292
‘‘(4) COMPENSATION
EXPENSES.—‘Compensa-
tion expenses’ means—
‘‘(A) wages, salaries or other cash payable
for services,
‘‘(B) any taxes imposed on the recipient
that are withheld by the business entity,
‘‘(C) the cost of property purchased to pro-
vide employees with compensation (other than
property incidental to the provision of fringe
benefits that are excluded from income under
the individual tax),
‘‘(D) the cost of fringe benefits which are
includible in an employee’s, partner’s, or propri-
etor’s income under the Simplified USA Income
Tax (or are excluded solely because they con-
stitute employee savings), including (without
limitation)—
‘‘(i) contributions to retirement and
severance benefit plans,
‘‘(ii) premiums for the cost of life,
health, accident, disability and other insur-
ance policies for which the service provider,
members of his family, or persons des-
ignated by him or members of his family
are the beneficiaries,
293
‘‘(iii) rental of parking spaces or park-
ing fees (unless the parking space is used
for a vehicle that is regularly used in a
business activity);
‘‘(iv) employer paid educational bene-
fits;
‘‘(v) employer paid housing (other
than housing provided for the convenience
of the employer); and
‘‘(vi) employer paid meals (other than
meals provided for the convenience of the
employer).
‘‘(b) COST OF BUSINESS PURCHASES.—
‘‘(1) IN
GENERAL.—The ‘cost of a business
purchase’ is the amount paid or to be paid for the
business purchase.
‘‘(2) TAXES.—
‘‘(A) IN GENERAL.—The ‘cost of business
purchases’ includes any product taxes paid with
respect to the property or services purchased.
‘‘(B) PRODUCT TAX.—‘Product tax’ means
any excise tax, sales or use tax, custom duty, or
other separately stated levy imposed by a Fed-
eral, State, or local government on the produc-
tion, severance or consumption of property or
294
on the provision of services, whether or not sep-
arately stated, and including any such taxes
that are technically imposed on the seller of
property or services.
‘‘(C) TAXES NOT PRODUCT TAXES.—Prod-
uct taxes do not include—
‘‘(i) the import tax,
‘‘(ii) state and local property taxes,
‘‘(iii) franchise or income taxes,
‘‘(iv) payroll taxes and self-employ-
ment taxes, or
‘‘(v) the business tax.
‘‘(3) IMPORTS.—In the case of an import by a
business entity, the cost of the import is the import
price for purposes of the import tax. The import tax
is not part of the cost of the import.
‘‘(c) PROPERTY
AND
SERVICES
ACQUIRED
FOR
PROPERTY.—If a business entity receives property or serv-
ices from a business entity in whole or partial exchange
for property or services, the property or services acquired
shall be treated as if they were purchased for an amount
equal to the fair market value of the services or property
received. For purposes of this section, property includes
stock and other equity interests in business other than
stock or an equity interest in the business entity acquiring
295
the property or services. See section 210(b) for rules on
property or services received in exchange for an equity in-
terest in the recipient.
‘‘(d) GAMBLING PAYMENTS.—In the case of a busi-
ness involving gambling, lotteries, or other games of
chance, business purchases include amounts paid to win-
ners.
‘‘(e) SAVINGS
ASSETS.—‘Savings assets’ means
stocks, bonds, securities, certificates of deposits, invest-
ments in partnerships and limited liability companies,
shares of mutual funds, life insurance policies, annuities,
and other similar savings or investment assets.
‘‘(f) CROSS REFERENCES.—
‘‘(1) FINANCIAL INTERMEDIATION AND INSUR-
ANCE.—For rules relating to fees for financial inter-
mediation services and insurance, see subchapter F.
‘‘(2) LAND.—For special rules relating to the
acquisition of land, see subchapter E.
‘‘(3) RENTAL REAL ESTATE.—For special rules
relating to the rental of real estate previously occu-
pied by an owner of the real estate, see section 232.
‘‘(4) OUTSIDE THE UNITED STATES.—For spe-
cial rules relating to services performed outside the
United States but used inside the United States and
international services, see subchapter J.
296
‘‘SEC. 206. BUSINESS ENTITY AND BUSINESS ACTIVITY.
‘‘(a) BUSINESS ENTITY.—For purposes of the busi-
ness tax, ‘business entity’ means any corporation, unincor-
porated association, partnership, limited liability company,
proprietorship, independent contractor, individual, or any
other person engaging in business activity in the United
States. An individual shall be considered a business entity
only with respect to the individual’s business activities.
‘‘(b) BUSINESS ACTIVITY.—‘Business activity’ means
the sale of property or services, the leasing of property,
the development of property or services for subsequent
sale or use in producing property or services for subse-
quent sale. ‘Business activity’ does not include casual or
occasional sales of property used by an individual (other
than in a business activity), such as the sale by an indi-
vidual of a vehicle used by the individual.
‘‘(c) EXCEPTION FOR CERTAIN EMPLOYEES.—
‘‘(1) IN GENERAL.—‘Business activity’ does not
include—
‘‘(A) the performance of services by an em-
ployee for an employer that is a business entity
with respect to the activity in which the em-
ployee is engaged, or
‘‘(B) the performance of regular domestic
household 
services 
(including 
babysitting,
housecleaning, and lawn cutting) by an em-
297
ployee of an employer that is an individual or
family.
‘‘(2) EMPLOYEE
DEFINED.—For purposes of
this subsection, ‘employee’ includes an individual
partner who provides services to a partnership or an
individual member who provides services to a limited
liability company, or a proprietor with respect to
compensation for services from his proprietorship.
‘‘SEC. 207. LOSS CARRYOVER DEDUCTION.
‘‘(a) DEDUCTION.—The ‘loss carryover deduction’ for
a taxable year is the lesser of—
‘‘(1) the business entity’s gross profits for the
taxable year (determined without the loss carryover
deduction), or
‘‘(2) the amount of the loss carryover to the
taxable year.
‘‘(b) LOSS CARRYOVER.—
‘‘(1) GENERAL RULE.—A loss for any taxable
year shall be a loss carryover to each of the 215 tax-
able years following the taxable year of the loss.
‘‘(2) LOSS CARRYOVERS TO A TAXABLE YEAR.—
The loss carryover to a taxable year is the sum of
the loss carryovers from all prior taxable years be-
ginning on or after January 1, 2002, that can be
carried over to the taxable year.
