or disposes of such credit, or receives a refund of all
or a portion of such credit—
(A) no portion of the net proceeds of such
transfer or disposition or of such refund shall
constitute income to such taxpayer under sec-
tion 61(a) of the Internal Revenue Code of
1986, and
(B) the taxpayer’s adjusted basis in the
property with respect to which the State his-
toric tax credit is allowed shall be reduced by
an amount equal to such net proceeds or refund
received by such taxpayer,
unless the taxpayer makes an election under sub-
section (b).
(2) 
DETERMINATION
OF
REDUCTION
IN
BASIS.—The reduction in basis under paragraph (1)
shall be applied—
(A) first, against the basis in the under-
lying real property,
(B) second, against the adjusted cost of
acquisition, exclusive of land, as defined in sec-
tion 47(c)(2)(B)(ii) of the Internal Revenue
Code of 1986, and
(C) third, against the remaining basis in
the property.
(3) ADJUSTMENT
IN
BASIS
OF
INTEREST
IN
PARTNERSHIP
OR
S
CORPORATION.—The adjusted
basis of—
(A) a partner’s interest in a partnership,
or
(B) stock in an S corporation (as defined
in section 1361(a)(1) of such Code),
shall be appropriately adjusted to take into account
adjustments made under this subsection in the basis
of property held by the partnership or S corporation
(if any).
(b) ELECTION TO INCLUDE IN INCOME.—
(1) IN GENERAL.—In the case of a taxpayer
who elects to have this subsection apply, the net pro-
ceeds of the transfer or disposition or the refund de-
scribed in subsection (a) received by such taxpayer
shall constitute income to such taxpayer under sec-
tion 61(a) of the Internal Revenue Code of 1986.
(2) MAKING OF ELECTION.—An election under
this subsection shall be made at such time and in
such manner as the Secretary of the Treasury may
by regulation prescribe. Such election shall apply for
the taxable year for which it is made and for all sub-
sequent taxable years and may be revoked only with
the consent of the Secretary of the Treasury.
(c) EFFECT ON QUALIFIED REHABILITATION EX-
PENDITURES AND REHABILITATION CREDITS.—For pur-
poses of determining the rehabilitation credit allowable to
a taxpayer under section 47 of the Internal Revenue Code
of 1986, the transfer or disposition of State historic tax
credits with respect to any property by a taxpayer shall
not affect or reduce the amount of qualified rehabilitation
expenditures (as defined in section 47(c)(2) of such Code)
incurred in connection with such property, nor shall such
transfer or disposition, nor any basis adjustments under
subsection (a), be treated as an early disposition of invest-
ment credit property for purposes of the recapture provi-
sions of section 50 of such Code.
(d) STATE HISTORIC TAX CREDITS DEFINED.—For
purposes of this section, the term ‘‘State historic tax cred-
it’’ means any credit against State or local tax liabilities
which—
(1) is allowable under the laws of any State or
political subdivision thereof to a taxpayer with re-
spect to expenditures made for the rehabilitation of
property identified by such laws, and
(2) is transferable or refundable under such
laws.
(e) EFFECTIVE DATE.—This section shall apply to
transfers or dispositions made, or refunds received, after
the date of the enactment of this Act.
Æ