATION TO CARRYFORWARD OF DISALLOWED INTEREST.—The term ‘‘pre-change loss’’ shall include any carryover of 

disallowed interest described in section 163(j)(2) under rules 

similar to the rules of paragraph (1). 

(4) EXCEPTION FOR START-UP LOSSES.— 

(A) IN GENERAL.—In the case of any net operating loss 

carryforward described in paragraph (1)(A) which arose in 

a start-up period taxable year, the amount of such net operating loss carryforward otherwise taken into account under 

such paragraph shall be reduced by the net start-up loss 

determined with respect to the trade or business referred to 

in subparagraph (B)(i) for such start-up period taxable 

year. 

(B) START-UP PERIOD TAXABLE YEAR.—The term ‘‘start-up 

period taxable year’’ means any taxable year of the old loss 

corporation which— 

(i) begins before the close of the 3-year period beginning on the date on which any trade or business of 

such corporation begins as an active trade or business 

(as determined under section 195(d)(2) without regard 

to subparagraph (B) thereof), and 

(ii) ends after September 10, 2018. 

(C) NET START-UP LOSS.— (i) IN GENERAL.—The term ‘‘net start-up loss’’ means, 

with respect to any trade or business referred to in subparagraph (B)(i) for any start-up period taxable year, 

the amount which bears the same ratio (but not greater 

than 1) to the net operating loss carryforward which 

arose in such start-up period taxable year as— 

(I) the net operating loss (if any) which would 

have been determined for such start-up period taxable year if only items of income, gain, deduction, 

and loss properly allocable to such trade or business were taken into account, bears to 

(II) the amount of the net operating loss determined for such start-up period taxable year. 

(ii) SPECIAL RULE FOR LAST TAXABLE YEAR IN START- UP PERIOD.—In the case of any start-up period taxable 

year which ends after the close of the 3-year period described in subparagraph (B)(i) with respect to any 

67 

trade or business, the net start-up loss with respect to 

such trade or business for such start-up period taxable 

year shall be the same proportion of such loss (determined without regard to this clause) as the proportion 

of such start-up period taxable year which is on or before the last day of such period. 

(D) APPLICATION TO NET OPERATING LOSS ARISING IN

YEAR OF OWNERSHIP CHANGE.—Subparagraph (A) shall 

apply to any net operating loss described in paragraph 

(1)(B) in the same manner as such subparagraph applies to 

net operating loss carryforwards described in paragraph 

(1)(A), but by only taking into account the amount of such 

net operating loss (and the amount of the net start-up loss) 

which is allocable under paragraph (1)(B) to the period described in such paragraph. Proper adjustment in the allocation of the net start-up loss under the preceding sentence 

shall be made in the case of a taxable year to which subparagraph (C)(ii) applies. 

(E) APPLICATION TO TAXABLE YEARS WHICH ARE START-UP

PERIOD TAXABLE YEARS WITH RESPECT TO MORE THAN 1

TRADE OR BUSINESS.—In the case of any net operating loss 

carryforward which arose in a taxable year which is a 

start-up period taxable year with respect to more than 1 

trade or business— 

(i) this paragraph shall be applied separately with 

respect to each such trade or business, and 

(ii) the aggregate reductions under subparagraph (A) 

shall not exceed such net operating loss carryforward. 

(F) CONTINUITY OF BUSINESS REQUIREMENT.—If the new 

loss corporation does not continue the trade or business referred to in subparagraph (B)(i) at all times during the 2- 

year period beginning on the change date, this paragraph 

shall not apply with respect to such trade or business. 

(G) CERTAIN TITLE 11 OR SIMILAR CASES.— 

(i) MULTIPLE OWNERSHIP CHANGES.—In the case of a 

2nd ownership change to which subsection (l)(5)(D) applies, this paragraph shall not apply for purposes of 

determining the pre-change loss with respect to such 

2nd ownership change. 

(ii) CERTAIN INSOLVENCY TRANSACTIONS.—If subsection (l)(6) applies for purposes of determining the 

value of the old loss corporation under subsection (e), 

this paragraph shall not apply. 

(H) NOT APPLICABLE TO DISALLOWED INTEREST.—This 

paragraph shall not apply for purposes of applying the 

rules of paragraph (1) to the carryover of disallowed interest under paragraph (3). 

(I) TRANSITION RULE.—This paragraph shall not apply 

with respect to any trade or business if the date on which 

such trade or business begins as an active trade or business 

(as determined under section 195(d)(2) without regard to 

subparagraph (B) thereof) is on or before September 10, 

2018. 

(e) VALUE OF OLD LOSS CORPORATION.—For purposes of this section— 

68 

(1) IN GENERAL.—Except as otherwise provided in this subsection, the value of the old loss corporation is the value of the 

stock of such corporation (including any stock described in section 1504(a)(4)) immediately before the ownership change. 

(2) SPECIAL RULE IN THE CASE OF REDEMPTION OR OTHER

CORPORATE CONTRACTION.—If a redemption or other corporate 

contraction occurs in connection with an ownership change, the 

value under paragraph (1) shall be determined after taking 

such redemption or other corporate contraction into account. 

(3) TREATMENT OF FOREIGN CORPORATIONS.—Except as otherwise provided in regulations, in determining the value of any 

old loss corporation which is a foreign corporation, there shall 

be taken into account only items treated as connected with the 

conduct of a trade or business in the United States. 

(f) LONG-TERM TAX-EXEMPT RATE.—For purposes of this section— 

(1) IN GENERAL.—The long-term tax-exempt rate shall be the 

highest of the adjusted Federal long-term rates in effect for 

any month in the 3-calendar-month period ending with the calendar month in which the change date occurs. 

(2) ADJUSTED FEDERAL LONG-TERM RATE.—For purposes of 

paragraph (1), the term ‘‘adjusted Federal long-term rate’’ 

means the Federal long-term rate determined under section 

1274(d), except that— 

(A) paragraphs (2) and (3) thereof shall not apply, and 

(B) such rate shall be properly adjusted for differences 

between rates on long-term taxable and tax-exempt obligations. 

(g) OWNERSHIP CHANGE.—For purposes of this section— 

(1) IN GENERAL.—There is an ownership change if, immediately after any owner shift involving a 5-percent shareholder 

or any equity structure shift— 

(A) the percentage of the stock of the loss corporation 

owned by 1 or more 5-percent shareholders has increased 

by more than 50 percentage points, over 

(B) the lowest percentage of stock of the loss corporation 

(or any predecessor corporation) owned by such shareholders at any time during the testing period. 

(2) OWNER SHIFT INVOLVING 5-PERCENT SHAREHOLDER.— There is an owner shift involving a 5-percent shareholder if— 

(A) there is any change in the respective ownership of 

stock of a corporation, and 

(B) such change affects the percentage of stock of such 

corporation owned by any person who is a 5-percent shareholder before or after such change. 

(3) EQUITY STRUCTURE SHIFT DEFINED.— 

(A) IN GENERAL.—The term ‘‘equity structure shift’’ 

means any reorganization (within the meaning of section 

368). Such term shall not include— 

(i) any reorganization described in subparagraph (D) 

or (G) of section 368(a)(1) unless the requirements of 

section 354(b)(1) are met, and 

(ii) any reorganization described in subparagraph 

(F) of section 368(a)(1). 

(B) TAXABLE REORGANIZATION-TYPE TRANSACTIONS, 

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69 

uity structure shift’’ includes taxable reorganization-type 

transactions, public offerings, and similar transactions. 

(4) SPECIAL RULES FOR APPLICATION OF SUBSECTION.— 

(A) TREATMENT OF LESS THAN 5-PERCENT SHAREHOLDERS.—Except as provided in subparagraphs (B)(i) and 

(C), in determining whether an ownership change has occurred, all stock owned by shareholders of a corporation 

who are not 5-percent shareholders of such corporation 

shall be treated as stock owned by 1 5-percent shareholder 

of such corporation. 

(B) COORDINATION WITH EQUITY STRUCTURE SHIFTS.—For 

purposes of determining whether an equity structure shift 

(or subsequent transaction) is an ownership change— 

(i) LESS THAN 5-PERCENT SHAREHOLDERS.—Subparagraph (A) shall be applied separately with respect to 

each group of shareholders (immediately before such 

equity structure shift) of each corporation which was 

a party to the reorganization involved in such equity 

structure shift. 

(ii) ACQUISITIONS OF STOCK.—Unless a different proportion is established, acquisitions of stock after such 

equity structure shift shall be treated as being made 

proportionately from all shareholders immediately before such acquisition. 

(C) COORDINATION WITH OTHER OWNER SHIFTS.—Except 

as provided in regulations, rules similar to the rules of 

subparagraph (B) shall apply in determining whether 

there has been an owner shift involving a 5-percent shareholder and whether such shift (or subsequent transaction) 

results in an ownership change. 

(D) TREATMENT OF WORTHLESS STOCK.—If any stock held 

by a 50-percent shareholder is treated by such shareholder 

as becoming worthless during any taxable year of such 

shareholder and such stock is held by such shareholder as 

of the close of such taxable year, for purposes of determining whether an ownership change occurs after the 

close of such taxable year, such shareholder— 

(i) shall be treated as having acquired such stock on 

the 1st day of his 1st succeeding taxable year, and 

(ii) shall not be treated as having owned such stock 

during any prior period. 

For purposes of the preceding sentence, the term ‘‘50-percent shareholder’’ means any person owning 50 percent or 

more of the stock of the corporation at any time during the 

3-year period ending on the last day of the taxable year 

with respect to which the stock was so treated. 

(h) SPECIAL RULES FOR BUILT-IN GAINS AND LOSSES AND SECTION

338 GAINS.—For purposes of this section— 

(1) IN GENERAL.— 

(A) NET UNREALIZED BUILT-IN GAIN.— 

(i) IN GENERAL.—If the old loss corporation has a net 

unrealized built-in gain, the section 382 limitation for 

any recognition period taxable year shall be increased 

by the recognized built-in gains for such taxable year. 

70 

(ii) LIMITATION.—The increase under clause (i) for 

any recognition period taxable year shall not exceed— 

(I) the net unrealized built-in gain, reduced by 

(II) recognized built-in gains for prior years ending in the recognition period. 

(B) NET UNREALIZED BUILT-IN LOSS.— 

(i) IN GENERAL.—If the old loss corporation has a net 

unrealized built-in loss, the recognized built-in loss for 

any recognition period taxable year shall be subject to 

limitation under this section in the same manner as if 

such loss were a pre-change loss. 

(ii) LIMITATION.—Clause (i) shall apply to recognized 

built-in losses for any recognition period taxable year 

only to the extent such losses do not exceed— 

(I) the net unrealized built-in loss, reduced by 

(II) recognized built-in losses for prior taxable 

years ending in the recognition period. 

(C) SPECIAL RULES FOR CERTAIN SECTION 338 GAINS.—If 

an election under section 338 is made in connection with 

an ownership change and the net unrealized built-in gain 

is zero by reason of paragraph (3)(B), then, with respect to 

such change, the section 382 limitation for the post-change 

year in which gain is recognized by reason of such election 

shall be increased by the lesser of— 

(i) the recognized built-in gains by reason of such 

election, or 

(ii) the net unrealized built-in gain (determined 

without regard to paragraph (3)(B)). 

(2) RECOGNIZED BUILT-IN GAIN AND LOSS.— 

(A) RECOGNIZED BUILT-IN GAIN.—The term ‘‘recognized 

built-in gain’’ means any gain recognized during the recognition period on the disposition of any asset to the extent the new loss corporation establishes that— 

(i) such asset was held by the old loss corporation 

immediately before the change date, and 

(ii) such gain does not exceed the excess of— 

(I) the fair market value of such asset on the 

change date, over 

(II) the adjusted basis of such asset on such 

date. 

(B) RECOGNIZED BUILT-IN LOSS.—The term ‘‘recognized 

built-in loss’’ means any loss recognized during the recognition period on the disposition of any asset except to 

the extent the new loss corporation establishes that— 

(i) such asset was not held by the old loss corporation immediately before the change date, or 

(ii) such loss exceeds the excess of— 

(I) the adjusted basis of such asset on the 

change date, over 

(II) the fair market value of such asset on such 

date. 

Such term includes any amount allowable as depreciation, 

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71 

tion establishes that the amount so allowable is not attributable to the excess described in clause (ii). 

(3) NET UNREALIZED BUILT-IN GAIN AND LOSS DEFINED.— (A) NET UNREALIZED BUILT-IN GAIN AND LOSS.— (i) IN GENERAL.—The terms ‘‘net unrealized built-in 

gain’’ and ‘‘net unrealized built-in loss’’ mean, with respect to any old loss corporation, the amount by 

which— 

(I) the fair market value of the assets of such 

corporation immediately before an ownership 

change is more or less, respectively, than 

(II) the aggregate adjusted basis of such assets 

at such time. 

(ii) SPECIAL RULE FOR REDEMPTIONS OR OTHER CORPORATE CONTRACTIONS.—If a redemption or other corporate contraction occurs in connection with an ownership change, to the extent provided in regulations, determinations under clause (i) shall be made after taking such redemption or other corporate contraction 

into account. 

(B) THRESHOLD REQUIREMENT.— (i) IN GENERAL.—If the amount of the net unrealized 

built-in gain or net unrealized built-in loss (determined without regard to this subparagraph) of any old 

loss corporation is not greater than the lesser of— 

(I) 15 percent of the amount determined for purposes of subparagraph (A)(i)(I), or (II) $10,000,000, 

the net unrealized built-in gain or net unrealized 

built-in loss shall be zero. 

(ii) CASH AND CASH ITEMS NOT TAKEN INTO ACCOUNT.—In computing any net unrealized built-in gain 

or net unrealized built-in loss under clause (i), except 

as provided in regulations, there shall not be taken 

into account— 

(I) any cash or cash item, or 

(II) any marketable security which has a value 

which does not substantially differ from adjusted 

basis. 

(4) DISALLOWED LOSS ALLOWED AS A CARRYFORWARD.—If a 

deduction for any portion of a recognized built-in loss is disallowed for any post-change year, such portion— 

(A) shall be carried forward to subsequent taxable years 

under rules similar to the rules for the carrying forward 

of net operating losses (or to the extent the amount so disallowed is attributable to capital losses, under rules similar to the rules for the carrying forward of net capital 

losses), but 

(B) shall be subject to limitation under this section in 

the same manner as a pre-change loss. 

(5) SPECIAL RULES FOR POST-CHANGE YEAR WHICH INCLUDES

CHANGE DATE.—For purposes of subsection (b)(3)— 

(A) in applying subparagraph (A) thereof, taxable income 

shall be computed without regard to recognized built-in 

gains to the extent such gains increased the section 382 

72 

limitation for the year (or recognized built-in losses to the 

extent such losses are treated as pre-change losses), and 

gain described in paragraph (1)(C), for the year, and 

(B) in applying subparagraph (B) thereof, the section 382 

limitation shall be computed without regard to recognized 

built-in gains, and gain described in paragraph (1)(C), for 

the year. 

(6) TREATMENT OF CERTAIN BUILT-IN ITEMS.— (A) INCOME ITEMS.—Any item of income which is properly taken into account during the recognition period but 

which is attributable to periods before the change date 

shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account. 

(B) DEDUCTION ITEMS.—Any amount which is allowable 

as a deduction during the recognition period (determined 

without regard to any carryover) but which is attributable 

to periods before the change date shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction. 

(C) ADJUSTMENTS.—The amount of the net unrealized 

built-in gain or loss shall be properly adjusted for amounts 

which would be treated as recognized built-in gains or 

losses under this paragraph if such amounts were properly 

taken into account (or allowable as a deduction) during the 

recognition period. 

(7) Recognition period, etc. 

(A) RECOGNITION PERIOD.—The term ‘‘recognition period’’ 

means, with respect to any ownership change, the 5-year 

period beginning on the change date. 

(B) RECOGNITION PERIOD TAXABLE YEAR.—The term ‘‘recognition period taxable year’’ means any taxable year any 

portion of which is in the recognition period. 

(8) DETERMINATION OF FAIR MARKET VALUE IN CERTAIN

CASES.—If 80 percent or more in value of the stock of a corporation is acquired in 1 transaction (or in a series of related 

transactions during any 12-month period), for purposes of determining the net unrealized built-in loss, the fair market 

value of the assets of such corporation shall not exceed the 

grossed up amount paid for such stock properly adjusted for indebtedness of the corporation and other relevant items. 

(9) TAX-FREE EXCHANGES OR TRANSFERS.—The Secretary 

shall prescribe such regulations as may be necessary to carry 

out the purposes of this subsection where property held on the 

change date was acquired (or is subsequently transferred) in a 

transaction where gain or loss is not recognized (in whole or 

in part). 

(i) TESTING PERIOD.—For purposes of this section— 

(1) 3-YEAR PERIOD.—Except as otherwise provided in this section, the testing period is the 3-year period ending on the day 

of any owner shift involving a 5-percent shareholder or equity 

structure shift. 

(2) SHORTER PERIOD WHERE THERE HAS BEEN RECENT OWNER- SHIP CHANGE.—If there has been an ownership change under 

this section, the testing period for determining whether a 2nd 

ownership change has occurred shall not begin before the 1st 

73 

day following the change date for such earlier ownership 

change. 

(3) SHORTER PERIOD WHERE ALL LOSSES ARISE AFTER 3-YEAR

PERIOD BEGINS.—The testing period shall not begin before the 

earlier of the 1st day of the 1st taxable year from which there 

is a carryforward of a loss or of an excess credit to the 1st postchange year or the taxable year in which the transaction being 

tested occurs. Except as provided in regulations, this paragraph shall not apply to any loss corporation which has a net 

unrealized built-in loss (determined after application of subsection (h)(3)(B)). 

(j) CHANGE DATE.—For purposes of this section, the change date 

is— 

(1) in the case where the last component of an ownership 

change is an owner shift involving a 5-percent shareholder, the 

date on which such shift occurs, and 

(2) in the case where the last component of an ownership 

change is an equity structure shift, the date of the reorganization. 

(k) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— 

(1) LOSS CORPORATION.—The term ‘‘loss corporation’’ means 

a corporation entitled to use a net operating loss carryover or 

having a net operating loss for the taxable year in which the 

ownership change occurs. Such term shall include any corporation entitled to use a carryforward of disallowed interest described in section 381(c)(20). Except to the extent provided in 

regulations, such term includes any corporation with a net unrealized built-in loss. 