298
‘‘(3) REDUCTION OF LOSS CARRYOVERS AS A
RESULT OF THE DEDUCTION.—A business entity’s
loss carryovers shall be reduced each year by the
amount of the loss carryover deduction for the year.
Loss carryovers shall be reduced in the order that
they arose.
‘‘(c) LOSS FOR TAXABLE YEAR.—A business entity’s
loss (if any) for the taxable year equals the excess (if any)
of—
‘‘(1) the sum of—
‘‘(A) the cost of business purchases for the
taxable year, and
‘‘(B) the transition basis adjustment for
the taxable year, over
‘‘(2) taxable receipts for the taxable year.
‘‘(d) SPECIAL RULES.—
‘‘(1) CONSOLIDATED RETURNS.—In the case of
a consolidated return, the loss for a taxable year
shall be determined on a consolidated group basis.
In the case of a deconsolidation, the loss carryovers
from the consolidated group shall be allocated in ac-
cordance with rules to be prescribed by the Sec-
retary.
‘‘(2) LOSS
CARRYOVERS
OF
ACQUIRED
BUSI-
NESS ENTITY.—
299
‘‘(A) IN GENERAL.—If a business entity
acquires another business entity in a trans-
action that is considered the acquisition of a
business entity and the two entities file a con-
solidated return or if two business entities
merge, the loss carryovers will survive and can
be applied against the taxable receipts attrib-
utable to the business activities carried on (or
in the case of a merger formerly carried on) by
either entity.
‘‘(B) ASSET ACQUISITION.—If a business
entity acquires all or substantially all of the as-
sets of another entity in a transaction that is
considered an asset acquisition rather than the
acquisition of a business entity, the acquirer
will be treated as if it acquired the loss
carryovers of the selling entity. For purposes of
this rule, the assets of a business entity include
ownership interests in other business entities.
‘‘(C) SUBSTANTIALLY ALL.—For purposes
of this paragraph ‘substantially all’ means more
than 80 percent of the fair market value of a
business entity’s net assets. Under rules pre-
scribed by the Secretary, the parties to a trans-
action may elect to treat acquisitions in excess
300
of 70 percent of the fair market value of a busi-
ness entity’s net assets as acquisitions of ‘sub-
stantially all’ of a business entity’s net assets.
‘‘Subchapter C—Capital Contributions,
Mergers, Acquisitions, and Distributions
‘‘Sec. 210. Contributions to a business entity.
‘‘Sec. 211. Distributions of property.
‘‘Sec. 212. Asset acquisitions.
‘‘Sec. 213. Mergers and stock acquisitions.
‘‘Sec. 214. Spin-offs, split-off, etc.
‘‘Sec. 215. Allocation of certain tax attributes.
‘‘SEC. 210. CONTRIBUTIONS TO A BUSINESS ENTITY.
‘‘(a) BY BUSINESS ENTITY.—
‘‘(1) CASH.—If a business entity contributes
cash to a business entity of which it is or becomes
a partial or full owner, the amount contributed is
not a deductible amount to the contributor or a tax-
able receipt to the recipient.
‘‘(2) PROPERTY OR SERVICES.—If a business
entity contributes property or services to a business
entity of which it is or becomes a partial or full
owner, the transaction will not result in taxable re-
ceipts to the contributor or a deduction for a busi-
ness purchase for the recipient and will not con-
stitute a sale resulting in taxable receipts to the con-
tributor.
‘‘(b) BY INDIVIDUAL.—
301
‘‘(1) CASH.—If an individual contributes cash
to a business entity, the cash received is not a tax-
able receipt.
‘‘(2) NEW PROPERTY.—If an individual contrib-
utes to a business entity property that the individual
purchased for the business entity but which was not
used by any person after its purchase, the property
shall be considered purchased by such business enti-
ty from the person from which the individual pur-
chased the property.
‘‘(3) PERSONAL USE PROPERTY.—
‘‘(A) IN GENERAL.—If an individual con-
tributes personal use property to a business en-
tity in which the individual has an ownership
interest or for which the individual receives an
ownership interest, the business entity shall not
be permitted to deduct the value of the property
received as a business expense. The business
entity will have a tax basis in the contributed
property equal to the contributor’s basis.
‘‘(B) PERSONAL
USE
PROPERTY.—‘Per-
sonal use property’ means any property used by
an individual at any time other than in a busi-
ness activity.
303
ness entity, the fair market value of the property for pur-
poses of paragraph (a) shall equal the basis of the prop-
erty plus any enhancement in value of the property attrib-
utable to business purchases with respect to the property.
‘‘(d) CONTROLLING BUSINESS ENTITY.—A business
entity is a ‘controlling business entity’ with respect to an-
other business entity if it owns directly or indirectly more
than 50 percent of the profits or capital interest in the
other business entity.
‘‘(e) APPLICATION OF THIS SECTION.—This section
applies to both liquidating and nonliquidating distribu-
tions. Property shall be treated as distributed if the prop-
erty is used for a nonbusiness purpose (as defined in sec-
tion 232) for more than an insubstantial period of time
during a taxable year. See section 232 for rules relating
to certain rental property.
‘‘SEC. 212. ASSET ACQUISITIONS.
‘‘(a) IN GENERAL.—If a business entity transfers
some or all of its assets, the consideration received for
such assets shall be allocated among the assets transferred
in the same manner as was required by section 1060 of
the Internal Revenue Code of 1986. If the transferee and
transferor agree in writing on the allocation of any consid-
eration, or as to the fair market value of any of the assets,
such agreement shall be binding on both the transferor
304
and transferee unless the Secretary determines that such
allocation (or fair market value) is not appropriate.
‘‘(b) TAX CONSEQUENCES.—The tax consequences of
an asset acquisition shall be determined in accordance
with the rules of this chapter and shall be dependent upon
allocations made under subsection (a). In general, consid-
eration allocable to savings assets, such as stock in an-
other business entity, would not be included in taxable re-
ceipts of the transferor and would not be a business pur-
chase of the purchaser, but consideration allocable to the
sale of tangible property and intangible property (other
than savings assets) will constitute taxable receipts of the
seller and a business purchase of the purchaser.
