Tax Reform Act of 1986
PL 99-514 (H.R.3838), enacted 10/22/1986

PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2085 
Public Law 99-514 
99th Congress 
An Act 
To reform the internal revenue laws of the United States. 
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Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled, 
Tax Reform Act 
of 1986. 
SECTION 1. SHORT TITLE; TABLE OF CONTENTS. 
26 USC 1 et seq. 
(a) SHORT TITLE.—This Act may be cited as the "Tax Reform Act of 
1986". 
(b) TABLE OF CONTENTS.— 
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TITLE I-INDIVIDUAL INCOME TAX PROVISIONS 
Subtitle A—Rate Reductions; Increase in Standard Deduction and Personal 
Exemptions 
Sec. 101. Rate reductions. 
Sec. 102. Increase in standard deduction. 
Sec. 103. Increase in personal exemptions. 
Sec. 104. Technical amendments. 
Subtitle B—Provisions Related to Tax Credits 
Sec. 111. Increase in earned income credit. 
Sec. 112. Repeal of credit for contributions to candidates for public office. 
Subtitle C—Provisions Related to Exclusions 
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Sec. 121. Taxation of unemployment compensation. 
Sec. 122. Prizes and awards. 
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Sec. 123. Scholarships. 
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Subtitle D—Provisions Related to Deductions 
Sec. 131. Repeal of deduction for 2-earner married couples. 
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Sec. 132. 2-percent floor on miscellaneous itemized deductions. 
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Sec. 133. Medical expense deduction limitation increased. 
Sec. 134. Repeal of deduction for State and local sales tax. 
Sec. 135. Repeal of deduction for adoption expenses. 
Subtitle E—Miscellaneous Provisions 
Sec. 141. Repeal of income averaging. 
Sec. 142. Limitations on deductions for meals, travel, and entertainment. 
Sec. 143. Changes in treatment of hobby loss, etc. 
Sec. 144. Deduction for mortgage interest and real property taxes allowable where 
parsonage allowance or military housing allowance received. 
Subtitle F—Effective Dates 
Sec. 151. Effective dates. 
TITLE II-PROVISIONS RELATING TO CAPITAL COST 
Subtitle A—Depreciation Provisions 
Sec. 201. Modification of accelerated cost recovery system. 
Sec. 202. Expensing of depreciable assets. 
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Sec. 203. Effective dates; general transitional rules. 
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Subtitle B—Repeal of Regular Investment Tax Credit 
Sec. 211. Repeal of regular investment tax credit. 
Sec. 212. Effective 15-year carryback of existing carryforwards of steel companies. 
Sec. 213. Effective 15-year carryback of existing carryforwards of qualified farmers. 
100 STAT. 2086 
PUBLIC LAW 99-514—OCT. 22, 1986 
Subtitle C—General Business Credit Reduction 
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Sec. 221. Reduction in tax liability which may be offset by business credit from 85 
percent to 75 percent. 
Subtitle D—Research and Development Provisions 
Sec. 231. Amendments relating to credit for increasing research activities. 
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Sec. 232. Extension of credit for clinical testing expenses for certain drugs. 
Subtitle E—Changes in Certain Amortization Provisions 
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Sec. 241. Repeal of 5-year amortization of trademark and trade name expenditures. 
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Sec. 242. Repeal of amortization of railroad grading and tunnel bores. 
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Sec. 243. Deduction for bus and freight forwarder operating authority. 
Sec. 244. Treatment of expenditures for removal of architectural barriers to the 
handicapped and elderly made permanent. 
Subtitle F—Provisions Relating to Real Estate 
Sec. 251. Modification of investment tax credit for rehabilitation expenditures. 
Sec. 252. Low-income housing credit. 
Subtitle G—Merchant Marine Capital Construction Funds 
Sec. 261. Provisions relating to merchant marine capital construction funds. 
TITLE III—CAPITAL GAINS 
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Subtitle A—Individual Capital Gains 
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Sec. 301. Repeal of exclusion for long-term capital gains of individuals. 
Sec. 302. 28-percent capital gains rate for taxpayers other than corporations. 
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Subtitle B—Repeal of Corporate Capital Gains Treatment 
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Sec. 311. Repeal of corporate capital gains treatment. 
Subtitle C—Incentive Stock Options 
Sec. 321. Repeal of requirement that incentive stock options are exercisable only in 
chronological order; modification of $100,000 limitation. 
Subtitle D—Straddles 
Sec. 331. Year-end rule expanded. 
TITLE IV—AGRICULTURE. ENERGY, AND NATURAL RESOURCES 
Subtitle A—Agriculture 
Sec. 401. Limitation on expensing of soil and water conservation expenditures. 
Sec. 402. Repeal of special treatment for expenditures for clearing land. 
Sec. 403. Treatment of dispositions of converted wetlands or highly erodible 
croplands. 
Sec. 404. Limitation on certain prepaid farming expenses. 
Sec. 405. Tax treatment of discharge of certain indebtedness of solvent farmers. 
Subtitle B—Treatment of Oil, Gas, Geothermal, and Hard Minerals 
Sec. 411. Treatment of intangible drilling costs and mineral exploration and devel-
opment costs. 
Sec. 412. Modification of percentage depletion rules. 
Sec. 413. Gain from disposition of interests in oil, g£is, geothermal, or other mineral 
properties. 
Subtitle C—Other Provisions 
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Sec. 421. Extension of energy investment credit for solar, geothermal, ocean ther-
mal, and biomass property. 
Sec. 422. Provisions relating to excise tax on fuels. 
Sec. 423. Ethyl alcohol and mixtures thereof for fuel use. ^j ,.,4-, 
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TITLE V—TAX SHELTER LIMITATIONS; INTEREST LIMITATIONS 
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Subtitle A—Limitations on Tax Shelters 
Sec. 501. Limitations on losses and credits from passive activities. 
Sec. 502. Transitional rule for low-income housing. 
Sec. 503. Extension of at risk limitations to real property. 
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2087 
Subtitle B—Interest Expense 
Sec. 511. Limitations on deduction for nonbusiness interest. 
TITLE VI—CORPORATE PROVISIONS 
Subtitle A—Corporate Rate Reductions 
Sec. 601. Corporate rate reductions. 
Subtitle B—Treatment of Stock and Stock Dividends 
Sec. 611. Reduction in dividends received deduction. 
Sec. 612. Repeal of partial exclusion of dividends received by individuals. 
Sec. 613. Nondeductibility of stock redemption expenses. 
Sec. 614. Reduction in stock basis for nontaxed portion of extraordinary dividends. 
Subtitle C—Limitation on Net Operating Loss Carryforwards and Excess Credit 
Carryforwards 
Sec. 621. Limitation on net operating loss carryforwards. 
Subtitle D—Recognition of Gain and Loss on Distributions of Property in 
Liquidation 
Sec. 631. Recognition of gain and loss on distributions of property in liquidation. 
Sec. 632. Treatment of C corporations electing subchapter S status. 
Sec. 633. Effective dates. 
Sec. 634. Study of corporate provisions. 
Subtitle E—Other Corporate P*rovisions 
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Sec. 641. Special allocation rules for certain asset acquisitions. 
Sec. 642. Modification of definition of related party. 
Sec. 643. Treatment of amortizable bond premium as interest. 
Sec. 644. Provisions relating to cooperative housing corporations. 
Sec. 645. Special rules relating to personal holding company tax. 
Sec. 646. Certain entitles not treated as corporations. 
Sec. 647. Special rule for disposition of stock of subsidiary. 
Subtitle F—Regulated Investment Companies 
Sec. 651. Excise tax on undistributed income of r^ulated investment companies. 
Sec. 652. Treatment of business development companies. 
Sec. 653. Amendments to qualification rules. 
Sec. 654. Treatment of series funds as separate corporations. 
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Sec. 655. Extension of period for mailing notices to shareholders. 
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Sec. 656. Protection of mutual funds receiving third-party summonses. 
Sec. 657. Certain distributions not treated as preferential dividends. 
Subtitled—Real Estate Investment Trusts 
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Sec. 661. General qualification requirements. 
Sec. 662. Asset and income requirements. 
Sec. 663. Definition of rents. 
Sec. 664. Distribution requirements. 
Sec. 665. Treatment of capital gains. 
Sec. 666. Modifications of prohibited transaction rules. 
Sec. 667. Deficiency dividends of real estate investment trusts not subject to penalty 
under section 6697. 
Sec. 668. Excise tax on undistributed income of real estate investment trusts. 
Sec. 669. Effective dates. 
Subtitle H—Taxation of Interests in Entities Holding Real Estate Mortgages 
Sec. 671. Taxation of real estate mortgage investment conduits. 
Sec. 672. Rules for accruing original issue discount on r^;ular interests and similar 
debt instruments. 
Sec. 673. Treatment of taxable mortgage pools. 
Sec. 674. Compliance provisions. 
Sec. 675. Effective dates. 
TITLE Vn—ALTERNATIVE MINIMUM TAX 
Sec. 701. Alternative minimum tax for individuals and corporations. 
Sec. 702. Study of book and earnings and profits adjustments. 
100 STAT. 2088 
PUBLIC LAW 99-514—OCT. 22, 1986 
TITLE VIII-ACCOUNTING PROVISIONS 
Subtitle A—General Provisions 
Sec. 801. Limitation on use of cash method of accounting. 
Sec. 802. Simplified dollar-value LIFO method for certain small businesses. 
Sec. 803. Capitalization and inclusion in inventory costs of certain expenses. 
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Sec. 804. Modifications of method of accounting for long-term contracts. 
Sec. 805. Repeal of reserve for bad debts of taxpayers other than financial institu-
tions. 
Sec. 806. Taxable years of certain entities. 
Subtitle B—Treatment of Installment Obligations 
Sec. 811. Allocation of indebtedness as payment on installment obligation. 
Sec. 812. Disallowance of use of installment method for certain obligations. 
Subtitle C—Other Provisions 
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Sec. 821. Income attributable to utility services. 
Sec. 822. Repeal of application of discharge of indebtedness rules to qualified busi-
ness indebtedness. 
Sec. 823. Repeal of deduction for qualified discount coupons. 
Sec. 824. Inclusion in gross income of contributions in aid of construction. . -, ' 
TITLE IX—FINANCIAL INSTITUTIONS 
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Sec. 901. Limitations on bad debt reserves. 
Sec. 902. Interest incurred to carry tax-exempt bonds. 
Sec. 903. Termination of special 10-year carryback rules for certain financial insti-
tutions; new special carryover rules for certain losses. 
Sec. 904. Repeal of special reorganization rules for financial institutions. 
Sec. 905. Treatment of losses on deposits or accounts in insolvent financial institu-
tions. 
TITLE X-INSURANCE PRODUCTS AND COMPANIES 
Subtitle A—Policyholder Issues 
Sec. 1001. Repeal of exclusion for interest on installment payments of life insurance 
proceeds. 
Sec. 1002. Exclusion from income with respect to structured settlements limited to 
cases involving ph3rsical injury. 
Sec. 1003. Denial of deduction for interest on loans from certain life insurance 
contracts. 
Sec. 1004. Deduction for nonbusiness casualty losses covered by insurance allowable 
only if claim filed. 
Subtitle B—Life Insurance Companies 
Sec. 1011. Repeal of special life insursuice company deduction. 
Sec. 1012. Repeal of tax-exempt status for certain organizations providing commer-
cial-type insurance. 
Sec. 1013. Operations loss deduction of insolvent companies may offset distributions 
from policyholders surplus account. 
Subtitle C—Property and Casualty Insurance Companies 
Sec. 1021. Inclusion in income of 20 percent of unearned premium reserve. 
Sec. 1022. Treatment of certain dividends and tax-exempt interest. 
Sec. 1023. Discounting of unpaid losses and certain unpaid expenses. 
Sec. 1024. Repeal of protection against loss account; revision of special treatment 
for small companies; combination of parts II and III. 
Sec. 1025. Study of treatment of property and casualty insurance companies. 
Subtitle D—Miscellaneous Provisions 
Sec. 1031. Physicians' and surgeons' mutual protection and interindemnity arrange-
ments or associations. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2089 
TITLE XI-PENSIONS AND DEFERRED COMPENSATION; EMPIOYEE 
BENEFITS; EMPLOYEE STOCK OWNERSHIP PLANS 
Subtitle A—Pensions and Deferred Compensation 
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PART I—LIMITATIONS ON TAX-DEFERRED SAVINGS 
SUBPART A—RULES APPLICABLE TO IRAS 
Sec. 1101. Limitations on IRA deductions for active participants in certain pension 
plans. 
Sec. 1102. Nondeductible contributions may be made to individual retirement plans. 
Sec. 1103. Spousal deduction allowed where spouse has small amount of earned 
income. 
SUBPART B—OTHER PROVISIONS 
Sec. 1105. $7,000 limitation on elective deferrals. 
Sec. 1106. Adjustments to limitations on contributions and benefits under qualified 
plans. 
Sec. 1107. Modifications of section 457. 
Sec. 1108. Special rules for simplified employee pensions. 
Sec. 1109. Deductible contributions permitted under section 501(cX18) plan. 
PART II—NONDISCRIMINATION REQUIREMENTS 
SUBPART A—GENERAL REQUIREMENTS 
Sec. 1111. Application of nondiscrimination rules to integrated plans. 
Sec. 1112. Minimum coverage requirements for qualified plans. 
Sec. 1113. Minimum vesting standards. 
Sec. 1114. Definition of highly compensated employee. 
Sec. 1115. Separate lines of business; compensation. 
SUBPART B — O T H E R PROVISIONS 
Sec. 1116. Cash or deferred arrangements. 
Sec. 1117. Nondiscrimination requirements for employer matching contributions 
and employee contributions. 
Sec. 1118. Benefits treated as accruing ratably for purposes of determining whether 
plan is top-heavy. 
Sec. 1119. Modification of rules for benefit forfeitures. 
Sec. 1120. Nondiscrimination requirements for tax-sheltered annuities. 
PART III—TREATMENT OF DISTRIBUTIONS 
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Sec. 1121. Minimum distribution requirements. 
Sec. 1122. Taxation of distributions. 
Sec. 1123. Uniform additional tax on early distributions from qualified retirement 
plans. 
Sec. 1124. Election to treat certain lump sum distributions received during 1987 as 
received during 1986. 
PART IV—MISCELLANEOUS PROVISIONS 
Sec. 1131. Adjustments to section 404 limitations. 
Sec. 1132. Excise tax on reversion of qualified plan assets to employer. 
Sec. 1133. Tax on excess distributions. 
Sec. 1134. Treatment of loans. 
Sec. 1135. Deferred annuities available only to natural persons. 
Sec. 1136. Profits not required for profit-sharing plans. 
Sec. 1137. Requirement that collective bargaining agreements be bona fide. 
Sec. 1138. Penalty on underpayments attributable to overstatement of pension 
liabilities. 
Sec. 1139. Interest rate assumptions. 
Sec. 1140. Plan amendments not required under January 1, 1989. 
Sec. 1141. Issuance of final regulations. 
Sec. 1142. Secretary to accept applications with respect to section 401(k) plans. 
Sec. 1143. Treatment of certain fishermen as self-employed individuals. 
Sec. 1144. Acquisition of gold and silver coins by individual retirement accounts. 
Sec. 1145. Requirement of joint and survivor annuities and preretirement survivor 
annuities not to apply to certain plan. 
Sec. 1146. Treatment of leased employees. 
Sec. 1147. Tax treatment of Federal Thrift Savings Fund. 
100 STAT. 2090 
PUBLIC LAW 99-514—OCT. 22, 1986 
Subtitle B—Employee Benefit Provisions 
PART I—NONDISCRIMINATION RULES F
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PLANS 
Sec. 1151. Nondiscrimination rules for coverage and benefits under certain statu-
tory employee benefit plans. 
PART II—OTHER PROVISIONS 
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Sec. 1161. Deductibility of health insurance costs of self-employed individuals. 
Sec. 1162. 2-year extension of exclusions for educational assistance programs and 
group legal plans. 
Sec. 1163. $5,000 limit on dependent care assistance exclusion. 
Sec. 1164. Tax treatment of faculty housing. 
Sec. 1165. Limitation on accrual of vacation pay. 
Sec. 1166. Treatment of certain full-time life insurance salesmen. 
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Sec. 1167. Extension of due date for study of welfare benefit plans. 
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Sec. 1168. Exclusion from gross income of certain military benefits. 
Subtitle C—Changes Relating to Employee Stock Ownership Plans 
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Sec. 1171. Repeal of employee stock ownership credit. 
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Sec. 1172. Estate tax deduction for proceeds from sales of employer securities. 
Sec. 1173. Provisions relating to loans used to acquire employer securities. 
Sec. 1174. Requirements for employee stock ownership plans. 
Sec. 1175. Additional qualification requirements. 
Sec. 1176. Special ESOP requirements. 
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Sec. 1177. Transition rules. 
TITLE XII—FOREIGN TAX PROVISIONS 
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Subtitle A—Foreign Tax Credit Modifications 
Sec. 1201. Separate application of section 904 with respect to certain categories of 
income. 
Sec. 1202. Deemed paid credit under sections 902 and 960 determined on accumu-
lated basis. 
Sec. 1203. Clarification of treatment of separate limitation losses. 
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Sec. 1204. Foreign taxes used to provide subsidies. 
Sec. 1205. Limitation on carryback of foreign tax credits to taxable years beginning 
before 1987. 
Subtitle B—Source Rules 
Sec. 1211. Determination of source in case of sales of personal property. 
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Sec. 1212. Special rules for transportation income. 
Sec. 1213. Source rule for space and certain ocean activities. 
Sec. 1214. Limitations on special treatment of 80-20-corporations. 
Sec. 1215. Rules for allocating interest, etc., to foreign source income. 
Sec. 1216. 1-year modification in regulations providing for allocation of research 
and experimental expenditures. 
Subtitle C—Taxation of Income Earned Through Foreign Corporations 
Sec. 1221. Income subject to current taxation. 
Sec. 1222. Testing controlled foreign corporations and foreign personal holding com-
pemies by value and voting power. 
Sec. 1223. Subpart F de minimis rule. 
Sec. 1224. Repeal of special treatment of possessions corporations. 
Sec. 1225. Only effectively connected capital gains and losses of foreign corporations 
taken into account for purposes of accumulated earnings tax and per-
sonal holding company provisions. 
Sec. 1226. Deductions for dividends received from certain foreign corporations. 
Sec. 1227. Special rule for application of section 954 to certain dividends. 
Subtitle D—Special Tax Provisions for United States Persons 
Sec. 1231. Modifications to section 936. 
Sec. 1232. Treatment of certain persons in Panama. 
Sec. 1233. Provisions relating to section 911 exclusion. 
Sec. 1234. Foreign compliance provisions. 
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Sec. 1235. Treatment of certain passive foreign investment companies. 
Sec. 1236. Treatment of interest on obligations of the United States received by 
banks organized in Guam. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2091 
Subtitle E—Treatment of Foreign Taxpayers 
Sec. 1241. Branch profits tax. 
Sec. 1242. Treatment of deferred payments and appreciation arising out of business 
conducted within the United States. 
Sec. 1243. Treatment under section 877 of property received in tax-free exchanges, 
etc. 
Sec. 1244. Study of United States reinsurance industry. 
Sec. 1245. Information with respect to certain foreign-owned corporations. 
Sec. 1246. Withholding tax on amounts paid by partnerships to foreign partners. 
Sec. 1247. Income of foreign governments. 
Sec. 1248. Limitation on cost of property imported from related persons. 
Sec. 1249. Treatment of dual residence corporations. 
Subtitle F—Foreign Currency Transactions 
Sec. 1261. Treatment of foreign currency transactions. 
Subtitle G—Tax Treatment of Possessions 
PART I—TREATMENT OF GUAM, AMERICAN SAMOA, AND THE NORTHERN MARIANA 
ISLANDS 
Sec. 1271. Authority of Guam, American Samoa, and the Northern Mariana Islands 
to enact revenue laws. 
Sec. 1272. Exclusion of possession source income from the gross income of certain 
individuals. 
Sec. 1273. Treatment of corporations organized in Guam, American Samoa, or the 
Northern Mariana Islands. 
PART II—TREATMENT OF THE VIRGIN ISLANDS 
Sec. 1274. Coordination of United States and Virgin Islands income taxes. 
Sec. 1275. Virgin Islands corporations allowed possession tax credit. 
PART III—COVER OVER OF INCOME TAXES 
Sec. 1276. Cover over of income taxes. 
PART IV—EFFECTIVE DATE 
Sec. 1277. Effective date. 
TITLE XIII—TAX-EXEMPT BONDS 
Subtitle A—Amendments of Internal Revenue Code of 1954 
Sec. 1301. State and local bonds. 
Sec. 1302. Repeal of provisions relating to general stock ownership corporations. 
Subtitle B—Effective Dates and Transitional Rules 
Sec. 1311. General effective dates. 
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Sec. 1312. Transitional rules for construction or binding agreements, etc. 
Sec. 1313. Transitional rules relating to refundings. 
Sec. 1314. Special rules for certain bonds issued before August 16, 1986. 
Sec. 1315. Transitional rules relating to volume cap. 
Sec. 1316. Provisions relating to bonds provided special rules under prior revenue 
acts. 
Sec. 1317. Other transitional rules. 
Sec. 1318. Transitional rules for specific facilities. 
Sec. 1319. Definitions, etc., relating to effective dates and transitional rules. 
TITLE XIV—TRUSTS AND ESTATES; UNEARNED INCOME OF CERTAIN 
MINOR CHILDREN; GIFT AND ESTATE TAXES; GENERATION-SKIPPING 
TRANSFER TAX 
Subtitle A—Income Taxation of Trusts and Estates 
Sec. 1401. Grantor treated as holding any power or interest of grantor's spouse. 
Sec. 1402. Limitations to reversionary interest rule exceptions. 
Sec. 1403. Taxable year of trusts to be calendar year. 
Sec. 1404. Trusts and certain estates to make estimated payments of income taxes. 
Subtitle B—Unearned Income of Certain Minor Children 
Sec. 1411. Unearned income of certain minor children. 
100 STAT. 2092 
PUBLIC LAW 99-514—OCT. 22, 1986 
Subtitle C—Gift and Estate Taxes 
Sec. 1421. Information necessary for valid special use valuation election. 
Sec. 1422. Gift and estate tax deductions for certain conservation easement dona-
tions. 
Sec. 1423. Conveyance of certain real and personal property of decedent to charita-
ble foundation treated as charitable contribution. 
Subtitle D—Generation Skipping Transfers 
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Sec. 1431. New tax on generation-skipping transfers. 
Sec. 1432. Related amendments. 
Sec. 1433. Effective dates. 
TITLE XV-COMPLIANCE AND TAX ADMINISTRATION 
Subtitle A—Revision of Certain Penalties, Etc. 
Sec. 1501. Penalty for failure to file information returns or statements. 
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Sec. 1502. Increase in penalty for failure to pay tax. 
Sec. 1503. Amendments to penalty for negligence and fraud. 
Sec. 1504. Increase in penalty for substantial understatement of liability. 
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Subtitle B—Interest Provisions 
Sec. 1511. Differential interest rate. 
Sec. 1512. Interest on accumulated earnings tax to accrue beginning on date return 
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Subtitle C—Information Reporting Provisions 
Sec. 1521. Requirement of reporting for real estate transactions. 
Sec. 1522. Information reporting on persons receiving contracts from certain 
Federal agencies. 
Sec. 1523. Returns regarding payments of royalties. 
Sec. 1524. TINS required for dependents claimed on tax returns. 
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Sec. 1525. Tax-exempt interest required to be shown on return. 
Subtitle D—Provisions Relating to Tax Shelters 
Sec. 1531. Modification of tax shelter ratio test for registration of tax shelters. 
Sec. 1532. Increased penalty for failure to register tax shelters. 
Sec. 1533. Penalty for failure to include tax shelter identification number on return 
increased to $250. 
Sec. 1534. Increased penalty for failure to maintain lists of investors in potentially 
abusive tax shelters. 
Sec. 1535. Clarification of treatment of sham or fraudulent transactions under sec-
tion 6621(c). 
Subtitle E—Elstimated Tax Provisions 
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Sec. 1541. Current year liability test increased from 80 to 90 percent for estimated 
tax payments by individuals. 
Sec. 1542. Certain tax-exempt organizations subject to corporate estimated tax 
rules. 
Sec. 1543. Waiver of estimated penalties for 1986 underpayments attributable to 
this Act. 
Subtitle F—Provisions Regarding Judicial Proceedings 
Sec. 1551. Limitations on awarding of court costs and certain fees modified. 
Sec. 1552. Failure to pursue administrative remedies. 
Sec. 1553. Tax Court practice fee. 
Sec. 1554. Clarification of jurisdiction over addition to tax for failure to pay amount 
of tax shown on return. 
Sec. 1555. Authority to require attendance of United States marshals at Tax Court 
sessions. 
Sec. 1556. Changes in certain provisions relating to special trial judges. 
Sec 1557. Effect on retired pay by election to practice law, etc., after retirement. 
Sec. 1558. Authorization for appeals from interlocutory orders of the Tax Court. 
Sec. 1559. Changes relating to annuities for surviving spouses and dependent chil-
dren of Tax Court judges. 
Subtitle G—Tax Administration Provisions 
Sec. 1561. Suspension of statute of limitations if third-party records not produced 
within 6 months after service of summons. 
Sec. 1562. Authority to rescind notice of deficiency with taxpayer's consent. 
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PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2093 
Sec. 1563. Authority to abate interest due to errors or delays by the Internal Reve-
nue Service. 
Sec. 1564. Suspension of compounding where interest on deficiency suspended. 
Sec 1565. Certain service-connected disability payments exempt from levy. 
Sec. 1566. Increase in value of personal property subject to certain listing and 
notice procedures. 
Sec 1567. Certain recordkeeping requirements. 
Sec 1568 Disclosure of returns and return information to certain cities. 
Sec 1.569. Treatment of certain forfeitures. 
Subtitle H—Miscellaneous Provisions 
Sec. 1571. Withholding allowances to reflect new rate schedules. 
Sec. 1572. Report on return-free system. 
TITLE XVI—EXEMPT AND NONPROFIT ORGANIZATIONS 
Sec 1601 Certain distributions of low cost articles and exchanges and rentals of 
member lists by certain organizations not to be treated as unrelated 
trade or business. 
Sec 1602. Educational activities at convention and trade shows. 
Sec 1603. Tax exemption for certain title-holding companies. 
Sec. 1604. Exception to membership organization deduction rules. 
Sec 1605 Tax-exempt status for an organization introducing into public use tech-
nology developed by qualified organizations. 
Sec 1606 Definition of government official. 
Sec. 1607. Transition rule for acquisition indebtedness with respect to certain land. 
Sec 1608. Treatment of certain amounts paid to or for the benefit of certain institu-
tions of higher education. 
TITLE XVII—MISCELLANEOUS PROVISIONS 
Sec. 1701 Extension and modification of targeted jobs credit. 
Sec. 1702 Certain diesel fuel taxes may be imposed on sales to retailers. 
Sec. 1703 Gasoline tax generally collected at terminal level. 
Sec 1704. Exemption from social security coverage for certain clergy. 
Sec 1705. Applicability of unemployment compensation tax to certain services per-
formed for certain Indian tribal governments. 
Sec 1706. Treatment of certain technical personnel. 
Sec 1707. Exclusion for certain foster care payments. 
Sec. 1708. Extension of rules for spouses of individuals missing in action. 
Sec. 1709 Amendment to the Reindeer Industry Act of 1937. 
Sec. 1710 Quality control studies. 
Sec. 1711. Adoption assistance agreements under adoption assistance program: 
payment of nonrecurring expenses related to adoptions of children with 
special needs. 
TITLE XVIII—TECHNICAL CORRECTIONS 
Sec 1800. Coordination with other titles. 
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Subtitle A—Amendments Related to the Tax Reform Act of 1984 
CHAPTER 1—AMENDMENTS RELATED TO TITLE I OF THE ACT 
Sec. 1801 Amendments related to deferral of certain tax reductions. 
Sec. 1802. Amendments related to tax-exempt entity leasing provisions. 
Sec 1803. Amendments related to treatment of bonds and other debt instruments. 
Sec. 1804. Amendments related to corporate provisions. 
Sec 1805. Amendments related to partnership provisions. 
Sec. 1806. Amendments related to trust provisions. 
Sec. 1807. Amendments related to accounting changes. 
Sec. 1808. Amendments related to tax straddle provisions. 
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Sec. 1809. Amendments related to depreciation provisions. 
Sec. 1810. Amendments related to foreign provisions. 
Sec. 1811. Amendments related to reporting, penalty, and other provisions. 
Sec. 1812. Amendments related to miscellaneous provisions. 
CHAPTER 2—AMENDMENTS RELATED TO TITLE II OF THE ACT 
Sec. 1821. Amendments related to section 211 of the Act. 
Sec. 1822. Amendments related to section 216 of the Act. 
Sec. 1823. Amendment related to section 217 of the Act. 
Sec. 1824. Amendment related to section 218 of the Act. 
Sec. 1825. Amendments related to section 221 of the Act. 
Sec. 1826. Amendments related to section 222 of the Act. 
100 STAT. 2094 
PUBLIC LAW 99-514—OCT. 22, 1986 
Sec. 1827. Amendments related to section 223 of the Act. 
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Sec. 1828. Amendment related to section 224 of the Act. 
Sec. 1829. Waiver of interest on certain underpayments of tax. 
Sec. 1830. Scope of section 255 of the Tax Equity and Fiscal Responsibility Act of 
1982. 
CHAPTER 3—AMENDMENTS RELATED TO TITLE III OF THE ACT 
Sec. 1831. Amendment related to section 301 of the Act. 
Sec. 1832. Amendment related to section 303 of the Act. 
Sec. 1833. Amendment related to section 305 of the Act. 
Sec. 1834. Amendment related to section 311 of the Act. 
CHAPTER 4—AMENDMENTS RELATED TO TITLE IV OP THE ACT 
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Sec. 1841. Amendment related to section 311 of the Act. 
Sec. 1842. Amendments related to section 421 of the Act. 
Sec. 1843. Amendments related to section 422 of the Act. 
Sec. 1844. Amendments related to section 431 of the Act. 
Sec. 1845. Amendment related to section 452 of the Act. 
Sec. 1846. Amendments related to section 473 of the Act. 
',' 
Sec. 1847. Amendments related to section 474 of the Act. 
Sec. 1848. Amendments related to section 491 of the Act. 
CHAPTER 5—AMENDMENTS RELATED TO SECTION 216 OF THE ACT 
Sec. 1851. Amendments related to welfare benefit plan provisions. 
,,, 
Sec. 1852. Amendments related to pension plan provisions. 
' i „ •
. 
Sec. 1853. Amendments related to fringe benefit provisions. 
Sec. 1854. Amendments related to employee stock ownership plans. 
Sec. 1855. Amendments related to miscellaneous employee benefit provisions. 
CHAPTER 6—AMENDMENTS RELATED TO TITLE VI OF THE ACT 
Sec. 1861. Amendments related to section 611 of the Act. 
Sec. 1862. Amendment related to section 612 of the Act. 
Sec. 1863. Amendment related to section 613 of the Act. 
Sec. 1864. Amendments related to section 621 of the Act. 
Sec. 1865. Amendment related to section 622 of the Act. 
, ,-> 
Sec. 1866. Transitional rule for limit on small issue exception. 
Sec. 1867. Amendments related to section 624 of the Act. 
Sec. 1868. Amendment related to section 625 of the Act. 
Sec. 1869. Amendments related to section 626 of the Act. 
Sec. 1870. Amendment related to section 627 of the Act. 
Sec. 1871. Amendments related to section 628 of the Act. 
Sec. 1872. Amendments related to section 631 of the Act. 
Sec. 1873. Amendments related to section 632 of the Act. 
CHAPTER 7—MISCELLANEOUS PROVISIONS 
Sec. 1875. Amendments related to title VII of the Act. 
Sec. 1876. Amendments related to title VIII of the Act. 
Sec. 1877. Amendments related to title IX of the Act. 
Sec. 1878. Amendments related to title X of the Act. 
- ' " 
Sec. 1879. Miscellaneous provisions. 
CHAPTER 8—EFFECTIVE DATE 
'" -
Sec. 1881. Effective date. 
Subtitle B—Related to Other Programs Affected by the Deficit Reduction Act of 
1984 
CHAPTER 1—AMENDMENTS RELATED TO SOCIAL SECURITY ACT PROGRAMS 
Sec. 1882. Amendments related to coverage of church employees (section 2603 of the 
Deficit Reduction Act). 
Sec. 1883. Technical corrections in other provisions related to Social Security Act 
pn^rams. 
CHAPTER 2—AMENDMENTS RELATED TO UNEMPLOYMENT COMPENSATION PROGRAM 
Sec. 1884. Technical corrections in Federal Unemployment Tax Act. 
CHAPTER 3—AMENDMENTS RELATED TO TRADE AND TARIFF PROGRAMS 
Sec. 1885. Amendments to the tariff schedules. 
Sec. 1886. Technical corrections to countervailing and antidumping duty provisions. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2095 
Sec. 1887. Amendments to the Trade Act of 1974. 
Sec. 1888. Amendments to the Tariff Act of 1930. 
Sec. 1890. Amendments to the Caribbean Basin Economic Recovery Act. 
Sec. 1891. Conforming amendments regarding customs brokers. 
Sec. 1892. Special effective date provisions for certain articles given duty-free treat-
ment under the Trade and Tariff Act of 1984. 
Sec. 1893. Technical amendments relating to customs user fees. 
Subtitle C—Miscellaneous 
CHAPTER 1—AMENDMENTS RELATED TO THE CONSOLIDATED OMNIBUS BUDGET 
RECONCIUATION ACT OF 1985 
Sec. 1895. COBRA technical corrections relating to Social Security Act programs. 
Sec. 1896. Extension of time for filing for credit or refund with respect to certain 
changes involving insolvent farmers. 
Sec. 1897. Correction of clerical error in amendments to coal tax. 
CHAPTER 2—AMENDMENTS RELATED TO THE RETIREMENT EQUITY ACT OF 1984 
Sec. 1898. Technical corrections to the Retirement Equity Act of 1984. 
CHAPTER 3—AMENDMENT RELATED TO THE CHILD SUPPORT ENFORCEMENT 
AMENDMENTS OF 1984 
Sec. 1899. Amendment related to the Child Support Enforcement Amendments of 
1984. 
.v. 
CHAPTER 4—MISCELLANEOUS AMENDMENTS CORRECTING ERRORS OF SPELLING, 
PUNCTUATION, ETC. 
Sec. 1899A. Miscellaneous amendments correcting errors of spelling, punctuation, 
etc. 
SEC. 2. INTERNAL REVENUE CODE OF 1986. 
(a) REDESIGNATION OF 1954 CODE.—The Internal Revenue Title 
enacted August 16, 1954, as heretofore, hereby, or 
hereafter 
amended, may be cited as the "Internal Revenue Code of 1986". 
(b) REFERENCES IN LAWS, ETC.—Except when inappropriate, any 
reference in any law. Executive order, or other document— 
(1) to the Internal Revenue Code of 1954 shall include a 
reference to the Internal Revenue Code of 1986, and 
(2) to the Internal Revenue Code of 1986 shall include a 
reference to the provisions of law formerly known as the In-
ternal Revenue Code of 1954. 
SEC 3. AMENDMENT OF 1986 CODE; COORDINATION WITH SECTION 15. 
(a) AMENDMENT OF 1986 CODE.—Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed 
in terms of an amendment to, or repeal of, a section or other 
provision, the reference shall be considered to be made to a section 
or other provision of the Internal Revenue Code of 1986. 
(b) COORDINATION WITH SECTION 15.— 
(1) IN GENERAL.—Except as provided in paragraph (2), for 
purposes of section 15 of the Internal Revenue Code of 1986, no 
amendment or repeal made by this Act shall be treated as a 
' 
change in the rate of a tax imposed by chapter 1 of such Code. 
(2) EXCEPTION.—Paragraph (1) shall not apply to the amend-
-j o ment made by section 601 (relating to corporate rate reduc-
tions). 
100 STAT. 2096 
PUBLIC LAW 99-514—OCT. 22, 1986 
TITLE I—INDIVIDUAL INCOME TAX 
PROVISIONS 
Subtitle A—Rate Reductions; Increase in 
Standard Deduction and Personal Exemptions 
SEC. 101. RATE REDUCTIONS. 
(a) GENERAL RULE.—Section 1 (relating to tax imposed on individ-
uals) is amended to read as follows: 
"SECTION 1. TAX IMPOSED. 
"(a) MARRIED INDIVIDUALS FIUNG JOINT RETURNS AND SURVIVING 
SPOUSES.—There is hereby imposed on the taxable income o
f
— 
"(1) every married individual (as defined in section 7703) who 
makes a single return jointly with his spouse under section 
6013, and 
"(2) every surviving spouse (as defined in section 2(a)), 
a tax determined in accordance with the following table: 
"If taxable income is 
The tax is: 
Not over $29,750 
15% of taxable income. 
Over $29,750 
$4,462.50, plus 28% of the excess over 
$29,750. 
"(h) HEADS OF HOUSEHOLDS.—There is hereby imposed on the 
taxable income of every head of a household (as defined in section 
2(b)) a tax determined in accordance with the following table: 
"If taxable income is 
The tax is: 
Not over $23,900 
15% of taxable income. 
Over $23,900 
$3,585, plus 28% of the excess over 
$23,900. 
"(c) UNMARRIED INDIVIDUALS (OTHER THAN SURVIVING SPOUSES 
AND HEADS OF HOUSEHOLDS).—There is hereby imposed on the tax-
able income of every individual (other than a surviving spouse as 
defined in section 2(a) or the head of a household as defined in 
section 2(h)) who is not a married individual (as defined in section 
7703) a tax determined in accordance with the following table: 
"If taxable income is 
The tax is: 
. Not over $17,850 
15% of taxable income. 
Over $17,850 
$2,677.50, plus 28% of the excess over 
$17,850. 
"(d) MARRIED INDIVIDUALS FILING SEPARATE RETURNS.—There is 
hereby imposed on the taxable income of every married individual 
(as defined in section 7703) who does not make a single return 
jointly with his spouse under section 6013, a tax determined in 
accordance with the following table: 
"If taxable income is 
The tax is: 
'' 
,, Not over $14,875 
15% of taxable income. 
' Over $14,875 
$2,231.25, plus 28% of the excess over 
•^ 
$14,875. 
"(e) ESTATES AND TRUSTS.—There is hereby imposed on the taxable 
income o
f
— 
..i.«s 
"(1) every estate, and 
"(2) every trust, 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2097 
taxable under this subsection a tax determined in accordance with 
the following table: 
"If taxable income is 
The tax is: 
Not over $5,000 
15% of taxable income. 
Over $5,000 
$750, plus 28% of the excess over $5,000. 
"(f) ADJUSTMENTS IN TAX TABLES SO THAT INFLATION WILL NOT 
RESULT IN TAX INCREASES.— 
"(1) IN GENERAL.—Not later than December 15 of 1988, and 
each subsequent calendar year, the Secretary shall prescribe 
tables which shall apply in lieu of the tables contained in 
subsections (a), (b), (c), (d), and (e) with respect to taxable years 
beginning in the succeeding calendar year. 
"(2) METHOD OF PRESCRIBING TABLES.—The table which under 
paragraph (1) is to apply in lieu of the table contained in 
subsection (a), Ot)), (c), (d), or (e), as the case may be, with respect 
to taxable years beginning in any calendar year shall be pre-
scribed— 
"(A) by increasing the minimum and maximum dollar 
amounts for each rate bracket for which a tax is imposed 
under such table by the cost-of-living adjustment for such 
calendar year, 
"(B) by not changing the rate applicable to any rate 
bracket as adjusted under subparagraph (A), and 
"(C) by adjusting the amounts setting forth the tax to the 
extent necessary to reflect the adjustments in the rate 
brackets. 
"(3) COST-OF-UVING ADJUSTMENT.—For purposes of paragraph 
(2), the cost-of-living adjustment for any calendar year is the 
percentage (if any) by which— 
"(A) the CPI for the preceding calendar year, exceeds 
"(B) the CPI for the calendar year 1987. 
"(4) CPI FOR ANY CALENDAR YEAR.—For purposes of pareigraph 
(3), the CPI for any calendar year is the average of the 
(Consumer Price Index as of the close of the 12-month period 
ending on August 31 of such calendar year. 
"(5) (I!oNSUMER PRICE INDEX.—For purposes of paragraph (4), 
•- the term 'Consumer Price Index' means the last Consumer 
Price Index for all-urban consumers published by the Depart-
ment of Labor. For purposes of the preceding sentence, the 
revision of the Consumer Price Index which is most consistent 
with the (Consumer Price Index for calendar year 1986 shall be 
used. 
"(6) ROUNDING.— 
"(A) IN GENERAL.—If any increase determined under 
paragraph (2XA), subsection (gX4), section 63(cX4), or section 
151(dX3) is not a multiple of $50, such increase shall be 
rounded to the next lowest multiple of $50. 
-iv.) 
"(B) TABLE FOR MARRIED INDIVIDUALS FILING SEPA-
RATELY.—In the case of a married individual filing a sepa-
..,,. 
rate return, subparagraph (A) (other than with respect to 
section 63(cX4)) shall be applied by substituting '$25' for 
'$50' each place it appears. 
"(g) PHASEOUT OF IS^PERCENT RATE AND PERSONAL EXEMPTIONS.— 
"(1) IN GENERAL.—The amount of tax imposed by this section 
(determined without regard to this subsection) shall be in-
creased by 5 percent of the excess (if any) o
f
— 
100 STAT. 2098 
PUBLIC LAW 99-514—OCT. 22, 1986 
rlJiw : 
"(A) taxable income, over 
••''..-ii'li, 
,f 
-; 
- ' t:?^! 
"(B) the applicable dollar amount. 
"(2) LIMITATION.—The increase determined under paragraph 
(1) with respect to any taxpayer for any taxable year shall not 
:
> exceed the sum o
f
— 
"(A) 13 percent of the maximum amount of taxable 
* 
income to which the 15-percent rate applies under the table 
contained in subsection (a), (b), (c), or (e) (whichever applies), 
and 
"^ 
"(B) 28 percent of the deductions for personal exemptions 
allowable to the taxpayer for the taxable year under section 
151. 
In the case of any individual taxable under subsection (d), 
^' 
subparagraph (A) shall apply as if such individual were taxable 
" 
under subsection (a). 
"(3) APPLICABLE DOLLAR AMOUNT.—For purposes of paragraph 
*' 
(1), the applicable dollar amount shall be determined under the 
following table: 
"In the case of a taxpayer to which the 
following subsection of this section 
The applicable dollar 
^' 
applies: 
amount is: 
Subsection (a) 
$71,900 
yisV" 'f 
Subsection (b) 
61,650 
Subsection (c) 
43,150 
Subsection (d) 
35,950 
'• 
Subsection (e) 
13,000. 
"(4) ADJUSTMENT FOR INFLATION.—In the case of any taxable 
^ 
year beginning in a calendar year after 1988, each dollar 
"^ amount contained in paragraph (3) shall be increased by an 
amount equal to— 
. 
"(A) such dollar amount, multiplied by 
"(B) the cost-of-living adjustment determined under 
. 
subsection (f)(3) for the calendar year in which the taxable 
year begins. 
"(h) TAX SCHEDULES FOR TAXABLE YEARS BEGINNING IN 1987.—In 
the case of any taxable year beginning in 1987— 
"(1) subsection (g) shall not apply, and 
"(2) the following tables shall apply in lieu of the tables set 
forth in subsections (a), (b), (c), (d), and (e): 
g
^
^ 
"(A) MARRIED INDIVIDUALS FILING JOINT RETURNS AND 
^^ 
SURVIVING SPOUSES.—The table to apply for purposes of 
subsection (a) is as follows: 
. "iiii'.it 
"If taxable income is 
The tax is: 
Not over $3,000 
11% of taxable income. 
Over $3,000 but not over $28,000 
$330, plus 15% of the excess over $3,000. 
Over $28,000 but not over $45,000 
$4,080, plus 28% of the excess over 
$28 000 
Over $45,000 but not over $90,000 
$8,840, plus 35% of the excess over 
$45,000. 
Over $90,000 
$24,590, plus 38.5% of the excess over 
$90,000. 
0 
"(B) HEADS OF HOUSEHOLDS.—The table to apply for pur-
1 
poses of subsection (b) is as follows: 
"If taxable income is 
The tax is: 
Not over $2,500 
11% of taxable income. 
Over $2,500 but not over $23,000 
$275, plus 15% of the excess over $2,500. 
Over $23,000 but not over $38,000 
$3,350, plus 28% of the excess over 
$23,000. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2099 
"If taxable income is 
The tax is: 
Over $38,000 but not over $80,000 
$7,550, plus 35% of the excess over 
$38,000. 
Over $80,000 
$22,250, plus 38.5% of the excess over 
$80,000. 
"(C) 
UNMARRIED INDIVIDUALS OTHER THAN SURVIVING 
SPOUSES AND HEADS OF HOUSEHOLDS.—The table to apply for 
purposes of subsection (c) is as follows: 
"If taxable income is 
The tax is: 
Not over $1,800 
11% of taxable income. 
Over $1,800 but not over $16,800 
$198, plus 15% of the excess over $1,800. 
Over $16,800 but not over $27,000 
$2,448, plus 28% of the excess over 
$16,800. 
Over $27,000 but not over $54,000 
$5,304, plus 35% of the excess over 
$27,000. 
Over $54,000 
$14,754, plus 38.5% of the excess over 
$54,000. 
"(D) MARRIED INDIVIDUALS FIUNG SEPARATE RETURNS.— 
The table to apply for purposes of subsection (d) is as 
'•• 
follows: 
"If taxable income is 
The tax is: 
Not over $1,500 
11% of taxable income. 
Over $1,500 but not over $14,000 
$165, plus 15% of the excess over $1,500. 
Over $14,000 but not over $22,500 
$2,040, plus 28% of the excess over 
$14,000. 
Over $22,500 but not over $45,000 
$4,420, plus 35% of the excess over 
$22,500. 
Over $45,000 
$12,295, plus 38.5% of the excess over 
$45,000. 
^' 
"(E) ESTATES AND TRUSTS.—The table to apply for pur-
poses of subsection (e) is as follows: 
"If taxable income is 
The tax is: 
Not over $500 
11% of taxable income. 
Over $500 but not over $4,700 
$55, plus 15% of the excess over $500. 
Over $4,700 but not over $7,550 
$685, plus 28% of the excess over $4,700. 
Over $7,550 but not over $15,150 
$1,483, plus 35% of the excess over 
$7,550. 
Over $15,150 
$4,143, plus 38.5% of the excess over 
$15,150." 
(b) AMENDMENT OF SECTION 15.—Subsection (d) of section 15 (relat-
ing to effect of changes in rates during a taxable year) is amended to 
read as follows: 
"(d) SECTION NOT TO APPLY TO INFLATION ADJUSTMENTS.—This 
section shall not apply to any change in rates under subsection (f) of 
section 1 (relating to adjustments in tax tables so that inflation will 
not result in tax increases)." 
SEC. 102. INCREASE IN STANDARD DEDUCTION. 
(a) GENERAL RULE.—Section 63 (defining taxable income) is 
amended to read as follows: 
"SEC. 63. TAXABLE INCOME DEFINED. 
"(a) IN GENERAL.—Except as provided in subsection (b), for pur-
poses of this subtitle, the term 'taxable income' means gross income 
minus the deductions allowed by this chapter (other than the stand-
ard deduction). 
"(b) INDIVIDI/ALS WHO DO NOT ITEMIZE THEIR DEDUCTIONS.—In the 
case of an individual who does not elect to itemize his deductions for 
100 STAT. 2100 
PUBLIC LAW 99-514—OCT. 22, 1986 
the taxable year, for purposes of this subtitle, the term 'taxable 
income' means adjusted gross income, minus— 
"(1) the standard deduction, and 
"(2) the deduction for personal exemptions provided in section 
151. 
"(c) STANDARD DEDUCTION.—For purposes of this subtitle— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, the term 'standard deduction' means the sum o
f
— 
"(A) the basic standard deduction, and 
"(B) the additional standard deduction. 
?
r
? 
"(2) BASIC STANDARD DEDUCTION.—For purposes of paragraph 
*
*
'
*
' (1), the basic standard deduction is— 
"(A) $5,000 in the case of— 
"(i) a joint return, or 
iHvo r- * 
"(ii) a surviving spouse (as defined in section 2(a)), 
"(B) $4,400 in the case of a head of household (as defined 
in section 20))), 
"(C) $3,000 in the case of an individual who is not married 
and who is not a surviving spouse or head of household, or 
"(D) $2,500 in the case of a married individual filing a 
separate return. 
"(3) ADDITIONAL STANDARD DEDUCTION FOR AGED AND BLIND.— 
For purposes of paragraph (1), the additional standard deduc-
tion is the sum of each additional amount to which the taxpayer 
"
*
"
" is entitled under subsection (f). 
^ 
"(4) ADJUSTMENTS FOR INFLATION.—In the case of any taxable 
year beginning in a calendar year after 1988, each dollar 
,,^ amount contained in paragraph (2) or (5)(A) or subsection (f) 
* shall be increased by an amount equal to— 
"(A) such dollar amount, multiplied by 
"(B) the cost-of-living adjustment determined under sec-
tion 1(f)(3) for the calendar year in which the taxable year 
i
M
*
.
\
^ begins. 
*]' 
"(5) LIMITATION ON STANDARD DEDUCTION IN THE CASE OF 
CERTAIN DEPENDENTS.—In the case of an individual with respect 
19' to whom a deduction under section 151 is allowable to another 
taxpayer for a taxable year beginning in the calendar year in 
If which the individual's taxable year begins, the standard deduc-
es) ^ion applicable to such individual for such individual's taxable 
year shall not exceed the greater o
f
— 
"(A) $500, or 
"(B) such individual's earned income. 
"(6) CERTAIN INDIVIDUALS, ETC., NOT ELIGIBLE FOR STANDARD 
DEDUCTION.—In the case of— 
"(A) a married individual filing a separate return where 
either spouse itemizes deductions, 
m 's.c 
"(B) a nonresident alien individual, 
"(C) a citizen of the United States entitled to the benefits 
of section 931 (relating to income from sources within 
possessions of the United States), 
"(D) an individual making a return under section 
i 
443(a)(1) for a period of less than 12 months on account of a 
J {
*
, 
change in his annual accounting period, or 
"(E) an estate or trust, common trust fund, or partner-
ship, 
the standard deduction shall be zero. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2101 
"(d) ITEMIZED DEDUCTIONS.—For purposes of this subtitle, the term 
'itemized deductions' means the deductions allowable under this 
chapter other than— 
"(1) the deductions allowable in arriving at adjusted gross 
income, and 
"(2) the deduction for personal exemptions provided by sec-
tion 151. 
"(e) ELECTION TO ITEMIZE.— 
"(1) IN GENERAL.—Unless an individual makes an election 
under this subsection for the taxable year, no itemized deduc-
tion shall be allowed for the taxable year. For purposes of this 
subtitle, the determination of whether a deduction is allowable 
under this chapter shall be made without regard to the preced-
ing sentence. 
"(2) TIME AND MANNER OF ELECTION.—Any election under this 
subsection shall be made on the taxpayer's return, and the 
Secretary shall prescribe the manner of signifying such election 
on the return. 
"(3) CHANGE OF ELECTION.—Under regulations prescribed by 
the Secretary, a change of election with respect to itemized 
deductions for any taxable year may be made after the filing of 
the return for such year. If the spouse of the taxpayer filed a 
separate return for any taxable year corresponding to the tax-
able year of the taxpayer, the change shall not be allowed 
unless, in accordance with such regulations— 
"(A) the spouse makes a change of election with respect 
to itemized deductions, for the taxable year covered in such 
separate return, consistent with the change of treatment 
sought by the taxpayer, and 
"(B) the taxpayer and his spouse consent in writing to the 
assessment (within such period as may be agreed on with 
the Secretary) of any deficiency, to the extent attributable 
to such change of election, even though at the time of the 
p., 
filing 
of such consent the assessment of such deficiency 
would otherwise be prevented by the operation of any law 
or rule of law. 
This paragraph shall not apply if the tax liability of the tax-
payer's spouse for the taxable year corresponding to the taxable 
year of the taxpayer has been compromised under section 7122. 
"(f) AGED OR BLIND ADDITIONAL AMOUNTS.— 
"(1) ADDITIONAL AMOUNTS FOR THE AGED.—The taxpayer shall 
be entitled to an additional amount of $600— 
"(A) for himself if he has attained age 65 before the close 
of his taxable year, and 
"(B) for the spouse of the taxpayer if the spouse has 
attained age 65 before the close of the taxable year and an 
additional exemption is allowable to the taxpayer for such 
spouse under section 151(b). 
"(2) ADDITIONAL AMOUNT FOR BLIND.—The taxpayer shall be 
entitled to an additional amount of $600— 
"(A) for himself if he is blind at the close of the taxable 
year, and 
"(B) for the spouse of the taxpayer if the spouse is blind 
as of the close of the taxable year and an additional exemp-
; 
tion is allowable to the taxpayer for such spouse under 
section 151(b). 
100 STAT. 2102 
PUBLIC LAW 99-514—OCT. 22, 1986 
• For purposes of subparagraph (B), if the spouse dies during the 
Sir taxable year the determination of whether such spouse is blind 
shall be made as of the time of such death. 
«
» 
"(3) HIGHER AMOUNT FOR CERTAIN UNMARRIED INDIVIDUALS.— 
In the case of an individual who is not married and is not a 
> surviving spouse, paragraphs (1) and (2) shall be applied by 
substituting '$750' for '$600'. 
"(4) BUNDNESS DEFINED.—For purposes of this subsection, an 
ri individual is blind only if his central visual acuity does not 
exceed 20/200 in the better eye with correcting lenses, or if his 
visual acuity is greater than 20/200 but is accompanied by a 
limitation in the fields of vision such that the widest diameter of 
the visual field subtends an angle no greater than 20 degrees. 
"(g) MARITAL STATUS.—For purposes of this section, marital status 
shall be determined under section 7703. 
"(h) 
TRANSITIONAL RULE FOR TAXABLE YEARS BEGINNING IN 
1987.—In the case of any taxable year beginning in 1987, paragraph 
(2) of subsection (c) shall be applied— 
"(1) by substituting '$3,760' for '$5,000', 
"(2) by substituting'$2,540'for'$4,400', 
"(3) by substituting'$2,540'for'$3,000', and 
"(4) by substituting '$1,880' for '$2,500'. 
The preceding sentence shall not apply if the taxpayer is entitled to 
an additional amount determined under subsection (f) (relating to 
additional amount for aged and blind) for the taxable year." 
Ot)) TAX TABLES.—Section 3 (relating to tax tables for individuals) 
is amended by striking out subsection (a) and inserting in lieu 
thereof the following: 
"(a) IMPOSITION OF TAX TABLE TAX.— 
"(1) IN GENERAL.—In lieu of the tax imposed by section 1, 
there is hereby imposed for each taxable year on the taxable 
income of every individual— 
"(A) who does not itemize his deductions for the taxable 
;" 
year, and 
' 
"(B) whose taxable income for such taxable year does not 
exceed the ceiling amount, 
a tax determined under tables, applicable to such taxable year, 
which shall be prescribed by the Secretary and which shall be in 
such form as he determines appropriate. In the table so pre-
scribed, the amounts of the tax shall be computed on the basis 
of the rates prescribed by section 1. 
^' 
"(2) CEILING AMOUNT DEFINED.—For purposes of parstgraph (1), 
the term 'ceiling amount' means, with respect to any taxpayer, 
* 
the amount (not less than $20,000) determined by the Secretary 
for the tax rate category in which such taxpayer falls. 
"(3) AUTHORITY TO PRESCRIBE TABLES FOR TAXPAYERS WHO ITEM-
IZE DEDUCTIONS.—The Secretary may provide that this section 
•; 
shall apply also for any taxable year to individuals who itemize 
their deductions. Any tables prescribed under the preceding 
sentence shall be on the basis of taxable income." 
SEC.103. INCREASE IN PERSONAL EXEMPTIONS. 
(a) GENERAL RULE.—Subsection (f) of section 151 (defining exemp-
tion amount) is amended to read as follows: 
"(f) EXEMPTION AMOUNT.—For purposes of this section— 
"(1) IN GENERAL.—Except £is provided in paragraph (2), the 
term 'exemption amount' means— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2103 
"(A) $1,900 for taxable years beginning during 1987, 
"(B) $1,950 for taxable years beginning during 1988, and 
"(C) $2,000 for taxable years beginning after December 
31, 1988. 
"(2) EXEMPTION AMOUNT DISALLOWED IN THE CASE OF CERTAIN 
DEPENDENTS.—In the case of an individual with respect to whom 
a deduction under this section is allowable to another taxpayer 
for a taxable year beginning in the calendar year in which the 
individual's taxable year begins, the exemption amount ap-
plicable to such individual for such individual's taxable year 
shall be zero. 
"(3) INFLATION ADJUSTMENT FOR YEARS AFTER 1989.—In the 
case of any taxable year beginning in a calendar year after 
1989, the dollar amount contained in paragraph (1)(C) shall be 
increased by an amount equal to— 
"(A) such dollar amount, multiplied by 
"(B) the cost-of-living adjustment determined under sec-
tion 1(f)(3), for the calendar year in which the taxable year 
begins, by substituting 'calendar year 1988' for 'calendar 
year 1987' in subparagraph (B) thereof." 
(b) REPEAL OF ADDITIONAL EXEMPTIONS FOR TAXPAYERS OVER AGE 
65 O
R BUND.—Section 151 is amended by striking out subsections (c) 
and (d) and by redesignating subsections (e) and (f) as subsections (c) 
and (d), respectively. 
SEC. 104. TECHNICAL AMENDMENTS. 
(a) FILING REQUIREMENTS.— 
(1) SECTION 6O12.— 
(A) Paragraph (1) of section 6012(a) (relating to persons 
required to make returns of income) is amended to read as 
follows: 
"(1)(A) Every individual having for the taxable year gross 
income which equals or exceeds the exemption amount, except 
that a return shall not be required of an individual— 
"(i) who is not married (determined by applying section 
7703), is not a surviving spouse (as defined in section 2(a)), is 
.15i, 
not a head of a household (as defined in section 2(b)), and for 
the taxable year has gross income of less than the sum of 
isi: 
the exemption amount plus the basic standard deduction 
applicable to such an individual, 
.
V 
"(ii) who is a head of a household (as so defined) and for 
the taxable year has gross income of less than the sum of 
the exemption amount plus the basic standard deduction 
applicable to such an individual, 
"(iii) who is a surviving spouse (as so defined) and for the 
taxable year has gross income of less than the sum of the 
exemption amount plus the basic standard deduction ap-
plicable to such an individual, or 
"(iv) who is entitled to make a joint return and whose 
^ 
gross income, when combined with the gross income of his 
spouse, is, for the taxable year, less than the sum of twice 
the exemption amount plus the basic standard deduction 
applicable to a joint return, but only if such individual and 
his spouse, at the close of the taxable year, had the same 
' 
household as their home. 
100 STAT. 2104 
PUBLIC LAW 99-514—OCT. 22, 1986 
Clause (iv) shall not apply if for the taxable year such spouse 
makes a separate return or any other taxpayer is entitled to an 
exemption for such spouse under section 151(c). 
"(B) The amount specified in clause (i), (ii), or (iii) of subpara-
graph (A) shall be increased by the amount of 1 additional 
standard deduction (within the meaning of section 63(cX3)) in 
the case of an individual entitled to such deduction by reason of 
section 63(fKl)(A) (relating to individuals age 65 or more), and 
the amount specified in clause (iv) of subparagraph (A) shall be 
increased by the amount of the additional standard deduction 
for each additional standard deduction to which the individual 
or his spouse is entitled by reason of section 63(fXl). 
"(C) The exception under subparagraph (A) shall not apply to 
any individual— 
"(i) who is described in section 63(cX5) and who has— 
"(I) income (other than earned income) in excess of 
the amount in effect under section 63(cX5XA) (relating 
to limitation on standard deduction in the case of 
certain dependents), or 
"(II) total gross income in excess of the standard 
deduction, or 
•../ 
«^j) fQj, ^hom the standard deduction is zero under sec-
tion 63(cX6). 
"(D) For purposes of this subsection— 
"(i) The terms 'standard deduction', 'basic standard 
deduction' and 'additional standard deduction' have the 
respective meanings given such terms by section 63(c). 
"(ii) The term 'exemption amount' has the meaning given 
such term by section 151(d). In the case of an individual 
described in section 151(dX2), the exemption amount shall 
' 
be zero." 
(B) Paragraph (9) of section 6012(a) is amended by strik-
ing out "$2,700 or more" and inserting in lieu thereof "not 
less than the sum of the exemption amount plus the basic 
standard deduction under section 63(cX2XD)". 
(2) SECTION 6013.—Subparagraph (A) of section 6013(bX3) 
(relating to when return deemed filed) is amended— 
(A) by striking out "(twice the exemption amount in case 
such spouse was 65 or over)" each place it appears, 
(B) by striking out "section 151(f)" and inserting in lieu 
thereof "section 151(d)", and 
(C) by adding at the end thereof the following new sen-
tence: "For purposes of clauses (ii) and (iii), if the spouse 
whose gross income is being compared to the exemption 
amount is 65 or over, such clauses shall be applied by 
substituting 'the sum of the exemption amount and the 
additional standard deduction under section 63(cX2) by 
reason of section 63(fKlXA)' for 'the exemption amount'. 
O
t
>
) OTHER AMENDMENTS.— 
M) SECTION 21 ETTC. 
(A) Sections 21(bXlXA), 21(eX6XA), and 129(cXl) are each 
amended by striking out "section 151(e)" and inserting in 
lieu thereof "section 151(c)". 
(B) Sections 
21(eX6XB), 32(cXlXAXi), 
129(cX2), 
and 
,^., 
152(eXlXA) are each amended by striking out "section 
151(eX3)" and inserting in lieu thereof "section 151(cX3)". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2105 
(2) SECTION I08.—Subparagraph (B) of section 108(b)(3) is 
amended by striking out "50 cents" and inserting in lieu thereof 
"331/3 cents". 
(3) SECTION 152, ETC.—Sections 152(d)(2) and 2032A(c)(7)(D) are 
each amended by striking out "section 151(e)(4)" and inserting 
in Heu thereof "section 151(c)(4)". 
(4) SECTION 172.—Subsection (d) of section 172 (relating to 
modifications) is amended by striking out paragraph (7). 
(5) SECTION 402.—Subparagraph (B) of section 402(e)(1), as 
amended by section 1222(b), is amended by striking out "the 
zero bracket amount applicable to such individual for the tax-
able year plus". 
(6) SECTION 441.—Clause (iii) of section 441(f)(2)(B) (relating to 
change in accounting period) is amended by striking out "and 
by adding the zero bracket amount,". 
(7) SECTION 443.— 
(A) Paragraph (1) of section 443(b) (relating to computa-
tion of tax on change of annual accounting period) is 
amended by striking out ", and adding the zero bracket 
amount". 
(B) Clause (ii) of section 443G))(2)(A) (relating to computa-
tion based on 12-month period) is amended to read as 
follows: 
"(ii) the tax computed on the modified taxable 
income for the short period." 
(8) SECTION 541.—Section 541 is amended by striking out "50 
percent" and inserting in lieu thereof "28 percent (38.5 percent 
in the case of taxable years beginning in 1987)". 
(9) SECTION 613A.—Paragraph (1) of section 613A(d) (relating 
to limitation on percentage depletion based on taxable income) 
is amended by striking out "(reduced in the case of an individ-
ual by the zero bracket amount)". 
(10) SECTION 667.—Paragraph (2) of section 667(b) (relating to 
tax on amount deemed distributed by trust in preceding years) 
is amended to read as follows: 
"(2) TREATMENT OF LOSS YEARS.—For purposes of paragraph 
(1), the taxable income of the beneficiary for any taxable year 
shall be deemed to be not less than zero." 
(11) SECTION 86I.—Subsection (b) of section 861 (relating to 
taxable income from sources within the United States) is 
amended by striking out "the zero bracket amount" and insert-
ing in lieu thereof "the standard deduction". 
(12) SECTION 862.—Subsection (b) of section 862 (relating to 
taxable income from sources without the United States) is 
amended by striking out "the zero bracket amount" and insert-
ing in lieu thereof "the standard deduction". 
(13) SECTION 904.—Subsection (a) of section 904 (relating to 
limitation on foreign tax credit) is amended by striking out the 
last sentence. 
(14) SECTION 1398.—Subsection (c) of section 1398 (relating to 
computation and payment of tax; zero bracket amount) is 
amended— 
(A) by striking out 
"ZERO BRACKET AMOUNT" in 
the 
subsection heading and inserting in lieu thereof "BASIC 
STANDARD DEDUCTION", and 
(B) by striking out paragraph (3) and inserting in lieu 
thereof the following: 
100 STAT. 2106 
PUBLIC LAW 99-514—OCT. 22, 1986 
^:! 
"(3) BASIC STANDARD DEDUCTION.—In the case of an estate 
f'' which does not itemize deductions, the basic standard deduction 
for the estate for the taxable year shall be the same as for a 
married individual filing a separate return for such year." 
(15) SECTION 3402.— 
(A) Paragraph (1) of section 3402(f) (relating to withhold-
I A»'' ing exemptions) is amended by striking out subparagraphs 
(B) and (C) and by redesignating subparagraphs (D), (E), (F), 
and (G) as subparagraphs (B), (C), (D), and (E), respectively. 
(B) Subparagraph (A) of section 3402(f)(1) is amended by 
inserting "unless he is an individual described in section 
151(d)(2)" after "himself'. 
(C) Subparagraph (B) of section 3402(f)(1), as redesignated 
" ' 
by subparagraph (A), is amended by striking out "subpara-
graph (A), (B), (C), or (F)" and inserting in lieu thereof 
.. 
"subparagraph (A) or (D)". 
(D) Subparagraph (C) of section 3402(D(1), as redesignated 
'.^ 
by subparagraph (A), is amended by striking out "section 
151(e)" and inserting in lieu thereof "section 151(c)". 
- 
(E) Subparagraph (E) of section 3402(f)(1), as redesignated 
by subparagraph (A), is amended by striking out "zero 
bracket" and inserting in lieu thereof "standard deduc-
sio.: . tion". 
(F) The last sentence of paragraph (1) of section 3402(f) is 
. <
= ' amended— 
(i) by striking out "subparagraph (G)" and inserting 
in lieu thereof "subparagraph (E)", and 
-ii' 
(ii) by striking out "zero bracket" and inserting in 
lieu thereof "standard deduction". 
•'-'' 
(G) Paragraph (3) of section 3402(m) is amended by insert-
ing "(including the additional standard deduction under 
» 
section 63(c)(3) for the aged and blind)" after "deductions". 
'
«
^ 
(16) SECTION 6014.— 
(A) Subsection (a) of section 6014 (relating to income tax 
return—tax not computed by taxpayer) is amended by strik-
• 
ing out "who does not have an unused zero bracket amount 
(determined under section 63(e))" and inserting in lieu 
l'^ 
thereof "who is not described in section 6012(aXl)(C)(i)". 
(B) Paragraph (4) of section 6014(b) is amended to read as 
follows: 
"(4) to cases where the taxpayer itemizes his deductions or 
' 
where the taxpayer claims a reduced standard deduction by 
reason of section 63(c)(5)." 
(17) SECTION 6212.—Subparagraph (A) of section 6212(c)(2) 
(relating to cross references) is amended to read as follows: 
-jj., 
"(A) Deficiency attributable to change of treatment with 
respect to itemized deductions, see section 63(e)(3)." 
(18) SECTION 6504.—Paragraph (2) of section 6504 (relating to 
cross references) is amended to read as follows: 
"(2) Change of treatment with respect to itemized deductions where tax-
^
. 
payer and his spouse make separate returns, see section 63(e)(3)." 
bnB 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2107 
Subtitle B—Provisions Related to Tax Credits 
SEC. 111. INCREASE IN EARNED INCOME CREDIT. 
(a) INCREASE IN AMOUNT OF CREDIT.—Subsection (a) of section 32 
(relating to earned income credit) is amended— 
(1) by striking out "11 percent" and inserting in lieu thereof 
b 
"14 percent", and 
(2) by striking out "$5,000" and inserting in lieu thereof 
"$5,714". 
Oa) INCREASE IN INCOME LEVEL AT WHICH PHASEOUT BEGINS.— 
Subsection O
t
>
) of section 32 is amended to read as follows: 
"(b) LIMITATION.—The amount of the credit allowable to a tax-
payer under subsection (a) for any taxable year shall not exceed the 
excess (if any) of— 
"(1) the maximum credit allowable under subsection (a) to any 
taxpayer, over 
"(2) 10 percent of so much of the adjusted gross income (or, if 
greater, the earned income) of the taxpayer for the taxable year 
as exceeds $9,000. 
In the case of any taxable year beginning in 1987, paragraph (2) 
shall be applied by substituting '$6,500' for '$9,000'." 
(c) INFLATION ADJUSTMENTS.—Section 32 is amended by adding at 
the end thereof the following new subsection: 
"(i) INFLATION ADJUSTMENTS.— 
"(1) IN GENERAL.—In the case of any taxable year beginning 
after the applicable calendar year, each dollar amount referred 
to in paragraph (2)(B) shall be increased by an amount equal 
to— 
"(A) such dollar amount, multiplied by 
"(B) the cost-of-living adjustment determined under sec-
tion 1(f)(3), for the calendar year in which the taxable year 
begins, by substituting 'calendar year 1984' for 'calendar 
year 1987' in subparagraph (B) thereof. 
"(2) DEFINITIONS, ETC.—For purposes of paragraph (1)— 
* 
"(A) APPLICABLE CALENDAR YEAR.—The term 'applicable 
calendar year' means— 
-,if 3 G 
"(i) 1986 in the case of the dollar amounts referred to 
in clause (i) or (ii) of subparagraph (B), and 
"(ii) 1987 in the case of the dollar amount referred to 
* 
' 
in clause (iii) of subparagraph (B). 
"(B) DOLLAR AMOUNTS.—The dollar amounts referred to 
, J 
in this subparagraph are— 
"(i) the $5,714 amount contained in subsection (a), 
-e- Au 
"(ii) the $6,500 amount contained in the last sentence 
of subsection (b), and 
"(iii) the $9,000 amount contained in subsection (b)(2). 
"(3) ROUNDING.—If any increase determined under paragraph 
(1) is not a multiple of $10, such increase shall be rounded to the 
i 
nearest multiple of $10 (or, if such increase is a multiple of $5, 
such increase shall be increased to the next higher multiple of 
$10)." 
(d) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 32(f) (relating to amount of credit 
to be determined under tables) is amended by striking out 
subparagraphs (A) and (B) and inserting in lieu thereof the 
following: 
100 STAT. 2108 
PUBLIC LAW 99-514—OCT. 22, 1986 
II; 
"(A) for earned income between $0 and the amount of 
earned income at which the credit is phased out under 
subsection O
t
>
)
, and 
"(B) for adjusted gross income between the dollar amount 
i& tiOii at which the phaseout begins under subsection (b) and the 
amount of adjusted gross income at which the credit is 
j ::•-' 
phased out under subsection (b)." 
(2) Subparagraph (B) of section 3507(c)(2) (relating to earned 
"^^ income advance amount) is amended by striking out clauses (i) 
and (ii) and inserting in lieu thereof the following: 
"(i) of not more than 14 percent of earned income not 
in excess of the amount of earned income taken into 
'• 
account under section 32(a), which 
"(ii) phases out between the amount of earned 
income at which the phaseout begins under subsection 
V ~ 
• 
(b) of section 32 and the amount of earned income at 
which the credit under section 32 is phased out under 
such subsection, or". 
(3) Subparagraph (C) of section 3507(cX2) is amended by strik-
ing out clauses (i) and (ii) and inserting in lieu thereof the 
following: 
"(i) of not more than 14 percent of earned income not 
in excess of Vz of the amount of earned income taken 
into account under section 32(a), which 
"(ii) phases out between amounts of earned income 
which are V2 of the amounts of earned income de-
scribed in subparagraph (B)(ii)." 
(e) EMPLOYEE NOTIFICATION.—The Secretary of the Treasury is 
directed to require, under regulations, employers to notify any 
employee who has not had any tax withheld from wages (other than 
an employee whose wages are exempt from withholding pursuant to 
section 3402(n) of the Internal Revenue Code of 1986) that such 
employee may be eligible for a refund because of the earned income 
credit. 
SEC. 112. REPEAL OF CREDIT FOR CONTRIBUTIONS TO CANDIDATES FOR 
PUBLIC OFFICE. 
(a) GENERAL RULE.—Section 24 (relating to contributions to can-
didates for public office) is hereby repealed. 
(b) TECHNICAL AMENDMENTS.— 
(1) Subsection (g) of section 527 (relating to treatment of 
newsletter funds) is amended— 
(A) by striking out "section 24(c)(2)" in paragraph (1) and 
inserting in lieu thereof "paragraph (3)", and 
(B) by adding at the end thereof the following new para-
graph: 
'^ 
"(3) CANDIDATE.—For purposes of paragraph (1), the term 
'candidate' means, with respect to any Federal, State, or local 
elective public office, an individual who— 
"(A) publicly announces that he is a candidate for 
> 
nomination or election to such office, and 
"(B) meets the qualifications prescribed by law to hold 
such office." 
(2) Subsection (a) of section 642 (relating to credits against tax 
for estates and trusts) is amended to read as follows: 
"(a) FOREIGN TAX CREDIT ALLOWED.—An estate or trust shall be 
allowed the credit against tax for taxes imposed by foreign countries 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2109 
and possessions of the United States, to the extent allowed by 
section 901, only in respect of so much of the taxes described in such 
section as is not properly allocable under such section to the bene-
ficiaries." 
(3) Paragraph (3) of section 901(i) (relating to cross references) 
is amended by striking out "section 642(a)(1)" and inserting in 
lieu thereof "section 642(a)". 
(4) Paragraph (6) of section 7871(a) (relating to Indian tribal 
governments treated as States for certain purposes) is amended 
by striking out subparagraph (A) and by redesignating subpara-
graphs (B), (C), (D), (E), and (F) as subparagraphs (A), (B), (C), (D), 
and (E), respectively. 
(5) The table of sections for subpart A of part IV of subchapter 
A of chapter 1 is amended by striking out the item relating to 
section 24. 
Subtitle C—Provisions Related to Exclusions 
SEC. 121. TAXATION OF UNEMPLOYMENT COMPENSATION. 
Section 85 (relating to unemployment compensation) is amended 
to read as follows: 
"SEC. 85. UNEMPLOYMENT COMPENSATION. 
"(a) GENERAL RULE.—In the case of an individual, gross income 
includes unemployment compensation. 
"(b) UNEMPLOYMENT COMPENSATION DEFINED.—For purposes of 
this section, the term 'unemployment compensation' means any 
amount received under a law of the United States or of a State 
which is in the nature of unemployment compensation." 
SEC. 122. PRIZES AND AWARDS. 
(a) EXCLUSION FROM GROSS INCOME.— 
(1) IN GENERAL.—Section 74 (relating to prizes and awards) is 
amended— 
(A) by striking out "Except as provided in subsection (b) 
and" in subsection (a) and inserting in lieu thereof "Except 
as otherwise provided in this section or", 
:• 
(B) by striking out "EXCEPTION" in the heading for subsec-
tion (b) and inserting in lieu thereof "EXCEPTION FOR CER-
TAIN PRIZES AND AWARDS TRANSFERRED TO CHARITIES", 
(C) by striking out "and" at the end of subsection (b)(1), by 
striking out the period at the end of subsection (bX2) and 
inserting in lieu thereof "; and", and by adding after subsec-
tion (bX2) the following new paragraph: 
"(3) the prize or award is transferred by the payor to a 
governmental unit or organization described in paragraph (1) or 
(2) of section 170(c) pursuant to a designation made by the 
recipient.", and 
(D) by adding at the end thereof the following new subsec-
tion: 
"(c) EXCEPTION FOR CERTAIN EMPLOYEE ACHIEVEMENT AWARDS.— 
"(1) IN GENERAL.—Gross income shall not include the value of 
an employee achievement award (as defined in section 274(j)) 
received by the taxpayer if the cost to the employer of the 
employee achievement award does not exceed the amount 
100 STAT. 2110 
PUBLIC LAW 99-514-OCT. 22, 1986 
"1 allowable as a deduction to the employer for the cost of the 
employee achievement award. 
"(2) EXCESS DEDUCTION AWARD.—If the cost to the employer of 
the employee achievement award received by the taxpayer 
'<;?) exceeds the amount allowable as a deduction to the employer, 
*\ 
then gross income includes the greater o
f
— 
"(A) an amount equal to the portion of the cost to the 
employer of the award that is not allowable as a deduction 
to the employer (but not in excess of the value of the 
award), or 
"(B) the amount by which the value of the award exceeds 
the amount allowable as a deduction to the employer. 
The remaining portion of the value of such award shall not be 
included in the gross income of the recipient. 
"(3) TREATMENT OF TAX-EXEMPT EMPLOYERS.—In the case of an 
employer exempt from taxation under this subtitle, any ref-
erence in this subsection to the amount allowable as a deduction 
? to the employer shall be treated as a reference to the amount 
which would be allowable as a deduction to the employer if the 
employer were not exempt from taxation under this subtitle. 
"(4) CROSS REFERENCE.— 
"For 
provisions excluding certain de minimis fringes from gross 
income, see section 132(e)." 
(2) CONFORMING AMENDMENTS.— 
. 
- 
. 
.... 
.Hft 
(A) Clause (i) of section 4941(d)(2)(G) is amended by strik-
ing out "section 74(b)" and inserting in lieu thereof "section 
"*»> 
74(b) (without regard to paragraph (3) thereof)". 
(B) Paragraph (2) of section 4945(g) is amended by strik-
ing out "section 74(b)" and inserting in lieu thereof "section 
74(b) (without regard to paragraph (3) thereof)". 
(b) AMOUNTS TRANSFERRED BY EMPLOYER NOT EXCLUDABLE AS 
GIFTS.—Section 102 (relating to gifts and inheritances) is amended 
by adding at the end thereof the following new subsection: 
"(c) EMPLOYEE GIFTS.— 
"(1) IN GENERAL.—Subsection (a) shall not exclude from gross 
income any amount transferred by or for an employer to, or for 
the benefit of, an employee. 
"(2) CROSS REFERENCES.— 
"For provisions excluding certain employee achievement awards from 
gross income, see section 74(c). 
"For 
provisions excluding certain de minimis fringes from gross 
, 
income, see section 132(e)." 
(c) GIFTS.—Section 2740t)) (relating to gifts) is amended— 
(1) by adding "or" at the end of subparagraph (A) of para-
graph (1), 
(2) by striking out "or" at the end of subparagraph (B) of 
paragraph (1), and inserting in lieu thereof a period, 
(3) by striking out subparagraph (C) of paragraph (1), and 
(4) by striking out paragraph (3). 
(d) DEDUCTION FOR COST OF EMPLOYEE ACHIEVEMENT AWARDS.— 
Section 274 (relating to certain entertainment, etc., expenses) is 
amended by redesignating subsection (j) as subsection (k) and by 
inserting after subsection (i) the following new subsection: 
"(j) EMPLOYEE ACHIEVEMENT AWARDS.— 
"(1) GENERAL RULE.—No deduction shall be allowed under 
section 162 or section 212 for the cost of an employee achieve-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2111 
ment award except to the extent that such cost does not exceed 
the deduction Hmitations of paragraph (2). 
"(2) DEDUCTION LIMITATIONS.—The deduction for the cost of an 
employee achievement award made by an employer to an 
employee— 
"(A) which is not a qualified plan award, when added to 
the cost to the employer for all other employee achievement 
awards made to such employee during the taxable year 
which are not qualified plan awards, shall not exceed $400, 
and 
"(B) which is a qualified plan award, when added to the 
cost to the employer for all other employee achievement 
awards made to such employee during the taxable year 
(including employee achievement awards which are not 
qualified plan awards), shall not exceed $1,600. 
"(3) DEFINITIONS.—For purposes of this subsection— 
"(A) EMPLOYEE ACHIEVEMENT AWARD.—The term 'em-
ployee achievement award* means an item of tangible per-
sonal property which is— 
"(i) transferred by an employer to an employee for 
length of service achievement or safety achievement, 
. .^ 
"(ii) awarded as part of a meaningful presentation, 
and 
"(iii) awarded under conditions and circumstances 
that do not create a significant likelihood of the pay 
ment of disguised compensation. 
"(B) QUALIFIED PLAN AWARD.— 
"(i) IN GENERAL.—The term 'qualified plan award' 
means an employee achievement award awarded as 
part of an established written plan or program of the 
taxpayer which does not discriminate in favor of highly 
compensated employees (within the meaning of section 
414(q)) as to eligibility or benefits. 
"(ii) LIMITATION.—An employee achievement award 
shall not be treated as a qualified plan award for any 
taxable year if the average cost of all employee achieve-
ment awards which are provided by the employer 
during the year, and which would be qualified plan 
awards but for this subparagraph, exceeds $400. For 
i 
purposes of the preceding sentence, average cost shall 
be determined by including the entire cost of qualified 
plan awards, without taking into account employee 
achievement awards of nominal value. 
"(4) SPECIAL RULES.—For purposes of this subsection— 
"(A) PARTNERSHIPS.—In the case of an employee achieve-
ment award made by a partnership, the deduction limita-
tions contained in paragraph (2) shall apply to the partner-
ship as well as to each member thereof. 