(2) OLD LOSS CORPORATION.—The term ‘‘old loss corporation’’ 

means any corporation— 

(A) with respect to which there is an ownership change, 

and 

(B) which (before the ownership change) was a loss corporation. 

(3) NEW LOSS CORPORATION.—The term ‘‘new loss corporation’’ means a corporation which (after an ownership change) 

is a loss corporation. Nothing in this section shall be treated 

as implying that the same corporation may not be both the old 

loss corporation and the new loss corporation. 

(4) TAXABLE INCOME.—Taxable income shall be computed 

with the modifications set forth in section 172(d). 

(5) VALUE.—The term ‘‘value’’ means fair market value. 

(6) RULES RELATING TO STOCK.— 

(A) PREFERRED STOCK.—Except as provided in regulations and subsection (e), the term ‘‘stock’’ means stock 

other than stock described in section 1504(a)(4). 

(B) TREATMENT OF CERTAIN RIGHTS, ETC..—The Secretary 

shall prescribe such regulations as may be necessary— 

(i) to treat warrants, options, contracts to acquire 

stock, convertible debt interests, and other similar interests as stock, and 

(ii) to treat stock as not stock. 

74 

(C) DETERMINATIONS ON BASIS OF VALUE.—Determinations of the percentage of stock of any corporation held by 

any person shall be made on the basis of value. 

(7) 5-PERCENT SHAREHOLDER.—The term ‘‘5-percent shareholder’’ means any person holding 5 percent or more of the 

stock of the corporation at any time during the testing period. 

(l) CERTAIN ADDITIONAL OPERATING RULES.—For purposes of this 

section— 

(1) CERTAIN CAPITAL CONTRIBUTIONS NOT TAKEN INTO AC- COUNT.— 

(A) IN GENERAL.—Any capital contribution received by 

an old loss corporation as part of a plan a principal purpose of which is to avoid or increase any limitation under 

this section shall not be taken into account for purposes of 

this section. 

(B) CERTAIN CONTRIBUTIONS TREATED AS PART OF

PLAN.—For purposes of subparagraph (A), any capital contribution made during the 2-year period ending on the 

change date shall, except as provided in regulations, be 

treated as part of a plan described in subparagraph (A). 

(2) ORDERING RULES FOR APPLICATION OF SECTION.— (A) COORDINATION WITH SECTION 172(B) CARRYOVER

RULES.—In the case of any pre-change loss for any taxable 

year (hereinafter in this subparagraph referred to as the 

‘‘loss year’’) subject to limitation under this section, for 

purposes of determining under the 2nd sentence of section 

172(b)(2) the amount of such loss which may be carried to 

any taxable year, taxable income for any taxable year shall 

be treated as not greater than— 

(i) the section 382 limitation for such taxable year, 

reduced by 

(ii) the unused pre-change losses for taxable years 

preceding the loss year. 

Similar rules shall apply in the case of any credit or loss 

subject to limitation under section 383. 

(B) ORDERING RULE FOR LOSSES CARRIED FROM SAME

TAXABLE YEAR.—In any case in which— 

(i) a pre-change loss of a loss corporation for any 

taxable year is subject to a section 382 limitation, and 

(ii) a net operating loss of such corporation from 

such taxable year is not subject to such limitation, 

taxable income shall be treated as having been offset first 

by the loss subject to such limitation. 

(3) OPERATING RULES RELATING TO OWNERSHIP OF STOCK.— 

(A) CONSTRUCTIVE OWNERSHIP.—Section 318 (relating to 

constructive ownership of stock) shall apply in determining 

ownership of stock, except that— 

(i) paragraphs (1) and (5)(B) of section 318(a) shall 

not apply and an individual and all members of his 

family described in paragraph (1) of section 318(a) 

shall be treated as 1 individual for purposes of applying this section, 

(ii) paragraph (2) of section 318(a) shall be applied— 

(I) without regard to the 50-percent limitation 

contained in subparagraph (C) thereof, and 

75 

(II) except as provided in regulations, by treating stock attributed thereunder as no longer being 

held by the entity from which attributed, 

(iii) paragraph (3) of section 318(a) shall be applied 

only to the extent provided in regulations, 

(iv) except to the extent provided in regulations, an 

option to acquire stock shall be treated as exercised if 

such exercise results in an ownership change, and 

(v) in attributing stock from an entity under paragraph (2) of section 318(a), there shall not be taken 

into account— 

(I) in the case of attribution from a corporation, 

stock which is not treated as stock for purposes of 

this section, or 

(II) in the case of attribution from another entity, an interest in such entity similar to stock described in subclause (I). 

A rule similar to the rule of clause (iv) shall apply in the 

case of any contingent purchase, warrant, convertible debt, 

put, stock subject to a risk of forfeiture, contract to acquire 

stock, or similar interests. 

(B) STOCK ACQUIRED BY REASON OF DEATH, GIFT, DI- VORCE, SEPARATION, ETC..—If— 

(i) the basis of any stock in the hands of any person 

is determined— 

(I) under section 1014 (relating to property acquired from a decedent), 

(II) section 1015 (relating to property acquired 

by a gift or transfer in trust), or 

(III) section 1041(b)(2) (relating to transfers of 

property between spouses or incident to divorce), 

(ii) stock is received by any person in satisfaction of 

a right to receive a pecuniary bequest, or 

(iii) stock is acquired by a person pursuant to any 

divorce or separation instrument (within the meaning 

of section 121(d)(3)(C)), 

such person shall be treated as owning such stock during 

the period such stock was owned by the person from whom 

it was acquired. 

(C) CERTAIN CHANGES IN PERCENTAGE OWNERSHIP WHICH

ARE ATTRIBUTABLE TO FLUCTUATIONS IN VALUE NOT TAKEN

INTO ACCOUNT.—Except as provided in regulations, any 

change in proportionate ownership which is attributable 

solely to fluctuations in the relative fair market values of 

different classes of stock shall not be taken into account. 

(4) REDUCTION IN VALUE WHERE SUBSTANTIAL NONBUSINESS

ASSETS.— 

(A) IN GENERAL.—If, immediately after an ownership 

change, the new loss corporation has substantial nonbusiness assets, the value of the old loss corporation shall be 

reduced by the excess (if any) of— 

(i) the fair market value of the nonbusiness assets 

of the old loss corporation, over 

(ii) the nonbusiness asset share of indebtedness for 

which such corporation is liable. 

76 

(B) CORPORATION HAVING SUBSTANTIAL NONBUSINESS AS- SETS.—For purposes of subparagraph (A)— 

(i) IN GENERAL.—The old loss corporation shall be 

treated as having substantial nonbusiness assets if at 

least 1/3 of the value of the total assets of such corporation consists of nonbusiness assets. 

(ii) EXCEPTION FOR CERTAIN INVESTMENT ENTITIES.— A regulated investment company to which part I of 

subchapter M applies, a real estate investment trust 

to which part II of subchapter M applies, or a REMIC 

to which part IV of subchapter M applies, shall not be 

treated as a new loss corporation having substantial 

nonbusiness assets. 

(C) NONBUSINESS ASSETS.—For purposes of this paragraph, the term ‘‘nonbusiness assets’’ means assets held 

for investment. 

(D) NONBUSINESS ASSET SHARE.—For purposes of this 

paragraph, the nonbusiness asset share of the indebtedness of the corporation is an amount which bears the same 

ratio to such indebtedness as— 

(i) the fair market value of the nonbusiness assets 

of the corporation, bears to 

(ii) the fair market value of all assets of such corporation. 

(E) TREATMENT OF SUBSIDIARIES.—For purposes of this 

paragraph, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall 

be deemed to own its ratable share of the subsidiary’s assets. For purposes of the preceding sentence, a corporation 

shall be treated as a subsidiary if the parent owns 50 percent or more of the combined voting power of all classes of 

stock entitled to vote, and 50 percent or more of the total 

value of shares of all classes of stock. 

(5) TITLE 11 OR SIMILAR CASE.— 

(A) IN GENERAL.—Subsection (a) shall not apply to any 

ownership change if— 

(i) the old loss corporation is (immediately before 

such ownership change) under the jurisdiction of the 

court in a title 11 or similar case, and 

(ii) the shareholders and creditors of the old loss corporation (determined immediately before such ownership change) own (after such ownership change and as 

a result of being shareholders or creditors immediately 

before such change) stock of the new loss corporation 

(or stock of a controlling corporation if also in bankruptcy) which meets the requirements of section 

1504(a)(2) (determined by substituting ‘‘50 percent’’ for 

‘‘80 percent’’ each place it appears). 

(B) REDUCTION FOR INTEREST PAYMENTS TO CREDITORS

BECOMING SHAREHOLDERS.—In any case to which subparagraph (A) applies, the pre-change losses and excess credits 

(within the meaning of section 383(a)(2)) which may be 

carried to a post-change year shall be computed as if no 

deduction was allowable under this chapter for the interest 

paid or accrued by the old loss corporation on indebtedness 

77 

which was converted into stock pursuant to title 11 or 

similar case during— 

(i) any taxable year ending during the 3-year period 

preceding the taxable year in which the ownership 

change occurs, and 

(ii) the period of the taxable year in which the ownership change occurs on or before the change date. 

(C) COORDINATION WITH SECTION 108.—In applying section 108(e)(8) to any case to which subparagraph (A) applies, there shall not be taken into account any indebtedness for interest described in subparagraph (B). 

(D) SECTION 382 LIMITATION ZERO IF ANOTHER CHANGE

WITHIN 2 YEARS.—If, during the 2-year period immediately 

following an ownership change to which this paragraph 

applies, an ownership change of the new loss corporation 

occurs, this paragraph shall not apply and the section 382 

limitation with respect to the 2nd ownership change for 

any post-change year ending after the change date of the 

2nd ownership change shall be zero. 

(E) ONLY CERTAIN STOCK TAKEN INTO ACCOUNT.—For 

purposes of subparagraph (A)(ii), stock transferred to a 

creditor shall be taken into account only to the extent such 

stock is transferred in satisfaction of indebtedness and 

only if such indebtedness— 

(i) was held by the creditor at least 18 months before the date of the filing of the title 11 or similar 

case, or 

(ii) arose in the ordinary course of the trade or business of the old loss corporation and is held by the person who at all times held the beneficial interest in 

such indebtedness. 

(F) TITLE 11 OR SIMILAR CASE.—For purposes of this 

paragraph, the term ‘‘title 11 or similar case’’ has the 

meaning given such term by section 368(a)(3)(A). 

(G) ELECTION NOT TO HAVE PARAGRAPH APPLY.—A new 

loss corporation may elect, subject to such terms and conditions as the Secretary may prescribe, not to have the 

provisions of this paragraph apply. 

(6) SPECIAL RULE FOR INSOLVENCY TRANSACTIONS.—If paragraph (5) does not apply to any reorganization described in 

subparagraph (G) of section 368(a)(1) or any exchange of debt 

for stock in a title 11 or similar case (as defined in section 

368(a)(3)(A)), the value under subsection (e) shall reflect the increase (if any) in value of the old loss corporation resulting 

from any surrender or cancellation of creditors’ claims in the 

transaction. 

(7) COORDINATION WITH ALTERNATIVE MINIMUM TAX.—The 

Secretary shall by regulation provide for the application of this 

section to the alternative tax net operating loss deduction 

under section 56(d). 

(8) PREDECESSOR AND SUCCESSOR ENTITIES.—Except as provided in regulations, any entity and any predecessor or successor entities of such entity shall be treated as 1 entity. 

(m) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes 

78 

of this section and section 383, including (but not limited to) regulations— 

(1) providing for the application of this section and section 

383 where an ownership change with respect to the old loss 

corporation is followed by an ownership change with respect to 

the new loss corporation, and 

(2) providing for the application of this section and section 

383 in the case of a short taxable year, 

(3) providing for such adjustments to the application of this 

section and section 383 as is necessary to prevent the avoidance of the purposes of this section and section 383, including 

the avoidance of such purposes through the use of related persons, pass-thru entities, or other intermediaries, 

(4) providing for the application of subsection (g)(4) where 

there is only 1 corporation involved, and 

(5) providing, in the case of any group of corporations described in section 1563(a) (determined by substituting ‘‘50 percent’’ for ‘‘80 percent’’ each place it appears and determined 

without regard to paragraph (4) thereof), appropriate adjustments to value, built-in gain or loss, and other items so that 

items are not omitted or taken into account more than once. 

(n) SPECIAL RULE FOR CERTAIN OWNERSHIP CHANGES.— 

(1) IN GENERAL.—The limitation contained in subsection (a) 

shall not apply in the case of an ownership change which is 

pursuant to a restructuring plan of a taxpayer which— 

(A) is required under a loan agreement or a commitment 

for a line of credit entered into with the Department of the 

Treasury under the Emergency Economic Stabilization Act 

of 2008, and 

(B) is intended to result in a rationalization of the costs, 

capitalization, and capacity with respect to the manufacturing workforce of, and suppliers to, the taxpayer and its 

subsidiaries. 

(2) SUBSEQUENT ACQUISITIONS.—Paragraph (1) shall not 

apply in the case of any subsequent ownership change unless 

such ownership change is described in such paragraph. 

(3) LIMITATION BASED ON CONTROL IN CORPORATION.— 

(A) IN GENERAL.—Paragraph (1) shall not apply in the 

case of any ownership change if, immediately after such 

ownership change, any person (other than a voluntary employees’ beneficiary association under section 501(c)(9)) 

owns stock of the new loss corporation possessing 50 percent or more of the total combined voting power of all 

classes of stock entitled to vote, or of the total value of the 

stock of such corporation. 

(B) TREATMENT OF RELATED PERSONS.— 

(i) IN GENERAL.—Related persons shall be treated as 

a single person for purposes of this paragraph. 

(ii) RELATED PERSONS.—For purposes of clause (i), a 

person shall be treated as related to another person 

if— 

(I) such person bears a relationship to such 

other person described in section 267(b) or 707(b), 

or 

79 

(II) such persons are members of a group of persons acting in concert. 

SEC. 383. SPECIAL LIMITATIONS ON CERTAIN EXCESS CREDITS, ETC. 

(a) EXCESS CREDITS.— (1) IN GENERAL.—Under regulations, if an ownership change 

occurs with respect to a corporation, the amount of any excess 

credit for any taxable year which may be used in any postchange year shall be limited to an amount determined on the 

basis of the tax liability which is attributable to so much of the 

taxable income as does not exceed the section 382 limitation 

for such post-change year to the extent available after the application of section 382 and subsections (b) and (c) of this section. 

(2) EXCESS CREDIT.—For purposes of paragraph (1), the term 

‘‘excess credit’’ means— 

(A) any unused general business credit of the corporation under section 39, and 

(B) any unused minimum tax credit of the corporation 

under section 53. 

(b) LIMITATION ON NET CAPITAL LOSS.—If an ownership change 

occurs with respect to a corporation, the amount of any net capital 

loss under section 1212 for any taxable year before the 1st postchange year which may be used in any post-change year shall be 

limited under regulations which shall be based on the principles 

applicable under section 382. Such regulations shall provide that 

any such net capital loss used in a post-change year shall reduce 

the section 382 limitation which is applied to pre-change losses 

under section 382 for such year. 

(c) FOREIGN TAX CREDITS.—If an ownership change occurs with 

respect to a corporation, the amount of any excess foreign taxes 

under section 904(c) for any taxable year before the 1st post-change 

taxable year shall be limited under regulations which shall be consistent with purposes of this section and section 382. 

(d) PRO RATION RULES FOR YEAR WHICH INCLUDES CHANGE.—For 

purposes of this section, rules similar to the rules of subsections 

(b)(3) and (d)(1)(B) of section 382 shall apply. 

(e) EXCEPTION FOR START-UP EXCESS CREDITS.— (1) IN GENERAL.—In the case of any unused general business 

credit of the corporation under section 39 which arose in a 

start-up period taxable year, the amount of such unused general 

business credit otherwise taken into account under subsection 

(a)(2)(A) shall be reduced by the start-up excess credit determined with respect to any trade or business referred to in section 382(d)(4)(B)(i) for such start-up period taxable year. 

(2) START-UP PERIOD TAXABLE YEAR.—For purposes of this 

subsection, the term ‘‘start-up period taxable year’’ has the 

meaning given such term in section 382(d)(4)(B). 

(3) START-UP EXCESS CREDIT.—For purposes of this subsection, the term ‘‘start-up excess credit’’ means, with respect to 

any trade or business referred to in section 382(d)(4)(B)(i) for 

any start-up period taxable year, the amount which bears the 

same ratio to the unused general business credit which arose in 

such start-up period taxable year as— 

(A) the amount of the general business credit which 

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80 

able year if only credits properly allocable to such trade or 

business were taken into account, bears to 

(B) the amount of the general business credit determined 

for such start-up period taxable year. 

(4) APPLICATION OF CERTAIN RULES.—Rules similar to the 

rules of subparagraphs (C)(ii), (D), (E), and (F) of section 

382(d)(4) shall apply for purposes of this subsection. 

(5) TRANSITION RULE.—This subsection shall not apply with 

respect to any trade or business if the date on which such trade 

or business begins as an active trade or business (as determined 

under section 195(d)(2) without regard to subparagraph (B) 

thereof) is on or before September 10, 2018. 

ø(e)¿ (f) DEFINITIONS.—Terms used in this section shall have the 

same respective meanings as when used in section 382, except that 

appropriate adjustments shall be made to take into account that 

the limitations of this section apply to credits and net capital 

losses. 

* * * * * * * 

Subchapter G—Corporations Used to Avoid 

Income Tax on Shareholders 

* * * * * * * 

PART I—CORPORATIONS IMPROPERLY ACCUMULATING 

SURPLUS 

* * * * * * * 

SEC. 535. ACCUMULATED TAXABLE INCOME. 

(a) DEFINITION.—For purposes of this subtitle, the term ‘‘accumulated taxable income’’ means the taxable income, adjusted in the 

manner provided in subsection (b), minus the sum of the dividends 

paid deduction (as defined in section 561) and the accumulated 

earnings credit (as defined in subsection (c)). 

(b) ADJUSTMENTS TO TAXABLE INCOME.—For purposes of subsection (a), taxable income shall be adjusted as follows: 

(1) TAXES.—There shall be allowed as a deduction Federal 

income and excess profits taxes and income, war profits, and 

excess profits taxes of foreign countries and possessions of the 

United States (to the extent not allowable as a deduction under 

section 275(a)(4)), accrued during the taxable year or deemed 

to be paid by a domestic corporation under section 960 for the 

taxable year, but not including the accumulated earnings tax 

imposed by section 531 or the personal holding company tax 

imposed by section 541. 