‘‘(c) ELECTION TO TREAT ASSET ACQUISITION AS A
STOCK ACQUISITION.—In the case of the sale of substan-
tially all of the assets of a business entity or substantially
all of the assets of a line of business or a separately stand-
ing business of a business entity, the transferee and trans-
feror can jointly elect to treat the acquisition as if it were
an acquisition of the stock of a business entity holding
the assets so transferred. In such case, the rules of section
213 shall apply.
‘‘(d) AUTHORITY TO REQUIRE ALLOCATION AGREE-
MENT AND NOTICE TO THE SECRETARY.—If the Sec-
retary determines that certain types of asset acquisitions
305
have significant possibilities of tax avoidance, the Sec-
retary may require—
‘‘(1) parties to such types of acquisitions to
enter into agreements allocating consideration,
‘‘(2) parties to acquisitions involving certain
kinds of assets to enter into agreements allocating
part of the consideration to those assets, or
‘‘(3) parties to certain acquisitions to report in-
formation to the Secretary.
‘‘(e) ASSET ACQUISITION RULES DO NOT APPLY IF
CONSIDERATION INCLUDES EQUITY IN PURCHASER.—
‘‘(1) IN GENERAL.—If a business entity issues
its own equity or equity in a subsidiary or other con-
trolled entity as part of the consideration for the
transfer of assets to it, the transaction shall not be
treated as an asset acquisition and the rules of sec-
tion 13 shall apply.
‘‘(2) EQUITY.—For purposes of this subsection,
equity means—
‘‘(A) stock, in the case of a corporation,
‘‘(B) partnership or similar interest, in the
case of a partnership or limited liability com-
pany, and
‘‘(C) an ownership interest or interest in
profits in the case of any other business entity.
306
‘‘SEC. 213. MERGERS AND STOCK ACQUISITIONS.
‘‘(a) MERGERS.—A merger of one business entity
into another or two businesses entities into a third busi-
ness entity or any other similar transaction shall have no
direct consequences under the business tax. The surviving
entity shall assume the tax attributes of the merged cor-
porations, including any loss carryovers and credit
carryovers.
‘‘(b) STOCK ACQUISITION.—The acquisition of all or
substantially all of the ownership interest in one business
entity either for cash or in exchange for ownership in the
acquiring entity or an entity controlled by the acquired
entity shall have no direct consequences under the busi-
ness tax.
‘‘SEC. 214. SPIN-OFFS, SPLIT-OFFS, ETC.
‘‘A spin-off, split-off or split-up of a business entity
shall have no direct tax consequences under the business
tax.
‘‘SEC. 215. ALLOCATION OF CERTAIN TAX ATTRIBUTES.
‘‘The Secretary shall prescribe rules for allocation of
loss carryovers and payroll tax credit carryovers in cases
of substantial shifts of assets from one business entity to
another business entity. Under such rules, a portion of a
business entity’s carryovers may be deemed transferred
when assets are transferred.
307
‘‘Subchapter D—Accounting Method Rules
‘‘Sec. 220. General accounting rules.
‘‘Sec. 221. Use of the cash method of accounting.
‘‘Sec. 222. Taxable year.
‘‘Sec. 223. Long-term contracts.
‘‘Sec. 224. Post-sale price adjustments and refunds.
‘‘Sec. 225. Bad debts.
‘‘Sec. 226. Transition rules.
‘‘SEC. 220. GENERAL ACCOUNTING RULES.
‘‘(a) IN GENERAL.—Except as provided in section
221, a business entity shall use an accrual method of ac-
counting for purposes of determining the timing of rec-
ognition of taxable receipts and deduction of business pur-
chases. All business purchases shall be deducted when in-
curred (in the case of a business entity using the accrual
method of accounting) or when paid (in case of a business
entity using the cash method of accounting) without re-
gard to whether the business purchases are for or relate
to—
‘‘(1) inventory,
‘‘(2) assets with a useful life of more than one
year, or
‘‘(3) property that will be used to produce other
property.
‘‘(b) ECONOMIC PERFORMANCE.—For purposes of
determining whether an amount has been incurred, the all
events test shall not be treated as met any earlier than
when economic performance with respect to such item oc-
curs.
308
‘‘(c) CONSISTENT ACCOUNTING METHODS.—Except
as otherwise expressly provided in this chapter, a business
entity shall secure the consent of the Secretary before
changing the method of accounting by which it determines
gross profits. This provision shall not apply to changes
required by the adoption of the business tax.
‘‘SEC. 221. USE OF THE CASH METHOD OF ACCOUNTING.
‘‘(a) IN GENERAL.—A business entity that was per-
mitted to use and used the cash method of accounting
under the Internal Revenue Code of 1986 shall be per-
mitted to continue to use the cash method of accounting.
‘‘(b) NEW BUSINESS ENTITIES.—A new business en-
tity shall be permitted to use the cash method of account-
ing if permitted to under regulations prescribed by the
Secretary.
‘‘(c) CHANGE OR EXPANSION OF BUSINESS.—Sub-
section (a) shall cease to apply to a business entity that
changes or expands its business such that under regula-
tions prescribed by the Secretary it is no longer eligible
to use the cash method of accounting.
‘‘(d) REGULATIONS.—
‘‘(1) USE OF CASH METHOD.—The Secretary
shall prescribe regulations defining which business
entities may use the cash method of accounting. In
general, those regulations shall be consistent with
309
the rules under sections 447 and 448 of the Internal
Revenue Code of 1986, except that all corporations
shall be treated as C corporations were treated
under those sections. The regulations shall not re-
quire a business entity described in subsection (a) to
convert to the accrual method prior to January 1,
2003.
‘‘(2) CHANGE IN ACCOUNTING METHOD.—The
Secretary shall prescribe regulations to prevent dou-
ble counting of taxable receipts and deductible ex-
penses in the case of a change in accounting method.
‘‘SEC. 222. TAXABLE YEAR.
‘‘(a) COMPUTATION
OF
GROSS
PROFITS.—Gross
profits shall be computed on the basis of a business enti-
ty’s taxable year.
‘‘(b) TAXABLE YEAR.—‘Taxable year’ means—
‘‘(1) the taxpayer’s annual accounting period, if
it is a calendar year or a fiscal year;
‘‘(2) the calendar year, if subsection (g) applies;
or
‘‘(3) the period for which the return is made if
the return is made for a period of less than 12
months.