"(B) LENGTH OF SERVICE AWARDS.—An item shall not be 
treated as having been provided for length of service 
achievement if the item is received during the recipient's 
1st 5 years of employment or if the recipient received a 
length of service achievement award (other than an award 
excludable under section 132(e)(1)) during that year or any 
of the prior 4 years. 
100 STAT. 2112 
PUBLIC LAW 99-514—OCT. 22, 1986 
' ; . ' 
"(C) SAFETY ACHIEVEMENT AWARDS.—An item provided by 
an employer to an employee shall not be treated as having 
;>. : 
been provided for safety achievement i
f
— 
r *
i G, 
"(i) during the taxable year, employee achievement 
awards (other than awards excludable under section 
132(e)(1)) for safety achievement have previously been 
awarded by the employer to more than 10 percent of 
the employees of the employer (excluding employees 
described in clause (ii)), or 
"(ii) such item is awarded to a manager, adminis-
trator, 
clerical 
employee, 
or 
other 
professional 
employee.". 
(e) TREATMENT FOR PURPOSES OF EMPLOYMENT TAXES.—Each of the 
following provisions are amended by striking out "117 or" and 
inserting in lieu thereof "74(c), 117, or": 
(1) Section 3121(a)(20). 
(2) Section 3231(e)(5). 
(3) Section 3306(b)(16). 
(4) Section 3401(a)(20). 
(5) Section 209(s) of the Social Security Act. 
SEC. 123. SCHOLARSHIPS. 
(a) IN GENERAL.—Section 117 (relating to scholarship and fellow-
ship grants) is amended to read as follows: 
"SEC. 117. QUALIFIED SCHOLARSHIPS. 
"(a) GENERAL RULE.—Gross income does not include any amount 
received as a qualified scholarship by an individual who is a can-
didate for a degree at an educational organization described in 
section 170(b)(l)(A)(ii). 
"(b) QUALIFIED SCHOLARSHIP.—For purposes of this section— 
"(1) IN GENERAL.—The term 'qualified scholarship' means any 
amount received by an individual as a scholarship or fellowship 
grant to the extent the individual establishes that, in accord-
• ance with the conditions of the grant, such amount was used for 
qualified tuition and related expenses. 
"(2) QUALIFIED TUITION AND RELATED EXPENSES.—For purposes 
of paragraph (1), the term 'qualified tuition and related ex-
penses' means— 
"(A) tuition and fees required for the enrollment or 
attendance of a student at an educational organization 
described in section 170(b)(l)(A)(ii), and 
"(B) fees, books, supplies, and equipment required for 
courses of instruction at such an educational organization. 
"(c) LIMITATION.—Subsections (a) and (d) shall not apply to that 
portion of any amount received which represents payment for teach-
ing, research, or other services by the student required as a condi-
tion for receiving the qualified scholarship or qualified tuition 
reduction. 
"(d) QUALIFIED TUITION REDUCTION.— 
"(1) IN GENERAL.—Gross income shall not include any quali-
fied tuition reduction. 
"(2) QUALIFIED TUITION REDUCTION.—For purposes of this 
subsection, the term 'qualified tuition reduction' means the 
,, 
amount of any reduction in tuition provided to an employee of 
an organization described in section 170(b)(l)(A)(ii) for the edu-
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2113 
cation (below the graduate level) at such organization (or an-
other organization described in section 170(b)(l)(A)(ii)) of— 
"(A) such employee, or 
"(B) any person treated as an employee (or whose use is 
treated as an employee use) under the rules of section 
132(f). 
"(3) REDUCTION MUST NOT DISCRIMINATE IN FAVOR OF HIGHLY 
COMPENSATED, ETC.—Paragraph (1) shall apply with respect to 
any qualified tuition reduction provided with respect to any 
officer, owner, or highly compensated employee only if such 
reduction is available on substantially the same terms to each 
member of a group of employees which is defined under a 
reasonable classification set up by the employer which does not 
discriminate in favor of officers, owners, or highlv compensated 
employees (within the meaning of section 414(q)).' 
(b) TECHNICAL AMENDMENTS.— 
(1) Subsection (a) of section 74 is amended by striking out 
"(relating to scholarship and fellowship grants)" and inserting 
in lieu thereof "(relating to qualified scholarships)". 
(2) The second sentence of section 1441(b) (relating to income 
items) is amended to read as follows: "The items of income 
referred to in subsection (a) from which tax shall be deducted 
and withheld at the rate of 14 percent are amounts which are 
received by a nonresident alien individual who is temporarily 
present in the United States as a nonimmigrant under subpara-
graph (F) or (J) of section 101(a)(15) of the Immigration and 
Nationality Act and which are incident to a qualified scholar-
ship to which section 117(a) applies, but only to the extent such 
amounts are includible in gross income." 
(3) Paragraph (6) of section 7871(a) (relating to Indian tribal 
governments treated as States for certain purposes), as amend-
ed by section 112, is amended by striking out subparagraph (B) 
and by redesignating subparagraphs (C), (D), and (E) as subpara-
graphs (B), (C), and (D), respectively. 
(4) The table of sections for part III of subchapter B of chapter 
1 is amended by striking out the item relating to section 117 and 
inserting in lieu thereof the following new item: 
"Sec. 117. Qualified scholarships." 
Subtitle D—Provisions Related to Deductions 
SEC. 131. REPEAL OF DEDUCTION FOR 2-EARNER MARRIED COUPLES. 
(a) GENERAL RULE.—Section 221 (relating to deduction for 2-earner 
married couples) is hereby repealed. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 62 is amended by striking out paragraph (16). 
(2) Subparagraph (A) of section 86(b)(2) is amended by striking 
out "sections 221," and inserting in lieu thereof "sections . 
(3) The table of sections for part VII of subchapter B of 
chapter 1 is amended by striking out the item relating to section 
221. 
SEC. 132. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS. 
(a) GENERAL RULE.—Part I of subchapter B of chapter 1 (defining 
gross income, adjusted gross income, etc.) is amended by adding at 
the end thereof the following new section: 
100 STAT. 2114 
PUBLIC LAW 99-514—OCT. 22, 1986 
"SEC. 67. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS. 
"(a) GENERAL RULE.—In the case of an individual, the miscellane-
ous itemized deductions for any taxable year shall be allowed only to 
the extent that the aggregate of such deductions exceeds 2 percent 
of adjusted gross income. 
"(b) MISCELLANEOUS ITEMIZED DEDUCTIONS.—For purposes of this 
section, the term 'miscellaneous itemized deductions' means the 
itemized deductions other than— 
"(1) the deduction under section 163 (relating to interest), 
"(2) the deduction under section 164 (relating to taxes), 
"(3) the deduction under section 165(a) for losses described in 
subsection (c)(3) or (d) of section 165, 
"(4) the deduction under section 170 (relating to charitable, 
etc., contributions and gifts), 
"(5) the deduction under section 213 (relating to medical, 
dental, etc., expenses), 
"(6) the deduction under section 217 (relating to moving 
expenses), 
"(7) any deduction allowable for impairment-related work 
expenses, 
"(8) the deduction under section 691(c) (relating to deduction 
for estate tax in ceise of income in respect of the decedent), 
"(9) any deduction allowable in connection with personal 
property used in a short sale, 
"(10) the deduction under section 1341 (relating to computa-
tion of tax where taxpayer restores substantial amount held 
under claim of right), 
"(11) the deduction under section 720t))(3) (relating to deduc-
tion where annuity payments cease before investment recov-
ered), 
"(l2) the deduction under section 171 (relating to deduction 
for amortizable bond premium), and 
"(13) the deduction under section 216 (relating to deductions 
in connection with cooperative housing corporations). 
"(c) DISALLOWANCE OF INDIRECT DEDUCTION THROUGH PASS-THRU 
ENTITY.—The Secretary shall prescribe regulations which prohibit 
the indirect deduction through pass-thru entities of amounts which 
are not allowable as a deduction if paid or incurred directly by an 
individual and which contain such reporting requirements as may 
be necessary to carry out the purposes of this subsection. The 
preceding sentence shall not apply with respect to estates, trusts, 
cooperatives, and real estate investment trusts. 
"(d) IMPAIRMENT-RELATED WORK EXPENSES.—For purposes of this 
section, the term 'impairment-related work expenses means ex-
penses— 
"(1) of a handicapped individual (as defined in section 
190(b)(3)) for attendant care services at the individual's place of 
employment and other expenses in connection with such place 
of employment which are necessary for such individual to be 
able to work, and 
"(2) with respect to which a deduction is allowable under 
section 162 (determined without regard to this section). 
"(e) DETERMINATION OF ADJUSTED GROSS INCOME IN CASE OF ES-
TATES AND TRUSTS.—For purposes of this section, the adjusted gross 
income of an estate or trust shall be computed in the same manner 
as in the case of an individual, except that the deductions for osts 
P U B L I C L A W 99-514—OCT. 22, 1986 
100 STAT. 2115 
which are paid or incurred in connection with the administration of 
the estate or trust and would not have been incurred if the property 
were not held in such trust or estate shall be treated as allowable in 
arriving at adjusted gross income." 
(b) TREATMENT OF TRADE AND BUSINESS DEDUCTIONS OF EMPLOY-
EES.— 
(1) I N GENERAL.—Paragraph (2) of section 62 (defining ad-
justed gross income) is amended to read as follows: 
"(2) 
CERTAIN TRADE AND BUSINESS DEDUCTIONS OF EMPLOY-
EES.— 
"(A) 
REIMBURSED EXPENSES OF EMPLOYEES.—The deduc-
tions allowed by part VI (section 161 and following) which 
consist of expenses paid or incurred by the taxpayer, in 
connection with the performance by him of services as an 
employee, under a reimbursement or other expense allow-
ance arrangement with his employer. 
' - 
"(B) 
CERTAIN 
EXPENSES OF PERFORMING 
ARTISTS.—The 
deductions allowed by section 162 which consist of expenses 
paid or incurred by a qualified performing artist in connec-
tion with the performances by him of services in the 
performing arts as an employee." 
(2) DEFINITION OF QUAUFIED PERFORMING ARTIST.—Section 62 
is amended— 
(A) by striking out "For purposes of this subtitle" and 
inserting in lieu thereof "(a) GENERAL RULE.—For purposes 
^ 
of this subtitle", and 
(B) by adding at the end thereof the following new subsec-
tion: 
"(b) QUAUFIED PERFORMING ARTIST.— 
"(1) I N GENERAL.—For purposes of subsection (aX2XB), the 
term 'qualified performing artist' means, with respect to any 
taxable year, any individual if— 
"(A) such individual performed services in the performing 
arts as an employee during the taxable year for at least 2 
employers, 
"(B) the aggregate amount allowable as a deduction 
under section 162 in connection with the performance of 
such services exceeds 10 percent of such individual's gross 
income attributable to the performance of such services, 
and 
"(C) the adjusted gross income of such individual for the 
(
S
T
i k 
taxable year (determined without regard to subsection 
(aX2XB)) does not exceed $16,000. 
"(2) 
NOMINAL 
EMPLOYER 
NOT TAKEN 
INTO 
ACCOUNT.—An 
individual shall not be treated as performing services in the 
performing arts as an employee for any employer during any 
taxable year unless the amount received by such individual 
from such employer for the performance of such services during 
the taxable year equals or exceeds $200. 
"(3) SPECIAL RULES FOR MARRIED COUPLES.— 
"(A) I N GENERAL.—Except in the case of a husband and 
wife who lived apart at all times during the taxable year, if 
the taxpayer is married at the close of the taxable year, 
subsection (aX2XB) shall apply only if the taxpayer and his 
spouse file a joint return for the taxable year. 
"(B) APPUCATION OF PARAGRAPH (1).—In the case of a 
joint return— 
100 STAT. 2116 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(i) paragraph (1) (other than subparagraph (C) 
thereof) shall be applied separately with respect to each 
- 
^ 
spouse, but 
"(ii) paragraph (1)(C) shall be applied with respect to 
/ . ? 
their combined adjusted gross income. 
J 
"(C) DETERMINATION OF MARITAL STATUS.—For purposes of 
'iM:, 
^j^-g subsection, marital status shall be determined under 
section 7703(a). 
'' 
"(D) JOINT RETURN.—For purposes of this subsection, the 
term 'joint return' means the joint return of a husband and 
wife made under section 6013." 
(c) MOVING EXPENSE DEDUCTION NOT ALLOWABLE IN COMPUTING 
ADJUSTED GROSS INCOME.—Subsection (a) of section 62 (as amended 
by subsection (b)) is amended by striking out paragraph (8). 
(d) CLERICAL AMENDMENT.—The table of sections for part I of 
subchapter B of chapter 1 is amended by adding at the end thereof 
the following new item: 
"Sec. 67. 2-percent floor on miscellaneous itemized deductions." 
SEC. 133. MEDICAL EXPENSE DEDUCTION LIMITATION INCREASED. 
Subsection (a) of section 213 (relating to deduction for medical, 
dental, etc., expenses) is amended by striking out "5 percent" and 
inserting in lieu thereof "7.5 percent". 
SEC. 134. REPEAL OF DEDUCTION FOR STATE AND LOCAL SALES TAXES. 
(a) GENERAL RULE.—Subsection (a) of section 164 (relating to 
deduction for taxes) is amended— 
(1) by striking out paragraph (4) and by redesignating para-
graph (5) as paragraph (4), and 
(2) by adding at the end thereof the following new sentence: 
"Notwithstanding the preceding sentence, any tax (not de-
scribed in the first sentence of this subsection) which is paid or 
accrued by the taxpayer in connection with an acquisition or 
disposition of property shall be treated as part of the cost of the 
acquired property or, in the case of a disposition, as a reduction 
in the amount realized on the disposition." 
(b) CONFORMING AMENDMENTS.—Subsection (b) of section 164 is 
amended— 
(1) by striking out paragraphs (2) and (5), and 
(2) by redesignating paragraphs (3) and (4) as paragraphs (2) 
and (3), respectively. 
SEC. 135. REPEAL OF DEDUCTION FOR ADOPTION EXPENSES. 
(a) GENERAL RULE.—Section 222 (relating to deduction for adop-
tion expenses) is hereby repealed. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 223 is redesignated as section 220. 
(2) The table of sections for part VII of subchapter B of 
chapter 1 is amended by striking out the items relating to 
sections 222 and 223 and inserting in lieu thereof the following: 
"Sec. 220. Cross references." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2117 
Subtitle E—Miscellaneous Provisions 
SEC. 141. REPEAL OF INCOME AVERAGING. 
(a) GENERAL RULE.—Part I of subchapter Q of chapter 1 (relating 
to income averaging) is hereby repealed. 
(b) TECHNICAL AMENDMENTS.— 
(1) Subsection (b) of section 3 (relating to section inapplicable 
to certain individuals) is amended by striking out paragraph (1) 
and by redesignating paragraphs (2) and (3) as paragraphs (1) 
and (2), respectively. 
(2) Subsection (b) of section 5 (relating to cross references 
relating to tax on individuals) is amended by striking out 
• • 
paragraph (2) and by redesignating paragraph (3) as paragraph 
(2). 
(3) Subparagraph (B) of section 6511(dX2) (relating to special 
rules applicable to income taxes) is amended to read as follows: 
"(B) APPUCABLE RULES.— 
' f 
"(i) IN GENERAL.—If the allowance of a credit or 
refund of an overpayment of tax attributable to a net 
operating loss carryback or a capital loss carryback is 
otherwise prevented by the operation of any law or rule 
of law other than section 7122 (relating to com-
promises), such credit or refund may be allowed or 
made, if claim therefor is filed within the period pro-
vided in subparagraph (A) of this paragraph. 
"(ii) TENTATIVE CARRYBACK ADJUSTMENTS.—If 
the 
allowance of an application, credit, or refund of a 
decrease in tax determined under section 6411(b) is 
otherwise prevented by the operation of any law or rule 
of law other than section 7122, such application, credit, 
or refund may be allowed or made if application for a 
tentative carryback adjustment is made within the 
period provided in section 6411(a). 
"(iii) DETERMINATIONS BY COURTS TO BE CONCLUSIVE.— 
In the case of any such claim for credit or refund or any 
such application for a tentative carryback adjustment, 
the determination by any court, including the Tax 
Court, in any proceeding in which the decision of the 
court has become final, shall be conclusive except with 
respect to— 
"(I) the net operating loss deduction and the 
effect of such deduction, and 
"(II) the determination of a short-term capital 
loss and the effect of such short-term capital loss, 
to the extent that such deduction or short-term 
capital loss is affected by a carryback which was 
not an issue in such proceeding." 
(c) CLERICAL AMENDMENT.—The table of parts for subchapter Q of 
chapter 1 is amended by striking out the item relating to part I. 
SEC. 142. LIMITATIONS ON DEDUCTIONS FOR MEALS. TRAVEL, AND 
ENTERTAINMENT. 
(a) BUSINESS MEALS.— 
(1) IN GENERAL.—Section 274 (relating to disallowance of cer-
tain entertainment, etc. expenses), as amended by section 
122(d), is amended by redesignating subsection (k) as subsection 
100 STAT. 2118 
PUBLIC LAW 99-514—OCT. 22, 1986 
(o) and by inserting after subsection (j) the following new subsec-
tion: 
"(k) BUSINESS MEALS.— 
"(1) IN GENERAL.—No deduction shall be allowed under this 
chapter for the expense of any food or beverages unless— 
"(A) such expense is not lavish or extravagant under the 
circumstances, and 
"(B) the taxpayer (or an employee of the taxpayer) is 
present at the furnishing of such food or beverages. 
"(2) EXCEPTIONS.—Paragraph (1) shall not apply to any ex-
pense if subsection (a) does not apply to such expense by reason 
of paragraph (2), (3), (4), (7), (8), or (9) of subsection (e)." 
(2) TECHNICAL AMENDMENTS.— 
(A) Subsection (e) of section 274 (relating to specific excep-
tions to application of subsection (a)) is amended by striking 
out paragraph (1) and by redesignating paragraphs (2) 
through (10) as paragraphs (1) through (9), respectively. 
(B) Paragraph (3) of section 274(e), as redesignated by 
subparagraph (A), is amended bv striking out "paragraph 
(3)" and inserting in lieu thereof 'paragraph (2)". 
(b) ADDITIONAL RESTRICTIONS ON EXPENSES FOR MEALS, TRAVEL, 
AND ENTERTAINMENT.—Section 274 is amended by inserting after 
the subsection added by subsection (a) the following new subsections: 
"(1) ADDITIONAL LIMITATIONS ON ENTERTAINMENT TICKETS.— 
"(1) ENTERTAINMENT TICKETS.— 
"(A) I N GENERAL.—In determining the amount allowable 
as a deduction under this chapter for any ticket for any 
activity or facility described in subsection (d)(2), the amount 
taken into account shall not exceed the face value of such 
ticket. 
"(B) EXCEPTION FOR CERTAIN CHARITABLE SPORTS EVENTS.— 
Subparagraph (A) shall not apply to any ticket for any 
vi 
sports event— 
"(i) which is organized for the primary purpose of 
benefiting an organization which is described in section 
501(c)(3) and exempt from tax under section 501(a), 
"(ii) all of the net proceeds of which are contributed 
to such organization, and 
"(iii) which utilizes volunteers for substantially all of 
the work performed in carrying out such event. 
"(2) SKYBOXES, ETC.— 
"(A) IN GENERAL.—In the case of a skybox or other pri-
vate luxury box leased for more than 1 event, the amount 
allowable as a deduction under this chapter with respect to 
such events shall not exceed the sum of the face value of 
non-luxury box seat tickets for the seats in such box cov-
ered by the lease. For purposes of the preceding sentence, 2 
or more related leases shall be treated as 1 lease. 
f, 
"(B) PHASEIN.—In the case of— 
"(i) a taxable year beginning in 1987, the amount 
disallowed under subparagraph (A) shall be V
a of the 
«»; H 
amount which would be disallowed without regard to 
this subparagraph, and 
"(ii) in the case of a taxable year beginning in 1988, 
. 
, 
the amount disallowed under subparagraph (A) shall be 
% of the amount which would have been disallowed 
without regard to this subparagraph." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2119 
"(m) ADDITIONAL LIMITATIONS ON TRAVEL EXPENSES.— 
"(1) LUXURY WATER TRANSPORTATION.— 
"(A) IN GENERAL.—No deduction shall be allowed under 
this chapter for expenses incurred for transportation by 
water to the extent such expenses exceed twice the aggre-
gate per diem amounts for days of such transportation. For 
purposes of the preceding sentence, the term 'per diem 
amounts' means the highest amount generally allowable 
with respect to a day to employees of the executive branch 
of the Federal Government for per diem while away from 
'" 
' 
home but sei'ving in the United States. 
"(B) EXCEPTIONS.—Subparagraph (A) shall not apply to— 
"(i) any expense allocable to a convention, seminar, 
or other meeting which is held on any cruise ship, and 
I. . 
"(ii) any expense to which subsection (a) does not 
' 
apply by reason of paragraph (2), (3), (4), (7), (8), or (9) of 
subsection (e). 
"(2) TRAVEL AS FORM OF EDUCATION.—No deduction shall be 
allowed under this chapter for expenses for travel as a form of 
education, 
"(n) ONLY 80 PERCENT OF MEAL AND ENTERTAINMENT EXPENSES 
ALLOWED AS DEDUCTION.— 
"(1) IN GENERAL.—The amount allowable as a deduction 
under this chapter for— 
"(A) any expense for food or beverages, and 
"(B) any item with respect to an activity which is of a 
type generally considered to constitute entertainment, 
• ' a 
amusement, or recreation, or with respect to a facility used 
in connection with such activity, 
shall not exceed 80 percent of the amount of such expense or 
j 
item which would (but for this paragraph) be allowable as a 
deduction under this chapter. 
"(2) EXCEPTIONS.—Paragraph (1) shall not apply to any ex-
pense if— 
"(A) subsection (a) does not apply to such expense by 
reason of paragraph (2), (3), (4), (7), (8), or (9) of subsection 
• 
" 
(e), 
"(B) in the case of an expense for food or beverages, such 
expense is excludable from the gross income of the recipient 
under section 132 by reason of subsection (e) thereof (relat-
ing to de minimis fringes), 
?-! 
"(C) such expense is covered by a package involving a 
?j 
ticket described in subsection (1)(1XB), or 
ft 
"(D) in the case of an expense for food or beverages before 
January 1, 1989, such expense is an integral part of a 
:', 
qualified meeting. 
"(3) QUALIFIED MEETING.—For purposes of paragraph (2)(D), 
%_ the term 'qualified meeting' means any convention, seminar, 
5 
annual meeting, or similar business program with respect to 
which— 
ij 
"(A) an expense for food or beverages is not separately 
stated, 
"(B) more than 50 percent of the participants are away 
from home, 
J' 
"(C) at least 40 individuals attend, and 
100 STAT. 2120 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(D) such food and beverages are part of a program which 
includes a speaker." 
(c) No DEDUCTION ALLOWED FOR SEMINARS, ETC., FOR SECTION 212 
PURPOSES.— 
(1) IN GENERAL.—Subsection (h) of section 274 (relating to 
attendance at conventions, etc.) is amended by adding at the 
end thereof the following new paragraph: 
"(7) SEMINARS, ETC. FOR SECTION 212 PURPOSES.—No deduction 
shall be allowed under section 212 for expenses allocable to a 
convention, seminar, or similar meeting." 
(2) TECHNICAL AMENDMENTS.—Paragraphs (1), (2), (4), and (5) 
of section 274(h) are each amended— 
(A) by striking out "or 212" each place it appears, and 
(B) by striking out "or to an activity described in section 
212 and" each place it appears. 
(d) DENIAL OF CHARITABLE CONTRIBUTION FOR CERTAIN TRAVEL 
EXPENSES.—Section 170 (relating to charitable, etc., contributions 
and gifts) is amended by redesignating subsections (k) and (1) as 
subsections (1) and (m), respectively, and by inserting after subsec-
tion (j) the following new subsection: 
"(k) 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 vaca-
tion in such travel." 
SEC. 143. CHANGES IN TREATMENT OF HOBBY LOSS, ETC. 
(a) HOBBY Loss.—Subsection (d) of section 183 (relating to 
presumption) is amended— 
(1) by striking out "2 or more of the taxable years in the 
period of 5 consecutive taxable years" and inserting in lieu 
thereof "3 or more of the taxable years in the period of 5 
consecutive taxable years", and 
(2) by striking out the last sentence and inserting in lieu 
thereof the following: "In the case of an activity which consists 
in major part of the breeding, training, showing, or racing of 
horses, the preceding sentence shall be applied by substituting 
'2'for'3'and T for'5'." 
(b) TREATMENT OF RENTAL TO EMPLOYER UNDER SECTION 280A.— 
Subsection (c) of section 280A (relating to exceptions for certain 
business or rental use; limitation on deductions for such use) is 
amended by adding at the end thereof the following new paragraph: 
"(6) TREATMENT OF RENTAL TO EMPLOYER.—Paragraphs (1) and 
(3) shall not apply to any item which is attributable to the 
rental of the dwelling unit (or any portion thereof) by the 
taxpayer to his employer during any period in which the tax-
payer uses the dwelling unit (or portion) in performing services 
as an employee of the employer." 
(c) REVISION OF LIMITATION ON DEDUCTION FOR BUSINESS USE OF 
HOME.—Paragraph (5) of section 280A(c) (relating to exceptions for 
certain business or rental use; limitation on deductions for such use) 
is amended by striking out subparagraph (B) and inserting in lieu 
thereof the following: 
"(B) the sum o
f
— 
"(i) the deductions allocable to such use which are 
allowable under this chapter for the taxable year 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2121 
whether or not such unit (or portion thereof) was so 
used, and 
"(ii) the deductions allocable to the trade or business 
in which such use occurs (but which are not allocable to 
such use) for such taxable year. 
Any amount not allowable as a deduction under this chapter by 
reason of the preceding sentence shall be taken into account as 
a deduction (allocable to such use) under this chapter for the 
succeeding taxable year." 
SEC. 144. DEDUCTION FOR MORTGAGE INTEREST AND REAL PROPERTY 
TAXES ALLOWABLE WHERE PARSONAGE ALLOWANCE OR 
MILITARY HOUSING ALLOWANCE RECEIVED. 
Section 265 (relating to expenses and interest relating to tax-
exempt income) is amended by adding at the end thereof the follow-
ing new paragraph: 
"(6) SECTION NOT TO APPLY WITH RESPECT TO PARSONAGE AND 
MiuTARY HOUSING ALLOWANCES.—No deduction shall be denied 
under this section for interest on a mortgage on, or real prop-
erty taxes on, the home of the taxpayer by reason of the receipt 
of an amount as-r 
"(A) a military housing allowance, or 
"(B) a parsonage allowance excludable from gross income 
under section 107." 
fi-i.' 
Subtitle F—Effective Dates 
SEC. 15L EFFECTIVE DATES. 
(a) GENERAL RULE.—Except £is otherwise provided in this section, 
the amendments made by this title shall apply to taxable years 
beginning after December 31,1986. 
(b) UNEMPLOYMENT COMPENSATION.—The amendment made by 
section 121 shall apply to amounts received after December 31,1986, 
in taxable years ending after such date. 
(c) PRIZES AND AWARDS.—The amendments made by section 122 
shall apply to prizes and awards granted after December 31, 1986. 
(d) SCHOLARSHIPS.—The amendments made by section 123 shall 
apply to taxable years beginning after December 31, 1986, but only 
in the case of scholarships and fellowships granted after August 16, 
1986. 
(e) 
PARSONAGE 
AND 
MIUTARY 
HOUSING 
ALLOWANCES.—The 
amendment made by section 144 shall apply to taxable years begin-
ning before, on, or after, December 31,1986. 
TITLE II—PROVISIONS RELATING TO 
CAPITAL COST 
Subtitle A—Depreciation Provisions 
SEC. 201. MODIFICATION OF ACCELERATED COST RECOVERY SYSTEM. 
(a) GENERAL RULE.—Section 168 (relating to accelerated cost 
recovery system) is amended to read as follows: 
100 STAT. 2122 
PUBLIC LAW 99-514—OCT. 22, 1986 
"SEC. 168. ACCELERATED COST RECOVERY SYSTEM. 
"(a) GENERAL RULE.—Except as otherwise provided in this section, 
the depreciation deduction provided by section 167(a) for any tan-
gible property shall be determined by using— 
"(1) the applicable depreciation method, 
"(2) the applicable recovery period, and 
"(3) the applicable convention. 
"(b) APPUCABLE DEPRECIATION METHOD.—For purposes of this sec-
tion— 
"(1) IN GENERAL.—Except as provided in paragraphs (2) and 
(3), the applicable depreciation method is— 
"(A) the 200 percent declining balance method, 
"(B) switching to the straight line method for the 1st 
taxable year for which using the straight line method with 
respect to the adjusted basis as of the beginning of such 
year will yield a larger allowance. 
"(2) 15-YEAR AND 20-YEAR PROPERTY.—In the case of 15-year 
and 20-year property, paragraph (1) shall be applied by 
substituting '150 percent' for '200 percent'. 
"(3) PROPERTY TO WHICH STRAIGHT UNE METHOD APPLIES.—The 
applicable depreciation method shall be the straight line 
method in the case of the following property: 
"(A) Nonresidential real property. 
"(B) Residential rental property. 
"(C) Property with respect to which the taxpayer elects 
under paragraph (5) to have the provisions of this para-
graph apply. 
"(4) SALVAGE VALUE TREATED AS ZERO.—Salvage value shall be 
treated as zero. 
"(5) ELECTION.—An election under paragraph (3XC) may be 
made with respect to 1 or more classes of property for any 
taxable year and once made with respect to any class shall 
apply to all property in such class placed in service during such 
taxable year. Such an election, once made, shall be irrevocable. 
"(c) APPLICABLE RECOVERY PERIOD.—For purposes of this section, 
the applicable recovery period shall be determined in accordance 
with the following table: 
The applicable 
recovery period 
"In the case of: 
is: 
3-year property 
3 years 
5-year property 
5 years 
7-year property 
7 years 
10-year property 
10 years 
15-year property 
15 years 
20-year property 
20 years 
Residential rental property 
27.5 years 
Nonresidential real property 
31.5 years. 
"(d) APPLICABLE CONVENTION.—For purposes of this section— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, 
the applicable 
convention 
is the 
half-year 
convention. 
"(2) REAL PROPERTY.—In the case of— 
"(A) nonresidential real property, and 
"(B) residential rental property, 
"K.-
the applicable convention is the mid-month convention. 
"(3) SPECIAL RULE WHERE SUBSTANTIAL PROPERTY PLACED IN 
SERVICE DURING LAST 3 MONTHS OF TAXABLE YEAR.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2123 
in >
* 
"(A) IN GENERAL.—Except as provided in regulations, if 
during any taxable year— 
"(i) the aggregate bases of property to which this 
section applies and which are placed in service during 
the last 3 months of the taxable year, exceed 
"(ii) 40 percent of the aggregate bases of property to 
which this section applies placed in service during such 
taxable year, 
- • 
the applicable convention for all property to which this 
section applies placed in service during such taxable year 
shall be the mid-quarter convention. 
tw'd 
«^g^ CERTAIN REAL PROPERTY NOT TAKEN INTO ACCOUNT.— 
For purposes of subparagraph (A), nonresidential real prop-
erty and residential rental property shall not be taken into 
account. 
"(4) DEFINITIONS.— 
"(A) HALF-YEAR CONVENTION.—The half-year convention 
is a convention which treats all property placed in service 
. 
during any taxable year (or disposed of during any taxable 
year) as placed in service (or disposed of) on the mid-point of 
such taxable year. 
"(B) MID-MONTH CONVENTION.—The mid-month conven-
tion is a convention which treats all property placed in 
service during any month (or disposed of during any month) 
|j,: 
as placed in service (or disposed of) on the mid-point of such 
month. 
"(C) 
MID-QUARTER 
CONVENTION.—The 
mid-quarter 
:k|<!" 
convention is a convention which treats all property placed 
in service during any quarter of a taxable year (or disposed 
:
«
> ' 
of during any quarter of a taxable year) as placed in service 
(or disposed of) on the mid-point of such quarter. 
i "(e) CLASSIFICATION OF PROPERTY.—For purposes of this section— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, property shall be classified under the following 
table: 
If such property has a class life (in years) 
"Property shall be treated as: 
of: 
3-year property 
4 or less 
5-year property 
More than 4 but less than 10 
7-year property 
10 or more but less than 16 
i 
10-year property 
16 or more but less than 20 
15-year property 
20 or more but less than 25 
20-year property 
25 or more. 
"(2) RESIDENTIAL RENTAL OR NONRESIDENTIAL REAL PROP-
ERTY.— 
"(A) RESIDENTIAL RENTAL PROPERTY.—The term 'residen-
tial rental property' has the meaning given such term by 
tw 
section 167(jX2XB). 
"(B) 
NONRESIDENTIAL 
REAL 
PROPERTY.—The 
term 
V 
'nonresidential real property' means section 1250 property 
which is not— 
"(i) residential rental property, or 
of^b- 
"(ii) property with a class life of less than 27.5 years. 
"(3) CLASSIFICATION OF CERTAIN PROPERTY.— 
'r 
"(A) 3-YEAR PROPERTY.—The term '3-year property' in-
cludes— 
100 STAT. 2124 
PUBLIC LAW 99-514—OCT. 22, 1986 
,,'C'5 
"(i) any race horse which is more than 2 years old at 
the time it is placed in service, and 
, .J ff',f - " 
"(ii) any horse other than a race horse which is more 
^^a'l .r. ' 
than 12 years old at the time it is placed in service. 
"(B) 5-YEAR PROPERTY.—The term '5-year property' in-
cludes— 
"(i) any automobile or light general purpose truck, 
"(ii) any semi-conductor manufacturing equipment, 
,, J: 
"(iii) any computer-based telephone central office 
. 
switching equipment, 
"(iv) any qualified technological equipment, 
_ .-^.,^ , ., 
"(v) any property used in connection with research 
and experimentation, and 
"(vi) any property which— 
"(I) 
is 
described 
in 
paragraph 
(3)(A)(viii), 
(3)(A)(ix), or (4) of section 48(1), or 
"(II) is described in paragraph (15) of section 48(1) 
and is a qualifying small power production facility 
within the meaning of section 3(17)(C) of the Fed-
eral Power Act (16 U.S.C. 796(17)(C)), as in effect on 
September 1,1986. 
"(C) 7-YEAR PROPERTY.—The term '7-year property' in-
cludes— 
"(i) any railroad track, 
•' 
"(ii) any single-purpose agricultural or horticultural 
'- 
structure (within the meaning of section 48(p)), and 
"(iii) any property which— 
-ftj* = ,! 
or 
«<(j) (jQgg jjQ^ have a class life, and 
"(II) is not otherwise classified under paragraph 
(2) or this paragraph. 
••>• >
. 
"(D) 15-YEAR PROPERTY.—The term *15-year property' in-
cludes— 
"(i) any municipal wastewater treatment plant, and 
', 
"(ii) any telephone distribution plant and comparable 
. 
equipment used for 2-way exchange of voice and data 
communications. 
"(E) 20-YEAR PROPERTY.—The term '20-year property' in-
cludes any municipal sewers. 
"(0 PROPERTY TO WHICH SECTION DOES NOT APPLY.—This section 
shall not apply to— 
"(1) CERTAIN METHODS OF DEPRECIATION.—Any property i
f
— 
"(A) the taxpayer elects to exclude such property from 
the application of this section, and 
"(B) for the 1st taxable year for which a depreciation 
I 
' * deduction would be allowable with respect to such property 
in the hands of the taxpayer, the property is properly 
pa: 
depreciated under the unit-of-production method or any 
•~rp, ( ri*: method of depreciation not expressed in a term of years 
(other than the retirement-replacement-betterment method 
or similar method). 
"(2) CERTAIN PUBLIC UTILITY PROPERTY.—Any public utility 
property (within the meaning of section 167(1X3XA)) if the tax-
payer does not use a normalization method of accounting. 
3
-
y
i 
(3) FILMS AND VIDEO TAPE.—Any motion picture film or video 
tape. 
0? 
"(4) SOUND RECORDINGS.—Any sound recording described in 
section 48(rX5). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2125 
"(5) CERTAIN PROPERTY PLACED IN SERVICE IN CHURNING TRANS-
ACTIONS.— 
"(A) IN GENERAL.—Property— 
"(i) described in paragraph (4) of section 168(e) (as in 
effect before the amendments made by the Tax Reform 
Act of 1986), or 
"(ii) which would be described in such paragraph if 
such paragraph were applied by substituting '1987' for 
'1981' and '1986' for '1980' each place such terms 
appear. 
"(B) SUBPARAGRAPH (A) (ii) NOT TO APPLY.—Clause (ii) of 
subparagraph (A) shall not apply to— 
"(i) any residential rental property or nonresidential 
real property, or 
"(ii) any property if, for the 1st full taxable year in 
which such property is placed in service— 
"(I) the amount allowable as a deduction under 
this section (as in effect before the date of the 
enactment of this paragraph) with respect to such 
property is greater than, 
"(II) the amount allowable as a deduction under 
this section (as in effect on or after such date and 
using the half-year convention) for such taxable 
year. 
'(g) ALTERNATIVE DEPRECIATION SYSTEM FOR CERTAIN PROPERTY.— 
"(1) IN GENERAL.—In the case o
f
— 
"(A) any tangible property which during the taxable year 
is used predominantly outside the United States, 
"(B) any tax-exempt use property, 
"(C) any tax-exempt bond financed property, 
"(D) any imported property covered by an Executive 
order under paragraph (6), and 
"(E) any property to which an election under paragraph 
(7) applies, 
the depreciation deduction provided by section 167(a) shall be 
determined under the alternative depreciation system. 
"(2) ALTERNATIVE DEPRECIATION SYSTEM.—For purposes of 
paragraph (1), the alternative depreciation system is deprecia-
tion determined by using— 
"(A) the straight line method (without regard to salvage 
value), 
"(B) the applicable convention determined under subsec-
tion (d), and 
"(C) a recovery period determined under the following 
table: 
The recovery 
period 
"In the case of: 
shall be: 
(i) Property not described in clause (ii) or (iii) 
The class life. 
(ii) Personal property with no class life 
12 years. 
(iii) Nonresidential real and residential rental prop-
erty 
» 
40 years. 
"(3) SPECIAL RULES FOR DETERMINING CLASS LIFE.— 
"(A) TAX-EXEMPT USE PROPERTY SUBJECT TO LEASE.—In the 
case of any tax-exempt use property subject to a lease, the 
recovery period used for purposes of paragraph (2) shall in 
no event be less than 125 percent of the lease term. 
*.c 
100 STAT. 2126 
PUBLIC LAW 99-514—OCT. 22, 1986 
'4.1/-i 
"(B) SPECIAL RULE FOR CERTAIN PROPERTY ASSIGNED TO 
CLASSES.—For purposes of paragraph (2), in the case of 
property described in any of the following subparagraphs of 
subsection (e)(3), the class life shall be determined as fol-
lows: 
"If property is described 
.,,, 
The class 
•ji 4 
in subparagraph: 
--* ; - 
life is: 
<
: 
(BXii) 
....:. 
5 
'^'*- 
(BXiii) 
9.5 
dr;K.' 
(CXi) 
10 
(CXii) 
15 
(DXi) 
24 
' 
(DXii) 
24 
(E) 
50. 
"(C) QUALIFIED TECHNOLOGICAL EQUIPMENT.—In the case 
of any qualified technological equipment, the recovery 
period used for purposes of paragraph (2) shall be 5 years. 
"(D) AUTOMOBILES, ETC—In the case of any automobile or 
light general purpose truck, the recovery period used for 
purposes of paragraph (2) shall be 5 years. 
"(E) CERTAIN REAL PROPERTY.—In the case of any section 
1245 property which is real property with no class life, the 
recovery period used for purposes of paragraph (2) shall be 
40 years. 
"(4) PROPERTY USED PREDOMINANTLY OUTSIDE THE UNITED 
STATES.—For purposes of this subsection, rules similar to the 
rules under section 48(a)(2) (including the exceptions contained 
in subparagraph (B) thereof) shall apply in determining 
whether property is used predominantly outside the United 
States. In addition to the exceptions contained in such subpara-
graph (B), there shall be excepted any satellite or other space-
craft (or any interest therein) held by a United States person if 
such satellite or spacecraft was launched from within the 
^ United States. 
a 
"(5) TAX-EXEMPT BOND FINANCED PROPERTY.—For purposes of 
, this subsection— 
^' 
"(A) IN GENERAL.—Except as otherwise provided in this 
paragraph, the term 'tax-exempt bond, financed property' 
^' ^•''' means any property to the extent such property is financed 
''" 
(directly or indirectly) by an obligation the interest on 
which is exempt from tax under section 103(a). 
' ' • 
"(B) ALLOCATION OF BOND PROCEEDS.—For purposes of 
subparagraph (A), the proceeds of any obligation shall be 
' ^ ' 
treated as used to finance property acquired in connection 
with the issuance of such obligation in the order in which 
' 
such property is placed in service. 
"(C) QUALIFIED RESIDENTIAL RENTAL PROJECTS.—The term 
• '' 
'tax-exempt bond financed property' shall not include any 
qualified residential rental project (within the meaning of 
section 142(a)(7)). 
»
•
> 
"(6) IMPORTED PROPERTY.— 
"(A) COUNTRIES MAINTAINING TRADE RESTRICTIONS OR 
' 
ENGAGING IN DISCRIMINATORY ACTS.—If the President deter-
mines that a foreign country— 
.^ r,\ 
"(i) maintains nontariff trade restrictions, including 
Mf • 
variable import fees, which substantially 
burden 
•',/<; 
United States commerce in a manner inconsistent with 
provisions of trade agreements, or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2127 
"(ii) engages in discriminatory or other acts (includ-
ing tolerance of international cartels) or policies 
unjustifiably restricting United States commerce, 
the President may by Executive order provide for the ap-
plication of paragraph (IXD) to any article or class of 
articles manufactured or produced in such foreign country 
for such period as may be provided by such Executive order. 
Any period specified in the preceding sentence shall not 
apply to any property ordered before (or the construction, 
reconstruction, or erection of which began before) the date 
of the Executive order unless the President determines an 
earlier date to be in the public interest and specifies such 
date in the Executive order. 
'• 
"(B) IMPORTED PROPERTY.—For purposes of this subsec-
tion, the term 'imported property' means any property if— 
"(i) such property was completed outside the United 
States, or 
"(ii) less than 50 percent of the basis of such property 
is attributable to value added within the United States. 
For purposes of this subparagraph, the term 'United States' 
includes the Commonwealth of Puerto Rico and the posses-
sions of the United States. 
"(7) ELECTION TO USE ALTERNATIVE DEPRECIATION SYSTEM.— 
"(A) IN GENERAL.—If the taxpayer makes an election 
under this paragraph with respect to any class of property 
for any taxable year, the alternative depreciation system 
under this subsection shall apply to all property in such 
class placed in service during such taxable year. Notwith-
standing 
the 
preceding 
sentence, 
in 
the 
case 
of 
>' 
nonresidential real property or residential rental property, 
such election may be made separately with respect to each 
property. 
"(B) ELECTION IRREVOCABLE.—An election under subpara-
graph (A), once made, shall be irrevocable. 
'(h) TAX-EXEMPT USE PROPERTY.— 
"(1) IN GENERAL.—For purposes of this section— 
"(A) PROPERTY OTHER THAN NONRESIDENTIAL REAL PROP-
ERTY.—Except as otherwise provided in this subsection, the 
term 'tax-exempt use property' means that portion of any 
tangible property (other than nonresidential real property) 
leased to a tax-exempt entity. 
"(B) NONRESIDENTIAL REAL PROPERTY.— 
"(i) IN GENERAL.—In the csise of nonresidential real 
property, the term 'tax-exempt use property' means 
that portion of the property leased to a tax-exempt 
entity in a disqualified lease. 
"(ii) 
DISQUAUFIED 
LEASE.—For purposes of this 
subparagraph, the term 'disqualified lease' means any 
,rj .. 
lease of the property to a tax-exempt entity, but only 
i
f
— 
"(I) part or all of the property was financed 
(directly or indirectly) by an obligation the interest 
on which is exempt from tax under section 103(a) 
and such entity (or a related entity) participated in 
such financing, 
"(II) under such lease there is a fixed or deter-
minable price purchase or sale option which in-
100 STAT. 2128 
PUBLIC LAW 99-514—OCT. 22, 1986 
volves such entity (or a related entity) or there is 
the equivalent of such an option, 
"(HI) such lease has a lease term in excess of 20 
•.' 
•, 
years, or 
"(IV) such lease occurs after a sale (or other 
transfer) of the property by, or lease of the prop-
erty from, such entity (or a related entity) and such 
property has been used by such entity (or a related 
entity) before such sale (or other transfer) or lease, 
"(iii) 35-PERCENT THRESHOLD TEST.—Clause (i) shall 
apply to any property only if the portion of such prop-
erty leased to tax-exempt entities in disqualified leases 
is more than 35 percent of the property. 
"(iv) TREATMENT OF IMPROVEMENTS.—For purposes of 
this subparagraph, improvements to a property (other 
than land) shall not be treated as a separate property. 
"(v) LEASEBACKS DURING IST 3 MONTHS OF USE NOT 
TAKEN INTO ACCOUNT.—Subclause (IV) of clause (ii) 
shall not apply to any property which is leased within 3 
months after the date such property is first used by the 
tax-exempt entity (or a related entity). 
"(C) EXCEPTION FOR SHORT-TERM LEASES.— 
"(i) IN GENERAL.—Property shall not be treated as 
tax-exempt use property merely by reason of a short-
term lease. 
"(ii) SHORT-TERM LEASE.—For purposes of clause (i), 
the term 'short-term lease' means any lease the term of 
which is— 
"(I) less than 3 years, and 
J - . 
"(II) less than the greater of 1 year or 30 percent 
of the property's present class life. 
In the case of nonresidential real property and prop-
• ;,;>q ^ 
erty with no present class life, subclause (II) shall not 
apply. 
"(D) EXCEPTION WHERE PROPERTY USED IN UNRELATED 
TRADE O
R BUSINESS.—The term 'tax-exempt use property' 
ioif 
shall not include any portion of a property if such portion is 
predominantly used by the tax-exempt entity (directly or 
through a partnership of which such entity is a partner) in 
an unrelated trade or business the income of which is 
subject to tax under section 511. For purposes of subpara-
graph (B)(iii), any portion of a property so used shall not be 
*
4 I
J Seated as leased to a tax-exempt entity in a disqualified 
. 
lease. 
"(E) NONRESIDENTIAL REAL PROPERTY DEFINED.—For pur-
poses of this paragraph, the term 'nonresidential real prop-
t-i 
erty' includes residential rental property. 
"(2) TAX-EXEMPT ENTITY.— 
"(A) IN GENERAL.—For purposes of this subsection, the 
term 't£ix-exempt entity' means— 
"(i) the United States, any State or political subdivi-
sion thereof, any possession of the United States, or 
any agency or instrumentality of any of the foregoing, 
"(ii) an organization (other than a cooperative de-
scribed in section 521) which is exempt from tax im-
-t 3, 
posed by this chapter, and 
"(iii) any foreign person or entity. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2129 
"(B) 
EXCEPTIONS FOR CERTAIN PROPERTY SUBJECT TO 
UNITED STATES TAX AND USED BY FOREIGN PERSON OR 
ENTITY.— 
"(i) INCOME FROM PROPERTY SUBJECT TO UNITED STATES 
TAX.—Clause (iii) of subparagraph (A) shall not apply 
with respect to any property if more than 50 percent of 
the gross income for the taxable year derived by the 
foreign person or entity from the use of such property 
is— 
"(I) subject to tax under this chapter, or 
"(II) included under section 951 in the gross 
income of a United States shareholder for the tax-
able year with or within which ends the taxable 
year of the controlled foreign corporation in which 
such income was derived. 
For purposes of the preceding sentence, any exclusion 
or exemption shall not apply for purposes of determin-
ing the amount of the gross income so derived, but shall 
apply for purposes of determining the portion of such 
gross income subject to tax under this chapter. 
"(ii) MOVIES AND SOUND RECORDINGS.—Clause (iii) of 
subparagraph (A) shall not apply with respect to any 
qualified film (as defined in section 48(kXlXB)) or any 
sound recording (as defined in section 48(r)(5)). 
"(C) FOREIGN PERSON OR ENTITY.—For purposes of this 
paragraph, the term 'foreign person or entity' means— 
"(i) any foreign government, any 
international 
organization, or any agency or instrumentality of any 
of the foregoing, and 
"(ii) any person who is not a United States person. 
Such term does not include any foreign partnership or 
other foreign pass-thru entity. 
"(D) 
TREATMENT OF CERTAIN TAXABLE INSTRUMENTAL-
ITIES.—For purposes of this subsection, a corporation shall 
not be treated as an instrumentality of the United States or 
of any State or political subdivision thereof if— 
"(i) all of the activities of such corporation are subject 
to tax under this chapter, and 
"(ii) a majority of the board of directors of such 
corporation is not selected by the United States or any 
State or political subdivision thereof. 
"(E) CERTAIN PREVIOUSLY TAX-EXEMPT ORGANIZATIONS.— 
"(i) IN GENERAL.—For purposes of this subsection, an 
organization shall be treated as an organization de-
scribed in subparagraph (A)(ii) with respect to any 
property (other than property held by such organiza-
tion) if such organization was an organization (other 
than a cooperative described in section 521) exempt 
from tax imposed by this chapter at any time during 
the 5-year period ending on the date such property was 
first used by such organization. The preceding sentence 
and subparagraph (D)(ii) shall not apply to the Federal 
Home Loan Mortgage Corporation. 
"(ii) ELECTION NOT TO HAVE CLAUSE (I) APPLY.— 
"(I) IN GENERAL.—In the case of an organization 
formerly exempt from tax under section 501(a) as 
an organization described in section 501(c)(12), 
100 STAT. 2130 
PUBLIC LAW 99-514—OCT. 22, 1986 
•- 
' 
clause (i) shall not apply to such organization with 
^' "
f -' 
respect to any property if such organization elects 
not to be exempt from tax under section 501(a) 
i^' ^ 
during the tax-exempt use period with respect to 
• 
such property. 
"(II) TAX-EXEMPT USE PERIOD.—For purposes of 
subclause (I), the term 'tax-exempt use period' 
means the period beginning with the taxable year 
in which the property described in subclause (I) is 
first used by the organization and ending with the 
" 
' 
"' 
close of the 15th taxable year following the last 
taxable year of the applicable recovery period of 
such property. 
* -
f
*
^
^ - 
"(III) ELECTION.—Any election under subclause 
(I), once made, shall be irrevocable, 
"(iii) TREATMENT OF SUCCESSOR ORGANIZATIONS.—Any 
organization which is engaged in activities substan-
tially similar to those engaged in by a predecessor 
organization shall succeed to the treatment under this 
subparagraph of such predecessor organization. 
''.- 
"(iv) FIRST USED.—For purposes of this subparagraph, 
property shall be treated as first used by the organiza-
tion— 
"(I) when the property is first placed in service 
'^ 
under a lease to such organization, or 
"(II) in the case of property leased to (or held by) 
a partnership (or other pass-thru entity) in which 
the organization is a member, the later of when 
such property is first used by such partnership or 
'" • 
' 
pass-thru entity or when such organization is first 
B' 
a member of such partnership or pass-thru entity. 
"(3) SPECIAL RULES FOR CERTAIN HIGH TECHNOLOGY EQUIP-
MENT.— 
"(A) EXEMPTION WHERE LEASE TERM IS 5 YEARS OR LESS.— 
:
© 
For purposes of this section, the term 'tax-exempt use 
property shall not include any qualified technological 
i:>t 
equipment if the lease to the tax-exempt entity has a lease 
term of 5 years or less. 
f >
! ? 
"(B) EXCEPTION FOR CERTAIN PROPERTY.— 
{ • 
"(i) IN GENERAL.—For purposes of subparagraph (A), 
the term 'qualified technological equipment' shall not 
-- ' 
include any property leased to a tax-exempt entity if^ 
"(I) part or all of the property was financed 
(directly or indirectly) by an obligation the interest 
on which is exempt from tax under section 103(a), 
"(II) such lease occurs after a sale (or other 
transfer) of the property by, or lease of such prop-
erty from, such entity (or related entity) and such 
property has been used by such entity (or a related 
entity) before such sale (or other transfer) or lease, 
or 
<
i
^
* J 
- 
"(III) such tax-exempt entity is the United States 
or any agency or instrumentality of the United 
States. 
(if'} <»•' 
"(ii) LEASEBACKS DURING IST 3 MONTHS OF USE NOT 
TAKEN INTO ACCOUNT.—Subclause (II) of clause (i) shall 
not apply to any property which is leased within 3 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2131 
months after the date such property is first used by the 
tax-exempt entity (or a related entity). 
"(4) RELATED ENTITIES.—For purposes of this subsection— 
"(A)(i) Each governmental unit and each agency or 
instrumentality of a governmental unit is related to each 
other such unit, agency, or instrumentality which directly 
or indirectly derives its powers, rights, and duties in whole 
or in part from the same sovereign authority. 
"(ii) For purposes of clause (i), the United States, each 
State, and each possession of the United States shall be 
fsl 
treated as a separate sovereign authority. 
"(B) Any entity not described in subparagraph (AXi) is 
related to any other entity if the 2 entities have— 
t 
"(i) significant common purposes and substantial 
common membership, or 
"(ii) directly or indirectly substantial common direc-
tion or control., 
"(C)(i) An entity is related to another entity if either 
entity owns (directly or through 1 or more entities) a 50 
percent or greater interest in the capital or profits of the 
other entity. 
"(ii) For purposes of clause (i), entities treated as related 
under subparagraph (A) or (B) shall be treated as 1 entity. 
"(D) An entity is related to another entity with respect to 
a transaction if such transaction is part of an attempt by 
-c 
such entities to avoid the application of this subsection. 
"(5) TAX-EXEMPT USE OF PROPERTY LEASED TO PARTNERSHIPS, 
ETC., DETERMINED AT PARTNER LEVEL.—For purposes of this 
subsection— 
"(A) IN GENERAL.—In the case of any property which is 
leased to a partnership, the determination of whether any 
portion of such property is tax-exempt use property shall be 
- 
i 
made by treating each tax-exempt entity partner's propor-
5- > 
tionate share (determined under paragraph (6XC)) of such 
property as being leased to such partner. 
"(B) OTHER PASS-THRU ENTITIES; TIERED ENTITIES.—Rules 
similar to the rules of subparagraph (A) shall also apply in 
the case of any pass-thru entity other than a partnership 
as. 
and in the case of tiered partnerships and other entities. 
"(C) PRESUMPTION WITH RESPECT TO FOREIGN ENTITIES.— 
Unless it is otherwise established to the satisfaction of the 
to- 
Secretary, it shall be presumed that the partners of a 
foreign partnership (and the beneficiaries of any other 
I 
foreign pass-thru entity) are persons who are not United 
States persons. 
::^;.. "(6) TREATMENT OF PROPERTY OWNED BY PARTNERSHIPS, ETC.— 
"(A) IN GENERAL.—For purposes of this subsection, if— 
• 
"(i) any property which Ot>ut for this subparagraph) is 
•f's- 
not tax-exempt use property is owned by a partnership 
which has both a tax-exempt entity and a person who is 
not a tax-exempt entity as partners, and 
"(ii) any allocation to the tax-exempt entity of part-
nership items is not a qualified allocation, 
an amount equal to such tax-exempt entity's proportionate 
share of such property shall (except as provided in paragraph 
(IXD)) be treated as tax-exempt use property. 
100 STAT. 2132 
PUBLIC LAW 99-514—OCT. 22, 1986 
.:;,rQ 
"(B) QUALIFIED ALLOCATION.—For purposes of subpara-
graph (A), the term 'qualified allocation' means any alloca-
f
, 
tion to a tax-exempt entity which— 
"(i) is consistent with such entity's being allocated 
the same distributive share of each item of income, 
gain, loss, deduction, credit, and basis and such share 
remains the same during the entire period the entity is 
a partner in the partnership, and 
t v|: 
"(ii) has substantial economic effect within the mean-
cH 
ing of section 704(b)(2). 
For purposes of this subparagraph, items allocated 
under 
section 704(c) shall not be taken into account. 
"(C) DETERMINATION OF PROPORTIONATE SHARE.— 
• , ' 
"(i) IN GENERAL.—For purposes of subparagraph (A), 
a tax-exempt entity's proportionate share of any prop-
.;. ; 
erty owned by a partnership shall be determined on the 
basis of such entity's share of partnership items of 
( ; 
income or gain (excluding gain allocated under section 
704(c)), whichever results in the largest 
proportionate 
share. 
"(ii) DETERMINATION WHERE ALLOCATIONS VARY.—For 
-,»„... 
purposes of clause (i), if a tax-exempt entity's share of 
partnership items of income or gain (excluding gain 
allocated under section 704(c)) may vary during the 
period such entity is a partner in the partnership, such 
share shall be the highest share such entity may 
receive. 
"(D) DETERMINATION OF WHETHER PROPERTY USED IN UN-
RELATED TRADE OR BUSINESS.—For purposes of this subsec-
tion, in the case of any property which is owned by a 
partnership which has both a tax-exempt entity and a 
person who is not a tax-exempt entity as partners, the 
determination of whether such property is used in an unre-
lated trade or business of such an entity shall be made 
without regard to section 514. 
"(E) OTHER PASS-THRU ENTITIES; TIERED ENTITIES.—Rules 
similar to the rules of subparagraphs (A), (B), (C), and (D) 
shall also apply in the case of any pass-thru entity other 
than a partnership and in the case of tiered partnerships 
and other entities. 
"(F) TREATMENT OF CERTAIN TAXABLE ENTITIES.— 
"(i) IN GENERAL.—For purposes of this paragraph and 
paragraph (5), except as otherwise provided in this 
subparagraph, any tax-exempt controlled entity shall 
be treated as a tax-exempt entity. 
. ,i 
"(ii) ELECTION.—If a tax-exempt controlled entity 
makes an election under this clause— 
vj 
"(I) such entity shall not be treated as a tax-
exempt entity for purposes of this paragraph and 
paragraph (5), and 
"(II) any gain recognized by a tax-exempt entity 
on any disposition of an interest in such entity (and 
any dividend or interest received or accrued by a 
,y .,,', 
tax-exempt entity from such tax-exempt controlled 
-*-;. ' 
J,:* 
entity) shall be treated as unrelated business tax-
able income for purposes of section 511. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2133 
Any such election shall be irrevocable and shall bind 
all tax-exempt entities holding interests in such tax-
exempt controlled entity. For purposes of subclause (II), 
there shall only be taken into account dividends which 
are properly allocable to income of the tax-exempt 
controlled entity which was not subject to tax under 
this chapter. 
"(iii) TAX-EXEMPT CONTROLLED ENTITY.— 
"(I) IN GENERAL.—The term 'tax-exempt con-
trolled entity' means any corporation (which is not 
a tax-exempt entity determined without regard to 
this subparagraph and paragraph (2)(E)) if 50 per-
cent or more (in value) of the stock in such corpora-
tion is held by 1 or more tax-exempt entities (other 
than a foreign person or entity). 
"(II) ONLY 5-PERCENT SHAREHOLDERS TAKEN INTO 
ACCOUNT IN CASE OF PUBUCLY TRADED STOCK.—For 
purposes of subclause (I), in the case of a corpora-
tion the stock of which is publicly traded on an 
established securities market, stock held by a tax-
exempt entity shall not be taken into account 
unless such entity holds at least 5 percent (in 
value) of the stock in such corporation. For pur-
poses of this subclause, related entities (within the 
meaning of paragraph (4)) shall be treated as 1 
entity. 
"(Ill) SECTION 318 TO APPLY.—For purposes of this 
clause, a tax-exempt entity shall be treated as 
holding stock which it holds through application of 
section 318 (determined without regard to the 50-
percent limitation contained in subsection (aX2XC) 
thereof). 
"(G) 
REGULATIONS.—For 
purposes 
of 
determining 
whether there is a qualified allocation under subparagraph 
(B), the regulations prescribed under paragraph (8) for pur-
poses of this paragraph— 
"(i) shall set forth the proper treatment for partner-
ship guaranteed payments, and 
"(ii) may provide for the exclusion or segregation of 
items. 
"(7) LEASE.—For purposes of this subsection, the term 'le£ise' 
includes any grant of a right to use property. 
"(8) REGULATIONS.—The Secretary shall prescribe such regu-
lations as may be necessary or appropriate to carry out the 
purposes of this subsection. 
"(i) DEFINITIONS AND SPECIAL RULES.—For purposes of this sec-
tion— 
"(1) CLASS LIFE.— 
"(A) IN GENERAL.—Except as provided in this section, the 
term 'class life' means the class life (if any) which would be 
applicable with respect to any property as of January 1, 
1986, under subsection (m) of section 167 (determined with-
out regard to paragraph (4) thereof and as if the taxpayer 
had made an election under such subsection). 
"(B) SECRETARIAL AUTHORITY.—The Secretary, through an 
office established in the Treasury— 
100 STAT. 2134 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(i) shall monitor and analyze actual experience with 
respect to all depreciable assets, and 
"(ii) except in the case of residential rental property 
or nonresidential real property— 
"(I) may prescribe a new class life for any prop-
erty, 
(II) in the case of assigned property, may modify 
any assigned item, or 
"(III) may prescribe a class life for any property 
which does not have a class life within the mean-
ing of subparagraph (A). 
Any class life or assigned item prescribed or modified under 
the preceding sentence shall reasonably reflect the antici-
pated useful life, and the anticipated decline in value over 
time, of the property to the industry or other group. 
"(C) EFFECT OF MODIFICATION.—Any class life or assigned 
item with respect to any property prescribed or modified 
under subparagraph (B) shall be used in classifying such 
property under subsection (e) and in applying subsection (g). 
"(D) 
No 
MODIFICATION OF ASSIGNED PROPERTY BEFORE 
JANUARY 1, 1992.— 
"(i) IN GENERAL.—Except as otherwise provided in 
this subparagraph, the Secretary may not modify an 
assigned item under subparagraph (B)(ii)(II) for any 
assigned property which is placed in service before 
January 1,1992. 
"(ii) EXCEPTION FOR SHORTER CLASS LIFE.—In the case 
of assigned property which is placed in service before 
January 1, 1992, and for which the assigned item re-
flects a class life which is shorter than the class life 
under subparagraph (A), the Secretary may modify 
such assigned item under subparagraph (B)(ii)(II) if 
such modification results in an item which reflects a 
shorter class life than such assigned item. 
"(E) ASSIGNED PROPERTY AND ITEM.—For purposes of this 
paragraph— 
"(i) ASSIGNED PROPERTY.—The term 'assigned prop-
erty' means property for which a class life, classifica-
tion, or recovery period is assigned under subsection 
(eX3) or subparagraph (B), (C), or (D) of subsection (gX3). 
"(ii) 
ASSIGNED ITEM.—The term 
'assigned 
item' 
means the class life, classification, or recovery period 
assigned under subsection (e)(3) or subparagraph (B), 
(C), or (D) of subsection (gX3). 
"(2) QUALIFIED TECHNOLOGICAL EQUIPMENT.— 
* (A) IN GENERAL.—The term 'qualified technological 
equipment' means— 
"(i) any computer or peripheral equipment, 
"(ii) any high technology telephone station equip-
ment installed on the customer's premises, and 
"(iii) any high technology medical equipment. 
"(B) COMPUTER OR PERIPHERAL EQUIPMENT DEFINED.—For 
purposes of this paragraph— 
"(i) IN GENERAL.—The term 'computer or peripheral 
equipment' means— 
"(I) any computer, and 
"(II) any related peripheral equipment. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2135 
"(ii) COMPUTER.—The term 'computer' means a 
programmable electronically activated device which— 
"(I) is capable of accepting information, applying 
prescribed 
processes to the information, 
and 
supplying the results of these processes with or 
without human intervention, and 
"(II) consists of a central processing unit contain-
ing extensive storage, logic, arithmetic, and control 
capabilities, 
"(iii) RELATED PERIPHERAL EQUIPMENT.—The term 're-
lated peripheral equipment' means any auxiliary ma-
chine (whether on-line or off-line) which is designed to 
be placed under the control of the central processing 
unit of a computer. 
"(iv) EXCEPTIONS.—The term 'computer or peripheral 
equipment' shall not include— 
"(I) any equipment which is an integral part of 
other property which is not a computer, 
"(II) 
typewriters, 
calculators, 
adding 
and 
accounting machines, copiers, duplicating equip-
ment, and similar equipment, and 
"(III) equipment of a kind used primarily for 
amusement or entertainment of the user. 
"(C) HIGH TECHNOLOGY MEDICAL EQUIPMENT.—For pur-
poses of this paragraph, the term 'high technology medical 
equipment' means any electronic, electromechanical, or 
computer-based high technology equipment used in the 
screening, monitoring, observation, diagnosis, or treatment 
of patients in a laboratory, medical, or hospital environ-
ment. 
"(3) LEASE TERM.— 
"(A) IN GENERAL.—In determining a lease term— 
"(i) there shall be taken into account options to 
renew, and 
"(ii) 2 or more successive leases which are part of the 
same transaction (or a series of related transactions) 
with respect to the same or substantially similar prop-
erty shall be treated as 1 lease. 
"(B) 
SPECIAL 
RULE 
FOR 
FAIR 
RENTAL 
OPTIONS 
ON 
NONRESIDENTIAL REAL PROPERTY O
R RESIDENTIAL RENTAL 
PROPERTY.—For purposes of clause (i) of subparagraph (A), 
in the case of nonresidential real property or residential 
rental property, there shall not be taken into account any 
option to renew at fair market value, determined at the 
time of renewal. 
"(4) GENERAL ASSET ACCOUNTS.—Under regulations, a tax-
payer may maintain 1 or more general asset accounts for any 
property to which this section applies. Except as provided in 
regulations, all proceeds realized on any disposition of property 
in a general asset account shall be included in income as 
ordinary income. 
"(5) CHANGES IN USE.—The Secretary shall, by regulations, 
provide for the method of determining the deduction allowable 
under section 167(a) with respect to any tangible property for 
any taxable year (and the succeeding taxable years) during 
which such property changes status under this section but 
continues to be held by the same person. 
100 STAT. 2136 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(6) TREATMENTS OF ADDITIONS OR IMPROVEMENTS TO PROP-
ERTY.—In the case of any addition to (or improvement of) any 
property— 
"(A) any deduction under subsection (a) for such addition 
or improvement shall be computed in the same manner as 
the deduction for such property would be computed if such 
property had been placed in service at the same time as 
such addition or improvement, and 
"(B) the applicable recovery period for such addition or 
improvement shall begin on the later of— 
"(i) the date on which such addition (or improvement) 
is placed in service, or 
"(ii) the date on which the property with respect to 
which such addition (or improvement) was made is 
placed in service. 
"(7) TREATMENT OF CERTAIN TRANSFEREES.— 
"(A) IN GENERAL.—In the case of any property trans-
ferred in a transaction described in subparagraph (B), the 
transferee shall be treated as the transferor for purposes of 
computing the depreciation deduction determined under 
this section with respect to so much of the basis in the 
hands of the transferee as does not exceed the adjusted 
basis in the hands of the transferor. 
"(B) TRANSACTIONS COVERED.—The transactions described 
in this subparagraph are any transaction described in sec-
tion 332, 351, 361, 371(a), 374(a), 721, or 731. Subparagraph 
(A) shall not apply in the case of a termination of a partner-
ship under section 708(b)(1)(B). 
"(C) PROPERTY REACQUIRED BY THE TAXPAYER.—Under 
regulations, property which is disposed of and then re-
acquired by the taxpayer shall be treated for purposes of 
computing the deduction allowable under subsection (a) as 
if such property had not been disposed of. 
"(D) EXCEPTION.—This paragraph shall not apply to any 
transaction to which subsection (fK5) applies (relating to 
churning transactions). 
"(8) TREATMENT OF LEASEHOLD IMPROVEMENTS.—In the case of 
any building erected (or improvements made) on leased prop-
erty, if such building or improvement is property to which this 
section applies, the depreciation deduction shall be determined 
under the provisions of this section. 
"(9) NORMAUZATION RULES.— 
"(A) IN GENERAL.—In order to use a normalization 
method of accounting with respect to any public utility 
property for purposes of subsection (fK2)— 
"(i) the taxpayer must, in computing its tax expense 
for purposes of establishing its cost of service for rate-
making purposes and reflecting operating results in its 
regulated books of account, use a method of deprecia-
tion with respect to such property that is the same as, 
and a depreciation period for such property that is no 
shorter than, the method and period used to compute 
its depreciation expense for such purposes; and 
"(ii) if the amount allowable as a deduction under 
this section with respect to such property differs from 
the amount that would be allowable as a deduction 
under section 167 (determined without regard to sec-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2137 
tion 167(1)) using the method (including the period, first 
and last year convention, and salvage value) used to 
compute regulated tax expense under clause (i), the 
taxpayer must make adjustments to a reserve to reflect 
the deferral of taxes resulting from such difference. 
"(B) USE OF INCONSISTENT ESTIMATES AND PROJECTIONS, 
ETC.— 
"(i) IN GENERAL.—One way in which the require-
ments of subparagraph (A) are not met is if the tax-
payer, for ratemaking purposes, uses a procedure or 
adjustment which is inconsistent with the require-
ments of subparagraph (A). 
"(ii) USE OF INCONSISTENT ESTIMATES AND PROJEC-
TIONS.—The procedures and adjustments which are to 
be treated as inconsistent for purposes of clause (i) shall 
include any procedure or adjustment for ratemaking 
purposes which uses an estimate or projection of the 
taxpayer's, tax expense, depreciation expense, or re-
serve for deferred taxes under subparagraph (A)(ii) 
unless such estimate or projection is also used, for 
ratemaking purposes, with respect to the other 2 such 
items and with respect to the rate base. 
"(iii) REGULATORY AUTHORITY.—The Secretary may 
by regulations prescribe procedures and adjustments 
(in addition to those specified in clause (ii)) which are to 
be treated as inconsistent for purposes of clause (i). 
"(C) PUBLIC UTILITY PROPERTY WHICH DOES NOT MEET 
NORMALIZATION RULES.—In the case of any public utility 
property to which this section does not apply by reason of 
subsection (fK2), the allowance for depreciation under sec-
tion 167(a) shall be an amount computed using the method 
and period referred to in subparagraph (A)(i). 
"(10) PUBLIC UTILITY PROPERTY.—The term 'public utility prop-
erty' has the meaning given such term by section 167(1X3XA). 
"(11) RESEARCH AND EXPERIMENTATION.—The term 'research 
and experimentation' has the same meaning as the term re-
search and experimental has under section 174. 
"(12) SECTION 1245 AND 1250 PROPERTY.—The terms 'section 
1245 property' and 'section 1250 property' have the meanings 
given such terms by sections 1245(a)(3) and 1250(c), respec-
tively." 
(b) SYSTEM USED FOR PURPOSES OF EARNINGS AND PROFITS.—Para-
graph (3) of section 312(k) is amended to read as follows: 
"(3) EXCEPTION FOR TANGIBLE PROPERTY.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), in the case of tangible property to which section 168 
applies, the adjustment to earnings and profits for deprecia-
tion 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.—For purposes of computing the earnings and profits of 
a corporation, any amount deductible under section 179 
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)." 
100 STAT. 2138 
PUBLIC LAW 99-514—OCT. 22, 1986 
(c) CONTINUATION OF RULES RELATING TO MOTOR VEHICLE OPERAT-
ING LEASES.—Section 7701 is amended by redesignating subsection 
(h) as subsection (i) and by inserting after subsection (g) the follow-
ing new subsection: 
"(h) MOTOR VEHICLE OPERATING LEASES.— 
"(1) IN GENERAL.—For purposes of this title, in the case of a 
qualified motor vehicle operating agreement which contains a 
terminal rental adjustment clause— 
"(A) such agreement shall be treated as a lease if Ojut for 
such terminal rental adjustment clause) such agreement 
would be treated as a lease under this title, and 
"(B) the lessee shall not be treated as the owner of the 
property subject to an agreement during any period such 
agreement is in effect. 
"(2) 
QUALIFIED MOTOR VEHICLE OPERATING AGREEMENT DE-
FINED.—For purposes of this subsection— 
"(A) IN GENERAL.—The term 'qualified motor vehicle 
operating agreement' means any agreement with respect to 
a motor vehicle (including a trailer) which meets the 
requirements of subparagraphs (B), (C), and (D) of this 
paragraph. 
"(B) MINIMUM UABIUTY OF LESSOR.—An agreement meets 
the requirements of this subparagraph if under such agree-
ment the sum o
f
— 
"(i) the amount the lessor is personally liable to 
repay, and 
"(ii) the net fair market value of the lessor's interest 
in any property pledged as security for property subject 
to the agreement, 
equals or exceeds all amounts borrowed to finance the 
acquisition of property subject to the agreement. There 
shall not be taken into account under clause (ii) any prop-
erty pledged which is property subject to the agreement or 
property directly or indirectly financed by indebtedness 
secured by property subject to the agreement. 
"(C) 
CERTIFICATION BY LESSEE; NOTICE OF TAX OWNER-
SHIP.—An agreement meets the requirements of this 
subparagraph if such agreement contains a separate writ-
ten statement separately signed by the lessee— 
"(i) under which the lessee certifies, under penalty of 
perjury, that it intends that more than 50 percent of 
the use of the property subject to such agreement is to 
be in a trade or business of the lessee, and 
"(ii) which clearly and legibly states that the lessee 
has been advised that it will not be treated as the 
owner of the property subject to the agreement for 
Federal income tax purposes. 
"(D) 
LESSOR MUST HAVE NO KNOWLEDGE THAT CERTIFI-
CATION IS FALSE.—An agreement meets the requirements of 
this subparagraph if the lessor does not know that the 
certification described in subparagraph (CXi) is false. 
"(3) TERMINAL RENTAL ADJUSTMENT CLAUSE DEFINED.— 
"(A) IN GENERAL.—For purposes of this subsection, the 
term 'terminal rental adjustment clause' means a provision 
of an agreement which permits or requires the rental price 
to be adjusted upward or downward by reference to the 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2139 
amount realized by the lessor under the agreement upon 
sale or other disposition of such property. 
"(B) SPECIAL RULE FOR LESSEE DEALERS.—The term 'termi-
nal rental adjustment clause' also includes a provision of an 
agreement which requires a lessee who is a dealer in motor 
vehicles to purchase the motor vehicle for a predetermined 
price and then resell such vehicle where such provision 
achieves substantially the same results as a provision de-
scribed in subparagraph (A)." 
(d) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) SECTION 167.—Paragraph (4) of section 167(m) (relating to 
termination of class lives) is amended to read as follows: 
"(4) TERMINATION.—This subsection shall not apply with re-
spect to any property to which section 168 applies." 
(2) SECTION 178.— 
(A) Section 178 is amended to read as follows: 
"SEC. 178. AMORTIZATION OF COST OF ACQUIRING A LEASE. 
"(a) GENERAL RULE.—In determining the amount of the deduction 
allowable to a lessee of a lease for any taxable year for amortization 
under section 167, 169, 179, 185, 190, 193, or 194 in respect of any 
cost of acquiring the lease, the term of the lease shall be treated as 
including all renewal options (and any other period for which the 
parties reasonably expect the lease to be renewed) if less than 75 
percent of such cost is attributable to the period of the term of the 
lease remaining on the date of its acquisition. 
"Ob) CERTAIN PERIODS EXCLUDED.—For purposes of subsection (a), 
in determining the period of the term of the lease remaining on the 
date of acquisition, there shall not be taken into account any period 
for which the lease may subsequently be renewed, extended, or 
continued pursuant to an option exercisable by the lessee." 
(B) The table of sections for part VI of subchapter B of 
chapter 1 is amended by striking out the item relating to 
section 178 and inserting in lieu thereof the following new 
item: 
"Sec. 178. Amortization of cost of acquiring a lease." 
(3) SECTION 179.—Paragraph (8) of section 179(d) is amended to 
read as follows: 
"(8) TREATMENT OF PARTNERSHIPS AND S CORPORATIONS.—In 
the case of a partnership, the limitations of subsection (b) shall 
apply with respect to the partnership and with respect to each 
partner. A similar rule shall apply in the case of an S corpora-
tion and its shareholders." 
(4) SECTION 280F.— 
(A) Paragraph (2) of section 280F(a) (relating to deprecia-
tion) is amended— 
(i) by striking out clauses (i) and (ii) of subparagraph 
(A) thereof and inserting in lieu thereof the following 
new clauses: 
"(i) $2,560 for the 1st taxable year in the recovery 
period, 
"(ii) $4,100 for the 2nd taxable year in the recovery 
period, 
"(iii) $2,450 for the 3rd taxable year in the recovery 
period, and 
100 STAT. 2140 
PUBLIC LAW 99-514—OCT. 22, 1986 
**(iv) $1,475 for each succeeding taxable year in the 
recovery period.", and 
(ii) by striking out "$4,800" each place it appears in 
subparagraph (B) thereof and inserting in lieu thereof 
"$1,475". 
(B) Subparagraph (A) of section 280F(bX3) (relating to 
recapture) is amended by striking out "the straight line 
method over the earnings and profits life" and inserting in 
lieu thereof "section 168(g) (relating to alternative deprecia-
tion system)". 
(C) Paragraph (4) of section 280FOt>) (relating to defini-
tions) is amended to read as follows: 
"(4) PROPERTY PREDOMINANTLY USED IN QUALIFIED BUSINESS 
USE.—For purposes of this subsection, property shall be treated 
as predominantly used in a qualified business use for any 
taxable year if the business use percentage for such taxable 
year exceeds 50 percent." 
(D) Paragraph (4) of section 280F(c) is amended by strik-
ing out "section 168(j)(6)(B)" and inserting in lieu thereof 
"section 168(i)(3XA)". 
(E) Paragraph (1) of section 280F(d) is amended by strik-
ing out "recovery deduction" and inserting in lieu thereof 
"depreciation deduction". 
(F) Paragraph (2) of section 280F(d) is amended— 
(i) by striking out "recovery deduction" and inserting 
in lieu thereof "depreciation deduction", and 
(ii) by striking out "use described in section 168(cXl) 
(defining recovery property)" and inserting in lieu 
thereof "use in a trade or business (including the hold-
ing for the production of income)". 
(G) Clause (iv) of section 280F(dX4XA) is amended by 
striking out "section 168(jX5XD)" and inserting in lieu 
thereof "section 168(iX2XB)'\ 
(H) Paragraph (8) of section 280F(d) (defining unrecovered 
basis) is amended to read as follows: 
"(8) UNRECOVERED BASIS.—For purposes of subsection (aX2), 
the term 'unrecovered basis' means the adjusted basis of the 
passenger automobile determined after the application of 
subsection (a) and as if all use during the recovery period were 
use in a trade or business (including the holding of property for 
the production of income)." 
(I) Paragraph (10) of section 280F(d) is amended by strik-
ing out ", notwithstanding any regulations prescribed 
under section 168(fK7),". 
(J) Paragraph (2) of section 280FOt>) is amended by strik-
ing out "the straight line method over the earnings and 
profits life for such property" and inserting in lieu thereof 
'section 
168(g) (relating 
to 
alternative 
depreciation 
system)". 
(K) Subsections (a) and (b) of section 280F are amended by 
striking out "recovery deduction" each place it appears and 
inserting in lieu thereof "depreciation deduction'. 
(5) SECTION 291.— 
(A) Subparagraph (A) of section 291(aXl) is amended by 
striking out "or section 1245 recovery property". 
(B) Paragraph (1) of section 291(c) is amended to read as 
follows: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2141 
"(1) 
ACCELERATED COST RECOVERY DEDUCTION.—Section 
168 
shall apply with respect to that portion of the basis of any 
property not taken into account under section 169 by reason of 
subsection (a)(5)." 
(C) Section 291(e)(2) is amended by striking out ", 'section 
1245 recovery property'," and ", section 1245(a)(5),". 
(6) SECTION 312.—Paragraph (4) of section 312(k) is amended 
by striking out the last sentence. 
(7) SECTION 465.— 
(A) Subparagraph (C) of section 46503)(3) is amended to 
read as follows: 
"(C) RELATED PERSON.—For purposes of this subsection, a 
person (hereinafter in this paragraph referred to as the 
'related person') is related to any person i
f
— 
"(i) the related person bears a relationship to such 
person specified in section 267(b) or section 707(b)(1), or 
"(ii) the related person and such person are engaged 
in trades or business under common control (within the 
meaning of subsections (a) and (b) of section 52). 
For purposes of clause (i), in applying section 267(b) or 7070t>Xl), 
'10 percent' shall be substituted for '50 percent'." 
(B) Section 46(c)(8)(D)(v) is amended by striking out "sec-
tion 168(e)(4)" and inserting in lieu thereof "section 
465(b)(3)(C)". 
(C) Section 4162(c)(3) is amended by striking out "section 
168(e)(4)(D)" and 
inserting 
in 
lieu 
thereof 
"section 
465(b)(3)(C)". 
(8) SECTION 467.— 
(A) Paragraph (3) of section 467(e) is amended to read as 
follows: 
"(3) STATUTORY RECOVERY PERIOD.— 
"(A) IN GENERAL.— 
The statutory 
recovery 
"In the case of: 
period is: 
3-year property 
3 years 
5-year property 
5 years 
7-year property 
7 years 
10-year property 
10 years 
15-year and 20-year property 
15 years 
Residential rental property and nonresidential real prop-
erty 
19 years. 