(2) CHARITABLE CONTRIBUTIONS.—The deduction for charitable contributions provided under section 170 shall be allowed 

without regard to section 170(b)(2). 

(3) SPECIAL DEDUCTIONS DISALLOWED.—The special deductions for corporations provided in part VIII ø(except section 

248)¿ of subchapter B (section 241 and following, relating to 

the deduction for dividends received by corporations, etc.) shall 

not be allowed. 

81 

(4) NET OPERATING LOSS.—The net operating loss deduction 

provided in section 172 shall not be allowed. 

(5) CAPITAL LOSSES.— (A) IN GENERAL.—Except as provided in subparagraph 

(B), there shall be allowed as a deduction an amount equal 

to the net capital loss for the taxable year (determined 

without regard to paragraph (7)(A)). 

(B) RECAPTURE OF PREVIOUS DEDUCTIONS FOR CAPITAL

GAINS.—The aggregate amount allowable as a deduction 

under subparagraph (A) for any taxable year shall be reduced by the lesser of— 

(i) the nonrecaptured capital gains deductions, or 

(ii) the amount of the accumulated earnings and 

profits of the corporation as of the close of the preceding taxable year. 

(C) NONRECAPTURED CAPITAL GAINS DEDUCTIONS.—For 

purposes of subparagraph (B), the term ‘‘nonrecaptured 

capital gains deductions’’ means the excess of— 

(i) the aggregate amount allowable as a deduction 

under paragraph (6) for preceding taxable years beginning after July 18, 1984, over 

(ii) the aggregate of the reductions under subparagraph (B) for preceding taxable years. 

(6) NET CAPITAL GAINS.— (A) IN GENERAL.—There shall be allowed as a deduction— 

(i) the net capital gain for the taxable year (determined with the application of paragraph (7)), reduced 

by 

(ii) the taxes attributable to such net capital gain. 

(B) ATTRIBUTABLE TAXES.—For purposes of subparagraph (A), the taxes attributable to the net capital gain 

shall be an amount equal to the difference between— 

(i) the taxes imposed by this subtitle (except the tax 

imposed by this part) for the taxable year, and 

(ii) such taxes computed for such year without including in taxable income the net capital gain for the 

taxable year (determined without the application of 

paragraph (7)). 

(7) CAPITAL LOSS CARRYOVERS.— 

(A) UNLIMITED CARRYFORWARD.—The net capital loss for 

any taxable year shall be treated as a short-term capital 

loss in the next taxable year. 

(B) SECTION 1212 INAPPLICABLE.—No allowance shall be 

made for the capital loss carryback or carryforward provided in section 1212. 

(8) SPECIAL RULES FOR MERE HOLDING OR INVESTMENT COM- PANIES.—In the case of a mere holding or investment company— 

(A) CAPITAL LOSS DEDUCTION, ETC., NOT ALLOWED.— Paragraphs (5) and (7)(A) shall not apply. 

(B) DEDUCTION FOR CERTAIN OFFSETS.—There shall be 

allowed as a deduction the net short-term capital gain for 

the taxable year to the extent such gain does not exceed 

the amount of any capital loss carryover to such taxable 

82 

year under section 1212 (determined without regard to 

paragraph (7)(B)). 

(C) EARNINGS AND PROFITS.—For purposes of subchapter 

C, the accumulated earnings and profits at any time shall 

not be less than they would be if this subsection had applied to the computation of earnings and profits for all taxable years beginning after July 18, 1984. 

(9) SPECIAL RULE FOR CAPITAL GAINS AND LOSSES OF FOREIGN

CORPORATIONS.—In the case of a foreign corporation, paragraph (6) shall be applied by taking into account only gains 

and losses which are effectively connected with the conduct of 

a trade or business within the United States and are not exempt from tax under treaty. 

(10) CONTROLLED FOREIGN CORPORATIONS.—There shall be 

allowed as a deduction the amount of the corporation’s income 

for the taxable year which is included in the gross income of 

a United States shareholder under section 951(a). In the case 

of any corporation the accumulated taxable income of which 

would (but for this sentence) be determined without allowance 

of any deductions, the deduction under this paragraph shall be 

allowed and shall be appropriately adjusted to take into account any deductions which reduced such inclusion. 

(c) ACCUMULATED EARNINGS CREDIT.— (1) GENERAL RULE.—For purposes of subsection (a), in the 

case of a corporation other than a mere holding or investment 

company the accumulated earnings credit is (A) an amount 

equal to such part of the earnings and profits for the taxable 

year as are retained for the reasonable needs of the business, 

minus (B) the deduction allowed by subsection (b)(6). For purposes of this paragraph, the amount of the earnings and profits 

for the taxable year which are retained is the amount by which 

the earnings and profits for the taxable year exceed the dividends paid deduction (as defined in section 561) for such year. 

(2) MINIMUM CREDIT.— 

(A) IN GENERAL.—The credit allowable under paragraph 

(1) shall in no case be less than the amount by which 

$250,000 exceeds the accumulated earnings and profits of 

the corporation at the close of the preceding taxable year. 

(B) CERTAIN SERVICE CORPORATIONS.—In the case of a 

corporation the principal function of which is the performance of services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, 

or consulting, subparagraph (A) shall be applied by substituting ‘‘$150,000’’ for ‘‘$250,000’’. 

(3) HOLDING AND INVESTMENT COMPANIES.—In the case of a 

corporation which is a mere holding or investment company, 

the accumulated earnings credit is the amount (if any) by 

which $250,000 exceeds the accumulated earnings and profits 

of the corporation at the close of the preceding taxable year. 

(4) ACCUMULATED EARNINGS AND PROFITS.—For purposes of 

paragraphs (2) and (3), the accumulated earnings and profits 

at the close of the preceding taxable year shall be reduced by 

the dividends which under section 563(a) (relating to dividends 

paid after the close of the taxable year) are considered as paid 

during such taxable year. 

83 

(5) CROSS REFERENCE.—For limitation on credit provided in 

paragraph (2) or (3) in the case of certain controlled corporations, see section 1561. 

(d) INCOME DISTRIBUTED TO UNITED STATES-OWNED FOREIGN COR- PORATION RETAINS UNITED STATES CONNECTION.— (1) IN GENERAL.—For purposes of this part, if 10 percent or 

more of the earnings and profits of any foreign corporation for 

any taxable year— 

(A) is derived from sources within the United States, or 

(B) is effectively connected with the conduct of a trade 

or business within the United States, 

any distribution out of such earnings and profits (and any interest payment) received (directly or through 1 or more other 

entities) by a United States-owned foreign corporation shall be 

treated as derived by such corporation from sources within the 

United States. 

(2) UNITED STATES-OWNED FOREIGN CORPORATION.—The term 

‘‘United States-owned foreign corporation’’ has the meaning 

given to such term by section 904(h)(6). 

* * * * * * * 

PART II—PERSONAL HOLDING COMPANIES 

* * * * * * * 

SEC. 545. UNDISTRIBUTED PERSONAL HOLDING COMPANY INCOME. 

(a) DEFINITION.—For purposes of this part, the term ‘‘undistributed personal holding company income’’ means the taxable income 

of a personal holding company adjusted in the manner provided in 

subsections (b), (c), and (d), minus the dividends paid deduction as 

defined in section 561. In the case of a personal holding company 

which is a foreign corporation, not more than 10 percent in value 

of the outstanding stock of which is owned (within the meaning of 

section 958(a)) during the last half of the taxable year by United 

States persons, the term ‘‘undistributed personal holding company 

income’’ means the amount determined by multiplying the undistributed personal holding company income (determined without regard to this sentence) by the percentage in value of its outstanding 

stock which is the greatest percentage in value of its outstanding 

stock so owned by United States persons on any one day during 

such period. 

(b) ADJUSTMENTS TO TAXABLE INCOME.—For the purposes of subsection (a), the taxable income shall be adjusted as follows: 

(1) TAXES.—There shall be allowed as a deduction Federal 

income and excess profits taxes and income, war profits and 

excess profits taxes of foreign countries and possessions of the 

United States (to the extent not allowable as a deduction under 

section 275(a)(4)), accrued during the taxable year or deemed 

to be paid by a domestic corporation under section 960 for the 

taxable year, but not including the accumulated earnings tax 

imposed by section 531 or the personal holding company tax 

imposed by section 541. 

(2) CHARITABLE CONTRIBUTIONS.—The deduction for charitable contributions provided under section 170 shall be allowed, but in computing such deduction the limitations in section 170(b)(1)(A), (B), (D), and (E) shall apply, and section 

84 

170(b)(2) and (d)(1) shall not apply. For purposes of this paragraph, the term ‘‘contribution base’’ when used in section 

170(b)(1) means the taxable income computed with the adjustments (other than the 10-percent limitation) provided in section 170(b)(2) and (d)(1) and without deduction of the amount 

disallowed under paragraph (6) of this subsection. 

(3) SPECIAL DEDUCTIONS DISALLOWED.—The special deductions for corporations provided in part VIII ø(except section 

248)¿ of subchapter B (section 241 and following, relating to 

the deduction for dividends received by corporations, etc.) shall 

not be allowed. 

(4) NET OPERATING LOSS.—The net operating loss deduction 

provided in section 172 shall not be allowed, but there shall be 

allowed as a deduction the amount of the net operating loss (as 

defined in section 172(c)) for the preceding taxable year computed without the deductions provided in part VIII ø(except 

section 248)¿ of subchapter B. 

(5) NET CAPITAL GAINS.—There shall be allowed as a deduction the net capital gain for the taxable year, minus the taxes 

imposed by this subtitle attributable to such net capital gain. 

The taxes attributable to such net capital gain shall be an 

amount equal to the difference between— 

(A) the taxes imposed by this subtitle (except the tax imposed by this part) for such year, and 

(B) such taxes computed for such year without including 

such excess in taxable income. 

(6) EXPENSES AND DEPRECIATION APPLICABLE TO PROPERTY OF

THE TAXPAYER.—The aggregate of the deductions allowed under 

section 162 (relating to trade or business expenses) and section 

167 (relating to depreciation), which are allocable to the operation and maintenance of property owned or operated by the 

corporation, shall be allowed only in an amount equal to the 

rent or other compensation received for the use of, or the right 

to use, the property, unless it is established (under regulations 

prescribed by the Secretary) to the satisfaction of the Secretary— 

(A) that the rent or other compensation received was the 

highest obtainable, or, if none was received, that none was 

obtainable; 

(B) that the property was held in the course of a business carried on bona fide for profit; and 

(C) either that there was reasonable expectation that the 

operation of the property would result in a profit, or that 

the property was necessary to the conduct of the business. 

(7) SPECIAL RULE FOR CAPITAL GAINS AND LOSSES OF FOREIGN

CORPORATIONS.—In the case of a foreign corporation, paragraph (5) shall be applied by taking into account only gains 

and losses which are effectively connected with the conduct of 

a trade or business within the United States and are not exempt from tax under treaty. 

(c) CERTAIN FOREIGN CORPORATIONS.—In the case of a foreign corporation all of the outstanding stock of which during the last half 

of the taxable year is owned by nonresident alien individuals 

(whether directly or indirectly through foreign estates, foreign 

trusts, foreign partnerships, or other foreign corporations), the taxVerDate Sep 11 2014 04:56 Sep 25, 2018 Jkt 079006 PO 00000 Frm 00084 Fmt 6659 Sfmt 6601 E:\HR\OC\HR957.XXX HR957
85 

able income for purposes of subsection (a) shall be the income 

which constitutes personal holding company income under section 

543(a)(7), reduced by the deductions attributable to such income, 

and adjusted, with respect to such income, in the manner provided 

in subsection (b). 

* * * * * * * 

Subchapter K—Partners and Partnerships 

* * * * * * * 

PART I—DETERMINATION OF TAX LIABILITY 

* * * * * * * 

øSec. 709. Treatment of organization and syndication fees.¿ 

Sec. 709. Treatment of syndication fees. 

* * * * * * * 

øSEC. 709. TREATMENT OF ORGANIZATION AND SYNDICATION FEES. 

ø(a) GENERAL RULE.—Except as provided in subsection (b), no deduction shall be allowed under this chapter to the partnership or 

to any partner for any amounts paid or incurred to organize a partnership or to promote the sale of (or to sell) an interest in such 

partnership. 

ø(b) DEDUCTION OF ORGANIZATION FEES.— ø(1) ALLOWANCE OF DEDUCTION.—If a partnership elects the 

application of this subsection (in accordance with regulations 

prescribed by the Secretary) with respect to any organizational 

expenses— 

ø(A) the partnership shall be allowed a deduction for the 

taxable year in which the partnership begins business in 

an amount equal to the lesser of— 

ø(i) the amount of organizational expenses with respect to the partnership, or 

ø(ii) $5,000, reduced (but not below zero) by the 

amount by which such organizational expenses exceed 

$50,000, and 

ø(B) the remainder of such organizational expenses shall 

be allowed as a deduction ratably over the 180-month period beginning with the month in which the partnership 

begins business. 

ø(2) DISPOSITIONS BEFORE CLOSE OF AMORTIZATION PERIOD.— 

In any case in which a partnership is liquidated before the end 

of the period to which paragraph (1)(B) applies, any deferred 

expenses attributable to the partnership which were not allowed as a deduction by reason of this section may be deducted 

to the extent allowable under section 165. 

ø(3) ORGANIZATIONAL EXPENSES DEFINED.—The organizational expenses to which paragraph (1) applies, are expenditures which— 

ø(A) are incident to the creation of the partnership; 

ø(B) are chargeable to capital account; and 

ø(C) are of a character which, if expended incident to the 

creation of a partnership having an ascertainable life, 

would be amortized over such life.¿ 

86 

SEC. 709. TREATMENT OF SYNDICATION FEES. 

No deduction shall be allowed under this chapter to a partnership 

or to any partner of the partnership for any amounts paid or incurred to promote the sale of (or to sell) an interest in the partnership. 

* * * * * * * 

Subchapter L—Insurance Companies 

* * * * * * * 

PART II—OTHER INSURANCE COMPANIES 

* * * * * * * 

SEC. 834. DETERMINATION OF TAXABLE INVESTMENT INCOME. 

(a) GENERAL RULE.—For purposes of section 831(b), the term 

‘‘taxable investment income’’ means the gross investment income, 

minus the deductions provided in subsection (c). 

(b) GROSS INVESTMENT INCOME.—For purposes of subsection (a), 

the term ‘‘gross investment income’’ means the sum of the following: 

(1) The gross amount of income during the taxable year 

from— 

(A) interest, dividends, rents, and royalties, 

(B) the entering into of any lease, mortgage, or other instrument or agreement from which the insurance company 

derives interest, rents, or royalties, 

(C) the alteration or termination of any instrument or 

agreement described in subparagraph (B), and 

(D) gains from sales or exchanges of capital assets to the 

extent provided in subchapter P (relating to capital gains 

and losses). 

(2) The gross income during the taxable year from any trade 

or business (other than an insurance business) carried on by 

the insurance company, or by a partnership of which the insurance company is a partner. In computing gross income under 

this paragraph, there shall be excluded any item described in 

paragraph (1). 

(c) DEDUCTIONS.—In computing taxable investment income, the 

following deductions shall be allowed: 

(1) TAX-FREE INTEREST.—The amount of interest which under 

section 103 is excluded for the taxable year from gross income. 

(2) INVESTMENT EXPENSES.—Investment expenses paid or accrued during the taxable year. If any general expenses are in 

part assigned to or included in the investment expenses, the 

total deduction under this paragraph shall not exceed onefourth of 1 percent of the mean of the book value of the invested assets held at the beginning and end of the taxable year 

plus one-fourth of the amount by which taxable investment income (computed without any deduction for investment expenses allowed by this paragraph, for tax-free interest allowed 

by paragraph (1), or for dividends received allowed by paragraph (7)), exceeds 3 3/4 percent of the book value of the mean 

of the invested assets held at the beginning and end of the taxable year. 

87 

(3) REAL ESTATE EXPENSES.—Taxes (as provided in section 

164), and other expenses, paid or accrued during the taxable 

year exclusively on or with respect to the real estate owned by 

the company. No deduction shall be allowed under this paragraph for any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value 

of any property. 

(4) DEPRECIATION.—The depreciation deduction allowed by 

section 167. 

(5) INTEREST PAID OR ACCRUED.—All interest paid or accrued 

within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations the 

interest on which is wholly exempt from taxation under this 

subtitle. 

(6) CAPITAL LOSSES.—Capital losses to the extent provided in 

subchapter P (sec. 1201 and following) plus losses from capital 

assets sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders. Capital assets 

shall be considered as sold or exchanged in order to obtain 

funds to meet abnormal insurance losses and to provide for the 

payment of dividends and similar distributions to policyholders 

to the extent that the gross receipts from their sale or exchange are not greater than the excess, if any, for the taxable 

year of the sum of dividends and similar distributions paid to 

policyholders, losses paid, and expenses paid over the sum of 

the items described in subsection (b) (other than paragraph 

(1)(D) thereof) and net premiums received. In the application 

of section 1212 for purposes of this section, the net capital loss 

for the taxable year shall be the amount by which losses for 

such year from sales or exchanges of capital assets exceeds the 

sum of the gains from such sales or exchanges and whichever 

of the following amounts is the lesser: 

(A) the taxable investment income (computed without regard to gains or losses from sales or exchanges of capital 

assets); or 

(B) losses from the sale or exchange of capital assets sold 

or exchanged to obtain funds to meet abnormal insurance 

losses and to provide for the payment of dividends and 

similar distributions to policyholders. 

(7) SPECIAL DEDUCTIONS.—The special deductions allowed by 

part VIII ø(except section 248)¿ of subchapter B (sec. 241 and 

following, relating to dividends received). In applying section 

246(b) (relating to limitation on aggregate amount of deductions for dividends received) for purposes of this paragraph, the 

reference in such section to ‘‘taxable income’’ shall be treated 

as a reference to ‘‘taxable investment income’’. 