310
‘‘(c) ANNUAL ACCOUNTING PERIOD.—‘Annual ac-
counting period’ means the annual period on the basis of
which the business entity regularly keeps its books.
‘‘(d) CALENDAR YEAR.—‘Calendar year’ means a pe-
riod of 12 months ending on December 31.
‘‘(e) FISCAL YEAR.—‘Fiscal year’ means a period of
12 months ending on the last day of any month other than
December. In the case of any business entity that has
made the election provided by subsection (f), the term
means the annual period (varying from 52 to 53 weeks)
so elected.
‘‘(f) ELECTION OF 52–53 WEEK YEAR.—
‘‘(1) GENERAL RULE.—A business entity which,
in keeping its books, regularly computes its income
or profits on a basis of an annual period which var-
ies from 52 to 53 weeks and ends always on the
same day of the week and ends always—
‘‘(A) on whatever date such same day of
the week last occurs in a calendar month, or
‘‘(B) on whatever date such same day of
the week falls which is nearest to the last day
of a calendar month,
may elect to compute its gross profits on the basis
of such annual period.
311
‘‘(2) REGULATIONS.—The Secretary shall pre-
scribe such regulations as he deems necessary for
the application of this subsection, including regula-
tions relating to the application of effective dates to
taxpayers using a 52–53 week year.
‘‘(g) CALENDAR YEAR REQUIRED.—
‘‘(1) NO ACCOUNTING PERIOD.—A business en-
tity’s taxable year shall be the calendar year if the
business entity does not have an annual accounting
period or has an annual accounting period that does
not qualify as a fiscal year.
‘‘(2) NEW
BUSINESS
ENTITY.—The taxable
year of a business entity that begins business activ-
ity after December 31, 2001, shall be the calendar
year (or a 52–53 week fiscal year ending in Decem-
ber) unless the business entity can demonstrate a
business reason for selecting an accounting period
other than the calendar year.
‘‘(h) TRANSITION RULE FOR BUSINESS ENTITIES
WITH A FISCAL YEAR.—
‘‘(1) IN GENERAL.—A business entity with a
taxable year that is not the calendar year shall have
a short taxable year ending on December 31, 2001,
and a subsequent taxable year beginning on January
1, 2002, and ending on the day immediately pre-
312
ceding the beginning of the business entity’s next
fiscal year.
‘‘(2) BUSINESS
ENTITIES
WITH
52–53
WEEK
YEAR ENDING IN DECEMBER.—
‘‘(A) IN GENERAL.—If a business entity
has a 52–53 week taxable year (under the In-
ternal Revenue Code of 1986) that ends in De-
cember 2001, it may elect to begin its first tax-
able year for the business tax on the first day
immediately following the last day of such tax-
able year.
‘‘(B) NO ELECTION.—If a business entity
that has a 52–53 week taxable year that ends
in December 2001, does not make the election
under subparagraph (A) or is prohibited from
making such election by subparagraph (C), the
business entity’s taxable year under the Inter-
nal Revenue Code of 1986 that would end in
December 2001 shall end on December 31,
2001.
‘‘(C) ANTI-ABUSE
RULE.—Subparagraph
(A) shall not apply to any taxpayer that enters
into business transactions in 2001 following the
scheduled end of its fiscal year with business
entities that are not subject to the business tax
313
at the time of such transactions if such trans-
actions deviate from the normal course of busi-
ness in order to achieve some tax benefit.
‘‘SEC. 223. LONG-TERM CONTRACTS.
‘‘(a) IN GENERAL.—In the case of a long-term
contract—
‘‘(1) CONTRACTOR EXPENSES.—The contractor
shall be entitled to deduct its business purchases
when paid or incurred.
‘‘(2) CONTRACTOR RECEIPTS.—The contractor
shall recognize taxable receipts—
‘‘(A) in the case of a project in which the
acquirer has no ownership interest in the
project until delivery—
‘‘(i) upon delivery of the project, in
the case of an accrual basis contractor, or
‘‘(ii) upon the later of delivery of the
project or the receipt of payment, in the
case of cash-basis contractor.
‘‘(B) in the case of a project in which the
acquirer obtains an ownership interest as the
project is constructed—
‘‘(i) when the contractor has the right
to payments, in the case of an accrual
basis contractor, or
314
‘‘(ii) upon the later of when the con-
tractor receives the cash or has the right
to payments, in the case of a cash basis
contractor.
‘‘(3) ACQUIRER EXPENSES.—The acquirer that
is a business entity shall be entitled to deduct its
costs of the business purchase—
‘‘(A) in the case of a cash-basis acquirer,
at such time as a cash basis contractor would
be required to treat the amounts paid as tax-
able receipts, or
‘‘(B) in the case of an accrual-basis
acquirer, at such time as an accrual basis con-
tractor would be required to treat the amounts
paid or due as taxable receipts.
‘‘(b) RIGHT TO PAYMENTS.—
‘‘(1) IN GENERAL.—A contractor shall be treat-
ed as having a right to payments with respect to a
project at any time to the extent that the contractor
would not be required to return payments received
(or would be entitled to collect payments not yet re-
ceived) if the project were terminated at such time
by the contractor.
‘‘(2) CONTRACTUAL
PROVISIONS.—If a long-
term contract includes a procedure for paying the
315
contractor as work is completed (for example, by
reason of a draw down from a trust account), the
contractual provisions shall generally govern when a
contractor has a right to payment.
‘‘(3) PERCENTAGE
COMPLETION
METHOD
OF
ACCOUNTING.—If a long-term contract does not in-
clude a mechanism for paying the contractor as
work is completed, the percentage-of-completion
method of accounting shall be used to determine the
timing of taxable receipts of the contractor and busi-
ness purchases of the acquirer.
‘‘(c) LONG-TERM CONTRACT.—
‘‘(1) 
IN
GENERAL.—‘Long-term 
contract’
means—
‘‘(A) any contract that covers service or
production through parts of two different cal-
endar years if the contract includes a formal
deposit and draw-down mechanism, and
‘‘(B) any contract for the manufacture,
building, installation, or construction of prop-
erty if such contract is not completed within the
taxable year of the contractor in which such
contract is entered into.
‘‘(2) EXCEPTION.—A contract for the manufac-
ture of property shall not be treated as a long-term
316
contract unless such contract involves the manufac-
ture of—
‘‘(A) any unique item of a type which is
not normally included in the finished goods in-
ventory of the taxpayer, or
‘‘(B) any item which normally requires
more than 12 calendar months to complete.