"(B) SPECIAL RULE FOR PROPERTY NOT DEPRECIABLE UNDER 
SECTION 168.—In the case of property to which section 168 
does not apply, subparagraph (A) shall be applied as if 
section 168 applies to such property." 
(B) Paragraph (5) of section 467(e) (defining related 
person) is amended by striking out "section 168(e)(4)(D)" 
and inserting in lieu thereof "section 4650t))(3)(C)". 
(9) SECTION 5 14.—Subclause (II) of section 514(cX9)(BXvi) 
(relating to real property acquired by a qualified organization) is 
amended by striking out "section 168(jX9)" and inserting in lieu 
thereof "section 168(hX6)". 
(10) SECTION 751.—Subsection (c) of section 751 (defining un-
realized receivables) is amended by striking out "section 1245 
recovery property (as defined in section 1245(aX5)),". 
(11) SECTION 1245.— 
100 STAT. 2142 
PUBLIC LAW 99-514—OCT. 22, 1986 
(A) Paragraph (1) of section 1245(a) (relating to gain from 
dispositions of certain depreciable property) is amended by 
striking out "during a taxable year beginning after Decem-
ber 31,1962, or section 1245 recovery property is disposed of 
after December 31,1980,". 
(B) Paragraph (2) of section 1245(a) (defining recomputed 
basis) is amended to read as follows: 
"(2) RECOMPUTED BASIS.—For purposes of this section— 
"(A) IN GENERAL.—The term 'recomputed basis' means, 
with respect to any property, its adjusted basis recomputed 
by adding thereto all adjustments reflected in such adjusted 
basis on account of deductions (whether in respect of the 
same or other property) allowed or allowable to the tax-
payer or to any other person for depreciation or amortiza-
tion. 
"(B) TAXPAYER MAY ESTABUSH AMOUNT ALLOWED.—For 
purposes of subparagraph (A), if the taxpayer can establish 
by adequate records or other sufficient evidence that the 
amount allowed for depreciation or amortization for any 
period was less than the amount allowable, the amount 
added for such period shall be the amount allowed. 
"(C) CERTAIN DEDUCTIONS TREATED AS AMORTIZATION.— 
Any deduction allowable under section 179,190, or 193 shall 
be treated as if it were a deduction allowable for amortiza-
tion." 
(C) Paragraph (3) of section 1245(a) (defining section 1245 
property) is amended by striking out subparagraph (C) and 
by redesignating subparagraphs (D), (E), and (F) as subpara-
graphs (C), (D), and (E), respectively. 
(D) Subsection (a) of section 1245 is amended by striking 
out paragraphs (5) and (6). 
(12) SECTION 4162.—Paragraph (3) of section 4162(c) (defining 
related person) is amended by striking out "section 168(eX4)(D)" 
and inserting in lieu thereof "section 4650t))(3XC)". 
(13) SECTION 6111.—Clause (ii) of section 6111(c)(3XB) (relating 
to certain borrowed amounts excluded) is amended by striking 
out "section 168(eX4)" and inserting in lieu thereof "section 
465(bX3)(C)". 
(14) SECTION 7701.— 
(A) Subparagraph (A) of section 7701(eX4) is amended by 
striking out "section 168(j)" and inserting in lieu thereof 
"section 168(h)". 
(B) Paragraph (5) of section 7701(e) (relating to exception 
for certain low-income housing) is amended by striking out 
"low-income housing (section 168(cX2XF))" and inserting in 
lieu thereof "property described in clause (i), (ii), (iii), or (iv) 
of section 1250(aXlXB) (relating to low-income housing)". 
SEC. 202. EXPENSING OF DEPRECIABLE ASSETS. 
(a) LIMITATIONS ON EXPENSING.—Subsection (h) of section 179 
(relating o election to expense certain depreciable assets) is 
amended to read £is follows: 
"
O
t
>
) LIMITATIONS.— 
"(1) DOLLAR UMITATION.—The aggregate cost which may be 
taken into account under subsection (a) for any taxable year 
shall not exceed $10,000. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2143 
"(2) REDUCTION IN UMITATION.—The limitation under para-
graph (1) for any taxable year shall be reduced (but not below 
zero) by the amount by which the cost of section 179 property 
placed in service during such taxable year exceeds $200,000. 
"(3) LIMITATION BASED ON INCOME FROM TRADE OR BUSINESS.— 
"(A) IN GENERAL.—The aggregate cost of section 179 prop-
erty taken into account under subsection (a) for any taxable 
year shall not exceed the aggregate amount of taxable 
income of the taxpayer for such taxable year which is 
derived from the active conduct by the taxpayer of any 
trade or business during such taxable year. 
"(B) CARRYOVER OF UNUSED COST.—The amount of any 
cost which (but for subparagraph (A)) would have been 
allowed as a deduction under subsection (a) for any taxable 
year shall be carried to the succeeding taxable year and 
added to the amount allowable as a deduction under subsec-
tion (a) for such succeeding taxable year. 
"(C) COMPUTATION OF TAXABLE INCOME.—For purposes of 
this paragraph, taxable income derived from the conduct of 
a trade or business shall be computed without regard to the 
cost of any section 179 property. 
"(4) MARRIED INDIVIDUALS FIUNG SEPARATELY.—In the case of 
a husband and wife filing separate returns for the taxable 
year— 
"(A) such individuals shall be treated as 1 tgixpayer for 
purposes of paragraphs (1) and (2), and 
"(B) unless such individuals elect otherwise, 50 percent of 
the cost which may be taken into account under subsection 
(a) for such taxable year (before application of paragraph 
(3)) shall be allocated to each such individual." 
(b) SECTION 179 PROPERTY.—Paragraph (1) of section 179(d) (defin-
ing section 179 property) is amended by inserting "in the active 
conduct of after "purchase for use". 
(c) RECAPTURE.—Section 179(dX10) (relating to recapture in certain 
cases) is amended by striking out all that follows "at any time" and 
inserting in lieu thereof a period. 
SEC. 203. EFFECTIVE DATES; GENERAL TRANSITIONAL RULES. 
(a) GENERAL EFFECTIVE DATES.— 
(1) SECTION 201.— 
(A) IN GENERAL.—Except as provided in this section, sec-
tion 204, and section 251(d), the amendments made by 
section 201 shall apply to property placed in service after 
December 31, 1986, in taxable years ending after such date. 
(B) ELECTION TO HAVE AMENDMENTS MADE BY SECTION 201 
APPLY.—A taxpayer may elect (at such time and in such 
manner as the Secretary of the Treasury or his delegate 
may prescribe) to have the amendments made by section 
201 apply to any property placed in service after July 31, 
1986, and before January 1,1987. 
(2) SECTION 202.—The amendments made by section 202 shall 
apply to property placed in service after December 31, 1986, in 
taxable years ending after such date. 
(b) GENERAL TRANSITIONAL RULE.— 
(1) IN GENERAL.—The amendments made by section 201 shall 
not apply to— 
100 STAT. 2144 
PUBLIC LAW 99-514—OCT. 22, 1986 
(A) any property which is constructed, reconstructed, or 
acquired by the taxpayer pursuant to a written contract 
which was binding on March 1,1986, 
(B) property which is constructed or reconstructed by the 
taxpayer i
f
— 
(i) the lesser of (I) $1,000,000, or (II) 5 percent of the 
cost of such property has been incurred or committed 
by March 1,1986, and 
(ii) the construction or reconstruction of such prop-
erty began by such date, or 
(C) an equipped building or plant facility if construction 
has commenced as of March 1, 1986, pursuant to a written 
specific plan and more than one-half of the cost of such 
equipped building or facility has been incurred or commit-
ted by such date. 
(2) REQUIREMENT THAT CERTAIN PROPERTY BE PLACED IN SERV-
ICE BEFORE CERTAIN DATE.— 
(A) IN GENERAL.—Paragraph (1) and section 204(a) (other 
than paragraph (8) or (12) thereof) shall not apply to any 
property unless such property has a class life of at legist 7 
years and is placed in service before the applicable date 
determined under the following table: 
In the case of property 
The applicable 
with a class life of: 
date is: 
At least 7 but less than 20 years 
January 1, 1989 
20 years or more 
January 1, 1991. 
(B) RESIDENTIAL RENTAL AND NONRESIDENTIAL REAL PROP-
ERTY.—In the case of residential rental property and 
nonresidential real property, the applicable date is January 
1,1991. 
(C) CLASS LIVES.—For purposes of subparagraph (A)— 
(i) the class life of property to which section 
168(g)(3)(B) of the Internal Revenue Code of 1986 (as 
added by section 201) shall be the class life in effect on 
January 1, 1986, except that computer-based telephone 
central office switching equipment described in section 
168(e)(3XB)(iii) of such Code shall be treated as having a 
class life of 6 years, 
(ii) property described in section 204(a) shall be 
treated as having a class life of 20 years, and 
(iii) property with no class life shall be treated as 
having a class life of 12 years. 
(D) SUBSTITUTION OF APPLICABLE DATES.—If any provision 
of this Act substitutes a date for an applicable date, this 
paragraph shall be applied by using such date. 
(3) 
PROPERTY 
QUALIFIES 
IF SOLD AND LEASED 
BACK IN 3 
MONTHS.—Property shall be treated as meeting the require-
ments of paragraphs (1) and (2) or section 204(a) with respect to 
any taxpayer if such property is acquired by the taxpayer from 
a person— 
(A) in whose hands such property met the requirements 
of paragraphs (1) and (2) or section 204(a), or 
(B) who placed the property in service before January 1, 
1987, 
and such property is leased back by the taxpayer to such person 
not later than the earlier of the applicable date under para-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2145 
graph (2) or the day which is 3 months after such property was 
placed in service. 
(4) PLANT FACILITY.—For purposes of paragraph (1), the term 
"plant facility" means a facility which does not include any 
building (or with respect to which buildings constitute an 
insignificant portion) and which is— 
(A) a self-contained single operating unit or processing 
operation, 
(B) located on a single site, and 
(C) identified as a single unitary project as of March 1, 
1986. 
(c) PROPERTY FINANCED WITH TAX-EXEMPT BONDS.— 
(1) IN GENERAL.—Subparagraph (C) of section 168(gXl) of the 
Internal Revenue Code of 1986 (as added by this Act) shall apply 
to property placed in service after December 31, 1986, in taxable 
years ending after such date, to the extent such property is 
financed by the proceeds of an obligation (including a refunding 
obligation) issued after March 1,1986. 
(2) EXCEPTIONS.— 
(A) CONSTRUCTION OR BINDING AGREEMENTS.—Subpara-
graph (C) of section 168(g)(1) of such Code (as so added) shall 
not apply to obligations with respect to a facility— 
(i)(I) the original use of which commences with the 
taxpayer, and the construction, reconstruction, or re-
habilitation of which began before March 2, 1986, and 
was completed on or after such date, 
(II) with respect to which a binding contract to incur 
significant expenditures for construction, reconstruc-
tion, or rehabilitation was entered into before March 2, 
1986, and some of such expenditures are incurred on or 
after such date, or 
(III) acquired on or after March 2, 1986, pursuant to a 
binding contract entered into before such date, and 
(ii) described in an inducement resolution or other 
comparable preliminary approval adopted by the issu-
ing authority (or by a voter referendum) before March 
2, 1986. 
(B) REFUNDING.— 
(i) IN GENERAL.—Except as provided in clause (ii), in 
the case of property placed in service after December 
31, 1986, which is financed by the proceeds of an obliga-
tion which is issued solely to refund another obligation 
which was issued before March 2, 1986, subparagraph 
(C) of section 168(g)(1) of such Code (as so added) shall 
apply only with respect to an amount equal to the basis 
in such property which has not been recovered before 
the date such refunded obligation is issued. 
(ii) SIGNIFICANT EXPENDITURES.—In the case of facili-
ties the original use of which commences with the 
taxpayer and with respect to which significant expendi-
tures are made before January 1, 1987, subparagraph 
(C) of section 168(g)(1) of such Code (as so added) shall 
not apply with respect to such facilities to the extent 
such facilities are financed by the proceeds of an obliga-
tion issued solely to refund another obligation which 
was issued before March 2, 1986. 
100 STAT. 2146 
PUBLIC LAW 99-514—OCT. 22, 1986 
(C) FACILITIES.—In the case of an inducement resolution 
or other comparable preliminary approval adopted by an 
issuing authority before March 2, 1986, for purposes of 
subparagraphs (A) and (BXii) with respect to obligations 
described in such resolution, the term "facilities" means 
the facilities described in such resolution. 
(D) SIGNIFICANT EXPENDITURES.—For purposes of this 
paragraph, the term "significant expenditures" means 
expenditures greater than 10 percent of the reasonably 
anticipated cost of the construction, reconstruction, or re-
habilitation of the facility involved. 
(d) MID-QUARTER CONVENTION.—In the case of any taxable year in 
which property to which the amendments made by section 201 do 
not apply is placed in service, such property shall be taken into 
account in determining whether section 168(dX3) of the Internal 
Revenue Code of 1986 (as added by section 201) applies for such 
taxable year to property to which such amendments apply. 
(e) NORMAUZATION REQUIREMENTS.— 
(1) IN GENERAL.—A normalization method of accounting shall 
not be treated as being used with respect to any public utility 
property for purposes of section 167 or 168 of the Internal 
Revenue Code of 1986 if the taxpayer, in computing its cost of 
service for ratemaking purposes and reflecting operating results 
in its regulated books of account, reduces the excess tax reserve 
more rapidly or to a greater extent than such reserve would be 
reduced under the average rate assumption method. 
(2) DEFINITIONS.—For purposes of this subsection— 
(A) EXCESS TAX RESERVE.—The term "excess tax reserve" 
means the excess o
f
— 
(i) the reserve for deferred taxes (as described in 
section 167(lX3XGXii) or 168(eX3XBXii) of the Internal 
Revenue Code of 1954 as in effect on the day before the 
date of the enactment of this Act), over 
(ii) the amount which would be the balance in such 
reserve if the amount of such reserve were determined 
by assuming that the corporate rate reductions pro-
vided in this Act were in effect for all prior periods. 
(B) AVERAGE RATE ASSUMPTION METHOD.—The average 
rate assumption method is the method under which the 
excess in the reserve for deferred taxes is reduced over the 
remaining lives of the property as used in its regulated 
books of account which gave rise to the reserve for deferred 
taxes. Under such method, if timing differences for the 
property reverse, the amount of the adjustment to the 
reserve for the deferred taxes is calculated by multiplying— 
(i) the ratio of the aggregate deferred taxes for the 
property to the aggregate timing differences for the 
property as of the beginning of the period in question, 
by 
(ii) the amount of the timing differences which re-
verse during such period. 
SEC. 204. ADDITIONAL TRANSITIONAL RULES. 
(a) OTHER TRANSITIONAL RULES.— 
(1) URBAN RENOVATION PROJECTS.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2147 
(A) IN GENERAL.—The amendments made by section 201 
shall not apply to any property which is an integral part of 
any qualified urban renovation project. 
(B) QUALIFIED URBAN RENOVATION PROJECT.—For purposes 
of subparagraph (A), the term "qualified urban renovation 
project" means any project— 
(i) described in subparagraph (C), (D), (E), or (G) 
which before March 1, 1986, was publicly announced by 
a political subdivision of a State for a renovation of an 
urban area within its jurisdiction, 
(ii) described in subparagraph (C), (D) or (G) which 
before March 1, 1986, was identified as a single unitary 
project in the internal financing plans of the primary 
developer of the project, and 
(iii) described in subparagraph (C) or (D), which is not 
substantially modified on or after March 1,1986. 
(C) PROJECT WHERE AGREEMENT ON DECEMBER 19, I984.—A 
project is described in this subparagraph if— 
(i) a political subdivision granted on July 11, 1985, 
development rights to the primary developer-purchaser 
of such project, and 
(ii) such project was the subject of a development 
agreement between a political subdivision and a bridge 
authority on December 19,1984. 
For purposes of this subparagraph, subsection Ot)X2) shall be 
applied by substituting "January 1, 1994" for "January 1, 
1991". 
(D) CERTAIN ADDITIONAL PROJECTS.—A project is described 
in this subparagraph if it is described in any of the follow-
ing clauses of this subparagraph and the primary developer 
of all such projects is the same person: 
(i) A project is described in this clause if the develop-
ment agreement with respect thereto was entered into 
during April 1984 and the estimated cost of the project 
is approximately $194,000,000. 
(ii) A project is described in this clause if the develop-
ment agreement with respect thereto was entered into 
during May 1984 and the estimated cost of the project 
is approximately $190,000,000. 
(iii) A project is described in this clause if the project 
has an estimated cost of approximately $92,000,000 and 
at least $7,000,000 was spent before September 26,1985, 
with respect to such project. 
(iv) A project is described in this clause if the esti-
mated project cost is approximately $39,000,000 and at 
least $2,000,000 of construction cost for such project 
were incurred before September 26,1985. 
(v) A project is described in this clause if the develop-
ment agreement with respect thereto was entered into 
before September 26, 1985, and the estimated cost of 
the project is approximately $150,000,000. 
(vi) A project is described in this clause if the board of 
directors of the primary developer approved such 
project in December 1982, and the estimated cost of 
such project is approximately $107,000,000. 
(vii) A project is described in this clause if the board 
of directors of the primary developer approved such 
100 STAT. 2148 
PUBLIC LAW 99-514—OCT. 22, 1986 
project in December 1982, and the estimated cost of 
such project is approximately $59,000,000. 
(viii) A project is described in this clause if the Board 
of Directors of the primary developer approved such 
project in December 1983, following selection of the 
developer by a city council on September 26, 1983, and 
the estimated cost of such project is approximately 
$107,000,000." 
(E) 
PROJECT WHERE PLAN CONFIRMED ON OCTOBER 
4, 
1984.—A project is described in this subparagraph i
f
— 
(i) a State or an agency, instrumentality, or political 
subdivision thereof approved the filing of a general 
project plan on June 18, 1981, and on October 4, 1984, a 
State or an agency, instrumentality, or political sub-
division thereof confirmed such plan, 
(ii) the project plan as confirmed on October 4, 1984, 
included construction or renovation of office buildings, 
a hotel, a trade mart, theaters, and a subway complex, 
and 
(iii) significant segments of such project were the 
sulbject of one or more conditional designations granted 
by a State or an agency, instrumentality, or political 
subdivision thereof to one or more developers before 
January 1,1985. 
The preceding sentence shall apply with respect to a prop-
erty only to the extent that a building on such property site 
was identified as part of the project plan before September 
26, 1985, and only to the extent that the size of the building 
on such property site was not substantially increased by 
reason of a modification to the project plan with respect to 
such property on or after such date. For purposes of this 
subparagraph, 
subsection 
Ot))(2) shall 
be applied 
by 
substituting "January 1,1998" for "January 1,1991". 
(F) A project is described in this paragraph if it is a sports 
and entertainment facility which— 
(i) is to be used by both a National Hockey League 
team and a National Basketball Association team; 
(ii) is to be constructed on a platform utilizing air 
rights over land acquired by a State authority and 
identified as site B in a report dated May 30, 1984, 
prepared for a State urban development corporation; 
and 
(iii) is eligible for real property tax, and power and 
energy benefits pursuant to the provisions of State 
legislation approved and effective July 7,1982, or 
(iv) the mixed-use development is— 
(I) to be constructed above a public railroad sta-
tion utilized by the national railroad passenger 
corporation and commuter railroads serving two 
States; and 
(II) will include the reconstruction of such sta-
tion so as to make it a more efficient transpor-
tation center and to better integrate the station 
with the development above, such reconstruction 
plans to be prepared in cooperation with a State 
transportation authority. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2149 
For purposes of this subparagraph, subsection (b)i2) shall be 
applied by substituting "January 1, 1993" for the applicable 
date that would otherwise apply. 
(G) A project is described in this subparagraph i
f
— 
(i) an inducement resolution was passed on March 9, 
1984, for the issuance of obligations with respect to 
such project, 
(ii) such resolution was extended by resolutions 
passed on August 14, 1984, April 2, 1985, August 13, 
1985, and July 8,1986, 
(iii) an application was submitted on January 31, 
1984, for an Urban Development Action Grant with 
respect to such project, and 
(iv) an Urban Development Action Grant was 
preliminarily approved for all or part of such project on 
July 3,1986. 
(H) A project is described in this subparagraph if it is a 
redevelopment project, with respect to which $10,000,000 in 
industrial revenue bonds were approved by a State Develop-
ment Finance Authority on January 15, 1986, a village 
transferred 
approximately $4,000,000 of bond volume 
authority to the State in June 1986, and a binding Redevel-
opment Agreement was executed between a city and the 
development team on July 1, 1986. 
(2) 
CERTAIN PROJECTS GRANTED FERC LICENSES, ETC.—The 
amendments made by section 201 shall not apply to any prop-
erty which is part of a project— 
(A) which is certified by the Federal Energy Regulatory 
Commission before March 2, 1986, as a qualifying facility 
for purposes of the Public Utility Regulatory Policies Act of 
1978, 
(B) which was granted before March 2, 1986, a hydro-
electric license for such project by the Federal Energy 
Regulatory Commission, or 
(C) which is a hydroelectric project of less than 80 
megawatts that filed an application for a permit, exemp-
tion, or license with the Federal Energy Regulatory 
Commission before March 2, 1986. 
(3) SUPPLY OR SERVICE CONTRACTS.—The amendments made by 
section 201 shall not apply to any property which is readily 
identifiable with and necessary to carry out a written supply or 
service contract, or agreement to lease, which was binding on 
March 1, 1986. 
(4) PROPERTY TREATED UNDER PRIOR TAX ACTS.—The amend-
ments made by section 201 shall not apply to property described 
in section 12(cX2) or 31(g)(5) and 31(g)(17)g) of the Tax Reform 
Act of 1984, to property described in section 209(d)(1)(B) of the 
Tax Equity and Fiscal Responsibility Act of 1982, as amended by 
the Tax Reform Act of 1984 and to property described in section 
216(b)(3) of the Tax Equity and Fiscal Responsibility Act of 1982. 
(5) SPECIAL RULES FOR PROPERTY INCLUDED IN MASTER PLANS OF 
INTEGRATED PROJECTS.—The amendments made by section 201 
shall not apply to any property placed in service pursuant to a 
master plan which is clearly identifiable as of March 1, 1986, for 
any project described in any of the following subparagraphs of 
this paragraph: 
(A) A project is described in this subparagraph i
f
— 
100 STAT. 2150 
PUBLIC LAW 99-514—OCT. 22, 1986 
(i) the project involves production platforms for off-
shore drilling, oil and gas pipeline to shore, process and 
storage facilities, and a marine terminal, and 
(ii) at least $900,000,000 of the costs of such project 
were incurred Isefore September 26,1985. 
(B) A project is described in this subparagraph i
f
— 
(i) such project involves a fiber optic network of at 
least 20,000 miles, and 
(ii) before September 26, 1985, construction com-
menced pursuant to the master plan and at least 
$85,000,000 was spent on construction. 
(C) A project is described in this subparagraph if— 
(i) such project passes through at least 10 States and 
involves intercity communication links (including one 
or more repeater sites, terminals and junction stations 
for microwave transmissions, regenerators or fiber 
optics and other related equipment), 
(ii) the lesser of $150,000,000 or 5 percent of the total 
project cost has been expended, incurred, or committed 
before March 2, 1986, by one or more taxpayers each of 
which is a member of the same affiliated group (as 
defined in section 1504(a)), and 
(iii) such project consists of a comprehensive plan for 
meeting network capacity requirements as encom-
passed within either: 
(I) a November 5, 1985, presentation made to and 
accepted by the Chairman of the Board and the 
president of the taxpayer, or 
(II) the approvals by the Board of Directors of the 
parent company of the taxpayer on May 3, 1985, 
and September 22, 1985, and of the executive 
committee of said board on December 23, 1985. 
(D) A project is described in this subparagraph i
f
— 
(i) such project is part of a flat rolled product mod-
ernization plan which was initially presented to the 
Board of Directors of the taxpayer on July 8, 1983, 
(ii) such program will be carried out at 3 locations, 
and 
(iii) such project will involve a total estimated mini-
mum capital cost of at least $250,000,000. 
(E) A project is described in this subparagraph if the 
project is being carried out by a corporation engaged in the 
production of paint, chemicals, fiberglass, and glass, and 
if— 
(i) the project includes a production line which ap-
plies a thin coating to glass in the manufacture of 
energy efficient residential products, if approved by the 
management committee of the corporation on January 
29,1986, 
(ii) the project is a turbogenerator which was ap-
proved by the president of such corporation and at least 
$1,000,000 of the cost of which was incurred or commit-
ted before such date, 
(iii) the project is a waste-to-energy disposal system 
which was initially approved by the management 
committee of the corporation on March 29, 1982, and at 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2151 
least $5,000,000 of the cost of which was incurred before 
September 26,1985, 
(iv) the project, which involves the expansion of an 
existing service facility and the addition of new lab 
facilities needed to accommodate topcoat and under-
coat production needs of a nearby automotive assembly 
plant, was approved by the corporation's management 
committee on March 5,1986, or 
(v) the project is part of a facility to consolidate and 
modernize the silica production of such corporation and 
the project was approved by the president of such 
corporation on August 19, 1985. 
(F) A project is described in this subparagraph if— 
(i) such project involves a port terminal and oil pipe-
line extending generally from the area of Los Angeles, 
California, to the area of Midland, Texas, and 
(ii) before September 26, 1985, there is a binding 
contract for dredging and channeling with respect 
thereto and a management contract with a construc-
tion manager for such project. 
(G) A project is described in this subparagraph i
f
— 
(i) the project is a newspaper printing and distribu-
tion plant project with respect to which a contract for 
the purchase of 8 printing press units and related 
equipment to be installed in a single press line was 
entered into on January 8,1985, and 
(ii) the contract price for such units and equipment 
represents at least 50 percent of the total cost of such 
project. 
(H) A project is described in this subparagraph if it is the 
second phase of a project involving direct current trans-
mission lines spanning approximately 190 miles from the 
United States-Canadian border to Ayer, Massachusetts, 
alternating current transmission lines in Massachusetts 
from Ayers to Millbury to West Medway, DC-AC converted 
terminals 
to 
Monroe, 
New 
Hampshire, 
and 
Ayer, 
Massachusetts, and other related equipment and facilities. 
(I) A project is described in this subparagraph if it in-
volves not more than two natural gas-fired combined cycle 
electric generating units each having a net electrical 
capability of approximately 233 megawatts, and a sales 
contract for approximately one-half of the output of the 1st 
unit was entered into in December 1985. 
(J) A project is described in this subparagraph if— 
(i) the project involves an automobile manufacturing 
facility (including equipment and incidental appur-
tenances) to be located in the United States, and 
(ii) either— 
(I) the project was the subject of a memorandum 
of understanding between 2 automobile manufac-
turers that was signed before September 25, 1985, 
the automobile manufacturing facility (including 
equipment and incidental appurtenances) will in-
volve a total estimated cost of approximately 
$750,000,000, and will have an annual production 
capacity of approximately 240,000 vehicles or 
100 STAT. 2152 
PUBLIC LAW 99-514—OCT. 22, 1986 
(II) the Board of Directors of an automobile 
manufacturer approved a written plan for the 
conversion of an existing facility to produce a new 
model of a vehicle currently not produced in the 
United States, such facility will be placed in serv-
ice by July 1, 1987, and such Board action occurred 
in July 1985, with respect to a $523,000,000 
expenditure, in June 1983, with respect to a 
$475,000,000 expenditure, or in July 1984, with 
respect to a $312,000,000 expenditure. 
(K) A project is described in this subparagraph if either— 
(i) the project involves a joint venture between a 
utility company and a paper company for a super 
calendar paper mill, and at least $50,000,000 were in-
curred or committed with respect to such project before 
March 1, 1986, or 
(ii) the project involves a paper mill for the manufac-
ture of newsprint (including a cogeneration facility) is 
generally based on a written design and feasibility 
study that was completed on December 15, 1981, and 
will be placed in service before January 1, 1991, or 
(iii) the project is undertaken by a Maine corporation 
and involves the modernization of pulp and paper mills 
in Millinocket and/or East Millinocket, Maine, or 
(iv) the project involves the installation of a paper 
machine for production of coated publication papers, 
the modernization of a pulp mill, and the installation of 
machinery and equipment with respect to related proc-
esses, as of December 31, 1985, in excess of $50,000,000 
was incurred for the project, as of July 1986, in excess 
of $150,000,000 was incurred for the project, and the 
project is located in Pine Bluff, Arkansas, or 
(v) involves property of a type described in ADR 
classes 26.1, 26.2, 25, 00.3 and 00.4 included in a paper 
plant which will manufacture and distribute tissue, 
towel or napkin products; is located in Effingham 
County, Georgia; and is generally based upon a written 
General Description which was submitted to the Geor-
gia Department of Revenue on or about June 13, 1985. 
(L) A project is described in this subparagraph if— 
(i) a letter of intent with respect to such project was 
executed on June 4,1985, and 
(ii) a 5-percent downpayment was made in connection 
with such project for 2 10-unit press lines and related 
equipment. 
(M) A project is described in this subparagraph if— 
(i) the project involves the retrofit of ammonia 
plants, 
(ii) as of March 1, 1986, more than $390,000 had been 
expended for engineering and equipment, and 
(iii) more than $170,000 was expensed in 1985 as a 
portion of preliminary engineering expense. 
(N) A project is described in this subparagraph if the 
project involves bulkhead intermodal flat cars which are 
placed in service before January 1, 1987, and either— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2153 
(i) more than $2,290,000 of expenditures were made 
before March 1, 1986, with respect to a project involv-
ing up to 300 platforms, or 
(ii) more than $95,000 of expenditures were made 
before March 1, 1986, with respect to a project involv-
ing up to 850 platforms. 
(O) A project is described in this subparagraph i
f
—
-
(i) the project involves the production and transpor-
tation of oil and gas from a well located north of the 
Arctic Circle, and 
(ii) more than $200,000,000 of cost had been incurred 
or committed before September 26, 1985. 
(P) A project is described in this subparagraph i
f
— 
(i) a commitment letter was entered into with a 
financial institution on January 23, 1986, for the 
financing of the project, 
(ii) the project involves intercity communication 
links (including microwave and fiber optics commu-
nications systems and related property), 
(iii) the project consists of communications links be-
tween— 
(I) Omaha, Nebraska, and Council Bluffs, Iowa, 
(II) Waterloo, Iowa and Sioux City, Iowa, 
(III) Davenport, Iowa and Springfield, Illinois, 
and 
(iv) the estimated cost of such project is approxi-
mately $13,000,000. 
(Q) A project is described in this subparagraph i
f
— 
(i) such project is a mining modernization project 
involving mining, transport, and milling operations, 
(ii) before September 26, 1985, at least $20,000,000 
was expended for engineering studies which were ap-
proved by the Board of Directors of the taxpayer on 
January 27, 1983, and 
(iii) such project will involve a total estimated mini-
mum cost of $350,000,000. 
(R) A project is described in this subparagraph if— 
(i) such project is a dragline acquired in connection 
with a 3-stage program which began in 1980 to increase 
production from a coal mine, 
(ii) at least $35,000,000 was spent before September 
26, 1985, on the 1st 2 stages of the program, and 
(iii) at least $4,000,000 was spent to prepare the mine 
site for the dragline. 
(S) A project is described in this subparagraph if—it is a 
project consisting of a mineral processing facility using a 
heap leaching system (including waste dumps, low-grade 
dumps, a leaching area, and mine roads) and if— 
(i) convertible subordinated debentures were issued 
in August 1985, to finance the project, 
(ii) construction of the project was authorized by the 
Board of Directors of the taxpayer on or before Decem-
ber 31, 1985, 
(iii) at least $750,000 was paid or incurred with re-
spect to the project on or before December 31, 1985, and 
(iv) the project is placed in service on or before 
December 31, 1986. 
100 STAT. 2154 
PUBLIC LAW 99-514—OCT. 22, 1986 
(T) A project is described in this subparagraph if it is a 
plant facility on Alaska's North Slope and— 
(i) the approximate cost is $575,000,000 of which 
approximately 
$100,000,000 was spent on 
off-site 
construction or 
(ii) the approximate cost of which is $450,000,000, of 
which approximately $100,000,000 was spent on off-site 
construction, more than 50 percent of the project cost 
was spent prior to December 31, 1985, and which will 
be placed in service in 1987. 
(U) A project is described in this subparagraph if it 
involves the connecting of existing retail stores in the 
downtown area of a city to a new covered area, the total 
project will be 250,000 square feet, a formal Memorandum 
of Understanding relating to development of the project 
was executed with the city on July 2, 1986, and the esti-
mated cost of the project is $18,186,424. 
(V) A project is described in this subparagraph if it 
includes a 200,000 square foot office tower, a 200-room 
hotel, a 300,000 square foot retail center, an 800-space 
parking facility, the total cost is projected to be $60,000,000, 
and $1,250,000 was expended with respect to the site before 
August 25,1986. 
(W) A project is described in this subparagraph if it is a 
joint use and development project including an integrated 
hotel, convention center, office, related retail facilities and 
public mass transportation terminal, and vehicle parking 
facilities which satisfies the following conditions: 
(i) is developed within certain air space rights and 
upon real property exchanged for such joint use and 
development project which is owned or acquired by a 
state department of transportation, a regional mass 
transit district in a county with a population of at least 
5,000,000 and a community redevelopment agency; 
(ii) such project affects an existing, approximately 40 
acre public mass transportation bus-way terminal facil-
ity located adjacent to an interstate highway; 
(iii) a memorandum of understanding with respect to 
such joint use and development project is executed by a 
state department of transportation, such a county re-
gional mass transit district and a community redevel-
opment agency on or before December 31, 1986, and 
(iv) a major portion of such joint use and develop-
ment project is placed in service by December 31, 1990. 
(X) A project is described in this subparagraph if^ 
(i) it is an $8,000,000 project to provide advanced 
control technology for adipic acid at a plant, which was 
authorized by the company's Board of Directors in 
October 1985, at December 31, 1985, $1,400,000 was 
committed and $400,000 expended with respect to such 
project, or 
(ii) it is an $8,300,000 project to achieve compliance 
with State and Federal regulations for particulates 
emissions, which was authorized by the company's 
Board of Directors in December 1985, by March 31, 
1986, $250,000 was committed and $250,000 was ex-
pended with respect to such project, or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2155 
(iii) it is a $22,000,000 project for the retrofit of a 
plant that makes a raw material for aspartame, which 
was approved in the company's December 1985 capital 
budget, if approximately $3,000,000 of the $22,000,000 
was spent before August 1, 1986. 
(Y) A project is described in this subparagraph if such 
project passes through at least 9 States and involves an 
intercity communication link (including multiple repeater 
sites and junction stations for microwave transmissions and 
amplifiers for fiber optics); the link from Buffalo to New 
York/Elizabeth was completed in 1984; the link from Buf-
falo to Chicago was completed in 1985; and the link from 
New York to Washington is completed in 1986. 
(6) NATURAL GAS PIPELINE.—The amendments made by section 
201 shall not apply to any interstate natural gas pipeline (and 
related equipment) i
f
— 
(A) 3 applications for the construction of such pipeline 
were filed with the Federal Energy Regulatory Commission 
before November 22, 1985 (and 2 of which were filed before 
September 26, 1985), and 
(B) such pipeline has 1 of its terminal points near Bakers-
field, California. 
(7) CERTAIN LEASEHOLD IMPROVEMENTS.—The amendments 
made by section 201 shall not apply to any reasonable leasehold 
improvements, equipment and furnishings placed in service by 
a lessee or its affiliates if^ 
(A) the lessee or an affiliate is the original lessee of each 
building in which such property is to be used, 
(B) such lessee is obligated to lease the building under an 
agreement to lease entered into before September 26, 1985, 
and such property is provided for such building, and 
(C) such buildings are to serve as world headquarters of 
the lessee and its affiliates. 
For purposes of this paragraph, a corporation is an affiliate of 
another corporation if both corporations are members of a 
controlled group of corporations within the meaning of section 
1563(a) of the Internal Revenue Code of 1954 without regard to 
section 1563(b)(2) of such Code. Such lessee shall include a 
securities firm that meets the requirements of subparagraph 
(A), except the lessee is obligated to lease the building under a 
lease entered into on June 18, 1986. 
(8) SOLID WASTE DISPOSAL FACILITIES.—The amendments made 
by section 201, and section 203(c), shall not apply to the tax-
payer who originally places in service any qualified solid waste 
disposal facility (as defined in section 7701(e)(3)(B) of the In-
ternal Revenue Code of 1986) if before March 2, 1986— 
(A) there is a binding written contract between a service 
recipient and a service provider with respect to the oper-
ation of such facility to pay for the services to be provided 
by such facility, 
(B) a service recipient or governmental unit (or any entity 
related to such recipient or unit) made a financial commit-
ment of at least $200,000 for the financing or construction 
of such facility, 
(C) such facility is the Tri-Cities Solid Waste Recovery 
Project involving Fremont, Newark, and Union City, 
California, and has received an authority to construct from 
100 STAT. 2156 
PUBLIC LAW 99-514—OCT. 22, 1986 
' 
the Environmental Protection Agency or from a State or 
local agency authorized by the Environmental Protection 
Agency to issue air quality permits under the Clean Air 
Act. 
(9) CERTAIN SUBMERSIBLE DRILLING UNITS.—In the case of a 
binding contract entered into on October 30, 1984, for the 
purchase of 6 semi-submersible drilling units at a cost of 
$425,000,000, such units shall be treated as having an applicable 
date under subsection 203(bX2) of January 1,1991. 
(10) 
WASTEWATER OR SEWAGE TREATMENT FACILITY.—The 
amendments made by section 201 shall not apply to any prop-
erty which is part of a wastewater or sewage treatment facility 
if either— 
(A) site preparation for such facility commenced before 
September 1985, and a parish council approved a service 
agreement with respect to such facility on December 4, 
1985; 
(B) a city-parish advertised in September 1985, for bids 
for construction of secondary treatment improvements for 
such facility, in May 1985, the city-parish received state-
ments from 
16 firms 
interested 
in privatizing 
the 
wastewater treatment facilities, and the metropolitan coun-
cil selected a privatizer at its meeting on November 20, 
1985, and adopted a resolution authorizing the Mayor to 
enter into contractual negotiation with the selected 
privatizer; 
r 
(Q the property is part of a wastewater treatment facility 
with respect to which a binding service agreement between 
a privatizer and the Western Carolina Regional Sewer 
Authority with respect to such facility was signed before 
January 1,1986; or 
(D) such property is part of a wastewater treatment 
facility (located in Cameron County, Texas, within one mile 
of the City of Harlingen), an application for a wastewater 
discharge permit was filed with respect to such facility on 
December 4, 1985, and a City Commission approved a letter 
of intent relating to a service agreement with respect to 
such facility on August 7, 1986; or a wastewater facility 
(located in Harlingen, Texas) which is a subject of the letter 
of intent and service agreement described in subparagraph 
(A)(2) of this paragraph and the design of which was con-
tracted for in a letter of intent dated January 23, 1986. 
(11) CERTAIN AIRCRAFT.—The amendments made by section 
201 shall not apply to any new aircraft with 19 or fewer 
passenger seats if— 
(A) the aircraft is manufactured in Kansas, Florida, Geor-
gia, or Texas. For purposes of this subparsigraph, an air-
craft is "manufactured' at the point of its final assembly, 
(B) the aircraft was in inventory or in the planned 
production schedule of the final assembly manufacturer, 
with orders placed for the engine(s) on or before August 16, 
1986, and 
(C) the aircraft is purchased or subject to a binding 
contract on or before December 31, 1986, and is delivered 
and placed in service by the purchase, before July 1, 1987. 
Section 211(dX2XB) shall not apply to aircraft which meet the 
requirements of this subparagraph. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2157 
(12) CERTAIN SATELLITES.—The amendments made by section 
201 shall not apply to any satellite with respect to which— 
(A) on or before January 28, 1986, there wgis a binding 
contract to construct or acquire a satellite, and 
(i) an agreement to launch was in existence on that 
date, or 
(ii) on or before August 5, 1983, the Federal Commu-
nications Commission had authorized the construction 
and for which the authorized party has a specific al-
though undesignated agreement to launch in existence 
on January 28,1986; 
(B) by order adopted on July 25, 1985, the Federal 
Communications Commission granted the taxpayer an or 
bital slot and authorized the taxpayer to launch and oper-
ate 2 satellites with a cost of approximately $300,000,000; or 
(C) the 
International 
Telecommunications 
Satellite 
Organization or the International Maritime Satellite 
Organization entered into written binding contracts before 
May 1,1985. 
(13) CERTAIN NONWIRE UNE CELLULAR TELEPHONE SYSTEMS.— 
The amendments made by section 201 shall not apply to prop-
erty that is part of a nonwire line system in the Domestic Public 
Cellular Radio Telecommunications Service for which the Fed-
eral Communications Commission has issued a construction 
permit before September 26, 1985, but only if such property is 
placed in service before January 1,1987. 
(14) CERTAIN COGENERATION FACILITIES.—The amendments 
made by section 201 shall not apply to projects consisting of 1 or 
more facilities for the cogeneration and distribution of elec-
tricity and steam or other forms of thermal energy if— 
(A) at least $100,000 was paid or incurred with respect to 
the project before March 1, 1986, a memorandum of under-
standing was executed on September 13, 1985, and the 
project is placed in service before January 1,1989, 
(B) at least $500,000 was paid or incurred with respect to 
the projects before May 6, 1986, the projects involve a 22-
megawatt combined cycle gas turbine plant and a 45-mega-
watt coal waste plant, and applications for qualifying facil-
ity status were filed with the Federal Energy Regulatory 
Commission on March 5,1986, 
(C) the project 
cost approximates 
$125,000,000 
to 
$140,000,000 and an application was made to the Federal 
Energy Regulatory Commission in July 1985, 
(D) an inducement resolution for such facility was 
adopted on September 10, 1985, a development authority 
was given an inducement date of September 10, 1985, for a 
loan not to exceed $80,000,000 with respect to such facility, 
and such facility is expected to have a capacity of approxi-
mately 30 megawatts of electric power and 70,000 pounds of 
steam per hour, 
(E) at least $1,000,000 was incurred with respect to the 
project before May 6, 1986, the project involves a 52-mega-
watt combined cycle gas turbine plant and a petition was 
filed with the Connecticut Department of Public Utility 
Control to approve a power sales agreement with respect to 
the project on March 27, 1986. 
100 STAT. 2158 
PUBLIC LAW 99-514—OCT. 22, 1986 
r ' - 
(15) CERTAIN ELECTRIC GENERATING STATIONS.—The amend-
ments made by section 201 shall not apply to a project consist-
; 
ing of a coal-fired electric generating station (including multiple 
generating units, coal mine equipment, and transmission facili-
u, 
ties) if— 
(A) a tax-exempt entity will own an equity interest in all 
property included in the project (except the coal mine 
equipment), and 
(B) at least $72,000 was expended in the acquisition of 
coal leases, land and water rights, engineering studies, and 
other development costs before May 6,1986. 
For purposes of this subparagraph, subsection (b)(2) shall be 
applied by substituting "January 1, 1986" for "January 1, 
1991." 
(16) SPORTS ARENAS.— 
(A) INDOOR SPORTS FACIUTY.—The amendments made by 
section 201 shall not apply to up to $20,000,000 of improve-
ments made by a lessee of any indoor sports facility pursu-
ant to a lease from a State commission granting the right to 
make limited and specified 
improvements 
(including 
planned seat explanations), if architectural renderings of 
the project were commissioned and received before Decem-
ber 22,1985. 
(B) METROPOLITAN SPORTS ARENA.—The amendments 
made by section 201 shall not apply to any property which 
is part of an arena constructed for professional sports 
activities in a metropolitan area, provided that such arena 
' 
is capable of seating no less than 18,000 spectators and a 
binding contract to incur significant expenditures for its 
construction was entered into before June 1,1986. 
(17) CERTAIN WASTE-TO-ENERGY FACILITIES.—The amendments 
made by section 201 shall not apply to 2 agricultural waste-to-
energy powerplants (and required transmission facilities), in 
connection with which a contract to sell 100 megawatts of 
electricity to a city was executed in October 1984. 
(18) CERTAIN COAL-FIRED PLANTS.—The amendments made by 
section 201 shall not apply to one of three 540 megawatt coal-
fired plants that are placed in service after a sale leaseback 
occurring after January 1,1986, if— 
(A) the Board of Directors of an electric power coopera-
tion authorized the investigation of a sale leaseback of a 
nuclear generation facility by resolution dated January 22, 
1985, and 
(B) a loan was extended by the Rural Electrification 
t' ' 
Administration on February 20, 1986, which contained a 
covenant with respect to used property leasing from unit II. 
(19) CERTAIN RAIL SYSTEMS.— 
(A) The amendments made by section 201 shall not apply 
to a light rail transit system, the approximate cost of which 
is $235,000,000, if, with respect to which, the board of 
directors of a corporation (formed in September 1984 for the 
purpose of developing, financing, and operating the system) 
authorized a $300,000 expenditure for a feasibility study in 
April 1985. 
(B) The amendments made by section 201 shall not apply 
to any project for rehabilitation of regional railroad rights 
of way and properties including grade crossings which was 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2159 
authorized by the Board of Directors of such company prior 
to October 1985; and/or was modified, altered or enlarged 
as a result of termination of company contracts, but ap-
proved by said Board of Directors no later than January 30, 
1986, and which is in the public interest, and which is 
subject to binding contracts or substantive commitments by 
December 31,1987. 
(20) 
CERTAIN 
DETERGENT MANUFACTURING FACILITY.—The 
amendments made by section 201 shall not apply to a laundry 
detergent manufacturing facility, the approximate cost of which 
is $13,200,000, with respect to which a project agreement was 
fully executed on March 17,1986. 
(21) CERTAIN RESOURCE RECOVERY FACIUTY.—The amendments 
made by section 201 shall not apply to any of 3 resource 
recovery plants, the aggregate cost of which approximates 
$300,000,000, if an industrial development authority adopted a 
bond resolution with respect to such facilities on December 17, 
1984, and the projects were approved by the department of 
commerce of a Commonwealth on December 27,1984. 
(22) The amendments made by section 201 shall not apply to a 
computer and office support center building in Minneapolis, 
with respect to which the first contract, with an architecture 
firm, was signed on April 30, 1985, and a construction contract 
was signed on March 12,1986. 
(23) CERTAIN DISTRICT HEATING AND COOUNG FACILITIES.—The 
amendments made by section 201 shall not apply to pipes, 
mains, and related equipment included in district heating and 
cooling facilities, with respect to which the development author-
ity of a State approved the project through an inducement 
resolution adopted on October 8, 1985, and in connection with 
which approximately $11,000,000 of tax-exempt bonds are to be 
issued. 
(24) CERTAIN VESSELS.— 
(A) CERTAIN OFFSHORE VESSELS.—The amendments made 
by section 201 shall not apply to any offshore vessel the 
construction contract for which was signed on February 28, 
1986, and the approximate cost of which is $9,000,000. 
(B) CERTAIN INLAND RIVER VESSEL.—The amendments 
made by section 201 shall not apply to a project involving 
the reconstruction of an inland river vessel docked on the 
Mississippi River at St. Louis, Missouri, on July 14, 1986, 
and with respect to which: 
(i) the estimated cost of reconstruction is approxi-
mately $39,000,000; 
(ii) reconstruction was commenced prior to December 
1,1985; 
(iii) at least $17,000,000 was expended before Decem-
ber 31,1985; and 
(C) SPECIAL AUTOMOBILE CARRIER VESSELS.—The amend-
ments made by section 201 shall not apply to two new 
automobile carrier vessels which will cost approximately 
$47,000,000 and will be constructed by a United States-flag 
carrier to operate, under the United States-flag and with an 
American crew, to transport foreign automobiles to the 
United States, in a case where negotiations for such 
transportation arrangements commenced in April 1985, 
formal contract bids were submitted prior to the end of 
100 STAT. 2160 
PUBLIC LAW 99-514—OCT. 22, 1986 
1985, and definitive transportation contracts were awarded 
in May 1986. 
(D) The amendments made by section 201 shall not apply 
to a 562-foot passenger cruise ship, which was purchased in 
1980 for the purpose of returning the vessel to United 
States service, the approximate cost of refurbishment of 
which is approximately $47,000,000. 
(25) CERTAIN WOOD ENERGY PROJECTS.—The amendments 
made by section 201 shall not apply to two wood energy prod-
ucts for which applications with the Federal Energy Regulatory 
Commission were filed before January 1, 1986, which are de-
scribed as follows: 
(A) a 26.5 megawatt plant in Fresno, California, and 
(B) a 26.5 megawatt plant in Rocklin, California. 
(26) The amendments made by section 201 shall not apply to 
property which is a geothermal project of less than 20 
megawatts that was certified by the Federal Energy Regulatory 
Commission on July 14, 1986, as a qualifying small power 
production facility for purposes of the Public Utility Regulatory 
Policies Act of 1978 pursuant to an application filed with the 
Federal Energy Regulatory Commission on April 17,1986. 
(27) CERTAIN ECONOMIC DEVELOPMENT PROJECTS.—The amend-
ments made by section 201 shall not apply to any of the 
following projects: 
(A) A mixed use development on the East River the total 
cost of which is approximately $400,000,000, with respect to 
which a letter of intent was executed on January 24, 1984, 
and with respect to which approximately $2.5 million had 
been spent by March 1,1986. 
. (B) A 356-room hotel, banquet, and conference facility 
(including 525,000 square feet of office space) the approxi-
mate cost of which is $158,000,000, with respect to which a 
letter of intent was executed on June 1, 1984, and with 
respect to which an inducement resolution and bond resolu-
tion was adopted on August 20,1985. 
(C) Phase 1 of a 4-phase project involving the construction 
of laboratory space and ground-floor retail space the esti-
mated cost of which is $32,000,000 and with respect to 
which a memoradum of understanding was made before 
August 29,1983. 
(D) A project involving the development of a 490,000 
square foot mixed-use building at 152 W. 57th Street and 
7th Avenue, New York, New York, the estimated cost of 
which is $100,000,000, and with respect to which a building 
permit application was filed in May 1986. 
(E) A mixed-use project containing a 300 unit, 12-story 
hotel, garage, two multi-rise office buildings, and also in-
cluded a park, renovated riverboat, and barge with festival 
marketplace, the capital outlays for which approximate 
$68,000,000. 
(F) The construction of a three-story office building that 
will serve as the home office for an insurance group and its 
affiliated companies, with respect to which a city agreed to 
transfer its ownership of the land for the project in a 
Redevelopment Agreement executed on September 18, 1985, 
once certain conditions are met. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2161 
(G) A commercial bank formed under the laws of the 
State of New York which entered into an agreement on 
September 5, 1985, to construct its headquarters at 60 Wall 
Street, New York, New York, with respect to such head-
quarters. 
(H) Any property which is part of a commercial and 
residential project, the first phase of which is currently 
under construction, to be developed on land which is the 
subject of an ordinance passed on July 20, 1981, by the city 
council of the city in which such land is located, designating 
such land and the improvements to be placed thereon as a 
residential-business planned development, which develop-
ment is being financed in part by the proceeds of industrial 
development bonds in the amount of $62,000 issued on 
December 4,1985. 
(28) The amendments made by section 201 shall not apply to 
an $80,000,000 capital project steel seamless tubular casings 
minimill and melting facility located in Youngstown, Ohio, 
which was purchased by the taxpayer in April 1985, and— 
(A) the purchase and renovation of which was approved 
by a committee of the Board of Directors on February 22, 
1985, and 
(B) as of December 31, 1985, more than $20,000,000 was 
incurred or committed with respect to the renovation. 
(29) The amendments made by section 201 shall not apply to 
any project for residential rental property if— 
(A) an inducement resolution with respect to such project 
was adopted by the State housing development authority on 
January 18,1985, and 
(B) such project was the subject of law suits filed on June 
22,1984, and November 21,1985. 
(30) The amendments made by section 201 shall not apply to a 
30 megawatt electric generating facility fueled by geothermal 
and wood waste, the approximate cost of which is $55,000,000, 
and with respect to which a 30-year power sales contract was 
executed on March 22, 1985. 
(31) The amendments made by section 201 shall not apply to 
railroad maintenance-of-way equipment, with respect to which 
a Boston bank entered into a firm binding contract with a major 
northeastern 
railroad before March 2, 1986, to 
finance 
$10,200,000 of such equipment, if all of the equipment was 
placed in service before August 1,1986. 
(32) The amendment made by section 201 shall not apply to— 
(A) a facility constructed on approximately seven acres of 
land located on Ogle's Poso Creek Oil field, the primary fuel 
of which will be bituminous coal from Utah or Wyoming, 
with respect to which an application for an authority to 
construct was filed on July 30, 1984, an authority to con-
struct was issued on February 28, 1985, and a prevention of 
significant deterioration permit application was submitted 
on June 17,1985, 
(B) a facility constructed on approximately seven acres of 
land located on Teorco's Jasmin oil field, the primary fuel 
of which will be bituminous coal from Utah or Wyoming, 
with respect to which an authority to construct was filed on 
August 30, 1984, an authority to construct was issued on 
100 STAT. 2162 
PUBLIC LAW 99-514—OCT. 22, 1986 
May 4, 1985, and a prevention of significant deterioration 
permit application was submitted on July 3,1985, 
(C) the 
Mountain 
View 
Apartments, 
in 
Hadley, 
Massachusetts, 
(D) a facility expected to have a capacity of not less than 
65 megawatts of electricity, the steam from which is to be 
sold to a pulp and paper mill, with respect to which applica-
tion was made to the Federal Regulatory Commission for 
certification as a qualified facility on November 1,1985, and 
received such certification on January 24,1986, 
(E) $2,200,000 of equipment ordered on January 27, 1986, 
in connection with a 60,000 square foot plant that was 
completed in 1983, 
(F) a magnetic resonance imaging machine, with respect 
to which a binding contract to purchase was entered into in 
April 1986, in connection with the construction of a mag-
netic resonance imaging clinic with respect to which a 
Determination of Need certification was obtained from a 
State Department of Public Health on October 22, 1985, if 
such property is placed in service before December 31,1986, 
(G) a company located in Salina, Kansas, which has been 
engaged in the construction of highways and city streets 
since 1946, but only to the extent of $1,410,000 of invest-
ment in new section 38 property, 
(H) a $300,000 project undertaken by a small metal finish-
ing company located in Minneapolis, Minnesota, the first 
parts of which were received and paid for in January 1986, 
with respect to which the company received Board approval 
to purchase the largest piece of machinery it has ever 
ordered in 1985, 
(I) A $1,200,000 finishing machine that was purchased on 
April 2,1986 and placed into service in September 1986 by a 
company located in Davenport, Iowa, 
(J) A 25 megawatt small power production facility, with 
respect to which Qualifying Facility status numbered 
QF86-593-000 was granted on March 5,1986, 
(K) A $600,000,000, 250 megawatt plant placed in service 
by the Sierra Pacific Power Company, 
(L) 128 units of rental housing the Point Gloria Limited 
Partnership, 
(M) Kenosha Harbor, in Kenosha, Wisconsin, 
(N) Lakeland Park Phase II, in Baton Rouge, Louisiana, 
(O) the Santa Rosa Hotel, in New Orleans, Louisiana, 
(P) the Sheraton Baton Rouge, in Baton Rouge, Louisi-
ana, 
(Q) $300,000 of equipment placed in service in 1986, in 
connection with the renovation of the Best Western Town-
house Convention Center in Cedar Rapids, Iowa, 
(R) the segment of a nationwide fiber optics telecommuni-
cations network placed in service by SouthernNet, the total 
estimated cost of which is $37,000,000, 
(S) two cogeneration facilities, placed in service by the 
Reading 
Anthracite 
Company, 
costing 
approximately 
$110,000,000 each, with respect to which filings were made 
with the Federal Energy Regulatory Commission on Decem-
ber 31, 1985, and which are located in Pennsylvania, 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2163 
(T) a fiber optics network placed in service by Kansas City 
Southern Industries, the total estimated cost of which is 
$25,000,000, 
(U) 3 newly constructed fishing vessels, and one vessel 
that is overhauled, placed in service by Mid Coast Marine, 
but only to the extent of $6,700,000 of investment, 
(V) $350,000 of equipment acquired in connection with 
the reopening of a plant in Bristol, Rhode Island, which 
plant was purchased by Button 
woods, Ltd., Associates on 
February 7,1986, 
(W) $4,046,000 of equipment placed in service by 
Brendle's Incorporated, acquired in connection with a Dis-
tribution Center, 
(X) a multi-family mixed-use housing project located in a 
home rule city, the zoning for which was changed to resi-
dential business planned development on November 26, 
1985, and with respect to which both the home rule city and 
the State housing finance agency adopted inducement reso-
lutions on December 20,1985, 
(Y) the Myrtle Beach Convention Center, in South Caro-
lina, to the extent of $25,000,000 of investment, and 
(Z) railroad cars placed in service by the Pullman Leasing 
Company, pursuant to an April 3, 1986 purchase order, 
costing approximately $10,000,000. 
(33) The amendments made by section 201 shall not apply to— 
(A) $400,000 of equipment placed in service by Super Key 
Market, if such equipment is placed in service before Janu-
ary 1,1987, 
(B) the Trolley Square project, the total project cost of 
which is $24,500,000, and the amount of depreciable real 
property of which is $14,700,000. 
(C) a waste-to-energy project in Derry, New Hampshire, 
costing approximtely $60,000,000, 
(D) the City of Los Angeles Co-composting project, the 
estimated cost of which is $62,000,000, with respect to 
which, on July 17, 1985, the California Pollution Control 
Financing Authority issued an initial resolution in the 
maximum amount of $75,000,000 to finance this project, 
(E) the St. Charles, Missouri Mixed-Use Center, 
(F) Oxford Place in Tulsa, Oklahoma, 
(G) an amount of investment generating $20,000,000 of 
investment tax credits attributable to property used on the 
Illinois Diversatech Campus, 
(H) $25,000,000 of equipment used in the Melrose Park 
Engine Plant that is sold and leased back by Navistar, 
(I) 80,000 vending machines, for a cost approximating 
$3,400,000 placed into service by Folz Vending Co., 
(J) a 24 megawatt alternative energy facility placed in 
service by Peat Products, with respect to which certification 
by the Federal Energy Regulatory Commission on April 3, 
1986, and 
(K) Burbank Manors, in Illinois. 
O
t
>
) SPECIAL RULE FOR CERTAIN PROPERTY.—The provisions of sec-
tion 168(f)(8) of the Internal Revenue Code of 1954 (as amended by 
section 209 of the Tax Equity and Fiscal Responsibility Act of 1982) 
shall continue to apply to any transaction permitted by reason of 
100 STAT. 2164 
PUBLIC LAW 99-514—OCT. 22, 1986 
section 12(c)(2) of the Tax Reform Act of 1984 or section 209(d)(1)(B) 
of the Tax Equity and Fiscal Responsibility Act of 1982. 
(c) APPLICABLE DATE IN CERTAIN CASES.— 
(1) Section 203(b)(2) shall be applied by substituting "January 
1, 1992" for January 1,1991" in the following cases. 
(A) in the case of a 2-unit nuclear powered electric 
generating plant (and equipment and incidental appur-
tenances), constructed pursuant to contracts entered into 
by the owner operator of the facility before December 31, 
1975, including contracts with the engineer/constructor 
and the nuclear steam system supplier, such contracts shall 
be treated as contracts described in section 2030t))(l)(A), 
(B) a cogeneration facility with respect to which an ap-
plication with the Federal Energy Regulatory Commission 
was filed on August 2, 1985, and approved October 15, 1985. 
(C) in the case of a 1,300 megawatt coal-fired steam 
powered electric generating plant (and related equipment 
and incidental appurtenances), which the three owners 
determined in 1984 to convert from nuclear power to coal 
power and for which more than $600,000,000 had been 
incurred or committed for construction before September 
25, 1985, except that no investment tax credit will be 
allowable under section 49(d)(3) added by section 211(a) of 
this Act for any qualified progress expenditures made after 
December 31,1990. 
(2) Section 203a))(2) shall be applied by substituting "April 1, 
1992" for the applicable date that would otherwise apply, in the 
case of the second unit of a twin steam electric generating 
facility and related equipment which was granted a certificate 
of public convenience and necessity by a public service commis-
sion prior to January 1, 1982, if the first unit of the facility was 
placed in service prior to January 1, 1985, and before September 
26, 1985, more than $100,000,000 had been expended toward the 
construction of the second unit. 
(3) Section 203(b)(2) shall be applied by substituting "January 
1, 1990," for the applicable date that would otherwise apply in 
the case of— 
(A) new commercial passenger aircraft used by a domestic 
airline, if a binding contract with respect to such aircraft 
was entered into before April 1, 1986, and such aircraft has 
a present class life of 12 years, 
(B) a pumped storage hydroelectric project with respect to 
which an application was made to the Federal Energy 
Regulatory Commission for a license on February 4, 1974, 
and license was issued August 1, 1977, the project number 
of which is 2740, 
(C) a facility for the manufacture of an improved 
particleboard, if—a binding contract to purchase such 
equipment was executed March 3, 1986, such equipment 
will be placed in service by January 1, 1988, and such 
facility is located in or near Moncure, North Carolina, and 
(D) a newsprint mill in Pend Oreille county, Washington, 
costing about $290,000,000. 
(4) The amendments made by section 201 shall not apply to a 
limited amount of the following property or a limited amount of 
property set forth in submission before September 16, 1986, by 
the following taxpayers— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2165 
(A) Arena project, Michigan, 
(B) Campbell Soup Company, Pennsylvania and Califor-
nia, 
(C) Overton, Florida, 
(D) Legett and Piatt, 
(E) East Bank Housing Project, 
(F) Standard Telephone Company, 
(G) Presidential Air, 
(H) Ann Arbor Railroad, 
(I) Ada, Michigan Cogeneration, 
(J) Anchor Store Project, Michigan, 
(K) Biogen Power, 
(L) $14,000,000 of television transmitting towers placed in 
service by Media General, Inc., which were subject to bind-
ing contracts as of January 21, 1986, and will be placed in 
service before January 1,1988, 
(M) Hardage Company, 
(N) Mesa Airlines, 
(O) Yarn-spinning equipment used at Spring Cotton Mills, 
and 
(P) 328 units of low-income housing at Angelus Plaza. 
(d) RAILROAD GRADING AND TUNNEL BORES.— 
(1) IN GENERAL.—In the case of expenditures for railroad 
grading and tunnel bores which were incurred by a common 
carrier by railroad to replace property destroyed in a disaster 
occurring on or about April 17, 1983, near Thistle, Utah, such 
expenditures, to the extent not in excess of $15,000,000, shall be 
treated as recovery property which is 5-year property under 
section 168 of the Internal Revenue Code of 1954 (as in effect 
before the amendments made by this Act) and which is placed 
in service at the time such expenditures were incurred. 
(2) BUSINESS INTERRUPTION PROCEEDS.—Business interruption 
proceeds received for loss of use, revenues, or profits in connec-
tion with the disaster described in paragraph (1) and devoted by 
the taxpayer described in paragraph (1) to the construction of 
replacement track and related grading and tunnel bore expendi-
tures shall be treated as constituting an amount received from 
the involuntary conversion of property under section 1033(a)(2) 
of such Code. 
(3) EFFECTIVE DATE.—This subsection shall apply to taxable 
years ending after April 17,1983. 
(e) TREATMENT OF CERTAIN DISASTER LOSSES.— 
(1) IN GENERAL.—In the case of a disaster described in para-
graph (2), at the election of the taxpayer, the amendments made 
by section 201 of this Act— 
(A) shall not apply to any property placed in service 
during 1987 or 1988, or 
(B) shall apply to any property placed in service during 
1985 or 1986, 
which is property to replace property lost, damaged, or de-
stroyed in such disaster. 
(2) DISASTER TO WHICH SECTION APPUES.—This section shall 
apply to a flood which occurred on November 3 through 7, 1985, 
and which was declared a natural disaster area by the President 
of the United States. 
100 STAT. 2166 
PUBLIC LAW 99-514—OCT. 22, 1986 
Subtitle B—Repeal of Regular Investment Tax 
Credit 
SEC. 
2
1
1
. 
REPEAL 
OF 
REGULAR 
INVESTMENT 
TAX 
CREDIT. 
(a) GENERAL RULE.—Subpart E of part IV of subchapter A of 
chapter 1 (relating to investment tax credit) is amended by adding at 
the end thereof the following new section: 
"SEC. 
4
9
. 
TERMINATION 
OF 
REGULAR 
PERCENTAGE. 
"(a) GENERAL RULE.—For purposes of determining the amount of 
the investment tax credit determined under section 46, the regular 
percentage shall not apply to any property placed in service after 
December 31,1985. 
"(b) EXCEPTIONS.—Subject to the provisions of subsections (c) and 
(d), subsection (a) shall not apply to the following: 
"(1) TRANSITION PROPERTY.—Property which is transition 
property (within the meaning of subsection (e)). 
"(2) QUALIFIED PROGRESS EXPENDITURE FOR PERIODS BEFORE 
JANUARY 1, 1986.—In the case of any taxpayer who has made an 
election under section 46(d)(6), the portion of the adjusted basis 
of any progress expenditure property attributable to qualified 
progress expenditures for periods before January 1,1986. 
"(3) QUALIFIED TIMBER PROPERTY.—The portion of the adjusted 
basis of qualified timber property which is treated as section 38 
property under section 48 (a)(1)(F). 
"(c) 35-PERCENT REDUCTION IN CREDIT FOR TAXABLE YEARS AFTER 
1986.— 
"(1) REDUCTION IN CURRENT YEAR INVESTMENT CREDIT.—Any 
portion of the current year business credit under section 38(b) 
for any taxable year beginning after June 30, 1987, which is 
attributable to the regular investment credit shall be reduced 
by 35 percent. 
"(2) UNEXPIRED CARRYFORWARDS TO IST TAXABLE YEAR BEGIN-
NING AFTER JUNE 30, 1987.—Any portion of the business credit 
carryforward under section 38(a)(1) attributable to the regular 
investment credit which has not expired as of the close of the 
taxable year preceding the 1st taxable year of the taxpayer 
beginning after June 30, 1987, shall be reduced by 35 percent. 
"(3) SPECIAL RULE FOR TAXABLE YEARS BEGINNING BEFORE AND 
ENDING AFTER JULY 1, 1987.—In the case of any taxable year 
beginning before and ending after July 1, 1987— 
"(A) any portion of the current year business credit under 
section 3803) for such taxable year, or 
"(B) any portion of the business credit carryforward 
under section 38(a)(1) to such year, 
which is attributable to the regular investment credit shall be 
reduced by the applicable percentage. 
"(4) TREATMENT OF DISALLOWED CREDIT.— 
"(A) IN GENERAL.—The amount of the reduction of the 
regular investment credit under paragraphs (1) and (2) shall 
not be allowed as a credit for any taxable year. 
"(B) No CARRYBACK FOR YEAR STRADDLING JULY 1, 1987; 
GROSS UP OF CARRYFORWARDS.—The amount of the reduction 
of the regular investment credit under paragraph (3)— 
"(i) may not be carried back to any taxable year, but 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2167 
"(ii) shall be added to the carryforwards from the 
taxable year before applying paragraph (2). 
"(5) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
subsection— 
"(A) APPUCABLE 
PERCENTAGE.—The term 'applicable 
percentage' means, with respect to a taxable year beginning 
before and ending after July 1, 1987, the percentage which 
bears the same ratio to 35 percent as— 
"(i) the number of months in such taxable year after 
June 30,1987, bears to 
"(ii) the number of months in such taxable year. 
"(B) REGULAR INVESTMENT CREDIT.— 
"(i) IN GENERAL.—The term 'regular investment 
credit' has the meaning given such term by section 
48(0). 
"(ii) EXCEPTION FOR TIMBER PROPERTY.—The term 
'regular investment credit' shall not include any por-
tion of the regular investment credit which is attrib-
utable to section 38 property described in section 
48(aXlXF). 
"(C) 
PORTION OF CREDITS ATTRIBUTABLE TO REGULAR 
INVESTMENT CREDIT.—The portion of any current year busi-
ness credit or business credit carryforward which is attrib-
utable to the regular investment credit shall be determined 
on the basis that the regular investment credit is used first. 
'(d) FULL BASIS ADJUSTMENT.— 
"(1) IN GENERAL.—In the case of periods after December 31, 
1985, section 48(q) (relating to basis adjustment to section 38 
property) shall be applied with respect to transaction prop-
erty— 
"(A) by substituting '100 percent' for '50 percent' in 
paragraph (1), and 
"(B) without regard to paragraph (4) thereof (relating to 
election of reduced credit in lieu of basis adjustment). 
"(2) SPECIAL RULE FOR QUAUFIED PROGRESS EXPENDITURES.—If 
the taxpayer made an election under section 48(qX4) with re-
spect to any qualified progress expenditures for periods before 
Januarv 1,1986— 
' (A) paragraph (1) shall not apply to the portion of the 
adjusted basis attributable to such expenditures, and 
'(B) such election shall not apply to such expenditures for 
periods after December 31,1985. 
'(e) TRANSITION PROPERTY.—For purposes of this section— 
"(1) TRANSITION PROPERTY.—The term 'transition property' 
means any property placed in service after December 31, 1985, 
and to which the amendments made by section 201 of the Tax 
Reform Act of 1986 do not apply, except that in making such 
determination— 
"(A) section 203(aXlXA) of such Act shall be applied by 
substituting '1985' for '1986', 
"(B) sections 2030^X1) and 204(aX3) of such Act shall be 
applied by substituting 'December 31, 1985' for 'March 1, 
1986', 
"(C) in the case of transition property with a cltiss life of 
less than 7 years— 
"(i) section 203(bX2) of such Act shall apply, and 
"(ii) in the case of property with a class life— 
100 STAT. 2168 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(I) of less than 5 years, the appHcable date shall 
be July 1, 1986, and 
"(II) at least 5 years, but less than 7 years, the 
applicable date shall be January 1, 1987, and 
"(D) section 203(b)(3) shall be applied by substituting 
'1986' for '1987'. 
"(2) TREATMENT OF PROGRESS EXPENDITURES.—No progress 
expenditures for periods after December 31, 1985, with respect 
to any property shall be taken into account for purposes of 
applying the regular percentage unless it is reasonable to expect 
that such property will be transition property when placed in 
service. If any progress expenditures are taken into account by 
reason of the preceding sentence and subsequently there is not a 
reasonable expectation that such property would be transition 
property when placed in service, the credits attributable to 
progress expenditures with respect to such property shall be 
recaptured under section 47." 
(b) NORMALIZATION RULES.—If, for any taxable year beginning 
after December 31, 1985, the requirements of paragraph (1) or (2) of 
section 46(f) of the Internal Revenue Code of 1986 are not met with 
respect to public utility property to which the regular percentage 
applied for purposes of determining the amount of the investment 
tax credit— 
(1) all credits for open taxable years as of the time of the final 
determination referred to in section 46(f)(4)(A) of such Code 
shall be recaptured, and 
(2) if the amount of the taxpayer's unamortized credits (or the 
credits not previously restored to rate base) with respect to such 
property (whether or not for open years) exceeds the amount 
referred to in paragraph (1), the taxpayer's tax for the taxable 
year shall be increased by the amount of such excess. 
If any portion of the excess described in paragraph (2) is attributable 
to a credit which is allowable as a carryover to a taxable year 
beginning after December 31, 1985, in lieu of applying paragraph (2) 
with respect to such portion, the amount of such carryover shall be 
reduced by the amount of such portion. Rules similar to the rules of 
this subsection shall apply in the case of any property with respect 
to which the requirements of section 46(0(9) of such Code are met. 
(c) CONFORMING AMENDMENT.—The table of sections for subpart E 
of part IV of subchapter A of chapter 1 is amended by adding at the 
end thereof the following new item: 
"Sec. 49. Termination of regular percentage." 
(d) EXCEPTION FOR CERTAIN AIRCRAFT USED IN ALASKA.— 
(1) The amendments made by subsection (a) shall not apply to 
property originally placed in service after December 29, 1982, 
and before August 1, 1985, by a corporation incorporated in 
Alaska on May 21,1953, and used by it— 
(A) in part, for the transportation of mail for the United 
States Postal Service in the State of Alaska, and 
(B) in part, to provide air service in the State of Alaska on 
routes which had previously been served by an air carrier 
that received compensation from the Civil Aeronautics 
Board for providing service. 
(2) In the case of property described in subparagraph (A)— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2169 
(A) such property shall be treated as recovery property 
described in section 208(d)(5) of the Tax Equity and Fiscal 
Responsibility Act of 1982 ("TEFRA"); 
(B) "48 months" shall be substituted for "3 months" each 
place it appears in applying— 
(i) section 48(b)(2)(B) of the Code, and 
(ii) section 168(f)(8)(D) of the Code (as in effect after 
the amendments made by the Technical Corrections 
Act of 1982 but before the amendments made by 
TEFRA); and 
(C) the limitation of section 168(D(8)(D)(iiXIII) (as then in 
effect) shall be read by substituting "the lessee's original 
cost basis.", for "the adjusted basis of the lessee at the time 
of the lease.". 
(3) The aggregate amount of property to which this paragraph 
shall apply shall not exceed $60,000,000. 
(e) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to property placed 
in service after December 31, 1985, in taxable years ending after 
such date. 
(2) EXCEPTIONS FOR CERTAIN FILMS.—For purposes of determin-
ing whether any property is transition property within the 
meaning of section 49(e) of the Internal Revenue Code of 1986— 
(A) in the case of any motion picture or television film, 
construction shall be treated as including production for 
purposes of section 2030t)Xl) of this Act, and written contem-
porary evidence of an agreement (in accordance with indus-
try practice) shall be treated as a written binding contract 
for such purposes, 
(B) in the case of any television film, a license agreement 
or agreement for production services between a television 
network and a producer shall be treated as a binding 
contract for purposes of section 203(bXlXA) of this Act, and 
(C) a motion picture film shall be treated as described in 
section 203(bXlXA) of this Act i
f
— 
(i) funds were raised pursuant to a public offering 
before September 26, 1985, for the production of such 
film, 
(ii) 40 percent of the funds raised pursuant to such 
public offering are being spent on films the production 
of which commenced before such date, and 
(iii) all of the films funded by such public offering are 
required to be distributed pursuant to distribution 
agreements entered into before September 26, 1985. 
(3) NORMALIZATION RULES.—The provisions of subsection 0^) 
shall apply to any violation of the normalization requirements 
under paragraph (1) or (2) of section 46(f) of the Internal Reve-
nue Code of 1986 occurring in taxable years ending after Decem-
ber 31,1985. 
(4) ADDITIONAL EXCEPTIONS.— 
(A) Paragraphs (c) and (d) of section 49 of the Internal 
Revenue Code of 1954 shall not apply to any continuous 
caster facility for slabs and blooms which is subject to a 
lease and which is part of a project the second phase of 
which is a continuous slab caster which was placed in 
service before December 31, 1935. 
100 STAT. 2170 
PUBLIC LAW 99-514—OCT. 22, 1986 
(B) For purposes of determining whether an automobile 
manufacturing facility (including equipment and incidental 
appurtenances) is transition property within the meaning 
of section 49(e), property with respect to which the Board of 
Directors of an automobile manufacturer formally ap-
proved the plan for the project on January 7, 1985 shall be 
treated as transition property, but only with respect to 
$70,000,000 of regular investment tax credits. 
SEC. 212. EFFECTIVE 
15-YEAR 
CARRYBACK 
OF 
EXISTING 
CARRY-
FORWARDS OF STEEL COMPANIES. 
(a) GENERAL RULE.—If a qualified corporation makes an election 
under this section for its 1st taxable year beginning after December 
31, 1986, with respect to any portion of its existing carryforwards, 
the amount determined under subsection 
flt>) 
shall be treated as a 
payment against the tax imposed by chapter 1 of the Internal 
Revenue Code of 1986 made by such corporation on the last day 
prescribed by law (without regard to extensions) for filing its return 
of tax under chapter 1 of such Code for such 1st taxable year. 
(b) AMOUNT.—For purposes of subsection (a), the amount deter-
mined under this subsection shall be the lesser of— 
(1) 50 percent of the portion of the corporation's existing 
carryforwards to which the election under subsection (a) ap-
plies, or 
(2) the corporation's net tax liability for the carryback period. 
(c) CORPORATION MAKING ELECTION MAY NOT USE SAME AMOUNTS 
UNDER SECTION 38.—In the case of a qualified corporation which 
makes an election under subsection (a), the portion of such corpora-
tion's existing carryforwards to which such an election applies shall 
not be taken into account under section 38 of the Internal Revenue 
Code of 1986 for any taxable year beginning after December 31, 
1986. 
(d) NET TAX LIABILITY FOR CARRYBACK PERIOD.—For purposes of 
this section— 
(1) IN GENERAL.—A corporation's net tax liability for the 
carryback period is the aggregate of such corporation's net tax 
liability for taxable years in the carryback period. 
(2) NET TAX UABIUTY.—The term "net tax liability" means, 
with respect to any taxable year, the amount of the tax imposed 
by chapter 1 of the Internal Revenue Code of 1954 for such 
taxable year, reduced by the sum of the credits allowable under 
part IV of subchapter A of such chapter 1 (other than section 34 
thereof). For purposes of the preceding sentence, any tax treated 
as not imposed by chapter 1 of such Code under section 26(bX2) 
of such Code shall not be treated as tax imposed by such chapter 
1. 
(3) CARRYBACK PERIOD.—The term "carryback period" means 
the period— 
(A) which begins with the corporation's 15th taxable year 
preceding the 1st taxable year from which there is an 
unused credit included in such corporation's existing 
carryforwards (but in no event shall such period begin 
before the corporation's 1st taxable year ending after 
December 31,1961), and 
(B) which ends with the corporation's last taxable year 
beginning before January 1, 1986. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2171 
(e) No RECOMPUTATION OF MINIMUM TAX, ETC.—Nothing in this 
section shall be construed to affect— 
(1) the amount of the tax imposed by section 56 of the Internal 
Revenue Code of 1986, or 
(2) the amount of any credit allowable under such Code, 
for any taxable year in the carryback period. 
(0 REINVESTMENT REQUIREMENT.— 
(1) IN GENERAL.—Any amount determined under this section 
must be committed to reinvestment in, and modernization of 
the steel industry through investment in modern plant and 
equipment, research and development, and other appropriate 
projects, such as working capital for steel operations and pro-
grams for the retraining of steel workers. 
(2) GENERAL RULE.—^If this section applies to LTV Corpora-
tion, then, in lieu of the requirements of paragraph (1)— 
(A) such corporation shall place such refund in a separate 
account; and 
(B) amounts in such separate account— 
(i) shall only be used by the corporation— 
(I) to purchase an insurance policy which pro-
vides that, in the event the corporation becomes 
involved in a title 11 or similar case (as defined in 
section 368(a)(3)(A) of the Internal Revenue Code of 
1954), the insurer will provide life and health 
insurance coverage during the 1-year period begin-
ning on the date such involvement begins to any 
individual with respect to whom the corporation 
would (but for such involvement) have been obli-
gated to provide such coverage the coverage pro-
vided by the insurer will be identical to the cov-
erage which the corporation would (but for such 
involvement) have been obligated to provide, and 
provides that the payment of insurance premiums 
will not be required during such 1-year period to 
keep such policy in force, or 
(II) directly in connection with the trade or busi-
ness of the corporation in the manufacturer or 
production of steel; and 
(ii) shall be used (or obligated) for purposes described 
in clause (i) not later than 3 months after the corpora-
tion receives the refund, 
(g) DEFINITIONS.—For purposes of this section— 
(1) QUALIFIED CORPORATION.— 
(A) IN GENERAL.—The term 'qualified 
corporation" 
means any corporation which is described in section 806(b) 
of the Steel Import Stabilization Act and a company which 
was incorporated on February 11,1983, in Michigan. 
(B) CERTAIN PREDECESSORS INCLUDED.—In the case of any 
qualified corporation which has carr5^orward attributable 
to a predecessor corporation described in such section 
806(b), the qualified corporation and the predecessor cor-
poration shall be treated as 1 corporation for purposes of 
subsections (d) and (e). 
(2) 
EXISTING 
CARRYFORWARDS.—The 
term 
"existing 
carryforward" means the aggregate of the amounts which— 
(A) are unused business credit carryforwards to the tax-
payer's 1st taxable year beginning after December 31, 1986 
100 STAT. 2172 
PUBLIC LAW 99-514—OCT. 22, 1986 
(determined without regard to the limitations of section 
38(c) and any reduction under section 49 of the Internal 
Revenue Code of 1986), and 
(B) are attributable to the amount of the regular invest-
ment credit determined under section 46(a)(1) of such Code 
(relating to regular percentage), or any corresponding provi-
sion of prior law, determined on the basis that the regular 
investment credit was used first. 
SEC. 213. EFFECTIVE 
15-YEAR 
CARRYBACK 
OF EXISTING 
CARRY-
FORWARDS OF QUALIFIED FARMERS. 
(a) GENERAL RULE.—If a taxpayer who is a qualified farmer makes 
an election under this section for its 1st taxable year beginning after 
December 31, 1986, with respect to any portion of its existing 
carryforwards, the amount determined under subsection (b) shall be 
treated as a payment against the tax imposed by chapter 1 of the 
Internal Revenue Code of 1986 made by such taxpayer on the last 
day prescribed by law (without regard to extensions) for filing its 
return of tax under chapter 1 of such Code for such 1st taxable year. 