(8) TRADE OR BUSINESS DEDUCTIONS.—The deductions allowed by this subtitle (without regard to this part) which are 

attributable to any trade or business (other than an insurance 

business) carried on by the insurance company, or by a partnership of which the insurance company is a partner; except 

that for purposes of this paragraph— 

88 

(A) any item, to the extent attributable to the carrying 

on of the insurance business, shall not be taken into account, and 

(B) the deduction for net operating losses provided in 

section 172 shall not be allowed. 

(9) DEPLETION.—The deduction allowed by section 611 (relating to depletion). 

(d) OTHER APPLICABLE RULES.— 

(1) RENTAL VALUE OF REAL ESTATE.—The deduction under 

subsection (c)(3) or (4) on account of any real estate owned and 

occupied in whole or in part by a mutual insurance company 

subject to the tax imposed by section 831 shall be limited to 

an amount which bears the same ratio to such deduction (computed without regard to this paragraph) as the rental value of 

the space not so occupied bears to the rental value of the entire 

property. 

(2) AMORTIZATION OF PREMIUM AND ACCRUAL OF DISCOUNT.— 

The gross amount of income during the taxable year from interest and the deduction provided in subsection (c)(1) shall 

each be decreased to reflect the appropriate amortization of 

premium and increased to reflect the appropriate accrual of 

discount attributable to the taxable year on bonds, notes, debentures, or other evidences of indebtedness held by a mutual 

insurance company subject to the tax imposed by section 831. 

Such amortization and accrual shall be determined— 

(A) in accordance with the method regularly employed 

by such company, if such method is reasonable, and 

(B) in all other cases, in accordance with regulations prescribed by the Secretary. 

No accrual of discount shall be required under this paragraph 

on any bond (as defined in section 171(d)) except in the case 

of discount which is original issue discount (as defined in section 1273). 

(3) DOUBLE DEDUCTIONS.—Nothing in this part shall permit 

the same item to be deducted more than once. 

(e) DEFINITIONS.—For purposes of this part— 

(1) NET PREMIUMS.—The term ‘‘net premiums’’ means gross 

premiums (including deposits and assessments) written or received on insurance contracts during the taxable year less return premiums and premiums paid or incurred for reinsurance. 

Amounts returned where the amount is not fixed in the insurance contract but depends on the experience of the company or 

the discretion of the management shall not be included in return premiums but shall be treated as dividends to policyholders under paragraph (2). 

(2) DIVIDENDS TO POLICYHOLDERS.—The term ‘‘dividends to 

policyholders’’ means dividends and similar distributions paid 

or declared to policyholders. For purposes of the preceding sentence, the term ‘‘paid or declared’’ shall be construed according 

to the method regularly employed in keeping the books of the 

insurance company. 

* * * * * * * 

89 

Subchapter M—Regulated Investment Companies 

and Real Estate Investment Trusts 

* * * * * * * 

PART I—REGULATED INVESTMENT COMPANIES 

* * * * * * * 

SEC. 852. TAXATION OF REGULATED INVESTMENT COMPANIES AND 

THEIR SHAREHOLDERS. 

(a) REQUIREMENTS APPLICABLE TO REGULATED INVESTMENT COM- PANIES.—The provisions of this part (other than subsection (c) of 

this section) shall not be applicable to a regulated investment company for a taxable year unless— 

(1) the deduction for dividends paid during the taxable year 

(as defined in section 561, but without regard to capital gain 

dividends) equals or exceeds the sum of— 

(A) 90 percent of its investment company taxable income 

for the taxable year determined without regard to subsection (b)(2)(D); and 

(B) 90 percent of the excess of (i) its interest income excludable from gross income under section 103(a) over (ii) 

its deductions disallowed under sections 265 and 171(a)(2), 

and 

(2) either— 

(A) the provisions of this part applied to the investment 

company for all taxable years ending on or after November 

8, 1983, or 

(B) as of the close of the taxable year, the investment 

company has no earnings and profits accumulated in any 

taxable year to which the provisions of this part (or the 

corresponding provisions of prior law) did not apply to it. 

The Secretary may waive the requirements of paragraph (1) for any 

taxable year if the regulated investment company establishes to 

the satisfaction of the Secretary that it was unable to meet such 

requirements by reason of distributions previously made to meet 

the requirements of section 4982. 

(b) METHOD OF TAXATION OF COMPANIES AND SHAREHOLDERS.— 

(1) IMPOSITION OF TAX ON REGULATED INVESTMENT COMPA- NIES.—There is hereby imposed for each taxable year upon the 

investment company taxable income of every regulated investment company a tax computed as provided in section 11, as 

though the investment company taxable income were the taxable income referred to in section 11. 

(2) INVESTMENT COMPANY TAXABLE INCOME.—The investment 

company taxable income shall be the taxable income of the regulated investment company adjusted as follows: 

(A) There shall be excluded the amount of the net capital gain, if any. 

(B) The net operating loss deduction provided in section 

172 shall not be allowed. 

(C) The deductions for corporations provided in part VIII 

ø(except section 248)¿ in subchapter B (section 241 and 

following, relating to the deduction for dividends received, 

etc.) shall not be allowed. 

90 

(D) The deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without 

regard to capital gain dividends and exempt-interest dividends. 

(E) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on 

change of annual accounting period). 

(F) The taxable income shall be computed without regard to section 454(b) (relating to short-term obligations 

issued on a discount basis) if the company so elects in a 

manner prescribed by the Secretary. 

(G) There shall be deducted an amount equal to the tax 

imposed by subsections (d)(2) and (i) of section 851 for the 

taxable year. 

(3) CAPITAL GAINS.— 

(A) IMPOSITION OF TAX.—There is hereby imposed for 

each taxable year in the case of every regulated investment company a tax, determined as provided in section 

11(b), on the excess, if any, of the net capital gain over the 

deduction for dividends paid (as defined in section 561) determined with reference to capital gain dividends only. 

(B) TREATMENT OF CAPITAL GAIN DIVIDENDS BY SHARE- HOLDERS.—A capital gain dividend shall be treated by the 

shareholders as a gain from the sale or exchange of a capital asset held for more than 1 year. 

(C) DEFINITION OF CAPITAL GAIN DIVIDEND.—For purposes of this part— 

(i) IN GENERAL.—Except as provided in clause (ii), a 

capital gain dividend is any dividend, or part thereof, 

which is reported by the company as a capital gain 

dividend in written statements furnished to its shareholders. 

(ii) EXCESS REPORTED AMOUNTS.—If the aggregate 

reported amount with respect to the company for any 

taxable year exceeds the net capital gain of the company for such taxable year, a capital gain dividend is 

the excess of— 

(I) the reported capital gain dividend amount, 

over 

(II) the excess reported amount which is allocable to such reported capital gain dividend 

amount. 

(iii) ALLOCATION OF EXCESS REPORTED AMOUNT.— 

(I) IN GENERAL.—Except as provided in subclause (II), the excess reported amount (if any) 

which is allocable to the reported capital gain dividend amount is that portion of the excess reported 

amount which bears the same ratio to the excess 

reported amount as the reported capital gain dividend amount bears to the aggregate reported 

amount. 

(II) SPECIAL RULE FOR NONCALENDAR YEAR TAX- PAYERS.—In the case of any taxable year which 

does not begin and end in the same calendar year, 

if the post-December reported amount equals or 

91 

exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting ‘‘post-December reported amount’’ for 

‘‘aggregate reported amount’’ and no excess reported amount shall be allocated to any dividend 

paid on or before December 31 of such taxable 

year. 

(iv) DEFINITIONS.—For purposes of this subparagraph— 

(I) REPORTED CAPITAL GAIN DIVIDEND AMOUNT.— The term ‘‘reported capital gain dividend amount’’ 

means the amount reported to its shareholders 

under clause (i) as a capital gain dividend. 

(II) EXCESS REPORTED AMOUNT.—The term ‘‘excess reported amount’’ means the excess of the aggregate reported amount over the net capital gain 

of the company for the taxable year. 

(III) AGGREGATE REPORTED AMOUNT.—The term 

‘‘aggregate reported amount’’ means the aggregate 

amount of dividends reported by the company 

under clause (i) as capital gain dividends for the 

taxable year (including capital gain dividends paid 

after the close of the taxable year described in section 855). 

(IV) POST-DECEMBER REPORTED AMOUNT.—The 

term ‘‘post-December reported amount’’ means the 

aggregate reported amount determined by taking 

into account only dividends paid after December 

31 of the taxable year. 

(v) ADJUSTMENT FOR DETERMINATIONS.—If there is 

an increase in the excess described in subparagraph 

(A) for the taxable year which results from a determination (as defined in section 860(e)), the company 

may, subject to the limitations of this subparagraph, 

increase the amount of capital gain dividends reported 

under clause (i). 

(vi) SPECIAL RULE FOR LOSSES LATE IN THE CAL- ENDAR YEAR.—For special rule for certain losses after 

October 31, see paragraph (8). 

(D) TREATMENT BY SHAREHOLDERS OF UNDISTRIBUTED

CAPITAL GAINS.— 

(i) Every shareholder of a regulated investment company at the close of the company’s taxable year shall 

include, in computing his long-term capital gains in 

his return for his taxable year in which the last day 

of the company’s taxable year falls, such amount as 

the company shall designate in respect of such shares 

in a written notice mailed to its shareholders at any 

time prior to the expiration of 60 days after close of its 

taxable year, but the amount so includible by any 

shareholder shall not exceed that part of the amount 

subjected to tax in subparagraph (A) which he would 

have received if all of such amount had been distributed as capital gain dividends by the company to the 

holders of such shares at the close of its taxable year. 

92 

(ii) For purposes of this title, every such shareholder 

shall be deemed to have paid, for his taxable year 

under clause (i), the tax imposed by subparagraph (A) 

on the amounts required by this subparagraph to be 

included in respect of such shares in computing his 

long-term capital gains for that year; and such shareholder shall be allowed credit or refund, as the case 

may be, for the tax so deemed to have been paid by 

him. 

(iii) The adjusted basis of such shares in the hands 

of the shareholder shall be increased, with respect to 

the amounts required by this subparagraph to be included in computing his long-term capital gains, by 

the difference between the amount of such includible 

gains and the tax deemed paid by such shareholder in 

respect of such shares under clause (ii). 

(iv) In the event of such designation the tax imposed 

by subparagraph (A) shall be paid by the regulated investment company within 30 days after close of its 

taxable year. 

(v) The earnings and profits of such regulated investment company, and the earnings and profits of 

any such shareholder which is a corporation, shall be 

appropriately adjusted in accordance with regulations 

prescribed by the Secretary. 

(E) CERTAIN DISTRIBUTIONS.—In the case of a distribution to which section 897 does not apply by reason of the 

second sentence of section 897(h)(1), the amount of such 

distribution which would be included in computing longterm capital gains for the shareholder under subparagraph 

(B) or (D) (without regard to this subparagraph)— 

(i) shall not be included in computing such shareholder’s long-term capital gains, and 

(ii) shall be included in such shareholder’s gross income as a dividend from the regulated investment 

company. 

(4) LOSS ON SALE OR EXCHANGE OF STOCK HELD 6 MONTHS OR

LESS.— 

(A) LOSS ATTRIBUTABLE TO CAPITAL GAIN DIVIDEND.—If— 

(i) subparagraph (B) or (D) of paragraph (3) provides 

that any amount with respect to any share is to be 

treated as long-term capital gain, and 

(ii) such share is held by the taxpayer for 6 months 

or less, 

then any loss (to the extent not disallowed under subparagraph (B)) on the sale or exchange of such share shall, to 

the extent of the amount described in clause (i), be treated 

as a long-term capital loss. 

(B) LOSS ATTRIBUTABLE TO EXEMPT-INTEREST DIVI- DEND.—If— 

(i) a shareholder of a regulated investment company 

receives an exempt-interest dividend with respect to 

any share, and 

(ii) such share is held by the taxpayer for 6 months 

or less, 

93 

then any loss on the sale or exchange of such share shall, 

to the extent of the amount of such exempt-interest dividend, be disallowed. 

(C) DETERMINATION OF HOLDING PERIODS.—For purposes 

of this paragraph, in determining the period for which the 

taxpayer has held any share of stock— 

(i) the rules of paragraphs (3) and (4) of section 

246(c) shall apply, and 

(ii) there shall not be taken into account any day 

which is more than 6 months after the date on which 

such share becomes ex-dividend. 

(D) LOSSES INCURRED UNDER A PERIODIC LIQUIDATION

PLAN.—To the extent provided in regulations, subparagraphs (A) and (B) shall not apply to losses incurred on the 

sale or exchange of shares of stock in a regulated investment company pursuant to a plan which provides for the 

periodic liquidation of such shares. 

(E) EXCEPTION TO HOLDING PERIOD REQUIREMENT FOR

CERTAIN REGULARLY DECLARED EXEMPT-INTEREST DIVIDENDS.— 

(i) DAILY DIVIDEND COMPANIES.—Except as otherwise provided by regulations, subparagraph (B) shall 

not apply with respect to a regular dividend paid by 

a regulated investment company which declares exempt-interest dividends on a daily basis in an amount 

equal to at least 90 percent of its net tax-exempt interest and distributes such dividends on a monthly or 

more frequent basis. 

(ii) AUTHORITY TO SHORTEN REQUIRED HOLDING PERIOD WITH RESPECT TO OTHER COMPANIES.—In the case 

of a regulated investment company (other than a company described in clause (i)) which regularly distributes at least 90 percent of its net tax-exempt interest, 

the Secretary may by regulations prescribe that subparagraph (B) (and subparagraph (C) to the extent it 

relates to subparagraph (B)) shall be applied on the 

basis of a holding period requirement shorter than 6 

months; except that such shorter holding period requirement shall not be shorter than the greater of 31 

days or the period between regular distributions of exempt-interest dividends. 

(5) EXEMPT-INTEREST DIVIDENDS.—If, at the close of each 

quarter of its taxable year, at least 50 percent of the value (as 

defined in section 851(c)(4)) of the total assets of the regulated 

investment company consists of obligations described in section 

103(a), such company shall be qualified to pay exempt-interest 

dividends, as defined herein, to its shareholders. 

(A) DEFINITION OF EXEMPT-INTEREST DIVIDEND.— 

(i) IN GENERAL.—Except as provided in clause (ii), 

an exempt-interest dividend is any dividend or part 

thereof (other than a capital gain dividend) paid by a 

regulated investment company and reported by the 

company as an exempt-interest dividend in written 

statements furnished to its shareholders. 

94 

(ii) EXCESS REPORTED AMOUNTS.—If the aggregate 

reported amount with respect to the company for any 

taxable year exceeds the exempt interest of the company for such taxable year, an exempt-interest dividend is the excess of— 

(I) the reported exempt-interest dividend 

amount, over 

(II) the excess reported amount which is allocable to such reported exempt-interest dividend 

amount. 

(iii) ALLOCATION OF EXCESS REPORTED AMOUNT.— (I) IN GENERAL.—Except as provided in subclause (II), the excess reported amount (if any) 

which is allocable to the reported exempt-interest 

dividend amount is that portion of the excess reported amount which bears the same ratio to the 

excess reported amount as the reported exempt-interest dividend amount bears to the aggregate reported amount. 

(II) SPECIAL RULE FOR NONCALENDAR YEAR TAX- PAYERS.—In the case of any taxable year which 

does not begin and end in the same calendar year, 

if the post-December reported amount equals or 

exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting ‘‘post-December reported amount’’ for 

‘‘aggregate reported amount’’ and no excess reported amount shall be allocated to any dividend 

paid on or before December 31 of such taxable 

year. 

(iv) DEFINITIONS.—For purposes of this subparagraph— 

(I) REPORTED EXEMPT-INTEREST DIVIDEND

AMOUNT.—The term ‘‘reported exempt-interest 

dividend amount’’ means the amount reported to 

its shareholders under clause (i) as an exempt-interest dividend. 

(II) EXCESS REPORTED AMOUNT.—The term ‘‘excess reported amount’’ means the excess of the aggregate reported amount over the exempt interest 

of the company for the taxable year. 

(III) AGGREGATE REPORTED AMOUNT.—The term 

‘‘aggregate reported amount’’ means the aggregate 

amount of dividends reported by the company 

under clause (i) as exempt-interest dividends for 

the taxable year (including exempt-interest dividends paid after the close of the taxable year described in section 855). 

(IV) POST-DECEMBER REPORTED AMOUNT.—The 

term ‘‘post-December reported amount’’ means the 

aggregate reported amount determined by taking 

into account only dividends paid after December 

31 of the taxable year. 

(V) EXEMPT INTEREST.—The term ‘‘exempt interest’’ means, with respect to any regulated investVerDate Sep 11 2014 04:56 Sep 25, 2018 Jkt 079006 PO 00000 Frm 00094 Fmt 6659 Sfmt 6601 E:\HR\OC\HR957.XXX HR957
95 

ment company, the excess of the amount of interest excludable from gross income under section 

103(a) over the amounts disallowed as deductions 

under sections 265 and 171(a)(2). 

(B) TREATMENT OF EXEMPT-INTEREST DIVIDENDS BY

SHAREHOLDERS.—An exempt-interest dividend shall be 

treated by the shareholders for all purposes of this subtitle 

as an item of interest excludable from gross income under 

section 103(a). Such purposes include but are not limited 

to— 

(i) the determination of gross income and taxable income, 

(ii) the determination of distributable net income 

under subchapter J, 

(iii) the allowance of, or calculation of the amount of, 

any credit or deduction, and 

(iv) the determination of the basis in the hands of 

any shareholder of any share of stock of the company. 

(6) SECTION 311(B) NOT TO APPLY TO CERTAIN DISTRIBUTIONS.—Section 311(b) shall not apply to any distribution by a 

regulated investment company to which this part applies, if 

such distribution is in redemption of its stock upon the demand 

of the shareholder. 

(7) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.—For purposes of this title, any dividend declared by a regulated investment company in October, November, or December of any calendar year and payable to shareholders of record on a specified 

date in such a month shall be deemed— 

(A) to have been received by each shareholder on December 31 of such calendar year, and 

(B) to have been paid by such company on December 31 

of such calendar year (or, if earlier, as provided in section 

855). 

The preceding sentence shall apply only if such dividend is actually paid by the company during January of the following 

calendar year. 

(8) ELECTIVE DEFERRAL OF CERTAIN LATE-YEAR LOSSES.— (A) IN GENERAL.—Except as otherwise provided by the 

Secretary, a regulated investment company may elect for 

any taxable year to treat any portion of any qualified lateyear loss for such taxable year as arising on the first day 

of the following taxable year for purposes of this title. 