‘‘(d) CONSISTENCY.—The Secretary may require
business entities to file statements containing such infor-
mation with respect to long-term contracts as the Sec-
retary may prescribe to ensure consistency in reporting.
‘‘(e) FOREIGN CONTRACTS.—This section shall not
be construed to permit a deduction for a business purchase
for the cost of property produced outside the United
States pursuant to a long-term contract at any time prior
to the import of such property into the United States.
‘‘SEC. 224. POST-SALE PRICE ADJUSTMENTS AND REFUNDS.
‘‘(a) RECEIPT OF PRICE ADJUSTMENT.—In the case
of a post-sale price adjustment attributable to a business
purchase which was taken into account in computing gross
profits for a prior taxable year, the amount of such adjust-
ment shall be treated as a reduction or increase, as the
case may be, in the cost of business purchases for the tax-
able year in which the adjustment is made or incurred.
317
‘‘(b) ISSUANCE OF PRICE ADJUSTMENT.—In the case
of a post-sale price adjustment attributable to a sale the
receipts from which were taken into account in deter-
mining taxable receipts for a prior taxable year, the
amount of such adjustment shall be treated as a reduction
or increase, as the case may be, in taxable receipts for
the taxable year in which the adjustment is made or in-
curred.
‘‘(c) POST-SALE PRICE ADJUSTMENT.—‘Post-sale
price adjustment’ means a refund, rebate, or other price
allowance attributable to a sale of property or services or
an upward adjustment in price that was not previously
taken into account under the business entity’s method of
accounting.
‘‘SEC. 225. BAD DEBTS.
‘‘(a) SELLER.—If an amount owed to an accrual
basis business entity for property or services sold—
‘‘(1) was taken into account as a taxable receipt
in a prior taxable year, and
‘‘(2) becomes wholly or partially uncollectible
during the taxable year, then the seller shall treat
the amount as a reduction in taxable receipts for the
taxable year in which it becomes wholly or partially
uncollectible.
318
‘‘(b) NOTICE REQUIREMENT.—No reduction shall be
allowed under subsection (a) unless the seller notifies the
purchaser of the amount which the seller has treated as
wholly or partially uncollectible.
‘‘(c) SUBSEQUENT
COLLECTION.—If an amount
which was treated as uncollectible under subsection (a) is
subsequently collected, it shall be treated as a taxable re-
ceipt when collected.
‘‘(d) PURCHASER.—If a purchaser receives notice
under subsection (b) from a seller and the purchaser has
treated the amount labeled uncollectible as a business pur-
chase in a prior taxable year, then the purchaser shall
treat such amount as a reduction in the cost of business
purchases in the taxable year to which the notice relates.
If the purchaser subsequently repays such amount, the re-
payment shall constitute the cost of a business purchase.
‘‘SEC. 226. TRANSITION RULES.
‘‘(a) NO DOUBLE DEDUCTIONS.—A business entity
shall not be entitled to treat as a ‘cost of business pur-
chase’ any amount that the business entity deducted in
computing taxable income under the income tax in effect
prior the effective date of the business tax.
‘‘(b) NO DOUBLE INCLUSION.—A business entity
shall not be required to include in taxable receipts any
receipt that the business entity took into account in com-
319
puting taxable income under the income tax in effect prior
to the effect date of the business tax.
‘‘(c) NO LOSS OF DEDUCTION.—An expense which—
‘‘(1) a business entity would have been able to
deduct as a cost of a business purchase in an ac-
counting period before the effective date of the busi-
ness tax if the business tax had been in effect in
such period, and
‘‘(2) the business entity would have been able to
deduct as an expense in computing taxable income
in a period after the business tax is effective if the
income tax had continued in effect,
shall be treated as a cost of a business purchase incurred
or paid at the time that it would have been paid or in-
curred under the income tax if the income tax had contin-
ued in effect. This subsection shall not apply to any
amount which is to be taken into account under sub-
chapter N (relating to amortization of transition basis, in-
ventory costs, and safe harbor leases), any amounts which
would have been deducted under the income tax through
loss carryover deductions, or any deductions deferred by
the uniform capitalization rules under section 263A of the
Internal Revenue Code of 1986.
‘‘(d) ALL TAXABLE RECEIPTS TAXED.—A receipt
which—
320
‘‘(1) a business entity would have been required
to treat as a taxable receipt in an accounting period
before the effective date of the business tax if the
business tax had been in effect in such period, and
‘‘(2) the business entity would have been re-
quired to include in gross income in a period after
the business tax is effective if the income tax had
continued in effect
shall be treated as a taxable receipt at the time that it
would have been included in income if the income tax had
continued in effect.
‘‘Subchapter E—Land and rental property
‘‘Sec. 230. No deduction for land purchased for nonbusiness use.
‘‘Sec. 231. Taxable receipts for land held for nonbusiness use.
‘‘Sec. 232. Certain rental property.
‘‘SEC. 230. NO DEDUCTION FOR LAND PURCHASED FOR
NONBUSINESS USE.
‘‘(a) IN GENERAL.—The acquisition of unimproved
land shall not constitute a business purchase if the unim-
proved land is not acquired to be used in a business activ-
ity or if the land is acquired for—
‘‘(1) speculation,
‘‘(2) development (including subdivision), or
‘‘(3) temporary leasing or other use not com-
mensurate with the value of the land,
‘‘(4) indefinite future use in a business activity,
or
321
‘‘(5) use in compensating employees.
‘‘(b) FUTURE USE IN BUSINESS ACTIVITY.—Unim-
proved land will not be considered held for ‘indefinite fu-
ture use in a business activity’ if promptly upon acquisi-
tion, the purchaser or the lessee begins construction of im-
provements on the land (other than improvements, such
as paving or sewage lines, intended for indefinite future
development) that will be used in a business activity. Such
improvement must be commensurate with the value of the
land.
‘‘(c) 
UNIMPROVED
LAND.—‘Unimproved 
land’
means—
‘‘(1) land with no buildings on it,
‘‘(2) land with improvements if the value of the
improvements is relatively small in comparison to
the value of the land and it is anticipated that the
improvements will be demolished and not used,
‘‘(3) land in excess of the amount reasonably
needed for the buildings located on it.