(b) AMOUNT.—For purposes of subsection (a), the amount deter-
mined under this subsection shall be equal to the smallest o
f
— 
(1) 50 percent of the portion of the taxpayer's existing 
carryforwards to which the election under subsection (a) 
applies, 
(2) the taxpayer's net tax liability for the carryback period 
(within the meaning of section 212(d) of this Act), or 
(3) $750. 
(c) TAXPAYER MAKING ELECTION MAY NOT USE SAME AMOUNTS 
UNDER SECTION 38.—In the case of a qualified farmer who makes an 
election under subsection (a), the portion of such farmer's existing 
carryforwards to which such an election applies shall not be taken 
into account under section 38 of the Internal Revenue Code of 1986 
for any taxable year beginning after December 31,1986. 
(d) No RECOMPUTATION OF MINIMUM TAX, ETC.—Nothing in this 
section shall be construed to affect— 
(1) the amount of the tax imposed by section 56 of the Internal 
Revenue Code of 1954, or 
(2) the amount of any credit allowable under such Code, 
for any taxable year in the carryback period (within the meaning of 
section 212(dX3) of this Act). 
(e) DEFINITIONS AND SPECIAL 
RULES.—For purposes of this 
section— 
(1) QUAUFIED FARMER.—The term "qualified farmer" means 
any taxpayer who, during the 3-taxable year period preceding 
the taxable year for which an election is made under subsection 
(a), derived 50 percent or more of the taxpayer's gross income 
from the trade or business of farming. 
(2) 
EXISTING 
CARRYFORWARD.—The 
term 
"existing 
carryforward" means the aggregate of the amounts which— 
(A) are unused business credit carryforwards to the tax-
payer's 1st taxable year beginning after December 31, 1986 
(determined without regard to the limitations of section 
38(c) of the Internal Revenue Code of 1986), and 
(B) are attributable to the amount of the investment 
credit determined under section 46(a) of such Code (or any 
corresponding provision of prior law) with respect to section 
38 property which was used by the taxpayer in the trade or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2173 
business of farming, determined on the basis that such 
credit was used first. 
(3) FARMING.—The term "farming" has the meaning given 
such term by section 2032A(e) (4) and (5) of such Code. 
Subtitle C—General Business Credit Reduction 
SEC. 221. REDUCTION IN TAX LIABILITY WHICH MAY BE OFFSET BY BUSI-
NESS CREDIT FROM 85 PERCENT TO 75 PERCENT. 
(a) IN GENERAL.—Subparagraph (B) of section 38(c)(1) (relating to 
limitation based on amount of tax) is amended by striking out "85 
percent" and inserting in lieu thereof "75 percent". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1985. 
Subtitle D—Research and Development 
Provisions 
SEC. 231. AMENDMENTS RELATING TO CREDIT FOR INCREASING RE-
SEARCH ACTIVITIES. 
(a) 3-YEAR EXTENSION OF THE RESEARCH CREDIT.— 
(1) IN GENERAL.—Section 30 (relating to credit for increasing 
research activities) is amended by adding at the end thereof the 
following new subsection: 
"(h) TERMINATION.— 
"(1) IN GENERAL.—This section shall not apply to any amount 
paid or incurred after December 31,1988. 
"(2) COMPUTATION OF BASE PERIOD EXPENSES.—In the case of 
any taxable year which begins before January 1, 1989, and ends 
after December 31, 1988, any amount for any base period with 
respect to such taxable year shall be the amount which bears 
the same ratio to such amount for such base period as the 
number of days in such taxable year before January 1, 1989, 
bears to the total number of days in such taxable year." 
(2) CONFORMING AMENDMENT.—Subsection (d) of section 221 of 
the Economic Recovery Tax Act of 1981 is amended— 
(A) by striking out ", and before January 1, 1986" in 
paragraph (1), and 
(B) by striking out the last sentence of paragraph (2)(A). 
(b) DEFINITION OF QUALIFIED RESEARCH; CERTAIN RESEARCH NOT 
ELIGIBLE FOR CREDIT.—Subsection (d) of section 30 (defining qualified 
research) is amended to read as follows: 
"(d) QUALIFIED RESEARCH DEFINED.—For purposes of this section— 
"(1) IN GENERAL.—The term 'qualified 
research' 
means 
research— 
"(A) with respect to which expenditures may be treated 
as expenses under section 174, 
"(B) which is undertaken for the purpose of discovering 
information— 
"(i) which is technological in nature, and 
"(ii) the application of which is intended to be useful 
in the development of a new or improved business 
component of the taxpayer, and 
100 STAT. 2174 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(C) substantially all of the activities of which constitute 
elements of a process of experimentation for a purpose 
described in paragraph (3). 
Such term does not include any activity described in paragraph 
(4). 
"(2) TESTS TO BE APPLIED SEPARATELY TO EACH BUSINESS COMPO-
NENT.—For purposes of this subsection— 
"(A) IN GENERAL.—Paragraph (1) shall be applied sepa-
rately with respect to each business component of the 
taxpayer. 
"(B) BUSINESS COMPONENT DEFINED.—The term 'business 
component' means any product, process, computer software, 
technique, formula, or invention which is to be— 
"(i) held for sale, lease, or license, or 
"(ii) used by the taxpayer in a trade or business of the 
taxpayer. 
"(C) SPECIAL RULE FOR PRODUCTION PROCESSES.—Any plant 
process, machinery, or technique for commercial production 
of a business component shall be treated as a separate 
business component (and not as part of the business compo-
nent being produced). 
"(3) 
PURPOSES FOR WHICH RESEARCH MAY QUALIFY FOR 
CREDIT.—For purposes of paragraph dXC)— 
"(A) IN GENERAL.—Research shall be treated as conducted 
for a purpose described in this paragraph if it relates to— 
"(i) a new or improved function, 
"(ii) performance, or 
"(iii) reliability or quality. 
"(B) CERTAIN PURPOSES NOT QUAUFIED.—Research shall in 
no event be treated as conducted for a purpose described in 
this paragraph if it relates to style, taste, cosmetic, or 
seasonal design factors. 
"(4) ACTIVITIES FOR WHICH CREDIT NOT ALLOWED.—The term 
'qualified research' shall not include any of the following: 
"(A) RESEARCH AFTER COMMERCIAL PRODUCTION.—Any re-
search conducted after the beginning of cornmercial produc-
tion of the business component. 
"(B) 
ADAPTATION OF EXISTING BUSINESS COMPONENTS.— 
Any research related to the adaptation of an existing busi-
ness component to a particular customer's requirement or 
need. 
"(C) 
DUPLICATION OF EXISTING BUSINESS COMPONENT.— 
Any research related to the reproduction of an existing 
business component (in whole or in part) from a physical 
examination of the business component itself or from plans, 
blueprints, detailed specifications, or publicly available 
information with respect to such business component. 
"(D) SURVEYS, STUDIES, ETC.—Any— 
"(i) efficiency survey, 
"(ii) activity relating to management function or 
technique, 
"(iii) market research, testing, or 
development 
(including advertising or promotions), 
"(iv) routine data collection, or 
"(v) routine or ordinary testing or inspection for 
quality control. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2175 
"(E) COMPUTER SOFTWARE.—Except to the extent provided 
in regulations, any research with respect to computer soft-
ware which is developed by (or for the benefit of) the 
taxpayer primarily for internal use by the taxpayer, other 
than for use in— 
"(i) an activity which constitutes qualified research 
(determined with regard to this subparagraph), or 
"(ii) a production process with respect to which the 
requirements of paragraph (1) are met. 
"(F) FOREIGN RESEARCH.—Any research conducted outside 
the United States. 
"(G) SOCIAL SCIENCES, ETC.—Any research in the social 
sciences, arts, or humanities. 
"(H) FUNDED RESEARCH.—Any research to the extent 
funded by any grant, contract, or otherwise by another 
person (or governmental entity)." 
(c) REDUCTION IN CREDIT; CREDIT FOR BASIC RESEARCH PAYMENTS 
TO QUALIFIED ORGANIZATIONS.— 
(1) IN GENERAL.—Subsection (a) of section 30 is amended to 
read as follows: 
"(a) GENERAL RULE.—For purposes of section 38, the research 
credit determined under this section for the taxable year shall be an 
amount equal to the sum of— 
"(1) 20 percent of the excess (if any) of— 
"(A) the qualified research expenses for the taxable year, 
over 
"(B) the base period research expenses, and 
"(2) 20 percent of the basic research payments determined 
under subsection (e)(lXA)." 
(2) DEFINITIONS AND SPECIAL RULES RELATING TO PAYMENTS FOR 
BASIC RESEARCH.—Subsection (e) of section 30 (relating to credit 
available with respect to certain basic research by colleges, 
universities, and certain research organizations) is amended to 
read £is follows: 
"(e) CREDIT ALLOWABLE WITH RESPECT TO CERTAIN PAYMENTS TO 
QUALIFIED ORGANIZATIONS FOR BASIC RESEARCH.—For purposes of 
this section— 
"(1) IN GENERAL.—In the case of any taxpayer who makes 
basic research payments for any taxable year— 
"(A) the amount of basic research payments taken into 
account under subsection (aX2) shall be equal to the excess 
of-
"(i) such basic research payments, over 
"(ii) the qualified organization base period amount, 
and 
"(B) that portion of such basic research payments which 
does not exceed the qualified organization base period 
amount shall be treated as contract research expenses for 
purposes of subsection (aXD. 
"(2) BASIC RESEARCH PAYMENTS DEFINED.—For purposes of this 
subsection— 
"(A) IN GENERAL.—The term 'basic research payment' 
means, with respect to any taxable year, any amount paid 
in cash during such taxable year by a corporation to any 
qualified organization for basic research but only i
f
— 
100 STAT. 2176 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(i) such payment is pursuant to a written agreement 
between such corporation and such qualified organiza-
tion, and 
"(ii) such basic research is to be performed by such 
qualified organization. 
"(B) EXCEPTION TO REQUIREMENT THAT RESEARCH BE PER-
FORMED B
Y THE ORGANIZATION.—In the case of a qualified 
organization described in subparagraph (C) or (D) of para-
graph (6), clause (ii) of subparagraph (A) shall not apply. 
"(3) QUALIFIED ORGANIZATION BASE PERIOD AMOUNT.—For pur-
poses of this subsection, the term 'qualified organization base 
period amount' means an amount equal to the sum of^ 
"(A) the minimum basic research amount, plus 
"(B) the maintenance-of-effort amount. 
"(4) MINIMUM BASIC RESEARCH AMOUNT.—For purposes of this 
subsection— 
"(A) IN GENERAL.—The term 'minimum basic research 
amount' means an amount equal to the greater of— 
"(i) 1 percent of the average of the sum of amounts 
paid or incurred during the base period for— 
"(I) any in-house research expenses, and 
"(II) any contract research expenses, or 
"(ii) the amounts treated as contract research ex-
penses during the base period by reason of this subsec-
tion (as in effect during the base period). 
"(B) FLOOR AMOUNT.—Except in the case of a taxpayer 
which was in existence during a taxable year (other than a 
short taxable year) in the base period, the minimum basic 
research amount for any base period shall not be less than 
50 percent of the basic research payments for the taxable 
year for which a determination is being made under this 
subsection. 
"(5) MAINTENANCE-OF-EFFORT AMOUNT.—For purposes of this 
subsection— 
"(A) IN GENERAL.—The term 
'maintenance-of-effort 
amount' means, with respect to any taxable year, an 
amount equal to the excess (if any) o
f
— 
"(i) an amount equal to— 
"(I) the average of the nondesignated university 
contributions paid by the taxpayer during the base 
period, multiplied by 
"(II) the cost-of-living adjustment for the cal-
endar year in which such taxable year begins, over 
"(ii) the amount of nondesignated university con-
tributions paid by the taxpayer during such taxable 
year. 
"(B) 
NONDESIGNATED UNIVERSITY CONTRIBUTIONS.—For 
purposes of this paragraph, the term 
'nondesignated 
university contribution' means any amount paid by a tax-
payer to any qualified organization described in paragraph 
(6XA)-
"(i) for which a deduction was allowable under sec-
tion 170, and 
"(ii) which was not taken into account— 
"(I) in computing the amount of the credit under 
this section (as in effect during the base period) 
during any taxable year in the base period, or 
PUBLIC LAW 99-514—OCT. 22, 1986 
' 
100 STAT. 2177 
"(II) as a basic research payment for purposes of 
this section. 
"(C) COST-OF-LIVING ADJUSTMENT DEFINED.— 
"(i) IN GENERAL.—The cost-of-living adjustment for 
any calendar year is the cost-of-living adjustment for 
such calendar year determined under section 1(f)(3). 
"(ii) SPECIAL RULE WHERE BASE PERIOD ENDS IN A 
CALENDAR YEAR OTHER THAN 1983 OR 1984.—If the base 
period of any taxpayer does not end in 1983 or 1984, 
section 1(f)(3)(B) shall, for purposes of this paragraph, 
be applied by substituting the calendar year in which 
such base period ends for 1987. 
"(6) QUALIFIED ORGANIZATION.—For purposes of this subsec-
tion, the term 'qualified organization' means any of the follow-
ing organizations: 
"(A) 
EDUCATIONAL 
INSTITUTIONS.—Any 
educational 
organization which— 
"(i) is an institution of higher education (within the 
meaning of section 3304(f)), and 
"(ii) is described in section 170(b)(lKA)(ii). 
"(B) CERTAIN SCIENTIFIC RESEARCH ORGANIZATIONS.—Any 
organization not described in subparagraph (A) which— 
"(i) is described in section 501(cX3) and is exempt 
from tax under section 501(a), 
"(ii) is organized and operated primarily to conduct 
scientific research, and 
"(iii) is not a private foundation. 
"(C) 
SCIENTIFIC 
TAX-EXEMPT 
ORGANIZATIONS.—Any 
organization which— 
"(i) is described in— 
"(I) section 501(c)(3) (other than a private founda-
tion), or 
"(II) section 501(c)(6), 
"(ii) is exempt from tax under section 501(a), 
"(iii) is organized and operated primarily to promote 
scientific research by qualified organizations described 
in subparagraph (A) pursuant to written research 
agreements, and 
"(iv) currently expends— 
"(I) substantially all of its funds, or 
"(II) substantially all of the basic research pay-
ments received by it, 
for grants to, or contracts for basic research with, an 
organization described in subparagraph (A). 
"(D) CERTAIN GRANT ORGANIZATIONS.—Any organization 
not described in subparagraph (B) or (C) which— 
"(i) is described in section 501(c)(3) and is exempt 
from tax under section 501(a) (other than a private 
foundation), 
"(ii) is established and maintained by an organization 
established before July 10, 1981, which meets the 
requirements of clause (i), 
"(iii) is organized and operated exclusively for the 
purpose of making grants to organizations described in 
subparagraph (A) pursuant to written research agree-
ments for purposes of basic research, and 
100 STAT. 2178 
* 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(iv) makes an election, revocable only with the con-
sent of the Secretary, to be treated as a private founda-
tion for purposes of this title (other than section 4940, 
relating to excise tax based on investment income). 
"(7) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
subsection— 
"(A) BASIC RESEARCH.—The term 'basic research' means 
any original investigation for the advancement of scientific 
knowledge not having a specific commercial objective, 
except that such term shall not include— 
"(i) basic research conducted outside of the United 
States, and 
"(ii) basic research in the social sciences, arts, or 
humanities. 
"(B) BASE PERIOD.—The term 'base period' means the 3-
taxable-year period ending with the taxable year imme-
diately preceding the 1st taxable year of the taxpayer 
beginning after December 31,1983. 
"(C) 
EXCLUSION FROM INCREMENTAL CREDIT CALCULA-
TION.—For purposes of determining the amount of credit 
allowable under subsection (a)(1) for any taxable year, the 
amount of the basic research payments taken into account 
under subsection (a)(2)— 
"(i) shall not be treated as qualified research ex-
penses under subsection (aXl)(A), and 
"(ii) shall not be included in the computation of base 
period research expenses under subsection (a)(1)(B). 
"(D) TRADE OR BUSINESS QUALIFICATION.—For purposes of 
applying subsection (bXD to this subsection, any basic re-
search payments shall be treated as an amount paid in 
carrying on a trade or business of the taxpayer in the 
taxable year in which it is paid (without regard to the 
provisions of subsection (bX3)(B)). 
"(E) CERTAIN CORPORATIONS NOT ELIGIBLE.—The term 'cor-
poration' shall not include— 
"(i) an S corporation, 
"(ii) a personal holding company (as defined in sec-
tion 542), or 
"(iii) a service organization (as defined in section 
414(mX3))." 
(d) RESEARCH CREDIT TREATED AS OTHER BUSINESS CREDITS.— 
(1) IN GENERAL.—Section 38(b) (relating to current year busi-
ness credit), as amended by this Act, is amended by striking out 
"plus" at the end of paragraph (2), by striking out the period at 
the end of paragraph (3) and inserting in lieu thereof ", plus", 
and by adding at the end thereof the following new paragraph: 
"(4) the research credit determined under section 41(a)." 
(2) TRANSFER OF RESEARCH CREDIT TO SUBPART RELATING TO 
BUSINESS CREDITS.—Section 30 (relating to credit for increasing 
research activities) is hereby transferred to subpart D of part IV 
of subchapter A of chapter 1 of the Internal Revenue (I!ode of 
1986 (as amended by this Act), inserted after section 40 of such 
Code, and redesignated as section 41 of such Code. 
(3) TECHNICAL AND CONFORMING AMENDMENTS.— 
(AXi) Subsections (b) and (c) of section 28 are each 
amended by striking out "section 30" each place it appears 
and inserting in lieu thereof "section 41". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2179 
(ii) Paragraph (2) of section 28(c) is amended by striking 
out "section 30(b)" and inserting in lieu thereof "section 
41(b)". 
(iii) Paragraph (4) of section 28(d) is amended by striking 
out "section 30(f)" and inserting in lieu thereof "section 
41(f)". 
(iv) Subparagraph (D) of section 2803X1) is amended by 
striking out "1985" and inserting in lieu thereof "1988". 
(B) Subsection (d) of section 38, as amended by this Act, is 
amended by inserting "41(a)," after "40(a),". 
(CXi) Subsection (d) of section 39 (relating to carryback 
and carry forward of unused credits) is amended by adding 
at the end thereof the following new paragraph: 
"(3) SIMILAR RULES FOR RESEARCH CREDIT.—Rules similar to 
the rules of paragraphs (1) and (2) shall apply to the credit 
allowable under section 30 (as in effect before the date of the 
enactment of the Tax Reform Act of 1986) except that— 
"(A) 'December 31, 1985' shall be substituted for 'Decem-
ber 31,1983' each place it appears, and 
"(B) 'January 1, 1986' shall be substituted for 'January 1, 
1984'." 
(ii) Subsection (g) of section 41 (relating to limitation 
based on amount of tax), as redesignated by this section, is 
amended to read as follows: 
"(g) SPECIAL RULE FOR PASS-THRU OF CREDIT.—In the case of an 
individual who— 
"(1) owns an interest in an unincorporated trade or business, 
"(2) is a partner in a partnership, 
"(3) is a beneficiary of an estate or trust, or 
"(4) is a shareholder in an S corporation, 
the amount determined under subsection (a) for any taxable year 
shall not exceed an amount (separately computed with respect to 
such person's interest in such trade or business or entity) equal to 
the amount of tax attributable to that portion of a person's taxable 
income which is allocable or apportionable to the person's interest 
in such trade or business or entity." 
(D) Subparagraph (B) of section 10800X2) (relating to 
reduction of tax attributes in title 11 C£ise or insolvency), as 
amended by this Act, is amended to read as follows: 
"(B) 
GENERAL BUSINESS CREDIT.—Any carryover to 
or 
from the taxable year of a discharge of an amount for 
purposes for determining the amount allowable as a credit 
under section 38 (relating to general business credit)." 
(E) Paragraph (3) of section 280COt)) is amended— 
(i) by striking out "section 30(fK5)" and inserting in 
lieu thereof "section 41(0(5)", 
(ii) by striking out "section 30(fKlXB)" and inserting 
in lieu thereof "section 41(fKlXB)", and 
(iii) by striking out "section 30(fXl)" and inserting in 
lieu thereof "section 41(0(1)". 
(F) Subsection (c) of section 381 is amended by striking 
out paragraph (25) and by redesignating paragraph (26) £is 
paragraph (25). 
(G) Section 936(hX5XCXiXIXa) (defining product area re-
search) is amended by striking out "section 3O0b)" and 
inserting in lieu thereof "section 41(b)". 
100 STAT. 2180 
PUBLIC LAW 99-514—OCT. 22, 1986 
, 
i 
(H) Section 6411 (relating to tentative carryback and 
refund adjustments) is amended— 
(i) by striking out "by a research credit carryback 
provided in section 30(gX2)" in subsection (a), 
(ii) by striking out "a research credit carryback or" 
in subsection (a), 
(iii) by striking out "(or, with respect to any portion 
of a business credit carryback attributable to a re-
search credit carryback from a subsequent taxable year 
within a period of 12 months from the end of such 
subsequent taxable year)" in subsection (a), and 
(iv) by striking out "unused research credit," each 
place it appears in subsections (a) and (b). 
(I) Subparagraph (C) of section 6511(dX6) (defining credit 
carryback) is amended by striking out "and any research 
credit carryback under section 30(gX2)". 
(J) The table of sections for subpart B of part IV of 
subchapter A of chapter 1 is amended by striking out the 
item relating to section 30. 
(K) The table of sections for subpart D of such part is 
amended by inserting after the item relating to section 40 
the following new item: 
"Sec. 41. Credit for increasing research activities." 
(e) DENIAL OF CREDIT WITH RESPECT TO AMOUNTS FOR CERTAIN 
LEASED PERSONAL PROPERTY.—Clause (iii) of section 4103X2XA) 
(defining in-house research expenses), as redesignated by subsection 
(d), is amended to read as follows: 
"(iii) under regulations prescribed by the Secretary, 
any amount paid or incurred to another person for the 
right to use computers in the conduct of qualified 
research." 
(f) DEDUCTION FOR CERTAIN CONTRIBUTIONS OF SCIENTIFIC RE-
SEARCH PROPERTY.—Clause (i) of section 170(eX4XB) (relating to spe-
cial rule for contributions of scientific property used for research) is 
amended to read as follows: 
"(i) the contribution is to an organization described 
in subparagraph (A) or subparagraph (B) of section 
41(eX6),". 
(g) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in this subsection (2), the 
amendments made by this section shall apply to taxable years 
beginning after December 31, 1985. 
(2) SUBSECTION (a).—The amendments made by subsection (a) 
shall apply to taxable years ending after December 31, 1985. 
(3) BASIC RESEARCH.—Section 41(aX2) of the Internal Revenue 
Code of 1986 (as added by this section), and the amendments 
made by subsection (cX2), shall apply to taxable years beginning 
after December 31,1986. 
SEC. 232. EXTENSION OF CREDIT FOR CLINICAL TESTING EXPENSES FOR 
CERTAIN DRUGS. 
Subsection (e) of section 28 (relating to termination) is amended by 
striking out "1987" and inserting in lieu thereof "1990". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2181 
Subtitle E—Changes in Certain Amortization 
Provisions 
SEC. 241. REPEAL OF 5-YEAR AMORTIZATION OF TRADEMARK AND 
TRADE NAME EXPENDITURES. 
(a) IN GENERAL.—Section 177 (relating to trademark and trade 
name expenditures) is hereby repealed. 
(b) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) Paragraph (3) of section 312(n) is amended by striking out 
", 177,". 
(2) Subsection (a) of section 1016 (relating to adjustments to 
basis) is amended by striking out paragraph (16) and by re-
designating paragraphs (17) through (27) as paragraphs (16) 
through (26), respectively. 
(3) The table of sections for part VI of subchapter B of chapter 
1 is amended by striking out the item relating to section 177. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to expenditures 
paid or incurred after December 31, 1986. 
(2) TRANSITIONAL RULE.—The amendments made by this sec-
tion shall not apply to any expenditure incurred— 
(A) pursuant to a binding contract entered into before 
March 2,1986, or 
(B) with respect to the development, protection, expan-
sion, registration, or defense of a trademark or trade name 
commenced before March 2, 1986, but only if not less than 
the lesser of $1,000,000 or 5 percent of the aggregate cost of 
such development, protection, expansion, registration, or 
defense has been incurred or committed before such date. 
The preceding sentence shall not apply to any expenditure with 
respect to a trademark or trade name placed in service after 
December 31,1987. 
SEC. 242. REPEAL OF AMORTIZATION OF RAILROAD GRADING AND 
TUNNEL BORES. 
(a) IN GENERAL.—Section 185 (relating to amortization of railroad 
grading and tunnel bores) is hereby repealed. 
(b) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) Subparagraph (B) of section 1082(a)(2) is amended by strik-
ing out", 185,^'. 
(2) Paragraph (3) of section 1250(b) (defining additional depre-
ciation) is amended by inserting "(as in effect before its repeal 
by the Tax Reform Act of 1986)" after "185". 
(3) The table of sections for part VI of subchapter B of chapter 
1 is amended by striking out the item relating to section 185. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to that portion of 
the basis of any property which is attributable to expenditures 
paid or incurred after December 31,1986. 
(2) TRANSITIONAL RULE.—The amendments made by this sec-
tion shall not apply to any expenditure incurred— 
(A) pursuant to a binding contract entered into before 
March 2, 1986, or 
100 STAT. 2182 
PUBLIC LAW 99-514—OCT. 22, 1986 
(B) with respect to any improvement commenced before 
March 2, 1986, but only if not less than the lesser of 
$1,000,000 or 5 percent of the aggregate cost of such 
improvement has been incurred or committed before such 
date. 
The preceding sentence shall not apply to any expenditure with 
respect to an improvement placed in service after December 31, 
1987. 
SEC. 243. DEDUCTION FOR BUS AND FREIGHT FORWARDER OPERATING 
AUTHORITY. 
. ">. > 
(a) Bus OPERATING AUTHORITY.— 
(1) IN GENERAL.—Subject to the modifications contained in 
paragraph (2), section 266 of the Economic Recovery Tax Act of 
1981 shall be applied as if the term "motor carrier operating 
authority" included a bus operating authority. 
(2) MODIFICATIONS.—For purposes of paragraph (1), section 266 
of such Act shall be applied— 
(A) by substituting "November 19, 1982" for "July 1, 
1980" each place it appears, and 
(B) by substituting "November 1982" for "July 1980" in 
subsection (a) thereof. 
(3) B u s OPERATING AUTHORITY DEFINED.—For purpOSeS of this 
subsection and section 266 of such Act, the term "bus operating 
authority" means— 
(A) a certificate or permit held by a motor common or 
contract carrier of passengers which was issued pursuant to 
subchapter II of chapter 109 of title 49, United States Code, 
and 
(B) a certificate or permit held by a motor carrier au-
thorizing the transportation of passengers, as a common 
carrier, over regular routes in intrastate commerce which 
was issued by the appropriate State agency. 
(b) FREIGHT FORWARDER OPERATING AUTHORITY.— 
(1) IN GENERAL.—Subject to the modifications contained in 
paragraph (2), section 266 of the Economic Recovery Tax Act of 
1981 shall be applied as if subsection Ot)) thereof contained "or a 
freight forwarder" after "contract carrier of property". 
(2) MODIFICATIONS.—The modifications referred to in this 
paragraph are: 
(A) 60-MONTH PERIOD TO BEGIN IN 1987.—The 60-month 
period referred to in section 266(a) of such Act shall begin 
with the later of— 
(i) the deregulation month, or 
(ii) at the election of the taxpayer, the 1st month of 
the taxpayer's 1st taxable year beginning after the 
deregulation month. 
(B) AUTHORITY MUST BE HELD AS OF BEGINNING OF 60-
MONTH PERIOD.—A motor carrier operating authority shall 
not be taken into account unless such authority is held by 
the taxpayer at the beginning of the 60-month period ap-
plicable to the taxpayer under subparagraph (A). 
(C) ADJUSTED BASIS NOT TO EXCEED ADJUSTED BASIS AT 
BEGINNING OF 60-MONTH PERIOD.—The adjusted basis taken 
into account with respect to any motor carrier operating 
authority shall not exceed the adjusted basis of such 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2183 
authority as of the beginning of the 60-month period ap-
plicable to the taxpayer under subparagraph (A). 
(3) DEREGULATION MONTH.—For purposes of this section, the 
term "deregulation month" means the month in which the 
Secretary of the Treasury or his delegate determines that a 
Federal law has been enacted which deregulates the freight 
forwarding industry. 
(c) SPECIAL RULE FOR MOTOR CARRIER OPERATING AUTHORITY.—In 
the case of a corporation which was incorporated on December 29, 
1969, in the State of Delaware, notwithstanding any other provision 
of law, there shall be allowed as a deduction for the taxable year of 
the taxpayer beginning in 1980 an amount equal to $2,705,188 for its 
entire loss due to a decline in value of its motor carrier operating 
authority by reason of deregulation. 
(d) EFFECTIVE DATES.— 
(1) Bus OPERATING AUTHORITY.— 
(A) IN GENERAL.—Subsection (a) shall apply to taxable 
years ending after November 18,1982. 
(B) STATUTE OF LIMITATIONS.—If refund or credit of any 
overpayment of tax resulting from subsection (a) is pre-
vented at any time on or before the date which is 1 year 
after the date of the enactment of this Act by the operation 
of any law or rule of law (including res judicata), refund or 
credit of such overpayment (to the extent attributable to 
the application of such subsection) may, notwithstanding 
such law or rule of law, be made or allowed if claim 
therefore is filed on or before the date which is 18 months 
after such date of enactment. 
(2) FREIGHT FORWARDER OPERATING AUTHORITY.—Subsection 
(b) shall apply to taxable years ending after the month preced-
ing the deregulation month. 
SEC. 244. TREATMENT OF EXPENDITURES FOR REMOVAL OF ARCHITEC-
TURAL BARRIERS TO THE HANDICAPPED AND ELDERLY 
MADE PERMANENT. 
Paragraph (2) of section 190(d) (relating to expenditures to remove 
architectural and transportation barriers to the handicapped and 
elderly) is amended by striking out "1983, and before January 1, 
1986" and inserting in lieu thereof "1983" 
Subtitle F—Provisions Relating to Real Estate 
SEC. 251. MODIFICATION OF INVESTMENT TAX CREDIT FOR REHABILITA-
TION EXPENDITURES. 
(a) REDUCTION IN PERCENTAGE.—Paragraph (4) of section 460t>) 
(relating to rehabilitation percentage) is amended to read as follows: 
"(4) REHABILITATION PERCENTAGE.— 
"(A) IN GENERAL.—The term 'rehabilitation percentage' 
means— 
"(i) 10 percent in the case of qualified rehabilitation 
expenditures with respect to a qualified rehabilitated 
building other than a certified historic structure, and 
"(ii) 20 percent in the case of such expenditure with 
respect to a certified historic structure. 
"(B) REGULAR AND ENERGY PERCENTAGES NOT TO APPLY.— 
The regular percentage and the energy percentages shall 
100 STAT. 2184 
PUBLIC LAW 99-514—OCT. 22, 1986 
not apply to that portion of the basis of any property which 
is attributable to qualified rehabilitation expenditures." 
(b) SPECIAL RULES FOR QUALIFIED REHABIUTATED BUILDINGS.— 
Subsection (g) of section 48 (relating to special rules for qualified 
rehabilitated buildings) is amended to read as follows: 
"(g) SPECIAL RULES FOR QUAUFIED REHABILITATED BUILDINGS.—For 
purposes of this subpart— 
"(1) QUAUFIED REHABIUTATED BUILDING.—For purposes of this 
subsection— 
"(A) IN GENERAL.—The term 'qualified rehabilitated 
building' means any building (and its structural compo-
nents) i
f
— 
"(i) such building has been substantially rehabili-
tated, 
"(ii) such building was placed in service before the 
beginning of the rehabilitation, and 
"(iii) in the case of any building other than a certified 
historic structure, in the rehabilitation process— 
"(I) 50 percent or more of the existing external 
walls of such building are retained in place as 
external walls, 
"(II) 75 percent or more of the existing external 
walls of such building are retained in place as 
internal or external walls, and 
"(III) 75 percent or more of the existing internal 
structural framework of such building is retained 
in place. 
"(B) BUILDING MUST BE FIRST PLACED IN SERVICE BEFORE 
1936.—In the case of a building other than a certified 
historic structure, a building shall not be a qualified re-
habilitated building unless the building was first placed in 
service before 1936. 
"(C) SUBSTANTIALLY REHABIUTATED DEFINED.— 
"(i) IN GENERAL.—For purposes of subparagraph 
(AXi), a building shall be treated as having been 
substantially rehabilitated only if the qualified re-
habilitation expenditures during the 24-month period 
selected by the taxpayer (at the time and in the 
manner prescribed by regulations) and ending with or 
within the taxable year exceed the greater o
f
— 
"(I) the adjusted basis of such building (and its 
structural components), or 
"(II) $5,000. 
The adjusted basis of the building (and its structural 
components) shall be determined sis of the beginning of 
the 1st day of such 24-month period, or of the holding 
period of the building, whichever is later. For purposes 
of the preceding sentence, the determination of the 
beginning of the holding period shall be made without 
regard to any reconstruction by the taxpayer in connec-
tion with the rehabilitation. 
"(ii) SPECIAL RULE FOR PHASED REHABILITATION.—In 
the case of any rehabilitation which may reasonably be 
expected to be completed in phases set forth in ar-
chitectural plans and specifications completed before 
the rehabilitation begins, clause (i) shall be applied by 
substituting *60-month period' for '24-month period . 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2185 
"(iii) LESSEES.—The Secretary shall prescribe by 
regulation rules for applying this subparagraph to les-
sees. 
"(D) 
RECONSTRUCTION.—Rehabilitation 
includes 
re-
construction. 
"(2) 
QUALIFIED REHABIUTATION EXPENDITURE DEFINED.—For 
purposes of this section— 
"(A) IN GENERAL.—The term 'qualified rehabilitation 
expenditure' means any amount properly chargeable to 
capital account— 
"(i) for property for which depreciation is allowable 
under section 168 and which is— 
"(I) nonresidential real property, 
"(II) residential rental property, 
"(III) real property which has a class life of more 
than 12.5 years, or 
"(IV) an addition or improvement to property or 
housing described in subclause (I), (II), or (III), and 
"(ii) in connection with the rehabilitation of a quali-
fied rehabilitated building. 
"(B) CERTAIN EXPENDITURES NOT INCLUDED.—The term 
'qualified rehabilitation expenditure' does not include— 
"(i) STRAIGHT LINE DEPRECIATION MUST BE USED.—Any 
expenditure with respect to which the taxpayer does 
not use the straight line method over a recovery period 
determined under subsection (c) or (g) of section 168. 
The preceding sentence shall not apply to any expendi-
ture to the extent the alternative depreciation system 
of section 168(g) applies to such expenditure by reason 
of subparagraph (B) or (C) of section 168(gXl). 
"(ii) COST OF ACQUISITION.—The cost of acquiring any 
building or interest therein. 
"(iii) ENLARGEMENTS.—Any expenditure attributable 
to the enlargement of an existing building. 
"(iv) 
CERTIFIED 
HISTORIC 
STRUCTURE, 
ETC.—Any 
expenditure attributable to the rehabilitation of a cer-
tified historic structure or a building in a registered 
historic district, unless the rehabilitation is a certified 
rehabilitation (within the meaning of subparagraph 
(O). The preceding sentence shall not apply to a build-
ing in a registered historic district i
f
— 
"(I) such building was not a certified historic 
structure, 
"(II) the Secretary of the Interior certified to the 
Secretary that such building is not of historic 
significance to the district, and 
"(III) if the certification referred to in subclause 
(II) occurs after the beginning of the rehabilitation 
of such building, the taxpayer certifies to the Sec-
retary that, at the beginning of such rehabilitation, 
he in good faith was not aware of the requirement 
of subclause (II). 
"(v) TAX-EXEMPT USE PROPERTY.— 
"(I) IN GENERAL.—Any expenditure in connection 
with the rehabilitation of a building which is 
allocable to that portion of such building which is 
100 STAT. 2186 
PUBLIC LAW 99-514—OCT. 22, 1986 
(or may reasonably be expected to be) tax-exempt 
use property (within the meaning of section 168(h)). 
"(II) CLAUSE NOT TO APPLY FOR PURPOSES OF PARA-
GRAPH (i)(c).—This clause shall not apply for 
purposes of determining under paragraph dXC) 
whether a building has been substantially rehabili-
tated, 
"(vi) EXPENDITURES OF LESSEE.—Any expenditure of a 
lessee of a building if, on the date the rehabilitation is 
completed, the remaining term of the lease (determined 
without regard to any renewal periods) is less than the 
recovery period determined under section 168(c). 
"(C) CERTIFIED REHABIUTATION.—For purposes of subpara-
graph (B), the term 'certified rehabilitation' means any 
rehabilitation of a certified historic structure which the 
Secretary of the Interior has certified to the Secretary as 
being consistent with the historic character of such prop-
erty or the district in which such property is located. 
' (D) NONRESIDENTIAL REAL PROPERTY; RESIDENTIAL RENTAL 
PROPERTY; CLASS UFE.—For purposes of subparagraph (A), 
the terms 'nonresidential real property', 'residential rental 
property', and 'class life' have the respective meanings 
given such terms by section 168. 
"(3) CERTIFIED HISTORIC STRUCTURE DEFINED.—For purposes of 
this subsection— 
"(A) IN GENERAL.—The term 'certified historic structure' 
means any building (and its structural 
components) 
which— 
"(i) is listed in the National Register, or 
"(ii) is located in a registered historic district and is 
certified by the Secretary of the Interior to the Sec-
retary as being of historic significance to the district. 
"(B) REGISTERED HISTORIC DISTRICT.—The term 'registered 
historic district' means— 
"(i) any district listed in the National Register, and 
"(ii) any district— 
"(I) which is designated under a statute of the 
appropriate State or local government, if such stat-
ute is certified by the Secretary of the Interior to 
the Secretary as containing criteria which will 
substantially achieve the purpose of preserving 
and rehabilitating buildings of historic significance 
to the district, and 
"(II) which is certified by the Secretary of the 
Interior to the Secretary as meeting substantially 
all of the requirements for the listing of districts in 
the National Register. 
"(4) PROPERTY TREATED AS NEW SECTION 38 PROPERTY.—Prop-
erty which is treated as section 38 property by reason of subsec-
tion (aXlXE) shall be treated as new section 38 property." 
(c) BASIS ADJUSTMENT FOR CERTIFIED HISTORIC STRUCTURES.—Para-
graph (3) of section 48(q) (relating to special rule for qualified 
rehabilitated buildings) is amended by striking out "other than a 
certified historic structure". 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as otherwise provided in this subsec-
tion, the amendments made by this section shall apply to 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2187 
property placed in service after December 31, 1986, in taxable 
years ending after such date. 
(2) GENERAL TRANSITIONAL RULE.—The amendments made by 
this section and section 201 shall not apply to any property 
placed in service before January 1, 1994, if such property is 
placed in service as part of— 
(A) a rehabilitation which was completed pursuant to a 
written contract which was binding on March 1, 1986, or 
(B) a rehabilitation incurred in connection with property 
(including any leasehold interest) acquired before March 2, 
1986, or acquired on or after such date pursuant to a 
written contract that was binding on March 1, 1986, if— 
(i) the rehabilitation was completed pursuant to a 
written contract that was binding on March 1, 1986, 
(ii) parts 1 and 2 of the Historic Preservation Certifi-
cation Application were filed with the Department of 
the Interior (or its designee) before March 2, 1986, or 
(iii) the lesser of $1,000,000 or 5 percent of the cost of 
the rehabilitation is incurred before March 2, 1986, or 
is required to be incurred pursuant to a written con-
tract which was binding on March 1,1986. 
(3) CERTAIN ADDITIONAL REHABIUTATIONS.—The amendments 
made by this section and section 201 shall not apply to— 
(A) the rehabilitation of 8 bathhouses within the Hot 
Springs National Park or of buildings in the CJentral 
Avenue Historic District at such Park, 
(B) the rehabilitation of the Upper Pontabla Building in 
New Orleans, Louisiana, 
(C) the rehabilitation of at least 60 buildings listed on the 
National Register at the Frankford Arsenal, 
(D) the rehabilitation of De Baliveriere Arcade, St. Louis 
(Dentre, and Drake Apartments in Missouri, 
(E) the rehabilitation of The Tides in Bristol, Rhode 
Island, 
(F) the rehabilitation and renovation of the Outlet Com-
pany building and garage in Providence, Rhode Island, 
(G) the rehabilitation of 10 structures in Harrisburg, 
Pennsylvania, with respect to which the Harristown Devel-
opment Corporation was designated redeveloper and re-
ceived an option to acquire title to the entire project site for 
$1 on June 27,1984, 
(H) the rehabilitation of a project involving the renova-
tion of 3 historic structures on the Minneapolis riverfront, 
with respect to which the developer of the project entered 
into a redevelopment agreement with a municipality dated 
January 4, 1985, and industrial development bonds were 
sold in 3 separate issues in May, July, and October 1985, 
(I) the rehabilitation of a bank's main office facilities of 
approximately 120,000 square feet, in connection with 
which the bank's board of directors authorized a $3,300,000 
expenditure for the renovation and retrofit on March 20, 
1984, 
(J) the rehabilitation of 10 warehouse buildings built 
between 1906 and 1910 and purchased under a contract 
dated February 17,1986, 
(K) the rehabilitation of a facility which is customarily 
used for conventions and sporting events if an analysis of 
100 STAT. 2188 
PUBLIC LAW 99-514—OCT. 22, 1986 
operations and recommendations of utilization of such facil-
ity was prepared by a certified public accounting firm 
pursuant to an engagement authorized on March 6, 1984, 
and presented on June 11, 1984, to officials of the city in 
which such facility is located, 
(L) Mount Vernon Mills in Columbia, South Carolina, 
(M) the Barbara Jordan II Apartments, 
(N) the rehabilitation of the Federal Building and Post 
Office, 120 Hanover Street, Manchester, New Hampshire, 
(0) the rehabilitation of the Charleston 
Waterfront 
project in South Carolina, 
(P) the Hayes Mansion in San Francisco, 
(Q) the renovation of a facility owned by the National 
Railroad Passenger Corporation ("Amtrak") for which 
project Amtrak engaged a development team by letter 
agreement dated August 23, 1985, as modified by letter 
agreement dated September 9,1985, 
(R) the rehabilitation of a structure or its components 
which is listed in the National Register of Historic Places, is 
located in Allegheny County, Pennsylvania, will be substan-
tially rehabilitated (as defined in section 48(gXlXC) prior to 
amendment by this Act), prior to December 31, 1989; and 
was previously utilized as a market and an auto dealership, 
(S) The Bellevue Stratford Hotel in Philadelphia, Penn-
sylvania, 
(T) the Dixon Mill Housing project in Jersey City, New 
Jersey, 
(U) Motor Square Garden, 
(V) the Blackstone Apartments, and the Shriver-Johnson 
building, in Sioux Falls, South Dakota, 
(W) the Holy Name Academy in Spokane, Washington, 
(X) the Nike/Clemson Mill in Exeter, New Hampshire, 
(Y) the Central Bank Building in Grand Rapids, Michi-
gan, and 
(Z) the Heritage Hotel, in the City of Marquette, Michi-
gan. 
(4) ADDITIONAL REHABILITATIONS.—The amendments made by 
this section and section 201 shall not apply to— 
(A) the Fort Worth Town Square Project in Texas, 
(B) the American Youth Hostel in New York, New York, 
(C) The Riverwest Loft Development (including all three 
phases, two of which do not involve rehabilitations), 
(D) the Gaslamp Quarter Historic District in California, 
(E) the Eberhardt & Ober Brewery, in Pennsylvania, 
(F) the Captain's Walk Limited Partnership-Harris Place 
Development, in Connecticut, 
(G) the Velvet Mills in Connecticut, 
(H) the Roycroft Inn, in New York, 
(1) Old Main Villeige, in Mankato, Minnesota, 
(J) the Washburn-Crosby A Mill, in Minneapolis, Min-
nesota, 
(K) the Lakeland marbel Arcade in Lakeland, Florida, 
(L) the Willard Hotel, in Washington, D.C., 
(M) the H. P. Lau Building in Lincoln, Nebraska, 
(N) the Starks Building, in Louisville, Kentucky, 
(O) the Bellevue High School, in Bellevue, Kentucky, 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2189 
(P) the Major Hampden Smith House, in Owensboro, 
Kentucky, 
(Q) the Doe Run Inn, in Brandenburg, Kentucky, 
(R) the State National Bank, in Frankfort, Kentucky, 
(S) the Captain Jack House, in Fleming, Kentucky, 
(T) the Elizabeth Arlinghaus House, in Louisville, Ken-
tucky, 
(U) Limerick Shamrock, in Louisville, Kentucky, 
(V) the Robert Mills Project, in South Carolina, 
(W) the 620 Project, consisting of 3 buildings, in Ken-
tucky, 
(X) the Warrior Hotel, Ltd., the first two floors of the 
Martin Hotel, and the 105,000 square foot warehouse con-
structed in 1910, all in Sioux City, Iowa, 
(Y) the waterpark condominium residential project, to the 
extent of $2 million of expenditures, and 
(Z) the Apollo and Bishop Building Complex on 125th 
Street, the Bigelow-Hartford Carpet Mill in New York, New 
York. 
(5) REDUCTION IN CREDIT FOR PROPERTY UNDER TRANSITIONAL 
RULES.—In the case of property placed in service after Decem-
ber 31, 1986, and to which the amendments made by this section do 
not apply, subparagraph (A) of section 460t>X4) of the Internal 
Revenue Code of 1954 (as in effect before the enactment of this 
Act) shall be applied— 
(A) by substituting "10 percent" for "15 percent", and 
(B) by substituting "13 percent" for "20 percent". 
(6) 
EXPENSING OF REHABIUTATION EXPENDITURES FOR THE 
FRANKFORD ARSENAL.—In the CEise of any expenditures paid or 
incurred in connection with the rehabilitation of the Frankford 
Arsenal during the 8-year period beginning on January 1, 1987, 
such expenditures (including expenditures for repair and 
maintenance of the building and property) shall be allowable as 
a deduction in the taxable year in which paid or incurred in an 
amount not in excess of the submissions made by the taxpayer 
before September 16,1986. 
SEC. 252. LOW-INCOME HOUSING CREDIT. 
(a) IN GENERAL.—Subpart D of part IV of subchapter A of chapter 
1 (relating to business credits) is amended by adding at the end 
thereof the following new section: 
"SEC. 42. LOW-INCOME HOUSING CREDIT. 
"(a) IN GENERAL.—For purposes of section 38, the amount of the 
low-income housing credit determined under this section for any 
taxable year in the credit period shall be an amount equal to— 
"(1) the applicable percentage of 
"(2) the qualified basis of each qualified low-income building. 
"Ot)) APPUCABLE PERCENTAGE: 70 PERCENT PRESENT VALUE CREDIT 
F
O
R CERTAIN NEW BUILDINGS; 30 PERCENT PRESENT VALUE CREDIT 
F
O
R CERTAIN OTHER BUILDINGS.—For purposes of this section— 
"(1) BUILDING PLACED IN SERVICE DURING 1987.—In the case of 
any qualified low-income building placed in service by the 
taxpayer during 1987, the term 'applicable percentage' means— 
"(A) 9 percent for new buildings which are not federally 
subsidized for the taxable year, or 
"(B) 4 percent for— 
100 STAT. 2190 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(i) new buildings which are federally subsidized for 
the taxable year, and 
"(ii) existing buildings. 
"(2) BUILDINGS PLACED IN SERVICE AFTER 1987.— 
"(A) IN GENERAL.—In the case of any qualified low-
income building placed in service by the taxpayer after 
1987, the term 'applicable percentage' means the appro-
priate percentage prescribed by the Secretary for the 
month in which such building is placed in service. 
"(B) METHOD OF PRESCRIBING PERCENTAGES.—The percent-
ages prescribed by the Secretary for any month shall be 
percentages which will yield over a 10-year period amounts 
of credit under subsection (a) which have a present value 
equal to— 
"(i) 70 percent of the qualified beisis of a building 
described in paragraph (IXA), and 
"(ii) 30 percent of the qualified basis of a building 
described in paragraph (IXB). 
"(C) METHOD OF DISCOUNTING.—The present value under 
subparagraph (B) shall be determined— 
"(i) as of the last day of the 1st year of the 10-year 
period referred to in subparagraph (B), 
"(ii) by using a discount rate equal to 72 percent of 
the average of the annual Federal mid-term rate and 
the annual Federal long-term rate applicable under 
section 1274(dXl) to the month in which the building 
w£is placed in service and compounded annually, and 
"(iii) by assuming that the credit allowable under 
this section for any year is received on the last day of 
such year. 
"(3) CROSS REFERENCE.— 
"For treatment of certain rehabilitation expenditures as separate new 
buildings, see subsection (e).— 
"(c) QUAUFIED BASIS; QUAUFIED LOW-INCOME BUILDING.—For pur-
poses of this section— 
"(1) QUAUFIED BASIS.— 
"(A) DETERMINATION.—The qualified basis of any quali-
fied low-income building for any taxable year is an amount 
equal to— 
"(i) the applicable fraction (determined as of the close 
of such t£ixable year) of 
"(ii) the eligible basis of such building (determined 
under subsection (dX5)). 
"(B) APPUCABLE FRACTION.—For purposes of subpara-
graph (A), the term 'applicable fraction' means the smaller 
of the unit fraction or the floor space fraction. 
"(C) UNIT FRACTION.—For purposes of subparagraph (B), 
the term 'unit fraction' means the fraction— 
"(i) the numerator of which is the number of low-
income units in the building, and 
"(ii) the denominator of which is the number of 
residential rental units (whether or not occupied) in 
such building. 
"(D) FLOOR SPACE FRACTION.—For purposes of subpara-
graph (B), the term 'floor space fraction' means the frac-
tion— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2191 
"(i) the numerator of which is the total floor space of 
the low-income units in such building, and 
"(ii) the denominator of which is the total floor space 
of the residential rental units (whether or not occupied) 
in such building. 
"(2) QuAUFiED LOW-INCOME BUILDING.—The term 'qualified 
low-income building' means any building— 
"(A) which at all times during the compliance period with 
respect to such building is part of a qualified low-income 
housing project, and 
"(B) to which the amendments made by section 201(a) of 
the Tax Reform Act of 1986 apply. 
"(d) EuGiBLE BASIS.—For purposes of this section— 
"(1) NEW BUILDINGS.—The eligible basis of a new building is 
its adjusted basis. 
"(2) EXISTING BUILDINGS.— 
"(A) IN GENERAL.—The eligible basis of an existing build-
ing is— 
"(i) in the case of a building which meets the require-
ments of subparagraph (B), the sum o
f
— 
"(I) the portion of its adjusted basis attributable 
to its acquisition cost, plus 
"(II) amounts chargeable to capital account and 
incurred by the taxpayer (before the close of the 
1st taxable year of the credit period for such build-
ing) for property (or additions or improvements to 
property) of a character subject to the allowance 
for depreciation, and 
"(ii) zero in any other case. 
"(B) REQUIREMENTS.—A building meets the requirements 
of this subparagraph i
f
— 
"(i) the building is acquired by purchase (as defined 
in section 179(dX2)), 
"(ii) there is a period of at least 10 years between the 
date of its acquisition by the taxpayer and the later 
of— 
"(I) the date the building was last placed in 
service, or 
"(II) the date of the most recent nonqualified 
substantial improvement of the building, and 
"(iii) the building wgis not previously placed in serv-
ice by the taxpayer or by any person who was a related 
person with respect to the taxpayer as of the time 
previously placed in service. 
"(C) ACQUISITION COST.—For purposes of subparsigraph (A), 
the cost of any building shall not include so much of the basis of 
such building as is determined by reference to the basis of other 
property held at any time by the person acquiring the building. 
"(D) SPECIAL RULES FOR SUBPARAGRAPH (B) .— 
"(i) NONQUAUFIED SUBSTANTIAL IMPROVEMENT.—For pur-
poses of subparagraph (BXii)— 
"(I) IN GENERAL.—The term 'nonqualified substantial 
improvement' means any substantial improvement if 
section 167(k) was elected with respect to such improve-
ment or section 168 (as in effect on the day before the 
date of the enactment of the Tax Reform Act of 1986) 
applied to such improvement. 
100 STAT. 2192 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(ID DATE OF SUBSTANTIAL IMPROVEMENT.—The date 
of a substantial improvement is the last day of the 24-
month period referred to in subclause (III). 
"(Ill) 
SUBSTANTIAL 
IMPROVEMENT.—The 
term 
'substantial improvement' means the improvements 
added to capital account with respect to the building 
during any 24-month period, but only if the sum of the 
amounts added to such account during such period 
equals or exceeds 25 percent of the adjusted basis of the 
building (determined without regard to paragraphs (2) 
and (3) of section 1016(a)) as of the 1st day of such 
period. 
"(ii) SPECIAL RULE FOR NONTAXABLE EXCHANGES.—For pur-
poses of determining under subparagraph (BXii) when a 
building was last placed in service, there shall not be taken 
into account any placement in service in connection with 
the acquisition of the building in a transaction in which the 
basis of the building in the hands of the person acquiring it 
is determined in whole or in part by reference to the 
adjusted basis of such building in the hands of the person 
from whom aquired. 
"(iii) RELATED PERSON, ETC.— 
"(I) APPLICATION OF SECTION 179.—For purposes of 
subparagraph (BXi), section 179(d) shall be applied by 
substituting '10 percent' for '50 percent' in section 
267(b) and 707(b) and in section 179(bX7). 
"(II) RELATED PERSON.—For purposes of subpara-
graph (BXiii), a person (hereinafter in this subclause 
referred to as the 'related person') is related to any 
person if the related person bears a relationship to such 
person specified in section 267(b) or 707(bXl), or the 
related person and such person are engEiged in trades 
or businesses under common control (within the mean-
ing of subsections (a) and (b) of section 52). For purposes 
of the preceding sentence, in applying section 267(b) or 
7070t)Xl), '10 percent' shall be substituted for '50 per-
cent'. 
"(3) EUGIBLE BASIS REDUCED WHERE DISPROPORTIONATE STAND-
ARDS FOR UNITS.—The eligible basis of any building shall be 
reduced by an amount equal to the portion of the adjusted basis 
of the building which is attributable to residential rental units 
in the building which are not low-income units and which are 
above the average quality standard of the low-income units in 
the building. 
"(4) SPECIAL RULES RELATING TO DETERMINATION OF ADJUSTED 
BASIS.—For purposes of this subsection— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the adjusted basis of any building shall be determined 
without regard to the adjusted basis of any property which 
is not residential rental property. 
"(B) BASIS OF PROPERTY IN COMMON AREAS, ETC., IN-
CLUDED.—The adjusted basis of any building shall be deter-
mined by taking into account the adjusted basis of property 
(of a character subject to the allowance for depreciation) 
used in common areas or provided 2is comparable amenities 
to all residential rental units in such building. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2193 
"(C) No REDUCTION F
O
R DEPRECIATION.—The adjusted 
basis of any building shall be determined without regard to 
paragraphs (2) and (3) of section 1016(a). 
"(5) ELIGIBLE BASIS DETERMINED WHEN BUILDING PLACED IN 
SERVICE.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the eligible basis of any building for the entire compli-
ance period for such building shall be its eligible basis on 
the date such building is placed in service. 
"(B) ELIGIBLE BASIS REDUCED BY FEDERAL GRANTS.—If, 
during any taxable year of the compliance period, a grant is 
made with respect to any building or the operation thereof 
and any portion of such grant is funded with Federal funds 
(whether or not includible in gross income), the eligible 
basis of such building for such taxable year and all succeed-
ing taxable years shall be reduced by the portion of such 
grant which is so funded. 
"(6) CREDIT ALLOWABLE FOR CERTAIN FEDERALLY-ASSISTED 
BUILDINGS ACQUIRED DURING 10-YEAR PERIOD DESCRIBED IN PARA-
GRAPH (2) (B) (ii).— 
"(A) IN GENERAL.—On application by the taxpayer, the 
Secretary (after consultation with the appropriate Federal 
official) may waive paragraph (2XBXii) with respect to any 
federally-assisted building if the Secretary determines that 
such waiver is necessary— 
"(i) to avert an assignment of the mortgage secured 
by property in the project (of which such building is a 
part) to the Department of Housing and Urban Devel-
opment or the Farmers' Home Administration, 
"(ii) to avert a claim against a Federal mortgage 
insurance fund (or such Department or Administra-
tion) with respect to a mortgage which is so secured, or 
"(iii) to the extent provided in regulations, by reason 
of other circumstances of financial distress. 
The preceding sentence shall not apply to any building 
described in paragraph (7XB). 
"(B) 
FEDERALLY-ASSISTED BUILDING.—For purposes of 
subparagraph (A), the term 'federally-assisted building' 
means any building which is substantially assisted, fi-
nanced, or operated under— 
"(i) section 8 of the United States Housing Act of 
1937 
"(ii) section 221(dX3) or 236 of the National Housing 
Act of 1934, or 
"(iii) section 515 of the Housing Act of 1949, 
as such Acts are in effect on the date of the enactment of 
the Tax Reform Act of 1986. 
"(C) APPROPRIATE FEDERAL OFFICIAL.—For purposes of 
subparagraph (A), the term 'appropriate Federal official' 
means— 
"(i) the Secretary of Housing and Urban Develop-
ment in the case of any building described in subpara-
graph (B) by reason of clause (i) or (ii) thereof, and 
"(ii) the Secretary of Agriculture in the case of any 
building described in subparagraph (B) by reason of 
clause (iii) thereof. 
100 STAT. 2194 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(7) ACQUISITION OF BUILDING BEFORE END OF PRIOR COMPLI-
ANCE PERIOD.— 
"(A) IN GENERAL.—Under regulations prescribed by the 
Secretary, in the case of a building described in subpara-
graph (B) which is acquired by the taxpayer— 
"(i) paragraph (2XB) shall not apply, but 
"(ii) the credit allowable by reason of subsection (a) to 
the taxpayer for any period after such acquisition shall 
be equal to the amount of credit which would have 
been allowable under sebsection (a) for such period to 
the prior owner referred to in subpareigraph (B) had 
such owner not disposed of the building. 
"(B) DESCRIPTION OF BUILDING.—A building is described in 
this subparagraph if— 
"(i) a credit was allowed by reason of subsection (a) to 
any prior owner of such building, and 
"(ii) the taxpayer acquired such building before the 
end of the compliance period for such building with 
respect to such prior owner (determined without regard 
to any disposition by such prior owner). 
"(e) REHABIUTATION EXPENDITURES TREATED AS SEPARATE NEW 
BUILDING.— 
"(1) IN GENERAL.—Rehabilitation expenditures paid or in-
curred by the taxpayer with respect to any building shall be 
treated for purposes of this section as a separate new building. 
"(2) REHABIUTATION EXPENDITURES.—For purposes of para-
graph (D— 
"(A) IN GENERAL.—The term 'rehabilitation expenditures' 
means amounts chargeable to captial account and incurred 
for property (or additions or improvements to property) of a 
character subject to the allowance for depreciation in 
connection with the rehabilitation of a building. 
"(B) COST OF ACQUISITION, ETC, NOT INCLUDED.—Such term 
does not include the cost of acquiring any building (or 
interest therein) or any amount not permitted to be taken 
into account under paragraph (3) or (4) of subsection (d). 
"(3) AVERAGE OF REHABIUTATION EXPENDITURES MUST BE $2,OOO 
OR MORE.— 
"(A) IN GENERAL.—Paragraph (1) shall apply to re-
habilitation expenditures with respect to any building only 
if the qualified basis attributable to such expenditures in-
curred during any 24-month period, when divided by the 
low-income units in the building, is $2,000 or more. 
"(B) DATE OF DETERMINATION.—The determination under 
subparagraph (A) shall be made as of the close of the 1st 
taxable year in the credit period with respect to such 
expenditures, 
"(4) SPECIAL RULES.—For purposes of applying this section 
with respect to expenditures which are treated as a separate 
building by reason of this subsection— 
"(A) such expenditures shall be treated as placed in 
service at the close of the 24-month period referred to in 
paragraph (3XA), and 
"(B) the applicable fraction under subsection (cXD shall 
be the applicable fraction for the building (without regard 
to paragraph (1)) with respect to which the expenditures 
were incurred. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2195 
Nothing in subsection (dX2) shall prevent a credit from being 
allowed by reason of this subsection. 
"(5) No DOUBLE COUNTING.—Rehabilitation expenditures may, 
at the election of the taxpayer, be taken into account under this 
subsection or subsection (dX2XAXiXII) but not under both such 
subsections. 
"(6) 
REGULATIONS TO APPLY SUBSECTION WITH RESPECT TO 
GROUP OF UNITS IN BUILDING.—The Secretary may prescribe 
regulations, consistent with the purposes of this subsection, 
treating a group of units with respect to which rehabilitation 
expenditures are incurred as a separate new building. 
"(f) DEFINITION AND SPECIAL RULES RELATING TO CREDIT PERIOD.— 
"(1) CREDIT PERIOD DEFINED.—For purposes of this section, the 
term 'credit period' means, with respect to any building, the 
period of 10 taxable years beginning with the taxable year in 
which the building is placed in service or, at the election of the 
taxpayer, the succeeding taxable year. Such an election, once 
made, shall be irrevocable. 
"(2) SPECIAL RULE FOR IST YEAR OF CREDIT PERIOD.— 
"(A) IN GENERAL.—The credit allowable under subsection 
(a) with respect to any building for the 1st taxable year of 
the credit period shall be determined by substituting for the 
applicable fraction under subsection (cXD the fraction— 
"(i) the numerator of which is the sum of the ap-
plicable fractions determined under subsection (cXD as 
of the close of each full month of such year during 
which such building was in service, and 
"(ii) the denominator of which is 12. 
"(B) 
DISALLOWED IST YEAR CREDIT ALLOWED IN 
IITH 
YEAR.—Any reduction by reason of subparagraph (A) in the 
credit allowable (without regard to subparagraph (A)) for 
the 1st taxable year of the credit period shall be allowable 
under subsection (a) for the 1st taxable year following the 
credit period. 
"(3) SPECIAL RULE WHERE INCREASE IN QUAUFIED BASIS AFTER 
1ST YEAR OF CREDIT PERIOD.— 
"(A) CREDIT INCREASED.—If— 
"(i) as of the close of any taxable year in the compli-
ance period (after the 1st year of the credit period) the 
qualified basis of any building exceeds 
"(ii) the qualified basis of such building as of the close 
of the 1st year of the credit period, 
the credit allowable under subsection (a) for the taxable 
year (determined without regard to this paragraph) shall be 
incrcEised by an amount equal to the product of such excess 
and the percentage equal to % of the applicable percentage 
for such building. 
"(B) 1ST YEAR COMPUTATION APPLIES.—A rule similar to 
the rule of paragraph (2XA) shall apply to the additional 
credit allowable by reason of this paragraph for the 1st year 
in which such additional credit is allowable. 
"(g) QUAUFIED LOW-INCOME HOUSING PROJECT.—For purposes O
i 
this section— 
"(1) IN GENERAL.—The term 'qualified low-income housing 
project' means any project for residential rental property if the 
project meets the requirements of subparagraph (A) or (B) 
whichever is elected by the taxpayer: 
100 STAT. 2196 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(A) 20-50 TEST.—The project meets the requirements of 
this subparagraph if 20 percent or more of the residential 
units in such project are both rent-restricted and occupied 
by individuals whose income is 50 percent or less of area 
median gross income. 
"(B) 40-60 TEST.—The project meets the requirements of 
this subparagraph if 40 percent or more of the residential 
units in such project are both rent-restricted and occupied 
by individuals whose income is 60 percent or less of area 
median gross income. 
Any election under this paragraph, once made, shall be irrev-
ocable. For purposes of this paragraph, any property shall not 
be treated £is failing to be residential rental property merely 
because part of the building in which such property is located is 
used for purposes other than residential rental purposes. 
"(2) RENT-RESTRICTED UNITS.— 
"(A) IN GENERAL.—For purposes of paragraph (1), a resi-
dential unit is rent-restricted if the gross rent with respect 
to such unit does not exceed 30 percent of the income 
limitation under paragraph (1) applicable to individuals 
occupying such unit. 
"(B) GROSS RENT.—For purposes of subparagraph (A), 
gross rent— 
"(i) does not include any payment under section 8 of 
the United States Housing Act of 1937 or any com-
parable Federal rental assistance program (with re-
spect to such unit or occupants thereof), and 
"(ii) includes any utility allowance determined by the 
Secretary after taking into account such determina-
tions under section 8 of the United States Housing Act 
of 1937. 
"(3) DATE FOR MEETING REQUIREMENTS.— 
"(A) PROJECTS CONSISTING OF i BUILDING.—In the case of a 
project which does not have any other building in service, 
such project shall not be treated as meeting the require-
ments of paragraph (1) unless it meets such requirements 
not later than the date which is 12 months after the date 
such project is placed in service. 
"(B) PROJECTS CONSISTING OF MORE THAN i BUILDING.—In 
the case of a project which has a building in service when a 
later building is placed in service as part of such project, 
such project shall not be treated as meeting the require-
ments of paragraph (1) with respect to such later building 
unless— 
"(i) such project meets such requirements without 
regard to such later building on the date such later 
building is placed in service, and 
"(ii) such project meets such requirements with 
regard to such later building not later than the date 
which is 12 months after the date such later building is 
placed in service. 
"(4) CERTAIN RULES MADE APPUCABLE.—Paragraphs (2) (other 
than subparagraph (A) thereof), (3), (4), (5), (6), and (7) of section 
142(d), and section 6652(j), shall apply for purposes of determin-
ing whether any project is a qualified low-income housing 
project and whether any unit is a low-income unit. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2197 
"(5) ELECTION TO TREAT BUILDING AFTER COMPLIANCE PERIOD AS 
NOT PART OF A PROJECT.—For purposes of this section, the 
taxpayer may elect to treat any building as not part of a 
qualified low-income housing project for any period beginning 
after the compliance period for such building. 
"(h) LIMITATION ON AGGREGATE CREDIT ALLOWABLE WITH RESPECT 
T
O PROJECTS LOCATED IN A STATE.— 
"(1) CREDIT MAY NOT EXCEED CREDIT AMOUNT ALLOCATED TO 
BUILDING.—No credit shall be allowed by reason of this section 
for any taxable year with respect to any building in excess of 
the housing credit dollar amount allocated to such building 
* 
under this subsection. An allocation shall be taken into account 
under the preceding sentence only if it occurs not later than the 
earlier o
f
— 
"(A) the 60th day after the close of the taxable year, or 
"(B) the close of the calendar year in which such taxable 
year ends. 
"(2): ALLOCATED CREDIT AMOUNT TO APPLY TO ALL TAXABLE 
YEARS ENDING DURING OR AFTER CREDIT ALLOCATION YEAR.—ANY 
housing credit dollar amount allocated to any building for any 
calendar year— 
"(A) shall apply to such building for all taxable years in 
the compliance period ending during or after such calendar 
year, and 
"(B) shall reduce the aggregate housing credit dollar 
amount of the allocating agency only for such calendar 
ye^r. 
"(3) HOUSING CREDIT DOLLAR AMOUNT FOR AGENCIES.— 
"(A) IN GENERAL.—The aggregate housing credit dollar 
amount which a housing credit agency may allocate for any 
calendar year is the portion of the State housing credit 
« 
ceiling allocated under this paragraph for such calendar 
year to such agency. 
^ 
"(B) STATE CEIUNG INITIALLY ALLOCATED TO STATE HOUS-
' 
ING CREDIT AGENCIES.—Except as provided in subpara-
graphs (D) and (E), the State housing credit ceiling for each 
calendar year shall be allocated to the housing credit 
agency of such State. If there is more than 1 housing credit 
agency of a State, all such agencies shall be treated as a 
! 
single agency. 
• i 
"(C) STATE HOUSING CREDIT CEIUNG.—The State housing 
credit ceiling applicable to any State for any calendar year 
shall be an amount equal to $1.25 multiplied by the State 
population. 
f 
"(D) SPECIAL RULE FOR STATES WITH CONSTITUTIONAL HOME 
RULE CITIES.—For purposes of this subsection— 
"(i) IN GENERAL.—The aggregate housing credit 
dollar amount for any constitutional home rule city for 
, J,, . 
any calendar year shall be an amount which bears the 
same ratio to the State housing credit ceiling for such 
fi0 
, 
calendar year as— 
"(I) the population of such city, bears to 
n 
"(II) the population of the entire State. 
"(ii) COORDINATION WITH OTHER ALLOCATIONS.—In the 
case of any State which contains 1 or more constitu-
tional home rule cities, for purposes of applying this 
paragraph with respect to housing credit agencies in 
100 STAT. 2198 
PUBLIC LAW 99-514—OCT. 22, 1986 
^'' 
' 
such State other than constitutional home rule cities, 
"''[[ 
the State housing credit ceiling for any calendar year 
' 
* 
shall be reduced by the aggregate housing credit dollar 
11'.'p.! 
amounts determined for such year for all constitutional 
home rule cities in such State. 
"•'- ^ ""'•' 
' 
"(iii) CONSTITUTIONAL HOME RULE CITY.—For purposes 
of this paragraph, the term 'constitutional home rule 
city' has the meaning given such term by section 
146(dX3XC). 
"(E) STATE MAY PROVIDE FOR DIFFERENT ALLOCATION.— 
Rules similar to the rules of section 146(e) (other than 
paragraph (2XB) thereof) shall apply for purposes of this 
paragraph. 
"(F) POPULATION.—For purposes of this paragraph, popu-
lation shall be determined in accordance with section 146(j). 
"(4) CREDIT FOR BUILDINGS FINANCED BY TAX-EXEMPT BONDS 
„ 
SUBJECT TO VOLUME CAP NOT TAKEN INTO ACCOUNT.— 
"(A) IN GENERAL.—Paragraph (1) shall not apply to the 
portion of any credit allowable under subsection (a) which is 
attributable to eligible basis financed by any obligation the 
- -. „ interest on which is exempt from tax under section 103 and 
,f, .
, 
which is taken into account under section 146. 
"(B) SPECIAL RULE WHERE 70 PERCENT OR MORE OF BUILD-
ING 
IS FINANCED WITH TAX-EXEMPT BONDS SUBJECT TO 
VOLUME CAP.—For purposes of subparagraph (A), if 70 per-
cent or more of the aggregate basis of any building and the 
land on which the building is located is financed by any 
obligation described in subparagraph (A), paragraph (1) 
shall not apply to any portion of the credit allowable under 
subsection (a) with respect to such building. 
"(5) PORTION OF STATE CEIUNG SET-ASIDE FOR CERTAIN PROJECTS 
INVOLVING QUAUFIED NONPROFIT ORGANIZATIONS.— 
"(A) IN GENERAL.—Not more than 90 percent of the State 
housing credit ceiling for any State for any calendar year 
shall be allocated to projects other than qualified low-
income housing projects described in subparagraph (B). 
"(B) PROJECTS INVOLVING QUAUFIED NONPROFIT ORGANIZA-
TIONS.—For purposes of subparagraph (A), a qualified low-
income housing project is described in this subparagraph if 
5f^!ii ', a qualified nonprofit organization is to materially partici-
pate (within the meaning of section 469(h)) in the develop-
ment and operation of the project throughout the compli-
ance period. 
•
V 
J 
"(C) QUAUFIED NONPROFIT ORGANIZATION.—For purposes 
of this paragraph, the term 'qualified nonprofit organiza-
tion' means any organization i
f
— 
"(i) such organization is described in paragraph (3) or 
(4) of section 501(c) and is exempt from tax under 
;i5i?;3 I 
lyi: section 501(a), and 
"(ii) 1 of the exempt purposes of such organization 
includes the fostering of low-income housing. 
"(D) STATE MAY NOT OVERRIDE SET-ASIDE.—Nothing in 
' • 
subparagraph (E) of paragraph (3) shall be construed to 
permit a State not to comply with subparagraph (A) of this 
- 
paragraph. 
'••'• 
"(6) SPECIAL R U L E S . — 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2199 
"(A) BUILDING MUST BE LOCATED WITHIN JURISDICTION OF 
CREDIT AGENCY.—A housing Credit agency may allocate its 
aggregate housing credit dollar amount only to buildings 
located in the jurisdiction of the governmental unit of 
which such agency is a part. 
"(B) HOUSING CREDIT DOLLAR AMOUNT MAY NOT BE CARRIED 
OVER, ETC.— 
"(i) No CARRYOVER.—The portion of the aggregate 
housing credit dollar amount of any housing credit 
agency which is not allocated for any calendar year 
i 
may not be carried over to any other calendar year. 
"(ii) ALLOCATION MAY NOT BE EARUER THAN YEAR IN 
•
)
f 
WHICH BUILDING PLACED IN SERVICE.—A housing Credit 
agency may allocate its housing credit dollar amount 
for any calendar year only to buildings placed in serv-
ice before the close of such calendar year. 
"(C) AGENCY ALLOCATIONS IN EXCESS OF UMIT.—If the 
aggregate housing credit dollar amounts allocated by a 
housing credit agency for any calendar year exceed the 
portion of the State housing credit ceiling allocated to such 
agency for such calendar year, the housing credit dollar 
amounts so allocated shall be reduced (to the extent of such 
excess) for buildings in the reverse of the order in which the 
. . . 
allocations of such amounts were made. 
"(D) CREDIT ALLOWABLE DETERMINED WITHOUT REGARD TO 
a. .. 
AVERAGING CONVENTION, ETC.—For purposes of this subsec-
tion, the credit allowable under subsection (a) with respect 
.»' .'. 
to any building shall be determined— 
"(i) without regard to paragraphs (2XA) and (3XB) of 
! 
subsection (f), and 
"(ii) by applying subsection (fK3XA) without regard to 
' 
.^ 
'the percentage equal to % of. 
"(7) OTHER DEFINITIONS.—For purposes of this subsection— 
"(A) HOUSING CREDIT AGENCY.—The term 'housing credit 
agency' means any agency authorized to carry out this 
subsection. 
"(B) POSSESSIONS TREATED AS STATES.—The term 'State' 
includes a possession of the United States, 
"(i) DEFINITIONS AND SPECIAL RULES.—For purposes of this sec-
tion— 
"(1) COMPUANCE PERIOD.—The term 'compliance period' 
means, with respect to any building, the period of 15 taxable 
years beginning with the 1st taxable year of the credit period 
with respect thereto. 
"(2) DETERMINATION OF WHETHER BUILDING IS FEDERALLY SUB-
SIDIZED.— 
"(A) IN GENERAL.—Except £is otherwise provided in this 
paragraph, for purposes of subsection (bXD, a new building 
shall be treated as federally subsidized for any taxable year 
if, at any time during such taxable year, there is outstand-
I 
ing any obligation the interest on which is exempt from tax 
under section 103, or any below market Federal loan, the 
-
J 
proceeds of which are used (directly or indirectly) with 
respect to such building or the operation thereof. 
.; 
"(B) ELECTION TO REDUCE EUGIBLE BASIS BY OUTSTANDING 
1. 
BALANCE OF LOAN.—A loan shall not be taken into account 
under subparagraph (A) if the taxpayer elects to exclude an 
100 STAT. 2200 
PUBLIC LAW 99-514—OCT. 22, 1986 
* 
amount equal to the outstanding balance of such loan from 
the eligible basis of the building for purposes of subsection 
o 
"(C) 
BELOW MARKET FEDERAL LOAN.—For purposes of 
subparagraph (A), the term 'below market Federal loan' 
e^i- 
means any loan funded in whole or in part with Federal 
funds if the interest rate payable on such loan is less than 
the applicable Federal rate in effect under section 1274(d)(1) 
(as of the date on which the loan was made). 
"(3) LOW-INCOME UNIT.— 
"(A) IN GENERAL.—The term 'low-income unit' means any 
unit in a building if— 
"(i) such unit is rent-restricted (as defined in subsec-
tion (gX2)), and 
"(ii) the individuals occupying such unit meet the 
income limitation applicable under subsection (gXl) to 
the project of which such building is a part. 
"(B) EXCEPTIONS.—A unit shall not be treated as a low-
income unit unless the unit is suitable for occupancy and 
used other than on a transient basis. 
"(C) SPECIAL RULE FOR BUILDINGS HAVING 4 OR FEWER 
UNITS.—In the case of any building which has 4 or fewer 
' ' 
residential rental units, no unit in such building shall be 
treated £is a low-income unit if the units in such building 
are owned by— 
"(i) any individual who occupies a residential unit in 
^ - -^" 
such building, or 
"(ii) any person who is related (as defined in subsec-
' ' 
tion (dX2XDXiii)) to such individual. 
"(4) NEW BUILDING.—The term 'new building' means a build-
ing the original use of which begins with the taxpayer. 
"(5) EXISTING BUILDING.—The term 'existing building' means 
any building which is not a new building. 
"(j) RECAPTURE OF CREDIT.— 
"(1) IN GENERAL.—If^ 
"(A) as of the close of any taxable year in the compliance 
>
• '* 
period, the amount of the qualified basis of any building 
with respect to the taxpayer is less than 
' 
"(B) the amount of such basis as of the close of the 
preceding taxable year, 
then the taxpayer's tax under this chapter for the taxable year 
shall be increased by the credit recapture amount. 
"(2) CREDIT RECAPTURE AMOUNT.—For purposes of paragraph 
(1), the credit recapture amount is an amount equal to the sum 
of— 
"(A) the aggregate decrease in the credits allowed to the 
taxpayer under section 38 for all prior taxable years which 
would have resulted if the accelerated portion of the credit 
allowable by reason of this section were not allowed for all 
prior taxable years with respect to the excess of the amount 
described in paragraph dXB) over the amount described in 
paragraph (IXA), plus 
"(B) interest at the overpayment rate established under 
section 6621 on the amount determined under subpara-
graph (A) for each prior taxable year for the period begin-
ning on the due date for filing the return for the prior 
taxable year involved. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2201 
No deduction shall be allowed under this chapter for interest 
described in subparagraph (B). 
"(3) ACCELERATED PORTION OF CREDIT.—For purposes of para-
graph (2), the accelerated portion of the credit for the prior 
taxable years with respect to any amount of basis is the excess 
o
f
— 
"(A) the aggregate credit allowed by reason of this section 
(without regard to this subsection) for such years with 
respect to such basis, over 
"(B) the aggregate credit which would be allowable by 
reason of this section for such years with respect to such 
basis if the aggregate credit which would (but for this 
subsection) have been allowable for the entire compliance 
period were allowable ratably over 15 years. 
"(4) SPECIAL RULES.— 
"(A) TAX BENEFIT RULE.—The tax for the taxable year 
shall be increased under paragraph (1) only with respect to 
credits allowed by reason of this section which were used to 
reduce tax liability. In the case of credits not so used to 
reduce tax liability, the carryforwards and carrybacks 
under section 39 shall be appropriately adjusted. 
"(B) ONLY BASIS FOR WHICH CREDIT ALLOWED TAKEN INTO 
ACCOUNT.—Qualified basis shall be taken into account 
under paragraph (1)(B) only to the extent such basis was 
taken into account in determining the credit under subsec-
tion (a) for the preceding taxable year referred to in such 
paragraph. 
"(C) No RECAPTURE OF ADDITIONAL CREDIT ALLOWABLE BY 
REASON OF SUBSECTION (f) (3).—Paragraph (1) shall apply to 
a decrease in qualified basis only to the extent such de-
crease exceeds the amount of qualified basis with respect to 
which a credit was allowable for the taxable year referred 
to in paragraph (1)(B) by reason of subsection (0(3). 
"(D) No CREDITS AGAINST TAX.—Any increase in tax under 
this subsection shall not be treated as a tax imposed by this 
chapter for purposes of determining the amount of any 
credit under subpart A, B, or D of this part. 
"(E) No RECAPTURE BY REASON OF CASUALTY LOSS.—The 
increase in tax under this subsection shall not apply to a 
reduction in qualified basis by reason of a casualty loss to 
the extent such loss is restored by reconstruction or replace-
ment within a reasonable period established by the Sec-
retary. 
"(5) CERTAIN PARTNERSHIPS TREATED AS THE TAXPAYER.— 
"(A) IN GENERAL.—For purposes of applying this subsec-
tion to a partnership to which this paragraph applies— 
"(i) such partnership shall be treated as the taxpayer 
to which the credit allowable under subsection (a) was 
allowed, 
"(ii) the amount of such credit allowed shall be treat-
ed as the amount which would have been allowed to the 
partnership were such credit allowable to such partner-
ship, 
''(iii) paragraph (4XA) shall not apply, and 
"(iv) the amount of the increase in tax under this 
subsection for any taxable year shall be allocated 
among the partners of such partnership in the same 
100 STAT. 2202 
PUBLIC LAW 99-514—OCT. 22, 1986 
manner as such partnership's taxable income for such 
year is allocated among such partners. 
"(B) PARTNERSHIPS TO WHICH PARAGRAPH APPUES.—This 
paragraph shall apply to any partnership— 
"(i) which has 35 or more partners each of whom is a 
natural person or an estate, and 
"(ii) which elects the application of this paragraph. 
fi 
"(C) SPECIAL RULES.— 
"(i) HUSBAND AND WIFE TREATED AS i PARTNER.—For 
' f , 
purposes of subparagraph (BXi), a husband and wife 
I 
(and their estates) shall be treated as 1 partner. 
"(ii) ELECTION IRREVOCABLE.—Any election under 
, \ 
subparagraph (B), once made, shall be irrevocable. 