(B) QUALIFIED LATE-YEAR LOSS.—For purposes of this 

paragraph, the term ‘‘qualified late-year loss’’ means— 

(i) any post-October capital loss, and 

(ii) any late-year ordinary loss. 

(C) POST-OCTOBER CAPITAL LOSS.—For purposes of this 

paragraph, the term ‘‘post-October capital loss’’ means— 

(i) any net capital loss attributable to the portion of 

the taxable year after October 31, or 

(ii) if there is no such loss— 

(I) any net long-term capital loss attributable to 

such portion of the taxable year, or 

(II) any net short-term capital loss attributable 

to such portion of the taxable year. 

96 

(D) LATE-YEAR ORDINARY LOSS.—For purposes of this 

paragraph, the term ‘‘late-year ordinary loss’’ means the 

sum of any post-October specified loss and any post-December ordinary loss. 

(E) POST-OCTOBER SPECIFIED LOSS.—For purposes of this 

paragraph, the term ‘‘post-October specified loss’’ means 

the excess (if any) of— 

(i) the specified losses (as defined in section 

4982(e)(5)(B)(ii)) attributable to the portion of the taxable year after October 31, over 

(ii) the specified gains (as defined in section 

4982(e)(5)(B)(i)) attributable to such portion of the taxable year. 

(F) POST-DECEMBER ORDINARY LOSS.—For purposes of 

this paragraph, the term ‘‘post-December ordinary loss’’ 

means the excess (if any) of— 

(i) the ordinary losses not described in subparagraph 

(E)(i) and attributable to the portion of the taxable 

year after December 31, over 

(ii) the ordinary income not described in subparagraph (E)(ii) and attributable to such portion of the 

taxable year. 

(G) SPECIAL RULE FOR COMPANIES DETERMINING REQUIRED CAPITAL GAIN DISTRIBUTIONS ON TAXABLE YEAR

BASIS.—In the case of a company to which an election 

under section 4982(e)(4) applies— 

(i) if such company’s taxable year ends with the 

month of November, the amount of qualified late-year 

losses (if any) shall be computed without regard to any 

income, gain, or loss described in subparagraphs (C) 

and (E), and 

(ii) if such company’s taxable year ends with the 

month of December, subparagraph (A) shall not apply. 

(9) DIVIDENDS TREATED AS RECEIVED BY COMPANY ON EX-DIVIDEND DATE.—For purposes of this title, if a regulated investment company is the holder of record of any share of stock on 

the record date for any dividend payable with respect to such 

stock, such dividend shall be included in gross income by such 

company as of the later of— 

(A) the date such share became ex-dividend with respect 

to such dividend, or 

(B) the date such company acquired such share. 

(c) EARNINGS AND PROFITS.— 

(1) TREATMENT OF NONDEDUCTIBLE ITEMS.— 

(A) NET CAPITAL LOSS.—If a regulated investment company has a net capital loss for any taxable year— 

(i) such net capital loss shall not be taken into account for purposes of determining the company’s earnings and profits, and 

(ii) any capital loss arising on the first day of the 

next taxable year by reason of clause (ii) or (iii) of section 1212(a)(3)(A) shall be treated as so arising for 

purposes of determining earnings and profits. 

(B) OTHER NONDEDUCTIBLE ITEMS.— 

97 

(i) IN GENERAL.—The earnings and profits of a regulated investment company for any taxable year (but 

not its accumulated earnings and profits) shall not be 

reduced by any amount which is not allowable as a deduction (other than by reason of section 265 or 

171(a)(2)) in computing its taxable income for such 

taxable year. 

(ii) COORDINATION WITH TREATMENT OF NET CAPITAL

LOSSES.—Clause (i) shall not apply to a net capital loss 

to which subparagraph (A) applies. 

(2) COORDINATION WITH TAX ON UNDISTRIBUTED INCOME.— For purposes of applying this chapter to distributions made by 

a regulated investment company with respect to any calendar 

year, the earnings and profits of such company shall be determined without regard to any net capital loss attributable to the 

portion of the taxable year after October 31, without regard to 

any late-year ordinary loss (as defined in subsection (b)(8)(D)), 

without regard to any capital loss arising on the first day of 

the taxable year by reason of clauses (ii) and (iii) of section 

1212(a)(3)(A), and with such other adjustments as the Secretary may prescribe. The preceding sentence shall apply— 

(A) only to the extent that the amount distributed by the 

company with respect to the calendar year does not exceed 

the required distribution for such calendar year (as determined under section 4982 by substituting ‘‘100 percent’’ for 

each percentage set forth in section 4982(b)(1)), and 

(B) except as provided in regulations, only if an election 

under section 4982(e)(4) is not in effect with respect to 

such company. 

(3) DISTRIBUTIONS TO MEET REQUIREMENTS OF SUBSECTION

(A)(2)(B).—Any distribution which is made in order to comply 

with the requirements of subsection (a)(2)(B)— 

(A) shall be treated for purposes of this subsection and 

subsection (a)(2)(B) as made from earnings and profits 

which, but for the distribution, would result in a failure to 

meet such requirements (and allocated to such earnings on 

a first-in, first-out basis), and 

(B) to the extent treated under subparagraph (A) as 

made from accumulated earnings and profits, shall not be 

treated as a distribution for purposes of subsection 

(b)(2)(D) and section 855. 

(4) REGULATED INVESTMENT COMPANY.—For purposes of this 

subsection, the term ‘‘regulated investment company’’ includes 

a domestic corporation which is a regulated investment company determined without regard to the requirements of subsection (a). 

(d) DISTRIBUTIONS IN REDEMPTION OF INTERESTS IN UNIT INVEST- MENT TRUSTS.—In the case of a unit investment trust— 

(1) which is registered under the Investment Company Act 

of 1940 (15 U.S.C. 80a-1 and following) and issues periodic 

payment plan certificates (as defined in such Act), and 

(2) substantially all of the assets of which consist of securities issued by a management company (as defined in such Act), 

section 562(c) (relating to preferential dividends) shall not 

apply to a distribution by such trust to a holder of an interest 

98 

in such trust in redemption of part or all of such interest, with 

respect to the capital gain net income of such trust attributable 

to such redemption. 

(e) PROCEDURES SIMILAR TO DEFICIENCY DIVIDEND PROCEDURES

MADE APPLICABLE.— (1) IN GENERAL.—If— 

(A) there is a determination that the provisions of this 

part do not apply to an investment company for any taxable year (hereinafter in this subsection referred to as the 

‘‘non-RIC year’’), and 

(B) such investment company meets the distribution requirements of paragraph (2) with respect to the non-RIC 

year, 

for purposes of applying subsection (a)(2) to subsequent taxable 

years, the provisions of this part shall be treated as applying 

to such investment company for the non-RIC year. If the determination under subparagraph (A) is solely as a result of the 

failure to meet the requirements of subsection (a)(2), the preceding sentence shall also apply for purposes of applying subsection (a)(2) to the non-RIC year and the amount referred to 

in paragraph (2)(A)(i) shall be the portion of the accumulated 

earnings and profits which resulted in such failure. 

(2) DISTRIBUTION REQUIREMENTS.— (A) IN GENERAL.—The distribution requirements of this 

paragraph are met with respect to any non-RIC year if, 

within the 90-day period beginning on the date of the determination (or within such longer period as the Secretary 

may permit), the investment company makes 1 or more 

qualified designated distributions and the amount of such 

distributions is not less than the excess of— 

(i) the portion of the accumulated earnings and profits of the investment company (as of the date of the 

determination) which are attributable to the non-RIC 

year, over 

(ii) any interest payable under paragraph (3). 

(B) QUALIFIED DESIGNATED DISTRIBUTION.—For purposes 

of this paragraph, the term ‘‘qualified designated distribution’’ means any distribution made by the investment company if— 

(i) section 301 applies to such distribution, and 

(ii) such distribution is designated (at such time and 

in such manner as the Secretary shall by regulations 

prescribe) as being taken into account under this paragraph with respect to the non-RIC year. 

(C) EFFECT ON DIVIDENDS PAID DEDUCTION.—Any qualified designated distribution shall not be included in the 

amount of dividends paid for purposes of computing the 

dividends paid deduction for any taxable year. 

(3) INTEREST CHARGE.— (A) IN GENERAL.—If paragraph (1) applies to any nonRIC year of an investment company, such investment company shall pay interest at the underpayment rate established under section 6621— 

(i) on an amount equal to 50 percent of the amount 

referred to in paragraph (2)(A)(i), 

99 

(ii) for the period— 

(I) which begins on the last day prescribed for 

payment of the tax imposed for the non-RIC year 

(determined without regard to extensions), and 

(II) which ends on the date the determination is 

made. 

(B) COORDINATION WITH SUBTITLE F.—Any interest payable under subparagraph (A) may be assessed and collected at any time during the period during which any tax 

imposed for the taxable year in which the determination is 

made may be assessed and collected. 

(4) PROVISION NOT TO APPLY IN THE CASE OF FRAUD.—The 

provisions of this subsection shall not apply if the determination contains a finding that the failure to meet any requirement of this part was due to fraud with intent to evade tax. 

(5) DETERMINATION.—For purposes of this subsection, the 

term ‘‘determination’’ has the meaning given to such term by 

section 860(e). Such term also includes a determination by the 

investment company filed with the Secretary that the provisions of this part do not apply to the investment company for 

a taxable year. 

(f) TREATMENT OF CERTAIN LOAD CHARGES.— (1) IN GENERAL.—If— 

(A) the taxpayer incurs a load charge in acquiring stock 

in a regulated investment company and, by reason of incurring such charge or making such acquisition, the taxpayer acquires a reinvestment right, 

(B) such stock is disposed of before the 91st day after the 

date on which such stock was acquired, and 

(C) the taxpayer acquires, during the period beginning 

on the date of the disposition referred to in subparagraph 

(B) and ending on January 31 of the calendar year following the calendar year that includes the date of such 

disposition, stock in such regulated investment company or 

in another regulated investment company and the otherwise applicable load charge is reduced by reason of the reinvestment right, 

the load charge referred to in subparagraph (A) (to the extent 

it does not exceed the reduction referred to in subparagraph 

(C)) shall not be taken into account for purposes of determining 

the amount of gain or loss on the disposition referred to in subparagraph (B). To the extent such charge is not taken into account in determining the amount of such gain or loss, such 

charge shall be treated as incurred in connection with the acquisition referred to in subparagraph (C) (including for purposes of reapplying this paragraph). 

(2) DEFINITIONS AND SPECIAL RULES.—For purposes of this 

subsection— 

(A) LOAD CHARGE.—The term ‘‘load charge’’ means any 

sales or similar charge incurred by a person in acquiring 

stock of a regulated investment company. Such term does 

not include any charge incurred by reason of the reinvestment of a dividend. 

(B) REINVESTMENT RIGHT.—The term ‘‘reinvestment 

right’’ means any right to acquire stock of 1 or more reguVerDate Sep 11 2014 04:56 Sep 25, 2018 Jkt 079006 PO 00000 Frm 00099 Fmt 6659 Sfmt 6601 E:\HR\OC\HR957.XXX HR957
100 

lated investment companies without the payment of a load 

charge or with the payment of a reduced charge. 

(C) NONRECOGNITION TRANSACTIONS.—If the taxpayer acquires stock in a regulated investment company from another person in a transaction in which gain or loss is not 

recognized, the taxpayer shall succeed to the treatment of 

such other person under this subsection. 

(g) SPECIAL RULES FOR FUND OF FUNDS.— (1) IN GENERAL.—In the case of a qualified fund of funds— 

(A) such fund shall be qualified to pay exempt-interest 

dividends to its shareholders without regard to whether 

such fund satisfies the requirements of the first sentence 

of subsection (b)(5), and 

(B) such fund may elect the application of section 853 

(relating to foreign tax credit allowed to shareholders) 

without regard to the requirement of subsection (a)(1) 

thereof. 

(2) QUALIFIED FUND OF FUNDS.—For purposes of this subsection, the term ‘‘qualified fund of funds’’ means a regulated 

investment company if (at the close of each quarter of the taxable year) at least 50 percent of the value of its total assets is 

represented by interests in other regulated investment companies. 

* * * * * * * 

PART II—REAL ESTATE INVESTMENT TRUSTS 

* * * * * * * 

SEC. 857. TAXATION OF REAL ESTATE INVESTMENT TRUSTS AND 

THEIR BENEFICIARIES. 

(a) REQUIREMENTS APPLICABLE TO REAL ESTATE INVESTMENT

TRUSTS.—The provisions of this part (other than subsection (d) of 

this section and subsection (g) of section 856) shall not apply to a 

real estate investment trust for a taxable year unless— 

(1) the deduction for dividends paid during the taxable year 

(as defined in section 561, but determined without regard to 

capital gains dividends) equals or exceeds— 

(A) the sum of— 

(i) 90 percent of the real estate investment trust taxable income for the taxable year (determined without 

regard to the deduction for dividends paid (as defined 

in section 561) and by excluding any net capital gain); 

and 

(ii) 90 percent of the excess of the net income from 

foreclosure property over the tax imposed on such income by subsection (b)(4)(A); minus 

(B) any excess noncash income (as determined under 

subsection (e)); and 

(2) either— 

(A) the provisions of this part apply to the real estate investment trust for all taxable years beginning after February 28, 1986, or 

(B) as of the close of the taxable year, the real estate investment trust has no earnings and profits accumulated in 

any non-REIT year. 

101 

For purposes of the preceding sentence, the term ‘‘non-REIT year’’ 

means any taxable year to which the provisions of this part did not 

apply with respect to the entity. The Secretary may waive the requirements of paragraph (1) for any taxable year if the real estate 

investment trust establishes to the satisfaction of the Secretary 

that it was unable to meet such requirements by reason of distributions previously made to meet the requirements of section 4981. 

(b) METHOD OF TAXATION OF REAL ESTATE INVESTMENT TRUSTS

AND HOLDERS OF SHARES OR CERTIFICATES OF BENEFICIAL INTER- EST.— (1) IMPOSITION OF TAX ON REAL ESTATE INVESTMENT

TRUSTS.—There is hereby imposed for each taxable year on the 

real estate investment trust taxable income of every real estate 

investment trust a tax computed as provided in section 11, as 

though the real estate investment trust taxable income were 

the taxable income referred to in section 11. 

(2) REAL ESTATE INVESTMENT TRUST TAXABLE INCOME.—For 

purposes of this part, the term ‘‘real estate investment trust 

taxable income’’ means the taxable income of the real estate investment trust, adjusted as follows: 

(A) The deductions for corporations provided in part VIII 

ø(except section 248)¿ of subchapter B (section 241 and following, relating to the deduction for dividends received, 

etc.) shall not be allowed. 

(B) The deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without 

regard to that portion of such deduction which is attributable to the amount excluded under subparagraph (D). 

(C) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on 

change of annual accounting period). 

(D) There shall be excluded an amount equal to the net 

income from foreclosure property. 

(E) There shall be deducted an amount equal to the tax 

imposed by paragraphs (5) and (7) of this subsection, section 856(c)(7)(C), and section 856(g)(5) for the taxable year. 

(F) There shall be excluded an amount equal to any net 

income derived from prohibited transactions. 

(3) CAPITAL GAINS.— (A) TREATMENT OF CAPITAL GAIN DIVIDENDS BY SHAREHOLDERS.—A capital gain dividend shall be treated by the 

shareholders or holders of beneficial interests as a gain 

from the sale or exchange of a capital asset held for more 

than 1 year. 

(B) DEFINITION OF CAPITAL GAIN DIVIDEND.—For purposes of this part, a capital gain dividend is any dividend, 

or part thereof, which is designated by the real estate investment trust as a capital gain dividend in a written notice mailed to its shareholders or holders of beneficial interests at any time before the expiration of 30 days after 

the close of its taxable year (or mailed to its shareholders 

or holders of beneficial interests with its annual report for 

the taxable year); except that, if there is an increase in the 

excess described in subparagraph (A)(ii) of this paragraph 

for such year which results from a determination (as deVerDate Sep 11 2014 04:56 Sep 25, 2018 Jkt 079006 PO 00000 Frm 00101 Fmt 6659 Sfmt 6601 E:\HR\OC\HR957.XXX HR957
102 

fined in section 860(e)), such designation may be made 

with respect to such increase at any time before the expiration of 120 days after the date of such determination. If 

the aggregate amount so designated with respect to a taxable year of the trust (including capital gain dividends 

paid after the close of the taxable year described in section 

858) is greater than the net capital gain of the taxable 

year, the portion of each distribution which shall be a capital gain dividend shall be only that proportion of the 

amount so designated which such net capital gain bears to 

the aggregate amount so designated. For purposes of this 

subparagraph, the amount of the net capital gain for any 

taxable year which is not a calendar year shall be determined without regard to any net capital loss attributable 

to transactions after December 31 of such year, and any 

such net capital loss shall be treated as arising on the 1st 

day of the next taxable year. To the extent provided in regulations, the preceding sentence shall apply also for purposes of computing the taxable income of the real estate 

investment trust. 

(C) TREATMENT BY SHAREHOLDERS OF UNDISTRIBUTED

CAPITAL GAINS.— 

(i) Every shareholder of a real estate investment 

trust at the close of the trust’s taxable year shall include, in computing his long-term capital gains in his 

return for his taxable year in which the last day of the 

trust’s taxable year falls, such amount as the trust 

shall designate in respect of such shares in a written 

notice mailed to its shareholders at any time prior to 

the expiration of 60 days after the close of its taxable 

year (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable 

year), but the amount so includible by any shareholder 

shall not exceed that part of the amount subjected to 

tax in paragraph (1) which he would have received if 

all of such amount had been distributed as capital 

gain dividends by the trust to the holders of such 

shares at the close of its taxable year. 

(ii) For purposes of this title, every such shareholder 

shall be deemed to have paid, for his taxable year 

under clause (i), the tax imposed by paragraph (1) on 

undistributed capital gain on the amounts required by 

this subparagraph to be included in respect of such 

shares in computing his long-term capital gains for 

that year; and such shareholders shall be allowed 

credit or refund as the case may be, for the tax so 

deemed to have been paid by him. 

(iii) The adjusted basis of such shares in the hands 

of the holder shall be increased with respect to the 

amounts required by this subparagraph to be included 

in computing his long-term capital gains, by the difference between the amount of such includible gains 

and the tax deemed paid by such shareholder in respect of such shares under clause (ii). 