‘‘(d) CONVERSION TO BUSINESS USE.—If the acqui-
sition of land is not treated as a business purchase by rea-
son of subsection (a) and the land is subsequently used
in a manner for which it could have been treated as a
business purchase, the cost of the land will be treated as
a business purchase when the improvements on the land
322
are placed in service (or in the case of construction for
sale, substantially completed and advertised for sale).
‘‘SEC. 231. TAXABLE RECEIPTS FROM SALE OF LAND HELD
FOR NONBUSINESS USE.
‘‘(a) TAX BASIS.—A business entity shall have a tax
basis in land equal to the cost of the land if such cost
is not deductible by reason of section 230(a) and the land
has not been converted to business use for purposes of
section 230(d).
‘‘(b) TAXABLE RECEIPTS OF A LAND SALE.—The
taxable receipts from the sale of land (or portion thereof)
in which a business entity has a tax basis by reason of
subsection (a) shall be the amount by which the proceeds
exceed the basis of such land (or portion thereof).
‘‘SEC. 232. CERTAIN RENTAL PROPERTY.
‘‘(a) IN GENERAL.—Except as provided in subsection
(b), the activity of rental of real estate is a business activ-
ity to which the business tax applies.
‘‘(b) NOT RENTAL PROPERTY.—Subsection (a) shall
not apply to property described in section 111(b)(1) (relat-
ing to property owned by individuals and used for at least
14 days for a nonbusiness purpose and rented for no more
than 14 days during the taxable year).
‘‘(c) RENTAL
PROPERTY
BECOMES
NONRENTAL
PROPERTY.—If property which is considered rental prop-
323
erty for purposes of subsection (a) in one taxable year
ceases to be rental property (by reason of subsection (b))
in the following taxable year, the property (and any associ-
ated debt) shall be treated as distributed by the business
entity to its owners. Section 211(a) shall apply to such
distribution.
‘‘Subchapter F—Insurance and
Financial Products
‘‘Sec. 235. General rules.
‘‘Sec. 236. Fees for financial intermediation services.
‘‘Sec. 237. Deductible insurance premiums.
‘‘Sec. 238. Nondeductible insurance premiums.
‘‘Sec. 239. Certain implicit fees for financial intermediate services.
‘‘SEC. 235. GENERAL RULES.
‘‘(a) TAXABLE RECEIPTS.—Except in the case of a
financial intermediation business, taxable receipts do not
include financial receipts (as defined in section 203(e)(2)).
‘‘(b) BUSINESS PURCHASES.—Except in the case of
a financial intermediation business, business purchases do
not include the cost of financial instruments (as defined
in section 242(b)(3)) or payments for use of money or cap-
ital, other than fees for financial intermediation services.
‘‘SEC. 236. FEES FOR FINANCIAL INTERMEDIATION SERV-
ICES.
‘‘(a) BUSINESS PURCHASE.—Business purchases in-
clude explicit fees and implicit fees for financial intermedi-
ation services (except to the extent that such fees are for
services treated as performed outside the United States
324
and not imported into the United States or for services
treated as exported.).
‘‘(b) FINANCIAL INTERMEDIATION SERVICES.—The
definition of ‘financial intermediation service’ in section
241 applies for purposes of this section.
‘‘(c) EXPLICIT FEES.—
‘‘(1) IN GENERAL.—‘Explicit fees for financial
intermediation services’ means separately stated fees
for services provided by a business entity in the fi-
nancial intermediation business. Explicit fees do not
include fees for use of money or capital.
‘‘(2) EXAMPLES.—Explicit fees for financial
intermediation services include (without limita-
tion)—
‘‘(A) separately listed maintenance and
service charges of providers of financial inter-
mediation services,
‘‘(B) loan documentation fees,
‘‘(C) brokerage fees,
‘‘(D) loan origination fees,
‘‘(E) underwriting fees,
‘‘(F) trustees’ fees, and
‘‘(G) fees for credit checks.
‘‘(3) EXCLUSIONS.—Explicit fees for financial
intermediation services do not include prepaid inter-
325
est and other fees for use of money or capital even
if such fees are separately stated or are labeled as
service fees.
‘‘(d) IMPLICIT FEES.—
‘‘(1) IMPLICIT FEES ATTRIBUTABLE TO BOR-
ROWING.—
‘‘(A) IN
GENERAL.—Implicit fees attrib-
utable to borrowing from banks and other fi-
nancial institutions shall include the portion of
interest payments that the Secretary designates
as constituting service fees.
‘‘(B) TIMING.—Implicit fees determined
under this paragraph shall not be deductible in
any taxable year prior to the taxable year in
which the interest is paid. If the amount of the
interest to which implicit fees relate was de-
ducted as original issue discount under the In-
ternal Revenue Code of 1986, the implicit fees
with respect to such interest shall not constitute
a deductible business purchase.
‘‘(C) DESIGNATION BY SECRETARY.—
‘‘(i) ESTIMATE OF DIFFERENTIAL.—
The Secretary shall estimate for each cal-
endar year the difference between the cost
of funds for banks and the rates of interest
326
(including discount points) charged to the
most credit-worthy depositors of banks.
The determinations shall be made sepa-
rately for—
‘‘(I) loans with terms of not more
than 3 years,
‘‘(II) loans with terms of over 3
but not over 9 years, and
‘‘(III) loans with terms of over 9
years.
‘‘(ii) 
DESIGNATION
OF
IMPLICIT
FEES.—The Secretary shall designate the
differences determined under clause (i) as
the portion of interest expense on loans
from banks and other financial institutions
that constitutes an implicit fee for term
loans originated during the following cal-
endar year for the respective periods listed
in subclauses (I) through (III) of clause
(i). The difference determined for loans de-
scribed in subclause (I) of clause (i) shall
apply to determine the implicit fee portion
of interest on demand loans outstanding
during the following calendar year.
327
‘‘(iii) HISTORICAL DETERMINATION.—
The Secretary shall make an historical de-
termination in accordance with the prin-
ciples of this subparagraph to designate
the portion of interest on term loans made
before January 1, 2001, that will con-
stitute implicit fees.
‘‘(2) IMPLICIT
FEES
FOR
OTHER
FINANCIAL
INTERMEDIATION ACTIVITY.—Implicit fees for finan-
cial intermediation services include the portion of the
fees or other charges paid to a provider of financial
intermediation services (other than lending) as such
provider designates in accordance with section 39.