"(6) No RECAPTURE ON DISPOSITION OF BUILDING WHERE BOND 
POSTED.—In the case of a disposition of a building, the taxpayer 
- 
shall be discharged from liability for any additional tax under 
this subsection by reason of such disposition i
f
— 
"(A) the taxpayer furnishes to the Secretary a bond in an 
amount satifactory to the Secretary and for the period 
required by the Secretary, and 
"(B) it is reasonably expected that such building will 
continue to be operated as a qualified low-income building 
for the remaining compliance period with respect to such 
building, 
"(k) APPUCATION OF AT-RISK RULES.—For purposes of this sec-
tion— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, rules similar to the rules of section 46(cX8) (other 
than subparagraph (DXivXD thereof), section 46(cX9), and sec-
tion 47(d)(1) shall apply in determining the qualified basis of any 
building in the same manner as such sections apply in deter-
„ ;. mining the credit b£ise of property. 
"(2) SPECIAL RULES FOR DETERMINING QUAUFIED PERSON.—For 
purposes of paragraph (1)— 
"(A) IN GENERAL.—If the requirements of subparagraphs 
-u; i' (B), (C), and (D) are met with respect to any financing 
borrowed from a qualified nonprofit organization (as de-
fined in subsection (hX5)), the determination of whether 
such financing is qualified commercial financing with re-
spect to any qualified low-income building shall be made 
without regard to whether such organization— 
B ;;. 
"(i) is actively and regularly engaged in the business 
of lending money, or 
"(ii) is a person described in section 46(cX8XDXivXn). 
• 
"(B) FINANCING SECURED BY PROPERTY.—The require-
ments of this subparagraph are met with respect to any 
financing if such financing is secured by the qualified low-
income building. 
"(C) PORTION OF BUILDING ATTRIBUTABLE TO FINANCING.— 
The requirements of this subparagraph are met with re-
spect to any financing for any taxable year in the compli-
. , 
ance period if, as of the close of such taxable year, not more 
than 60 percent of the eligible basis of the qualified low-
income building is attributable to such financing (reduced 
by the principal and interest of any governmental financing 
which is part of a wrap-around mortgage involving such 
y. 
financing). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2203 
"(D) 
REPAYMENT OF 
PRINCIPAL 
AND 
INTEREST.—The 
requirements of this subparagraph are met with respect to 
any financing if such financing is fully repaid on or before 
the earliest o
f
— 
-: 
"(i) the date on which such financing matures, 
"(ii) the 90th day after the close of the compliance 
period with respect to the qualified low-income build-
ing, or 
"(iii) the date of its refinancing or the sale of the 
building to which such financing relates. 
"(3) PRESENT VALUE OF FINANCING.—If the rate of interest on 
any financing described in paragraph (2KA) is less than the rate 
which is 1 percentage point below the applicable Federal rate as 
of the time such financing is incurred, then the qualified basis 
(to which such financing relates) of the qualified low-income 
- 
building shall be the present value of the amount of such 
' 
financing, 
using as the discount rate such applicable Federal 
rate. For purposes of the preceding sentence, the rate of interest 
on any financing shall be determined by treating interest to the 
extent of government subsidies as not payable. 
" 
"(4) FAILURE T
O FULLY REPAY.— 
"(A) IN GENERAL.—To the extent that the requirements of 
paragraph (2XD) are not met, then the taxpayer's tax under 
this chapter for the taxable year in which such failure 
occurs shall be increased by an amount equal to the ap-
plicable portion of the credit under this section with respect 
.
^
^ • 
to such building, increased by an amount of interest for the 
period— 
"(i) beginning with the due date for the filing of the 
•ifi) * s 
return of tax imposed by chapter 1 for the 1st taxable 
year for which such credit was allowable, and 
^ ,. 
"(ii) ending with the due date for the taxable year in 
\Z''-. 
which such failure occurs, 
determined by using the underpayment rate and method 
.,,;.. 
under section 6621. 
"(B) APPLICABLE PORTION.—For purposes of subparagraph 
(A), the term 'applicable portion' means the aggregate de-
crease in the credits allowed to a taxpayer under section 38 
for all prior taxable years which would have resulted if the 
. > . 
eligible basis of the building were reduced by the amount of 
financing which does not meet requirements of paragraph 
(2)(D). 
"(C) CERTAIN RULES TO APPLY.—Rules similar to the rules 
of subparagraphs (A) and (D) of subsection (jK4) shall apply 
for purposes of this subsection. 
"(1) CERTIFICATIONS TO SECRETARY.— 
"(1) 
CERTIFICATION WITH RESPECT TO IST YEAR OF CREDIT 
PERIOD.—Not later than the 90th day following the close of the 
1! 
1st taxable year in the credit period with respect to any quali-
fied low-income building, the taxpayer shall certify to the Sec-
retary (in such form and in such manner as the Secretary 
prescribes)— 
"(A) the taxable year, and calendar year, in which such 
building was placed in service, 
"(B) the adjusted basis and eligible basis of such building 
as of the close of the 1st year of the credit period. 
100 STAT. 2204 
PUBLIC LAW 99-514—OCT. 22, 1986 
i-:' i 
t'^Q^ ^jjg maximum applicable percentage and qualified 
basis permitted to be taken into account by the appropriate 
housing credit agency under subsection (h), 
"(D) the election made under subsection (g) with respect 
to the qualified low-income housing project of which such 
building is a part, and 
"(E) such other information as the Secretary may require. 
In the case of a failure to make the certification required by the 
*i? preceding sentence on the date prescribed therefor, unless it is 
shown that such failure is due to reasonable cause and not to 
willful neglect, no credit shall be allowable by reason of subsec-
tion (a) with respect to such building for any taxable year 
ending before such certification is made. 
"(2) ANNUAL REPORTS FROM HOUSING CREDIT AGENCIES.—Each 
agency which allocates any housing credit amount to any build-
ing for any calendar year shall submit to the Secretary (at such 
time and in such manner as the Secretary shall prescribe) an 
annual report specifying— 
ii t 
"(A) the amount of housing credit amount allocated to 
each building for such year, 
"(B) sufficient information to identify each such building 
« 
and the taxpayer with respect thereto, and 
"(C) such other information as the Secretary may require. 
The penalty under section 6652(j) shall apply to any failure to 
submit the report required by the preceding sentence on the 
date prescribed therefor. 
"(m) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
01 this section, including regulations— 
.,^j 
"(1) dealing with— 
"(A) projects which include more than 1 building or only 
,^- 
a portion of a building, 
"(B) buildings which are placed in service in portions, 
"(2) providing for the application of this section to short 
' *
'
* taxable years, and 
"(3) preventing the avoidance of the rules of this section. 
"(n) TERMINATION.— 
"(1) IN GENERAL.—Except as provided in parargraph (2), the 
State housing credit ceiling under subsection (h) shall be zero 
for any calendar year after 1989. 
"(2) CARRYOVER OF 1989 
LIMIT FOR CERTAIN PROJECTS IN 
i.q. 
PROGRESS.— 
"(A) IN GENERAL.—The aggregate housing credit amount 
of any agency for 1989 which is not allocated for 1989 shall 
be treated for purposes of applying this section to any 
building described in subparagraph (B) as the housing 
credit amount of such agency for 1990. 
"(B) DESCRIPTION.—A building is described in this 
subparagraph if— 
"(i) such building is constructed, reconstructed, or 
rehabilitated by the taxpayer, 
t>». r 
"(ii) more than 10 percent of the reasonably antici-
pated cost of such construction, reconstrcution, or re-
ti-jm 4 )if V
? habilitation has been incurred as of January 1, 1989, 
and 
pnib'jtv^ .T. 
"(iii) such building is placed in service before Janu-
ary 1, 1991. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2205 
"' 
"(C) CERTAIN RULE NOT TO APPLY.—Subsection (hX6)(B)(i) 
shall not apply for purposes of this paragraph." 
(b) LOW-INCOME HOUSING CREDIT TREATED AS OTHER BUSINESS 
CREDITS.— 
(1) Subsection (b) of section 38 (relating to current year busi-
ness credits), as amended by this Act, is amended by striking 
out "plus" at the end of paragraph (3), but striking out the 
period at the end of paragraph (4) and inserting in lieu thereof 
", plus", and by adding at the end thereof the following new 
paragraph: 
"(5) the low-income housing credit determined under section 
42(a)." 
(2) Subsection (d) of section 38 is amended by inserting 
"42(a)," before "46(a)". 
(c) RECAPTURE TAX NOT TO REDUCE MINIMUM TAX.—Paragraph (1) 
of section 55(c), as amended by section 701 of this Act, is amended by 
inserting "or section 42(j)" after "section 47". 
(d) CLERICAL AMENDMENT.—The table of sections for subpart D of 
part IV of subchapter A of chapter 1 is amended by adding at the 
end thereof the following new item: 
"Sec. 42. Low-income housing credit." 
(e) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to buildings placed in service after December 31, 1986, in 
taxable years ending after such date. 
(2) SPECIAL RULE FOR REHABILITATION EXPENDITURES.—Subsec-
tion (e) of section 42 of the Internal Revenue Code of 1986 (as 
added by this section) shall apply for purposes of paragraph (1). 
if) TRANSITIONAL RULES.— 
(1) LIMITATION TO NON-ACRS BUILDINGS NOT TO APPLY TO CER-
TAIN BUILDINGS, ETC.— 
(A) IN GENERAL.—In the case of a building which is part 
of a project described in subparagraph (B)— 
(i) section 42(c)(2)(B) of the Internal Revenue Code of 
1986 (as added by this section) shall not apply, and 
(ii) such building shall be treated as not federally 
subsidized for purposes of section 42(bXlXA) of such 
Code. 
(B) PROJECT DESCRIBED.—A project is described in this 
subparagraph if— 
(i) an urban development action grant application 
?•'. 
with respect to such project was submitted on Septem-
ber 13,1984, 
(ii) a zoning commission map amendment related to 
such project was granted on July 17,1985, and 
(iii) the number assigned to such project by the Fed-
eral Housing Administration is 023-36602. 
(C) ADDITIONAL UNITS ELIGIBLE FOR CREDIT.—In the case of 
a building to which subparagraph (A) applies and which is 
part of a project which meets the requirements of subpara-
graph (D), for each low-income unit in such building which 
is occupied by individuals whose income is 30 percent or 
less of area median gross income, one additional unit (not 
otherwise a low-income unit) in such building shall be 
treated as a low-income unit for purposes of such section 42. 
100 STAT. 2206 
PUBLIC LAW 99-514—OCT. 22, 1986 
i Y^q-':. 
(D) PROJECT DESCRIBED.—A project is described in this 
subparagraph i
f
— 
j^jg^^ 
(i) rents charged for units in such project are re-
stricted by State regulations, 
(ii) the annual cash flow of such project is restricted 
by State law, 
(iii) the project is located on land owned by or ground 
leased from a public housing authority, 
(iv) construction of such project begins on or before 
' " ' " 
December 31, 1986, and units within such project are 
, 
placed in service on or before June 1, 1990, and 
' " 
(v) for a 20-year period, 20 percent or more of the 
residential units in such project are occupied by 
l^.y^i '^ft 
individuals whose income is 50 percent or less of area 
median gross income. 
• J 
(E) MAXIMUM ADDITIONAL CREDIT.—The maximum annual 
^ ' 
additional credit allowable under section 42 of such Code by 
reason of subparagraph (C) shall not exceed 25 percent of 
the eligible basis of the building. 
(2) ADDITIONAL ALLOCATION OF HOUSING CREDIT CEILING.— 
' • 
(A) IN GENERAL.—There is hereby allocated to each 
housing credit agency described in subparagraph (B) an 
additional housing credit dollar amount determined in 
accordance with the following table: 
'
- 
' The additional 
For calendar year: 
allocation is: 
1987 
$3,900,000 
.^«s., 
1988 
$7,600,000 
1989 
$1,300,000. 
(B) HOUSING CREDIT AGENCIES DESCRIBED.—The housing 
credit agencies described in this subparagraph are: 
''^ * 
(i) A corporate governmental agency constituted as a 
public benefit corporation and established in 1971 
iifc i hi 
under the provisions of Article XII of the Private Hous-
ing Finance Law of the State. 
(ii) A city department established on December 20, 
1979, pursuant to chapter XVIII of a municipal code of 
such city for the purpose of supervising and coordinat-
ing the formation and execution of projects and pro-
grams affecting housing within such city. 
Mth m 
(iii) The State housing finance agency referred to in 
subparagraph (C), but only with respect to projects 
:UJII '' 
described in subparagraph (C). 
. . • 
(C) PROJECT DESCRIBED.—A project is described in this 
subparagraph if such project is a qualified low-income hous-
ry| f 
ing project which— 
(i) receives financing from a State housing finance 
4>3 f id 
agency from the proceeds of bonds issued pursuant to 
chapter 708 of the Acts of 1966 of such State pursuant 
%.. n . 
to loan commitments from such agency made between 
May 8,1984, and July 8,1986, and 
(ii) is subject to subsidy commitments issued pursu-
ant to a program established under chapter 574 of the 
Acts of 1983 of such State having award dates from 
such agency between May 31, 1984, and June 11, 1985. 
(D) SPECIAL RULES.— 
, ,, 
(i) Any building— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2207 
(I) which is allocated any housing credit dollar 
amount by a housing credit agency described in 
clause (iii) of subparagraph (B), and 
(II) which is placed in service after June 30, 1986, 
and before January 1, 1987, 
I 
shall be treated for purposes of the amendments made 
by this section as placed in service on January 1, 1987. 
(ii) Section 42(c)(2)(B) of the Internal Revenue Code of 
1986 shall not apply to any building which is allocated 
any housing credit dollar amount by any agency de-
scribed in subparagraph (B). 
(E) ALL UNITS TREATED AS LOW INCOME UNITS IN CERTAIN 
CASES.—In the case of any building— 
(i) which is allocated any housing credit dollar 
amount by any agency described in subparagraph (B), 
and 
(ii) which after the application of subparagraph (D)(ii) 
is a qualified low-income building at all times during 
any taxable year, 
such building shall be treated as described in section 
42(b)(1)(B) of such Code and having an applicable fraction 
for such year of 1. 
(3) CERTAIN PROJECTS PLACED IN SERVICE BEFORE I987.— 
(A) IN GENERAL.—In the case of a building which is part 
of a project described in subparagraph (B)— 
(i) section 42(c)(2)(B) of such Code shall not apply, 
(ii) such building shall be treated as placed in service 
during the first calendar year after 1986 and before 
1990 in which such building is a qualified low-income 
building (determined after the application of clause (i)), 
and 
(iii) for purposes of section 42(h) of such Code, such 
building shall be treated as having allocated to it a 
housing credit dollar amount equal to the dollar 
amount appearing in the clause of subparagraph (B) in 
which such building is described. 
(B) PROJECT DESCRIBED.—A project is described in this 
subparagraph if the code number assigned to such project 
by the Farmers' Home Administration appears in the fol-
lowing table: 
The housing 
credit 
dollar 
'••' 
The 
code number is: 
amount 
is: 
(
i
) 
49284553664 
$16,000 
(
i
i
) 4927742022446 
$22,000 
(
i
i
i
) 49270742276087 
$64,000 
(iv) 
490270742387293 
$48,000 
(V) 
4927074218234 
$32,000 
(vi) 
49270742274019 
$36,000 
(vii) 
5146074234.5074 
$53,000. 
(C) DETERMINATION OF ADJUSTED BASIS.—The adjusted 
basis of any building to which this paragraph applies for 
purposes of section 42 of such Code shall be its adjusted 
basis as of the close of the taxable year ending before the 
first taxable year of the credit period for such building 
(D) CERTAIN RULES TO APPLY.—Rules similar to the rules 
of subparagraph (E) of paragraph (2) shall apply for pur-
poses of this paragraph. 
100 STAT. 2208 
PUBLIC LAW 99-514—OCT. 22, 1986 
(4) DEFINITIONS.—For purposes of this subsection, terms used 
in such subsection which are also used in section 42 of the 
Internal Revenue Code of 1986 (as added by this section) shall 
have the meanings given such terms by such section 42. 
Subtitle G—Merchant Marine Capital 
Construction Funds 
SEC. 261. PROVISIONS 
RELATING TO MERCHANT MARINE CAPITAL 
CONSTRUCTION FUNDS. 
(a) PURPOSE.—The purpose of this section is to coordinate the 
application of the Internal Revenue Code of 1986 with the capital 
construction program under the Merchant Marine Act, 1936. 
(b) AMENDMENT OF 1986 CODE.—Chapter 77 (relating to mis-
cellaneous provisions) is amended by adding at the end thereof the 
following new section: 
"SEC. 7518. TAX INCENTIVES RELATING TO MERCHANT MARINE CAPITAL 
CONSTRUCTION FUNDS. 
"(a) CEILING ON D E P O S I T S . — 
"(1) IN GENERAL.—The amount deposited in a fund established 
under section 607 of the Merchant Marine Act, 1936 (herein-
after in this section referred to as a 'capital construction fund') 
shall not exceed for any taxable year the sum of: 
"(A) that portion of the taxable income of the owner or 
lessee for such year (computed as provided in chapter 1 but 
without regard to the carryback of any net operating loss or 
net capital loss and without regard to this section) which is 
* ' 
attributable to the operation of the agreement vessels in 
,. . 
the foreign or domestic commerce of the United States or in 
the fisheries of the United States, 
"(B) the amount allowable as a deduction under section 
167 for such year with respect to the agreement vessels, 
"(C) if the transaction is not taken into account for 
purposes of subparagraph (A), the net proceeds (as defined 
in joint regulations) from— 
"(i) the sale or other disposition of any agreement 
vessel, or 
"(ii) insurance or indemnity attributable to any 
agreement vessel, and 
"(D) the receipts from the investment or reinvestment of 
amounts held in such fund. 
"(2) LIMITATIONS ON DEPOSITS BY LESSEES.—In the case of a 
lessee, the maximum amount which may be deposited with 
respect to an agreement vessel by reason of paragraph (1)(B) for 
any period shall be reduced by any amount which, under an 
agreement entered into under section 607 of the Merchant 
Marine Act, 1936, the owner is required or permitted to deposit 
for such period with respect to such vessel by reason of para-
graph (1)(B). 
"(3) CERTAIN BARGES AND CONTAINERS INCLUDED.—For pur-
poses of paragraph (1), the term 'agreement vessel' includes 
barges and containers which are part of the complement of such 
vessel and which are provided for in the agreement. 
"(b) REQUIREMENTS AS TO INVESTMENTS.— 
, ,,. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2209 
"(1) IN GENERAL.—Amounts in any capital construction fund 
shall be kept in the depository or depositories specified in the 
agreement and shall be subject to such trustee and other fidu-
ciary requirements as may be specified by the Secretary. 
"(2) LIMITATION ON FUND INVESTMENTS.—Amounts in any cap-
ital construction ftind may be invested only in interest-bearing 
securities approved by the Secretary; except that, if such Sec-
retary consents thereto, an agreed percentage (not in excess of 
60 percent) of the assets of the fund may be invested in the stock 
of domestic corporations. Such stock must be currently fully 
listed and registered on an exchange registered with the Securi-
ties and Exchange Commission as a national securities ex-
change, and must be stock which would be acquired by prudent 
men of discretion and intelligence in such matters who are 
seeking a reasonable income and the preservation of their 
capital. If at any time the fair market value of the stock in the 
fund is more than the agreed percentage of the assets in the 
fund, any subsequent investment of amounts deposited in the 
fund, and any subsequent withdrawal from the fund, shall be 
made in such a way as to tend to restore the fund to a situation 
in which the fair market value of the stock does not exceed such 
agreed percentage. 
"(3) INVESTMENT IN CERTAIN PREFERRED STOCK PERMITTED.— 
For purposes of this subsection, if the common stock of a 
corporation meets the requirements of this subsection and if the 
preferred stock of such corporation would meet such require-
ments but for the fact that it cannot be listed and registered as 
required because it is nonvoting stock, such preferred stock 
shall be treated as meeting the requirements of this subsection. 
"(c) NONTAXABILITY FOR DEPOSITS.— 
"(1) IN GENERAL.—For purposes of this title— 
"(A) taxable income (determined without regard to this 
section and section 607 of the Merchant Marine Act, 1936) 
for the taxable year shall be reduced by an amount equal to 
the amount deposited for the taxable year out of amounts 
referred to in subsection (a)(1)(A), 
"(B) gain from a transaction referred to in subsection 
^ 
(a)(1)(C) shall not be taken into account if an amount equal 
to the net proceeds (as defined in joint regulations) from 
such transaction is deposited in the fund, 
"(C) the earnings (including gains and losses) from the 
investment and reinvestment of amounts held in the fund 
shall not be taken into account, 
"(D) the earnings and profits (within the meaning of 
section 316) of any corporation shall be determined without 
regard to this section and section 607 of the Merchant 
Marine Act, 1936, and 
"(E) in applying the tax imposed by section 531 (relating 
to the accumulated earnings tax), amounts while held in 
the fund shall not be taken into account. 
"(2) ONLY QUALIFIED DEPOSITS ELIGIBLE FOR TREATMENT.—Para-
graph (1) shall apply with respect to any amount only if such 
amount is deposited in the fund pursuant to the agreement and 
not later than the time provided in joint regulations. 
"(d) ESTABLISHMENT OF ACCOUNTS.—For purposes of this section— 
"(1) IN GENERAL.—Within a capital construction fund 3 ac-
counts shall be maintained: 
100 STAT. 2210 
P U B L I C L A W 99-514—OCT. 22, 1986 
"(A) the capital account, 
», 
; 
• 
"(B) the capital gain account, and 
' 
•>. 
J . 
' '(C) the ordinary income account. 
"(2) CAPITAL ACCOUNT.—The capital account shall consist of— 
"(A) amounts referred to in subsection (a)(l KB), 
"(B) amounts referred to in subsection (a)(1)(C) other than 
that portion thereof which represents gain not taken into 
account by reason of subsection (c)(1)(B), 
"(C) the percentage applicable under section 243(a)(1) of 
any dividend received by the fund with respect to which the 
person maintaining the fund would (but for subsection 
(c)(1)(C)) be allowed a deduction under section 243, and 
"(D) interest income exempt from taxation under section 
103. 
"(3) CAPITAL GAIN ACCOUNT.—The capital gain account shall 
consist of— 
"(A) amounts representing capital gains on assets held 
for more than 6 months and referred to in subsection 
(a)(1)(C) or (a)(1)(D), reduced by 
"(B) amounts representing capital losses on assets held in 
I? j 
the fund for more than 6 months. 
"(4) ORDINARY INCOME ACCOUNT.—The ordinary income ac-
count shall consist of— 
"(A) amounts referred to in subsection (a)(1)(A), 
"(B)(i) amounts representing capital gains on assets held 
for 6 months or less and referred to in subsection (a)(1)(C) or 
(a)(1)(D), reduced by 
"(ii) amounts representing capital losses on assets held in 
the fund for 6 months or less, 
"(C) interest (not including any tax-exempt interest re-
ferred to in paragraph (2XD)) and other ordinary income 
(not including any dividend referred to in subparagraph (E)) 
received on assets held in the fund, 
"(D) ordinary income from a transaction described in 
subsection (a)(1)(C), and 
"(E) the portion of any dividend referred to in paragraph 
(2)(C) not taken into account under such paragraph. 
"(5) CAPITAL LOSSES ONLY ALLOWED TO OFFSET CERTAIN GAINS.— 
Except on termination of a capital construction fund, capital 
losses referred to in paragraph (3)(B) or in paragraph (4)(B)(ii) 
shall be allowed only as an offset to gains referred to in para-
graph (3)(A) or (4)(B)(i), respectively. 
"(e) PURPOSES OF QUALIFIED WITHDRAWALS.— 
"(1) I N GENERAL.—A qualified withdrawal from the fund is 
one made in accordance with the terms of the agreement but 
only if it is for: 
"(A) the acquisition, construction, or reconstruction of a 
',;f?i: 
qualified vessel, 
i : I 
"(B) the acquisition, construction, or reconstruction of 
barges and containers which are part of the complement of 
a qualified vessel, or 
"(C) the payment of the principal on indebtedness in-
Ijif. 
curred in connection with the acquisition, construction, or 
reconstruction of a qualified vessel or a barge or container 
which is part of the complement of a qualified vessel. 
Except to the extent provided in regulations prescribed by the 
Secretary, subparagraph (B), and so much of subparagraph (C) 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2211 
as relates only to barges and containers, shall apply only with 
respect to barges and containers constructed in the United 
States. 
"(2) 
PENALTY FOR FAILING TO FULFILL ANY SUBSTANTIAL 
OBLIGATION.—Under joint regulations, if the Secretary deter-
mines that any substantial obligation under any agreement is 
not being fulfilled, he may, after notice and opportunity for 
hearing to the person maintaining the fund, treat the entire 
fund or any portion thereof as an amount withdrawn from the 
fund in a nonqualified withdrawal. 
"(f) TAX TREATMENT OF QUALIFIED WITHDRAWALS.— 
"(1) ORDERING RULE.—Any qualified withdrawal from a fund 
shall be treated— 
"(A) first as made out of the capital account, 
"(B) second as made out of the capital gain account, and 
"(C) third as made out of the ordinary income account. 
"(2) 
ADJUSTMENT TO BASIS OF VESSEL, ETC., WHERE WITH-
DRAWAL FROM ORDINARY INCOME ACCOUNT.—If any portion of a 
qualified withdrawal for a vessel, barge, or container is made 
out of the ordinary income account, the basis of such vessel, 
barge, or container shall be reduced by an amount equal to such 
portion. 
"(3) 
ADJUSTMENT TO BASIS OF VESSEL, ETC., WHERE WITH-
DRAWAL F
R
O
M CAPITAL GAIN ACCOUNT.—If any portion of a 
qualified withdrawal for a vessel, barge, or container is made 
out of the capital gain account, the basis of such vessel, barge, or 
container shall be reduced by an amount equal to such portion. 
"(4) ADJUSTMENT TO BASIS OF VESSELS, ETC., WHERE WITHDRAW-
ALS P
A
Y PRINCIPAL ON DEBT.—If any portion of a qualified with-
drawal to pay the principal on any indebtedness is made out of 
the ordinary income account or the capital gain account, then 
an amount equal to the aggregate reduction which would be 
required by paragraphs (2) and (3) if this were a qualified 
withdrawal for a purpose described in such paragraphs shall be 
applied, in the order provided in joint regulations, to reduce the 
basis of vessels, barges, and containers owned by the person 
maintaining the fund. Any amount of a withdrawal remaining 
after the application of the preceding sentence shall be treated 
as a nonqualified withdrawal. 
"(5) ORDINARY INCOME RECAPTURE OF BASIS REDUCTION.—If any 
property the basis of which was reduced under paragraph (2), 
(3), or (4) is disposed of, any gain realized on such disposition, to 
the extent it does not exceed the aggregate reduction in the 
basis of such property under such paragraphs, shall be treated 
as an amount referred to in subsection (g)(3)(A) which was 
withdrawn on the date of such disposition. Subject to such 
conditions and requirements as may be provided in joint regula-
tions, the preceding sentence shall not apply to a disposition 
where there is a redeposit in an amount determined under joint 
regulations which will, insofar as practicable, restore the fund 
to the position it was in before the withdrawal. 
"(g) TAX TREATMENT OF NONQUALIFIED WITHDRAWALS.— 
"(1) IN GENERAL.—Except as provided in subsection (h), any 
withdrawal from a capital construction fund which is not 
qualified withdrawal shall be treated as a nonqualified with-
drawal. 
100 STAT. 2212 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(2) ORDERING RULE.—Any nonqualified withdrawal from a 
« 
fund shall be treated— 
"(A) first as made out of the ordinary income account, 
,,.,,_.„, 
"(B) second as made out of the capital gain account, and 
"(C) third as made out of the capital account. 
For purposes of this section, items withdrawn from any account 
shall be treated as withdrawn on a first-in-first-out basis; except 
that (i) any nonqualified withdrawal for research, development, 
and design expenses incident to new and advanced ship design, 
machinery and equipment, and (ii) any amount treated as a 
nonqualified withdrawal under the second sentence of subsec-
tion (f)(4), shall be treated as withdrawn on a last-in-first-out 
basis. 
"(3) OPERATING RULES.—For purposes of this title— 
"(A) any amount referred to in paragraph (2)(A) shall be 
' ' ' " 
included in income as an item of ordinary income for the 
taxable year in which the withdrawal is made, 
"(B) any amount referred to in paragraph (2)(B) shall be 
included in income for the taxable year in which the with-
drawal is made as an item of gain realized during such year 
from the disposition of an asset held for more than 6 
months, and 
"(C) for the period on or before the last date prescribed 
'] 
for payment of tax for the taxable year in which this 
^
^
' 
withdrawal is made— 
"(i) no interest shall be payable under section 6601 
and no addition to the tax shall be payable under 
section 6651, 
"(ii) interest on the amount of the additional tax 
attributable to any item referred to in subparagraph 
(A) or (B) shall be paid at the applicable rate (as defined 
in paragraph (4)) from the last date prescribed for 
payment of the tax for the taxable year for which such 
r 
item was deposited in the fund, and 
"(iii) no interest shall be payable on amounts re-
ferred to in clauses (i) and (ii) of paragraph (2) or in the 
case of any nonqualified withdrawal arising from the 
application of the recapture provision of section 606(5) 
I 
of the Merchant Marine Act of 1936 as in effect on 
December 31, 1969. 
"(4) INTEREST RATE.—For purposes of paragraph (3)(C)(ii), the 
applicable rate of interest for any nonqualified withdrawal— 
"(A) made in a taxable year beginning in 1970 or 1971 is 8 
percent, or 
"(B) made in a taxable year beginning after 1971, shall be 
determined and published jointly by the Secretary of the 
Treasury or his delegate and the applicable Secretary and 
shall bear a relationship to 8 percent which the Secretaries 
determine under joint regulations to be comparable to the 
relationship which the money rates and investment yields 
for the calendar year immediately preceding the beginning 
of the taxable year bear to the money rates and investment 
yields for the calendar year 1970. 
"(5) AMOUNT NOT WITHDRAWN FROM FUND AFTER 25 YEARS 
FROM DEPOSIT TAXED AS NONQUALIFIED WITHDRAWAL.— 
"(A) IN GENERAL.—The applicable percentage of any 
amount which remains in a capital construction fund at the 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2213 
close of the 26th, 27th, 28th, 29th, or 30th taxable year 
following the taxable year for which such amount was 
deposited shall be treated as a nonqualified withdrawal in 
accordance with the following table: 
"If the amount remains in the fund at the 
The applicable 
close of the— 
percentage is— 
26th taxable year 
20 percent 
27th taxable year 
40 percent 
28th taxable year 
60 percent 
29th taxable year 
80 percent 
30th taxable year 
100 percent. 
"(B) EARNINGS TREATED AS DEPOSITS.—The earnings of any 
capital construction fund for any taxable year (other than 
net gains) shall be treated for purposes of this paragraph as 
an amount deposited for such taxable year. 
"(C) AMOUNTS COMMITTED TREATED AS WITHDRAWN.—For 
purposes of subparagraph (A), an amount shall not be 
treated as remaining in a capital construction fund at the 
close of any taxable year to the extent there is a binding 
contract at the close of such year for a qualified withdrawal 
of such amount with respect to an identified item for which 
such withdrawal may be made. 
"(D) AUTHORITY TO TREAT EXCESS FUNDS AS WITHDRAWN.— 
If the Secretary determines that the balance in any capital 
construction fund exceeds the amount which is appropriate 
to meet the vessel construction program objectives of the 
person who established such fund, the amount of such 
excess shall be treated as a nonqualified withdrawal under 
subparagraph (A) unless such person develops appropriate 
program objectives within 3 years to dissipate such excess. 
"(E) AMOUNTS IN FUND ON JANUARY i, 1987.—For pur-
poses of this paragraph, all amounts in a capital construc-
tion fund on January 1, 1987, shall be treated as deposited 
in such fund on such date. 
"(6) NONQUALIFIED 
WITHDRAWALS 
TAXED AT HIGHEST 
MAR-
GINAL RATE.— 
"(A) I N GENERAL.—In the case of any taxable year for 
which there is a nonqualified withdrawal (including any 
amount so treated under paragraph (5)), the tax imposed by 
chapter 1 shall be determined— 
"(i) by excluding such withdrawal from gross income, 
and 
"(ii) by increasing the tax imposed by chapter 1 by 
the product of the amount of such withdrawal and the 
highest rate of tax specified in section 1 (section 11 in 
the case of a corporation). 
With respect to the portion of any nonqualified withdrawal 
made out of the capital gain account during a taxable year 
to which section l(i) or 1201(a) applies, the rate of tax taken 
into account under the preceding sentence shall not exceed 
28 percent (34 percent in the case of a corporation). 
"(B) TAX BENEFIT RULE.—If any portion of a nonqualified 
withdrawal is properly attributable to deposits (other than 
earnings on deposits) made by the taxpayer in any taxable 
year which did not reduce the taxpayer's liability for \x 
under chapter 1 for any taxable year preceding the taxable 
year in which such withdrawal occurs— 
100 STAT. 2214 
P U B L I C L A W 99-514—OCT. 22, 1986 
'^^'•'' 
"(i) such portion shall not be taken into account 
under subparagraph (A), and 
"(ii) an amount equal to such portion shall be treated 
as allowed as a deduction under section 172 for the 
taxable year in which such withdrawal occurs. 
"(C) COORDINATION WITH DEDUCTION FOR NET OPERATING 
LOSSES.—Any nonqualified withdrawal excluded from gross 
income under subparagraph (A) shall be excluded in deter-
mining taxable income under section 172(b)(2). 
"(h) CERTAIN CORPORATE REORGANIZATIONS AND CHANGES IN PART-
NERSHIPS.—Under joint regulations— 
" ( D a transfer of a fund from one person to another person in 
a transaction to which section 381 applies may be treated as if 
such transaction did not constitute a nonqualified withdrawal, 
and 
"(2) a similar rule shall be applied in the case of a continu-
ation of a partnership. 
"(i) DEFINITIONS.—For purposes of this section, any term defined 
in section 607(k) of the Merchant Marine Act, 1936 which is also 
used in this section (including the definition of 'Secretary') shall 
have the meaning given such term by such section 607(k) as in effect 
on the date of the enactment of this section." 
(c) CREDITS N O T ALLOWED AGAINST INCREASE IN TAX.—Paragraph 
(2) of section 26(b) is amended by striking out "and" at the end of 
subparagraph (G), by striking out the period at the end of subpara-
graph (H) and inserting in lieu thereof ", and", and by adding at the 
end thereof the following new subparagraph: 
"(I) subparagraph (A) of section 7518(g)(6) (relating to 
nonqualified withdrawals from capital construction funds 
taxed at highest marginal rate)." 
(d) DEPARTMENTAL REPORTS AND CERTIFICATION.—Section 607 of 
the Merchant Marine Act, 1936, is amended by adding at the end 
thereof the following new subsection: 
"(m) DEPARTMENTAL REPORTS AND CERTIFICATION.— 
"(1) IN GENERAL.—For each calendar year, the Secretaries 
shall each provide the Secretary of the Treasury, within 120 
days after the close of such calendar year, a written report with 
respect to those capital construction funds that are under their 
jurisdiction. 
«^ 
"(2) CONTENTS OF REPORTS.—Each report shall set forth the 
name and taxpayer identification number of each person— 
"(A) establishing a capital construction fund during such 
* 
calendar year; 
' 
"(B) maintaining a capital construction fund as of the last 
day of such calendar year; 
"(C) terminating a capital construction fund during such 
calendar year; 
"(D) making any withdrawal from or deposit into (and the 
* 
amounts thereof) a capital construction fund during such 
calendar year; or 
» ' 
"(E) with respect to which a determination has been 
made during such calendar year that such person has failed 
to 
fulfill 
a substantial 
obligation 
under 
any capital 
construction fund agreement to which such person is a 
party." 
(e) CONFORMING AMENDMENTS.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2215 
(1) Subparagraph (A) of section 607(d)(1) of the Merchant 
Marine Act, 1936 is amended by inserting "and section 7518 of 
such Code" after "this section". 
(2) Subparagraph (D) of section 607(d)(1) of such Act is 
amended by inserting "and section 7518 of such Code" after 
"this section". 
(3) Subparagraph (C) of section 607(e)(2) of such Act is 
amended by striking out "85 percent" and inserting in lieu 
thereof "the percentage applicable under section 243(a)(1) of the 
Internal Revenue Code of 1986". 
(4) Subparagraph (E) of section 607(e)(4) of such Act is 
amended to read as follows: 
"(E) the portion of any dividend referred to in paragraph 
(2)(C) not taken into account under such paragraph." 
(5) Paragraph (3) of section 607(g) of such Act is amended to 
read as follows: 
"(3) If any portion of a qualified withdrawal for a vessel, 
barge, or container is made out of the capital gain account, the 
basis of such vessel, barge, or container shall be reduced by an 
amount equal to such portion." 
(6) Subsection (h) of section 607 of such Act is amended by 
adding at the end thereof the following new paragraphs: 
"(5) AMOUNT NOT WITHDRAWN FROM FUND AFTER 25 YEARS 
FROM DEPOSIT TAXED AS NONQUALIFIED WITHDRAWAL.— 
"(A) IN GENERAL.—The applicable percentage of any 
amount which remains in a capital construction fund at the 
close of the 26th, 27th, 28th, 29th, or 30th taxable year 
following the taxable year for which such amount was 
deposited shall be treated as a nonqualified withdrawal in 
accordance with the following table: 
"If the amount remains in the fund at the 
The applicable 
close of the— 
percentage is— 
2()th taxable year 
20 percent 
27th taxable year 
40 percent 
2Sth taxable year 
(jO percent 
29th taxable year 
80 percent 
:?()th taxable year 
100 percent. 
"(B) EARNINGS TREATED AS DEPOSITS.—The earnings of any 
capital construction fund for any taxable year (other than 
net gains) shall be treated for purposes of this paragraph as 
an amount deposited for such taxable year. 
"(C) AMOUNTS COMMITTED TREATED AS WITHDRAWN.—For 
purposes of subparagraph (A), an amount shall not be 
treated as remaining in a capital construction fund at the 
close of any taxable year to the extent there is a binding 
contract at the close of such year for a qualified withdrawal 
of such amount with respect to an identified item for which 
such withdrawal may be made. 
"(D) AUTHORITY TO TREAT EXCESS FUNDS AS WITHDRAWN.— 
If the Secretary determines that the balance in any capital 
construction fund exceeds the amount which is appropriate 
to meet the vessel construction program objectives of the 
person who established such fund, the amount of such 
excess shall be treated as a nonqualified withdrawal under 
subparagraph (A) unless such person develops appropriate 
program objectives within 3 years to dissipate such excess. 
100 STAT. 2216 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(E) AMOUNTS IN FUND ON JANUARY i, 1987.—For pur-
poses of this paragraph, all amounts in a capital construc-
tion fund on January 1, 1987, shall be treated as deposited 
in such fund on such date. 
"(6) 
NONQUALIFIED WITHDRAWALS TAXED AT HIGHEST MAR-
GINAL RATE.— 
"(A) IN GENERAL.—In the case of any taxable year for 
which there is a nonqualified withdrawal (including any 
amount so treated under paragraph (5)), the tax imposed by 
chapter 1 of the Internal Revenue Code of 1986 shall be 
determined— 
"(i) by excluding such withdrawal from gross income, 
.; 
. 
and 
"(ii) by increasing the tax imposed by chapter 1 of 
<
v
- 
|, 
such Code by the product of the amount of such with-
drawal and the highest rate of tax specified in section 1 
(section 11 in the case of a corporation) of such Code. 
With respect to the portion of any nonqualified withdrawal 
made out of the capital gain account during a taxable year 
to which section l(i) or 1201(a) of such Code applies, the rate 
,,l 
of tax taken into account under the preceding sentence 
shall not exceed 28 percent (34 percent in the case of a 
corporation). 
"(B) TAX BENEFIT RULE.—If any portion of a nonqualified 
withdrawal is properly attributable to deposits (other than 
earnings on deposits) made by the taxpayer in any taxable 
year which did not reduce the taxpayer's liability for tax 
under chapter 1 for any taxable year preceding the taxable 
year in which such withdrawal occurs— 
"(i) such portion shall not be taken into account 
under subparagraph (A), and 
' 
"(ii) an amount equal to such portion shall be treated 
as allowed as a deduction under section 172 of such 
Code for the taxable year in which such withdrawal 
occurs. 
"(C) COORDINATION WITH DEDUCTION FOR NET OPERATING 
LOSSES.—Any nonqualified withdrawal excluded from gross 
income under subparagraph (A) shall be excluded in deter-
mining taxable income under section 172(b)(2) of the 
Internal Revenue Code of 1986." 
(f) CLERICAL AMENDMENT.—The table of sections for chapter 77 is 
amended by adding at the end thereof the following new item: 
"Sec. 7518. Tax incentives relating to merchant marine capital construction 
funds." 
(g) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31, 1986. 
TITLE III—CAPITAL GAINS 
Subtitle A—Individual Capital Gains 
SEC. 301. REPEAL OF EXCLUSION FOR LONG-TERM CAPITAL GAINS OF 
INDIVIDUALS. 
(a) IN GENERAL.—Section 1202 (relating to deduction for capital 
gains) is hereby repealed. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2217 
(b) CONFORMING AMENDMENTS.— 
(1) Section 62(a) (defining adjusted gross income), as amended 
by section 132, is amended by striking out paragraph (3) and 
redesignating paragraphs (4), (5), (6), (7), (10), (11), (12), (13), (14), 
and (15) as paragraphs (3) through (12), respectively. 
(2) Section 170(e)(1) (relating to certain contributions of ord'-
nary income and capital gain property) is amended by striking 
out "40 percent (^%6 in the case of a corporation) of. 
(3) Paragraph (2) of section 172(d) (relating to modifications 
with respect to net operating loss deduction) is amended to read 
as follows: 
"(2) CAPITAL GAINS AND LOSSES OF TAXPAYERS OTHER THAN 
CORPORATIONS.—In the case of a taxpayer other than a corpora-
j 
tion, the amount deductible on account of losses from sales or 
exchanges of capital assets shall not exceed the amount includ-
ible on account of gains from sales or exchanges of capital 
assets." 
(4) Paragraph (1) of section 219(f) (defining compensation) is 
amended by striking out "paragraph (7)" and inserting in lieu 
thereof "paragraph (6)". 
(5)(A) Section 223 (relating to cross references) is amended to 
read as follows: 
"SEC. 223. CROSS REFERENCE. 
"For deductions in respect of a decedent, see section 691." 
(B) The table of sections for part VII of subchapter B of 
- 
chapter 1 is amended by striking out "references" in the item 
relating to section 223 and inserting in lieu thereof "reference". 
(6) Paragraph (4) of section 642(c) (relating to deduction for 
amounts paid or permanently set aside for a charitable purpose) 
is amended— 
(A) by striking out the 1st sentence, and 
(B) by striking out "ADJUSTMENTS" in the paragraph 
,' 
heading and inserting in lieu thereof "COORDINATION WITH 
SECTION 68l". 
(7) Paragraph (3) of section 643(a) (relating to distributable net 
income) is amended by striking out the last sentence. 
(8) Paragraph (4) of section 691(c) (relating to deduction for 
estate tax) is amended— 
(A) by striking out "1201,1202, and 1211, and for purposes 
' 
of section 57(a)(9)" and inserting in lieu thereof "l(j), 1201, 
and 1211", and 
^^. ; 
(B) by striking out "CAPITAL GAIN DEDUCTION, ETC.—" in 
the paragraph heading and inserting in lieu thereof "CAP-
j.^ .,, 
ITAL GAIN PROVISIONS.—". 
(9) The second sentence of paragraph (2) of section 871(a) 
(relating to income not connected with United States business) 
is amended by striking out "such gains and losses shall be 
determined without regard to section 1202 (relating to deduc-
tion for capital gains) and". 
(10) Subsection (b) of section 1211 (relating to limitation on 
capital losses) is amended to read as follows: 
"(b) OTHER TAXPAYERS.—In the case of a taxpayer other than a 
corporation, losses from sales or exchanges of capital assets shall be 
allowed only to the extent of the gains from such sales or exchanges, 
plus (if such losses exceed such gains) the lower of— 
100 STAT. 2218 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(1) $3,000 ($1,500 in the case of a married individual filing a 
separate return), or 
"(2) the excess of such losses over such gains." 
' 
(11) Paragraph (2) of section 12120t)) (relating to capital loss 
carrybacks and carryovers) is amended to read as follows: 
"(2) SPECIAL RULE.—For purposes of determining the excess 
-
f
^ referred to in subparagraph (A) or (B) of paragraph (1), an 
amount equal to the amount allowed for the taxable year under 
paragraph (1) or (2) of section 1211(b) shall be treated as a short-
term capital gain in such year." 
(12) Paragraph (1) of section 1402(i) (relating to special rules 
•"^'- for options and commodities dealers) is amended to read as 
follows: 
"(1) IN GENERAL.—Notwithstanding subsection (a)(3XA), in 
determining the net earnings from self-employment of any 
options dealer or commodities dealer, there shall not be ex-
cluded any gain or loss (in the normal course of the taxpayer's 
activity of dealing in or trading section 1256 contracts) from 
' " section 1256 contracts or property related to such contracts." 
(13) The table of sections for part I of subchapter P of chapter 
' 
1 is amended by striking out the item relating to section 1202. 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
SEC. 302. 28-PERCENT CAPITAL GAINS RATE FOR TAXPAYERS OTHER 
THAN CORPORATIONS. 
(a) IN GENERAL.—Section 1 (relating to tax imposed on individ-
uals), as amended by sections 101 and 1411, is amended by adding at 
the end thereof the following new subsection: 
"(j) MAXIMUM CAPITAL GAINS RATE.— 
"(1) IN GENERAL.—If a taxpayer has a net capital gain for any 
taxable year to which this subsection applies, then the tax 
imposed by this section shall not exceed the sum of— 
"(A) a tax computed at the rates and in the same manner 
'^ ' as if this subsection had not been enacted on the greater 
r. 
O f -
"(i) the taxable income reduced by the amount of net 
^ 
capital gain, or 
" ' 
"(ii) the amount of taxable income taxed at a rate 
below 28 percent, plus 
f/t ' 
"(B) a tax of 28 percent of the amount of taxable income 
^ J, 1 
in excess of the amount determined under subparagraph 
(A), plus 
^ 
. 
"(C) the amount of increase determined under subsection 
'''" 
(g). 
"(2) YEARS TO WHICH SUBSECTION APPLIES.—This subsection 
shall apply to— 
'(A) any taxable year beginning in 1987, and 
' 
"(B) any taxable year beginning after 1987 if the highest 
. b * rate of tax set forth in subsection (a), (b), (c), (d), or (e) 
(whichever applies) for such taxable year exceeds 28 per-
cent." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to taxable years beginning after December 31,1986. 
(c) TRANSITIONAL RULE.—The tax under section 1 of the Internal 
Revenue Code of 1986 on the long-term capital gain on rights to 
royalties paid under leases and assignments binding on Septem-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2219 
ber 25, 1985, by a limited partnership formed on March 1, 1977, 
which on October 30, 1979, assigned leases and which assignment 
was amended on April 27, 1981, shall not exceed 20 percent. 
Subtitle B—Repeal of Corporate Capital Gains 
Treatment 
SEC. 311. REPEAL OF CORPORATE CAPITAL GAINS TREATMENT. 
(a) GENERAL RULE.—Section 1201 (relating to alternative tax for 
corporations) is amended to read as follows: 
"SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS. 
"(a) GENERAL RULE.—If for any taxable year a corporation has a 
net capital gain and any rate of tax imposed by section 11, 511, or 
831(a) (whichever is applicable) exceeds 34 percent (determined 
without regard to the last sentence of section 110))), then, in lieu of 
any such tax, there is hereby imposed a tax (if such tax is less than 
the tax imposed by such sections) which shall consist of the sum o
f
— 
"(1) a tax computed on the taxable income reduced by the 
amount of the net capital gain, at the rates and in the manner 
as if this subsection had not been enacted, plus 
"(2) a tax of 34 percent of the net capital gain. 
"(b) CROSS REFERENCES.— 
"For computation of the alternative tax— 
!• 
"(1) in the case of life insurance companies, see section 801(aX2), 
tJii' 
"(2) in the case of regulated investment companies and their sharehold-
ers, see section 852(bX3XA) and (D), and 
"(3) in the case of real estate investment trusts, see section 857(bX3XA)." 
(b) TECHNICAL AMENDMENTS.— 
(1) Clause (iii) of section 8520b)(3)(D) is amended by striking 
out "72 percent" and inserting in lieu thereof "66 percent'. 
(2) Subparagraph (E) of section 593(b)(2), as in effect before the 
amendments made by title IX, is amended by adding "and" at 
the end of clause (iii), by striking out clause (iv), and by re-
designating clause (v) as clause (iv). 
(3) The second sentence of section 631(c) is amended by strik-
; 
ing out "Such owner" and inserting in lieu thereof "If for the 
taxable year of such gain or loss the maximum rate of tax 
imposed by this chapter on any net capital gain is less than such 
maximum rate for ordinary income, such owner". 
(4) Paragraphs (1) and (2) of section 1445(e) (as amended by 
title XVIII) are each amended by striking out "28 percent" and 
inserting in lieu thereof "34 percent". 
(c) EFFECTIVE DATE.—The amendments made by subsections (a) 
and (b) shall apply to taxable years beginning after December 31, 
1986. 
(d) TRANSITIONAL R U L E S . — 
(1) T A X A B L E YEARS WHICH BEGIN I N 1986 
A N D E N D I N 1987.—In 
the case of any taxable year which begins before January 1, 
1987, and ends on or after such date, paragraph (2) of section 
1201(a) of the Internal Revenue Code of 1954, as in effect on the 
date before the date of enactment of this Act, shall be applied as 
if it read as follows: 
. 
"(2) the sum of— 
"(A) 28 percent of the lesser of— 
100 STAT. 2220 
PUBLIC LAW 99-514—OCT. 22, 1986 
' 
"(i) the net capital gain determined by taking into 
' 
account only gain or loss which is properly taken into 
account for the portion of the taxable year before 
January 1, 1987, or 
';^ 
"(ii) the net capital gain for the taxable year, and 
"(B) 34 percent of the excess (if any) of^ 
"(i) the net capital gain for the taxable year, over 
"(ii) the amount of the net capital gain taken into 
account under subparagraph (A)." 
(2) REVOCATION OF ELECTIONS UNDER SECTION 631(a).—Any 
election under section 631(a) of the Internal Revenue Code of 
1954 made (whether by a corporation or a person other than a 
corporation) for a taxable year beginning before January 1, 
1987, may be revoked by the taxpayer for any taxable year 
ending after December 31, 1986. For purposes of determining 
whether the taxpayer may make a further election under such 
section, such election (and any revocation under this paragraph) 
shall not be taken into account. 
Subtitle C—Incentive Stock Options 
SEC. 321. REPEAL OF REQUIREMENT THAT INCENTIVE STOCK OPTIONS 
ARE EXERCISABLE ONLY IN CHRONOLOGICAL ORDER; MODI-
FICATION OF $100,000 LIMITATION. 
(a) GENERAL RULE.—Subsection (b) of section 422A is amended by 
inserting "and" at the end of paragraph (6) and by striking out 
paragraphs (7) and (8) and inserting in lieu thereof the following 
new paragraph: 
"(7) under the terms of the plan, the aggregate fair market 
value (determined at the time the option is granted) of the stock 
with respect to which incentive stock options are exercisable for 
the 1st time by such individual during any calendar year (under 
all such plans of the individual's employer corporation and its 
parent and subsidiary corporations) shall not exceed $100,000." 
0)) CONFORMING AMENDMENTS.— 
(1) Subsection (c) of section 422A is amended— 
(A) by striking out paragraphs (4) and (7), and 
(B) by redesignating paragraphs (5), (6), (8), (9), and (10) as 
paragraphs (4), (5), (6), (7), and (8), respectively. 
(2) The last sentence of section 422A(cXl) is amended by 
striking out "paragraph (8) of subsection O
t
)
) and paragraph (4) of 
this subsection" and inserting in lieu thereof "paragraph (7) of 
subsection (b)". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to options granted after December 31,1986. 
Subtitle D—Straddles 
SEC. 331. YEAR-END RULE EXPANDED. 
(a) IN GENERAL.—Subparagraph (E) of section 1092(cX4) (defining 
straddle) is amended— 
(1) by inserting "or the stock is disposed of at a loss" in clause 
(i) after "closed", 
(2) by striking out "is" in clause (ii) and inserting in lieu 
thereof "or gains on such options are", and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2221 
(3) by inserting "or option" after "stock" and "or the disposi-
tion of such stock" after "options" in clause (iii). 
(b) EFFECTIVE DATE.—The amendments made by this section shall 
apply to positions established on or after January 1, 1987. 
TITLE IV^AGRICULTURE, ENERGY, AND 
NATURAL RESOURCES 
Subtitle A—Agriculture 
SEC. 401. LIMITATION ON EXPENSING OF SOIL AND WATER CONSERVA-
TION EXPENDITURES. 
(a) GENERAL RULE.—Subsection (c) of section 175 (relating to soil 
and water conservation expenditures) is amended by adding at the 
end thereof the following new paragraph: 
"(3) ADDITIONAL LIMITATIONS.— 
.: 
"(A) EXPENDITURES MUST BE CONSISTENT WITH SOIL CON-
* 
SERVATION PLAN.—Notwithstanding any other provision of 
this section, subsection (a) shall not apply to any expendi-
tures unless such expenditures are consistent with— 
"(i) the plan (if any) approved by the Soil Conserva-
V .: 
tion Service of the Department of Agriculture for the 
area in which the land is located, or 
'." ; 
"(ii) if there is no plan described in clause (i), any soil 
conservation plan of a comparable State agency. 
"(B) CERTAIN WETLAND, ETC., ACTIVITIES NOT QUAUFIED.— 
Subsection (a) shall not apply to any expenditures in 
connection with the draining or filling of wetlands or land 
preparation for center pivot irrigation systems." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to amounts paid or incurred after December 31, 1986, in 
taxable years ending after such date. 
SEC. 402. REPEAL OF SPECIAL TREATMENT FOR EXPENDITURES FOR 
CLEARINC; LAND. 
(a) IN GENERAL.—Section 182 (relating to expenditures by farmers 
for clearing land) is hereby repealed. 
(b) TECHNICAL AMENDMENTS.— 
(1) Paragraph (1) of section 263(a) (relating to capital expendi-
tures) is amended by striking out subparagraph (E) and by 
redesignating subparagraphs (F), (G), and (H) as subparagraphs 
(E), (F), and (G), respectively. 
(2) Subparagraph (A) of section 1252(a)(1) (relating to gain 
from disposition of farm land) is amended by striking out 
"(relating to expenditures by farmers for clearing land)" and 
inserting in lieu thereof "(as in effect on the day before the date 
of the enactment of the Tax Reform Act of 1986)". 
(3) The table of sections for part VI of subchapter B of chapter 
1 is amended by striking out the item relating to section 182. 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to amounts paid or incurred after December 31, 1985, in 
taxable years ending after such date. 
100 STAT. 2222 
PUBLIC LAW 99-514—OCT. 22, 1986 
SEC. 403. TREATMENT OF DISPOSITIONS OF CONVERTED WETLANDS OR 
HIGHLY ERODIBLE CROPLANDS. 
(a) GENERAL RULE.—Part IV of subchapter P of chapter 1 (relating 
to special rules for determining capital gains and losses) is amended 
by adding at the end thereof the following new section: 
"SEC. 1257. DISPOSITION OF CONVERTED WETLANDS OR HIGHLY EROD-
IBLE CROPLANDS. 
"(a) GAIN TREATED AS ORDINARY INCOME.—Any gain on the dis-
position of converted wetland or highly erodible cropland shall be 
treated as ordinary income. Such gain shall be recognized notwith-
standing any other provision of this subtitle, except that this section 
shall not apply to the extent such gain is recognized as ordinary 
income under any other provision of this part. 
"(b) Loss TREATED AS LONG-TERM CAPITAL LOSS.—Any loss recog-
nized on the disposition of converted wetland or highly erodible 
cropland shall be treated as a long-term capital loss. 
t ^ 
"(c) DEFINITIONS.—For purposes of this section— 
"(1) CONVERTED WETLAND.—The term 'converted wetland' 
means any converted wetland (as defined in section 1201(4) of 
the Food Security Act of 1985 (16 U.S.C. 3801(4))) held— 
"(A) by the person whose activities resulted in such land 
4; 
being converted wetland, or 
"(B) by any other person who at any time used such land 
for farming purposes. 
"(2) HIGHLY ERODIBLE CROPLAND.—The term 'highly erodible 
cropland' means any highly erodible cropland (as defined in 
section 1201(6) of the Food Security Act of 1985 (16 U.S.C. 
3801(6))), if at any time the taxpayer used such land for farming 
purposes (other than the grazing of animals). 
"(3) TREATMENT OF SUCCESSORS.—If any land is converted 
wetland or highly erodible cropland in the hands of any person, 
such land shall be treated as converted wetland or highly 
erodible cropland in the hands of any other person whose 
adjusted basis in such land is determined (in whole or in part) 
by reference to the adjusted basis of such land in the hands of 
such person. 
"(d) SPECIAL RULES.—Under regulations prescribed by the Sec-
retary, rules similar to the rules applicable under section 1245 shall 
apply for purposes of subsection (a). For purposes of sections 170(e), 
341(eX12), and 751(c), amounts treated as ordinary income under 
subsection (a) shall be treated in the same manner as amounts 
treated as ordinary income under section 1245." 
OD) CLERICAL AMENDMENT.—The table of sections for part IV of 
subchapter P of chapter 1 is amended by adding at the end thereof 
the following new item: 
"Sec. 1257. Disposition of converted wetlands or highly erodible croplands." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to dispositions of converted wetland or highly erodible crop-
land (as defined in section 1257(c) of the Internal Revenue Code of 
1986 as added by this section) first used for farming after March 1, 
1986, in taxable years ending after that date. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2223 
SEC. 404. LIMITATION ON CERTAIN PREPAID FARMING EXPENSES. 
(a) GENERAL RULE.—Section 464 (relating to limitations on deduc-
tions in case of farming syndicates) is amended by adding at the end 
thereof the following new subsection: 
"(f) 
SUBSECTIONS (a) AND (b) To 
APPLY TO CERTAIN PERSONS 
PREPAYING 50 PERCENT OR MORE OF CERTAIN FARMING EXPENSES.— 
"(1) IN GENERAL.—In the case of a taxpayer to whom this 
subsection applies, subsections (a) and O
t
>
) shall apply to the 
excess prepaid farm supplies of such taxpayer in the same 
manner as if such taxpayer were a farming syndicate. 
"(2) TAXPAYER TO WHOM SUBSECTION APPLIES.—This subsection 
applies to any taxpayer for any taxable year if such taxpayer— 
"(A) does not use an accrual method of accounting, 
"(B) has excess prepaid farm supplies for the taxable 
year, and 
"(C) is not a qualified farm-related taxpayer. 
"(3) QUALIFIED FARM-RELATED TAXPAYER.— 
"(A) IN GENERAL.—For purposes of this subsection, the 
term 'qualified farm-related taxpayer' means any farm-
' 
related taxpayer i
f
— 
"(i)(I) the aggregate prepaid farm supplies for the 3 
'•'' 
taxable years preceding the taxable year are less than 
50 percent of, 
"(II) the aggregate deductible farming expenses 
(other than prepaid farm supplies) for such 3 taxable 
years, or 
"(ii) the taxpayer has excess prepaid farm supplies 
for the taxable year by reason of any change in busi-
ness operation directly attributable to extraordinary 
' 
' 
circumstances. 
"(B) FARM-RELATED TAXPAYER.—For purposes of this 
paragraph, the term 'farm-related taxpayer' means any 
taxpayer— 
"(i) whose principal residence (within the meaning of 
section 1034) is on a farm, 
'•' 
"(ii) who has a principal occupation of farming, or 
"(iii) who is a member of the family (within the 
meaning of subsection (c)(2)(E)) of a taxpayer described 
in clause (i) or (ii). 
"(4) DEFINITIONS.—For purposes of this subsection— 
"(A) EXCESS PREPAID FARM SUPPLIES.—The term 'excess 
prepaid farm supplies' means the prepaid farm supplies for 
the taxable year to the extent the amount of such supplies 
exceeds 50 percent of the deductible farming expenses for 
the taxable year (other than prepaid farm supplies). 
"(B) PREPAID FARM SUPPLIES.—The term 'prepaid farm 
" 
supplies' means any amounts which are described in subsec-
tion (a) or (b) and would be allowable for a subsequent 
y' ' 
taxable year under the rules of subsections (a) and (b). 
"(C) DEDUCTIBLE FARMING EXPENSES.—The term 'deduct-
sj- 
ible farming expenses' means any amount allowable £is a 
deduction under this chapter (including any amount allow-
able as a deduction for depreciation or amortization) which 
is properly allocable to the trade or business of farming." 
(b) CONFORMING AMENDMENTS.— 
100 STAT. 2224 
PUBLIC LAW 99-514—OCT. 22, 1986 
(1) The heading for section 464 is amended by striking out "IN 
CASE OF FARMING SYNDICATES" and inserting in lieu thereof 
"FOR CERTAIN FARMING". 
(2) The table of sections for subpart C of part II of subchapter 
E of chapter 1 is amended by striking out "in case of farming 
syndicates" in the item relating to section 464 and inserting in 
lieu thereof "for certain farming expenses". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to amounts paid or incurred after March 1, 1986, in taxable 
years beginning after such date. 
SEC. 405. TAX TREATMENT OF DISCHARGE OF CERTAIN INDEBTEDNESS 
OF SOLVENT FARMERS. 
(a) IN GENERAL.—Section 108 (relating to income from discharge 
of indebtedness) is amended by adding at the end thereof the 
following new subsection: 
"(g) SPECIAL RULES FOR DISCHARGE OF QUALIFIED FARM INDEBTED-
NESS OF SOLVENT FARMERS.— 
"(1) IN GENERAL.—For purposes of this section and section 
1017, the discharge by a qualified person of qualified farm 
indebtedness of a taxpayer who is not insolvent at the time of 
the discharge shall be treated in the same manner as if the 
discharge had occurred when the taxpayer was insolvent. 
"(2) QUAUFIED FARM INDEBTEDNESS.—For purpOSeS of this 
subsection, indebtedness of a taxpayer shall be treated as quali-
fied farm indebtedness if— 
"(A) such indebtedness was incurred directly in connec-
tion with the operation by the taxpayer of the trade or 
business of farming, and 
"(B) 50 percent or more of the average annual gross 
sfriJ 
receipts of the taxpayer for the 3 taxable years preceding 
.;(, 
the taxable year in which the discharge of such indebt-
edness occurs is attributable to the trade or business of 
farming. 
"(3) QuAUFiED PERSON.—For purposes of this subsection, the 
term 'qualified person' means a person described in section 
46(cX8XDXiv)." 
O
b
) BASIS ADJUSTMENT.—Section lOlTOt)) (relating to basis adjust-
ment) is amended by adding at the end thereof the following new 
paragraph: 
"(4) ORDERING RULE IN THE CASE OF QUALIFIED FARM INDEBTED-
NESS.—Any amount which is excluded from gross income under 
section 108(a) by reason of the discharge of qualified farm 
indebtedness (within the meaning of section 108(gX2)) and which 
under subsection (b) of section 108 is to be applied to reduce 
b£isis shall be applied— 
"(A) first to reduce the tax attributes described in section 
108(bX2) (other than subparagraph (D) thereof), 
"(B) then to reduce basis of property other than property 
described in subparagraph (C), and 
"(C) then to reduce the basis of land used or held for use 
in the trade or business of farming." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to discharges of indebtedness occurring after April 9, 1986, in 
taxable years ending after such date. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2225 
SEC. 406. RETENTION OF CAPITAL GAINS TREATMENT FOR SALES OF 
DAIRY CATTLE UNDER MILK PRODUCTION TERMINATION 
PROGRAM. 
The amendments made by subtitles A and B of title III shall not 
apply to any gain from the sale of dairy cattle under a valid contract 
with the United States Department of Agriculture under the milk 
production termination program to the extent such gain is properly 
taken into account under the taxpayer's method of accounting after 
January 1,1987, and before September 1,1987. 
Subtitle B—Treatment of Oil, Gas, Geothermal, 
and Hard Minerals 
SEC. 411. TREATMENT OF INTANGIBLE DRILLING COSTS AND MINERAL 
EXPLORATION AND DEVELOPMENT COSTS. 
(a) TREATMENT UNDER SECTION 291.— 
(1) INCREASE IN PERCENTAGE DISALLOWANCE.—Paragraph (1) of 
section 291(b) (relating to special rules for treatment of intangi-
ble drilling costs and mineral exploration and development 
costs) is amended by striking out "20 percent" and inserting in 
lieu thereof "30 percent". 
(2) TREATMENT OF DISALLOWED AMOUNT.—Subsection O
t
)
) of 
section 291 is amended by striking out paragraphs (2), (3), (4), (5), 
and (6) and inserting in lieu thereof the following new 
paragraphs: 
"(2) AMORTIZATION OF AMOUNTS NOT ALLOWABLE AS DEDUC-
• 
TiONS UNDER PARAGRAPH (1).—The amount not allowable as a 
deduction under section 263(c), 616(a), or 617(a) (as the case may 
be) for any taxable year by reason of paragraph (1) shall be 
allowable as a deduction ratably over the 60-month period 
beginning with the month in which the costs are paid or 
incurred. 
"(3) DISPOSITIONS.—For purposes of section 1254, any deduc-
tion under paragraph (2) shall be treated as a deduction 
allowable under section 263(c), 616(a), or 617(a) (whichever is 
appropriate). 
"(4) INTEGRATED OIL COMPANY DEFINED.—For purposes of this 
subsection, the term 'integrated oil company' means, with re-
spect to any taxable year, any producer (within the meaning of 
section 4996(aXl)) of crude oil other than an independent pro-
ducer (within the meaning of section 4992(b)). 
"(5) COORDINATION WITH COST DEPLETION.—The portion of the 
adjusted basis of any property which is attributable to amounts 
to which paragraph (1) applied shall not be taken into account 
for purposes of determining depletion under section 611." 
O
t
)
) TREATMENT OF COSTS INCURRED OUTSIDE THE UNITED STATES.— 
(1) INTANGIBLE DRILUNG AND DEVELOPMENT COSTS.— 
(A) IN GENERAL.—Section 263 (relating to capital expendi-
tures) is amended by adding at the end thereof the follow-
ing new subsection: 
"(i) SPECIAL RULES FOR INTANGIBLE DRILLING AND DEVELOPMENT 
COSTS INCURRED OUTSIDE THE UNITED STATES.—In the case of intan-
gible drilling and development costs paid or incurred with respect to 
an oil, gas, or geothermal well located outside the United States— 
"(1) subsection (c) shall not apply, and 
100 STAT. 2226 
PUBLIC LAW 99-514—OCT. 22, 1986 
^> 
"(2) such costs shall— 
^ 
i^ * •-'•• 
' -
4H 
"(A) at the election of the taxpayer, be included in 
adjusted basis for purposes of computing the amount of 
any deduction allowable under section 611 (determined 
without regard to section 613), or 
"(B) if subparagraph (A) does not apply, be allowed as 
a deduction ratably over the 10-taxable year period 
r f . PC 
beginning with the taxable year in which such costs 
were paid or incurred. 
This subsection shall not apply to costs paid or incurred with respect 
to a nonproductive well." 
(B) CONFORMING AMENDMENT.—Section 263(c) is amended 
by inserting "and except as provided in subsection (i)," after 
"subsection (a),". 
jf 
(2) DEVELOPMENT AND MINING EXPLORATION COSTS.— 
(A) IN GENERAL.—Section 616 (relating to development 
expenditures) is amended by redesignating subsection (d) as 
subsection (e), and inserting after subsection (c) the follow-
ing new subsection: 
"(d) SPECIAL RULES FOR FOREIGN DEVELOPMENT.—In the case of 
any expenditures paid or incurred with respect to the development 
of a mine or other natural deposit (other than an oil, gas, or 
geothermal well) located outside of the United States— 
"(1) subsections (a) and (b) shall not apply, and 
"(2) such expenditures shall— 
"(A) at the election of the taxpayer, be included in ad-
justed basis for purposes of computing the amount of any 
deduction allowable under section 611 (without regard to 
section 613), or 
"(B) if subparagraph (A) does not apply, be allowed as a 
deduction ratably over the 10-taxable year period beginning 
with the taxable year in which such expenditures were paid 
or incurred." 
<
i
s > 
(B) CERTAIN MINING EXPLORATION EXPENDITURES OUTSIDE 
THE UNITED STATES.—Section 617(h) (relating to limitation) 
is amended to read as follows: 
"(h) SPECIAL RULES FOR FOREIGN EXPLORATION.—In the case of any 
expenditures paid or incurred before the development stage for the 
purpose of ascertaining the existence, location, extent, or quality of 
any deposit of ore or other mineral (other than an oil, gas, or 
geothermal well) located outside the United States— 
"(1) subsection (a) shall not apply, and 
"(2) such expenditures shall— 
"(A) at the election of the taxpayer, be included in ad-
justed basis for purposes of computing the amount of any 
deduction allowable under section 611 (without regard to 
• *''"' section 613), or 
"(B) if subparagraph (A) does not apply, be allowed as a 
deduction ratably over the 10-taxable year period beginning 
with the taxable year in which such expenditures were paid 
or incurred." 
(C) CONFORMING AMENDMENTS.— 
(i) Subsection (a) of section 616 is amended by strik-
ing out "subsection (b)" and inserting in lieu thereof 
"subsections (b) and (d)". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2227 
} 
' 
(ii) Subparagraph (B) of section 29103)(1) is amended 
by striking out "617" and inserting in lieu thereof 
"617(a)". 
' . * 
(iii) Paragraph (10) of section 381(c) is amended by 
striking out the last sentence thereof. 
• 
(iv) Subparagraph 
(C) 
of 
section 
243(b)(3) 
is 
i - 
amended— 
(I) by adding "and" at the end of clause (i), 
• ' 
(II) by striking out clause (ii), and 
(III) by redesignating clause (iii) as clause (ii). 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to costs paid or incurred after December 31, 1986, in 
taxable years ending after such date. 
(2) TRANSITION RULE.—The amendments made by this section 
shall not apply with respect to intangible drilling and develop-
ment costs incurred,by United States companies pursuant to a 
minority interest in a license for Netherlands or United King-
dom North Sea development if such interest was acquired on or 
before December 31, 1985. 
SEC. 412. MODIFICATION OF PERCENTAGE DEPLETION RULES. 
(a) PERCENTAGE DEPLETION NOT ALLOWED FOR LEASE BONUSES, 
ETC.— 
(1) IN GENERAL.—Subsection (d) of section 613A (relating to 
limitations on application of subsection (c)) is amended by 
adding at the end thereof the following new paragraph: 
"(5) PERCENTAGE DEPLETION NOT ALLOWED FOR LEASE BONUSES, 
ETC.—In the case of any oil or gas property to which subsection 
(c) applies, for purposes of section 613, the term 'gross income 
from the property' shall not include any lease bonus, advance 
royalty, or other amount payable without regard to production 
from property." 
(2) GEOTHERMAL DEPOSITS.—Section 613(e) is amended by 
adding at the end thereof the following new paragraph: 
"(4) PERCENTAGE DEPLETION NOT TO INCLUDE LEASE BONUSES, 
ETC.—In the case of any geothermal deposit, the term 'gross 
income from the property' shall, for purposes of this section, not 
include any amount described in section 613A(d)(5)." 
(3) EFFECTIVE DATE.—The amendment made by this subsection 
shall apply to amounts received or accrued after August 16, 
1986, in taxable years ending after such date. 
(b) TREATMENT UNDER SECTION 291 OF COAL AND IRON ORE.— 
(1) IN GENERAL.—Paragraph (2) of section 291(a) (relating to 
reductions in percentage depletion) is amended by striking out 
"15 percent" and inserting in lieu thereof "20 percent". 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
shall apply to taxable years beginning after December 31, 1986. 
SEC. 413. GAIN FROM DISPOSITION OF INTERESTS IN OIL. GAS. GEO-
THERMAL. OR OTHER MINERAL PROPERTIES. 
(a) GENERAL RULE.—Section 1254 is amended to read as follows: 
"SEC. 1254. GAIN FROM DISPOSITION OF INTEREST IN OIL. GAS. GEO-
THERMAL. OR OTHER MINERAL PROPERTIES. 
"(a) GENERAL RULE.— 
100 STAT. 2228 
PUBLIC LAW 99-514—OCT. 22, 1986 
•'^' 
"(1) ORDINARY INCOME.—If any section 1254 property is dis-
' .; posed of, the lesser of— 
~ 
"(A) the aggregate amount o
f
— 
"(i) expenditures which have been deducted by the 
taxpayer or any person under section 263, 616, or 617 
.1 
, 
with respect to such property and which, but for such 
deduction, would have been included in the adjusted 
. i 
basis of such property, and 
"(ii) the deductions for depletion under section 611 
which reduced the adjusted basis of such property, or 
"(B) the excess of— 
"(i) in the case of— 
"(I) a sale, exchange, or involuntary conversion, 
the amount realized, or 
"(II) in the case of any other disposition, the fair 
market value of such property, over 
"(ii) the adjusted basis of such property, 
shall be treated as gain which is ordinary income. Such gain 
shall be recognized notwithstanding any other provision of this 
subtitle. 
"(2) DISPOSITION OF PORTION OF PROPERTY.—For purposes of 
paragraph (1)— 
"(A) In the case of the disposition of a portion of section 
1254 property (other than an undivided interest), the entire 
. 
amount of the aggregate expenditures or deductions de-
.^j 
scribed in paragraph (IXA) with respect to such property 
shall be treated as allocable to such portion to the extent of 
the amount of the gain to which paragraph (1) applies. 
"(B) In the case of the disposition of an undivided interest 
in a section 1254 property (or a portion thereof), a propor-
tionate part of the expenditures or deductions described in 
paragraph (1)(A) with respect to such property shall be 
treated as allocable to such undivided interest to the extent 
of the amount of the gain to which paragraph (1) applies. 
This paragraph shall not apply to any expenditures to the 
extent the taxpayer establishes to the satisfaction of the Sec-
retary that such expenditures do not relate to the portion (or 
interest therein) disposed of. 
"(3) SECTION 1254 PROPERTY.—The term 'section 1254 property' 
means any property (within the meaning of section 614) i
f
— 
"(A) any expenditures described in paragraph (IXA) are 
«" 
properly chargeable to such property, or 
"(B) the adjusted basis of such property includes adjust-
ments for deductions for depletion under section 611. 
"(b) SPECIAL RULES UNDER REGULATIONS.—Under regulations pre-
scribed by the Secretary— 
"(1) rules similar to the rule of subsection (g) of section 617 
and to the rules of subsections (b) and (c) of section 1245 shall be 
applied for purposes of this section; and 
"(2) in the case of the sale or exchange of stock in an S 
corporation, rules similar to the rules of section 751 shall be 
applied to that portion of the excess of the amount realized over 
the adjusted basis of the stock which is attributable to expendi-
tures referred to in subsection (aXlXA) of this section." 
(b) COORDINATION WITH SECTION 617(d).—Subsection (d) of section 
617 is amended by adding at the end thereof the following new 
paragraph: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2229 
"(5) COORDINATION WITH SECTION 1254.—This subsection shall 
not apply to any disposition to which section 1254 applies." 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to any disposition of property which is placed in service 
by the taxpayer after December 31,1986. 
(2) EXCEPTION FOR BINDING CONTRACTS.—The amendments 
made by this section shall not apply to any disposition of 
property placed in service after December 31, 1986, if such 
property was acquired pursuant to a written contract which was 
entered into before September 26, 1985, and which was binding 
at all times thereafter. 
Subtitle C—Other Provisions 
SEC. 421. EXTENSION OF ENERGY INVESTMENT CREDIT FOR SOLAR, GEO-
THERMAL, OCEAN THERMAL, AND BIOMASS PROPERTY. 
(a) IN GENERAL.—The table contained in subparagraph (A) of 
section 460t)X2) (relating to energy percentage) is amended by adding 
at the end thereof the following new items: 
"(viii) SOLAR ENERGY PROPERTY.—Property de- A. 15 percent Jan. 1, 1986 
Dec. 31, 1986. 
scribed in section 48(1X4) (other than wind B. 12 percent 
Jan. 1, 1987 
Dec. 31, 1987. 
energy property). 
C. 10 percent 
Jan. 1, 1988 
Dec. 31, 1988. 
"(ix) 
GEOTHERMAL PROPERTY.—Property de- A. 15 percent Jan. 1, 1986 
Dec. 31, 1986. 
scribed in section 48(lK3XAXviii). 
B. 10 percent 
Jan. 1, 1987 
Dec. 31, 1988. 
"(x) OCEAN THERMAL PROPERTY.—Property de- 15 percent 
Jan. 1, 1986 
Dec. 31, 1988. 
scribed in section 48(lX3XAXix). 
"(xi) BiOMASS PROPERTY.—Property described A. 15 percent Jan. 1, 1986 
Dec. 31, 1986. 
in section 48(1X15). 
B. 10 percent 
Jan. 1, 1987 
Dec. 31, 1987." 
(h) TREATMENT OF CERTAIN TRANSITIONAL RULE PROPERTY.—Para-
graph (2) of section 460t>) is amended by adding at the end thereof 
the following new subparagraph: 
"(E) CERTAIN RULES MADE APPLICABLE.—Rules similar to 
the rules of subsections (c) and (d) of section 49 shall apply 
to any credit allowable by reason of subparagraph (C) or 
(D)." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to periods beginning after December 31, 1985, under rules 
similar to rules under section 48(m) of the Internal Revenue Code of 
1986. 
SEC. 422. PROVISIONS RELATING TO EXCISE TAX ON FUELS. 
(a) REDUCTION IN EXCISE TAX EXEMPTION FOR QUAUFIED METH-
ANOL AND ETHANOL FUELS.— 
(1) IN GENERAL.—Subparagraph (A) of section 404103X2) (relat-
ing to exemption for qualified ethanol and methanol fuels) is 
amended to read as follows: 
"(A) IN GENERAL.—In the case of any qualified methanol 
or ethanol fuel, subsection (aX2) shall be applied by 
f 
substituting '3 cents' for '9 cents'.". 
(2) CONFORMING 
AMENDMENT.—The heading for 
section 
4041(b) is amended by striking out "Exemption" the second 
71-194 0 - 
89 
- 15 
: 
ex.. 
3 
Part3 
100 STAT. 2230 
PUBLIC LAW 99-514—OCT. 22, 1986 
*l«r* place it appears and inserting in lieu thereof "Reduction in 
• "^R- Tax". 
(3) EFFECTIVE DATE.—The amendments made by this subsec-
tion shall take effect on January 1, 1987. 
(b) EXTENSION OF REDUCTION IN TAX FOR FUEL USED BY TAXI-
CABS.—Paragraph (3) of section 6427(e) (relating to termination) is 
amended by striking out "September 30, 1985" and inserting in lieu 
thereof "September 30, 1988". 
SEC. 423. ETHYL ALCOHOL AND MIXTURES THEREOF FOR FUEL USE. 
(a) IN GENERAL.—Except as provided in subsection (b), no ethyl 
alcohol or a mixture thereof may be considered— 
(1) for purposes of general headnote 3(a) of the Tariff Sched-
ules of the United States, to be— 
(A) the growth or product of an insular possession of the 
United States, 
j'^ft 
(B) manufactured or produced in an insular possession 
from materials which are the growth, product, or manufac-
-j, 
, 
ture of any such possession, or 
'.,<'/? 
(C) otherwise eligible for exemption from duty under such 
'^•"' • 
headnote as the growth or product of an insular possession; 
or 
(2) for purposes of section 213 of the Caribbean Basin Eco-
nomic Recovery Act, to be— 
(A) an article that is wholly the growth, product, or 
manufacture of a beneficiary country, 
.•*'•'• 
(B) a new or different article of commerce which has been 
grown, produced, or manufactured in a beneficiary country, 
# 
(C) a material produced in a beneficiary country, or 
(D) otherwise eligible for duty-free treatment under such 
~- 
Act as the growth, product, or manufacture of a beneficiary 
country; 
unless the ethyl alcohol or mixture thereof is an indigenous product 
vt 1 hat insular possession or beneficiary country. 
(b) E X C E P T I O N . — 
>•<•£•,= 
^ 
(1) Subject to the limitation in paragraph (2), subsection (a) 
shall not apply to ethyl alcohol that is imported into the United 
States during calendar years 1987 and 1988 and produced in— 
(A) an azeotropic distillation facility located in an insular 
1 V 
possession of the United States or a beneficiary country, if 
that facility was established before, and in operation on, 
January 1,1986, or 
(B) an azeotropic distillation facility— 
k' ajx>3 
(i) at least 50 percent of the total value of the equip-
ment and components of which were— 
(I) produced in the United States, and 
(II) owned by a corporation at least 50 percent of 
'Wr-iM f s r I 
the total value of the outstanding shares of stock of 
which were owned by a United States person (or 
-Isl^i) V0. 
persons) on or before January 1, 1986, and 
ai (aiBifl 
(ii) substantially all of the equipment and compo-
nents of which were, on or before January 1, 1986— 
(I) located in the United States under the posses-
sion or control of such corporation, 
(II) ready for shipment to, and installation in, a 
v
:
< ' o , 
,' 
beneficiary country, and 
, jnotxif' :'-" 
(iii) which— 
:«i»>.-isi.-c: ixi iu^ij*A:i:.<.i> -,. vu«»--.;s-
Uim 
f 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2231 
(I) has on the date of enactment of this Act, or 
(II) will have at the time such facility is placed in 
service (based on estimates made before the date of 
enactment of this Act), 
' ''" 
a stated capacity to produce not more than 42,000,000 
gallons of such product per year. 