103 

(iv) In the event of such designation, the tax imposed by paragraph (1) on undistributed capital gain 

shall be paid by the real estate investment trust within 30 days after the close of its taxable year. 

(v) The earnings and profits of such real estate investment trust, and the earnings and profits of any 

such shareholder which is a corporation, shall be appropriately adjusted in accordance with regulations 

prescribed by the Secretary. 

(vi) As used in this subparagraph, the terms 

‘‘shares’’ and ‘‘shareholders’’ shall include beneficial interests and holders of beneficial interests, respectively. 

(D) COORDINATION WITH NET OPERATING LOSS PROVISIONS.—For purposes of section 172, if a real estate investment trust pays capital gain dividends during any taxable 

year, the amount of the net capital gain for such taxable 

year (to the extent such gain does not exceed the amount 

of such capital gain dividends) shall be excluded in determining— 

(i) the net operating loss for the taxable year, and 

(ii) the amount of the net operating loss of any prior 

taxable year which may be carried through such taxable year under section 172(b)(2) to a succeeding taxable year. 

(E) CERTAIN DISTRIBUTIONS.—In the case of a shareholder of a real estate investment trust to whom section 

897 does not apply by reason of the second sentence of section 897(h)(1) or subparagraph (A)(ii) or (C) of section 

897(k)(2), the amount which would be included in computing long-term capital gains for such shareholder under 

subparagraph (A) or (C) (without regard to this subparagraph)— 

(i) shall not be included in computing such shareholder’s long-term capital gains, and 

(ii) shall be included in such shareholder’s gross income as a dividend from the real estate investment 

trust. 

(F) UNDISTRIBUTED CAPITAL GAIN.—For purposes of this 

paragraph, the term ‘‘undistributed capital gain’’ means 

the excess of the net capital gain over the deduction for 

dividends paid (as defined in section 561) determined with 

reference to capital gain dividends only. 

(4) INCOME FROM FORECLOSURE PROPERTY.— 

(A) IMPOSITION OF TAX.—A tax is hereby imposed for 

each taxable year on the net income from foreclosure property of every real estate investment trust. Such tax shall 

be computed by multiplying the net income from foreclosure property by the highest rate of tax specified in section 11(b). 

(B) NET INCOME FROM FORECLOSURE PROPERTY.—For 

purposes of this part, the term ‘‘net income from foreclosure property’’ means the excess of— 

(i) gain (including any foreign currency gain, as defined in section 988(b)(1)) from the sale or other disposition of foreclosure property described in section 

104 

1221(a)(1) and the gross income for the taxable year 

derived from foreclosure property (as defined in section 856(e)), but only to the extent such gross income 

is not described in (or, in the case of foreign currency 

gain, not attributable to gross income described in) 

section 856(c)(3) other than subparagraph (F) thereof, 

over 

(ii) the deductions allowed by this chapter which are 

directly connected with the production of the income 

referred to in clause (i). 

(5) IMPOSITION OF TAX IN CASE OF FAILURE TO MEET CERTAIN

REQUIREMENTS.—If section 856(c)(6) applies to a real estate investment trust for any taxable year, there is hereby imposed 

on such trust a tax in an amount equal to the greater of— 

(A) the excess of— 

(i) 95 percent of the gross income (excluding gross 

income from prohibited transactions) of the real estate 

investment trust, over 

(ii) the amount of such gross income which is derived from sources referred to in section 856(c)(2); or 

(B) the excess of— 

(i) 75 percent of the gross income (excluding gross 

income from prohibited transactions) of the real estate 

investment trust, over 

(ii) the amount of such gross income which is derived from sources referred to in section 856(c)(3), 

multiplied by a fraction the numerator of which is the real 

estate investment trust taxable income for the taxable 

year (determined without regard to the deductions provided in paragraphs (2)(B) and (2)(E), without regard to 

any net operating loss deduction, and by excluding any net 

capital gain) and the denominator of which is the gross income for the taxable year (excluding gross income from 

prohibited transactions; gross income and gain from foreclosure property (as defined in section 856(e), but only to 

the extent such gross income and gain is not described in 

subparagraph (A), (B), (C), (D), (E), or (G) of section 

856(c)(3)); long-term capital gain; and short-term capital 

gain to the extent of any short-term capital loss). 

(6) INCOME FROM PROHIBITED TRANSACTIONS.— 

(A) IMPOSITION OF TAX.—There is hereby imposed for 

each taxable year of every real estate investment trust a 

tax equal to 100 percent of the net income derived from 

prohibited transactions. 

(B) DEFINITIONS.—For purposes of this part— 

(i) the term ‘‘net income derived from prohibited 

transactions’’ means the excess of the gain (including 

any foreign currency gain, as defined in section 

988(b)(1)) from prohibited transactions over the deductions (including any foreign currency loss, as defined 

in section 988(b)(2)) allowed by this chapter which are 

directly connected with prohibited transactions; 

(ii) in determining the amount of the net income derived from prohibited transactions, there shall not be 

105 

taken into account any item attributable to any prohibited transaction for which there was a loss; and 

(iii) the term ‘‘prohibited transaction’’ means a sale 

or other disposition of property described in section 

1221(a)(1) which is not foreclosure property. 

(C) CERTAIN SALES NOT TO CONSTITUTE PROHIBITED

TRANSACTIONS.—For purposes of this part, the term ‘‘prohibited transaction’’ does not include a sale of property 

which is a real estate asset (as defined in section 

856(c)(5)(B)) if— 

(i) the trust has held the property for not less than 

2 years; 

(ii) aggregate expenditures made by the trust, or 

any partner of the trust, during the 2-year period preceding the date of sale which are includible in the 

basis of the property do not exceed 30 percent of the 

net selling price of the property; 

(iii)(I) during the taxable year the trust does not 

make more than 7 sales of property (other than sales 

of foreclosure property or sales to which section 1033 

applies), or (II) the aggregate adjusted bases (as determined for purposes of computing earnings and profits) 

of property (other than sales of foreclosure property or 

sales to which section 1033 applies) sold during the 

taxable year does not exceed 10 percent of the aggregate bases (as so determined) of all of the assets of the 

trust as of the beginning of the taxable year, or (III) 

the fair market value of property (other than sales of 

foreclosure property or sales to which section 1033 applies) sold during the taxable year does not exceed 10 

percent of the fair market value of all of the assets of 

the trust as of the beginning of the taxable year, or 

(IV) the trust satisfies the requirements of subclause 

(II) applied by substituting ‘‘20 percent’’ for ‘‘10 percent’’ and the 3-year average adjusted bases percentage for the taxable year (as defined in subparagraph 

(G)) does not exceed 10 percent, or (V) the trust satisfies the requirements of subclause (III) applied by substituting ‘‘20 percent’’ for ‘‘10 percent’’ and the 3-year 

average fair market value percentage for the taxable 

year (as defined in subparagraph (H)) does not exceed 

10 percent; 

(iv) in the case of property, which consists of land or 

improvements, not acquired through foreclosure (or 

deed in lieu of foreclosure), or lease termination, the 

trust has held the property for not less than 2 years 

for production of rental income; and 

(v) if the requirement of clause (iii)(I) is not satisfied, substantially all of the marketing and development expenditures with respect to the property were 

made through an independent contractor (as defined 

in section 856(d)(3)) from whom the trust itself does 

not derive or receive any income or a taxable REIT 

subsidiary. 

106 

(D) CERTAIN SALES NOT TO CONSTITUTE PROHIBITED

TRANSACTIONS.—For purposes of this part, the term ‘‘prohibited transaction’’ does not include a sale of property 

which is a real estate asset (as defined in section 

856(c)(5)(B)) if— 

(i) the trust held the property for not less than 2 

years in connection with the trade or business of producing timber, 

(ii) the aggregate expenditures made by the trust, or 

a partner of the trust, during the 2-year period preceding the date of sale which— 

(I) are includible in the basis of the property 

(other than timberland acquisition expenditures), 

and 

(II) are directly related to operation of the property for the production of timber or for the preservation of the property for use as timberland, 

do not exceed 30 percent of the net selling price of the 

property, 

(iii) the aggregate expenditures made by the trust, 

or a partner of the trust, during the 2-year period preceding the date of sale which— 

(I) are includible in the basis of the property 

(other than timberland acquisition expenditures), 

and 

(II) are not directly related to operation of the 

property for the production of timber, or for the 

preservation of the property for use as timberland, 

do not exceed 5 percent of the net selling price of the 

property, 

(iv)(I) during the taxable year the trust does not 

make more than 7 sales of property (other than sales 

of foreclosure property or sales to which section 1033 

applies), or 

(II) the aggregate adjusted bases (as determined 

for purposes of computing earnings and profits) of 

property (other than sales of foreclosure property 

or sales to which section 1033 applies) sold during 

the taxable year does not exceed 10 percent of the 

aggregate bases (as so determined) of all of the assets of the trust as of the beginning of the taxable 

year, or 

(III) the fair market value of property (other 

than sales of foreclosure property or sales to 

which section 1033 applies) sold during the taxable year does not exceed 10 percent of the fair 

market value of all of the assets of the trust as of 

the beginning of the taxable year, or 

(IV) the trust satisfies the requirements of subclause (II) applied by substituting ‘‘20 percent’’ for 

‘‘10 percent’’ and the 3-year average adjusted 

bases percentage for the taxable year (as defined 

in subparagraph (G)) does not exceed 10 percent, 

or 

107 

(V) the trust satisfies the requirements of subclause (III) applied by substituting ‘‘20 percent’’ 

for ‘‘10 percent’’ and the 3-year average fair market value percentage for the taxable year (as defined in subparagraph (H)) does not exceed 10 percent, 

(v) in the case that the requirement of clause (iv)(I) 

is not satisfied, substantially all of the marketing expenditures with respect to the property were made 

through an independent contractor (as defined in section 856(d)(3)) from whom the trust itself does not derive or receive any income, or a taxable REIT subsidiary, and 

(vi) the sales price of the property sold by the trust 

is not based in whole or in part on income or profits, 

including income or profits derived from the sale or 

operation of such property. 

(E) SPECIAL RULES.—In applying subparagraphs (C) and 

(D) the following special rules apply: 

(i) The holding period of property acquired through 

foreclosure (or deed in lieu of foreclosure), or termination of the lease, includes the period for which the 

trust held the loan which such property secured, or 

the lease of such property. 

(ii) In the case of a property acquired through foreclosure (or deed in lieu of foreclosure), or termination 

of a lease, expenditures made by, or for the account of, 

the mortgagor or lessee after default became imminent 

will be regarded as made by the trust. 

(iii) Expenditures (including expenditures regarded 

as made directly by the trust, or indirectly by any 

partner of the trust, under clause (ii)) will not be 

taken into account if they relate to foreclosure property and did not cause the property to lose its status 

as foreclosure property. 

(iv) Expenditures will not be taken into account if 

they are made solely to comply with standards or requirements of any government or governmental authority having relevant jurisdiction, or if they are 

made to restore the property as a result of losses arising from fire, storm or other casualty. 

(v) The term ‘‘expenditures’’ does not include advances on a loan made by the trust. 

(vi) The sale of more than one property to one buyer 

as part of one transaction constitutes one sale. 

(vii) The term ‘‘sale’’ does not include any transaction in which the net selling price is less than 

$10,000. 

(F) NO INFERENCE WITH RESPECT TO TREATMENT AS INVENTORY PROPERTY.—The determination of whether property is described in section 1221(a)(1) shall be made without regard to this paragraph. 

(G) 3-YEAR AVERAGE ADJUSTED BASES PERCENTAGE.—The 

term ‘‘3-year average adjusted bases percentage’’ means, 

108 

with respect to any taxable year, the ratio (expressed as a 

percentage) of— 

(i) the aggregate adjusted bases (as determined for 

purposes of computing earnings and profits) of property (other than sales of foreclosure property or sales 

to which section 1033 applies) sold during the 3 taxable year period ending with such taxable year, divided by 

(ii) the sum of the aggregate adjusted bases (as so 

determined) of all of the assets of the trust as of the 

beginning of each of the 3 taxable years which are 

part of the period referred to in clause (i). 

(H) 3-YEAR AVERAGE FAIR MARKET VALUE PERCENTAGE.— 

The term ‘‘3-year average fair market value percentage’’ 

means, with respect to any taxable year, the ratio (expressed as a percentage) of— 

(i) the fair market value of property (other than 

sales of foreclosure property or sales to which section 

1033 applies) sold during the 3 taxable year period 

ending with such taxable year, divided by 

(ii) the sum of the fair market value of all of the assets of the trust as of the beginning of each of the 3 

taxable years which are part of the period referred to 

in clause (i). 

(I) SALES OF PROPERTY THAT ARE NOT A PROHIBITED

TRANSACTION.—In the case of a sale on or before the termination date, the sale of property which is not a prohibited 

transaction through the application of subparagraph (D) 

shall be considered property held for investment or for use 

in a trade or business and not property described in section 1221(a)(1) for all purposes of this subtitle. For purposes of the preceding sentence, the reference to subparagraph (D) shall be a reference to such subparagraph as in 

effect on the day before the enactment of the Housing Assistance Tax Act of 2008, as modified by subparagraph (G) 

as so in effect. 

(J) TERMINATION DATE.—For purposes of this paragraph, 

the term ‘‘termination date’’ has the meaning given such 

term by section 856(c)(10). 

(7) INCOME FROM REDETERMINED RENTS, REDETERMINED DEDUCTIONS, AND EXCESS INTEREST.— 

(A) IMPOSITION OF TAX.—There is hereby imposed for 

each taxable year of the real estate investment trust a tax 

equal to 100 percent of redetermined rents, redetermined 

deductions, excess interest, and redetermined TRS service 

income. 

(B) REDETERMINED RENTS.— 

(i) IN GENERAL.—The term ‘‘redetermined rents’’ 

means rents from real property (as defined in section 

856(d)) to the extent the amount of the rents would 

(but for subparagraph (F)) be reduced on distribution, 

apportionment, or allocation under section 482 to 

clearly reflect income as a result of services furnished 

or rendered by a taxable REIT subsidiary of the real 

estate investment trust to a tenant of such trust. 

109 

(ii) EXCEPTION FOR DE MINIMIS AMOUNTS.—Clause (i) 

shall not apply to amounts described in section 

856(d)(7)(A) with respect to a property to the extent 

such amounts do not exceed the one percent threshold 

described in section 856(d)(7)(B) with respect to such 

property. 

(iii) EXCEPTION FOR COMPARABLY PRICED SERVICES.— Clause (i) shall not apply to any service rendered by 

a taxable REIT subsidiary of a real estate investment 

trust to a tenant of such trust if— 

(I) such subsidiary renders a significant amount 

of similar services to persons other than such 

trust and tenants of such trust who are unrelated 

(within the meaning of section 856(d)(8)(F)) to 

such subsidiary, trust, and tenants, but 

(II) only to the extent the charge for such service so rendered is substantially comparable to the 

charge for the similar services rendered to persons 

referred to in subclause (I). 

(iv) EXCEPTION FOR CERTAIN SEPARATELY CHARGED

SERVICES.—Clause (i) shall not apply to any service 

rendered by a taxable REIT subsidiary of a real estate 

investment trust to a tenant of such trust if— 

(I) the rents paid to the trust by tenants (leasing at least 25 percent of the net leasable space in 

the trust’s property) who are not receiving such 

service from such subsidiary are substantially 

comparable to the rents paid by tenants leasing 

comparable space who are receiving such service 

from such subsidiary, and 

(II) the charge for such service from such subsidiary is separately stated. 

(v) EXCEPTION FOR CERTAIN SERVICES BASED ON SUB- SIDIARY’S INCOME FROM THE SERVICES.—Clause (i) 

shall not apply to any service rendered by a taxable 

REIT subsidiary of a real estate investment trust to a 

tenant of such trust if the gross income of such subsidiary from such service is not less than 150 percent 

of such subsidiary’s direct cost in furnishing or rendering the service. 

(vi) EXCEPTIONS GRANTED BY SECRETARY.—The Secretary may waive the tax otherwise imposed by subparagraph (A) if the trust establishes to the satisfaction of the Secretary that rents charged to tenants 

were established on an arms’ length basis even though 

a taxable REIT subsidiary of the trust provided services to such tenants. 

(C) REDETERMINED DEDUCTIONS.—The term ‘‘redetermined deductions’’ means deductions (other than redetermined rents) of a taxable REIT subsidiary of a real estate 

investment trust to the extent the amount of such deductions would (but for subparagraph (F)) be decreased on distribution, apportionment, or allocation under section 482 

to clearly reflect income as between such subsidiary and 

such trust. 

110 

(D) EXCESS INTEREST.—The term ‘‘excess interest’’ means 

any deductions for interest payments by a taxable REIT 

subsidiary of a real estate investment trust to such trust 

to the extent that the interest payments are in excess of 

a rate that is commercially reasonable. 

(E) REDETERMINED TRS SERVICE INCOME.— (i) IN GENERAL.—The term ‘‘redetermined TRS service income’’ means gross income of a taxable REIT 

subsidiary of a real estate investment trust attributable to services provided to, or on behalf of, such 

trust (less deductions properly allocable thereto) to the 

extent the amount of such income (less such deductions) would (but for subparagraph (F)) be increased 

on distribution, apportionment, or allocation under 

section 482. 

(ii) COORDINATION WITH REDETERMINED RENTS.— 

Clause (i) shall not apply with respect to gross income 

attributable to services furnished or rendered to a tenant of the real estate investment trust (or to deductions properly allocable thereto). 

(F) COORDINATION WITH SECTION 482.—The imposition of 

tax under subparagraph (A) shall be in lieu of any distribution, apportionment, or allocation under section 482. 

(G) REGULATORY AUTHORITY.—The Secretary shall prescribe such regulations as may be necessary or appropriate 

to carry out the purposes of this paragraph. Until the Secretary prescribes such regulations, real estate investment 

trusts and their taxable REIT subsidiaries may base their 

allocations on any reasonable method. 

(8) LOSS ON SALE OR EXCHANGE OF STOCK HELD 6 MONTHS OR

LESS.— 

(A) IN GENERAL.—If— 

(i) subparagraph (B) or (D) of paragraph (3) provides 

that any amount with respect to any share or beneficial interest is to be treated as a long-term capital 

gain, and 

(ii) the taxpayer has held such share or interest for 

6 months or less, 

then any loss on the sale or exchange of such share or interest shall, to the extent of the amount described in 

clause (i), be treated as a long-term capital loss. 