‘‘SEC. 237. DEDUCTIBLE INSURANCE PREMIUMS.
‘‘(a) IN GENERAL.—The cost of insurance premiums
on business loss policies that insure risks in the United
States constitute costs of business purchases. Proceeds
from such policies constitute taxable receipts.
‘‘(b) BUSINESS LOSS POLICY.—A ‘business loss pol-
icy’ is an insurance policy—
‘‘(1) owned by a business entity,
‘‘(2) the beneficiary of which is the business en-
tity or another business entity doing business with
the owner of the policy,
328
‘‘(3) that has no inside buildup or other savings
component,
‘‘(4) that covers losses on a loss incurred or
claims made basis during the term of the policy,
‘‘(5) that has a term of not more than 2 years,
‘‘(6) that is not a direct or indirect form of
compensation, and
‘‘(7) that covers direct losses of the business,
such as—
‘‘(A) damage to or theft of property used
in business activity,
‘‘(B) tort claims against the business,
‘‘(C) loss of use of business premises or
services,
‘‘(D) malpractice, or
‘‘(E) alleged or actual breach of fiduciary
obligations.
‘‘SEC. 238. NONDEDUCTIBLE INSURANCE PREMIUMS.
‘‘(a) NONDEDUCTIBILITY.—The cost of insurance
policies that are not business loss policies are not deduct-
ible costs of business purchases.
‘‘(b) PROCEEDS OF NONDEDUCTIBLE POLICIES.—In-
surance proceeds from policies described in subsection (a)
do not constitute taxable receipts.
329
‘‘(c) APPLICATION OF THIS SECTION TO CERTAIN
INSURANCE.—This section shall apply to life insurance
policies.
‘‘SEC. 239. CERTAIN IMPLICIT FEES FOR FINANCIAL INTER-
MEDIATION SERVICES.
‘‘(a) DEDUCTIBILITY OF FEES.—If a financial inter-
mediation business (as defined in section 241(b)) elects
to determine implicit fees for financial intermediation
services pursuant to this section and notify its business
customers of their share of the implicit fees in accordance
with this section, a business entity which receives such no-
tice may treat the amount reported in the notice as an
implicit fee for financial intermediation services in the cal-
endar year to which such notice relates.
‘‘(b) ALLOCATION AND REPORTING.—
‘‘(1) IN GENERAL.—A financial intermediation
business may—
‘‘(A) allocate fees received for services for
which no separately stated fees (or implicit fees
for 
borrowing 
determined 
under 
section
236(d)(1)) are charged among recipients of
such services on a reasonable and consistent
basis, and
‘‘(B) report to each recipient not later
than February 15th of each year the amount so
330
allocated to it with respect to the immediately
preceding calendar year.
‘‘(2) MAXIMUM FEES ALLOCATED.—The max-
imum amount that may be allocated by a financial
intermediation business for a calendar is the excess
of—
‘‘(A) the gross profits of the financial
intermediation business for the calendar year
(as reasonably estimated by the financial inter-
mediation business), over
‘‘(B) the explicit fees for financial inter-
mediation services received by the financial
intermediation business.
‘‘(3) REASONABLE ALLOCATION.—An allocation
will not be considered reasonable unless it takes into
account and allocates fees to—
‘‘(A) both services provided to business en-
tities and services provided to individuals (other
than in a business capacity), and
‘‘(B) both persons who receive money from
the financial intermediation business and per-
sons who pay money to the financial intermedi-
ation business (even though amounts allocated
to the former do not constitute implicit fees).
331
‘‘(4) REGULATIONS.—The Secretary shall pre-
scribe regulations relating to the allocations under
this subsection, including regulations addressing—
‘‘(A) rules for timing of deductions of im-
plicit fees paid by fiscal year recipients,
‘‘(B) subsequent year adjustments if a fi-
nancial intermediation business allocates too
much in a calendar year,
‘‘(C) rules for advance approval from the
Secretary for allocation procedures, and
‘‘(D) safe-harbor alternatives to the alloca-
tion procedures described in this subsection.
‘‘(c) NOT APPLICABLE TO LENDING SERVICES.—
This section shall not apply to lending services.
‘‘Subchapter G—Financial Intermediation
and Financial Institutions
‘‘Sec. 241. Activities constituting a financial intermediation business.
‘‘Sec. 242. General rule for taxation.
‘‘Sec. 243. Special rule for banks.
‘‘Sec. 244. Insurance companies.
‘‘Sec. 245. Financial pass-through entities.
‘‘Sec. 246. Financial intermediation by other businesses.
‘‘SEC. 241. ACTIVITIES CONSTITUTING A FINANCIAL INTER-
MEDIATION BUSINESS.
‘‘(a) FINANCIAL INTERMEDIATION BUSINESS.—The
providing of financial intermediation services shall be con-
sidered a business activity. The gross profit of a business
entity providing financial intermediation services shall be
332
determined by taking into account the rules of this sub-
chapter.
‘‘(b) SEPARATE BUSINESS ACTIVITY.—The provision
of financial intermediation services for unrelated persons
shall be considered a separate business activity and a busi-
ness shall be considered a separate entity with respect to
such activity. An entity engaging in such business is re-
ferred to in this chapter as a ‘financial intermediation
business’.
‘‘(c) FINANCIAL INTERMEDIATION BY A BUSINESS.—
Section 246 shall apply to a business that provides finan-
cial intermediation services for itself and related parties
but generally does not provide such services for unrelated
parties.
‘‘(d) DEFINITIONS.—
‘‘(1) FINANCIAL INTERMEDIATION SERVICES.—
‘Financial intermediation services’ include—
‘‘(A) lending services,
‘‘(B) insurance services,
‘‘(C) market-making and dealer services,
and
‘‘(D) any other service provided as busi-
ness activity in which a person acts as an inter-
mediary in—
333
‘‘(i) the transfer of property, services,
or financial assets, liabilities, risks or in-
struments (or income or expense derived
therefrom) between two or more persons,
or
‘‘(ii) the pooling of economic risk
among other persons
and derives all or a portion of such person’s
gross receipts from streams of income or ex-
pense, discounts, or other financial flows associ-
ated with the matter with respect to which such
person is acting as an intermediary.