(2) The exception provided under paragraph (1) shall cease to 
apply during each of calendar years 1987 and 1988 to ethyl 
alcohol produced in a facility described in subparagraph (A) or 
(B) of paragraph (1) after 20,000,000 gallons of ethyl alcohol 
produced in that facility are entered into the United States 
during that year. 
(c) DEFINITIONS.—For purposes of this section— 
(1) The term "ethyl alcohol or a mixture thereof means 
(except for purposes of subsection (e)) ethyl alcohol or any 
mixture thereof described in item 901.50 of the Appendix to the 
Tariff Schedules of the United States. 
(2) Ethyl alcohol or a mixture thereof may be treated as being 
an indigenous product of an insular possession or beneficiary 
country only if the ethyl alcohol or a mixture thereof— 
(A) has been both dehydrated and produced by a process 
of full-scale fermentation within that insular possession or 
beneficiary country; or 
(B) has been dehydrated within that insular possession or 
beneficiary country from hydrous ethyl alcohol that in-
cludes hydrous ethyl alcohol which is wholly the product or 
-i ^ 
manufacture of any insular possession or beneficiary coun-
'^ 
try and which has a value not less than— 
(i) 30 percent of the value of the ethyl alcohol or 
r, > 
mixture, if entered during calendar year 1987, except 
that this clause shall not apply to any ethyl alcohol or 
mixture which has been dehydrated in the United 
States Virgin Islands by a facility with respect to 
which— 
(I) the owner has entered into a binding contract 
for the engineering and design of full-scale fer-
mentation capacity, and 
(II) authorization for operation of a full-scale 
fermentation facility has been granted by the 
Island authorities before May 1,1986, 
, 
(ii) 60 percent of the value of the ethyl alcohol or 
mixture, if entered during calendar year 1988, and 
(iii) 75 percent of the value of the ethyl alcohol or 
mixture, if entered after December 31,1988. 
(3) The term "beneficiary country" has the meaning given to 
such term under section 212 of the Caribbean Basin Economic 
Recovery Act (19 U.S.C. 2702). 
(4) The term "United States person" has the meaning given to 
such term by section 7701(aX3) of the Internal Revenue Code of 
1986. 
(5) The term "entered" means entered, or withdrawn from 
warehouse, for consumption in the customs territory of the 
United States. 
(d) AMENDMENT TO APPENDIX TO SCHEDULES.—The item designa-
tion for item 901.50 of the Appendix to the Tariff Schedules of the 
United States is amended to read as follows: "Ethyl alcohol (pro-
vided for in item 427.88, part 2D, schedule 4) or any mixture 
100 STAT. 2232 
PUBLIC LAW 99-514—OOT. 22, 1986 
containing such ethyl alcohol (provided for in part 1, 2 or 10, 
schedule 4) if such ethyl alcohol or mixture is to be used as fuel or in 
producing a mixture of gasoline and alcohol, a mixture of a special 
fuel and alcohol, or any other mixture to be used as fuel (including 
motor fuel provided for in item 475.25), or is suitable for any such 
uses." 
(e) DRAWBACKS.— 
(1) For purposes of subsections O?) and (j)(2) of section 313 of 
the Tariff Act of 1930 (19 U.S.C. 1313), as amended by section 
1888(2) of this Act, any ethyl alcohol (provided for in item 427.88 
of the Tariff Schedules of the United States) or mixture contain-
ing such ethyl alcohol (provided for in part 1, 2, or 10 of 
schedule 4 of such Schedules) which is subject to the additional 
duty imposed by item 901.50 of the Appendix to such Schedules 
may be treated as being fungible with, or of being of the same 
kind and quality as, any other imported ethyl alcohol (provided 
for in item 427.88 of such Schedules) or mixture containing such 
ethyl alcohol (provided for in part 1, 2, or 10 of schedule 4 of 
such Schedules) only if such other imported ethyl alcohol or 
mixture thereof is also subject to such additional duty. 
(2) Paragraph (1) shall not apply with respect to ethyl alcohol 
(provided for in item 427.88 of the Tariff Schedules of the 
United States) or mixture containing such ethly alcohol (pro-
vided for in part 1, 2, or 10 of schedule 4 of such Schedules) that 
is exempt from the additional duty imposed by item 901.50 of 
the Appendix to such Schedules by resison of— 
(A) subsection Ot)), or 
(B) any agreement entered into under section 102 (b) of 
the Trade Act of 1974. 
(f) CONFORMING AMENDMENTS.— 
(1) General headnote 3(a)(i) of the Tariff Schedules of the 
United States is amended by inserting "and except as provided 
in section 423 of the Tax Reform Act of 1986," after "part 7 of 
schedule 7,". 
(2) Section 213(aXl) of the Caribbean Basin Economic Recov-
ery Act (19 U.S.C. 2703(aXl)) is amended by inserting "and 
subject to section 423 of the Tax Reform Act of 1986,' after 
"Unless otherwise excluded from eligibility by this title,". 
(3) The headnotes to subpart A of part 1 of the Appendix to 
the Tariff Schedules of the United States are amended by 
adding at the end thereof the following: 
"2. For purposes of item 901.50, the phrase 'is suitable for any 
such uses' does not include ethyl alcohol (provided for in item 427.88, 
part 2D, schedule 4) that is certified by the importer of record to the 
satisfaction of the Commissioner of Customs (hereinafter in this 
headnote referred to as the 'Commissioner') to be ethyl alcohol or a 
mixture containing such ethyl alcohol imported for uses other than 
liquid motor fuel use or use in producing liquid motor fuel related 
mixtures. If the importer of record certifies nonliquid motor fuel use 
for purposes of establishing actual use or suitability under item 
901.50, the Commissioner shall not liquidate the entry of ethyl 
alcohol until he is satisfied that the ethyl alcohol has in fact not 
been used for liquid motor fuel use or use in producing liquid motor 
fuel related mixtures. If he is not satisfied within a reasonable 
period of time not less than 18 months from the date of entry, then 
the duties provided for in item 901.50 shall be payable retroactive to 
the date of entry. Such duties shall also become payable, retroactive 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2233 
to the date of entry, immediately upon the diversion to liquid motor 
fuel use of any ethyl alcohol or ethyl alcohol mixture certified upon 
entry as having been imported for non-liquid motor fuel use." 
(g) EFFECTIVE PERIOD.— 
(1) The provisions of, and the amendments made by, this 
section (other than subsection (e)) shall apply to articles en-
tered— 
(A) after December 31,1986, and 
(B) before the expiration of the effective period of item 
901.50 of the Appendix to the Tariff Schedules of the United 
States. 
(2) The provisions of subsection (e) shall take effect on the 
date of the enactment of this Act. 
TITLE V—TAX SHELTER LIMITATIONS; 
INTEREST LIMITATIONS 
Subtitle A—Limitations On Tax Shelters 
SEC. 501. LIMITATIONS ON LOSSES AND CREDITS FROM PASSIVE ACTIVI-
TIES. 
(a) GENERAL RULE.—Subpart C of part II of subchapter E of 
chapter 1 (relating to taxable year for which deductions taken) is 
amended by adding at the end thereof the following new section: 
"SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED. 
"(a) DISALLOWANCE.— 
"(1) IN GENERAL.—If for any taxable year the taxpayer is 
described in paragraph (2), neither— 
"(A) the passive activity loss, nor 
"(B) the passive activity credit, 
for the taxable year shall be allowed. 
"(2) PERSONS DESCRIBED.—The following are described in this 
paragraph: 
"(A) any individual, estate, or trust, 
^ 
"(B) any closely held C corporation, and 
"(C) any personal service corporation. 
"(b) DISALLOWED LOSS OR CREDIT CARRIED TO NEXT YEAR.—Except 
as otherwise provided in this section, any loss or credit from an 
activity which is disallowed under subsection (a) shall be treated as 
a deduction or credit allocable to such activity in the next taxable 
year. 
"(c) PASSIVE ACTIVITY DEFINED.—For purposes of this section— 
"(1) IN GENERAL.—The term 'passive activity' means any 
activity— 
"(A) which involves the conduct of any trade or business, 
and 
"(B) in which the taxpayer does not materially partici-
pate. 
-n. 
'«(2) PASSIVE ACTIVITY INCLUDES ANY RENTAL ACTIVITY.—The 
term 'passive activity' includes any rental activity. 
"(3) WORKING INTERESTS IN OIL AND GAS PROPERTY.— 
"(A) IN GENERAL.—The term 'passive activity' shall not 
\ 
include any working interest in any oil or gas property 
which the taxpayer holds directly or through an entity 
100 STAT. 2234 
PUBLIC LAW 99-514—OCT. 22, 1986 
'i^'* ^ 
which does not limit the liability of the taxpayer with 
l^K ' ' 
respect to such interest. 
"(B) INCOME IN SUBSEQUENT YEARS.—If any taxpayer has 
any loss for any taxable year from a working interest in 
^'^' 
any oil or gas property which is treated as a loss which is 
'^ 
not from a passive activity, then any net income from such 
property (or any property the basis of which is determined 
in whole or in part by reference to the basis of such 
property) for any succeeding taxable year shall be treated 
as income of the taxpayer which is not from a passive 
J 
activity. 
"(4) MATERIAL PARTICIPATION NOT REQUIRED FOR PARAGRAPHS 
(2) AND (3).—Paragraphs (2) and (3) shall be applied without 
regard to whether or not the taxpayer materially participates in 
the activity. 
"(5) TRADE OR BUSINESS INCLUDES RESEARCH AND EXPERIMEN-
TATION ACTIVITY.—For purposes of paragraph (IXA), the term 
'trade or business' includes any activity involving research or 
experimentation (within the meaning of section 174). 
"(6) ACTIVITY IN CONNECTION WITH TRADE OR BUSINESS OR 
PRODUCTION OF INCOME.—To the extent provided in regulations, 
for purposes of paragraph (IXA), the term 'trade or business' 
includes— 
"(A) any activity in connection with a trade or business, 
or 
"(B) any activity with respect to which expenses are 
allowable as a deduction under section 212. 
"(d) PASSIVE ACTIVITY Loss AND CREDIT DEFINED.—For purposes of 
this section— 
"(1) PASSIVE ACTIVITY LOSS.—The term 'passive activity loss' 
means the amount (if any) by which— 
"(A) the aggregate losses from all passive activities for 
the taxable year, exceed 
«! It 
"(B) ^j^e aggregate income from all psissive activities for 
such year. 
"(2) PASSIVE ACTIVITY CREDIT.—The term 'passive activity 
credit' means the amount (if any) by which—^ 
"(A) the sum of the credits from all passive activities 
allowable for the taxable year under— 
"(i) subpart D of part IV of subchapter A, or 
' > 
"(ii) subpart B (other than section 27(a)) of such part 
IV, exceeds 
;4_ 
"(B) the regular tax liability of the taxpayer for the 
taxable year allocable to all passive activities. 
"(e) SPECIAL RULES FOR DETERMINING INCOME OR LOSS FROM A 
PASSIVE ACTIVITY.—For purposes of this section— 
"(1) CERTAIN INCOME NOT TREATED AS INCOME FROM PASSIVE 
ACTIVITY.—In determining the income or loss from any activ-
i t y -
»iyll 
"(A) IN GENERAL.—There shall not be taken into ac-
count— 
. 
"(i) any— 
,, 
\ . ', 
"(I) gross income from interest, dividends, annu-
ities, or royalties not derived in the ordinary 
. :J 5 ; 
^
, 
course of a trade or business. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2235 
"(II) expenses (other than interest) which are 
clearly and directly allocable to such gross income, 
and 
"(III) interest expense properly allocable to such 
gross income, and 
"(ii) gain or loss attributable to the disposition of 
property— 
V 
"(I) producing income of a type described in 
fV 
clause (i), or 
-i 
"(II) held for investment. 
For purposes of clause (ii), any interest in a passive activity 
tt 
shall not be treated as property held for investment. 
"(B) 
RETURN ON WORKING CAPITAL.—For purposes 
of 
subparagraph (A), any income, gain, or loss which is attrib-
tud 
utable to an investment of working capital shall be treated 
as not derived in the ordinary course of a trade or business. 
"(2) PASSIVE LOSSES OF CERTAIN CLOSELY HELD CORPORATIONS 
MAY OFFSET ACTIVE INCOME.— 
"(A) IN GENERAL.—If a closely held C corporation (other 
than a personal service corporation) has net active income 
for any taxable year, the passive activity loss of such tax-
fi, 
payer for such taxable year (determined without regard to 
:' 
this paragraph)— 
£
, 
"(i) shall be allowable as a deduction against net 
active income, and 
i, 
"(ii) shall not be taken into account under subsection 
fio 
(a) to the extent so allowable as a deduction. 
A similar rule shall apply in the c£ise of any passive activity 
-; 
credit of the taxpayer. 
t 
"(B) NET ACTIVE INCOME.—For purposes of this para-
graph, the term 'net active income' means the taxable 
lis 0 
income of the taxpayer for the taxable year determined 
without regard to— 
"(i) any income or loss from a passive activity, and 
J' 
"(ii) any item of gross income, expense, gain, or loss 
r 
described in paragraph (IXA). 
"(3) COMPENSATION FOR PERSONAL SERVICES.—Earned income 
(within the meaning of section 911(dX2XA)) shall not be taken 
into account in computing the income or loss from a passive 
activity for any taxable year. 
"(4) DIVIDENDS REDUCED BY DIVIDENDS RECEIVED DEDUCTION.— 
For purposes of paragraphs (1) and (2), income from dividends 
shall be reduced by the amount of any dividends received 
deduction under section 243, 244, or 245. 
"(f) TREATMENT OF FORMER PASSIVE ACTIVITIES.—For purposes of 
this section— 
"(1) IN GENERAL.—If an activity is a former passive activity 
for any taxable year— 
"(A) any unused deduction allocable to such activity 
under subsection (b) shall be offset against the income from 
such activity for the taxable year, 
"(B) any unused credit allocable to such activity under 
subsection (b) shall be offset against the regular tax liability 
(computed after the application of paragraph (1)) allocable 
to such activity for the taxable year, and 
100 STAT. 2236 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(C) any such deduction or credit remaining after the 
application of subparagraphs (A) and (B) shall continue to 
be treated as arising from a passive activity. 
- ^ 
"(2) CHANGE IN STATUS OF CLOSELY HELD C CORPORATION OR 
PERSONAL SERVICE CORPORATION.—If a taxpayer ceases for any 
taxable year to be a closely held C corporation or personal 
service corporation, this section shall continue to apply to losses 
» 
and credits to which this section applied for any preceding 
taxable year in the same manner as if such taxpayer continued 
to be a closely held C corporation or personal service corpora-
tion, whichever is applicable. 
"(3) FORMER PASSIVE ACTIVITY.—The term 'former passive 
activity' means any activity which, with respect to the tax-
payer— 
"(A) is not a passive activity for the taxable year, but 
"(B) was a passive activity for any prior taxable year. 
"(g) DISPOSITIONS OF ENTIRE INTEREST IN PASSIVE ACTIVITY.—If 
during the taxable year a taxpayer disposes of his entire interest in 
any passive activity (or former passive activity), the following rules 
shall apply: 
"(1) FULLY TAXABLE TRANSACTION.— 
"(A) IN GENERAL.—If all gain or loss realized on such 
disposition is recognized, any loss from such activity which 
•' 
has not previously been allowed as a deduction (and in the 
case of a passive activity for the taxable year, any loss 
^ tt > realized on such disposition) shall not be treated as a 
passive activity loss and shall be allowable as a deduction 
"'^- ' against income in the following order: 
"(i) Income or gain from the passive activity for the 
taxable year (including any gain recognized on the 
'•'f-' 
disposition). 
>^?:" 
"(ii) Net income or gain for the taxable year from all 
passive activities. 
• 
"(iii) Any other income or gain. 
"(B) SUBPARAGRAPH (A) NOT TO APPLY TO DISPOSITION 
INVOLVING RELATED PARTY.—If the taxpayer and the person 
acquiring the interest bear a relationship to each other 
described in section 267(b) or section 707(bXl), then subpara-
'-'"" 
graph (A) shall not apply to any loss of the taxpayer until 
the taxable year in which such interest is acquired (in a 
transaction described in subparagraph (A)) by another 
•iyfji 
person who does not bear such a relationship to the tax-
payer. 
"(C) COORDINATION WITH SECTION 1211.—In the ceise of 
~ any loss realized on the disposition of an interest in a 
passive activity, section 1211 shall be applied before 
subparagraph (A) is applied. 
"(2) DISPOSITION BY DEATH.—If an interest in the activity is 
transferred by reason of the death of the taxpayer— 
"(A) paragraph (1) shall apply to such losses to the extent 
such losses are greater than the excess (if any) o
f
— 
i 
"(i) the basis of such property in the hands of the 
transferee, over 
"(ii) the adjusted basis of such property immediately 
before the death of the taxpayer, and 
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2237 
"(B) any losses to the extent of the excess described in 
subparagraph (A) shall not be allowed as a deduction for 
any taxable year. 
"(3) INSTALLMENT SALE OF ENTIRE INTEREST.—In the case of an 
installment sale of an entire interest in an activity to which 
section 453 applies, paragraph (1) shall apply to the portion of 
such losses for each taxable year which bears the same ratio to 
all such losses as the gain recognized on such sale during such 
taxable year bears to the gross profit from such sale realized (or 
to be realized) when payment is completed. 
"(h) MATERIAL PARTICIPATION DEFINED.—For purposes of this sec-
tion— 
"(1) IN GENERAL.—A taxpayer shall be treated as materially 
participating in an activity only if the taxpayer is involved in 
the operations of the activity on a basis which is— 
"(A) regular, 
"(B) continuous, and 
"(C) substantial. 
"(2) INTERESTS IN LIMITED PARTNERSHIPS.—Except as provided 
in regulations, no interest in a limited partnership as a limited 
partner shall be treated as an interest with respect to which a 
taxpayer materially participates. 
"(3) TREATMENT OF CERTAIN RETIRED INDIVIDUALS AND SURVIV-
ING SPOUSES.—A taxpayer shall be treated as materially partici-
pating in any farming activity for a taxable year if paragraph 
(4) or (5) of section 2032A(b) would cause the requirements of 
section 2032A(b)(l)(C)(ii) to be met with respect to real property 
used in such activity if such taxpayer had died during the 
taxable year. 
"(4) CERTAIN CLOSELY HELD C CORPORATIONS AND PERSONAL 
SERVICE CORPORATIONS.—A closely held C corporation or per-
sonal service corporation shall be treated as materially partici-
pating in an activity i
f
— 
"(A) 1 or more shareholders holding stock representing 
more than 50 percent Ot)y value) of the outstanding stock of 
such corporation materially participate in such activity, or 
"(B) in the case of a closely held C corporation (other than 
a personal service corporation), the requirements of section 
465(c)(7)(C) (without regard to clause (iv)) are met with 
respect to such activity. 
"(5) PARTICIPATION BY SPOUSE.—In determining whether a 
taxpayer materially participates, the participation of the spouse 
of the taxpayer shall be taken into account, 
"(i) $25,000 OFFSET FOR RENTAL REAL ESTATE ACTIVITIES.— 
"(1) IN GENERAL.—In the case of any natural person, subsec-
tion (a) shall not apply to that portion of the passive activity loss 
or the deduction equivalent (within the meaning of subsection 
(j)(5)) of the passive activity credit for any taxable year which is 
attributable to all rental real estate activities with respect to 
which such individual actively participated in the taxable year 
in which such portion of such loss or credit arose. 
"(2) DOLLAR LIMITATION.—The aggregate amount to which 
paragraph (1) applies for any taxable year shall not exceed 
$25,000. 
"(3) PHASE-OUT OF EXEMPTION.— 
"(A) IN GENERAL.—In the case of any taxpayer, the 
$25,000 amount under paragraph (2) shall be reduced (but 
100 STAT. 2238 
PUBLIC LAW 99-514—OCT. 22, 1986 
'. 
- \ not below zero) by 50 percent of the amount by which the 
'*' 
r adjusted gross income of the taxpayer for the taxable year 
exceeds $100,000. 
"(B) SPECIAL PHASE-OUT OF LOW-INCOME HOUSING AND RE-
HABILITATION CREDITS.—In the case of any portion of the 
passive activity credit for any taxable year which is attrib-
utable to any credit to which paragraph (6XB) applies, 
subparagraph (A) shall be applied by substituting '$200,000' 
for '$100,000'. 
"(C) ORDERING RULE TO REFLECT SEPARATE PHASE-OUTS.—If 
"'^"- - 
subparagraph (B) applies for any taxable year, paragraph 
(1) shall be applied— 
"(i) first to the passive activity loss, 
^ 
"(ii) second to the portion of the passive activity 
credit to which subparagraph (B) does not apply, and 
"(iii) then to the portion of such credit to which 
subparagraph (B) applies. 
"(D) ADJUSTED GROSS INCOME.—For purposes of this para-
^
'
^
^ 
graph, adjusted gross income shall be determined without 
^ 
regard to— 
*' 
"(i) any amount includible in gross income under 
section 86, 
"(ii) any amount allowable as a deduction under 
'• 
' 
section 219, and 
{ 
"(iii) any passive activity loss. 
>
: - , 
"(4) SPECIAL RULE FOR ESTATES.— 
"(A) IN GENERAL.—In the case of taxable years of an 
estate ending less than 2 years after the date of the death of 
the decedent, this subsection shall apply to all rental real 
X ! ' 
estate activities with respect to which such decedent ac-
' ' 
tively participated before his death. 
"(B) REDUCTION FOR SURVIVING SPOUSE'S EXEMPTION.—For 
purposes of subparagraph (A), the $25,000 amount under 
paragraph (2) shall be reduced by the amount of the exemp-
^
^ 
tion under paragraph (1) (without regard to paragraph (3)) 
t^;^ 
allowable to the surviving spouse of the decedent for the 
„*^ 
taxable year ending with or within the taxable year of the 
''il-^ 
estate. 
"(5) MARRIED INDIVIDUALS FILING SEPARATELY.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), in the case of any married individual filing a separate 
return, this subsection shall be applied by substituting— 
"(i) '$12,500' for '$25,000' each place it appears, 
"(ii) '$50,000' for '$100,000' in paragraph (3XA), and 
"(iii)'$100,000'for'$200,000'in paragraph (3XB). 
"(B) TAXPAYERS NOT LIVING APART.—This subsection shall 
. \ 
not apply to a taxpayer who— 
"(i) is a married individual filing a separate return 
., „,, 
for any taxable year, and 
"(ii) does not live apart from his spouse at all times 
during such taxable year. 
, .; 
j i t t m 
"(6) ACTIVE PARTICIPATION.— 
"(A) IN GENERAL.—An individual shall not be treated as 
actively participating with respect to any interest in any 
^j|^ 
rental real estate activity for any period if, at any time 
ticd? 
during such period, such interest (including any interest of 
%i 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2239 
the spouse of the individual) is less than 10 percent Ot)y 
value) of all interests in such activity. 
"(B) No PARTICIPATION REQUIREMENT FOR LOW-INCOME 
HOUSING O
R REHABILITATION CREDIT.—Paragraphs (1) and 
(4XA) shall be applied without regard to the active partici-
pation requirement in the case o
f
— 
"(i) any credit determined under section 42 for any 
* 
taxable year, or 
lu 
"(ii) any rehabilitation investment credit (within the 
meaning of section 48(o)). 
"(C) INTEREST AS A UMITED PARTNER.—No interest as a 
limited partner in a limited partnership shall be treated as 
an interest with respect to which the taxpayer actively 
participates. 
"(D) PARTICIPATION BY SPOUSE.—In determining whether 
a taxpayer actively participates, the participation of the 
spouse of the taxpayer shall be taken into account. 
"(j) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) CLOSELY HELD C CORPORATION.—The term 'closely held C 
corporation' means any C corporation described in section 
465(a)(1)(B). 
"(2) PERSONAL SERVICE CORPORATION.—The term 'personal 
service corporation' has the meaning given such term by section 
269A(b)(l), except that section 269A(bX2) shall be applied— 
"(A) by substituting 'any' for 'more than 10 percent', and 
y' 
"(B) by substituting'any'for'50 percent or more in value' 
in section 318(a)(2)(C). 
A corporation shall not be treated as a personal service corpora-
tion unless more than 10 percent of the stock Ot)y value) in such 
corporation is held by employee-owners (within the meaning of 
section 269A(b)(2), as modified by the preceding sentence). 
"(3) REGULAR TAX UABILITY.—The term 'regular tax liability' 
has the meaning given such term by section 260t)). 
"(4) ALLOCATION OF PASSIVE ACTIVITY LOSS AND CREDIT.—The 
passive activity loss and the passive activity credit (and the 
$25,000 amount under subsection (i)) shall be allocated to activi-
ties, and within activities, on a pro rata b£isis in such manner as 
the Secretary may prescribe. 
"(5) DEDUCTION EQUIVALENT.—The deduction equivalent of 
credits from a passive activity for any taxable year is the 
amount which (if allowed as a deduction) would reduce the 
regular tax liability for such taxable year by an amount equal 
to such credits. 
"(6) SPECIAL RULE FOR GIFTS.—In the case of a disposition of 
any interest in a passive activity by gift— 
"(A) the basis of such interest immediately before the 
transfer shall be increased by the amount of any passive 
activity losses allocable to such interest, and 
"(B) such losses shall not be allowable as a deduction for 
any taxable year. 
"(7) QUALIFIED RESIDENCE INTEREST.—The passive activity loss 
of a taxpayer shall be computed without regard to qualified 
residence interest (within the meaning of section 163(h)(3)). 
"(8) RENTAL ACTIVITY.—The term 'rental activity' means any 
activity where payments are principally for the use of tangible 
property. 
100 STAT. 2240 
PUBLIC LAW 99-514—OCT. 22, 1986 
;-v 
"(9) ELECTION TO INCREASE BASIS OF PROPERTY BY AMOUNT OF 
DISALLOWED CREDIT.—For purposes of determining gain or loss 
from a disposition of any property to which subsection (g)(1) 
applies, the transferor may elect to increase the basis of such 
property immediately before the transfer by an amount equal to 
the portion of any unused credit allowable under this chapter 
which reduced the basis of such property for the taxable year in 
which such credit arose. If the taxpayer elects the application of 
this paragraph, such portion of the passive activity credit of 
such taxpayer shall not be allowed for any taxable year, 
"(k) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out provisions of 
this section, including regulations— 
"(1) which specify what constitutes an activity, material 
participation, or active participation for purposes of this section, 
"(2) which provide that certain items of gross income will not 
be taken into account in determining income or loss from any 
activity (and the treatment of expenses allocable to such 
income), 
"(3) requiring net income or gain from a limited partnership 
or other passive activity to be treated as not from a passive 
activity, 
"(4) which provide for the determination of the allocation of 
interest expense for purposes of this section, and 
"(5) which deal with changes in marital status and changes 
between joint returns and separate returns. 
"(1) PHASE-IN OF DISALLOWANCE OF LOSSES AND CREDITS FOR IN-
TERESTS HELD BEFORE DATE OF ENACTMENT.— 
"(1) IN GENERAL.—In the case of any passive activity loss or 
credit for any taxable year beginning in calendar years 1987 
through 1990 which— 
"(A) is attributable to a pre-enactment interest, but 
\ - 
"(B) is not attributable to a carryforward to such taxable 
year of any loss or credit which was disallowed under this 
section for a preceding taxable year, 
there shall be disallowed under subsection (a) only the ap-
plicable percentage of the amount which Ot)ut for this subsec-
tion) would have been disallowed under subsection (a) for such 
taxable year. 
"(2) APPLICABLE PERCENTAGE.—For purposes of this subsec-
tion, the applicable percentage shall be determined in accord-
ance with the following table: 
"In the case of taxable 
The applicable 
vears beginning in: 
percentage is: 
'^^ i 
1987 
35 
\\m 
60 
1989 
80 
: 
1990 
90. 
"(3) PORTION OF LOSS OR CREDIT ATTRIBUTABLE TO PRE-ENACT-
MENT INTERESTS.—For purposes of this subsection— 
"(A) IN GENERAL.—The portion of the passive activity loss 
for any taxable year which is attributable to pre-enactment 
interests shall be equal to the lesser of— 
"(i) the passive activity loss for such taxable year, or 
"(ii) the passive activity loss for such taxable year 
f, , 
determined by taking into account only pre-enactment 
interests. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2241 
For purposes of this subparagraph, the deduction equiva-
lent (within the meaning of subsection (jX5)) of a passive 
activity credit shall be taken into account. 
"(B) PRE-ENACTMENT INTEREST.— 
.^, 
"(i) IN GENERAL.—The term 'pre-enactment interest' 
means any interest in a passive activity held by a 
taxpayer on the date of the enactment of the Tax 
Reform Act of 1986, and at all times thereafter. 
•V 
"(ii) BINDING CONTRACT EXCEPTION.—For purposes of 
'
^ 
clause (i), any interest acquired after such date of 
enactment pursuant to a written binding contract in 
effect on such date, and at all times thereafter, shall be 
treated as held on such date. 
"(iii) INTEREST IN ACTIVITIES.—The term 'pre-enact-
ment interest' shall not include an interest in a passive 
activity unless such activity was being conducted on 
such date of enactment. The preceding sentence shall 
not apply to an activity commencing after such date 
if— 
"(I) the property used in such activity is acquired 
pursuant to a written binding contract in effect on 
% 
August 16, 1986, and at all times thereafter, or 
"(II) construction of property used in such activ-
ity began on or before August 16,1986." 
(b) CONFORMING AMENDMENT.—The table of sections for subpart C 
of part II of subchapter E of chapter 1 is amended by adding at the 
end thereof the following new item: 
"Sec. 469. Passive activity losses and credits limited." 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
(2) SPECIAL RULE FOR CARRYOVERS.—The amendments made by 
this section shall not apply to any loss, deduction, or credit 
carried to a taxable year beginning after December 31, 1986, 
from a taxable year beginning before January 1,1987. 
(3) SPECIAL RULE FOR LOW-INCOME HOUSING.— 
(A) IN GENERAL.—Except as provided in subparagraph (B), 
t 
section 469(iX6XBXi) of the Internal Revenue Code of 1986 
(as added by this section) shall not apply to any property 
t. 
placed in service after December 31,1989. 
(B) EXCEPTION WHERE AT LEAST lO PERCENT OF COSTS IN-
CURRED.—In the case of property placed in service after 
December 31, 1989, and before January 1, 1991, section 
i 
469(iX6XBXi) of such Code shall apply to such property if at 
least 10 percent of the costs of such property were incurred 
before January 1,1989. 
SEC. 502. TRANSITIONAL RULE FOR LOW-INCOME HOUSING. 
(a) GENERAL RULE.—Any loss sustained by a qualified investor 
with respect to an interest in a qualified low-income housing project 
for any taxable year in the relief period shall not be treated as a loss 
from a psissive activity for purposes of section 469 of the Internal 
Revenue Code of 1986. 
(b) REUEF PERIOD.—For purposes of subsection (a), the term "relief 
period" means the period beginning with the taxable year in which 
the investor made his initial investment in the qualified low-income 
100 STAT. 2242 
PUBLIC LAW 99-514—OCT. 22, 1986 
housing project and ending with whichever of the following is the 
earliest— 
(1) the 6th taxable year after the taxable year in which the 
investor made his initial investment, 
(2) the 1st taxable year after the taxable year in which the 
investor is obligated to make his last investment, or 
(3) the taxable year preceding the 1st taxable year for which 
such project ceased to be a qualified low-income housing project. 
(c) QUALIFIED LOW-INCOME HOUSING PROJECT.—For purposes of 
this section, the term "qualified low-income housing project" means 
any project if— 
(1) such project meets the requirements of clause (i), (ii), (iii), 
or (iv) of section 1250(a)(1)(B) as of the date placed in service and 
* '^' for each taxable year thereafter which begins after 1986 and for 
which a passive loss may be allowable with respect to such 
project, 
(2) the operator certifies to the Secretary of the Treasury or 
his delegate that such project met the requirements of para-
s' , graph (1) on the date of the enactment of this Act (or, if later, 
when placed in service) and annually thereafter, 
(3) such project is constructed or acquired pursuant to a 
binding written contract entered into on or before August 16, 
*
^ 1986, and 
(4) such project is placed in service before January 1, 1989. 
(d) QUALIFIED INVESTOR.—For purposes of this section— 
' 
(1) IN GENERAL.—The term "qualified investor" means any 
natural person who holds (directly or through 1 or more enti-
ties) an interest in a qualified low-income housing project— 
(A) if-
iif.iiH ;t 
(i) in the case of a project placed in service before 
August 16, 1986, such person held an interest in such 
project on August 16, 1986, and the taxpayer made his 
. f > 
initial investment after December 31,1983, or 
,dS^I .i 
(ii) in the case of a project not described in subpara-
graph (A), such investor held an interest in such project 
on December 31,1986, and 
(B) if such investor is required to make payments after 
December 31, 1986, of 50 percent or more of the total 
t 
original obligated investment for such interest. 
For purposes of subparagraph (A), a person shall be treated as 
holding an interest on August 16, 1986, or December 31, 1986, if 
on such date such person had a binding contract to acquire such 
interest. 
(2) TREATMENT OF ESTATES.—The estate of a decedent shall 
a-^' succeed to the treatment under this section of the decedent but 
only with respect to the 1st 2 taxable years of such estate ending 
after the date of the decedent's death, 
(d) SPECIAL RULES.— 
(1) WHERE MORE THAN i BUILDING IN PROJECT.—If there is 
more than 1 building in any project, the determination of when 
such project is placed in service shall be based on when the 1st 
^ 
building in such project is placed in service. 
(2) ONLY CASH AND OTHER PROPERTY TAKEN INTO ACCOUNT.—In 
determining the amount any person invests in (or is obligated to 
invest in) any interest, only cash and other property shall be 
taken into account. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2243 
(3) COORDINATION 
WITH CREDIT.—No low-income housing 
credit shall be determined under section 42 of the Internal 
Revenue Code of 1986 with respect to any project with respect to 
which any person has been allowed any benefit under this 
section. 
SEC. 503. EXTENSION OF AT RISK LIMITATIONS TO REAL PROPERTY. 
(a) IN GENERAL.—Paragraph (3) of section 465(c) (relating to activi-
ties to which section applies) is amended by striking out subpara-
graph (D) and by redesignating subparagraph (E) as subparagraph 
(D). 
(b) QUALIFIED NONRECOURSE FINANCING TREATED AS AN AMOUNT 
A
T RISK.—Section 465(b) (relating to amounts considered at risk) is 
amended by adding at the end thereof the following new paragraph: 
"(6) QUALIFIED NONRECOURSE FINANCING TREATED AS AMOUNT 
A
T RISK.—For purposes of this section— 
"(A) IN GENERAL.—Notwithstanding any other provision 
of this subsection, in the case of an activity of holding real 
^ 
property, a taxpayer shall be considered at risk with 
I 
respect to the taxpayer's share of any qualified nonrecourse 
financing which is secured by real property used in such 
,, 
activity. 
"'' 
"(B) QUALIFIED NONRECOURSE FINANCING.—For purposes 
of this paragraph, the term 'qualified nonrecourse financ-
ing' means any financing— 
"(i) which is borrowed by the taxpayer with respect 
to the activity of holding real property, 
"(ii) which is borrowed by the taxpayer from a quali-
fied person or represents a loan from any Federal, 
State, or local government or instrumentality thereof, 
or is guaranteed by any Federal, State, or local govern-
ment, 
"(iii) except to the extent provided in regulations, 
with respect to which no person is personally liable for 
repayment, and 
"(iv) which is not convertible debt. 
"(C) SPECIAL RULE FOR PARTNERSHIPS.—In the case of a 
,, 
partnership, a partner's share of any qualified nonrecourse 
financing of such partnership shall be determined on the 
basis of the partner's share of liabilities of such partnership 
incurred in connection with such financing (within the 
meaning of section 752). 
^ 
"(D) QUALIFIED PERSON DEFINED.—For purposes of this 
[^ 
paragraph— 
rl 
"(i) IN GENERAL.—The term'qualified person'h£is the 
meaning given such term by section 46(c)(8)(D)(iv). 
" ' 
"(ii) CERTAIN COMMERCIALLY REASONABLE FINANCING 
lly r, 
FROM RELATED PERSONS.—For purposes of clause (i), 
'" 
section 46(c)(8)(D)(iv) shall be applied without regard to 
,; . 
subclause (I) thereof (relating to financing from related 
persons) if the financing from the related person is 
commercially reasonable and on substantially the same 
terms as loans involving unrelated persons. 
"(E) ACTIVITY OF HOLDING REAL PROPERTY.—For purposes 
, 
, 
of this paragraph— 
"(i) INCIDENTAL PERSONAL PROPERTY AND SERVICES.— 
The activity of holding real property includes the hold-
100 STAT. 2244 
PUBLIC LAW 99-514—OCT. 22, 1986 
ing of personal property and the providing of services 
which are incidental to making real property available 
as living accommodations. 
"(ii) MINERAL PROPERTY.—The activity of holding real 
" 
property shall not include the holding of mineral prop-
erty." 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to losses incurred 
after December 31, 1986, with respect to property placed in 
service by the taxpayer after December 31,1986. 
(2) SPECIAL RULE FOR LOSSES OF S CORPORATION, PARTNERSHIP, 
' 
O
R PASS-THRU ENTITY.—In the case of an interest in an S corpora-
tion, a partnership, or other pass-thru entity acquired after 
December 31, 1986, the amendments made by this section shall 
^' 
apply to losses after December 31, 1986, which are attributable 
to property placed in service by the S corporation, partnership, 
or pass-thru entity on, before, or after January 1,1986. 
(3) SPECIAL RULE FOR ATHLETIC STADIUM.—The amendments 
made by this section shall not apply to any losses incurred by a 
taxpayer with respect to the holding of a multi-use athletic 
stadium in Pittsburgh, Pennsylvania, which the taxpayer ac-
quired in a sale for which a letter of understanding was entered 
into before April 16,1986. 
J 
, ; 
Subtitle B—Interest Expense 
SEC. 511. LIMITATIONS ON DEDUCTION FOR NONBUSINESS INTEREST. 
(a) LIMITATION ON INVESTMENT INTEREST.—Subsection (d) of sec-
tion 163 (relating to limitation on interest on investment indebted-
ness) is amended to read as follows: 
"(d) LIMITATION ON INVESTMENT INTEREST.— 
"(1) IN GENERAL.—In the case of a taxpayer other than a 
•• * corporation, the amount allowed as a deduction under this 
chapter for investment interest for any taxable year shall not 
exceed the net investment income of the taxpayer for the 
taxable year. 
"(2) CARRYFORWARD OF DISALLOWED INTEREST.—The amount 
not allowed as a deduction for any taxable year by reason of 
paragraph (1) shall be treated as investment interest paid or 
accrued by the taxpayer in the succeeding taxable year. 
"(3) INVESTMENT INTEREST.—For purposes of this subsection— 
mm 
"(A) IN GENERAL.—The term 'investment interest' means 
any interest allowable as a deduction under this chapter 
Bit? 
(determined without regard to paragraph (1)) which is paid 
or accrued on indebtedness incurred or continued to pur-
chase or carry property held for investment. 
"(B) EXCEPTIONS.—The term 'investment interest' shall 
not include— 
"(i) any qualified residence interest (as defined in 
subsection (hX3)), or 
"(ii) any interest which is taken into account under 
section 469 in computing income or loss from a passive 
'*-'0t| :
< 
activity of the taxpayer. 
"(C) PERSONAL PROPERTY USED IN SHORT SALE.—For 
pur-
- '-'^ 
poses of this paragraph, the term 'interest' includes any 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2245 
amount allowable as a deduction in connection with per-
sonal property used in a short sale. 
"(4) NET INVESTMENT INCOME.—For purposes of this subsec-
tion— 
"(A) IN GENERAL.—The term 'net investment income' 
means the excess o
f
— 
"(i) investment income, over 
"(ii) investment expenses. 
"(B) INVESTMENT INCOME.—The term 'investment income' 
means the sum o
f
— 
"(i) gross income (other than gain described in clause 
(ii)) from property held for investment, and 
"(ii) any net gain attributable to the disposition of 
property held for investment, 
but only to the extent such amounts are not derived from 
the conduct of a trade or business. 
"(C) INVESTMENT EXPENSES.—The term 'investment ex-
penses' means the deductions allowed under this chapter 
(other than for interest) which are directly connected with 
the production of investment income. 
"(D) INCOME AND EXPENSES FROM PASSIVE ACTIVITIES.— 
Investment income and investment expenses shall not in-
clude any income or expenses taken into account under 
section 469 in computing income or loss from a passive 
activity. 
"(E) REDUCTION IN INVESTMENT INCOME DURING PHASE-IN 
OF PASSIVE LOSS RULES.—Investment income of the taxpayer 
for any taxable year shall be reduced by the amount of the 
passive activity loss to which section 469(a) does not apply 
for such taxable year by reason of section 469(1). The preced-
ing sentence shall not apply to any portion of such passive 
activity loss which is attributable to a rental real estate 
activity with respect to which the taxpayer actively partici-
pates (within the meaning of section 469(iX6)) during such 
taxable year. 
"(5) PROPERTY HELD FOR INVESTMENT.—For purposes of this 
subsection— 
"(A) IN GENERAL.—The term 'property held for invest-
ment' shall include— 
"(i) any property which produces income of a type 
described in section 469(eXl), and 
"(ii) any interest held by a taxpayer in an activity 
involving the conduct of a trade or business— 
"(I) which is not a passive activity, and 
"(II) with respect to which the taxpayer does not 
materially participate. 
"(B) INVESTMENT EXPENSES.—In the case of property de-
scribed in subparagraph (AXi), expenses shall be allocated 
to such property in the same manner as under section 469. 
"(C) TERMS.—For purposes of this paragraph, the terms 
'activity', 'passive activity', and 'materially participate' 
have the meanings given such terms by section 469. 
"(6) PHASE-IN OF DISALLOWANCE.—In the case of any taxable 
year beginning in calendar years 1987 through 1990— 
"(A) IN GENERAL.—The amount of interest disallowed 
under this subsection for any such taxable year shall be 
equal to the sum o
f
— 
100 STAT. 2246 
PUBLIC LAW 99-514—OCT. 22, 1986 
*' 
"(i) the applicable percentage of the amount which 
„ ,
^
^
. ^ 
(without regard to this paragraph) is not allowed as a 
deduction under this subsection for the taxable year to 
^
^ ., , ; 
, _
^ the extent such amount does not exceed the ceiling 
amount, 
"(ii) the amount which (without regard to this para-
graph) is not allowed as a deduction under this subsec-
-,. _ 
, 
tion in excess of the ceiling amount, plus 
"(iii) the amount of any carryforward to such taxable 
, §{'•'• 
^^^^ under paragraph (2) with respect to which a 
deduction was disallowed under this subsection for a 
'|.^ .. 
preceding taxable year. 
For purposes of this subparagraph, the amount under 
f. , 
clause (i) or (ii) shall be computed without regard to the 
amount described in clause (iii). 
"(B) APPLICABLE PERCENTAGE.—For purposes of this para-
graph, the applicable percentage shall be determined in 
,. 
accordance with the following table: 
"In the case of taxable 
The applicable 
years beginning in: 
percentage is: 
1987 
35 
1988 
60 
- .1' i 
1989 
80 
-•-H^ah^ 
1990 
90. 
"(C) CEILING AMOUNT.—For purposes of this paragraph, 
^, n. .^... ^j^^ term 'ceiling amount' means— 
"(i) $10,000 in the case of a taxpayer not described in 
clause (ii) or (iii), 
"(ii) $5,000 in the case of a married individual filing a 
separate return, and 
"(iii) zero in the case of a trust." 
(b) 
DISALLOWANCE OF DEDUCTION FOR PERSONAL INTEREST OF 
INDIVIDUALS.—Section 163 (relating to deduction for interest) is 
amended by redesignating subsection (h) as subsection (i) and by 
inserting after subsection (g) the following new subsection: 
"(h) DISALLOWANCE OF DEDUCTION FOR PERSONAL INTEREST.— 
"(1) IN GENERAL.—In the case of a taxpayer other than a 
corporation, no deduction shall be allowed under this chapter 
for personal interest paid or accrued during the taxable year. 
' f V 
"(2) PERSONAL INTEREST.—For purposes of this subsection, the 
^^ 
term 'personal interest' means any interest allowable as a 
V- ^' deduction under this chapter other than— 
"(A) interest paid or accrued on indebtedness incurred or 
continued in connection with the conduct of a trade or 
.0n f 
business (other than the trade or business of performing 
services as an employee), 
, -' 
"(B) any investment interest (within the meaning of 
subsection (d)), 
"(C) any interest which is taken into account under sec-
tion 469 in computing income or loss from a passive activity 
of the taxpayer, 
"(D) any qualified residence interest (within the meaning 
'"' 
of paragraph (3)), and 
"(E) any interest payable under section 6601 on any 
-"' "* 
unpaid portion of the tax imposed by section 2001 for the 
period during which an extension of time for payment of 
such tax is in effect under section 6163 or 6166. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2247 
"(3) QUALIFIED RESIDENCE INTEREST.—For purposes of this 
subsection— 
"(A) IN GENERAL.—The term 'quahfied residence interest' 
means interest which is paid or accrued during the taxable 
year on indebtedness which is secured by any property 
>
n 
which (at the time such interest is paid or accrued) is a 
; • 
qualified residence of the taxpayer. 
"(B) LIMITATION ON AMOUNT OF INTEREST.—The term 
'qualified residence interest' shall not include any interest 
•om- 
paid or accrued on indebtedness secured by any qualified 
residence which is allocable to that portion of the principal 
"i? 
amount of such indebtedness which, when added to the 
outstanding aggregate principal amount of all other indebt-
^r.ir 
edness previously incurred and secured by such qualified 
residence, exceeds the lesser of— 
"(i) the fair market value of such qualified residence, 
or 
"(ii) the sum of— 
"(I) the taxpayer's basis in such qualified resi-
dence (adjusted only by the cost of any improve-
• -• 
ments to such residence), plus 
''.'•• 
"(II) the aggregate amount of qualified indebted-
ness of the taxpayer with respect to such qualified 
residence. 
"(C) COST NOT LESS THAN BALANCE OF INDEBTEDNESS IN-
CURRED ON O
R BEFORE AUGUST 16, 1936.—The amount under 
subparagraph (B)(iiXI) at any time after August 16, 1986, 
•^'ii 
shall not be less than the outstanding aggregate principal 
amount (as of such time) of indebtedness which was in-
curred on or before August 16, 1986, and which was secured 
by the qualified residence on August 16,1986. 
"(D) TIME FOR DETERMINATION.—Except as provided in 
regulations, any determination under subparagraph (B) 
shall be made as of the time the indebtedness is incurred. 
"(4) QUALIFIED INDEBTEDNESS.—For purposes of this subsec-
tion— 
"(A) IN GENERAL.—The term 'qualified indebtedness' 
means indebtedness secured by a qualified residence of the 
taxpayer which is incurred after August 16, 1986, to pay 
for— 
"(i) qualified medical expenses, or 
"(ii) qualified educational expenses, 
which are paid or incurred within a reasonable period of 
time before or after such indebtedness is incurred. 
"(B) QUALIFIED MEDICAL EXPENSES.—For purposes of this 
paragraph, the term 'qualified medical expenses' means 
amounts, not compensated for by insurance or otherwise, 
incurred for medical care (within the meaning of subpara-
graphs (A) and (B) of section 213(d)(1)) for the taxpayer, his 
spouse, or a dependent. 
"(C) QUALIFIED EDUCATIONAL EXPENSES.—For purposes of 
this paragraph— 
"(i) IN GENERAL.—The term 'qualified educational 
expenses' means qualified tuition and related expenses 
of the taxpayer, his spouse, or a dependent for attend-
ed fi;?'. 
ance at an educational institution described in section 
170(b)(lXAXii). 
100 STAT. 2248 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(ii) QUALIFIED TUITION AND RELATED EXPENSES.—The 
term 'qualified tuition and related expenses' has the 
meaning given such term by section 117(b), except that 
such term shall include any reasonable living expenses 
while away from home. 
"(D) DEPENDENT.—For purposes of this paragraph, the 
term 'dependent' has the meaning given such term by 
section 152. 
"(5) OTHER DEFINITIONS AND SPECIAL RULES.— 
"(A) QUALIFIED RESIDENCE.—For purposes of this subsec-
tion— 
"(i) IN GENERAL.—The term 'qualified residence' 
means— 
"(I) the principal residence (within the meaning 
of section 1034) of the taxpayer, and 
K 
"(II) 1 other residence of the taxpayer which is 
selected by the taxpayer for purposes of this 
subsection for the taxable year and which is used 
by the taxpayer as a residence (within the meaning 
of section 280A(d)(l)). 
"(ii) 
MARRIED INDIVIDUALS FILING 
SEPARATE RE-
,., ^ .. 
TURNS.—If a married couple does not file a joint return 
I' 
for the taxable year— 
"(I) such couple shall be treated as 1 taxpayer for 
' . 
purposes of clause (i), and 
"(II) each individual shall be entitled to take into 
account 1 residence unless both individuals consent 
in writing to 1 individual taking into account the 
principal residence and 1 other residence, 
"(iii) RESIDENCE NOT USED OR RENTED.—For purposes 
of clause (i)(II), notwithstanding section 280A(d)(l), if 
the taxpayer does not rent or use a dwelling unit at any 
time during a taxable year, such unit may be treated as 
a residence for such taxable year. 
"(B) SPECIAL RULE FOR COOPERATIVE HOUSING CORPORA-
TIONS.—For purposes of this paragraph, any indebtedness 
.,„ 
secured by stock held by the taxpayer as a tenant-stock-
holder (as defined in section 216) in a cooperative housing 
corporation (as so defined) shall be treated as secured by the 
house or apartment which the taxpayer is entitled to 
occupy as such a tenant-stockholder. If stock described in 
the preceding sentence may not be used to secure indebted-
,, I 
ness, indebtedness shall be treated as so secured if the 
taxpayer establishes to the satisfaction of the Secretary 
that such indebtedness was incurred to acquire such stock. 
"(6) PHASE-IN OF UMITATION.—In the case of any taxable year 
beginning in calendar years 1987 through 1990, the amount of 
interest with respect to which a deduction is disallowed under 
this subsection shall be equal to the applicable percentage 
(within the meaning of subsection (dX6)(B)) of the amount which 
(but for this subsection) would have been so disallowed." 
(d) TECHNICAL AMENDMENTS.— 
(1) Clause (i) of section 7872(dXlXE) is amended by striking out 
"section 163(d)(3)" and inserting in lieu thereof "section 
163(dX4)". 
(2XA) Sections 467(cX5) and 1255(bX2) are each amended by 
striking out "section 163(d),". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2249 
(B) Section 703(b) is amended by striking out paragraph (3) 
and by redesignating paragraphs (4) and (5) as paragraphs (3) 
and (4), respectively. 
(C) Section 1363(c)(2) is amended by striking out subparagraph 
(A) and by redesignating subparagraphs (B) and (C) as subpara-
graphs (A) and (B), respectively. 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31, 1986. 
TITLE VI—CORPORATE PROVISIONS 
Subtitle A—Corporate Rate Reductions 
SEC. 601. CORPORATE RATE REDUCTIONS. 
(a) GENERAL RULE.—Subsection (b) of section 11 is amended to 
read as follows: 
"(b) AMOUNT OF TAX.—The amount of the tax imposed by subsec-
tion (a) shall be the sum of^ 
"(1) 15 percent of so much of the taxable income as does not 
exceed $50,000, 
"(2) 25 percent of so much of the taxable income as exceeds 
$50,000 but does not exceed $75,000, and 
"(3) 34 percent of so much of the taxable income as exceeds 
$75,000. 
In the case of a corporation which has taxable income in excess of 
$100,000 for any taxable year, the amount of tax determined under 
the preceding sentence for such taxable year shall be increased by 
the lesser of (A) 5 percent of such excess, or (B) $11,750." 
(b) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to taxable years beginning on or after July 1, 1987. 
(2) CROSS REFERENCE.— 
For treatment of taxable years which include July 1, 1987. see section 15 
of the Internal Revenue Code of 1986. 
Subtitle B—Treatment of Stock and Stock 
Dividends 
SEC. 611. REDUCTION IN DIVIDENDS RECEIVED DEDUCTION. 
(a) GENERAL RULE.—The following provisions are each amended 
by striking out "85 percent" and inserting in lieu thereof "80 
percent": 
(1) Section 243(a)(1) (relating to dividends received by corpora-
tions). 
(2) Sections 244 (a)(3) and (bK2) (relating to dividends received 
on certain preferred stock). 
(3) Section 2460))(1) (relating to limitation on aggregate 
amount of deductions). 
(4) Section 246A(a)(l) (relating to dividends received deduction 
reduced where portfolio stock is debt financed). 
(5) Subparagraph (B) of section 805(aX4) (relating to dividends 
received by insurance company). 
(b) EFFECTIVE DATES.— 
100 STAT. 2250 
PUBLIC LAW 99-514—OCT. 22, 1986 
(1) IN GENERAL.—The amendments made by subsection (a) 
f
. 
shall apply to dividends received or accrued after December 31, 
1986, in taxable years ending after such date. 
(2) AMENDMENT RELATING TO LIMITATION ON DEDUCTIONS.— 
The amendment made by subsection (a) to section 246(b) of the 
Internal Revenue Code of 1986 shall apply to taxable years 
beginning after December 31,1986. 
SEC. 612. REPEAL OF PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY 
INDIVIDUALS. 
(a) GENERAL RULE.—Section 116 (relating to partial exclusion of 
dividends received by individuals) is hereby repealed. 
(b) TECHNICAL AMENDMENTS.— 
(1) Subsection (g) of section 301 is amended by striking out 
paragraph (4). 
(2)(A) Subsection (c) of section 584 is amended to read as 
follows: 
"(c) INCOME OF PARTICIPANTS IN FUND.—Each participant in the 
common trust fund in computing its taxable income shall include, 
whether or not distributed and whether or not distributable— 
"(1) as part of its gains and losses from sales or exchanges of 
capital assets held for not more than 6 months, its proportionate 
share of the gains and losses of the common trust fund from 
sales or exchanges of capital assets held for not more than 6 
months, 
"(2) as part of its gains and losses from sales or exchanges of 
capital assets held for more than 6 months, its proportionate 
share of the gains and losses of the common trust fund from 
sales or exchanges of capital assets held for more than 6 
months, and 
"(3) its proportionate share of the ordinary taxable income or 
the ordinary net loss of the common trust fund, computed as 
provided in subsection (d)." 
(B) If the amendments made by section 1001 of the Tax 
Reform Act of 1984 cease to apply, effective with respect to 
property to which such amendments do not apply, subsection (c) 
of section 584 is amended by striking out "6 months" each place 
it appears and inserting in lieu thereof "1 year". 
(3) Section 642 is amended by striking out subsection (j). 
(4) Paragraph (7) of section 643(a) is hereby repealed. 
(5) Paragraph (5) of section 702(a) is amended to read as 
follows: 
"(5) dividends with respect to which there is a deduction 
under part VIII of subchapter B,". 
(6) Section 854 is amended— 
(A) by striking out "section 116 (relating to an exclusion 
%m0 
fQj. dividends received by individuals), and" in subsection 
, 
, 
(a), 
^"^ 
(B) in subsection (b)— 
(i) by striking out subparagraph (B) of paragraph (1) 
srSisTj^t 
^^^ 
redesignating subparagraph (C) as subparagraph 
" ' " ' 
(ii) by striking out "or (B)" in subparagraph (B) (as so 
j^ 
redesignated), 
G-. t-i*,» 
(iii) by striking out "the exclusion under section 116 
and" in paragraph (2), and 
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2251 
(iv) by amending subparagraph (B) of paragraph (3) to 
read as follows: 
"(B)(i) The term 'aggregate dividends received' includes 
only dividends received from domestic corporations. 
"(ii) For purposes of clause (i), the term 'dividend' shall 
not include any distribution from— 
"(I) a corporation which, for the taxable year of the 
• '. . • 
corporation in which the distribution is made, or for 
k 
the next preceding taxable year of the corporation, is a 
corporation exempt from tax under section 501 (relat-
' 
ing to certain charitable, etc., organizations) or section 
521 (relating to farmers' cooperative associations), or 
"(II) a real estate investment trust which, for the 
taxable year of the trust in which the dividend is paid, 
qualifies under part II of subchapter M (section 856 and 
.; 
following). 
' 
"(iii) In determining the amount of any dividend for 
purposes of this subparagraph, a dividend received from a 
regulated investment company shall be subject to the 
limitations prescribed in this section." 
^ 
(7) Subsection (c) of section 857 is amended by striking out 
"section 116 (relating to an exclusion for dividends received by 
^ 
individuals), and". 
(8) The taljle of sections for part III of subchapter B of chapter 
1 is amended by striking out the item relating to section 116. 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31, 1986. 
SEC. 613. NONDEDIICTIBILITY OF STOCK REDEMPTION EXPENSES. 
(a) IN GENERAL.—Section 162 (relating to trade or business ex-
penses) is amended by redesignating subsection (1) as subsection (m) 
\ 
and inserting after subsection (k) the following new subsection: 
"(1) STOCK REDEMPTION EXPENSES.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), no 
deduction otherwise allowable shall be allowed under this chap-
ter for any amount paid or incurred by a corporation in connec-
tion with the redemption of its stock. 
"(2) EXCEPTIONS.—Paragraph (1) shall not apply to— 
"(A) CERTAIN SPECII-'IC DEDUCTIONS.—Any— 
"(i) deduction allowable under section 163 (relating to 
i 
interest), or 
"(ii) deduction for dividends paid (within the mean-
ing of section 561). 
"(B) 
STOCK OF CERTAIN REGULATED INVESTMENT COMPA-
^^'* 
NiES.—Any amount paid or incurred in connection with the 
redemption of any stock in a regulated investment company 
which issues only stock which is redeemable upon the 
demand of the shareholder." 
(b) EFFECTIVE DATE.—The amendments made by subsection (a) 
shall apply to any amount paid or incurred after February 28, 1986, 
in taxable years ending after such date. 
SEC. 614. REDUCTION IN STOCK BASIS FOR NONTAXED PORTION OF 
EXTRAORDINARY DIVIDENDS. 
(a) 2-YEAR HOLDING REQUIREMENT.— 
/
•
• / 
100 STAT. 2252 
PUBLIC LAW 99-514—OCT. 22, 1986 
*
^
*
" 
(1) IN' GENERAL.—Section 1059(a) (relating to corporate share-
holder's basis in stock reduced by nontaxed portion of extraor-
dinary dividends) is amended to read as follows: 
"(a) GENERAL RULE.—If any corporation receives any extraor-
dinary dividend with respect to any share of stock and such corpora-
tion has not held such stock for more than 2 years before the 
dividend announcement date— 
"(1) REDUCTION IN BASIS.—The basis of such corporation in 
such stock shall be reduced Ot>ut not below zero) by the nontaxed 
portion of such dividends. 
"(2) RECOGNinoN UPON SALE OR DISPOSITION IN CERTAIN 
CASES.—In additivon to any gain recognized under this chapter, 
there shall be treated as gain from the sale or exchange of any 
stock for the taxable year in which the sale or disposition of 
such stock occurs Q.n amount equal to the aggregate nontaxed 
portions of any extraordinary dividends with respect to such 
stock which did not reduce the basis of such stock by reason of 
the limitation on reducing basis below zero." 
(2) DIVIDEND ANNOUNCEMENT DATE.—Section 1059(d) (relating 
to special rules) is amended by adding at the end thereof the 
following new paragraph: 
"(6) DIVIDEND ANNOUNCEMENT DATE.—The term 'dividend 
announcement date' meains, with respect to any dividend, the 
date on which the corporaition declares, announces, or agrees to 
the payment of such dividemd, whichever is the earliest." 
(3) CONFORMING AMENDMENT.—Section 1059(d)(3) (relating to 
determination of holding period) is amended by striking out "1 
year" and inserting in lieu thereof "2 years". 
Qo) EXTRAORDINARY DIVIDEND MAY BE DETERMINED BY REFERENCE 
TO FAIR MARKET VALUE.—Section 1059(c) (defining extraordinary 
dividend) is amended by adding at the end thereof the following new 
paragraph: 
"(4) FAIR MARKET VALUE DETERMINATION.—If the taxpayer 
establishes to the satisfaction of the Secretary the fair market 
value of any share of stock as of the day before the ex-dividend 
date, the taxpayer may elect to apply paragraphs (1) and (3) by 
substituting such value for the taxpayer's adjusted basis." 
(c) TIME FOR REDUCTION IN BASIS.— 
(1) IN GENERAL.—Paragraph (1) of section 1059(d) (relating to 
time for reduction) is amended to i-ead as follows: 
"(1) TIME FOR REDUCTION.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
ji J' 
(B), any reduction in basis under subsection (aXD shall 
occur immediately before any sale or disposition of the 
, ^ 
stock. 
"(B) SPECIAL RULE FOR COMPUTING EXTRAORDINARY DIVI-
DEND.—In determining a taxpayer's adjusted basis for pur-
poses of subsection (cXD, any reduction in basis under 
subsection (aXD by reason of a prior distribution which was 
•^ 
an extraordinary dividend shall be treated as occurring at 
the beginning of the ex-dividend date for such distribution." 
(2) CONFORMING AMENDMENT.—Section 1059(cXl) is amended 
by striking out "(determined without regard to this section)". 
(d) No EXTRAORDINARY DIVIDEND WHERE STOCK HELD DURING 
ENTIRE EXISTENCE OF CORPORATION.—Section 1059(d) (relating to 
special rules) is amended by adding at the end thereof the following 
new paragraph: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2253 
"(7) EXCEPTION WHERE STOCK HELD DURING ENTIRE EXISTENCE 
OF CORPORATION.—Subsection (a) shall not apply to any extraor-
dinary dividend with respect to any share of stock of a corpora-
tion i
f
— 
"(A) such stock was held by the taxpayer during the 
entire period such corporation (and any precedessor cor-
poration) was in existence, 
ii! 
"(B) except as provided in regulations, the only earnings 
and profits of such corporation were earnings and profits 
•' i 
accumulated by such corporation (or any predecessor cor-
poration) during such period, and 
"(C) the application of this paragraph to such dividend is 
not inconsistent with the purposes of this section." 
(e) CERTAIN LIQUIDATIONS AND REDEMPTIONS TREATED As EXTRAOR-
DINARY 
DIVIDENDS; 
QUALIFYING 
DIVIDENDS NOT TREATED AS 
EXTRAORDINARY DIVIDENDS; SPECIAL RULE FOR PREFERRED DIVI-
DENDS.—Section 1059 (relating to extraordinary dividends) is 
amended by redesignating subsection (e) as subsection (f) and by 
adding after subsection (d) the following new subsection: 
"(e) SPECIAL RULES FOR CERTAIN DISTRIBUTIONS.— 
"(1) TREATMENT OF PARTIAL LIQUIDATIONS AND NON-PRO RATA 
REDEMPTIONS.—Except as otherwise provided in regulations, in 
the case of any redemption of stock which is— 
"(A) part of a partial liquidation (within the meaning of 
section 302(e)) of the redeeming corporation, or 
"(B) not pro rata as to all shareholders, 
any amount treated as a dividend under section 301 with re-
spect to such redemption shall be treated as an extraordinary 
dividend for purposes of this section (without regard to the 
f 
holding period of the stock). 
"(2) QUAUFYING DIVIDENDS.—Except as provided in regula-
tions, the term 'extraordinary dividend' shall not include any 
qualifying dividend (within the meaning of section 243(bXl)). 
"(3) QUALIFIED PREFERRED DIVIDENDS.— 
"(A) IN GENERAL.—A qualified preferred dividend shall be 
treated as an extraordinary dividend— 
r, i 
"(i) only if the actual rate of return of the taxpayer 
on the stock with respect to which such dividend was 
paid exceeds 15 percent, or 
"(ii) if clause (i) does not apply, and the taxpayer 
disposes of such stock before the taxpayer has held 
such stock for more than 5 years, only to the extent the 
actual rate of return exceeds the stated rate of return. 
1 
"(B) RATE OF RETURN.—For purposes of subparagraph 
(A)-
"(i) ACTUAL RATE OF RETURN.—The actual rate of 
return shall be the rate of return for the period for 
which the taxpayer held the stock, determined— 
"(I) by only taking into account dividends during 
such period, and 
"(II) by using the lesser of the adjusted basis of 
the taxpayer in such stock or the liquidation pref-
• 
* 
erence of such stock. 
"(ii) STATED RATE OF RETURN.—The stated rate of 
return shall be the annual rate of the qualified pre-
•' 
ferred dividend payable with respect to any share of 
100 STAT. 2254 
PUBLIC LAW 99-514—OCT. 22, 1986 
arr fi^ixx H stock (expressed as a percentage of the amount de-
' J 
scribed in subparagraph (BXiXID). 
"(C) DEFINITIONS AND SPECIAL RULES.—For purposes of 
this paragraph— 
'K-i 
"(i) 
QUALIFIED 
PREFERRED 
DIVIDEND.—The 
term 
• i 
^' 
'qualified preferred dividend' means any dividend pay-
able with respect to any share of stock which— 
"(I) provides for fixed preferred dividends pay-
/\ 
able not less frequently than annually, and 
" : 
- • 
"(ID is not in arrears as to dividends at the time 
the taxpayer acquires the stock. 
J ^\ <
t ' 
"(ii) HOLDING PERIOD.—In determining the holding 
period for purposes of subpareigraph (AXii), subsection 
c . ., 
(dX3) shall be applied by substituting '5 years' for '2 
years'." 
(f) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to dividends 
declared after July 18, 1986, in taxable years ending after such 
date. 
(2) AGGREGATION.—For purposes of section 1059(cX3) of the 
Internal Revenue Code of 1986, dividends declared after July 18, 
1986, shall not be aggregated with dividends declared on or 
;,, ^ before July 18,1986. 
(3) REDEMPTIONS.—Section 1059(eXl) of the Internal Revenue 
Code of 1986 (as added by subsection (e)) shall apply to dividends 
^ 
declared after the date of the enactment of this Act, in taxable 
years ending after such date. 
Subtitle C—Limitation on Net Operating Loss 
Carryforwards and Excess Credit Carryfor-
wards 
SEC. 621. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS. 
(a) IN GENERAL.—Section 382 (relating to special limitations on 
net operating loss carryovers) is amended to read as follows: 
"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 sec-
^fi • tion, 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 UMITATION.—If the section 
" 
382 limitation for any post-change year exceeds the taxable 
income of the new loss corporation for such year which wsis 
,, 
offset by pre-change losses, the section 382 limitation for the 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2255 
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 in-
cludes the change date— 
"(A) 
LIMITATION DOES NOT APPLY TO TAXABLE INCOME 
BEFORE CHANGE.—Subsection (a) shall not apply to the por-
s 
tion 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 (hX5) and in regulations, 
taxable income shall be allocated ratably to each day in the 
A : 
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 limita-
tion 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 
REQUIREMENTS 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 limita-
tion for any post-change year shall not be less than the sum of^ 
"(A) any increase in such limitation under— 
?^> 
"(i) subsection (hXlXA) for recognized built-in gains 
for such year, and 
ri 
"(ii) subsection (hXlXC) for gain recognized by reason 
of an election under section 338, plus 
"(B) any increase in such limitation under subsection 
(bX2) for amounts described in subparagraph (A) which are 
carried forward to such year. 
"(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 
f' 
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 (hX5) 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. 
"(e) VALUE OF OLD Loss CORPORATION.—For purposes of this sec-
tion— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, the value of the old loss corporation is the value of 
100 STAT. 2256 
PUBLIC LAW 99-514—OCT. 22, 1986 
4:>, the stock of such corporation (including any stock described in 
section 1504(a)(4)) immediately before the ownership change. 
* J 
"(2) SPECIAL RULE IN THE CASE OF REDEMPTION.—If a redemp-
-M tion occurs in connection with an ownership change, the value 
under paragraph (1) shall be determined after taking such 
redemption into account. 
"(f) LONG-TERM TAX-EXEMPT RATE.—For purposes of this section— 
"(1) I N 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 obliga-
tions. 
"(g) OWNERSHIP CHANGE.—For purposes of this section— 
"(1) I N GENERAL.—There is an ownership change if, imme-
ms diately after any owner shift involving a 5-percent shareholder 
or any equity structure shift— 
''^ 
"(A) the percentage of the stock of the new loss corpora-
tion owned by 1 or more 5-percent shareholders has in-
creased by more than 50 percentage points, over 
v!j> 
t 
"(B) the lowest percentage of stock of the old loss corpora-
tion (or any predecessor corporation) owned by such share-
holders 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— 
-71 
"(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 share-
holder before or after such change. 
"(3) EQUITY STRUCTURE SHIFT DEFINED.— 
"(A) I N GENERAL.—The term 'equity structure 
shift' 
':o ;-".-^ 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 
; t 
(F) of section 368(a)(1). 
"(B) TAXABLE REORGANIZATION-TYPE TRANSACTIONS, ETC.— 
To the extent provided in regulations, the term 'equity 
structure shift' includes taxable reorganization-type trans-
it 14 
actions, public offerings, and similar transactions. 
«i 
"(4) SPECIAL RULES FOR APPLICATION OF SUBSECTION.— 
"(A) TREATMENT OF LESS THAN 5-PERCENT SHAREHOLD-
Bimetit 
ERS.—Except as provided in subparagraphs (BXi) and (C), in 
determining whether an ownership change has occurred, 
n3f> ?;ri all stock owned by shareholders of a corporation who are 
not 5-percent shareholders of such corporation shall be 
>'rij « 
treated as stock owned by 1 5-percent shareholder of such 
to BLUP^ corporation. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2257 
"(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.—Subpara-
graph (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 imme-
" '' r 
diately before such acquisition. 
"(C) COORDINATION WITH OTHER OWNER SHIFTS.—Except as 
provided in regulations, 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. 
"(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 
-T^r 
any recognition period taxable year shall be increased 
by the recognized built-in gains for such taxable year. 
gj^., 
"(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— 
:* r 
"(I) the net unrealized built-in loss, reduced by 
"(II) recognized built-in losses for prior taxable 
years ending in the recognition period. 
"(C) SECTION 338 GAIN.—The section 382 limitation for 
any taxable year in which gain is recognized by reason of 
an election under section 338 shall be increased by the 
excess of— 
"(i) the amount of such gain, over 
"(ii) the portion of such gain taken into account in 
computing recognized built-in gains for such taxable 
year. 
"(2) RECOGNIZED BUILT-IN GAIN AND LOSS.— 
"(A) RECOGNIZED BUILT-IN GAIN.—The term 'recognized 
built-in gain' means any gain recognized during the rec-
100 STAT. 2258 
PUBLIC LAW 99-514—OCT. 22, 1986 
-j^'if._ 
ognition period on the disposition of any asset to the extent 
JWIIH : 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 o
f
— 
"(I) the fair market value of such asset on the 
change date, over 
"(II) the adjusted basis of such asset on such 
date. 
*.<o- 
"(B) RECOGNIZED BUILT-IN LOSS.—The term 'recognized 
built-in loss' means any loss recognized during the recogni-
tion 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 corpora-
tion immediately before the change date, or 
"(ii) such loss exceeds the excess o
f
— 
.. .;,. 
"(I) the adjusted basis of such asset on the 
„ \',, ^ 
change date, over 
- . 
, 
"(II) the fair market value of such asset on such 
date. 
"(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 re-
(<i« p 
spect 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 
7 
at such time. 
5 
"(ii^ SPECIAL RULE FOR REDEMPTIONS.—If a redemp-
'^•'•'"•''I •
• 
tion occurs in connection with an ownership change, 
determinations under clause (i) shall be made after 
taking such redemption into account. 
fe 
"(B) THRESHOLD REQUIREMENT.— 
" 
"(i) 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 25 percent of the amount deter-
bs>ix:^o: ; 
mined for purposes of subparagraph (AXi)(I), the net 
lis ? >
, 
unrealized built-in gain or net unrealized built-in loss 
shall be zero. 
"(ii) 
CASH AND CASH ITEMS NOT TAKEN INTO AC-
COUNT.—In computing any net unrealized built-in gain 
or net unrealized built-in loss under clause (i), 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. 
ni 
"(4) DISALLOWED LOSS TREATED AS A NET OPERATING LOSS.—If a 
<l-] deduction for any portion of a recognized built-in loss is dis-
allowed for any post-change year, such portion— 
"(A) shall be carried forward to subsequent taxable years 
basiii 
under rules similar to the rules for the carrying forward of 
;>3i n'li net operating losses, but 
,. _ 
„ 
:, : 
. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2259 
"(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 (bX3)— 
"(A) in applying subparagraph (A) thereof, taxable 
income shall be computed without regard to recognized 
' * built-in gains and 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 (IXC), for 
the year. 
"(6) SECRETARY MAY TREAT CERTAIN DEDUCTIONS AS BUILT-IN 
LOSSES.—The Secretary may by regulation treat amounts which 
accrue on or before the change date but which are allowable as 
^ 
a deduction after such date as recognized built-in losses. 
"(7) RECOGNITION PERIOD, ETC.— 
8ft 
«(^) 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 'rec-
^ 
ognition period taxable year' means any tsixable 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 corpora-
tion is acquired in 1 transaction (or in a series of related 
transactions during any 12-month period), for purposes of deter-
mining 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. 
X 
"(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 is 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 
^
I 
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 
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 
1st day of the 1st taxable year from which there is a 
carryforward of a loss or of an excess credit to the 1st post-
change year. Except as provided in regulations, this paragraph 
shall not apply to any loss corporation which has a net unreal-
ized built-in loss (determined after application of subsection 
(hX3XB)). 
"(j) CHANGE DATE.—For purposes of this section, the change date 
is— 
100 STAT. 2260 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(1) in the case where the last component of an ownership 
change is an owner shift involving a 5-percent shareholder, the 
s. 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 reorganiza-
tion, 
"(k) DEFINITIONS AND SPECIAL RULES.—For purposes of this sec-
tion— 
"(1) Loss CORPORATION.—The term 'loss corporation' means a 
corporation entitled to use a net operating loss carryover. 
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 with respect to which there is an owner-
,. ship change— 
"(A) which (before the ownership change) was a loss 
corporation, or 
•5 
"(B) with respect to which there is a pre-change loss 
described in subsection (d)(1)(B). 
"(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 corpora-
tion 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 regula-
,,^ . tions 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 in-
terests as stock, and 
"(ii) to treat stock as not stock, 
"(C) DETERMINATIONS ON BASIS OF VALUE.—Determina-
tions 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 share-
holder' means any person holding 5 percent or more of the stock 
of the corporation at any time during the testing period. 
"(1) CERTAIN ADDITIONAL OPERATING RULES.—For purposes of this 
section— 
"(1) CERTAIN CAPITAL CONTRIBUTIONS NOT TAKEN INTO AC-
COUNT.— 
f A 
"(A) I N 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). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2261 
"(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 TAX-
ABLE 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 
"(II) except as provided in regulations, by treat-
ing 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, and 
"(iv) except to the extent provided in regulations, 
paragraph (4) of section 318(a) shall apply to an option 
if such application results in an ownership change. 
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, DIVORCE, 
SEPARATION, ETC.—If^ 
"(i) the basis of any stock in the hands of any person 
is determined— 
"(I) under section 1014 (relating to property ac-
quired 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, 
71-19^ 0 - 89 - 16 : QL. 3 Part3 
100 STAT. 2262 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(ii) stock is received by any person in satisfaction of 
t 
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 
,1 
of section 71(b)(2)), 
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) 
SPECIAL RULE FOR EMPLOYEE STOCK OWNERSHIP 
"i.- J" - PLANS.— 
"(i) IN GENERAL.—Except as provided in clause (ii), 
'' * 
-' the acquisition of employer securities (within the mean-
ing of section 409(1)) by— 
^ -' ' 
' 
"(I) a tax credit employee stock ownership plan 
or an employee stock ownership plan (within the 
'^- KJ/./ ^'- 
meaningofsection 4975(e)(7)), or 
"(II) a participant of any such plan pursuant to 
'''^' " 
the requirements of section 409(h), 
'•' „ 
shall not be taken into account in determining whether 
*
"
^ ' 
an ownership change has occurred. 
' 
"(ii) 
OWNERSHIP AND ALLOCATION REQUIREMENTS.— 
* 
Subclause (I) of clause (i) shall not apply to any acquisi-
tion unless— 
"(I) immediately after such acquisition the plan 
holds stock meeting the requirements of section 
' ' 
^- • 1042(b)(2), except that such section shall be applied 
by substituting '50 percent' for *30 percent', and 
*'"/ 
"(II) the plan meets requirements similar to the 
;'' \. 
requirements of section 409(n). 
**/ • 
"(D) CERTAIN CHANGES IN PERCENTAGE OWNERSHIP WHICH 
' ' 
ARE ATTRIBUTABLE T
O 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 
differeat 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 
,y 
shall be reduced by the excess (if any) o
f
— 
'r 
"(i) the fair market value of the nonbusiness assets of 
jf-. 
the old loss corporation, over 
*.^, . 
"(ii) the nonbusiness asset share of indebtedness for 
c,, 5 
which such corporation is liable. 
"(B) 
CORPORATION HAVING SUBSTANTIAL NONBUSINESS 
ASSETS.—For purposes of subparagraph (A)— 
"(i) IN GENERAL.—The old loss corporation shall be 
3'* ,, 
treated as having substantial nonbusiness assets if at 
least V
b of the value of the total assets of such corpora-
...r .. 
tion consists of nonbusiness assets. 
"(ii) EXCEPTION FOR CERTAIN INVESTMENT ENTITIES.— 
.J- I j. 
A regulated investment company to which part I of 
subchapter M applies, a real estate investment trust to 
to ?'i3 
which part II of subchapter M applies, or a real estate 
•d'.i^i .^ 
mortgage pool to which part IV of subchapter M ap-
\-i I 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2263 
plies, shall not be treated as a new loss corporation 
having substantial nonbusiness assets. 
"(C) NONBUSINESS ASSETS.—For purposes of this para-
graph, 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 
y0 . 
the corporation, bears to 
"(ii) the fair market value of all assets of such cor-
. ; 
poration. 
"(E) TREATMENT OF SUBSIDIARIES.—For purposes of this 
paragraph, stock and securities in any subsidiary corpora-
. 
tion shall be disregarded and the parent corporation shall 
r 
be deemed to own its ratable share of the subsidiary's 
assets. For purposes of the preceding sentence, a corpora-
. 
>
r
^ 
tion shall be treated £is a subsidiary if the parent owns 50 
percent or more of the combined voting power of all clsisses 
of stock entitled to vote, and 50 percent or more of the total 
value of shares of all classes of stock. 
' r , 
"(5) TITLE ii OR SIMILAR CASE.— 
"(A) IN GENERAL.—Subsection (a) shall not apply to any 
; ? * 
ownership change i
f
— 
"(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 
r ; 
"(ii) the shareholders and creditors of the old loss 
corporation 
(determined 
immediately 
before 
such 
ownership change) own (immediately after such owner-
ship change) stock of the new loss corporation (or stock 
1 
of controlling corporation if also in bankruptcy) which 
meets the requirements of section 1504(aX2) (deter-
mined by substituting '50 percent' for '80 percent' each 
place it appears). 
"(B) 
REDUCTION FOR INTEREST PAYMENTS TO CREDITORS 
. g. 
BECOMING SHAREHOLDERS.—In any case to which subpara-
graph (A) applies, the net operating loss deduction under 
jjgj, 
section 172(a) for any post-change year shall be determined 
as if no deduction was allowable under this chapter for the 
,,,, 
interest paid or accrued by the old loss corporation on 
/ 
indebtedness 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) REDUCTION OF CARRYFORWARDS WHERE DISCHARGE OF 
INDEBTEDNESS.—In any case to which subparagraph (A) ap-
plies, the pre-change losses and excess credits (within the 
meaning of section 383(aX2)) which may be carried to a post-
change year shall be computed as if 50 percent of the 
amount 
which, 
but 
for 
the 
application 
of 
section 
108(eX10XB), would have been includible in gross income for 
any taxable year had been so included. 
JC''». 
100 STAT. 2264 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(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 
f 
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 
« ! 4 
ownership change shall be zero. 
"(E) ONLY CERTAIN STOCK OF CREDITORS TAKEN INTO AC-
COUNT.—For purposes of subparagraph (AXii), stock trans-
ferred to a creditor in satisfaction of indebtedness shall be 
iw! 
taken into account 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) SPECIAL RULE FOR CERTAIN FINANCIAL INSTITUTIONS.— 
/ 
"(i) IN GENERAL.—In the case of any ownership 
Hi>: •:'•>-> 
change to which this subparagraph applies, this para-
graph shall be applied— 
"(I) by substituting '20 percent' for '50 percent' 
•:•-''• 
in subparagraph (AXii), and 
"(II) without regard to subparagraphs (B) and (C). 
.- 
"(ii) SPECIAL RULE FOR DEPOSITORS.—For purposes of 
en' 
applying this paragraph to an ownership change to 
which this subparagraph applies— 
?sm ': ' '• 
"(I) a depositor in the old loss corporation shall 
f'j 
be treated as a stockholder in such loss corporation 
immediately before the change, 
"(II) deposits which, after the change, become 
. 
deposits of the new loss corporation shall be 
A-- 
treated as stock of the new loss corporation, and 
"(III) the fair market value of the outstanding 
stock of the new loss corporation shall include 
« . 
deposits described in subclause (II). 