(B) DETERMINATION OF HOLDING PERIODS.—For purposes 

of this paragraph, in determining the period for which the 

taxpayer has held any share of stock or beneficial interest— 

(i) the rules of paragraphs (3) and (4) of section 

246(c) shall apply, and 

(ii) there shall not be taken into account any day 

which is more than 6 months after the date on which 

such share or interest becomes ex-dividend. 

(C) EXCEPTION FOR LOSSES INCURRED UNDER PERIODIC

LIQUIDATION PLANS.—To the extent provided in regulations, subparagraph (A) shall not apply to any loss incurred on the sale or exchange of shares of stock of, or beneficial interest in, a real estate investment trust pursuant 

111 

to a plan which provides for the periodic liquidation of 

such shares or interests. 

(9) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.—For purposes of this title, any dividend declared by a real estate investment trust in October, November, or December of any calendar year and payable to shareholders of record on a specified 

date in such a month shall be deemed— 

(A) to have been received by each shareholder on December 31 of such calendar year, and 

(B) to have been paid by such trust on December 31 of 

such calendar year (or, if earlier, as provided in section 

858). 

The preceding sentence shall apply only if such dividend is actually paid by the company during January of the following 

calendar year. 

(c) RESTRICTIONS APPLICABLE TO DIVIDENDS RECEIVED FROM REAL

ESTATE INVESTMENT TRUSTS.— 

(1) SECTION 243.—For purposes of section 243 (relating to deductions for dividends received by corporations), a dividend received from a real estate investment trust which meets the requirements of this part shall not be considered a dividend. 

(2) Section ( 1)(h)(11) 

(A) IN GENERAL.—In any case in which— 

(i) a dividend is received from a real estate investment trust (other than a capital gain dividend), and 

(ii) such trust meets the requirements of section 

856(a) for the taxable year during which it paid such 

dividend, 

then, in computing qualified dividend income, there shall 

be taken into account only that portion of such dividend 

designated by the real estate investment trust. 

(B) LIMITATION.—The aggregate amount which may be 

designated as qualified dividend income under subparagraph (A) shall not exceed the sum of— 

(i) the qualified dividend income of the trust for the 

taxable year, 

(ii) the excess of— 

(I) the sum of the real estate investment trust 

taxable income computed under section 857(b)(2) 

for the preceding taxable year and the income 

subject to tax by reason of the application of the 

regulations under section 337(d) for such preceding taxable year, over 

(II) the sum of the taxes imposed on the trust 

for such preceding taxable year under section 

857(b)(1) and by reason of the application of such 

regulations, and 

(iii) the amount of any earnings and profits which 

were distributed by the trust for such taxable year and 

accumulated in a taxable year with respect to which 

this part did not apply. 

(C) NOTICE TO SHAREHOLDERS.—The amount of any distribution by a real estate investment trust which may be 

taken into account as qualified dividend income shall not 

exceed the amount so designated by the trust in a written 

112 

notice to its shareholders mailed not later than 60 days 

after the close of its taxable year. 

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

paragraph, the term ‘‘qualified dividend income’’ has the 

meaning given such term by section 1(h)(11)(B). 

(d) EARNINGS AND PROFITS.— (1) IN GENERAL.—The earnings and profits of a real estate 

investment trust for any taxable year (but not its accumulated 

earnings) shall not be reduced by any amount which— 

(A) is not allowable in computing its taxable income for 

such taxable year, and 

(B) was not allowable in computing its taxable income 

for any prior taxable year. 

(2) COORDINATION WITH TAX ON UNDISTRIBUTED INCOME.—A 

real estate investment trust shall be treated as having sufficient earnings and profits to treat as a dividend any distribution (other than in a redemption to which section 302(a) applies) which is treated as a dividend by such trust. The preceding sentence shall not apply to the extent that the amount 

distributed during any calendar year by the trust exceeds the 

required distribution for such calendar year (as determined 

under section 4981). 

(3) DISTRIBUTIONS TO MEET REQUIREMENTS OF SUBSECTION

(A)(2)(B).—Any distribution which is made in order to comply 

with the requirements of subsection (a)(2)(B)— 

(A) shall be treated for purposes of this subsection and 

subsection (a)(2)(B) as made from earnings and profits 

which, but for the distribution, would result in a failure to 

meet such requirements (and allocated to such earnings on 

a first-in, first-out basis), and 

(B) to the extent treated under subparagraph (A) as 

made from accumulated earnings and profits, shall not be 

treated as a distribution for purposes of subsection 

(b)(2)(B) and section 858. 

(4) REAL ESTATE INVESTMENT TRUST.—For purposes of this 

subsection, the term ‘‘real estate investment trust’’ includes a 

domestic corporation, trust, or association which is a real estate investment trust determined without regard to the requirements of subsection (a). 

(5) SPECIAL RULES FOR DETERMINING EARNINGS AND PROFITS

FOR PURPOSES OF THE DEDUCTION FOR DIVIDENDS PAID.—For 

special rules for determining the earnings and profits of a real 

estate investment trust for purposes of the deduction for dividends paid, see section 562(e)(1). 

(e) EXCESS NONCASH INCOME.— 

(1) IN GENERAL.—For purposes of subsection (a)(1)(B), the 

term ‘‘excess noncash income’’ means the excess (if any) of— 

(A) the amount determined under paragraph (2) for the 

taxable year, over 

(B) 5 percent of the real estate investment trust taxable 

income for the taxable year determined without regard to 

the deduction for dividends paid (as defined in section 561) 

and by excluding any net capital gain. 

(2) DETERMINATION OF AMOUNT.—The amount determined 

under this paragraph for the taxable year is the sum of— 

113 

(A) the amount (if any) by which— 

(i) the amounts includible in gross income under section 467 (relating to certain payments for the use of 

property or services), exceed 

(ii) the amounts which would have been includible 

in gross income without regard to such section, 

(B) any income on the disposition of a real estate asset 

if— 

(i) there is a determination (as defined in section 

860(e)) that such income is not eligible for nonrecognition under section 1031, and 

(ii) failure to meet the requirements of section 1031 

was due to reasonable cause and not to willful neglect, 

(C) the amount (if any) by which— 

(i) the amounts includible in gross income with respect to instruments to which section 860E(a) or 1272 

applies, exceed 

(ii) the amount of money and the fair market value 

of other property received during the taxable year 

under such instruments, and 

(D) amounts includible in income by reason of cancellation of indebtedness. 

(f) REAL ESTATE INVESTMENT TRUSTS TO ASCERTAIN OWNERSHIP.— (1) IN GENERAL.—Each real estate investment trust shall 

each taxable year comply with regulations prescribed by the 

Secretary for the purposes of ascertaining the actual ownership 

of the outstanding shares, or certificates of beneficial interest, 

of such trust. 

(2) FAILURE TO COMPLY.— 

(A) IN GENERAL.—If a real estate investment trust fails 

to comply with the requirements of paragraph (1) for a 

taxable year, such trust shall pay (on notice and demand 

by the Secretary and in the same manner as tax) a penalty 

of $25,000. 

(B) INTENTIONAL DISREGARD.—If any failure under paragraph (1) is due to intentional disregard of the requirement under paragraph (1), the penalty under subparagraph (A) shall be $50,000. 

(C) FAILURE TO COMPLY AFTER NOTICE.—The Secretary 

may require a real estate investment trust to take such actions as the Secretary determines appropriate to ascertain 

actual ownership if the trust fails to meet the requirements of paragraph (1). If the trust fails to take such actions, the trust shall pay (on notice and demand by the 

Secretary and in the same manner as tax) an additional 

penalty equal to the penalty determined under subparagraph (A) or (B), whichever is applicable. 

(D) REASONABLE CAUSE.—No penalty shall be imposed 

under this paragraph with respect to any failure if it is 

shown that such failure is due to reasonable cause and not 

to willful neglect. 

(g) LIMITATIONS ON DESIGNATION OF DIVIDENDS.— (1) OVERALL LIMITATION.—The aggregate amount of dividends designated by a real estate investment trust under subsections (b)(3)(C) and (c)(2)(A) with respect to any taxable year 

114 

may not exceed the dividends paid by such trust with respect 

to such year. For purposes of the preceding sentence, dividends 

paid after the close of the taxable year described in section 858 

shall be treated as paid with respect to such year. 

(2) PROPORTIONALITY.—The Secretary may prescribe regulations or other guidance requiring the proportionality of the designation of particular types of dividends among shares or beneficial interests of a real estate investment trust. 

(h) CROSS REFERENCE.—For provisions relating to excise tax 

based on certain real estate investment trust taxable income not 

distributed during the taxable year, see section 4981. 

* * * * * * * 

Subchapter P—Capital Gains and Losses 

* * * * * * * 

PART I—TREATMENT OF CAPITAL GAINS 

* * * * * * * 

SEC. 1202. PARTIAL EXCLUSION FOR GAIN FROM CERTAIN SMALL 

BUSINESS STOCK. 

(a) EXCLUSION.— (1) IN GENERAL.—In the case of a taxpayer other than a corporation, gross income shall not include 50 percent of any gain 

from the sale or exchange of qualified small business stock 

held for more than 5 years. 

(2) EMPOWERMENT ZONE BUSINESSES.— (A) IN GENERAL.—In the case of qualified small business 

stock acquired after the date of the enactment of this paragraph in a corporation which is a qualified business entity 

(as defined in section 1397C(b)) during substantially all of 

the taxpayer’s holding period for such stock, paragraph (1) 

shall be applied by substituting ‘‘60 percent’’ for ‘‘50 percent’’. 

(B) CERTAIN RULES TO APPLY.—Rules similar to the rules 

of paragraphs (5) and (7) of section 1400B(b) (as in effect 

before its repeal) shall apply for purposes of this paragraph. 

(C) GAIN AFTER 2018 NOT QUALIFIED.—Subparagraph (A) 

shall not apply to gain attributable to periods after December 31, 2018. 

(D) TREATMENT OF DC ZONE.—The District of Columbia 

Enterprise Zone shall not be treated as an empowerment 

zone for purposes of this paragraph. 

(3) SPECIAL RULES FOR 2009 AND CERTAIN PERIODS IN 2010.— 

In the case of qualified small business stock acquired after the 

date of the enactment of this paragraph and on or before the 

date of the enactment of the Creating Small Business Jobs Act 

of 2010— 

(A) paragraph (1) shall be applied by substituting ‘‘75 

percent’’ for ‘‘50 percent’’, and 

(B) paragraph (2) shall not apply. 

In the case of any stock which would be described in the preceding sentence (but for this sentence), the acquisition date for 

115 

purposes of this subsection shall be the first day on which such 

stock was held by the taxpayer determined after the application of section 1223. 

(4) 100 PERCENT EXCLUSION FOR STOCK ACQUIRED DURING

CERTAIN PERIODS IN 2010 AND THEREAFTER.—In the case of 

qualified small business stock acquired after the date of the enactment of the Creating Small Business Jobs Act of 2010— 

(A) paragraph (1) shall be applied by substituting ‘‘100 

percent’’ for ‘‘50 percent’’, 

(B) paragraph (2) shall not apply, and 

(C) paragraph (7) of section 57(a) shall not apply. 

In the case of any stock which would be described in the preceding sentence (but for this sentence), the acquisition date for 

purposes of this subsection shall be the first day on which such 

stock was held by the taxpayer determined after the application of section 1223. 

(b) PER-ISSUER LIMITATION ON TAXPAYER’S ELIGIBLE GAIN.— 

(1) IN GENERAL.—If the taxpayer has eligible gain for the 

taxable year from 1 or more dispositions of stock issued by any 

corporation, the aggregate amount of such gain from dispositions of stock issued by such corporation which may be taken 

into account under subsection (a) for the taxable year shall not 

exceed the greater of— (A) $10,000,000 reduced by the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for prior taxable years and attributable to dispositions of stock issued by such corporation, or 

(B) 10 times the aggregate adjusted bases of qualified 

small business stock issued by such corporation and disposed of by the taxpayer during the taxable year. 

For purposes of subparagraph (B), the adjusted basis of any 

stock shall be determined without regard to any addition to 

basis after the date on which such stock was originally issued. 

(2) ELIGIBLE GAIN.—For purposes of this subsection, the term 

‘‘eligible gain’’ means any gain from the sale or exchange of 

qualified small business stock held for more than 5 years. 

(3) TREATMENT OF MARRIED INDIVIDUALS.— (A) SEPARATE RETURNS.—In the case of a separate return by a married individual, paragraph (1)(A) shall be applied by substituting ‘‘$5,000,000’’ for ‘‘$10,000,000’’. 

(B) ALLOCATION OF EXCLUSION.—In the case of any joint 

return, the amount of gain taken into account under subsection (a) shall be allocated equally between the spouses 

for purposes of applying this subsection to subsequent taxable years. 

(C) MARITAL STATUS.—For purposes of this subsection, 

marital status shall be determined under section 7703. 

(c) QUALIFIED SMALL BUSINESS STOCK.—For purposes of this section— 

(1) IN GENERAL.—Except as otherwise provided in this section, the term ‘‘qualified small business stock’’ means any stock 

in a C corporation which is originally issued after the date of 

the enactment of the Revenue Reconciliation Act of 1993, if— 

(A) as of the date of issuance, such corporation is a 

qualified small business, and 

116 

(B) except as provided in subsections (f) and (h), such 

stock is acquired by the taxpayer at its original issue (directly or through an underwriter)— 

(i) in exchange for money or other property (not including stock), or 

(ii) as compensation for services provided to such 

corporation (other than services performed as an underwriter of such stock). 

(2) Active business requirement; etc. 

(A) IN GENERAL.—Stock in a corporation shall not be 

treated as qualified small business stock unless, during 

substantially all of the taxpayer’s holding period for such 

stock, such corporation meets the active business requirements of subsection (e) and such corporation is a C corporation. 

(B) SPECIAL RULE FOR CERTAIN SMALL BUSINESS INVESTMENT COMPANIES.— 

(i) WAIVER OF ACTIVE BUSINESS REQUIREMENT.—Notwithstanding any provision of subsection (e), a corporation shall be treated as meeting the active business requirements of such subsection for any period 

during which such corporation qualifies as a specialized small business investment company. 

(ii) SPECIALIZED SMALL BUSINESS INVESTMENT COM- PANY.—For purposes of clause (i), the term ‘‘specialized 

small business investment company’’ means any eligible corporation (as defined in subsection (e)(4)) which 

is licensed to operate under section 301(d) of the Small 

Business Investment Act of 1958 (as in effect on May 

13, 1993). 

(3) CERTAIN PURCHASES BY CORPORATION OF ITS OWN

STOCK.— 

(A) REDEMPTIONS FROM TAXPAYER OR RELATED PERSON.— Stock acquired by the taxpayer shall not be treated as 

qualified small business stock if, at any time during the 4- 

year period beginning on the date 2 years before the 

issuance of such stock, the corporation issuing such stock 

purchased (directly or indirectly) any of its stock from the 

taxpayer or from a person related (within the meaning of 

section 267(b) or 707(b)) to the taxpayer. 

(B) SIGNIFICANT REDEMPTIONS.—Stock issued by a corporation shall not be treated as qualified business stock if, 

during the 2-year period beginning on the date 1 year before the issuance of such stock, such corporation made 1 or 

more purchases of its stock with an aggregate value (as of 

the time of the respective purchases) exceeding 5 percent 

of the aggregate value of all of its stock as of the beginning 

of such 2-year period. 

(C) TREATMENT OF CERTAIN TRANSACTIONS.—If any 

transaction is treated under section 304(a) as a distribution in redemption of the stock of any corporation, for purposes of subparagraphs (A) and (B), such corporation shall 

be treated as purchasing an amount of its stock equal to 

the amount treated as such a distribution under section 

304(a). 

117 

(d) QUALIFIED SMALL BUSINESS.—For purposes of this section— 

(1) IN GENERAL.—The term ‘‘qualified small business’’ means 

any domestic corporation which is a C corporation if— 

(A) the aggregate gross assets of such corporation (or 

any predecessor thereof) at all times on or after the date 

of the enactment of the Revenue Reconciliation Act of 1993 

and before the issuance did not exceed $50,000,000, 

(B) the aggregate gross assets of such corporation immediately after the issuance (determined by taking into account amounts received in the issuance) do not exceed 

$50,000,000, and 

(C) such corporation agrees to submit such reports to the 

Secretary and to shareholders as the Secretary may require to carry out the purposes of this section. 

(2) AGGREGATE GROSS ASSETS.— 

(A) IN GENERAL.—For purposes of paragraph (1), the 

term ‘‘aggregate gross assets’’ means the amount of cash 

and the aggregate adjusted bases of other property held by 

the corporation. 

(B) TREATMENT OF CONTRIBUTED PROPERTY.—For purposes of subparagraph (A), the adjusted basis of any property contributed to the corporation (or other property with 

a basis determined in whole or in part by reference to the 

adjusted basis of property so contributed) shall be determined as if the basis of the property contributed to the corporation (immediately after such contribution) were equal 

to its fair market value as of the time of such contribution. 

(3) AGGREGATION RULES.— (A) IN GENERAL.—All corporations which are members of 

the same parent-subsidiary controlled group shall be treated as 1 corporation for purposes of this subsection. 

(B) PARENT-SUBSIDIARY CONTROLLED GROUP.—For purposes of subparagraph (A), the term ‘‘parent-subsidiary 

controlled group’’ means any controlled group of corporations as defined in section 1563(a)(1), except that— 

(i) ‘‘more than 50 percent’’ shall be substituted for 

‘‘at least 80 percent’’ each place it appears in section 

1563(a)(1), and 

(ii) section 1563(a)(4) shall not apply. 

(e) ACTIVE BUSINESS REQUIREMENT.— 

(1) IN GENERAL.—For purposes of subsection (c)(2), the requirements of this subsection are met by a corporation for any 

period if during such period— 

(A) at least 80 percent (by value) of the assets of such 

corporation are used by such corporation in the active conduct of 1 or more qualified trades or businesses, and 

(B) such corporation is an eligible corporation. 

