I
104TH CONGRESS
1ST SESSION
H. R. 1518
To the Internal Revenue Code of 1986 to provide an incremental investment
tax credit to assist defense contractors in converting to nondefense operations.
IN THE HOUSE OF REPRESENTATIVES
APRIL 7, 1995
Ms. WATERS introduced the following bill; which was referred to the
Committee on Ways and Means
A BILL
To the Internal Revenue Code of 1986 to provide an incre-
mental investment tax credit to assist defense contractors
in converting to nondefense operations.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. CONVERSION INVESTMENT CREDIT FOR DE-
FENSE CONTRACTORS.
(a) ALLOWANCE OF CREDIT.—Section 46 of the In-
ternal Revenue Code of 1986 (relating to amount of in-
vestment credit) is amended by striking ‘‘and’’ at the end
of paragraph (2), by striking the period at the end of para-
graph (3) and inserting ‘‘, and’’, and by adding at the
end thereof the following new paragraph:
‘‘(4) in the case of a defense contractor (as de-
fined in section 48(c)), the defense contractor con-
version credit.’’
(b) AMOUNT OF CREDIT.—Section 48 of such Code
is amended by adding at the end thereof the following new
subsection:
‘‘(c) DEFENSE CONTRACTOR CONVERSION CRED-
IT.—
‘‘(1) IN GENERAL.—For purposes of section 46,
in the case of a defense contractor, the defense con-
tractor conversion credit for any taxable year is an
amount equal to 15 percent of the sum of—
‘‘(A) the incremental nondefense qualified
investment for such taxable year, plus
‘‘(B) the qualified nondefense product ex-
penses paid or incurred by the taxpayer during
the taxable year.
‘‘(2) DEFENSE CONTRACTOR.—For purposes of
this subsection, the term ‘defense contractor’ means
any taxpayer if more than 10 percent of its gross re-
ceipts for the taxable year is derived from defense
contracts.
‘‘(3) INCREMENTAL
NONDEFENSE
QUALIFIED
INVESTMENT.—For purposes of paragraph (1), the
incremental nondefense qualified investment for any
taxable year is the excess (if any) of—
‘‘(A) the net nondefense qualified invest-
ment for such taxable year, over
‘‘(B) the average of the net nondefense
qualified investment for the preceding 3 taxable
years.
‘‘(4) NET
NONDEFENSE
QUALIFIED
INVEST-
MENT.—For purposes of paragraph (3), the net
nondefense qualified investment for any taxable year
is the excess (if any) of—
‘‘(A) 
the 
qualified 
investment 
in
nondefense section 38 property placed in service
during such taxable year, over
‘‘(B) the aggregate fair market value of
nondefense section 38 property which is dis-
posed of, or otherwise ceases to be such prop-
erty, during such taxable year.
‘‘(5) QUALIFIED INVESTMENT.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, the qualified investment for any tax-
able year is the aggregate of—
‘‘(i) the applicable percentage of the
basis of each new nondefense section 38
property placed in service by the taxpayer
during such taxable year, plus
‘‘(ii) the applicable percentage of the
cost of each used nondefense section 38
property placed in service by the taxpayer
during such taxable year.
‘‘(B) 
APPLICABLE
PERCENTAGE.—For
purposes of subparagraph (A), the applicable
percentage for any property shall be determined
under paragraphs (2) and (7) of section 46(c)
(as in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of
1990).
‘‘(C) CERTAIN
RULES
MADE
APPLICA-
BLE.—The provisions of subsections (b) and (c)
of section 48 (as in effect on the day before the
date of the enactment of the Revenue Reconcili-
ation Act of 1990) shall apply for purposes of
this paragraph.
‘‘(6) NONDEFENSE SECTION 38 PROPERTY.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, the term ‘nondefense section 38
property’ means section 38 property to be used
other than in operations related to any defense
contract.