"(iii) CHANGES TO WHICH SUBPARAGRAPH APPUES.— 
This subparagraph shall apply to— 
"(I) an equity structure shift which is a reorga-
nization described in section 368(aX3XDXii), or 
L 
"(II) any other equity structure shift (or trans-
it 
action to which section 351 applies) which occurs as 
an integral part of a transaction involving a 
; >ru : • 
change to which subclause (I) applies. 
f;l.'krt.'i>i 
This subparagraph shall not apply to any equity struc-
ture shift or transaction occurring after December 31, 
•i- ' 
1988. 
"(G) TITLE ii OR SIMILAR CASE.—For purposes of this 
:
*
5 
paragraph, the term 'title 11 or similar case' has the mean-
ing given such term by section 368(aX3XA). 
"(H) ELECTION NOT TO HAVE PARAGRAPH APPLY.—A new 
loss corporation may elect, subject to such terms and condi-
tions as the Secretary may prescribe, not to have the 
provisions of this paragraph apply. 
"(6) SPECIAL RULE FOB INSOLVENCY TRANSACTIONS.—If para-
graph (5) does not apply to any reorganization described in 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2265 
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 be the value of 
the new loss corporation immediately after the ownership 
change. 
"(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). 
"(m) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this section and section 383, including (but not limited to) regula-
tions— 
"(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 treatment of corporate contractions as 
redemptions for purposes of subsections (e)(2) and (h)(3)(A), and 
"(5) providing for the application of subsection (g)(4) where 
there is only 1 corporation involved." 
(b) AMENDMENT OF SECTION 383.—Section 383 (relating to special 
limitations on unused investment credits, etc.) is amended to read as 
follows: 
"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 post-
change 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 applica-
tion 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 corpora-
tion 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 post-
change 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. 
100 STAT. 2266 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(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) DEFINITIONS.—Terms used in this section shall have the same 
respective meanings as when used in section 382, except that appro-
priate adjustments shall be made to take into account that the 
limitations of this section apply to credits and net capital losses." 
(c) CONFORMING AMENDMENTS.— 
(1) Paragraph (5) of section 318(b) is amended by striking out 
"section 382(a)(3)" and inserting in lieu thereof "section 
382(1)(3)". 
(2) The table of sections for part V of subchapter C of chapter 
1 is amended— 
J 
(A) by striking out the item relating to section 382 and 
*^'- 
inserting in lieu thereof the following new item: 
"Sec. 382. Limitation on net operating loss carryforwards and certain built-
in losses following ownership change.", 
and 
(B) by striking out the item relating to section 383 and 
inserting in lieu thereof the following new item: 
"Sec. 383. Special limitations on certain excess credits, etc.". 
(d) REPORT ON DEPRECIATION AND BUILT-IN DEDUCTIONS; REPORT 
ON BANKRUPTCY WORKOUTS.—The Secretary of the Treasury or his 
delegate— 
(1) shall, not later than January 1, 1989, conduct a study and 
report to the Committee on Ways and Means of the House of 
Representatives and the Committee on Finance of the Senate 
with respect to the treatment of depreciation, amortization, 
depletion, and other built-in deductions for purposes of sections 
382 and 383 of the Internal Revenue Code of 1986 (as amended 
by this section), and 
(2) shall, not later than January 1, 1988, conduct a study and 
report to the committees referred to in paragraph (1) with 
respect to the treatment of informal bankruptcy workouts for 
purposes of sections 108 and 382 of such Code. 
(e) REPEAL OF CHANGES MADE BY TAX REFORM ACT OF 1976.— 
(1) Subsections (e) and (f) of section 806 of the Tax Reform Act 
of 1976 (including the amendment treated as part of such 
subsections under section 59(b) of the Tax Reform Act of 1984) 
are hereby repealed. 
(2) Subsection (g) of such section 806 is amended by striking 
out paragraphs (2) and (3). 
(f) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by subsections (a), 
(b), and (c) shall apply to any ownership change following— 
(A) an owner shift involving a 5-percent shareholder 
occurring after December 31,1986, or 
(B) an equity structure shift occurring pursuant to a plan 
ISO 
of reorganization adopted after December 31,1986. 
(2) F O R A M E N D M E N T S TO TAX REFORM ACT OF 1976.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2267 
(A) IN GENERAL.—The repeals made by subsection (eXD 
and the amendment made by subsection (e)(2) shall take 
effect on January 1,1986. 
(B) ELECTION TO HAVE AMENDMENTS APPLY.— 
(i) If a taxpayer described in clause (ii) elects to have 
the provisions of this subparagraph apply, the amend-
ments made by subsections (e) and (f) of section 806 of 
the Tax Reform Act of 1976 shall apply to the reorga-
nization described in clause (ii). 
(ii) A taxpayer is described in this clause if the 
taxpayer filed a title 11 or similar case on December 8, 
1981, filed a plan of reorganization on February 5,1986, 
f 
filed an amended plan on March 14, 1986, and received 
court approval for the amended plan and disclosure 
statement on April 16,1986. 
(C) APPLICATION OF OLD RULES TO CERTAIN DEBT.—In the 
case of debt of a corporation incorpqrated in Colorado on 
November 8, 1924, with headquarters in Denver, Colorado— 
(i) the amendments made by subsections (a), (b), and 
(c) shall not apply to any debt restructuring of such 
debt which was approved by the debtor's Board of 
Directors and the lenders in 1986, and 
^
^
1 
(ii) the amendments made by subsections (e) and (f) of 
section 806 of the Tax Reform Act of 1976 (including 
the amendment treated as part of such subsections 
under section 590t)) of the Tax Reform Act of 1984) shall 
apply to such debt restructuring. 
(D) SPECIAL RULE FOR OIL AND GAS WELL DRILUNG BUSI-
NESS.—In the case of a Texas corporation incorporated on 
July 23, 1935, in applying section 382 of the Internal Reve-
nue Code of 1986 (as in effect before and after the amend-
ments made by subsections (a), (b), and (c)) to a loan 
restructuring agreement during 1985, section 382(aX5XC) of 
the Internal Revenue Code of 1954 (as added by the amend-
ments made by subsections (e) and (f) of section 806 of the 
Tax Reform Act of 1976) shall be applied as if it were in 
effect with respect to such restructuring or reorganization. 
(3) TESTING PERIOD.—For purposes of determining whether 
there is an ownership change after December 31, 1986, the 
testing period shall not begin before the later of— 
(A) May 6,1986, or 
(B) in the case of an ownership change which occurs after 
May 5,1986, and to which the amendments made by subsec-
tions (a), (b), and (c) do not apply, the first day following the 
date on which such ownership change occurs. 
(4) SPECIAL TRANSITION RULES.—The amendments made by 
subsections (a), (b), and (c) shall not apply to any— 
(A) stock-for-debt exchanges and stock sales made pursu-
ant to a plan of reorganization with respect to a petition for 
reorganization filed by a corporation under chapter 11 of 
title 11, United States Code, on August 26, 1982, and which 
filed with a United States district court a first amended and 
related plan of reorganization before March 1, 1986, or 
(B) ownership change of a Delaware corporation incor-
porated in August 1983, which may result from the exercise 
of put or call option under an agreement entered into on 
September 14, 1983, but only with respect to taxable years 
100 STAT. 2268 
PUBLIC LAW 99-514—OCT. 22, 1986 
; 2) -It beginning after 1991 regardless of when such ownership 
•>M; 
change takes place. 
Any regulations prescribed under section 382(g)(3)(B) of the 
Internal Revenue Code of 1986 (as amended by subsection (a)) 
ft' 
shall not apply with respect to domestic building and loan 
trasactions for any period before January 1,1989. 
(5) BANKRUPTCY PROCEEDINGS.—In the case of a reorganization 
, described in subparagraph (G) of section 368(a)(1) of the Internal 
Revenue Code of 1986 or an exchange of debt for stock in a title 
11 or similar case, as defined in section 368(a)(3) of such Code, 
the amendments made by subsections (a), (b), and (c) shall not 
apply to any ownership change resulting from such a reorga-
nization or proceeding if a petition in such case was filed with 
**' the court before August 14,1986. 
(6) CERTAIN PLANS.—The amendments made by subsections 
(a), (b), and (c) shall not apply to any ownership change with 
respect to— 
* 
(A) the acquisition of a corporation the stock of which is 
acquired pursuant to a plan of divestiture which identified 
such corporation and its assets, and was agreed to by the 
board of directors of such corporation's parent corporation 
on May 17,1985, 
(B) a merger which occurs pursuant to a merger agree-
ment (entered into before September 24, 1985) and an ap-
plication for approval by the Federal Home Loan Bank 
Board was filed on October 4,1985, 
(C) a reorganization involving a party to a reorganization 
of a group of corporations engaged in enhanced oil recovery 
operations in California, merged in furtherance of a plan of 
reorganization adopted by a board of directors vote on 
September 24, 1985, and a Delaware corporation whose 
principal oil and gas producing fields are located in Califor-
nia, or 
(D) the conversion of a mutual savings and loan associa-
tion holding a Federal charter dated March 22, 1985, to a 
stock savings and loan association pursuant to the rules 
and regulations of the Federal Home Loan Bank Board. 
^
^ 
(7) OWNERSHIP CHANGE OF REGULATED AIR CARRIER.—The 
amendments made by subsections (a), (b), and (c) shall not apply 
to an ownership change of a regulated air carrier if— 
(A) on July 16, 1986, at least 40 percent of the outstanding 
common stock (excluding all preferred stock, whether or 
not convertible) of such carrier had been acquired by the 
^' 
parent corporation referred to in section 203(d)(13XB), and 
.„ 
(B) the acquisition (hy or for such parent corporation) or 
retirement of the remaining common stock of such carrier 
is completed before the later of March 31, 1987, or 90 days 
after the requisite governmental approvals are finally 
granted, 
but only if the ownership change occurs on or before the later of 
March 31, 1987, or such 90th day. The aggregate reduction in 
tax for any taxable year by reason of this paragraph shall not 
exceed $10,000,000. The testing period for determining whether 
a subsequent ownership change has occurred shall not begin 
before the 1st day following an ownership change to which this 
paragraph applies. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2269 
(8) The amendments made by subsections (a), (b), and (c) shall 
not apply to any ownership change resulting from the conver-
sion of a Minnesota mutual savings bank holding a Federal 
charter dated December 31, 1985, to a stock savings bank pursu-
ant to the rules and regulations of the Federal Home Loan Bank 
Board, and from the issuance of stock pursuant to that conver-
sion to a holding company incorporated in Delaware on Febru-
ary 21, 1984. For purposes of determining whether any 
ownership change occurs with respect to the holding company or 
any subsidiary thereof (whether resulting from the transaction 
described in the preceding sentence or otherwise), any issuance of 
stock made by such holding company in connection with the 
' 
transaction described in the preceding sentence shall not be 
taken into account. 
(9) DEFINITIONS.—Except as otherwise provided, terms used in 
this subsection shall have the same meaning as when used in 
section 382 of the Internal Revenue Code of 1986 (as amended by 
this section). 
Subtitle D—Recognition of Gain and Loss on 
\ 
Distributions of Property in Liquidation 
SEC. 631. RECOGNITION OF GAIN AND LOSS ON DISTRIBUTIONS OF PROP-
ERTY IN LIQUIDATION. 
(a) GENERAL RULE.—Subpart B of part II of subchapter C (relating 
to effects on corporation) is amended by striking out sections 336 
and 337 and inserting in lieu thereof the following: 
"SEC. 336. GAIN OR LOSS RECOGNIZED ON PROPERTY DISTRIBUTED IN 
COMPLETE LIQUIDATION. 
"(a) GENERAL RULE.—Except as otherwise provided in this section 
or section 337, gain or loss shall be recognized to a liquidating 
corporation on the distribution of property in complete liquidation 
as if such property were sold to the distributee at its fair market 
value. 
"(bj TREATMENT OF LIABILITIES IN EXCESS OF BASIS.—If any prop-
erty distributed in the liquidation is subject to a liability or the 
shareholder assumes a liability of the liquidating corporation in 
connection with the distribution, for purposes of subsection (a) and 
section 337. the fair market value of such property shall be treated 
as not less than the amount of such liability. 
"(c) EXCEPTION FOR CERTAIN LIQUIDATIONS TO WHICH PART III 
APPLIES.—This section shall not apply with respect to any distribu-
tion of property to the extent there is nonrecognition of gain or loss 
with respect to such property to the recipient under part III. 
"(d) LIMITATIONS ON RECOGNITION OF Loss.— 
"(1) N o LOSS RECOGNIZED IN CERTAIN DISTRIBUTIONS TO RELATED 
PERSONS.— 
"(A) IN GENERAL.—No loss shall be recognized to a liq-
uidating corporation on the distribution of any property to 
a related person (within the meaning of section 267) i
f
— 
"(i) such distribution is not pro rata, or 
"(ii) such property is disqualified property. 
"(B) DISQUALIFIED PROPERTY.—For purposes of subpara-
graph (A), the term 'disqualified property means any prop-
100 STAT. 2270 
PUBLIC LAW 99-514—OCT. 22, 1986 
i .1 
, erty which is acquired by the liquidating corporation in a 
transaction to which section 351 applied, or as a contribu-
tion to capital, during the 5-year period ending on the date 
of the distribution. Such term includes any property if the 
adjusted basis of such property is determined (in whole or 
in part) by reference to the adjusted basis of property 
described in the preceding sentence. 
"(2) SPECIAL RULE FOR CERTAIN PROPERTY ACQUIRED IN CERTAIN 
CARRYOVER BASIS TRANSACTIONS.— 
"(A) IN GENERAL.—For purposes of determining the 
amount of loss recognized by any liquidating corporation on 
';i . 
any sale, exchange, or distribution of property described in 
. subparagraph (B), the adjusted basis of such property shall 
be reduced (but not below zero) by the excess (if any) o
f
— 
f»i :. 
"(i) the adjusted basis of such property immediately 
after its acquisition by such corporation, over 
"(ii) the fair market value of such property as of such 
time. 
"(B) DESCRIPTION OF PROPERTY.— 
,,t| J ^;. 
"(i) IN GENERAL.—For purposes of subparagraph (A), 
property is described in this subparagraph if^ 
iti^ 
"(I) such property is acquired by the liquidating 
corporation in a transaction to which section 351 
. . 
..' 
, . 
applied or as a contribution to capital, and 
"(II) the acquisition of such property by the liq-
, 
uidating corporation was part of a plan a principal 
' •' 
purpose of which was to recognize loss by the 
liquidating corporation with respect to such prop-
erty in connection with the liquidation. 
; 
, 
, Other property shall be treated as so described if the 
adjusted basis of such other property is determined (in 
whole or in part) by reference to the adjusted basis of 
property described in the preceding sentence. 
"(ii) 
CERTAIN ACQUISITIONS TREATED AS PART OF 
PLAN.—For purposes of clause (i), any property de-
scribed in clause (i)(I) acquired by the liquidating cor-
j ., 
poration during the 2-year period ending on the date of 
/ .' 
the adoption of the plan of complete liquidation shall, 
^ ' 
except as provided in regulations, be treated as part of 
a plan described in clause (i)(II). 
J...J 
"(C) RECAPTURE IN LIEU OF DISALLOWANCE.—The Sec-
retary may prescribe regulations under which, in lieu of 
disallowing a loss under subparagraph (A) for a prior tax-
able year, the gross income of the liquidating corporation 
for the taxable year in which the plan of complete liquida-
tion is adopted shall be increased by the amount of the 
disallowed loss. 
. , . 
"(3) SPECIAL RULE IN CASE OF LIQUIDATION TO WHICH SECTION 
332 APPLIES.—In the case of any liquidation to which section 332 
applies, no loss shall be recognized to the liquidating corpora-
tion on any distribution in such liquidation. 
"(e) CERTAIN STOCK SALES AND DISTRIBUTIONS MAY BE TREATED As 
ASSET TRANSFERS.—Under regulations prescribed by the Secretary, 
i
f
— 
"(1) a corporation owns stock in another corporation meeting 
the requirements of section 1504(a)(2), and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2271 
"(2) such corporation sells, exchanges, or distributes all of 
such stock, 
such corporation may elect to treat such sale, exchange, or distribu-
tion as a disposition of all of the assets of such other corporation, 
and no gain or loss shall be recognized on the sale, exchange, or 
distribution of such stock. 
"SEC. 337. NONRECOGNITION FOR PROPERTY DISTRIBUTED TO PARENT 
IN COMPLETE LIQUIDATION OF SUBSIDIARY. 
"(a) IN GENERAL.—No gain or loss shall be recognized to the 
liquidating corporation on the distribution to the 80-percent 
distributee of any property in a complete liquidation to which 
section 332 applies. 
"(h) TREATMENT OF INDEBTEDNESS OF SUBSIDIARY, ETC.— 
"(1) INDEBTEDNESS OF SUBSIDIARY TO PARENT.—If— 
"(A) a corporation is liquidated in a liquidation to which 
K ;
c
? 
section 332 applies, and 
"(B) on the date of the adoption of the plan of liquidation, 
such corporation was indebted to the 80-percent distributee, 
for purposes of this section and section 336, any transfer of 
property to the 80-percent distributee in satisfaction of such 
indebtedness shall be treated as a distribution to such distribu-
tee in such liquidation. 
"(2) TREATMENT OF TAX-EXEMPT DISTRIBUTEE.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), paragraph (1) and subsection (a) shall not apply where 
the 80-percent distributee is an organization (other than a 
cooperative described in section 521) which is exempt from 
the tax imposed by this chapter. 
"(B) EXCEPTION WHERE PROPERTY WILL BE USED IN UNRE-
LATED BUSINESS.— 
"(i) IN GENERAL.—Subparagraph (A) shall not apply 
to any distribution of property to an organization de-
scribed in section 511(aX2) or 511(b)(2) if, immediately 
after such distribution, such organization uses such 
property in an unrelated trade or business (as defined 
in section 513). 
"(ii) LATER DISPOSITION OR CHANGE IN USE.—If any 
property to which clause (i) applied is disposed of by the 
organization acquiring such property, notwithstanding 
?fi. . 
any other provision of law, any gain (not in excess of 
the amount not recognized by reason of clause (i)) shall 
,;n 
be included in such organization's unrelated business 
taxable income. For purposes of the preceding sentence, 
' 
if such property ceases to be used in an unrelated trade 
or business of such organization, such organization 
shall be treated as having disposed of such property on 
the date of such cessation. 
"(c) 80-PERCENT DISTRIBUTEE.—For purposes of this section, the 
term '80-percent distributee' means only the corporation which 
meets the 80-percent stock ownership requirements specified in 
section 332(b). 
"(d) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of the amendments made to this subpart by the Tax Reform Act of 
1986, including— 
100 STAT. 2272 
PUBLIC LAW 99-514—OCT. 22, 1986 
If; 
"(1) regulations to ensure that such purposes may not be 
circumvented through the use of any provision of law or regula-
tions (including the consolidated return regulations and part III 
of this subchapter), and 
"(2) regulations providing for appropriate coordination of the 
provisions of this section with the provisions of this title relat-
ing to taxation of foreign corporations and their shareholders." 
(b) AMENDMENTS TO SECTION 338.— 
(1) Subsection (a) of section 338 (relating to certain stock 
purchases treated as asset acquisitions) is amended by striking 
out "to which section 337 applies". 
(2) Subsection (c) of section 338 is hereby repealed. 
(3) Subparagraph (B) of section 338(h)(10) is amended by 
adding at the end thereof the following new sentence: 
"To the extent provided in regulations, such term also 
j^ y 
includes any affiliated group of corporations which includes 
the target corporation (whether or not such group files a 
consolidated return)." 
(c) TREATMENT OF DISTRIBUTIONS OF APPRECIATED PROPERTY.— 
Section 311 is amended to read as follows: 
"SEC. 311. TAXABILITY OF CORPORATION ON DISTRIBUTION. 
"(a) GENERAL RULE.—Except as provided in subsection (b), no gain 
or loss shall be recognized to a corporation on the distribution, with 
respect to its stock, o
f
— 
"(1) its stock (or rights to acquire its stock), or 
"(2) property. 
"(b) DISTRIBUTIONS OF APPRECIATED PROPERTY.— 
"(1) IN GENERAL.—If^ 
"(A) a corporation distributes property (other than an 
IK 
obligation of such corporation) to a shareholder in a dis-
tribution to which subpart A applies, and 
"(B) the fair market value of such property exceeds its 
adjusted basis (in the hands of the distributing corporation), 
then gain shall be recognized to the distributing corporation as 
if such property were sold to the distributee at its fair market 
value. 
"(2) TREATMENT OF LIABILITIES IN EXCESS OF BASIS.—Rules 
similar to the rules of section 336(b) shall apply for purposes of 
this subsection." 
(d) TREATMENT OF FOREIGN DISTRIBUTEES.— 
(1) AMENDMENTS TO SECTION 367.—Subsection (e) of section 367 
is amended to read as follows: 
"(e) TREATMENT OF DISTRIBUTIONS DESCRIBED IN SECTION 355 OR 
LIQUIDATIONS UNDER SECTION 332.— 
"(1) DISTRIBUTIONS DESCRIBED IN SECTION 355.—In the case of 
any distribution described in section 355 (or so much of section 
356 as relates to section 355) by a domestic corporation to a 
person who is not a United States person, to the extent provided 
in regulations, gain shall be recognized under principles similar 
to the principles of this section. 
"(2) LIQUIDATIONS UNDER SECTION 332.—In the case of any 
liquidation to which section 332 applies, except as provided in 
regulations, subsections (a) and (b)(1) of section 337 shall not 
apply where the 80-percent distributee (as defined in section 
337(c)) is a foreign corporation." 
(2) AMENDMENTS TO SECTION 1248.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2273 
(A) Subsection (e) of section 1248 is amended by striking 
out "Under regulations" and inserting in lieu thereof 
"Except as provided in regulations". 
(B) Subsection (f) of section 1248 is amended by inserting 
"Except as provided in regulations prescribed by the Sec-
retary—" after the subsection heading. 
(e) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) Paragraph (4) of section 312(n) (as redesignated by title 
XVIII) is amended to read as follows: 
"(4) LIFO INVENTORY ADJUSTMENTS.— 
"(A) IN GENERAL.—Earnings and profits shall be in-
creased 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 preced-
ing 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— 
"(i) the inventory amount of the inventory assets 
under the first-in, first-out method authorized by sec-
tion 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 last-
in, first-out inventories). 
"(ii) INVENTORY ASSETS.—The term 'inventory assets' 
means stock in trade of the corporation, or other prop-
erty 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." 
(2) Subsection (c) of section 332 is hereby repealed. 
(3) Section 333 is hereby repealed. 
(4XA) Subsection (a) of section 334 is amended by striking out 
"(other than a distribution to which section 333 applies)". 
(B) Subsection (c) of section 334 is hereby repealed. 
(5) Paragraph (12) of section 338(h) is hereby repealed. 
(6)(A) Subsection (e) of section 341 is amended by striking out 
paragraphs (2), (3), and (4). 
(B) Paragraph (5) of section 341(e) is amended— 
(i) by striking out "paragraphs (1), (2), and (4)" and insert-
* 
ing in lieu thereof "paragraph (1)", and 
(ii) by striking out subparagraph (B). 
(7) Subsection (b) of section 346 is amended by striking out 
100 STAT. 2274 
PUBLIC LAW 99-514—OCT. 22, 1986 
pm. 
(8)(A) Subparagraphs (A) and (B) of section 453(h)(1) (relating 
) to use of installment sales in section 337 liquidations) are 
amended to read as follows: 
i n •'• 
"(A) IN GENERAL.—If, in a liquidation to which section 331 
j< 
applies, the shareholder receives (in exchange for the share-
holder's stock) an installment obligation acquired in respect 
of a sale or exchange by the corporation during the 12-
; t vr month period beginning on the date a plan of complete 
liquidation is adopted and the liquidation is completed 
during such 12-month period, then, for purposes of this 
-ij 
section, the receipt of payments under such obligation (but 
not the receipt of such obligation) by the shareholder shall 
be treated as the receipt of payment for the stock. 
"(B) OBLIGATIONS ATTRIBUTABLE TO SALE OF INVENTORY 
MUST RESULT FROM B
U
L
K SALE.—Subparagraph (A) shall not 
apply to an installment obligation acquired in respect of a 
sale or exchange of— 
"(i) stock in trade of the corporation, 
g 
"(ii) other property of a kind which would properly be 
3
1 ii ^f. 
included in the inventory of the corporation if on hand 
at the close of the taxable year, and 
as^imB 
V 
"(iii) property held by the corporation primarily for 
"^cj. V a 
sale to customers in the ordinary course of its trade or 
business, 
c^ixi 
unless such sale or exchange is to one person and involves 
substantially all of such property attributable to a trade or 
business of the corporation." 
(B) Subparagraph (E) of section 453(h)(1) is amended to read as 
follows: 
"(E) SALES BY LIQUIDATING SUBSIDIARIES.—For purposes of 
;, .J 
subparagraph (A), in the case of a controlling corporate 
shareholder (within the meaning of section 368(c)(1)) of a 
selling corporation, an obligation acquired in respect of a 
i^ 
sale or exchange by the selling corporation shall be treated 
as so acquired by such controlling corporate shareholder. 
The preceding sentence shall be applied successively to 
each controlling corporate shareholder above such control-
ling corporate shareholder." 
io t 
^
C
)
) The heading for section 453(h) is amended by striking out 
r
j ; "SECTION 337" and inserting in lieu thereof "CERTAIN". 
(9) Subsection (d) of section 453B is amended to read as 
follows: 
"(d) EFFECT OF DISTRIBUTION IN LIQUIDATIONS TO WHICH SECTION 
332 APPLIES.—If— 
"(1) an installment obligation is distributed in a liquidation to 
which section 332 (relating to complete liquidations of subsidi-
aries) applies, and 
"(2) the basis of such obligation in the hands of the distributee 
is determined under section 334(b)(1), 
then no gain or loss with respect to the distribution of such obliga-
tion shall be recognized by the distributing corporation." 
(10) Paragraph (5) of section 467(c) is amended by striking out 
"453B(d)(2),". 
(11) Subsection (b) of section 852 is amended by adding at the 
end thereof the following new paragraph: 
"(6) SECTION 3 1 1 (b) NOT TO APPLY TO CERTAIN DISTRIBUTIONS.— 
Section 311(b) shall not apply to any distribution by a regulated 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2275 
investment company to which this part applies, if such distribu-
tion is in redemption of its stock upon the demand of the 
shareholder." 
(12) Subsection (d) of section 897 is amended— 
(A) by striking out paragraph (2), 
(B) by striking out the heading for paragraph (1), 
(C) by appropriately redesignating each subparagraph, 
•> 
clause, and subclause of paragraph (1) as a paragraph, 
subparagraph, or clause, £is the case may be, 
(D) by striking out "subparagraph (A)" in paragraph (2) 
(as so redesignated) and inserting in lieu thereof "para-
graph (1)", and 
(E) by striking out ", ETC.," in the subsection heading. 
(13) Subsection (a) of section 1056 is amended by striking out 
the last sentence thereof. 
(14) Paragraph (2) of section 1255(b) is amended by striking 
out "453B(d)(2)". 
(15) Paragraph (3) of section 1276(c) is amended by striking 
out "334(c),". 
(16) The table of sections for subpart A of part II of sub-
chapter C of chapter 1 is amended by striking out the item 
relating to section 333. 
(17) The table of sections for subpart B of part II of subchapter 
C of chapter 1 is amended by striking out the items relating to 
sections 336 and 337 and inserting in lieu thereof the following: 
"Sec. 336. Gain or loss recognized on property distributed in complete 
liquidation. 
"Sec. 337. Nonrecognition for property distributed to parent in complete 
liquidation of subsidiary." 
SEC. 632. 
TREATMENT 
OF C CORPORATIONS 
ELECTING 
SUBCHAPTER 
S 
STATUS. 
(a) GENERAL RULE.—Section 1374 (relating to tax imposed on 
certain capital gains) is amended to read as follows: 
"SEC. 1374. TAX IMPOSED ON CERTAIN BUILT-IN GAINS. 
"(a) GENERAL RULE.—If for any taxable year beginning in the 
recognition period an S corporation has a recognized built-in gain, 
there is hereby imposed a tax (computed under subsection (b)) on the 
income of such corporation for such taxable year. 
"(b) AMOUNT OF TAX.— 
"(1) IN GENERAL.—The tax imposed by subsection (a) shall be a 
tax computed by applying the highest rate of tax specified in 
section 11(b) to the lesser of— 
"(A) the recognized built-in gains of the S corporation for 
the taxable year, or 
"(B) the amount which would be the taxable income of 
the corporation for such taxable year if such corporation 
'^' 
were not an S corporation. 
"(2) NET OPERATING LOSS CARRYFORWARDS FROM C YEARS AL-
LOWED.—Notwithstanding section 1371(b)(1), any net operating 
loss carryforward arising in a taxable year for which the cor-
poration was a C corporation shall be allowed as a deduction 
against the lesser of the amounts referred to in subparagraph 
(A) or (B) of paragraph (1). For purposes of determining the 
amount of any such loss which may be carried to subsequent 
taxable years, the lesser of the amounts referred to in subpara-
100 STAT. 2276 
PUBLIC LAW 99-514—OCT. 22, 1986 
graph (A) or (B) of paragraph (1) shall be treated as taxable 
income. 
r ,
? •, 
. 
•--,t 
"(3) CREDITS.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), no credit shall be allowable under part IV of subchapter 
A of this chapter (other than under section 34) against the 
.•'ki 
tax imposed by subsection (a). 
"(B) BUSINESS CREDIT CARRYFORWARDS FROM C YEARS AL-
LOWED.—Notwithstanding section 1371(b)(1), any business 
C- 
credit carryforward under section 39 arising in a taxable 
-Elf 
year for which the corporation was a C corporation shall be 
allowed as a credit against the tax imposed by subsection (a) 
in the same manner as if it were imposed by section 11. 
"(4) COORDINATION WITH SECTION 1201(a).—For purposes of 
section 1201(a)— 
"(A) the tax imposed by subsection (a) shall be treated as 
if it were imposed by section 11, and 
*
* 
"(B) the lower of the amounts specified in subparagraphs 
(A) and (B) of paragraph (1) shall be treated as the taxable 
income. 
^. 
,
^ ., 
"(c) LIMITATIONS.— 
" 
' 
> • 
"(1) CORPORATIONS WHICH WERE ALWAYS S CORPORATIONS.— 
Subsection (a) shall not apply to any corporation if an election 
under section 1362(a) has been in effect with respect to such 
corporation for each of its taxable years. Except as provided in 
regulations, an S corporation and any predecessor corporation 
shall be treated as 1 corporation for purposes of the preceding 
sentence. 
"(2) LIMITATION ON AMOUNT OF RECOGNIZED BUILT-IN GAINS.— 
The amount of the recognized built-in gains taken into account 
under this section for any taxable year shall not exceed the 
excess (if any) o
f
— 
"(A) the net unrealized built-in gain, over 
"(B) the recognized built-in gains for prior taxable years 
beginning in the recognition period. 
"(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) NET UNREALIZED BUILT-IN GAIN.—The term 'net unreal-
ized built-in gain' means the amount (if any) by which— 
"(A) the fair market value of the sissets of the S corpora-
tion as of the beginning of its 1st taxable year for which an 
election under section 1362(a) is in effect, exceeds 
"(B) the aggregate adjusted bases of such assets at such 
time. 
"(2) RECOGNIZED BUILT-IN GAIN.—The term 'recognized built-
in gain' means any gain recognized during the recognition 
period on the disposition of any asset except to the extent that 
the S corporation establishes that— 
"(A) such asset was not held by the S corporation as of 
the beginning of the 1st taxable year referred to in para-
graph (1), or 
"(B) such gain exceeds the excess (if any) o
f
— 
"(i) the fair market value of such asset as of the 
beginning of such 1st taxable year, over 
"(ii) the adjusted basis of the asset as of such time. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2277 
"(3) RECOGNITION PERIOD.—The term 'recognition period' 
means the 10-year period beginning with the 1st day of the 1st 
taxable year for which the corporation was an S corporation. 
"(4) TAXABLE INCOME.—Taxable income of the corporation 
shall be determined under section 63(a)— 
"(A) without regard to the deductions allowed by part 
VIII of subchapter B (other than the deduction allowed by 
section 248, relating to organization expenditures), and 
"(B) without regard to the deduction under section 172." 
(b) TREATMENT OF DISTRIBUTIONS.—Subsection (e) of section 1363 is 
amended to read as follows: 
"(e) SUBSECTION (d) NOT TO APPLY TO REORGANIZATIONS, ETC.— 
Subsection (d) shall not apply to any distribution to the extent it 
consists of property permitted by section 354, 355, or 356 to be 
received without the recognition of gain." 
(c) CONFORMING AMENDMENTS.— 
(1) Subparagraph (G) of section 26(b)(2) is amended by striking 
out "certain capital gains" and inserting in lieu thereof "certain 
built-in gains". 
(2) Paragraph (2) of section 1366(f) is amended to read as 
follows: 
"(2) REDUCTION IN PASS-THRU FOR TAX IMPOSED ON BUILT-IN 
GAINS.—If any tax is imposed under section 1374 for any taxable 
year on an S corporation, for purposes of subsection (a), the 
amount of each recognized built-in gain (as defined in section 
1374(d)(2)) for such taxable year shall be reduced by its propor-
tionate share of such tax." 
(3) Subparagraph (B) of section 13750t))(l) is amended by strik-
ing out "section 1374(d)" and inserting in lieu thereof "section 
1374(d)(4)". 
(d) CLERICAL AMENDMENT.—The table of sections for part III of 
subchapter S of chapter 1 is amended by striking out the item 
relating to section 1374 and inserting in lieu thereof the following: 
"Sec. 1374. Tax imposed on certain built-in gains." 
SEC. 633. EFFECTIVE DATES. 
(a) GENERAL RULE.—Except as otherwise provided in this section, 
the amendments made by this subtitle shall apply to— 
(1) any distribution in complete liquidation, and any sale or 
exchange, made by a corporation after July 31, 1986, unless 
such corporation is completely liquidated before January 1, 
1987, 
(2) any transaction described in section 338 of the Internal 
Revenue Code of 1986 for which the acquisition date occurs after 
December 31,1986, and 
(3) any distribution (not in complete liquidation) made after 
December 31, 1986. 
03) BUILT-IN GAINS OF S CORPORATIONS.—The amendments made 
by section 632 (other than subsection (b) thereof) shall apply to 
taxable years beginning after December 31, 1986, but only in cases 
where the 1st taxable year for which the corporation is an S 
corporation is pursuant to an election made after December 31, 
1986. 
(c) EXCEPTION FOR CERTAIN PLANS OF LIQUIDATION AND BINDING 
CONTRACTS.— 
(1) IN GENERAL.—The amendments made by this subtitle shall 
not apply to— 
100 STAT. 2278 
PUBLIC LAW 99-514—OCT. 22, 1986 
• •' 
(A) any distribution or sale or exchange made pursuant to 
a plan of liquidation adopted before August 1, 1986, if the 
liquidating corporation is completely liquidated before 
January 1, 1988, 
(B) any distribution or sale or exchange made by any 
corporation if 50 percent or more of the voting stock O
^
y 
value) of such corporation is acquired on or after August 1, 
1986, pursuant to a written binding contract in effect before 
*
^ 
such date and if such corporation is completely liquidated 
• f 
before January 1, 1988, 
(C) any distribution or sale or exchange made by any 
corporation if substantially all of the assets of such corpora-
' 
tion are sold on or after August 1, 1986, pursuant to 1 or 
f ' 
more written binding contracts in effect before such date 
and if such corporation is completely liquidated before 
January 1,1988, or 
(D) any transaction described in section 338 of the In-
ternal Revenue Code of 1986 with respect to any target 
corporation if a qualified stock purchase of such target 
^s i 
corporation is made on or after August 1, 1986, pursuant to 
a written binding contract in effect before such date and 
the acquisition date (within the meaning of such section 
338) is before January 1,1988. 
(2) SPECIAL RULE FOR CERTAIN ACTIONS TAKEN BEFORE NOVEM-
BER 20, 1985.—For purposes of paragraph (1), transactions shall 
be treated as pursuant to a plan of liquidation adopted before 
August 1,1986, if— 
(A) before November 20,1985— 
>' 
(i) the board of directors of the liquidating corpora-
tion adopted a resolution to solicit shareholder ap-
it • • 
proval for a transaction of a kind described in section 
'•\ 
^ 
336 or 337, or 
'^ '
^
^ ' 
(ii) the shareholders or board of directors have ap-
proved such a transaction, 
; 
(B) before November 20,1985— 
(i) there has been an offer to purchase a majority of 
i ••- ''•" 
the voting stock of the liquidating corporation, or 
(ii) the board of directors of the liquidating corpora-
'•' '• 
tion has adopted a resolution approving an acquisition 
or recommending the approval of an acquisition to the 
shareholders, or 
(C) before November 20, 1985, a ruling request was 
"
*
^ 
submitted to the Secretary of the Treasury or his delegate 
" * 
with respect to a transaction of a kind described in section 
336 or 337 of the Internal Revenue Code of 1954 (as in effect 
before the amendments made by this subtitle). 
For purposes of the preceding sentence, any action taken by the 
board of directors or shareholders of a corporation with respect 
to any subsidiary of such corporation shall be treated as taken 
by the board of directors or shareholders of such subsidiary. 
(d) TRANSITIONAL RULE FOR CERTAIN SMALL CORPORATIONS.— 
(1) IN GENERAL.—In the case of the complete liquidation 
before January 1, 1989, of a qualified corporation, the amend-
ments made by this section shall not apply to the applicable 
percentage of each gain or loss which (but for this paragraph) 
would be recognized by reason of the amendments made by this 
subtitle. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2279 
(2) PARAGRAPH (D NOT TO APPLY TO CERTAIN ITEMS.—Para-
graph (1) shall not apply to— 
(A) any gain or loss which is an ordinary gain or loss 
(determined without regard to section 1239 of the Internal 
Revenue Code of 1986), 
(B) any gain or loss on a capital asset held for not more 
than 6 months, and 
(C) any gain to the extent section 453B of such Code 
applies. 
(3) APPLICABLE PERCENTAGE.—For purposes of this subsection, 
the term 'applicable percentage' means— 
(A) 100 percent if the applicable value of the qualified 
corporation is less than $5,000,000, or 
(B) 100 percent reduced by an amount which bears the 
t V 
same ratio to 100 percent as— 
H 8
v 
(i) the excess of the applicable value of the corpora-
tion over $5,000,000, bears to 
I 0' 
(ii) $5,000,000. 
(4) APPLICABLE VALUE.—For purposes of this subsection, the 
applicable value is the fair market value of all of the stock of 
the corporation on the date of the adoption of the plan of 
complete liquidation (or if greater, on August 1, 1986). 
(5) QUALIFIED CORPORATION.—For purposes of this subsection, 
the term "qualified corporation" means any corporation i
f
— 
(A) on August 1, 1986, and at all times thereafter before 
the corporation is completely liquidated, more than 50 
percent (by value) of the stock in such corporation is held by 
10 or fewer qualified persons, and 
(B) the applicable value of such corporation does not 
exceed $10,000,000. 
(6) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
subsection— 
(A) QUALIFIED PERSON.—The term "qualified person" 
^'^ 
means— 
(i) an individual, 
(ii) an estate, or 
• 
(iii) any trust described in clause (ii) or (iii) of section 
1361(c)(2)(A) of the Internal Revenue Code of 1986. 
^
^ ^ 
(B) ATTRIBUTION RULES.— 
(i) ENTITIES.—Any stock held by a corporation, trust, 
or partnership shall be treated as owned proportionally 
Jg-I 
by its shareholders, beneficiaries, or partners. Stock 
<*0f 
considered to be owned by a person by reason of the 
application of the preceding sentence shall, for pur-
poses of applying such sentence, be treated as actually 
owned by such person. 
(ii) FAMILY MEMBERS.—Stock owned (or treated as 
owned under clause (i)) by members of the same family 
(within the meaning of section 318(a)(1) of the Internal 
Revenue Code of 1986) shall be treated as owned by 1 
c 
person. 
(C) CONTROLLED GROUP OF CORPORATIONS.—All members 
1 
of the same controlled group (as defined in section 267(f)(1) 
of such Code) shall be treated as 1 corporation for purposes 
of this subsection. 
(7) SECTION 338 TRANSACTIONS.—The provisions of this subsec-
tion shall also apply in the case of a transaction described in 
100 STAT. 2280 
PUBLIC LAW 99-514—OCT. 22, 1986 
section 338 of the Internal Revenue Code of 1986 where the 
acquisition date (within the meaning of such section 338) is 
before January 1, 1989. 
(8) APPLICATION OF SECTION 1374.—Rules similar to the rules 
of this subsection shall apply for purposes of applying section 
1374 of the Internal Revenue Code of 1986 (as amended by 
section 632) in the case of a qualified corporation which becomes 
an S corporation for a taxable year beginning before January 1, 
1989. 
(d) COMPLETE LIQUIDATION DEFINED.—For purposes of this section, 
a corporation shall be treated as completely liquidated if all of the 
assets of such corporation are distributed in complete liquidation, 
less assets retained to meet claims. 
(e) OTHER TRANSITIONAL RULES.— 
(1) The amendments made by this subtitle shall not apply to 
any liquidation of a corporation incorporated under the laws of 
Pennsylvania on August 3,1970, if^ 
(A) the board of directors of such corporation approved a 
plan of liquidation before January 1,1986, 
1 
(B) an agreement for the sale of a material portion of the 
It 
assets of such corporation was signed on May 9, 1986 
(whether or not the assets are sold in accordance with such 
agreement), and 
(C) the corporation is completely liquidated on or before 
December 31,1988. 
(2) The amendments made by this subtitle shall not apply to 
any liquidation (or deemed liquidation under section 338 of the 
Internal Revenue Code of 1986) of a diversified financial serv-
ices corporation incorporated under the laws of Delaware on 
May 9,1929, pursuant to a binding written contract entered into 
on or before December 31, 1986; but only if the liquidation is 
completed (or in the case of a section 338 election, the acquisi-
tion date occurs) before January 1,1988. 
(3) The amendments made by this subtitle shall not apply to 
any distribution, or sale, or exchange— 
(A) of the assets owned (directly or indirectly) by a testa-
mentary trust established under the will of a decedent 
dying on June 15,1956, or its beneficiaries, 
(B) made pursuant to a court order in an action filed on 
January 18,1984, if such order— 
(i) is issued after July 31, 1986, and 
(ii) directs the disposition of the assets of such trust 
. . 
and the division of the trust corpus into 3 separate sub-
trusts. 
For purposes of the preceding sentence, an election under 
section 338(g) of the Internal Revenue Code of 1986 (or an 
election under section 338(h)(10) of such Code) qualifying as 
a section 337 liquidation pursuant to regulations prescribed 
by the Secretary under section 1.338(h)(10)-lT(j)) made in 
connection with a sale or exchange pursuant to a court 
order described in subparagraph (B) shall be treated as a 
sale of exchange, 
c 
(4)(A) The amendments made by this subtitle shall not apply 
to any distribution, or sale, or exchange— 
(i) if— 
(I) an option agreement binding on the selling cor-
poration to sell substantially all its assets is executed 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2281 
before August 1, 1986, the corporation adopts (by ap-
proval of its shareholders) a conditional plan of liquida-
tion before August 1,1986 to become effective upon the 
exercise of such option agreement (or modification 
. 
thereto), and the assets are sold pursuant to the exer-
cise of the option (as originally executed or subse-
H 
quently modified provided that the purchase price is 
not thereby increased), or 
(II) in the event that the optionee does not acquire 
substantially all the assets of the corporation, the 
optionor corporation sells substantially all its assets to 
another purchaser at a purchase price not greater than 
that contemplated by such option agreement pursuant 
to an effective plan of liquidation, and 
... 
(ii) the complete liquidation of the corporation occurs 
within 12 months of the time the plan of liquidation be-
comes effective, but in no event later than December 31, 
1989. 
(B) For purposes of subparagraph (A), a distribution, or sale, 
or exchange, of a distributee corporation (within the meaning of 
section 337(c)(3) of the Internal Revenue Code of 1986) shall be 
treated as satisfying the requirements of subparagraph (A) if its 
subsidiary satisfies the requirements of subparagraph (A). 
(C) For purposes of section 56 of the Internal Revenue Code of 
1986 (as amended by this Act), any gain or loss not recognized by 
reason of this paragraph shall not be taken into account in 
determining the adjusted net book income of the corporation. 
(5) In the case of a corporation incorporated under the laws of 
Wisconsin on April 3, 1948— 
(A) a voting trust established not later than December 31, 
1987, for purposes of holding employees' shares of stock in 
such corporation, shall qualify as a trust permitted as a 
shareholder of an S corporation, and 
(B) the amendment made by section 632 (other than 
subsection Oa) thereof) shall not apply to such corporation if 
it elects to be an S corporation before January 1, 1989. 
I 
(6) The amendments made by this subtitle shall not apply to 
the liquidation of a corporation incorporated on January 26, 
1982, under the laws of the State of Alabama with a principal 
place of business in Colbert County, Alabama, but only if such 
corporation is completely liquidated on or before December 31, 
1987. 
(7) The amendments made by this subtitle shall not apply to 
-I ? the acquisition by a Delaware bank holding company of all of 
the assets of an Iowa bank holding company pursuant to a 
^ written contract dated December 9,1981. 
(8) The amendments made by this subtitle shall not apply to 
the liquidation of a corporation incorporated under the laws of 
Delaware on January 20, 1984, if more than 40 percent of the 
stock of such corporation was acquired by purchase on June 11, 
1986, and there was a tender offer with respect to all additional 
outstanding shares of such corporation on July 29, 1986, but 
only if the corporation is completely liquidated on or before 
December 31, 1987. 
(f) TREATMENT OF CERTAIN DISTRIBUTIONS IN RESPONSE TO HOSTILE 
TENDER OFFER.— 
100 STAT. 2282 
PUBLIC LAW 99-514—OCT. 22, 1986 
(1) IN GENERAL.—No gain or loss shall be recognized under the 
Internal Revenue Code of 1986 to a corporation (hereinafter in 
this subsection referred to as "parent") on a qualified distribu-
tion. 
(2) QUALIFIED DISTRIBUTION DEFINED.—For purposes of para-
graph (D— 
(A) IN GENERAL.—The term "qualified 
distribution" 
means a distribution— 
(i) by parent of all of the stock of a qualified subsidi-
ary in exchange for stock of parent which was acquired 
for purposes of such exchange pursuant to a tender 
offer dated February 16, 1982, and 
(ii) pursuant to a contract dated February 13, 1982, 
and 
(iii) which was made not more than 60 days after the 
board of directors of parent recommended rejection of 
•''• ' 
' 
an unsolicited tender offer to obtain control of parent. 
(B) QUALIFIED SUBSIDIARY.—The term "qualified subsidi-
ary" means a corporation created or organized under the 
laws of Delaware on September 7, 1976, all of the stock of 
which was owned by parent immediately before the quali-
fied distribution. 
SEC. 634. STUDY OF CORPORATE PROVISIONS. 
The Secretary of the Treasury or his delegate shall conduct a 
study of proposals to reform the provisions of subchapter C of 
chapter 1 of the Internal Revenue Code of 1986. Not later than 
January 1, 1988, the Secretary shall submit to the Committee on 
Ways and Means of the House of Representatives and the Commit-
tee on Finance of the Senate a report on the study conducted under 
this section (together with such recommendations as he may deem 
advisable). 
Subtitle E—Other Corporate Provisions 
SEC. 641. SPECIAL ALLOCATION RULES FOR CERTAIN ASSET ACQUISI-
TIONS. 
(a) IN GENERAL.—Part IV of subchapter O of chapter 1 (relating to 
special rules for determining basis) is amended by redesignating 
section 1060 as section 1061 and by inserting after section 1059 the 
following new section: 
"SEC. 1060. SPECIAL ALLOCATION RULES FOR CERTAIN ASSET ACQUISI-
TIONS. 
"(a) GENERAL RULE.—In the case of any applicable asset acquisi-
tion, for purposes of determining both— 
^, 
"(1) the transferee's basis in such assets, and 
' 
"(2) the gain or loss of the transferor with respect to such 
acquisition, 
the consideration received for such assets shall be allocated among 
such assets acquired in such acquisition in the same manner as 
amounts are allocated to assets under section 338(bM5). 
"(b) LN'FORMATION REQUIRED TO BE FURNISHED TO SECRETARY.— 
Under regulations, the transferor and transferee in an applicable 
asset acquisition shall, at such times and in such manner as may be 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2283 
provided in such regulations, furnish to the Secretary the following 
information: 
"(1) The amount of the consideration received for the assets 
which is allocated to goodwill or going concern value. 
"(2) Any modification of the amount described in paragraph 
(1). 
"(3) Any other information with respect to other assets trans-
ferred in such acquisition as the Secretary may find necessary 
to carry out the provisions of this section. 
"(c) APPLICABLE ASSET ACQUISITION.—For purposes of this section, 
the term 'applicable asset acquisition' means any transfer (whether 
directly or indirectly)— 
"(1) of assets which constitute a trade or business, and 
,^ 
"(2) with respect to which the transferee's basis in such assets 
is determined wholly by reference to the consideration paid for 
such assets. 
A transfer shall not be treated as failing to be an applicable asset 
acquisition merely because section 1031 applies to a portion of the 
assets transferred." 
(b) CONFORMING AMENDMENT.—The table of sections for part IV of 
subchapter O of chapter 1 is amended by striking out the item 
relating to section 1060 and inserting in lieu thereof the following 
new items: 
"Sec. 1060. Special allocation rules for certain asset acquisitions. 
"Sec. 1061. Cross references." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to any acquisition of assets after May 6, 1986, unless such 
acquisition is pursuant to a binding contract which was in effect on 
May 6, 1986, and at all times thereafter. 
SEC. 642. MODIFICATION OF DEFINITION OF RELATED PARTY. 
(a) DEFINITIONS OF RELATED PARTY FOR PURPOSES OF CERTAIN 
SALES.— 
(1) SALE OF DEPRECIABLE PROPERTY BETWEEN CERTAIN RELATED 
TAXPAYERS.— 
(A) IN GENERAL.—Paragraph (1) of section 1239(b) (defin-
.3^ 
ing related persons) is amended by striking out "80-percent 
owned entities" and inserting in lieu thereof "controlled 
entities". 
(B) CONTROLLED ENTITY DEFINED.— 
v,., 
(i) IN GENERAL.—Section 1239(c)(1) (defining 80-per-
•p >, 
cent owned entity) is amended— 
(I) by striking out "80-percent owned entity" and 
inserting in lieu thereof "controlled entity", 
(II) by striking out "80 percent or more in value" 
f-t ,^ 
in subparagraph (A) and inserting in lieu thereof 
If 
j^. 
"more than 50 percent of the value", 
(III) by striking out "80 percent or more" in 
subparagraph (B) and inserting in lieu thereof 
"more than 50 percent", and 
(IV) by striking out "and" at the end of subpara-
graph (A), by striking out the period at the end of 
subparagraph (B) and inserting ", and", and by 
adding at the end thereof the following new para-
. :.;. 
graph: 
"(C) any entity which is a related person to such person 
under paragraph (3), (10), (11), or (12) of section 267(b)." 
100 STAT. 2284 
PUBLIC LAW 99-514—OCT. 22, 1986 
(ii) 
CONFORMING 
AMENDMENT.—Section 
1239(c) is 
amended by striking out "80-PERCENT OWNED ENTITY" 
in the heading thereof and inserting in lieu thereof 
"CONTROLLED ENTITY", 
' 
(C) CONSTRUCTIVE OWNERSHIP.—Paragraph (2) of section 
1239(c) is amended to read as follows: 
"(2) CONSTRUCTIVE OWNERSHIP.—For purposes of this section, 
ownership shall be determined in accordance with rules similar 
to the rules under section 267(c) (other than paragraph (3) 
thereof)." 
(D) CONFORMING AMENDMENT.—Section 453(g) is amended 
by striking out "80-PERCENT O W N E D " in the heading thereof 
and inserting in lieu thereof "CONTROLLED". 
(2) PARTNERSHIPS.—Paragraph (2) of section 707(b) (relating to 
gains treated as ordinary income) is amended by striking out 
"80 percent" each place it appears and inserting in lieu thereof 
"50 percent". 
(3) INSTALLMENT SALES.—Paragraph (1) of section 453(f) (defin-
ing related person) is amended to read as follows: 
"(1) RELATED PERSON.—Except for purposes of subsection (g) 
and (h), the term 'related person' means— 
"(A) a person whose stock would be attributed under 
section 318(a) (other than paragraph (4) thereof) to the 
person first disposing of the property, or 
"(B) a person who bears a relationship described in sec-
tion 267(b) to the person first disposing of the property." 
(b) RULES RELATING TO CONTINGENT PAYMENTS.— 
(1) PAYMENTS TO BE RECEIVED DEFINED.—Section 453(f) (relat-
ing to definitions and special rules) is amended by adding at the 
end thereof the following new paragraph: 
"(8) PAYMENTS TO BE RECEIVED DEFINED.—The term 'payment 
to be received' includes— 
"(A) the aggregate amount of all payments which are not 
' ^ 
contingent as to amount, and 
"(B) the fair market value of any payments which are 
' 
contingent as to amount." 
(2) SALE OF DEPRECIABLE PROPERTY BETWEEN RELATED PAR-
TIES.—Paragraph (1) of section 453(g) (relating to sale of depre-
ciable property to controlled entities) is amended to read as 
follows: 
"(1) I N GENERAL.—In the case of an installment sale of depre-
ciable property between related persons (within the meaning of 
section 1239(b))— 
"(A) subsection (a) shall not apply, and 
"(B) for purposes of this title— 
"(i) except as provided in clause (ii), all payments to 
be received shall be treated as received in the year of 
"' 
- 
the disposition, and 
"(ii) in the case of any payments which are contin-
gent as to amount but with respect to which the fair 
; 
• 
market value may not be reasonably ascertained— 
' 
"(I) the basis shall be recovered ratably, and 
"(II) the purchaser may not increase the basis of 
any property acquired in such sale by any amount 
before 
such time as the seller includes 
such 
amount in income." 
v- 
. 
(c) EFFECTIVE DATE.— 
w.-^ 
; i
f
M 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2285 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to sales after the 
date of the enactment of this Act, in taxable years ending after 
such date. 
(2) TRADITIONAL RULE FOR BINDING CONTRACTS.—The amend-
ments made by this section shall not apply to sales made after 
August 14, 1986, which are made pursuant to a binding contract 
in effect on August 14,1986, and at all times thereafter. 
SEC. 643. TREATMENT OF AMORTIZABLE BOND PREMIUM AS INTEREST. 
(a) IN GENERAL.—Section 171 (relating to amortizable bond pre-
mium) is amended by redesignating subsection (e) as (f) and by 
inserting after subsection (d) the following new subsection: 
"(e) TREATMENT AS INTEREST.—Except as provided in regulations, 
the amount of any amortizable bond premium with respect to which 
a deduction is allowed under subsection (aXD for any taxable year 
shall be treated as interest for purposes of this title." 
(b) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to obligations acquired after the date of the enact-
ment of this Act, in taxable years ending after such date. 
(2) REVOCATION OF ELECTION.—In the case of a taxpayer with 
respect to whom an election is in effect on the date of enactment 
of this Act under section 171(c) of the Internal Revenue Code of 
1986, such election shall apply to obligations issued after the 
date of the enactment of this Act only if the taxpayer chooses 
(at such time and in such manner as may be prescribed by the 
Secretary of the Treasury or his delegate) to have such election 
apply with respect to such obligations. 
SEC. 644. PROVISIONS RELATING TO COOPERATIVE HOUSING CORPORA-
TIONS. 
(a) TENANT-STOCKHOLDER MAY INCLUDE PERSON OTHER THAN 
INDIVIDUAL.— 
(1) IN GENERAL.—Section 216(b)(2) (defining tenant-stock-
holder) is amended— 
(A) by striking out "an individual" and inserting in lieu 
thereof "a person", and 
(B) by striking out "such individual" and inserting in lieu 
thereof "such person". 
(2) PRIOR APPROVAL OF OCCUPANCY.—Paragraphs (5) and (6) of 
section 216(b) are amended to read as follows: 
"(5) PRIOR APPROVAL OF OCCUPANCY.—For purposes of this 
section, in the following cases there shall not be taken into 
account the fact that (by agreement with the cooperative hous-
ing corporation) the person or his nominee may not occupy the 
house or apartment without the prior approval of such corpora-
tion: 
"(A) In any case where a person acquires stock of a 
cooperative housing corporation by operation of law. 
"(B) In any case where a person other than an individual 
acquires stock of a cooperative housing corporation. 
"(C) In any case where the original seller acquires any 
stock of the cooperative housing corporation from the cor-
poration not later than 1 year after the date on which the 
apartments or houses (or leaseholds therein) are trans-
ferred by the original seller to the corporation. 
100 STAT. 2286 
PUBLIC LAW 99-514—OCT. 22, 1986 
&«! 
"(6) ORIGINAL SELLER DEFINED.—For purposes of paragraph (5), 
the term 'original seller' means the person from whom the 
corporation has acquired the apartments or houses (or lease-
holds therein).". 
(b) TREATMENT OF DEPRECIATION.—Section 216(c) (relating to treat-
ment as property subject to depreciation) is amended to read as 
follows: 
"(c) TREATMENT AS PROPERTY SUBJECT TO DEPRECIATION.— 
"(1) IN GENERAL.—So much of the stock of a tenant-stock-
holder in a cooperative housing corporation as is allocable, 
under regulations prescribed by the Secretary, to a proprietary 
lease or right of tenancy in property subject to the allowance for 
depreciation under section 167(a) shall, to the extent such 
proprietary lease or right of tenancy is used by such tenant-
stockholder in a trade or business or for the production of 
income, be treated as property subject to the allowance for 
depreciation under section 167(a). The preceding sentence shall 
not be construed to limit or deny a deduction for depreciation 
under section 167(a) by a cooperative housing corporation with 
respect to property owned by such a corporation and leased to 
tenant-stockholders. 
"(2) DEDUCTION UMITED TO ADJUSTED BASIS IN STOCK.— 
"(A) IN GENERAL.—The amount of any deduction for 
depreciation allowable under section 167(a) to a tenant-
stockholder with respect to any stock for any taxable year 
by reason of paragraph (1) shall not exceed the adjusted 
basis of such stock as of the close of the taxable year of the 
tenant-stockholder in which such deduction was incurred. 
"(B) 
CARRYFORWARD 
OF 
DISALLOWED 
AMOUNT.—The 
amount of any deduction which is not allowed by reason of 
-i il( 
subparagraph (A) shall, subject to the provisions of subpara-
graph (A), be treated as a deduction allowable under section 
167(a) in the succeeding taxable year.". 
(c) DISALLOWANCE OF DEDUCTIONS FOR PAYMENTS TO CORPORA-
TION.—Section 216 is amended by adding at the end thereof the 
following new subsection: 
"(d) DISALLOWANCE OF DEDUCTION FOR CERTAIN PAYMENTS TO THE 
CORPORATION.—No deduction shall be allowed to a stockholder in a 
cooperative housing corporation for any amount paid or accrued to 
such corporation during any taxable year (in excess of the stockhold-
er's proportionate share of the items described in subsections (aXD 
and (aX2)) to the extent that, under regulations prescribed by the 
Secretary, such amount is properly allocable to amounts paid or 
incurred at any time by the corporation which are chargeable to the 
corporation's capital account. The stockholder's adjusted basis in the 
stock in the corporation shall be increased by the amount of such 
disallowance." 
(d) DEDUCTION OF TAXES AND INTEREST.—Paragraph (3) of section 
216(b) (defining 
tenant-stockholder's 
proportionate 
share) 
is 
amended to read as follows: 
"(3) TENANT-STOCKHOLDER'S PROPORTIONATE SHARE.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
V 
(B), the term 'tenant-stockholder's proportionate share' 
means that proportion which the stock of the cooperative 
. 
housing corporation owned by the tenant-stockholder is of 
^.pj; 
the total outstanding stock of the corporation (including 
any stock held by the corporation). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2287 
•'•'{ 
"(B) SPECIAL RULE WHERE ALLOCATION OF TAXES OR IN-
TEREST REFLECT C
O
S
T T
O CORPORATION OF STOCKHOLDER'S 
UNIT.— 
"(i) IN GENERAL.—If, for any taxable year— 
"(I) each dwelling unit owned or leased by a 
cooperative housing corporation is separately allo-
cated a share of such corporation's real estate 
v > : 
taxes described in subsection (a)(1) or a share of 
- H 1 
such corporation's interest described in subsection 
(a)(2), and 
i 
"(II) such allocations reasonably reflect the cost 
fj 
to such corporation of such taxes, or of such in-
terest, attributable to the tenant-stockholder's 
dwelling unit (and such unit's share of the common 
^j;' 
areas), 
>f;; M 
then 
the 
term 
'tenant-stockholder's 
proportionate 
share' means the shares determined in accordance with 
B 
^ 
the allocations described in subclause (II). 
* , 
"(ii) ELECTION BY CORPORATION REQUIRED.—Clause (i) 
3i, 
shall apply with respect to any cooperative 
housing 
corporation only if such corporation elects its applica-
tion. Such an election, once made, may be revoked only 
with the consent of the Secretary." 
(e) TREATMENT OF AMOUNTS RECEIVED IN CONNECTION W I T H THE 
REFINANCING OF INDEBTEDNESS OF CERTAIN COOPERATIVE HOUSING 
CORPORATIONS; TREATMENT OF AMOUNTS PAID FROM QUALIFIED RE-
FINANCING-RELATED RESERVE.— 
(1) 
PAYMENT OF CLOSING COSTS AND CREATION OF RESERVE 
E
X
C
L
U
D
E
D FROM GROSS INCOME.—For purposes of the Internal 
e 
Revenue Code of 1954, no amount shall be included in the gross 
s. 
income of a qualified cooperative housing corporation by reason 
t 
of the payment or reimbursement by a city housing develop-
V ment agency or corporation of amounts for— 
(A) closing costs, or 
(B) the creation of reserves for the qualified cooperative 
housing corporation, 
in connection with a qualified refinancing. 
f^ 
(2) INCOME FROM RESERVE FUND TREATED AS MEMBER INCOME.— 
r 
(A) I N GENERAL.—Income from a qualified 
refinancing-
related reserve shall be treated as derived from its mem-
|i!U 1 
bers for purposes of— 
I
S
O U 
(i) section 216 of the Internal Revenue Code of 1954 
(relating to deduction of taxes, interest, and business 
? 
depreciation 
by 
cooperative 
housing 
corporation 
I 
tenant-stockholder), and 
5 
(ii) section 277 of such Code (relating to deductions 
I> 
incurred by certain membership organizations in trans-
r 
actions with members). 
(B) No INFERENCE.—Nothing in the provisions of this 
r 
paragraph shall be construed to infer that a change in law 
: 
is intended with respect to the treatment of deductions 
I 
under section 277 of the Internal Revenue Code of 1954 with 
respect to cooperative housing corporations, and any deter-
g ;0< 
mination of such issue shall be made as if such provisions 
had not been enacted. 
(3) TREATMENT OF CERTAIN INTEREST CLAIMED AS DEDUCTION.— 
Any amount— 
100 STAT. 2288 
PUBLIC LAW 99-514—OCT. 22, 1986 
(A) claimed (on a return of tax imposed by chapter 1 of 
the Internal Revenue Code of 1954) as a deduction by a 
qualified cooperative housing corporation for interest for 
any taxable year beginning before January 1, 1986, on a 
3 v
^ 
second mortgage loan made by a city housing development 
^''•- 
agency or corporation in connection with a qualified re-
>' 
financing, 
and 
>
- 
(B) reported (before April 16, 1986) by the qualified co-
operative housing corporation to its tenant-stockholders as 
interest described in section 216(a)(2) of such Code, 
? • shall be treated for purposes of such Code as if such amount 
were paid by such qualified cooperative housing corporation 
during such taxable year. 
(4) QUALIFIED COOPERATIVE HOUSING CORPORATION.— 
(A) IN GENERAL.—For purposes of this subsection, the 
term "qualified cooperative housing corporation" means 
any corporation i
f
— 
(i) such corporation is, after the application of para-
graphs (1) and (2), a cooperative housing corporation (as 
defined in section 216(b) of the Internal Revenue Code 
of 1954), 
(ii) such corporation is subject to a qualified limited-
profit housing companies law, and 
(iii) such corporation either— 
' •;': 
(I) filed for incorporation on July 22, 1965, or 
'i ' 
(II) filed for incorporation on March 5, 1964. 
(B) QUALIFIED LIMITED-PROFIT HOUSING COMPANIES LAW.— 
'"''' 
For purposes of subparagraph (A), the term "qualified lim-
ited-profit housing companies law" means any limited-
profit housing companies law which limits the resale price 
for a tenant-stockholder's stock in a cooperative housing 
corporation to the sum of his basis for such stock plus his 
proportionate share of part or all of the amortization of any 
mortgage on the building owned by such corporation. 
'• 
(5) QUALIFIED REFINANCING.—For purposes of this subsection, 
the term "qualified refinancing" means any refinancing— 
(A) which occurred— 
(i) with respect to a qualified cooperative housing 
corporation described in paragraph (4)(A)(iii)(I) on 
September 20,1978, or 
(ii) with respect to a qualified cooperative housing 
^' 
corporation described in paragraph (4)(A)(iii)(II) on 
November 21,1978, and 
(B) in which a qualified cooperative housing corporation 
refinanced a first mortgage loan made to such corporation 
'•:.:' 
by a city housing development agency with a first mortgage 
-=?r 
loan made by a city housing development corporation and 
insured by an agency of the Federal Government and a 
'' * second mortgage loan made by such city housing develop-
ment agency, in the process of which a reserve was created 
(as required by such Federal agency) and closing costs were 
paid or reimbursed by such city housing development 
agency or corporation. 
(6) QuAUFiED REFINANCING-RELATED RESERVE.—For purposes 
of this subsection, the term "qualified refinancing-related re-
-" serve" means any reserve of a qualified cooperative housing 
corporation with respect to the creation of which no amount 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2289 
was included in the gross income of such corporation by reason 
of paragraph (a). 
(7) TREATMENT OF AMOUNTS PAID FROM QUALIFIED REFINANC-
ING-RELATED RESERVE.— 
(A) IN GENERAL.—With respect to any payment from a 
qualified refinancing-related reserve out of amounts ex-
cluded from gross income by reason of paragraph (1)— 
(i) no deduction shall be allowed under chapter 1 of 
such Code, and 
(ii) the basis of any property acquired with such 
payment (determined without regard to this subpara-
., 
u 
graph) shall be reduced by the amount of such pay-
ment. 
^ 
(B) ORDERING RULES.—For purposes of subparagraph (A), 
^ 
payments from a reserve shall be treated as being made— 
(i) first from amounts excluded from gross income by 
I 
reason of paragraph (1) to the extent thereof, and 
(ii) then from other amounts in the reserve. 
.. (f) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
(2) SUBSECTION (e).— 
(A) Except as provided in subparagraph (B), subsection (e) 
shall apply to taxable years beginning before January 1, 
1986. 
(B) Subsection (e)(7) shall apply to amounts paid or in-
curred, and property acquired, in taxable years beginning, 
after December 31,1985. 
SEC. 645. SPECIAL RULES RELATING TO PERSONAL HOLDING COMPANY 
TAX. 
^' (a) COMPUTER SOFTWARE ROYALTIES.— 
(1) IN GENERAL.—Paragraph (1) of section 543(a) (defining 
^ 
personal holding company income) is amended— 
^'\ 
(A) by striking out "and" at the end of subparagraph (A), 
(B) by striking out the period at the end of subparagraph 
(B) and inserting in lieu thereof ", and", and 
(C) by adding at the end thereof the following new 
- 
subparagraph: 
"(C) active business computer software royalties (within 
the meaning of subsection (d))." 
s 
(2) 
ACTIVE BUSINESS COMPUTER SOFTWARE ROYALTIES DE-
FINED.—Section 543 is amended by adding at the end thereof the 
following new subsection: 
= "(d) ACTIVE BUSINESS COMPUTER SOFTWARE ROYALTIES.— 
"(1) IN GENERAL.—For purposes of this section, the term 
'active business computer software royalties' means any royal-
ties— 
"(A) received by any corporation during the taxable year 
in connection with the licensing of computer software, and 
"(B) with respect to which the requirements of para-
graphs (2), (3), (4), and (5) are met. 
p.- 
"(2) ROYALTIES MUST BE RECEIVED BY CORPORATION ACTIVELY 
ENGAGED IN COMPUTER SOFTWARE BUSINESS.—The requirements 
of this paragraph are met if the royalties described in para-
graph (D— 
100 STAT. 2290 
PUBLIC LAW 99-514—OCT. 22, 1986 
fros;f .
s 1 
"(A) are received by a corporation engaged in the active 
conduct of the trade or business of developing, manufactur-
Di^Ait 
ing, or producing computer software, and 
"(B) are attributable to computer software which— 
;. 
ffio. 
"(i) is developed, manufactured, or produced by such 
s
*
* ' ' 
corporation (or its predecessor) in connection with the 
trade or business described in subparagraph (A), or 
^' 
"(ii) is directly related to such trade or business. 
"(3) ROYALTIES MUST CONSTITUTE AT LEAST 50 PERCENT OF 
' • INCOME.—The requirements of this paragraph are met if the 
- 
royalties described in paragraph (1) constitute at least 50 per-
V 
cent of the ordinary gross income of the corporation for the 
taxable year. 
,iA 
<'(4) DEDUCTIONS UNDER SECTIONS I62 AND 174 RELATING TO 
.' 
ROYALTIES MUST EQUAL OR EXCEED 25 PERCENT OF ORDINARY GROSS 
;t' 
INCOME.— 
ijii 
"(A) jj^ GENERAL.—The requirements of this paragraph 
are met if— 
. 
"(i) the sum of the deductions allowable to the cor-
sisrta a 
poration under sections 162, 174, and 195 for the tax-
able year which are properly allocable to the trade or 
business described in paragraph (2) equals or exceeds 
; •"' 
25 percent of the ordinary gross income of such cor-
4 / nn*' V 
poration for such taxable year, or 
.; 
"(ii) the average of such deductions for the 5-taxable 
year period ending with such taxable year equals or 
* ' 
exceeds 25 percent of the average ordinary gross 
income of such corporation for such period. 
V ^'iw.' If a corporation has not been in existence during the 5-
taxable year period described in clause (ii), then the period 
of existence of such corporation shall be substituted for 
f. .^; such 5-taxable year period. 
"(B) DEDUCTIONS ALLOWABLE UNDER SECTION 162.—For 
t- ^ ,. 
purposes of subparagraph (A), a deduction shall not be 
f,.. , treated as allowable under section 162 if it is specifically 
allowable under another section. 
•v6ir \ 
"(^) LIMITATION ON ALLOWABLE DEDUCTIONS.—For pur-
poses of subparagraph (A), no deduction shall be taken into 
,jj^«! ,^ account with respect to compensation for personal services 
rendered by the 5 individual shareholders holding the larg-
-j^ri 
est percentage Ot)y value) of the outstanding stock of the 
.;: , ,c; corporation. For purposes of the preceding sentence— 
"(i) individuals holding less than 5 percent (by value) 
of the stock of such corporation shall not be taken into 
fjn-• ;*.jt 
account, and 
lovoi /r. 
"^") stock deemed to be owned by a shareholder 
solely by attribution from a partner under section 
544(a)(2) shall be disregarded. 
"(5) DIVIDENDS MUST EQUAL OR EXCEED EXCESS OF PERSONAL 
.£.j, HOLDING COMPANY INCOME OVER 10 PERCENT OF ORDINARY GROSS 
INCOME.— 
,'<4i ' 
"(A) IN GENERAL.—The requirements of this paragraph 
• . rj 
are inet if the sum of— 
t -sr. ,' 
"(i) the dividends paid during the taxable year (deter-
mined under section 562), 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2291 
' 
. 
"(ii) the dividends considered as paid on the last day 
of the taxable year under section 563(c) (as limited by 
the second sentence of section 563(b)), and 
"(iii) the consent dividends for the taxable year 
(determined under section 565), 
equals or exceeds the amount, if any, by which the personal 
holding company income for the taxable year exceeds 10 
percent of the ordinary gross income of such corporation for 
such taxable year. 
"(B) 
COMPUTATION 
OF PERSONAL 
HOLDING 
COMPANY 
INCOME.—For purposes of this paragraph, personal holding 
company income shall be computed— 
"(i) without regard to amounts described in subsec-
tion (a)(1)(C), 
"(ii) without regard to interest income during any 
^'*" 
taxable year— 
.„ 
"(I) which is in the 5-taxable year period begin-
ning with the later of the 1st taxable year of the 
corporation or the 1st taxable year in which the 
corporation conducted the trade or business de-
scribed in paragraph (2)(A), and 
"(II) during which the corporation meets the 
requirements of paragraphs (2), (3), and (4), and 
.,, „^ 
"(iii) by including adjusted income from rents and 
adjusted income from mineral, oil, and gas royalties 
(within the meaning of paragraphs (2) and (3) of subsec-
tion (a)). 
"(6) SPECIAL RULES FOR AFFILIATED GROUP MEMBERS.— 
"(A) IN GENERAL.—In any case in which— 
"(i) the taxpayer receives royalties in connection with 
the licensing of computer software, and 
"(ii) another corporation which is a member of the 
same affiliated group as the taxpayer meets the 
requirements of paragraphs (2), (3), (4), and (5) with 
respect to such computer software, 
the taxpayer shall be treated as having met such require-
ments. 
"(B) AFFILIATED GROUP.—For purposes of this paragraph, 
the term 'affiliated group' has the meaning given such term 
by section 1504(a)." 
(3) FOREIGN PERSONAL HOLDING COMPANY INCOME.—Paragraph 
(1) of section 553(a) (defining foreign personal holding company 
income) is amended by adding at the end thereof the following 
new sentence: "This paragraph shall not apply to active busi-
ness computer software royalties (as defined in section 543(d))." 
(4) CONFORMING AMENDMENTS.— 
'-^' 
(A) Section 543(a)(4) (relating to copyright royalties) is 
amended by adding at the end thereof the following new 
sentence: "This paragraph shall not apply to active busi-
ness computer software royalties.". 
(B) Section 543(b)(3) (relating to adjusted income from 
rents) is amended— 
(i) by striking out "or" at the end of subparagraph 
(C), 
(ii) by striking out the period at the end of subpara-
graph (D) and inserting in lieu thereof ", or", and 
100 STAT. 2292 
PUBLIC LAW 99-514—OCT. 22, 1986 
(iii) by adding at the end thereof the following new 
•"• ^ 
subparagraph: 
"(E) active business computer software royalties (as de-
fined in subsection (d))." 
(b) SPECIAL RULES FOR BROKER-DEALERS.—In the case of a broker-
dealer which is part of an affiliated group which files a consolidated 
Federal income tax return, the common parent of which was incor-
porated in Nevada on January 27, 1972, the personal holding com-
pany income (within the meaning of section 543 of the Internal 
Revenue Code of 1986) of such broker-dealer, shall not include any 
interest received after the date of the enactment of this Act with 
respect to— 
(1) any securities or money market instruments held as inven-
tory, 
, f 
(2) margin accounts, or 
(3) any financing for a customer secured by securities or 
money market instruments. 
(c) SPECIAL RULE FOR ROYALTIES RECEIVED BY QUALIFIED TAX-
PAYER.— 
(1) IN GENERAL.—Any qualified royalty received or accrued in 
taxable years beginning after December 31, 1981, by a qualified 
taxpayer shall be treated in the same manner as a royalty with 
respect to software is treated under the amendments made by 
this section. 
(2) QUALIFIED TAXPAYER.—For purposes of this subsection, a 
qualified taxpayer is any taxpayer incorporated on September 7, 
1978, which is engaged in the trade or business of manufactur-
ing dolls and accessories. 
(3) QUALIFIED ROYALTY.—For purposes of this subsection, the 
., term "qualified royalty" means any royalty arising from an 
agreement entered into in 1982 which permits the licensee to 
manufacture and sell dolls and accessories. 
(d) SPECIAL RULE FOR TREATMENT OF ACTIVE BUSINESS COMPUTER 
ROYALTIES FOR S CORPORATION PURPOSES.—In the case of a taxpayer 
which was incorporated on May 3, 1977, in California and which 
elected to be taxed as an S corporation for its taxable year ending on 
December 31, 1985, any active business computer royalties (within 
the meaning of section 543(d) of the Internal Revenue Code of 1986 
as added by this Act) which are received by the taxpayer in taxable 
years beginning after December 31, 1984, shall not be treated as 
passive investment 
income (within 
the meaning of section 
1362(d)(3)(D)) for purposes of subchapter S of chapter 1 of such Code. 
(e) EFFECTIVE DATE.—The amendments made by subsection (a) 
shall apply to royalties received before, on, and after December 31, 
1986. 
SEC. 646. CERTAIN ENTITIES NOT TREATED AS CORPORATIONS. 
(a) GENERAL RULE.—For purposes of the Internal Revenue Code of 
1986, if the entity described in subsection (b) makes an election 
under subsection (c), such entity shall be treated as a trust to which 
subpart E of part 1 of subchapter J of chapter 1 of such Code applies. 
(b) ENTITY.—An entity is described in this subsection i
f
— 
(1) such entity was created in 1906 as a common law trust and 
. i • is governed by the trust laws of the State of Minnesota, 
(2) such entity receives royalties from iron ore leases, and 
(3) income interests in such entity are publicly traded on a 
v
^ national stock exchange. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2293 
(c) ELECTION.— 
(1) IN GENERAL.—An election under this subsection to have 
the provisions of this section apply— 
(A) shall be made by the board of trustees of the entity, 
and 
(B) shall not be valid unless accompanied by an agree-
ment described in paragraph (2). 
(2) AGREEMENT.—The agreement described in this paragraph 
is a written agreement signed by the board of trustees of the 
entity which provides that the entity will not— 
(A) sell any trust property, 
(B) purchase any additional trust properties, or 
(C) receive any income other than— 
(i) income from long-term mineral leases, or 
(ii) interest or other income attributable to ordinary 
and necessary reserves of the entity. 
(3) PERIOD FOR WHICH ELECTION IS IN EFFECT.—An election 
under this subsection shall be in effect during the period— 
(A) beginning on the first day of the first taxable year 
beginning after the date of the enactment of this Act and 
following the taxable year in which the election is made, 
and 
(B) ending as of the close of the taxable year preceding 
the taxable year in which the entity ceases to be described 
in subsection (b) or violates any term of the agreement 
under paragraph (2). 
(4) MANNER OF ELECTION.—Any election under this subsection 
shall be made in such manner as the Secretary of the Treasury 
or his delegate may prescribe. 
(d) SPECIAL RULES FOR TAXATION OF TRUST.— 
(1) ELECTION TREATED AS A LIQUIDATION.—If an election is 
made under subsection (c) with respect to any entity— 
(A) such entity shall be treated as having been liquidated 
into a trust immediately before the period described in 
subsection (c)(3) in a liquidation to which section 333 of the 
Internal Revenue Code of 1954 (as in effect before the 
amendments made by this Act) applies, and 
(B) any person holding an interest in the property held by 
such entity as of such time shall be treated as a qualified 
electing shareholder for purposes of section 333 of such 
Code (as so in effect). 
(2) TERMINATION OF ELECTION.—If an entity ceases to be de-
scribed in subsection (b) or violates any term of the agreement 
described in subsection (c)(2), then the tax imposed on such 
entity for the taxable year in which such cessation or violation 
occurs shall be increased by the sum o
f
— 
(A) the amount of taxes which would have been imposed 
on such entity during any taxable year with respect to 
which an election under subsection (c) was in effect if such 
election had not been in effect, plus 
(B) interest determined for the period— 
(i) beginning on the due date for any such taxable 
year, and 
(ii) ending on the due date for the taxable year in 
which such cessation or violation occurs, 
by using the rates and method applicable under section 
6621 for underpayments of tax for such period. 
71-194 0 - 89 - 17 : C
S
L
. 3 Part3 
100 STAT. 2294 
PUBLIC LAW 99-514—OCT. 22, 1986 
(3) TRUST CEASING TO EXIST.—Paragraph (2) shall not apply if 
the trust ceases to be described in subsection (b) or violates the 
agreement in subsection (cX2) because the trust ceases to exist 
or by reason of subsection (e). 
(e) TERMINATION OF ELECTION.—Any election under subsection (c) 
shall not apply to any taxable year beginning more than 5 years 
after the date of the enactment of this Act unless the trust petitions 
a court of competent jurisdiction and the court acts to remove from 
the trust instrument any powers deemed by the court to be 
inconsistent with the operation of the entity as a trust for tax 
purposes (as described in an Internal Revenue Service ruling dated 
November 1,1983). 
SEC. 647. SPECIAL RULE FOR DISPOSITION OF STOCK OF SUBSIDIARY. 
If for a taxable year of an affiliated group filing a consolidated 
return ending on or before December 31, 1987, there is a disposition 
of stock of a subsidiary (within the meaning of Treasury Regulation 
section 1.1502-19), the amount required to be included in income 
with respect to such disposition under Treasury Regulation section 
1.1502-19(a) shall, notwithstanding such section, be included in 
income ratably over the 15-year period beginning with the taxable 
year in which the disposition occurs. The preceding sentence shall 
apply only if such subsidiary was incorporated on December 24, 
1969, and is a participant in a mineral joint venture with a corpora-
tion organized under the laws of the foreign country in which the 
joint venture mineral project is located. 
