To amend the Internal Revenue Code of 1986 to provide an incremental investment tax credit to assist defense contractors in converting to nondefense operations.

SECTION 1. CONVERSION INVESTMENT CREDIT FOR DEFENSE CONTRACTORS.

    (a) Allowance of Credit.--Section 46 of the Internal Revenue Code 
of 1986 (relating to amount of investment credit) is amended by 
striking ``and'' at the end of paragraph (2), by striking the period at 
the end of paragraph (3) and inserting ``, and'', and by adding at the 
end thereof the following new paragraph:
            ``(4) in the case of a defense contractor (as defined in 
        section 48(c)), the defense contractor conversion 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 Credit.--
            ``(1) In general.--For purposes of section 46, in the case 
        of a defense contractor, the defense contractor 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 expenses 
                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 receipts 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 investment for 
                such taxable year, over
                    ``(B) the average of the net nondefense qualified 
                investment for the preceding 3 taxable years.
            ``(4) Net nondefense qualified investment.--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 disposed of, or otherwise 
                ceases to be such property, during such taxable year.
            ``(5) Qualified investment.--
                    ``(A) In general.--For purposes of this subsection, 
                the qualified investment for any taxable 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 applicable.--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 Reconciliation 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 `defense 
                contract' means any contract or subcontract 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, communications, 
                        electrical energy, gas, water, or sewage 
                        disposal services, or
                            ``(ii) constitutes a research facility used 
                        in connection with any of the activities 
                        referred to in clause (i), or
                            ``(iii) constitutes a facility used in 
                        connection with any of the activities referred 
                        to in clause (i) for the bulk storage of 
                        fungible commodities (including commodities 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 horticultural 
                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 depreciation (or amortization in lieu of 
        depreciation) is allowable 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 expenses.--For purposes 
        of this subsection, the term `qualified nondefense product 
        expenses' means the following expenses to the extent incurred 
        in connection with any product or service not related to any 
        defense contract: expenses for research, design, commercial 
        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 effect 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 taxable 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 section 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 property 
                which was taken into account under subsection (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 determining the incremental nondefense 
        qualified investment for any taxable year and which allow the 
        credit under paragraph (1)(A) attributable to such property 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 section 48(m) (as in effect on the day 
        before the date of the enactment of the Revenue Reconciliation 
        Act of 1990).''
    (c) Technical Amendments.--
            (1) Subparagraph (C) of section 49(a)(1) of such Code is 
        amended by striking ``and'' at the end of clause (ii), by 
        striking the period at the end of clause (iii) and inserting 
        ``, and'', and by adding at the end thereof the following new 
        clause:
                            ``(iv) the basis of any new nondefense 
                        section 38 property and the cost of any used 
                        nondefense section 38 property.''
            (2) Subparagraph (E) of section 50(a)(2) of such Code is 
        amended by inserting ``or 48(c)(5)'' before the period at the 
        end thereof.
            (3) Paragraph (5) of section 50(a) of such Code is amended 
        by adding at the end thereof the following new subparagraph:
                    ``(D) Special rules for certain property.--In the 
                case of any nondefense section 38 property which is 3-
                year property (within the meaning of section 168(e))--
                            ``(i) the percentage set forth in clause 
                        (ii) of the table contained in paragraph (1)(B) 
                        shall be 66 percent,
                            ``(ii) the percentage set forth in clause 
                        (iii) of such table shall be 33 percent, and
                            ``(iii) clauses (iv) and (v) of such table 
                        shall not apply.''
            (4) Section 280C of such Code is amended by adding at the 
        end thereof the following new subsection:
    ``(d) Credit for Certain Expenses of Defense Contractors.--No 
deduction shall be allowed for that portion of the qualified nondefense 
product expenses (as defined in section 48(c)(8)) otherwise allowable 
as a deduction for the taxable year which is equal to the amount of the 
credit determined for such taxable year under section 48(c) with 
respect to such expenses. Rules similar to the rules of paragraphs (2) 
and (3) of subsection (b) shall apply for purposes of this 
subsection.''
            (5)(A) The section heading for section 48 of such Code is 
        amended to read as follows:

``SEC. 48. OTHER CREDITS.''

            (B) The table of sections for subpart E of part IV of 
        subchapter A of chapter 1 of such Code is amended by striking 
        the item relating to section 48 and inserting the following:

                              ``Sec. 48. Other credits.''
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after December 31, 1994.

Summary: Amends the Internal Revenue Code to establish a defense contractor conversion investment tax credit to be equal to 15 percent of:  (1) the incremental nondefense qualified investment for a taxable year; plus (2) the qualified nondefense product expenses incurred during such year. 
Defines a "defense contractor" as any taxpayer if more than ten percent of its gross receipts are derived from defense contracts. 
Bars a deduction for that portion of the qualified nondefense product expenses otherwise allowable as a deduction that is equal to the amount of credit with respect to such expenses.