‘‘(2) LENDING
SERVICES.—‘Lending services’
means the regular making of loans and providing
credit to, or taking deposits from customers, but
does not include an installment or delayed payment
arrangement provided by a seller of property or serv-
ices under which additional charges or fees are im-
posed by the seller for the late payment.
‘‘(3) MARKET-MAKING OR DEALER SERVICES.—
‘Market-making or dealer services’ means services
provided by a person who—
‘‘(A) regularly purchases financial instru-
ments from or sells financial instruments to
334
customers in the ordinary course of a trade or
business,
‘‘(B) regularly offers to enter into, assume,
offset, assign, or otherwise terminate positions
in financial instruments with customers in the
ordinary course of a trade or business.
‘‘SEC. 242. GENERAL RULE FOR TAXATION.
‘‘(a) IN GENERAL.—In the case of a financial inter-
mediation business, gross profits shall be computed by—
‘‘(1) substituting financial receipts for taxable
receipts, and
‘‘(2) including financial expenses as business
purchases.
‘‘(b) DEFINITIONS.—
‘‘(1) FINANCIAL
RECEIPTS.—‘Financial re-
ceipts’ means all receipts other than amounts re-
ceived as contributions to capital.
‘‘(2) FINANCIAL
EXPENSES.—‘Financial ex-
penses’ include—
‘‘(A) payments for principal and interest
that is properly allocable to the provision of fi-
nancial intermediation services,
‘‘(B) the cost of and payments under fi-
nancial instruments (other than financial in-
struments in the person subject to the tax im-
335
posed under this chapter and any person re-
lated to such person),
‘‘(C) claims and cash surrender values paid
in connection with insurance or reinsurance
services, and
‘‘(D) amounts paid for reinsurance.
‘‘(3) FINANCIAL INSTRUMENT.—‘Financial in-
strument’ means any—
‘‘(A) share of stock in a corporation,
‘‘(B) equity ownership in any widely held
or publicly traded partnership, trust, or other
business entity,
‘‘(C) note, bond, debenture, or other evi-
dence of indebtedness,
‘‘(D) interest rate, currency, or equity no-
tional principal contract,
‘‘(E) evidence or interest in, or a derivative
financial instrument in, any financial instru-
ment described in subparagraph (A), (B), (C),
or (D), or any currency, including any option,
forward contract, short position, and any simi-
lar financial instrument in such a financial in-
strument or currency, and
‘‘(F) a position which—
336
‘‘(i) is not a financial instrument de-
scribed in subparagraph (A), (B), (C), (D)
or (E),
‘‘(ii) is a hedge with respect to such
a financial instrument, and
‘‘(iii) is clearly identified in the deal-
er’s records as being described in this sub-
paragraph before the close of the day on
which it was acquired or entered into.
‘‘(c) INTERNATIONAL MATTERS.—For purposes of
this section in the case of a financial intermediation busi-
ness with activity in and outside the United States—
‘‘(1) INCLUSION REGARDLESS OF SOURCE.—
‘‘(A) Financial receipts shall be determined
without regard to whether they are received for
property or service provided in or outside the
United States, except that financial receipts do
not include amounts that—
‘‘(i) are not taxable receipts (as deter-
mined without regard to this section), but
‘‘(ii) would have been taxable receipts
(as determined without regard to this sec-
tion) if they had been received for services
or property in the United States.
337
‘‘(B) Financial expenses shall be deter-
mined without regard to whether they are re-
ceived for property or services acquired in or
outside the United States.
‘‘(2) ALLOCATION.—Under regulations pre-
scribed by the Secretary, gross profits (as deter-
mined without regard to this paragraph) shall be re-
duced by the amount of financial intermediation
gross profit attributable to financial intermediation
activity provided outside the United States.
‘‘(3) GROSS PROFIT ATTRIBUTABLE TO FINAN-
CIAL INTERMEDIATION ACTIVITY.—‘Gross profits at-
tributable to financial intermediation activity’ means
the excess of—
‘‘(A) gross profits as determined under
this section (but without regard to paragraph
(2)), over
‘‘(B) gross profits as determined without
regard to this subchapter.
‘‘SEC. 243. SPECIAL RULES FOR BANKS.
‘‘(a) IN GENERAL.—In the case of a bank, gross prof-
its shall be determined in accordance with section 242, ex-
cept that—
‘‘(1) FINANCIAL RECEIPTS.—Financial receipts
shall include only—
338
‘‘(A) taxable receipts (as determined with-
out regard to this subchapter),
‘‘(B) interest on loans made or acquired by
the bank,
‘‘(C) gain on the sale of loans,
‘‘(D) discount points received, and
‘‘(E) any explicit fees for financial or fidu-
ciary services not included in subparagraphs
(A) through (E).
‘‘(2) FINANCIAL
EXPENSES.—Financial ex-
penses shall include only—
‘‘(A) interest paid to depositors and on
other funds borrowed by the bank, and
‘‘(B) reasonable additions to reserves for
bad debts.
‘‘(3) FORECLOSURE PROPERTY.—Gross profits
shall properly take into account proceeds from the
operation or sale of foreclosure property.
‘‘(b) BANK.—
‘‘(1) IN GENERAL.—‘Bank’ means a bank or
trust company incorporated and doing business
under the laws of the United States, the District of
Columbia, or any State, a substantial part of the
business of which consists of receiving deposits and
making loans and discounts, or of exercising fidu-
366
‘‘(A) to perform, on a centralized basis,
one or more of the following services which, if
performed on its own behalf by a hospital which
is an organization described in subsection (c)(3)
and exempt from taxation under subsection (a),
would constitute activities in exercising or per-
forming the purpose or function constituting
the basis for its exemption: data processing,
purchasing (including the purchasing of insur-
ance on a group basis), warehousing, billing
and collection, food, clinical, industrial engi-
neering, laboratory, printing, communications,
record center, and personnel (including selec-
tion, testing, training, and education of per-
sonnel) services; and
‘‘(B) to perform such services solely for
two or more hospitals each of which is—
‘‘(i) an organization described in sub-
section (c)(3) which is exempt from tax-
ation under subsection (a),
‘‘(ii) a constituent part of an organi-
zation described in subsection (c)(3) which
is exempt from taxation under subsection
(a) and which, if organized and operated
as a separate entity, would constitute an