(2) SPECIAL RULE FOR CERTAIN ACTIVITIES.—For purposes of 

paragraph (1), if, in connection with any future qualified trade 

or business, a corporation is engaged in— 

(A) start-up activities described in øsection 195(c)(1)(A)¿ 

section 195(d)(1)(A), 

(B) activities resulting in the payment or incurring of expenditures which may be treated as research and experimental expenditures under section 174, or 

118 

(C) activities with respect to in-house research expenses 

described in section 41(b)(4), 

assets used in such activities shall be treated as used in the 

active conduct of a qualified trade or business. Any determination under this paragraph shall be made without regard to 

whether a corporation has any gross income from such activities at the time of the determination. 

(3) QUALIFIED TRADE OR BUSINESS.—For purposes of this subsection, the term ‘‘qualified trade or business’’ means any trade 

or business other than— 

(A) any trade or business involving the performance of 

services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or 

any trade or business where the principal asset of such 

trade or business is the reputation or skill of 1 or more of 

its employees, 

(B) any banking, insurance, financing, leasing, investing, 

or similar business, 

(C) any farming business (including the business of raising or harvesting trees), 

(D) any business involving the production or extraction 

of products of a character with respect to which a deduction is allowable under section 613 or 613A, and 

(E) any business of operating a hotel, motel, restaurant, 

or similar business. 

(4) ELIGIBLE CORPORATION.—For purposes of this subsection, 

the term ‘‘eligible corporation’’ means any domestic corporation; except that such term shall not include— 

(A) a DISC or former DISC, 

(B) a regulated investment company, real estate investment trust, or REMIC, and 

(C) a cooperative. 

(5) STOCK IN OTHER CORPORATIONS.— 

(A) LOOK-THRU IN CASE OF SUBSIDIARIES.—For purposes 

of this subsection, stock and debt in any subsidiary corporation shall be disregarded and the parent corporation 

shall be deemed to own its ratable share of the subsidiary’s assets, and to conduct its ratable share of the subsidiary’s activities. 

(B) PORTFOLIO STOCK OR SECURITIES.—A corporation 

shall be treated as failing to meet the requirements of 

paragraph (1) for any period during which more than 10 

percent of the value of its assets (in excess of liabilities) 

consists of stock or securities in other corporations which 

are not subsidiaries of such corporation (other than assets 

described in paragraph (6)). 

(C) SUBSIDIARY.—For purposes of this paragraph, a corporation shall be considered a subsidiary if the parent 

owns more than 50 percent of the combined voting power 

of all classes of stock entitled to vote, or more than 50 percent in value of all outstanding stock, of such corporation. 

(6) WORKING CAPITAL.—For purposes of paragraph (1)(A), 

any assets which— 

119 

(A) are held as a part of the reasonably required working capital needs of a qualified trade or business of the corporation, or 

(B) are held for investment and are reasonably expected 

to be used within 2 years to finance research and experimentation in a qualified trade or business or increases in 

working capital needs of a qualified trade or business, 

shall be treated as used in the active conduct of a qualified 

trade or business. For periods after the corporation has been 

in existence for at least 2 years, in no event may more than 

50 percent of the assets of the corporation qualify as used in 

the active conduct of a qualified trade or business by reason of 

this paragraph. 

(7) MAXIMUM REAL ESTATE HOLDINGS.—A corporation shall 

not be treated as meeting the requirements of paragraph (1) 

for any period during which more than 10 percent of the total 

value of its assets consists of real property which is not used 

in the active conduct of a qualified trade or business. For purposes of the preceding sentence, the ownership of, dealing in, 

or renting of real property shall not be treated as the active 

conduct of a qualified trade or business. 

(8) COMPUTER SOFTWARE ROYALTIES.—For purposes of paragraph (1), rights to computer software which produces active 

business computer software royalties (within the meaning of 

section 543(d)(1)) shall be treated as an asset used in the active conduct of a trade or business. 

(f) STOCK ACQUIRED ON CONVERSION OF OTHER STOCK.—If any 

stock in a corporation is acquired solely through the conversion of 

other stock in such corporation which is qualified small business 

stock in the hands of the taxpayer— 

(1) the stock so acquired shall be treated as qualified small 

business stock in the hands of the taxpayer, and 

(2) the stock so acquired shall be treated as having been held 

during the period during which the converted stock was held. 

(g) TREATMENT OF PASS-THRU ENTITIES.— (1) IN GENERAL.—If any amount included in gross income by 

reason of holding an interest in a pass-thru entity meets the 

requirements of paragraph (2)— 

(A) such amount shall be treated as gain described in 

subsection (a), and 

(B) for purposes of applying subsection (b), such amount 

shall be treated as gain from a disposition of stock in the 

corporation issuing the stock disposed of by the pass-thru 

entity and the taxpayer’s proportionate share of the adjusted basis of the pass-thru entity in such stock shall be 

taken into account. 

(2) REQUIREMENTS.—An amount meets the requirements of 

this paragraph if— 

(A) such amount is attributable to gain on the sale or exchange by the pass-thru entity of stock which is qualified 

small business stock in the hands of such entity (determined by treating such entity as an individual) and which 

was held by such entity for more than 5 years, and 

(B) such amount is includible in the gross income of the 

taxpayer by reason of the holding of an interest in such enVerDate Sep 11 2014 04:56 Sep 25, 2018 Jkt 079006 PO 00000 Frm 00119 Fmt 6659 Sfmt 6601 E:\HR\OC\HR957.XXX HR957
120 

tity which was held by the taxpayer on the date on which 

such pass-thru entity acquired such stock and at all times 

thereafter before the disposition of such stock by such 

pass-thru entity. 

(3) LIMITATION BASED ON INTEREST ORIGINALLY HELD BY TAX- PAYER.—Paragraph (1) shall not apply to any amount to the extent such amount exceeds the amount to which paragraph (1) 

would have applied if such amount were determined by reference to the interest the taxpayer held in the pass-thru entity 

on the date the qualified small business stock was acquired. 

(4) PASS-THRU ENTITY.—For purposes of this subsection, the 

term ‘‘pass-thru entity’’ means— 

(A) any partnership, 

(B) any S corporation, 

(C) any regulated investment company, and 

(D) any common trust fund. 

(h) CERTAIN TAX-FREE AND OTHER TRANSFERS.—For purposes of 

this section— 

(1) IN GENERAL.—In the case of a transfer described in paragraph (2), the transferee shall be treated as— 

(A) having acquired such stock in the same manner as 

the transferor, and 

(B) having held such stock during any continuous period 

immediately preceding the transfer during which it was 

held (or treated as held under this subsection) by the 

transferor. 

(2) DESCRIPTION OF TRANSFERS.—A transfer is described in 

this subsection if such transfer is— 

(A) by gift, 

(B) at death, or 

(C) from a partnership to a partner of stock with respect 

to which requirements similar to the requirements of subsection (g) are met at the time of the transfer (without regard to the 5-year holding period requirement). 

(3) CERTAIN RULES MADE APPLICABLE.—Rules similar to the 

rules of section 1244(d)(2) shall apply for purposes of this section. 

(4) INCORPORATIONS AND REORGANIZATIONS INVOLVING NON- QUALIFIED STOCK.— (A) IN GENERAL.—In the case of a transaction described 

in section 351 or a reorganization described in section 368, 

if qualified small business stock is exchanged for other 

stock which would not qualify as qualified small business 

stock but for this subparagraph, such other stock shall be 

treated as qualified small business stock acquired on the 

date on which the exchanged stock was acquired. 

(B) LIMITATION.—This section shall apply to gain from 

the sale or exchange of stock treated as qualified small 

business stock by reason of subparagraph (A) only to the 

extent of the gain which would have been recognized at 

the time of the transfer described in subparagraph (A) if 

section 351 or 368 had not applied at such time. The preceding sentence shall not apply if the stock which is treated as qualified small business stock by reason of subparagraph (A) is issued by a corporation which (as of the time 

121 

of the transfer described in subparagraph (A)) is a qualified small business. 

(C) SUCCESSIVE APPLICATION.—For purposes of this paragraph, stock treated as qualified small business stock 

under subparagraph (A) shall be so treated for subsequent 

transactions or reorganizations, except that the limitation 

of subparagraph (B) shall be applied as of the time of the 

first transfer to which such limitation applied (determined 

after the application of the second sentence of subparagraph (B)). 

(D) CONTROL TEST.—In the case of a transaction described in section 351, this paragraph shall apply only if, 

immediately after the transaction, the corporation issuing 

the stock owns directly or indirectly stock representing 

control (within the meaning of section 368(c)) of the corporation whose stock was exchanged. 

(i) BASIS RULES.—For purposes of this section— 

(1) STOCK EXCHANGED FOR PROPERTY.—In the case where the 

taxpayer transfers property (other than money or stock) to a 

corporation in exchange for stock in such corporation— 

(A) such stock shall be treated as having been acquired 

by the taxpayer on the date of such exchange, and 

(B) the basis of such stock in the hands of the taxpayer 

shall in no event be less than the fair market value of the 

property exchanged. 

(2) TREATMENT OF CONTRIBUTIONS TO CAPITAL.—If the adjusted basis of any qualified small business stock is adjusted 

by reason of any contribution to capital after the date on which 

such stock was originally issued, in determining the amount of 

the adjustment by reason of such contribution, the basis of the 

contributed property shall in no event be treated as less than 

its fair market value on the date of the contribution. 

(j) TREATMENT OF CERTAIN SHORT POSITIONS.— (1) IN GENERAL.—If the taxpayer has an offsetting short position with respect to any qualified small business stock, subsection (a) shall not apply to any gain from the sale or exchange of such stock unless— 

(A) such stock was held by the taxpayer for more than 

5 years as of the first day on which there was such a short 

position, and 

(B) the taxpayer elects to recognize gain as if such stock 

were sold on such first day for its fair market value. 

(2) OFFSETTING SHORT POSITION.—For purposes of paragraph 

(1), the taxpayer shall be treated as having an offsetting short 

position with respect to any qualified small business stock if— 

(A) the taxpayer has made a short sale of substantially 

identical property, 

(B) the taxpayer has acquired an option to sell substantially identical property at a fixed price, or 

(C) to the extent provided in regulations, the taxpayer 

has entered into any other transaction which substantially 

reduces the risk of loss from holding such qualified small 

business stock. 

For purposes of the preceding sentence, any reference to the 

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122 

son who is related (within the meaning of section 267(b) or 

707(b)) to the taxpayer. 

(k) REGULATIONS.—The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations to prevent the avoidance of the purposes 

of this section through split-ups, shell corporations, partnerships, 

or otherwise. 

* * * * * * * 

Subchapter S—Tax Treatment of S Corporations 

and Their Shareholders 

* * * * * * * 

PART I—IN GENERAL 

* * * * * * * 

SEC. 1363. EFFECT OF ELECTION ON CORPORATION. 

(a) GENERAL RULE.—Except as otherwise provided in this subchapter, an S corporation shall not be subject to the taxes imposed 

by this chapter. 

(b) COMPUTATION OF CORPORATION’S TAXABLE INCOME.—The taxable income of an S corporation shall be computed in the same 

manner as in the case of an individual, except that— 

(1) the items described in section 1366(a)(1)(A) shall be separately stated, 

(2) the deductions referred to in section 703(a)(2) shall not be 

allowed to the corporation, and 

ø(3) section 248 shall apply, and¿ 

ø(4)¿ (3) section 291 shall apply if the S corporation (or any 

predecessor) was a C corporation for any of the 3 immediately 

preceding taxable years. 

(c) ELECTIONS OF THE S CORPORATION.— 

(1) IN GENERAL.—Except as provided in paragraph (2), any 

election affecting the computation of items derived from an S 

corporation shall be made by the corporation. 

(2) EXCEPTIONS.—In the case of an S corporation, elections 

under the following provisions shall be made by each shareholder separately— 

(A) section 617 (relating to deduction and recapture of 

certain mining exploration expenditures), and 

(B) section 901 (relating to taxes of foreign countries and 

possessions of the United States). 

(d) RECAPTURE OF LIFO BENEFITS.— 

(1) IN GENERAL.—If— 

(A) an S corporation was a C corporation for the last taxable year before the first taxable year for which the election under section 1362(a) was effective, and 

(B) the corporation inventoried goods under the LIFO 

method for such last taxable year, 

the LIFO recapture amount shall be included in the gross income of the corporation for such last taxable year (and appropriate adjustments to the basis of inventory shall be made to 

123 

take into account the amount included in gross income under 

this paragraph). 

(2) ADDITIONAL TAX PAYABLE IN INSTALLMENTS.— 

(A) IN GENERAL.—Any increase in the tax imposed by 

this chapter by reason of this subsection shall be payable 

in 4 equal installments. 

(B) DATE FOR PAYMENT OF INSTALLMENTS.—The first installment under subparagraph (A) shall be paid on or before the due date (determined without regard to extensions) for the return of the tax imposed by this chapter for 

the last taxable year for which the corporation was a C 

corporation and the 3 succeeding installments shall be 

paid on or before the due date (as so determined) for the 

corporation’s return for the 3 succeeding taxable years. 

(C) NO INTEREST FOR PERIOD OF EXTENSION.—Notwithstanding section 6601(b), for purposes of section 6601, the 

date prescribed for the payment of each installment under 

this paragraph shall be determined under this paragraph. 

(3) LIFO RECAPTURE AMOUNT.—For purposes of this subsection, the term ‘‘LIFO recapture amount’’ means the amount 

(if any) by which— 

(A) the inventory amount of the inventory asset under 

the first-in, first-out method authorized by section 471, exceeds 

(B) the inventory amount of such assets under the LIFO 

method. 

For purposes of the preceding sentence, inventory amounts 

shall be determined as of the close of the last taxable year referred to in paragraph (1). 

(4) OTHER DEFINITIONS.—For purposes of this subsection— 

(A) LIFO METHOD.—The term ‘‘LIFO method’’ means the 

method authorized by section 472. 

(B) INVENTORY ASSETS.—The term ‘‘inventory assets’’ 

means stock in trade of the corporation, or other property 

of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year. 

(C) METHOD OF DETERMINING INVENTORY AMOUNT.—The 

inventory amount of assets under a method authorized by 

section 471 shall be determined— 

(i) if the corporation uses the retail method of valuing inventories under section 472, by using such 

method, or 

(ii) if clause (i) does not apply, by using cost or market, whichever is lower. 

(D) NOT TREATED AS MEMBER OF AFFILIATED GROUP.— 

Except as provided in regulations, the corporation referred 

to in paragraph (1) shall not be treated as a member of an 

affiliated group with respect to the amount included in 

gross income under paragraph (1). 

(5) SPECIAL RULE.—Sections 1367(a)(2)(D) and 1371(c)(1) 

shall not apply with respect to any increase in the tax imposed 

by reason of this subsection. 

* * * * * * * 

124 

PART III—SPECIAL RULES 

* * * * * * * 

SEC. 1375. TAX IMPOSED WHEN PASSIVE INVESTMENT INCOME OF 

CORPORATION HAVING ACCUMULATED EARNINGS AND 

PROFITS EXCEEDS 25 PERCENT OF GROSS RECEIPTS. 

(a) GENERAL RULE.—If for the taxable year an S corporation 

has— 

(1) accumulated earnings and profits at the close of such taxable year, and 

(2) gross receipts more than 25 percent of which are passive 

investment income, 

then there is hereby imposed a tax on the income of such corporation for such taxable year. Such tax shall be computed by multiplying the excess net passive income by the highest rate of tax 

specified in section 11(b). 

(b) DEFINITIONS.—For purposes of this section— 

(1) EXCESS NET PASSIVE INCOME.— (A) IN GENERAL.—Except as provided in subparagraph 

(B), the term ‘‘excess net passive income’’ means an 

amount which bears the same ratio to the net passive income for the taxable year as— 

(i) the amount by which the passive investment income for the taxable year exceeds 25 percent of the 

gross receipts for the taxable year, bears to 

(ii) the passive investment income for the taxable 

year. 

(B) LIMITATION.—The amount of the excess net passive 

income for any taxable year shall not exceed the amount 

of the corporation’s taxable income for such taxable year as 

determined under section 63(a)— 

(i) without regard to the deductions allowed by part 

VIII of subchapter B ø(other than the deduction allowed by section 248, relating to organization expenditures)¿, and 

(ii) without regard to the deduction under section 

172. 

(2) NET PASSIVE INCOME.—The term ‘‘net passive income’’ 

means— 

(A) passive investment income, reduced by 

(B) the deductions allowable under this chapter which 

are directly connected with the production of such income 

(other than deductions allowable under section 172 and 

part VIII of subchapter B). 

(3) PASSIVE INVESTMENT INCOME, ETC..—The terms ‘‘passive 

investment income’’ and ‘‘gross receipts’’ have the same respective meanings as when used in paragraph (3) of section 

1362(d). 

(4) COORDINATION WITH SECTION 1374.—Notwithstanding 

paragraph (3), the amount of passive investment income shall 

be determined by not taking into account any recognized builtin gain or loss of the S corporation for any taxable year in the 

recognition period. Terms used in the preceding sentence shall 

have the same respective meanings as when used in section 

1374. 

125 

(c) CREDITS NOT ALLOWABLE.—No credit shall be allowed under 

part IV of subchapter A of this chapter (other than section 34) 

against the tax imposed by subsection (a). 

(d) WAIVER OF TAX IN CERTAIN CASES.—If the S corporation establishes to the satisfaction of the Secretary that— 

(1) it determined in good faith that it had no accumulated 

earnings and profits at the close of a taxable year, and 

(2) during a reasonable period of time after it was determined that it did have accumulated earnings and profits at the 

close of such taxable year such earnings and profits were distributed, 

the Secretary may waive the tax imposed by subsection (a) for such 

taxable year. 

* * * * * * * 

(126) 

VII. DISSENTING VIEWS 

Democrats believe in American innovation and entrepreneurship. 

Democrats support small businesses who are the backbone of our 

economy. My Democratic colleagues and I would have enthusiastically and actively participated in the construction of bipartisan legislation to help small businesses deduct more of their startup costs. 

We are interested in helping idea incubators attract capital in an 

efficient way. 

But that is not the process that the majority adopted. This exercise, capped off by what appears to be a dead-on-arrival reception 

in the Senate, told us how serious the majority is about making 

law. The Republicans are driving these bills down a road to nowhere. If they were serious about helping small business and innovative startups, they surely would not have treated these provisions like an afterthought to their 2017 tax bill. We can and should 

work together to ensure that small businesses and innovative 

startups have the tools to not just survive but actually thrive in 

this economy. We can and should do so in a fiscally responsible 

manner that does not further add to the deficit. We can and should 

be better. 

RICHARD E. NEAL, 

Ranking Member. 

Æ