‘‘(B) DEFENSE CONTRACT.—The term ‘de-
fense contract’ means any contract or sub-
contract entered into (whether or not by the
taxpayer) with a defense agency of the United
States to provide material or defense-related
operations.
‘‘(7) SECTION 38 PROPERTY.—For purposes of
this subsection, the term ‘section 38 property’
means—
‘‘(A) tangible personal property (other
than an air conditioning or heating unit), or
‘‘(B) other tangible property (not including
a building and its structural components) but
only if such property—
‘‘(i) is used as an integral part of
manufacturing, production, or extraction
or of furnishing transportation, commu-
nications, electrical energy, gas, water, or
sewage disposal services, or
‘‘(ii) constitutes a research facility
used in connection with any of the activi-
ties referred to in clause (i), or
‘‘(iii) constitutes a facility used in
connection with any of the activities re-
ferred to in clause (i) for the bulk storage
of fungible commodities (including com-
modities in a liquid or gaseous state), or
‘‘(C) elevators and escalators, but only if—
‘‘(i) the construction, reconstruction,
or erection of the elevator or escalator is
completed by the taxpayer, or
‘‘(ii) the original use of such elevator
or escalator commences with the taxpayer,
or
‘‘(D) single purpose agricultural or horti-
cultural structures; or
‘‘(E) a storage facility (not including a
building and its structural components) used in
connection with the distribution of petroleum or
any primary product of petroleum.
Such term includes only property to which section
168 applies without regard to any useful life and
any other property with respect to which deprecia-
tion (or amortization in lieu of depreciation) is al-
lowable and having a useful life (determined as of
the time such property is placed in service) of 3
years or more.
‘‘(8) QUALIFIED
NONDEFENSE
PRODUCT
EX-
PENSES.—For purposes of this subsection, the term
‘qualified nondefense product expenses’ means the
following expenses to the extent incurred in connec-
tion with any product or service not related to any
defense contract: expenses for research, design, com-
mercial cost, quality control, and marketing. Such
term shall not include any expense attributable to a
product produced or service provided before the date
of the enactment of this subsection.
‘‘(9) COORDINATION WITH OTHER CREDITS.—
This subsection shall not apply to any property to
which the energy credit or rehabilitation credit
would apply unless the taxpayer elects to waive the
application of such credits to such property.
‘‘(10) 
CERTAIN
PROGRESS
EXPENDITURE
RULES MADE APPLICABLE.—Rules similar to rules
of subsection (c)(4) and (d) of section 46 (as in ef-
fect on the day before the date of the enactment of
the Revenue Reconciliation Act of 1990) shall apply
for purposes of this subsection.
‘‘(11) ALLOCATION OF BASIS ADJUSTMENT.—
The reduction required by section 50(c) for any tax-
able year shall be allocated among the nondefense
section 38 property placed in service by the taxpayer
during such year in proportion to the respective
bases of such property.
‘‘(12) RECAPTURE.—In applying section 50(a)
to any property which ceases to be nondefense sec-
tion 38 property, the credit determined under this
section with respect to such property shall be treated
as being equal to 15 percent of the lesser of—
‘‘(A) the excess referred to in paragraph
(1) for the taxable year in which such property
was placed in service, or
‘‘(B) the qualified investment in such prop-
erty which was taken into account under sub-
section (a).
‘‘(13) CONTROLLED GROUPS.—Rules similar to
the rules of paragraph (1) of section 41(f) shall
apply for purposes of this subsection.
‘‘(14) INCLUSION OF LEASED PROPERTY.—The
Secretary shall prescribe regulations which require
leased property to be taken into account in deter-
mining the incremental nondefense qualified invest-
ment for any taxable year and which allow the credit
under paragraph (1)(A) attributable to such prop-
erty to be allowed to the lessor or lessee of such
property.
‘‘(15) APPLICATION
OF
SUBSECTION.—This
subsection shall apply to the 5-period beginning on
January 1, 1993, under rules similar to the rules of