Subtitle F—Regulated Investment Companies 
SEC. 651. EXCISE TAX ON UNDISTRIBUTED INCOME OF REGULATED 
INVESTMENT COMPANIES. 
(a) GENERAL RULE.—Chapter 44 (relating to real estate investment 
trusts) is amended by adding at the end thereof the following new 
section: 
"SEC. 4982. EXCISE TAX ON UNDISTRIBUTED INCOME OF REGULATED 
INVESTMENT COMPANIES, 
"(a) IMPOSITION OF TAX.—There is hereby imposed a tax on every 
regulated investment company for each calendar year equal to 4 
percent of the excess (if any) o
f
— 
"(1) the required distribution for such calendar year, over 
"(2) the distributed amount for such calendar year. 
"(b) REQUIRED DISTRIBUTION.—For purposes of this section— 
"(1) IN GENERAL.—The term 'required distribution' means, 
with respect to any calendar year, the sum o
f
— 
"(A) 97 percent of the regulated investment company's 
ordinary income for such calendar year, plus 
"(B) 90 percent of the regulated investment company's 
capital gain net income for the 1-year period ending on 
October 31 of such calendar year. 
"(2) INCREASE BY PRIOR YEAR SHORTFALL.—The amount deter-
mined under paragraph (1) for any calendar year shall be 
increased by the excess (if any) of— 
\ 
"(A) the grossed up required distribution for the preced-
ing calendar year, over 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2295 
"(B) the distributed amount for such preceding calendar 
"(3) GROSSED UP REQUIRED DISTRIBUTION.—The grossed up re-
quired distribution for any calendar year is the required dis-
tribution for such year determined— 
"(A) with the application of paragraph (2) to such taxable 
year, and 
"(B) by substituting '100 percent' for each percentage set 
forth in paragraph (1). 
"(c) DISTRIBUTED AMOUNT.—For purposes of this section— 
"(1) IN GENERAL.—The term 'distributed amount' means, with 
respect to any calendar year, the sum o
f
— 
"(A) the deduction for dividends paid (as defined in sec-
tion 561) during such calendar year, and 
"(B) any amount on which tax is imposed under subsec-
tion (bXD or (bX3)(A) of section 852 for any taxable year 
ending in such calendar year. 
"(2) INCREASE BY PRIOR YEAR OVERDISTRIBUTION.—The amount 
determined under paragraph (1) for any calendar year shall be 
increased by the excess (if any) o
f
— 
"(A) the distributed amount for the preceding calendar 
year (determined with the application of this paragraph to 
such preceding calendar year), over 
"(B) the grossed up required distribution for such preced-
ing calendar year. 
"(3) DETERMINATION OF DIVIDENDS PAID.—The amount of the 
dividends paid during any calendar year shall be determined 
without regard to— 
"(A) the provisions of section 855, and 
"(B) any exempt-interest dividend as defined in section 
8520a)(5). 
"(d) TIME FOR PAYMENT OF TAX.—The tax imposed by this section 
for any calendar year shall be paid on or before March 15 of the 
following calendar year. 
"(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) ORDINARY INCOME.—The term 'ordinary income' means 
the investment company taxable income (as defined in section 
852(bX2)) determined— 
"(A) without regard to subparagraphs (A) and (D) of 
section 852(bX2), 
"(B) by not taking into account any gain or loss from the 
sale or exchange of a capital asset, and 
"(C) by treating the calendar year as the company's 
taxable year. 
"(2) CAPITAL GAIN NET INCOME.—The term 'capital gain net 
income' has the meaning given to such term by section 1222(9) 
(determined by treating the 1-year period ending on October 31 
of any calendar year as the company's taxable year). 
"(3) TREATMENT OF DEFICIENCY DISTRIBUTIONS.—In the case of 
any deficiency dividend (as defined in section 860(0)— 
"(A) such dividend shall be taken into account when paid 
without regard to section 860, and 
"(B) any income giving rise to the adjustment shall be 
treated as arising when the dividend is paid. 
"(4) ELECTION TO USE TAXABLE YEAR IN CERTAIN CASES.— 
"(A) IN GENERAL.—If— 
100 STAT. 2296 
PUBLIC LAW 99-514-OCT. 22, 1986 
,.. 
"(i) the taxable year of the regulated investment 
company ends with the month of November or Decem-
.^ -
, 
ber, and 
..>- 
"(ii) such company makes an election under this 
paragraph, 
subsection (b)(1)(B) and paragraph (2) of this subsection 
shall be applied by taking into account the company's 
taxable year in lieu of the 1-year period ending on Octo-
ber 31 of the calendar year. 
"(B) ELECTION REVOCABLE ONLY WITH CONSENT.—An elec-
tion under this paragraph, once made, may be revoked only 
with the consent of the Secretary." 
(b) RELATED AMENDMENTS.— 
(1) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.— 
(A) Subsection (b) of section 852 (relating to method of 
taxation of regulated investment companies and their 
shareholders) is amended by adding at the end thereof the 
following new paragraph: 
"(6) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.—For pur-
poses of this title, any dividend declared by a regulated invest-
ment company in December of any calendar year and payable to 
shareholders of record on a specified date in such month shall 
be deemed— 
"(A) to have been received by each shareholder on such 
date, and 
"(B) to have been paid by such company on such date (or, 
if earlier, as provided in section 855). 
The preceding sentence shall apply only if such dividend is 
actually paid by the company before February 1 of the following 
. calendar year.' 
(B) Subsection (b) of section 855 is amended by striking 
out "Amounts" and inserting in lieu thereof "Except as 
provided in section 852(b)(6), amounts". 
(2) TREATMENT OF EARNINGS AND PROFITS.—Subsection (c) of 
section 852 is amended to read as follows: 
"(c) EARNINGS AND PROFITS.— 
"(1) IN GENERAL.—The earnings and profits of a regulated 
investment company for any taxable year (but not its accumu-
lated earnings and profits) shall not be reduced by any amount 
which is not allowable as a deduction in computing its taxable 
income for such taxable year. For purposes of this subsection, 
the term 'regulated investment company' includes a domestic 
corporation which is a regulated investment company deter-
mined without regard to the requirements of subsection (a). 
"(2) COORDINATION WITH TAX ON UNDISTRIBUTED INCOME.—A 
regulated investment company shall be treated as having suffi-
cient 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 company. The preceding 
sentence shall not apply to the extent that the amount distrib-
uted during any calendar year by the company exceeds the 
required distribution for such calendar year (as determined 
under section 4982)." 
(3) TREATMENT OF NET CAPITAL LOSS AFTER OCTOBER 3 1 OF ANY 
YEAR.—Subparagraph (C) of section 852(b)(3) (defining capital 
gain dividend) is amended by adding at the end thereof the 
following new sentences: "For purposes of this subparagraph. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2297 
the amount of the net capital gain for a taxable year (to which 
an election under section 4982(eX4) does not apply) shall be 
determined without regard to any net capital loss attributable 
to transactions after October 31 of such year, and any such net 
capital loss shall be treated £is arising on the 1st day of the next 
taxable year. To the extent provided in regulations, the preced-
ing sentence shall apply also for purposes of computing regu-
lated investment company taxable income." 
(c) CLERICAL AMENDMENT.—Chapter 44 is amended by striking out 
the chapter heading and the table of sections and inserting in lieu 
thereof the following: 
"CHAPTER 44—QUALIFIED INVESTMENT ENTITIES 
"Sec. 4981. Excise tax on undistributed income of real estate investment trusts. 
"Sec. 4982. Excise tax on undistributed income of regulated investment companies." 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
apply to calendar years beginning after December 31,1986. 
SEC. 652. TREATMENT OF BUSINESS DEVELOPMENT COMPANIES. 
(a) GENERAL RULE.—Paragraph (1) of section 851(a) is amended by 
striking out "either as a management company or as a unit invest-
ment trust" and inserting in lieu thereof "as a management com-
pany, business development company, or unit investment trust". 
OD) TECHNICAL AMENDMENT.—Paragraph (1) of section 851(e) (relat-
ing to investment companies furnishing capital to development 
corporations) is amended by striking out "registered management 
company" and inserting in lieu thereof "registered management 
company or registered business development company". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
SEC. 653. AMENDMENTS TO QUALIFICATION RULES. 
(a) TREATMENT OF CERTAIN HEDGING TRANSACTIONS.—Section 851 
(defining regulated investment company) is amended by adding at 
the end thereof the following new subsection: 
"(g) TREATMENT OF CERTAIN HEDGING TRANSACTIONS.— 
"(1) IN GENERAL.—In the case of any designated hedge, for 
purposes of subsection (bX3), increases (and decreases) during 
the period of the hedge in the value of positions which are part 
of such hedge shall be netted. 
"(2) DESIGNATED HEDGE.—For purposes of this subsection, 
there is a designated hedge where— 
"(A) the taxpayer's risk of loss with respect to any posi-
tion in property is reduced by reason of^ 
"(i) the taxpayer having an option to sell, being 
under a contractual option to sell, or having made (and 
not closed) a short sale of substantially identical prop-
ertv, 
' (ii) the taxpayer being the grantor of an option to 
buy substantially identical property, or 
"(iii) under regulations prescribed by the Secretary, 
the taxpayer holding 1 or more other positions, and 
"(B) the positions which are part of the hedge are clearly 
identified by the taxpayer in the manner prescribed by 
regulations.' 
100 STAT. 2298 
PUBLIC LAW 99-514—OCT. 22, 1986 
(b) DEFINITION OF QUALIFYING INCOME.—Paragraph (2) of subsec-
tion 851(b) is amended by striking out the semicolon at the end 
thereof and inserting in lieu thereof: "(as defined in section 2(a)(36) 
of the Investment Company Act of 1940, as amended) or foreign 
currencies, or other income (including but not limited to gains from 
options, futures, or forward contracts) derived with respect to its 
business of investing in such stock, securities, or currencies;". 
(c) FOREIGN CURRENCY GAINS.—Subsection (b) of section 851 is 
amended by inserting before the last sentence thereof the following 
new sentence: "For purposes of paragraph (2), the Secretary may by 
regulation exclude from qualifying income foreign currency gains 
which are not ancillary to the company's principal business of 
investing in stock or securities (or options and futures with respect 
to stock or securities)." 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act. 
SEC. 654. TREATMENT OF SERIES FUNDS AS SEPARATE CORPORATIONS. 
(a) GENERAL RULE.—Section 851 is amended by adding at the end 
thereof the following new subsection: 
"(q) SPECIAL RULE FOR SERIES FUNDS.— 
"(1) IN GENERAL.—In the case of a regulated investment 
company (within the meaning of subsection (a)) having more 
than one fund, each fund of such regulated investment company 
shall be treated as a separate corporation for purposes of this 
title (except with respect to the definitional requirement of 
subsection (a)). 
"(2) FUND DEFINED.—For purposes of paragraph (1) the term 
'fund' means a segregated portfolio of assets, the beneficial 
interests in which are owned by the holders of a class or series 
of stock of the regulated investment company that is preferred 
over all other classes or series in respect of such portfolio of 
assets." 
(b) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to taxable years beginning after the date of the 
enactment of this Act, 
(2) TREATMENT OF CERTAIN EXISTING SERIES FUNDS.—In 
the 
case of a regulated investment company which has more than 
one fund on the date of the enactment of this act, and has before 
such date been treated for Federal income tax purposes as a 
single corporation— 
(A) the amendment made by subsection (a), and the 
resulting treatment of each fund as a separate corporation, 
shall not give rise to the realization or recognition of 
income or loss by such regulated investment company, its 
funds, or its shareholders, and 
(B) the tax attributes of such regulated investment com-
pany shall be appropriately allocated among its funds. 
SEC. 655. EXTENSION OF PERIOD FOR MAILING NOTICES TO SHARE-
HOLDERS. 
(a) GENERAL RULE.—The following provisions are each amended 
by striking out "45 days" each place it appears and inserting in lieu 
thereof "60 days": 
(1) Paragraph (3) of subsection 852(b). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2299 
(2) Subparagraph (A) of paragraph 852(b)(5). 
(3) Subsection (c) of section 853. 
(4) Paragraph (2) of subsection 854(b). 
(5) Subsection (c) of section 855. 
(b) EFFECTIVE DATE.—The amendments made by subsection (a) 
shall apply to taxable years beginning after the date of the enact-
ment of this Act. 
SEC. 656. PROTECTION OF MUTUAL FUNDS RECEIVING THIRDPARTY 
SUMMONSES. 
(a) GENERAL RULE.—Paragraph (3) of subsection 7609(a) is 
amended— 
(1) by striking out "and" at the end of subparagraph (F); 
(2) by striking out the period at the end of subparagraph (G) 
and inserting in lieu thereof "; and"; and 
(3) by adding the following new subparagraph: 
"(H) any regulated investment company (as defined in 
section 851) and any agent of such regulated investment 
company when acting as an agent thereof." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to summonses served after the date of the enactment of 
this Act. 
SEC. 657. CERTAIN DISTRIBUTIONS NOT TREATED AS PREFERENTIAL 
DIVIDENDS. 
(a) GENERAL RULE.—Subsection (c) of section 562 (relating to 
preferential dividends) is amended by adding at the end thereof the 
following new sentence: "In the case of a distribution by a regulated 
investment company to a shareholder who made an initial invest-
ment of at least $10,000,000 in such company, such distribution shall 
not be treated as not being pro rata or as being preferential solely by 
reason of an increase in the distribution by reason of reductions in 
administrative expenses of the company." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to distributions after the date of the enactment of this 
Act. 
Subtitle G—Real Estate Investment Trusts 
SEC. 661. GENERAL QUALIFICATION REQUIREMENTS. 
(a) MODIFICATION OF CLOSELY-HELD REQUIREMENTS.— 
(1) Paragraph (6) of section 856(a) is amended to read as 
follows: 
"(6) which is not closely held (as determined under subsection 
(h)); and". 
(2) Section 856 is amended by adding at the end thereof the 
following new subsection: 
"(h) CLOSELY HELD DETERMINATIONS.— 
"(1) SECTION 542(a)(2) APPLIED.— 
"(A) IN GENERAL.—For purposes of subsection (a)(6), a 
corporation, trust, or association is closely held if the stock 
ownership requirement of section 542(a)(2) is met. 
"(B) WAIVER OF PARTNERSHIP ATTRIBUTION, ETC.—For pur-
poses of subparagraph (A)— 
100 STAT. 2300 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(i) paragraph (2) of section 544(a) shall be applied as 
if such paragraph did not contain the phrase 'or by or 
for his partner', and 
"(ii) sections 544(aX4XA) and 544(bXl) shall be applied 
by substituting 'the entity meet the stock ownership 
requirement of section 542(aX2)' for 'the corporation a 
personal holding company'. 
"(2) SUBSECTIONS (a) (5) AND (6) NOT TO APPLY TO IST YEAR.— 
Paragraphs (5) and (6) of subsection (a) shall not apply to the 1st 
taxable year for which an election is made under subsection 
(cXD by any corporation, trust, or association." 
(b) REQUIREMENT OF NO EARNINGS AND PROFITS ACCUMULATED IN 
NoN-REIT YEARS.—Subsection (a) of section 857 is amended by 
striking out "and" at the end of paragraph (1), by striking out the 
period at the end of paragraph (2) and inserting in lieu thereof ", 
and", and by adding at the end thereof the following: 
"(3) either— 
"(A) the provisions of this part apply to the real estate 
investment trust for all taxable years beginning after Feb-
ruary 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. 
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." 
(c) INITIAL CHANGE IN ANNUAL ACCOUNTING PERIOD PERMITTED.— 
(1) Section 859 is amended by adding at the end thereof the 
following new subsection: 
"(b) CHANGE OF ACCOUNTING PERIOD WITHOUT APPROVAL.—Not-
withstanding section 442, an entity which has not engaged in any 
active trade or business may change its accounting period to a 
calendar year without the approval of the Secretary if such change 
is in connection with an election under section 856(c)." 
(2) Section 859 is amended by striking out "For purposes o f 
and inserting in lieu thereof "(a) GENERAL RULE.—For purposes 
of. 
SEC. 662. ASSET AND INCOME REQUIREMENTS. 
(a) TREATMENT OF CERTAIN WHOLLY OWNED SUBSIDIARIES.—Sec-
tion 856 (defining real estate investment trust) is amended by 
adding at the end thereof the following new subsection: 
"(i) TREATMENT OF CERTAIN WHOLLY OWNED SUBSIDIARIES.— 
"(1) IN GENERAL.—For purposes of this title— 
"(A) a corporation which is a qualified REIT subsidiary 
shall not be treated as a separate corporation, and 
"(B) all assets, liabilities, and items of income, deduction, 
and credit of a qualified REIT subsidiary shall be treated as 
assets, liabilities, and such items (as the case may be) of the 
real estate investment trust. 
"(2) QUALIFIED REIT SUBSIDIARY.—For purposes of this subsec-
tion, the term 'qualified REIT subsidiary' means any corpora-
tion if 100 percent of the stock of such corporation is held by the 
real estate investment trust at all times during the period such 
corporation was in existence. 
"(3) TREATMENT OF TERMINATION OF QUALIFIED SUBSIDIARY 
STATUS.—For purposes of this subtitle, if any corporation which 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2301 
w£is a qualified REIT subsidiary ceases to meet the require-
ments of paragraph (2), such corporation shall be treated as a 
new corporation acquiring all of its assets (and assuming all of 
its liabilities) immediately before such cessation from the real 
estate investment trust in exchange for its stock." 
0?) TEMPORARY INVESTMENT OF NEW EQUITY CAPITAL.— 
(1) Paragraph (3) of section 856(c) is amended by striking out 
"and" at the end of subparagraph (G), by adding "and" at the 
end of subparagraph (H), and by inserting after subparagraph 
(H) the following new subparagraph: 
"(I) qualified temporary investment income;". 
(2) Subparagraph (B) of section 856(c)(6) is amended by adding 
at the end thereof the following new sentence: "Such term also 
includes any property (not otherwise a real estate asset) attrib-
utable to the temporary investment of new capital, but only if 
such property is stock or a debt instrument, and only for the 1-
year period beginning on the date the real estate trust receives 
such capital." 
(3) Paragraph (6) of section 856(c) is amended by redesignating 
subparagraph (D) as subparagraph (E) and by inserting after 
subparagraph (C) the following new subparagraph: 
"(D) QUALIFIED TEMPORARY INVESTMENT INCOME.— 
"(i) IN GENERAL.—The term 'qualified temporary 
investment income' means any income which— 
"(I) is attributable to stock or a debt instrument, 
"(II) is attributable to the temporary investment 
of new capital, and 
"(III) is received or accrued during the 1-year 
period beginning on the date on which the real 
estate investment trust receives such capital. 
"(ii) NEW CAPITAL.—The term 'new capital' means 
any amount received by the real estate investment 
trust— 
"(I) in exchange for stock in such trust (other 
than amounts received pursuant to a dividend re-
investment plan), or 
"(II) in a public offering of debt obligations of 
such trust which have maturities of at least 5 
years.' 
(c) TREATMENT OF SHARED APPRECIATION MORTGAGES.—Section 856 
is amended by adding at the end thereof the following new subsec-
tion; 
"(j) TREATMENT OF SHARED APPRECIATION MORTGAGES.— 
"(1) IN GENERAL.—Solely for purposes of subsection (c) of this 
section and section 857(b)(6), any income derived from a shared 
appreciation provision shall be treated as gain recognized on the 
sale of the secured property. 
"(2) TREATMENT OF INCOME.—For purposes of applying subsec-
tion (c) of this section and section 857(b)(6) to any income 
described in paragraph (1)— 
"(A) the real estate investment trust shall be treated as 
holding the secured property for the period during which it 
held the shared appreciation provision (or, if shorter, for 
the period during which the secured property was held by 
the person holding such property), and 
"(B) the secured property shall be treated as property 
described in section 1221(1) if it is so described in the hands 
100 STAT. 2302 
PUBLIC LAW 99-514—OCT. 22, 1986 
of the person holding the secured property (or it would be so 
described if held by the real estate investment trust). 
"(3) 
COORDINATION 
WITH 
PROHIBITED 
TRANSACTIONS 
SAFE 
HARBOR.—For purposes of section 857(b)(6)(C)— 
"(A) the real estate investment trust shall be treated as 
having sold the secured property when it recognizes any 
income described in paragraph (1), and 
"(B) any expenditures made by any holder of the secured 
property shall be treated as made by the real estate invest-
ment trust. 
"(4) DEFINITIONS.—For purposes of this subsection— 
"(A) SHARED APPRECIATION PROVISION.—The term 'shared 
appreciation provision' means any provision— 
"(i) which is in connection with an obligation which 
is held by the real estate investment trust and is 
secured by an interest in real property, and 
"(ii) which entitles the real estate investment trust to 
receive a specified portion of any gain realized on the 
sale or exchange of such real property (or of any gain 
which would be realized if the property were sold on a 
specified date). 
"(B) SECURED PROPERTY.—The term 'secured property' 
means the real property referred to in subparagraph (A)." 
SEC. 663. DEFINITION OF RENTS. 
(a) MODIFICATION OF INDEPENDENT CONTRACTOR REQUIREMENTS.— 
Paragraph (2) of section 856(d) (relating to certain amounts excluded 
from rents from real property) is amended by adding at the end 
thereof the following: 
"Subparagraph (C) shall not apply with respect to any amount if 
such amount would be excluded from unrelated business tax-
able income under section 512(b)(3) if received by an organiza-
tion described in section 511(a)(2)." 
(b) CERTAIN RENTS OR INTEREST BASED ON NET INCOME OR PROFITS 
PERMITTED.— 
(1) RENTS.—Subsection (d) of section 856 is amended by adding 
at the end thereof the following new paragraph: 
"(6) 
SPECIAL RULE FOR CERTAIN PROPERTY SUBLEASED BY 
TENANT OF REAL ESTATE INVESTMENT TRUSTS.— 
"(A) IN GENERAL.—If— 
"(i) a real estate investment trust receives or accrues, 
with respect to real or personal property, amounts from 
a tenant which derives substantially all of its income 
with respect to such property from the subleasing of 
substantially all of such property, and 
"(ii) such tenant receives or accrues, directly or in-
directly, from subtenants only amounts which are 
qualified rents, 
then the amounts that the trust receives or accrues from 
the tenant shall not be excluded from the term 'rents from 
real property' solely by reason of being based on the income 
or profits of such tenant. 
"(B) QUALIFIED RENTS.—For purposes of subparagraph 
(A), the term 'qualified rents' means any amount which 
would be treated as rents from real property if received by 
the real estate investment trust." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2303 
(2) INTEREST.—Subsection (f) of section 856 (relating to qualify-
ing interest income) is amended to read as follows: 
"(f) INTEREST.— 
"(1) IN GENERAL.—For purposes of paragraphs (2XB) and (3XB) 
of subsection (c), the term 'interest' does not include any 
amount received or accrued (directly or indirectly) if the deter-
mination of such amount depends (in whole or in part) on the 
income or profits of any person, except that— 
"(A) any amount so received or accrued shall not be 
excluded from the term 'interest' solely by reason of being 
based on a fixed percentage or percentages of receipts or 
sales, and 
"(B) any amount so received or accrued with respect to an 
obligation secured by a mortgage on real property or an 
interest in real property shall not be excluded from the 
term 'interest' solely by reason of being based on the 
income or profits of the debtor from such property, if— 
"(i) the debtor derives substantially all of its gross 
income with respect to such property from the leasing 
of substantially all of its interests in such property to 
tenants, and 
"(ii) the amounts received or accrued directly or 
indirectly by the debtor from such tenants are only 
qualified rents (as defined in subsection (dX6)(B)). 
"(2) SPECIAL RULE.—Where a real estate investment trust 
receives or accrues any amount which would be excluded from 
the term 'interest' solely because the debtor of the real estate 
investment trust receives or accrues any amount the determina-
tion of which depends (in whole or in part) on the income or 
profits of any person, only a proportionate part (determined 
under regulations prescribed by the Secretary) of the amount 
received or accrued by the real estate investment trust shall be 
excluded from the term 'interest'." 
(3) (DONFORMING AMENDMENT.—Subparagraph (A) of section 
856(dX2) is amended by striking out "paragraph (4)" and insert-
ing in lieu thereof "paragraphs (4) and (6)". 
SEC. 664. DISTRIBUTION REQUIREMENTS. 
(a) EXCLUSION OF CERTAIN NONCASH INCOME FROM DISTRIBUTION 
REQUIREMENT.—Subparagraph (B) of section 857(aXl) (relating to 
distribution requirements) is amended to read £is follows: 
"(B) any excess noncash income (as determined under 
subsection (e)); and" 
(b) EXCESS NONCASH INCOME DEFINED.—Section 857 is amended by 
redesignating subsection (e) as subsection (f) and by inserting after 
subsection (d) the following new subsection: 
"(e) EXCESS NONCASH INCOME.— 
"(1) IN GENERAL.—For purposes of subsection (aXlXB), the 
term 'excess noncash income means the excess (if any) o
f
— 
"(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 o
f
— 
100 STAT. 2304 
PUBLIC LAW 99-514—OCT. 22, 1986 
J i. 
' '(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) in the case of a real estate investment trust using the 
cash receipts and disbursements method of accounting, the 
amount (if any) by which— 
"(i) the amounts includible in gross income as origi-
nal issue discount on instruments to which section 1274 
(relating to certain debt instruments issued for prop-
erty) applies, exceed 
"(ii) the amount of money and the fair market value 
of other property received during the taxable year 
under such instruments; plus 
"(C) 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 nonrecogni-
tion under section 1031, and 
"(ii) failure to meet the requirements of section 1031 
was due to reasonable cause and not to willful neglect." 
SEC. 665. TREATMENT OF CAPITAL GAINS. 
(a) COORDINATION OF NET OPERATING LOSS DEDUCTION WITH PAY-
MENT OF CAPITAL GAIN DIVIDENDS.— 
(1) IN GENERAL.—Paragraph (3) of section 8570b) (relating to 
capital gains) is amended by adding at the end thereof the 
following new subparagraph: 
"(D) 
COORDINATION WITH NET OPERATING LOSS PROVI-
SIONS.—For purposes of section 172, if a real estate invest-
ment 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 determin-
ing— 
"(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 tax-
able year under section 1720t))(2) to a succeeding tax-
able year." 
(2) REPEAL OF LIMITATION OF NET CAPITAL GAIN TO REAL ESTATE 
INVESTMENT TRUST TAXABLE INCOME.—Subparagraph (C) of sec-
tion 85703)(3) (defining capital gain dividend) is amended by 
striking out the last sentence. 
(b) NOTICE OF CAPITAL GAINS DIVIDENDS MAY BE MAILED WITH 
ANNUAL REPORT.— 
(1) Subparagraph (C) of section 8570t))(3) (defining capital gain 
dividend) is amended by striking out "the close of its taxable 
year" and inserting in lieu thereof "the close of its taxable year 
(or mailed to its shareholders or holders of beneficial interests 
with its annual report for the taxable year)". 
(2) Subsection (c) of section 858 (relating to notice to share-
holders) is amended by striking out "distribution is made" and 
inserting in lieu thereof "distribution is made (or mailed to its 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2305 
shareholders or holders of beneficial interests with its annual 
report for the taxable year)". 
SEC. 666. MODIFICATIONS OF PROHIBITED TRANSACTION RULES. 
(a) EXEMPTIONS FROM PROHIBITED TRANSACTIONS RULES.— 
(1) Clause (iii) of section 857(b)(6)(C) (relating to certain sales 
not to constitute prohibited transactions) is amended to read as 
follows: 
"(iii)(I) during the taxable year the trust does not 
make more than 7 sales of property (other than fore-
closure property), or (II) the aggregate adjusted bases 
(as determined for purposes of computing earnings and 
protlts) of property (other than foreclosure property) 
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; and". 
(2) Clause (ii) of section 8570aX6)(C) is amended by striking out 
"20 percent" and inserting in lieu thereof "30 percent". 
(3) Subparagraph (C) of section 857(b)(6) is amended by strik-
ing out "and" at the end of clause (iii), by striking out the period 
at the end of clause (iv) and inserting in lieu thereof "; and", 
and by inserting after clause (iv) the following new clause: 
"(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 sec-
tion 856(d)(3)) from whom the trust itself does not 
derive or receive any income." 
(b) NET LOSS FROM PROHIBITED TRANSACTIONS.— 
(1) Loss FROM PROHIBITED TRANSACTIONS NOT ALLOWED TO 
OFFSET GAIN FROM SUCH TRANSACTIONS.—ClaUSe (li) of Section 
857(b)(6)(B) (relating to income from prohibited transactions) is 
amended to read as follows: 
"(ii) in determining the amount of the net income 
derived from prohibited transactions, there shall not be 
taken into account any item attributable to any prohib-
ited transaction for which there was a loss; and". 
(2) NET LOSS MAY REDUCE TAXABLE INCOME.—Subparagraph (F) 
of section 8570t))(2) (defining real estate investment trust taxable 
income) is amended by striking out "and there shall be included 
an amount equal to any net loss derived from prohibited trans-
actions". 
SEC. 667. DEFICIENCY DIVIDENDS OF REAL ESTATE INVESTMENT TRUSTS 
NOT SUBJECT TO PENALTY UNDER SECTION 6697. 
(a) GENERAL RULE.—The section heading and subsection (a) of 
section 6697 (relating to assessable penalties with respect to liability 
for tax of qualified investment entities) are amended to read as 
follows: 
"SEC. 6697. ASSESSABLE PENALTIES WITH RESPECT TO LIABILITY FOR 
TAX O F REGULATED INVESTMENT COMPANIES. 
"(a) CIVIL PENALTY.—In addition to any other penalty provided by 
law, any regulated investment company whose tax liability for any 
taxable year is deemed to be increased pursuant to section 
860(cXlXA) shall pay a penalty in an amount equal to the amount of 
100 STAT. 2306 
PUBLIC LAW 99-514—OCT. 22, 1986 
the interest (for which such company is liable) which is attributable 
solely to such increase." 
(b) CONFORMING AMENDMENT.— 
(1) Subsection (j) of section 860 is amended by striking out 
"qualified investment entity" and inserting in lieu thereof 
"regulated investment company". 
(2) The table of sections for subchapter B of chapter 68 is 
amended by striking out the item relating to section 6697 and 
inserting in lieu thereof the following: 
"Sec. 6697. Assessable penalties with respect to liability for tax of regulated 
investment companies." 
SEC. 668. EXCISE TAX ON UNDISTRIBUTED INCOME OF REAL ESTATE 
INVESTMENT TRUSTS. 
(a) GENERAL RULE.—Section 4981 is amended to read as follows: 
"SEC. 498L EXCISE TAX ON UNDISTRIBUTED INCOME OF REAL ESTATE 
INVESTMENT TRUSTS. 
"(a) IMPOSITION OF TAX.—There is hereby imposed a tax on every 
real estate investment trust for each calendar year equal to 4 
percent of the excess (if any) of— 
"(1) the required distribution for such calendar year, over 
"(2) the distributed amount for such calendar year. 
"(b) REQUIRED DISTRIBUTION.—For purposes of this section— 
"(1) IN GENERAL.—The term 'required distribution' means, 
with respect to any calendar year, the sum of— 
"(A) 85 percent of the real estate investment trust's 
ordinary income for such calendar year, plus 
"(B) 95 percent of the real estate investment trust's cap-
ital gain net income for such calendar year. 
"(2) INCREASE BY PRIOR YEAR SHORTFALL.—The amount deter-
mined under paragraph (1) for any calendar year shall be 
increased by the excess (if any) of— 
"(A) the grossed up required distribution for the preced-
ing calendar year, over 
"(B) the distributed amount for such preceding calendar 
year. 
"(3) GROSSED UP REQUIRED DISTRIBUTION.—The grossed up re-
quired distribution for any calendar year is the required dis-
tribution for such year determined— 
"(A) with the application of paragraph (2) to such taxable 
year, and 
"(B) by substituting '100 percent' for each percentage set 
forth in paragraph (1). 
"(c) DISTRIBUTED AMOUNT.—For purposes of this section— 
"(1) IN GENERAL.—The term 'distributed amount' means, with 
respect to any calendar year, the sum of— 
"(A) the deduction for dividends paid (as defined in sec-
tion 561) during such calendar year, and 
"(B) any amount on which tax is imposed under subsec-
tion (b)(1) or Ob)(3)(A) of section 857 for any taxable year 
, 
ending in such calendar year. 
"(2) INCREASE BY PRIOR YEAR OVERDISTRIBUTION.—The amount 
determined under paragraph (1) for any calendar year shall be 
increased by the excess (if any) o
f
— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2307 
"(A) the distributed amount for the preceding calendar 
year (determined with the application of this paragraph to 
such preceding calendar year), over 
"(B) the grossed up required distribution for such preced-
ing calendar year. 
"(3) DETERMINATION OF DIVIDENDS PAID.—The amount of the 
dividends paid during any calendar year shall be determined 
without regard to the provisions of section 858. 
"(d) TIME FOR PAYMENT OF TAX.—The tax imposed by this section 
for any calendar year shall be paid on or before March 15 of the 
following calendar year. 
"(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) ORDINARY INCOME.—The term 'ordinary income' means 
the real estate investment trust taxable income (as defined in 
section 857(bX2)) determined— 
"(A) without regard to subparagraph (B) of section 
857(bX2), 
"(B) by not taking into account any gain or loss from the 
sale or exchange of a capital asset, and 
"(C) by treating the calendar year as the trust's taxable 
year. 
"(2) CAPITAL GAIN NET INCOME.—The term 'capital gain net 
income' has the meaning given to such term by section 1222(9) 
(determined by treating the calendar year as the trust's taxable 
year). 
"(3) TREATMENT OF DEFICIENCY DISTRIBUTIONS.—In the case of 
any deficiency dividend (as defined in section 860(f))— 
"(A) such dividend shall be taken into account when paid 
without regard to section 860, and 
"(B) any income giving rise to the adjustment shall be 
treated as arising when the dividend is paid." 
(b) RELATED AMENDMENTS.— 
(1) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.— 
(A) Subsection (b) of section 857 (relating to method of 
taxation of real estate investment trusts and holders of 
interests therein) is amended by adding at the end thereof 
the following new paragraph: 
"(8) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.—For pur-
poses of this title, any dividend declared by a real estate invest-
ment trust in December of any calendar year and payable to 
shareholders of record on a specified date in such month shall 
be deemed— 
"(A) to have been received by each shareholder on such 
date, and 
"(B) to have been paid by such trust on such date (or, if 
earlier, as provided in section 858). 
The preceding sentence shall apply only if such dividend is 
actually paid by the company before February 1 of the following 
calendar year.' 
(B) Subsection (b) of section 856 is amended by striking 
out "Amounts" and inserting in lieu thereof "Except as 
provided in section 857(bX8), amounts". 
(2) TREATMENT OF EARNINGS AND PROFITS.—Subsection (d) of 
section 857 is amended to read as follows: 
"(d) EARNINGS AND PROFITS.— 
100 STAT. 2308 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(1) IN GENERAL.—The earnings and profits of a real estate 
investment trust for any taxable year O^ut not its accumulated 
earnings) shall not be reduced by any amount which is not 
allowable in computing its taxable income for such taxable 
year. 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). 
"(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 distrib-
uted during any calendar year by the trust exceeds the required 
distribution for such calendar year (as determined under section 
4981)." 
(3) TREATMENT OF NET CAPITAL GAIN AFTER OCTOBER 31 OF ANY 
YEAR.—Subparagraph (C) of section 857(b)(3) (defining capital 
gain dividend) is amended by adding at the end thereof the 
following new sentences: "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 such 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 real estate investment trust taxable 
income." 
SEC. 669. EFFECTIVE DATES. 
(a) GENERAL RULE.—Except as otherwise provided in this section, 
the amendments made by this part shall apply to taxable years 
beginning after December 31, 1986. 
(b) SECTION 668.—The amendments made by section 668 shall 
apply to calendar years beginning after December 31, 1986. 
(c) RETENTION OF EXISTING TRANSITIONAL RULE.—The amendment 
made by section 663(b)(2) shall not apply with respect to amounts 
received or accrued pursuant to loans made before May 28, 1976. For 
purposes of the preceding sentence, a loan is considered to be made 
before May 28, 1976, if such loan is made pursuant to a binding 
commitment entered into before May 28, 1976. 
Subtitle H—Taxation of Interests in Entities 
Holding Real Estate Mortgages 
SEC. 671. TAXATION OF REAL ESTATE MORTGAGE INVESTMENT CON-
DUITS. 
(a) GENERAL RULE.—Subchapter M of chapter 1 (relating to regu-
lated investment companies and real estate investment trusts) is 
amended by adding at the end thereof the following new part: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2309 
"PART IV—REAL ESTATE MORTGAGE 
INVESTMENT CONDUITS 
"Sec. 860A. Taxation of REMIC's. 
"Sec. 860B. Taxation of holders of regular interests. 
"Sec. 860C. Taxation of residual interests 
"Sec. 860D. REMIC defined. 
"Sec. 860E. Treatment of income in excess of daily accruals on residual in-
terests. 
"Sec. 860F Other rules. 
"Sec 860G. Other definitions and special rules. 
"SEC 860A. TAXATION OF REMIC's. 
"(a) GENERAL RULE.—Except as otherwise provided in this part, a 
REMIC shall not be subject to taxation under this chapter (and shall 
not be treated as a corporation, partnership, or trust for purposes of 
this chapter). 
"(b) INCOME TAXABLE TO HOLDERS.—The income of any REMIC 
shall be taxable to the holders of interests in such REMIC as 
provided in this part. 
"SEC. 860B. TAXATION OF HOLDERS OF REGULAR INTERESTS 
"(a) GENERAL RULE.—In determining the tax under this chapter of 
any holder of a regular interest in a REMIC, such interest (if not 
otherwise a debt instrument) shall be treated as a debt instrument. 
"(b) HOLDERS MUST USE ACCRUAL METHOD.—The amounts includ-
ible in gross income with respect to any regular interest in a REMIC 
shall be determined under the accrual method of accounting. 
"(c) PORTION OF GAIN TREATED AS ORDINARY INCOME.—Gain on the 
disposition of a regular interest shall be treated as ordinary income 
to the extent such gain does not exceed the excess (if any) o
f
— 
"(1) the amount which would have been includible in the 
gross income of the taxpayer with respect to such interest if the 
yield on such interest were 110 percent of the applicable Fed-
eral rate (as defined in section 1274(d) without regard to para-
graph (2) thereof) as of the beginning of the taxpayer's holding 
period, over 
"(2) the amount actually includible in gross income with 
respect to such interest by the taxpayer. 
"(d) CROSS REFERENCE.— 
"For special rules in determining inclusion of original issue discount on 
regular interests, see section 1272(a)(6). 
•SEC. 860C. TAXATION OF RESIDUAL INTERESTS. 
"(a) PASS-THRU OF INCOME OR Loss.— 
"(1) IN GENERAL.—In determining the tax under this chapter 
of any holder of a residual interest in a REMIC, such holder 
shall take into account his daily portion of the taxable income 
or net loss of such REMIC for each day during the taxable year 
on which such holder held such interest. 
"(2) DAILY PORTION.—The daily portion referred to in para-
graph (1) shall be determined— 
"(A) by allocating to each day in any calendar quarter its 
ratable portion of the taxable income (or net loss) for such 
quarter, and 
"(B) by allocating the amount so allocated to any day 
among the holders (on such day) of residual interests in 
proportion to their respective holdings on such day. 
100 STAT. 2310 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(h) DETERMINATION OF TAXABLE INCOME OR NET LOSS.—For pur-
poses of this section— 
"(1) TAXABLE INCOME.—The taxable income of a REMIC shall 
be determined under an accrual method of accounting and in 
the same manner as in the case of an individual, except that— 
"(A) regular interests in such REMIC (if not otherwise 
debt instruments) shall be treated as indebtedness of such 
REMIC, 
"(B) market discount on any market discount bond shall 
be included in gross income for the taxable years to which it 
is attributable as determined under the rules of section 
1276(b)(2) (and sections 1276(a) and 1277 shall not apply), 
"(C) there shall not be taken into account any item of 
income, gain, loss, or deduction allocable to a prohibited 
transaction, and 
"(D) the deductions referred to in section 703(a)(2) (other 
than any deduction under section 212) shall not be allowed. 
"(2) NET LOSS.—The net loss of any REMIC is the excess of— 
"(A) the deductions allowable in computing the taxable 
income of such REMIC, over 
"(B) its gross income. 
Such amount shall be determined with the modifications set 
forth in paragraph (1). 
"(c) DISTRIBUTIONS.—Any distribution by a REMIC— 
"(1) shall not be included in gross income to the extent it does 
not exceed the adjusted basis of the interest, and 
"(2) to the extent it exceeds the adjusted basis of the interest, 
shall be treated as gain from the sale or exchange of such 
interest. 
"(d) BASIS RULES.— 
"(1) INCREASE IN BASIS.—The basis of any person's residual 
interest in a REMIC shall be increased by the amount of the 
taxable income of such REMIC taken into account under subsec-
tion (a) by such person with respect to such interest. 
"(2) DECREASES IN BASIS.—The basis of any person's residual 
interest in a REMIC shall be decreased (but not below zero) by 
the sum of the following amounts: 
"(A) any distributions to such person with respect to such 
interest, and 
"(B) any net loss of such REMIC taken into account under 
subsection (a) by such person with respect to such interest. 
"(e) SPECIAL RULES.— 
"(1) AMOUNTS TREATED AS ORDINARY INCOME.—Any amount 
included in the gross income of any holder of a residual interest 
in a REMIC by reason of subsection (a) shall be treated as 
ordinary income. 
"(2) LIMITATION ON LOSSES.— 
"(A) IN GENERAL.—The amount of the net loss of any 
REMIC taken into account by a holder under subsection (a) 
with respect to any calendar quarter shall not exceed the 
adjusted basis of such holder's residual interest in such 
REMIC as of the close of such calendar quarter (determined 
without regard to the adjustment under subsection (d)(2XB) 
for such calendar quarter). 
"(B) INDEFINITE CARRYFORWARD.—Any loss disallowed by 
reason of subparagraph (A) shall be treated as incurred by 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2311 
the REMIC in the succeeding calendar quarter with respect 
to such holder 
"(3) CROSS REFERENCE.— 
"For special treatment of income in excess of daily accruals, see section 
860E. 
"SEC. 860D. REMIC DEFINED. 
"(a) GENERAL RULE.—For purposes of this title, the terms 'real 
estate mortgage investment conduit' and 'REMIC mean any 
entity— 
"(1) to which an election to be treated as a REMIC applies for 
the taxable year and all prior taxable years, 
"(2) all of the interests in which are regular interests or 
residual interests, 
"(3) which has 1 (and only 1) class of residual interests (and all 
distributions, if any, with respect to such interests are pro rata), 
"(4) as of the close of the 4th month ending after the startup 
day and each quarter ending thereafter, substantially all of the 
assets of which consist of qualified mortgages and permitted 
investments, and 
"(5) which has a taxable year which is a calendar year. 
"(b) ELECTION.— 
"(1) IN GENERAL.—An entity (otherwise meeting the require-
ments of subsection (a)) may elect to be treated as a REMIC for 
its 1st taxable year. Such an election shall be made on its return 
for such 1st taxable year. Except as provided in paragraph (2), 
such an election shall apply to the taxable year for which made 
and all subsequent taxable years. 
"(2) TERMINATION.— 
"(A) IN GENERAL.—If any entity ceases to be a REMIC at 
any time during the taxable year, such entity shall not be 
treated as a REMIC for such taxable year or any succeeding 
taxable year. 
"(B) INADVERTENT TERMINATIONS.—If— 
"(i) an entity ceases to be a REMIC, 
"(ii) the Secretary determines that such cessation 
was inadvertent, 
"(iii) no later than a reasonable time after the discov-
ery of the event resulting in such cessation, steps are 
taken so that such entity is once more a REMIC, and 
"(iv) such entity, and each person holding an interest 
in such entity at any time during the period specified 
pursuant to this subsection, agrees to make such 
adjustments (consistent with the treatment of such 
entity as a REMIC or a C corporation) as may be 
required by the Secretary with respect to such period, 
then, notwithstanding such terminating event, such entity 
shall be treated as continuing to be a REMIC (or such 
cessation shall be disregarded for purposes of subparagraph 
(A)) whichever the Secretary determines to be appropriate. 
"SEC 860E. TREATMENT OF INCOME IN EXCESS OF DAILY ACCRUALS ON 
RESIDUAL INTERESTS. 
"(a) EXCESS INCLUSIONS MAY NOT BE OFFSET BY NET OPERATING 
LOSSES.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), the 
taxable income of any holder of a residual interest in a REMIC 
100 STAT. 2312 
PUBLIC LAW 99-514—OCT. 22, 1986 
for any taxable year shall in no event be less than the excess 
inclusion for such taxable year. 
"(2) EXCEPTION FOR CERTAIN FINANCIAL INSTITUTIONS.—Para-
graph (1) shall not apply to any organization to whicli section 
593 applies. The Secretary may by regulations provide vhat the 
preceding sentence shall not apply where necessary or appro-
priate to prevent avoidance of tax imposed by this chapter. 
"(b) ORGANIZATIONS SUBJECT TO UNRELATED BUSINESS TAX.—If the 
holder of any residual interest in a REMIC is an organization 
subject to the tax imposed by section 511, the excess inclusion of 
such holder for any taxable year shall be treated as unrelated 
business taxable income of such holder for purposes of section 511. 
"(c) EXCESS INCLUSION.—For purposes of this section— 
"(1) IN GENERAL.—The term 'excess inclusion' means, with 
respect to any residual interest in a REMIC for any calendar 
quarter, the excess (if any) o
f
— 
"(A) the amount taken into account with respect to such 
interest by the holder under section 860C(a), over 
"(B) the sum of the daily accruals with respect to such 
interest for days during such calendar quarter while held 
by such holder. 
To the extent provided in regulations, if residual interests in a 
REMIC do not have significant value, the excess inclusions with 
respect to such interests shall be the amount determined under 
subparagraph (A) without regard to subparagraph (B). 
"(2) DETERMINATION OF DAILY ACCRUALS.— 
"(A) IN GENERAL.—For purposes of this subsection, the 
daily accrual with respect to any residual interest for any 
day in any calendar quarter shall be determined by allocat-
ing to each day in such quarter its ratable portion of the 
product o
f
— 
"(i) the adjusted issue price of such interest at the 
beginning of such quarter, and 
"(ii) 120 percent of the long-term Federal rate (deter-
mined on the basis of compounding at the close of each 
calendar quarter and properly adjusted for the length 
of such quarter). 
"(B) ADJUSTED ISSUE PRICE.—For purposes of this para-
graph, the adjusted issue price of any residual interest at 
the beginning of any calendar quarter is the issue price of 
residual interest— 
"(i) increased by the amount of daily accruals for 
prior quarters, and 
"(ii) decreased by any distribution made with respect 
to such interest before the beginning of such quarter. 
"(C) FEDERAL LONG-TERM RATE.—For purposes of this 
paragraph, the term 'Federal long-term rate' means the 
Federal long-term rate which would have applied to the 
residual interest under section 1274(d) (determined without 
regard to paragraph (2) thereof) if it were a debt 
instrument. 
"(d) TREATMENT OF RESIDUAL INTERESTS HELD BY REAL ESTATE 
INVESTMENT TRUSTS.—If a residual interest in a REMIC is held by a 
real estate investment trust, under regulations prescribed by the 
Secretary— 
"(1) any excess of— 
. ^ 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2313 
"(A) the aggregate excess inclusions determined with 
respect to such interests, over 
"(B) the real estate investment trust taxable income 
(within the meaning of section 857(b)(2), excluding any net 
capital gain), 
shall be allocated among the shareholders of such trust in 
proportion to the dividends received by such shareholders from 
such trust, and 
"(2) any amount allocated to a shareholder under paragraph 
(1) shall be treated as an excess inclusion with respect to a 
residual interest held by such shareholder. 
•SEC. 860F. OTHER RULES. 
"(a) 100 PERCENT TAX ON PROHIBITED TRANSACTIONS.— 
' 
"(1) TAX IMPOSED.—There is hereby imposed for each taxable 
year of a REMIC a tax equal to 100 percent of the net income 
derived from prohibited transactions. 
"(2) PROHIBITED TRANSACTION.—For purposes of this part, the 
term 'prohibited transaction' means— 
"(A) DISPOSITION OF QUAUFIED MORTGAGE.—The disposi-
tion of any qualified mortgage transferred to the REMIC 
other than a disposition pursuant to— 
"(i) the substitution of a qualified replacement mort-
gage for a qualified mortgage, 
"(ii) a disposition incident to the foreclosure, default, 
or imminent default of the mortgage, 
"(iii) the bankruptcy or insolvency of the real estate 
mortgage pool, or 
"(iv) a qualified liquidation. 
Notwithstanding the preceding sentence, the term 'prohib-
ited transaction shall not include any disposition required 
to prevent default on a regular interest where the threat-
ened default resulted from a default on 1 or more qualified 
mortgages. 
"(B) INCOME FROM NONPERMITTED ASSETS.—The receipt of 
any income attributable to any asset which is neither a 
qualified mortgage nor a permitted investment. 
"(C) COMPENSATION FOR SERVICES.—The receipt by the 
real estate mortgage pool of any amount representing a fee 
or other compensation for services. 
"(D) GAIN FROM DISPOSITION OF CASH FLOW INVEST-
MENTS.—Gain from the disposition of any cash flow invest-
ment other than pursuant to any qualified liquidation 
described in subsection (b). 
"(3) DETERMINATION OF NET INCOME.—For purposes of para-
graph (1), the term 'net income derived from prohibited trans-
actions' means the excess of the gross income from prohibited 
transactions over the deductions allowed by this chapter which 
are directly connected with such transactions; except that there 
shall not be taken into account any item attributable to any 
prohibited transaction for which there was a loss. 
"(4) QUAUFIED UQUIDATION.—For purposes of this part— 
"(A) IN GENERAL.—The term 'qualified liquidation' means 
a transaction in which— 
"(i) the REMIC adopts a plan of complete liquidation, 
"(ii) such REMIC sells all its assets (other than cash) 
within the liquidation period, and 
100 STAT. 2314 
PUBLIC LAW 99-514—OCT. 22, 1986 
111 V 
"(iii) all proceeds of the liquidation (plus the cash), 
less assets retained to meet claims, are credited or 
distributed to holders of regular or residual interests on 
or before the last day of the liquidation period. 
"(B) LIQUIDATION PERIOD.—The term liquidation period' 
means the period— 
"(i) beginning on the date of the adoption of the plan 
of liquidation, and 
"(ii) ending at the close of the 90th day after such 
date. 
"(b) TREATMENT OF TRANSFERS TO THE REMIC.— 
"(1) TREATMENT OF TRANSFEROR.— 
"(A) NONRECOGNITION GAIN OR LOSS.—No gain or loss 
' 
shall be recognized to the transferor on the transfer of any 
property to a REMIC. 
"(B) ADJUSTED BASES OF INTERESTS.—The adjusted bases of 
the regular and residual interests received in a transfer 
described in subparagraph (A) shall be equal to the aggre-
gate adjusted bases of the property transferred in such 
transfer. Such amount shall be allocated among such in-
terests in proportion to their respective fair market values. 
"(C) TREATMENT OF NONRECOGNIZED GAIN.—If the issue 
price of any regular or residual interest exceeds its adjusted 
basis as determined under subparagraph (B), for periods 
during which such interest is held by the transferor (or by 
any other person whose basis is determined in whole or in 
part by reference to the basis of such interest in the hand of 
the transferor)— 
"(i) in the case of a regular interest, such excess shall 
be included in gross income (as determined under rules 
similar to rules of section 1276(b)), and 
"(ii) in the case of a residual interest, such excess 
shall be included in gross income ratably over the 
anticipated period during which the real estate mort-
gage pool will be in existence. 
"(D) TREATMENT OF NONRECOGNIZED LOSS.—If the adjusted 
basis of any regular or residual interest received in a 
transfer described in subparagraph (A) exceeds its issue 
price, for periods during which such interest is held by the 
transferor (or by any other person whose basis is deter-
mined in whole or in part by reference to the basis of such 
interest in the hand of the transferor)— 
"(i) in the case of a regular interest, such excess shall 
be allowable as a deduction under rules similar to the 
rules of section 171, and 
"(ii) in the case of a residual interest, such excess 
shall be allowable as a deduction ratably over the 
anticipated period during which the real estate mort-
gage pool will be in existence. 
"(2) BASIS TO REMIC.—The basis of any property received by a 
REMIC in a transfer described in paragraph (1)(A) shall be its 
fair market value immediately after such transfer. 
"(c) DISTRIBUTIONS OF PROPERTY.—If a REMIC makes a distribu-
tion of property with respect to any regular or residual interest— 
"(1) notwithstanding any other provision of this subtitle, gain 
shall be recognized to such REMIC on the distribution in the 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2315 
same manner as if it had sold such property to the distributee at 
its fair market value, and 
"(2) the basis of the distributee in such property shall be its 
fair market value. 
"(d) COORDINATION WITH WASH SALE RULES.—For purposes of 
section 1091— 
"(1) any residual interest in a REMIC shall be treated as a 
security, and 
"(2) in applying such section to any loss claimed to have been 
sustained on the sale or other disposition of a residual interest 
in a REMIC— 
"(A) except as provided in regulations, any residual in-
terest in any REMIC and any interest in a taxable mort-
gage pool (as defined in section 7701(i)) comparable to a 
residual interest in a REMIC shall be treated as substan-
tially identical stock or securities, and 
"(B) subsections (a) and (e) of such section shall be applied 
by substituting '6 months' for '30 days' each place it 
appears. 
"(e) TREATMENT UNDER SUBTITLE F.—For purposes of subtitle F, a 
REMIC shall be treated as a partnership (and holders of residual 
interests in such REMIC shall be treated as partners). Any return 
required by reason of the preceding sentence shall include the 
amount of the daily accruals determined under section 860E(c). 
"SEC. 860G. OTHER DEFINITIONS AND SPECIAL RULES. 
"(a) DEFINITIONS.—For purposes of this part— 
"(1) REGULAR INTEREST.— The term 'regular interest' means 
an interest in a REMIC the terms of which are fixed on the 
startup day, and which— 
"(A) unconditionally entitles the holder to receive a speci-
fied principal amount (or other similar amount), and 
"(B) provides that interest payments (or other similar 
amounts), if any, at or before maturity are payable based on 
a fixed rate (or to the extent provided in regulations, at a 
variable rate). 
An interest shall not fail to meet the requirements of subpara-
graph (A) merely because the timing (but not the amount) of the 
principal payments (or other similar amounts) may be contin-
gent on the extent of prepayments on qualified mortgages and 
the amount of income from permitted investments. 
"(2) RESIDUAL INTEREST.—The term 'residual interest' means 
an interest in a REMIC which is not a regular interest and is 
designated as a residual interest. 
'•(3) QUALIFIED MORTGAGE.—The term 'qualified mortgage' 
means— 
"(A) any obligation (including any participation or certifi-
cate of beneficial ownership therein) which is principally 
secured, directly or indirectly, by an interest in real prop-
erty and which— 
"(i) is transferred to the REMIC on or before the 
startup day, or 
"(ii) is purchased by the REMIC within the 3-month 
period beginning on the startup day, 
"(B) any qualified replacement mortgage, and 
"(C) any regular interest in another REMIC transferred 
to the REMIC on or before the startup day. 
100 STAT. 2316 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(4) QUALIFIED REPLACEMENT MORTGAGE.—The term 'qualified 
replacement mortgage' means any obligation— 
"(A) which would be described in paragraph (3XA) if it 
were transferred to the REMIC on or before the startup 
n 
day, and 
"(B) which is received for— 
"(i) another obligation within the 3-month period 
beginning on the startup day, or 
"(ii) a defective obligation within the 2-year period 
beginning on the startup day. 
"(5) PERMITTED INVESTMENTS.—The term 'permitted invest-
ments' means any— 
"(A) cash flow investment, 
"(B) qualified reserve asset, or 
"(C) foreclosure property. 
"(6) CASH FLOW INVESTMENT.—The term 'cash flow invest-
ment' means any investment of amounts received under quali-
fied mortgages for a temporary period before distribution to 
holders of interests in the REMIC. 
"(7) QUAUFIED RESERVE ASSET.— 
"(A) IN GENERAL.—The term 'qualified reserve asset' 
means any intangible property which is held for investment 
and as part of a qualified reserve fund. 
"(B) QUALIFIED RESERVE FUND.—For purposes of subpara-
graph (A), the term 'qualified reserve fund' means any 
reasonably required reserve to provide for full payment of 
expenses of the REMIC or amounts due on regular interests 
in the event of defaults on qualified mortgages. The amount 
of any such reserve shall be promptly and appropriately 
reduced as payments of qualified mortgages are received. 
"(C) SPECIAL RULE.—A reserve shall not be treated as a 
qualified reserve for any taxable year (and all subsequent 
taxable years) if more than 30 percent of the gross income 
from the assets in such fund for the taxable year is derived 
from the sale or other disposition of property held for less 
than 3 months. For purposes of the preceding sentence, gain 
on the disposition of a qualified reserve asset shall not be 
taken into account if the disposition giving rise to such gain 
is required to prevent default on a regular interest where 
the threatened default resulted from a default on 1 or more 
qualified mortgages. 
"(8) FORECLOSURE PROPERTY.—The term 'foreclosure property' 
means property— 
"(A) which would be foreclosure property under section 
856(e) if acquired by a real estate investment trust, and 
"(B) which is acquired in connection with the default or 
imminent default of a qualified mortgage held by the 
REMIC. 
Property shall cease to be foreclosure property with respect to 
the REMIC on the date which is 1 year after the date such real 
estate mortgage pool acquired such property. 
"(9) STARTUP DAY.—The term 'startup day* means any day 
selected by a REMIC which is on or before the 1st day on which 
interests in such REMIC are issued. 
"(10) ISSUE PRICE.—The issue price of any regular or residual 
interest in a REMIC shall be determined under section 12730?) 
in the same manner as if such interest were a debt instrument; 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2317 
except that if the interest is issued for property, paragraph (3) of 
section 1273(b) shall apply whether or not the requirements of 
such paragraph are met. 
"(b) TREATMENT OF NONRESIDENT ALIENS AND FOREIGN CORPORA-
TIONS.—If the holder of a residual interest in a REMIC is a non-
resident alien individual or a foreign corporation, for purposes of 
sections 871(a), 881,1441, and 1442— 
"(1) amounts includible in the gross income of such holder 
under this part shall be taken into account when paid or 
distributed (or when the interest is disposed of), and 
"(2) no exemption from the taxes imposed by such sections 
(and no reduction in the rates of such taxes) shall apply to any 
excess inclusion. 
The Secretary may by regulations provide that such amounts shall 
be taken into account earlier than as provided in paragraph (1) 
where necessary or appropriate to prevent the avoidance of tax 
imposed by this chapter. 
"(c) REGULATIONS.—The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
part, including regulations— 
"(1) to prevent unreasonable accumulations of assets in a 
REMIC, 
"(2) permitting determinations of the fair market value of 
property transferred to a REMIC and issue price of interests in 
a REMIC to be made earlier than otherwise provided, and 
"(3) requiring reporting to holders of residual interests of such 
information as frequently as is necessary or appropriate to 
permit 
such 
holders to compute 
their 
taxable 
income 
accurately." 
(b) TECHNICAL AMENDMENTS.— 
(1) TREATMENT FOR REIT PURPOSES.—Paragraph (6) of section 
856(c) is amended by redesignating subparagraph (D) as 
subparagraph (E) and by inserting after subparagraph (C) the 
following new subparagraph: 
"(D) A regular or residual interest in a REMIC shall be 
treated as an interest in real property, and any amount 
includible in gross income with respect to such an interest 
shall be treated as interest; except that, if less than 95 
percent of the assets of such REMIC are interests in real 
property (determined as if the taxpayer held such assets), 
such interest shall be so treated only in the proportion 
which the assets of the REMIC consist of such interests." 
(2) TREATMENT FOR PURPOSES OF SECTION 593.—Subsection (d) 
of section 593 (defining loans) is amended by adding at the end 
thereof the following new paragraph: 
"(4) TREATMENT OF INTERESTS IN REMIC'S.—A regular or resid-
ual interest in a REMIC shall be treated as a qualifying real 
property loan; except that, if less than 95 percent of the assets of 
such REMIC are qualifying real property loans (determined as 
if the taxpayer held the assets of the REMIC), such interest 
shall be so treated only in the proportion which the assets of 
such REMIC consist of such loans." 
(3) TREATMENT FOR PURPOSES OF SECTION 7701(a) ( 1 9 ) . — 
Subparagraph (C) of section 7701(a)(19) (defining domestic build-
ing and loan associations) is amended by striking out "and" at 
the end of clause (ix), by striking out the period at the end of 
100 STAT. 2318 
PUBLIC LAW 99-514—OCT. 22, 1986 
clause (x) and inserting in lieu thereof ", and", and by inserting 
after clause (x) the following new clause: 
"(xi) any regular or residual interest in a REMIC, but 
only in the proportion which the assets of such REMIC 
consist of property described in any of the preceding 
clauses of this subparagraph; except that if 95 percent 
or more of the assets of such REMIC are loans de-
scribed in clauses (i) through (x), the entire interest in 
the REMIC shall qualify." 
(4) TREATMENT FOR PURPOSES OF SECTION 582(C).—Paragraph 
(1) of section 582(c) is amended by adding at the end thereof the 
following new sentence: "For purposes of the preceding sen-
tence, any regular or residual interest in a REMIC shall be 
treated as an evidence of indebtedness." 
SEC. 672. RULES FOR ACCRUING ORIGINAL ISSUE DISCOUNT ON REGULAR 
INTERESTS AND SIMILAR DEBT INSTRUMENTS. 
Subsection (a) of section 1272 (relating to current inclusion in 
income of original issue discount) is amended by redesignating 
paragraph (6) as paragraph (7) and by inserting after paragraph (5) 
the following new paragraph: 
"(6) DETERMINATION OF DAILY PORTIONS WHERE PRINCIPAL SUB-
JECT T
O ACCELERATION.— 
"(A) IN GENERAL.—In the case of any debt instrument to 
which this paragraph applies, the daily portion of the origi-
nal issue discount shall be determined by allocating to each 
day in any accrual period its ratable portion of the excess (if 
any)of^ 
"(i) the sum of (I) the present value determined under 
subparagraph (B) of all remaining payments under the 
debt instrument as of the close of such period, and (II) 
the payments during the accrual period of amounts 
included in the stated redemption price of the debt 
instrument, over 
"(ii) the adjusted issue price of such debt instrument 
at the beginning of such period. 
"(B) DETERMINATION OF PRESENT VALUE.—For purposes of 
subparagraph (A), the present value shall be determined on 
the basis of— 
"(i) the original yield to maturity (determined on the 
basis of compounding at the close of each accrual 
period and properly adjusted for the length of the 
accrual period), 
"(ii) events which have occurred before the close of 
the accrual period, and 
"(iii) a prepayment assumption determined in the 
manner prescribed by regulations. 
"(C) DEBT INSTRUMENTS TO WHICH PARAGRAPH APPLIES.— 
This paragraph applies to— 
"(i) any regular interest in a REMIC or qualified 
mortgage held by a REMIC, or 
"(ii) any other debt instrument if payments under 
such debt instrument may be accelerated by reason of 
prepayments of other obligations securing such debt 
instrument (or, to the extent provided in regulations, 
by reason of other events)." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2319 
SEC. 673. TREATMENT OF TAXABLE MORTGAGE POOLS. 
Section 7701, as amended by section 201(c), is amended by re-
designating subsection (i) as subsection (j) and by inserting after 
subsection (h) the following new subsection: 
"(i) TAXABLE MORTGAGE POOLS.— 
"(1) TREATED AS SEPARATE CORPORATIONS.—A taxable mort-
gage pool shall be treated as a separate corporation which may 
not be treated as an includible corporation with any other 
corporation for purposes of section 1501. 
"(2) TAXABLE MORTGAGE POOL DEFINED.—For purposes of this 
title— 
"(A) IN GENERAL.—Except as otherwise provided in this 
paragraph, a taxable mortgage pool is any entity (other 
than a HEMIC) if— 
"(i) substantially all of the assets of such entity 
consists of debt obligations (or interests therein) and 
more than 50 percent of such debt obligations (or in-
terests) consists of real estate mortgages (or interests 
therein), 
"(ii) such entity is the obligor under debt obligations 
with 2 or more maturities, and 
"(iii) under the terms of the debt obligations referred 
to in clause (ii) (or underlying arrangement), payments 
on such debt obligations bear a relationship to pay-
ments on the debt obligations (or interests) referred to 
in clause (i). 
"(B) PORTION OF ENTITIES TREATED AS POOLS.—Any portion 
of an entity which meets the definition of subparagraph (A) 
shall be treated as a taxable mortgage pool. 
"(C) EXCEPTION FOR DOMESTIC BUILDING AND LOAN.—Noth-
ing in this subsection shall be construed to treat any domes-
tic building and loan association (or portion thereof) as a 
taxable mortgage pool. 
"(D) TREATMENT OF CERTAIN EQUITY INTERESTS.—To the 
extent provided in regulations, equity interest of varying 
classes which correspond to maturity classes of debt shall 
be treated as debt for purposes of this subsection. 
"(3) TREATMENT OF CERTAIN REIT'S.—If— 
"(A) a real estate investment trust is a taxable mortgage 
pool, or 
"(B) a qualified REIT subsidiary (as defined in section 
856(i)(2)) of a real estate investment trust is a taxable 
mortgage pool, 
under regulations prescribed by the Secretary, adjustments 
similar to the adjustments provided in section 860E(d) shall 
apply to the shareholders of such real estate investment trust." 
SEC. 674. COMPLIANCE PROVISIONS. 
Subsection (d) of section 6049 (relating to returns regarding pay-
ments of interest) is amended by adding at the end thereof the 
following new paragraph: 
"(7) 
INTERESTS 
IN 
REMIC'S 
AND 
CERTAIN 
OTHER 
DEBT 
INSTRUMENTS.— 
"(A) IN GENERAL.—For purposes of subsection (a), the 
term 'interest' includes amounts includible in gross income 
with respect to regular interests in REMIC's. 
100 STAT. 2320 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(B) REPORTING TO CORPORATIONS, ETC.—Except as other-
wise provided in regulations, in the case of any interest 
described in subparagraph (A) of this paragraph and any 
other debt instrument to which section 1272(a)(6) apphes, 
subsection (b)(4) of this section shall be applied without 
regard to subparagraphs (A), (H), (I), (J), (K), and (L)(i). 
"(C) ADDITIONAL INFORMATION.—Except as otherwise pro-
vided in regulations, any return or statement required to be 
filed or furnished under this section with respect to interest 
income described in subparagraph (A) and interest on any 
other debt instrument to which section 1272(a)(6) applies 
shall also provide information setting forth the issue price 
of the interest to which the return or statement relates at 
the beginning of each accrual period with respect to which 
interest income is required to be reported on such return or 
statement and information necessary to compute accrual of 
market discount. 
"(D) REGULATORY AUTHORITY.—The Secretary may pre-
scribe such regulations as are necessary or appropriate to 
carry out the purposes of this paragraph, including regula-
tions which require more frequent or more detailed report-
ing." 
SEC. 675. EFFECTIVE DATES. 
(a) GENERAL RULE.—Except as otherwise provided in this section, 
the amendments made by this part shall apply to taxable years 
beginning after December 31, 1986. 
(b) RULES FOR ACCRUING ORIGINAL ISSUE DISCOUNT.—The amend-
ment made by section 672 shall apply to debt instruments issued 
after December 31, 1986, in taxable years ending after such date. 
(c) TREATMENT OF TAXABLE MORTGAGE POOLS.— 
(1) IN GENERAL.—The amendment made by section 673 shall 
take effect on January 1, 1992. 
(2) TREATMENT OF EXISTING ENTITIES.—The amendment made 
by section 673 shall not apply to any entity in existence on 
December 31, 1991. The preceding sentence shall cease to apply 
with respect to any entity as of the 1st day after December 31, 
1991, on which there is a substantial transfer of cash or other 
property to such entity. 
(3) SPECIAL RULE FOR COORDINATION WITH WASH-SALE RULES.— 
Notwithstanding paragraphs (1) and (2), for purposes of apply-
ing section 860F(d) of the Internal Revenue Code of 1986 (as 
added by this part), the amendment made by section 673 shall 
apply to taxable years beginning after December 31,1986. 
TITLE VII—ALTERNATIVE MINIMUM TAX 
SEC. 701. ALTERNATIVE MINIMUM TAX FOR INDIVIDUALS AND CORPORA-
TIONS. 
(a) GENERAL RULE.—Part VI of subchapter A of chapter 1 (relating 
to minimum tax for tax preferences) is amended to read as follows: 
"PART VI—ALTERNATIVE MINIMUM TAX 
"Sec. 55. Alternative minimum tax imposed. 
"Sec. 56. Adjustments in computing alternative minimum taxable income. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2321 
"Sec. 57. Items of tax preference. 
"Sec. 58. E)enial of certain losses. 
"Sec. 59 Other definitions and special rules 
"SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED. 
"(a) GENERAL RULE.—There is hereby imposed (in addition to any 
other tax imposed by this subtitle) a tax equal to the excess (if any) 
of-
"(1) the tentative minimum tax for the taxable year, over 
"(2) the regular tax for the taxable year. 
"(b) TENTATIVE MINIMUM TAX.—For purposes of this part— 
*(1) IN GENERAL.—The tentative minimum tax for the taxable 
year is— 
"(A) 20 percent (21 percent in the case of a taxpayer other 
than a corporation) of so much of the alternative minimum 
taxable income for the taxable year as exceeds the exemp-
tion amount, reduced by 
"(B) the alternative minimum tax foreign tax credit for 
the taxable year. 
"(2) ALTERNATIVE MINIMUM TAXABLE INCOME.—The term 
'alternative minimum taxable income* means the taxable 
income of the taxpayer for the taxable year— 
"(A) determined with the adjustments provided in section 
56 and section 58, and 
"(B) increased by the amount of the items of tax pref-
erence described in section 57. 
"(c) REGULAR TAX.— 
"(1) IN GENERAL.—For purposes of this section, the term 
'regular tax' means the regular tax liability for the taxable year 
(as defined in section 26(b)) reduced by the foreign tax credit 
allowable under section 27(a). Such term shall not include any 
tax imposed by section 402(e) and shall not include any increase 
in tax under section 47. 
"(2) CROSS REFERENCES.— 
"For provisions providing that certain credits are not allowable against 
the tax imposed by this section, see sections 26(a), 28(d)(2), 29(b)(5), and 
38(c). 
"(d) EXEMPTION AMOUNT.—For purposes of this section— 
"(1) EXEMPTION AMOUNT FOR TAXPAYERS OTHER THAN CORPORA-
TIONS.—In the case of a taxpayer other than a corporation, the 
term 'exemption amount' means— 
"(A) $40,000 in the case o
f
— 
"(i) a joint return, or 
"(ii) a surviving spouse, 
"(B) $30,000 in the case of an individual who— 
"(i) is not a married individual, and 
"(ii) is not a surviving spouse, and 
"(C) $20,000 in the case of— 
"(i) a married individual who files a separate return, 
or 
"(ii) an estate or trust. 
For purposes of this paragraph, the term 'surviving spouse' has 
the meaning given to such term by section 2(a), and marital 
status shall be determined under section 7703. 
"(2) CORPORATIONS.—In the case of a corporation, the term 
'exemption amount' means $40,000. 
100 STAT. 2322 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(3) PHASE-OUT OF EXEMPTION AMOUNT.—The exemption 
amount of any taxpayer shall be reduced (but not below zero) by 
an amount equal to 25 percent of the amount by which the 
alternative minimum taxable income of the taxpayer exceeds— 
"(A) $150,000 in the case of a taxpayer described in 
paragraph (IX 
A) or (2), 
"(B) $112,500 in the case of a taxpayer described in 
paragraph (1)(B), and 
"(C) $75,000 in the case of a taxpayer described in para-
graph (1)(C). 
"SEC. 56. ADJUSTMENTS IN COMPUTING ALTERNATIVE MINIMUM TAX-
ABLE INCOME. 
"(a) ADJUSTMENTS APPLICABLE TO ALL TAXPAYERS.—In determin-
ing the amount of the alternative minimum taxable income for any 
taxable year the following treatment shall apply (in lieu of the 
treatment applicable for purposes of computing the regular tax): 
"(1) DEPRECIATION.— 
"(A) IN GENERAL.— 
"(i) PROPERTY OTHER THAN CERTAIN REAL PROPERTY.— 
Except as provided in clause (ii), the depreciation 
deduction allowable under section 167 with respect to 
any tangible property placed in service after Decem-
ber 31, 1986, shall be determined under the alternative 
system of section 168(g). 
'•(ii) 150-PERCENT DECLINING BALANCE METHOD FOR 
CERTAIN PROPERTY.—The method of depreciation used 
shall be— 
"(I) the 150 percent declining balance method, 
"(II) switching to the straight line method for the 
1st taxable year for which using the straight line 
method with respect to the adjusted basis as of the 
beginning of the year will yield a higher allowance. 
The preceding sentence shall not apply to any section 
1250 property (as defined in section 1250(c)) or to any 
other property if the depreciation deduction deter-
mined under section 168 with respect to such other 
property for purposes of the regular tax is determined 
by using the straight line method. 
"(B) EXCEPTION FOR CERTAIN PROPERTY.—This paragraph 
shall not apply to property described in paragraph (1), (2), 
(3), or (4) of section 168(a 
"(C) COORDINATION WITH TRANSITIONAL RULES.— 
"(i) IN GENERAL.—This paragraph shall not apply to 
property placed in service after December 31, 1986, to 
which the amendments made by section 201 of the Tax 
Reform Act of 1986 do not apply. 
"(ii) TREATMENT OF CERTAIN PROPERTY PLACED IN 
SERVICE BEFORE 1987.—This paragraph shall apply to 
any property to which the amendments made by sec-
tion 201 of the Tax Reform Act of 1986 apply by reason 
of an election under section 203(aXl)(B) of such Act 
without regard to the requirement of subparagraph (A) 
that the property be placed in service after Decem-
ber 31, 1986. 
"(D) NORMAUZATION RULES.—With respect to public util-
ity property described in section 167(1X3)(A), the Secretary 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2323 
shall prescribe the requirements of a normalization method 
of accounting for this section. 
"(2) MINING EXPLORATION AND DEVELOPMENT COSTS.— 
"(A) IN GENERAL.—With respect to each mine or other 
natural deposit (other than an oil, gas, or geothermal well) 
of the taxpayer, the amount allowable as a deduction under 
section 616(a) or 617(a) (determined without regard to sec-
tion 291(b)) in computing the regular tax for costs paid or 
incurred after December 31, 1986, shall be capitalized and 
amortized ratably over the 10-year period beginning with 
the taxable year in which the expenditures were made. 
"(B) Loss ALLOWED.—If a loss is sustained with respect to 
any property described in subparagraph (A), a deduction 
shall be allowed for the expenditures described in subpara-
graph (A) for the taxable year in which such loss is sus-
tained in an amount equal to the lesser o
f
— 
"(i) the amount allowable under section 165(a) for the 
expenditures if they had remained capitalized, or 
"(ii) the amount of such expenditures which have not 
previously been amortized under subparagraph (A). 
"(3) TREATMENT OF CERTAIN LONG-TERM CONTRACTS.—In the 
case of any long-term contract entered into by the taxpayer on 
or after March 1, 1986, the taxable income from such contract 
shall be determined under the percentage of completion method 
of accounting (as modified by section 4600t))). 
"(4) ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION.—The 
alternative tax net operating loss deduction shall be allowed in 
lieu of the net operating loss deduction allowed under section 
172. 
"(5) POLLUTION CONTROL FACILITIES.—In the case of any cer-
tified pollution control facility placed in service after Decem-
ber 31, 1986, the deduction allowable under section 169 (without 
regard to section 291) shall be determined under the alternative 
system of section 168(g). 
"(6) INSTALLMENT SALES OF CERTAIN PROPERTY.—In the case of 
any— 
"(A) disposition after March 1,1986, of property described 
in section 1221(1), or 
"(B) other disposition if an obligation arising from such 
disposition would be an applicable installment obligation 
(as defined in section 453C(e)) to which section 453C applies, 
income from such disposition shall be determined without 
regard to the installment method under section 453 or 453A and 
all payments to be received for the disposition shall be deemed 
received in the taxable year of the disposition. This paragraph 
shall not apply to any disposition with respect to which an 
election is in effect under section 453C(e)(4). 
"(7) ADJUSTED BASIS.—The adjusted basis of any property to 
which paragraph (1) or (5) applies (or with respect to which 
there are any expenditures to which paragraph (2) or subsection 
03)(2) applies) shall be determined on the basis of the treatment 
prescribed in paragraph (1), (2), or (5), or subsection (b)(2), 
whichever applies. 
"Ot)) ADJUSTMENTS APPLICABLE TO INDIVIDUALS.—In determining 
the amount of the alternative minimum taxable income of any 
taxpayer (other than a corporation), the following treatment shall 
100 STAT. 2324 
PUBLIC LAW 99-514—OCT. 22, 1986 
apply (in lieu of the treatment applicable for purposes of computing 
the regular tax): 
"(1) LIMITATION ON ITEMIZED DEDUCTIONS.— 
"(A) IN GENERAL.—No deduction shall be allowed— 
"(i) for any miscellaneous itemized deduction (as de-
fined in section 67(b)), or 
"(ii) for any taxes described in paragraph (1), (2), or 
(3) of section 164(a). 
Clause (ii) shall not apply to any amount allowable in 
computing adjusted gross income. 
"(B) MEDICAL EXPENSES.—In determining the amount 
allowable as a deduction under section 213, subsection (a) of 
section 213 shall be applied by substituting '10 percent' for 
*7.5 percent'. 
"(C) INTEREST.—In determining the amount allowable as 
a deduction for interest, subsections (d) and (h) of section 
163 shall apply, except that— 
"(i) in lieu of the exception under section 163(h)(2)(D), 
the term 'personal interest' shall not include any quali-
fied housing interest (as defined in subsection (e)), 
"(ii) sections 163(d)(6) and 163(h)(6) (relating to phase-
ins) shall not apply, and 
"(iii) interest on any specified private activity bond 
(and any amount treated as interest on a specified 
activity bond under section 56(a)(5)(B)), and any deduc-
tion referred to in section 57(a)(5)(A), shall be treated as 
includible in gross income (or as deductible) for pur-
poses of applying section 163(d). 
"(D) TREATMENT OF CERTAIN RECOVERIES.—No recovery of 
any tax to which subparagraph (A)(ii) applied shall be 
included in gross income for purposes of determining alter-
native minimum taxable income. 
"(E) STANDARD DEDUCTION NOT ALLOWED.—The standard 
deduction provided in section 63(c) shall not be allowed. 
"(2) CIRCULATION AND RESEARCH AND EXPERIMENTAL EXPENDI-
TURES.— 
"(A) IN GENERAL.—The amount allowable as a deduction 
under section 173 or 174(a) in computing the regular tax for 
amounts paid or incurred after December 31, 1986, shall be 
capitalized and— 
"(i) in the case of circulation expenditures described 
in section 173, shall be amortized ratably over the 3-
year period beginning with the taxable year in which 
the expenditures were made, or 
"(ii) in the case of research and experimental 
expenditures described in section 174(a), shall be amor-
tized ratably over the 10-year period beginning with 
the taxable year in which the expenditures were made. 
"(B) Loss ALLOWED.—If a loss is sustained with respect to 
any property described in subparagraph (A), a deduction 
shall be allowed for the expenditures described in subpara-
graph (A) for the taxable year in which such loss is sus-
tained in an amount equal to the lesser of— 
"(i) the amount allowable under section 165(a) for the 
expenditures if they had remained capitalized, or 
"(ii) the amount of such expenditures which have not 
previously been amortized under subparagraph (A). 
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2325 
"(C) SPECIAL RULE FOR PERSONAL HOLDING COMPANIES.—In 
the case of circulation expenditures described in section 
173, the adjustments provided in this paragraph shall apply 
also to a personal holding company (as defined in section 
542). 
"(c) ADJUSTMENTS APPLICABLE TO CORPORATIONS.—In determining 
the amount of the alternative minimum taxable income of a cor-
poration, the following treatment shall apply: 
"(1) ADJUSTMENT FOR BOOK INCOME OR ADJUSTED EARNINGS 
AND PROFITS.— 
"(A) BOOK INCOME ADJUSTMENT.—For taxable years begin-
ning in 1987, 1988, and 1989, alternative minimum taxable 
income shall be adjusted as provided under subsection (f). 
"(B) ADJUSTED EARNINGS AND PROFITS.—For taxable years 
beginning after 1989, alternative minimum taxable income 
shall be adjusted as provided under subsection (g). 
"(2) MERCHANT MARINE CAPITAL CONSTRUCTION FUNDS.—In the 
case of a capital construction fund established under section 607 
of the Merchant Marine Act, 1936 (46 U.S.C. 1177)— 
"(A) subparagraphs (A), (B), and (C) of section 7518(c)(1) 
(and the corresponding provisions of such section 607) shall 
not apply to— 
"(i) any amount deposited in such fund after Decem-
ber 31,1986, or 
"(ii) any earnings (including gains and losses) after 
December 31, 1986, on amounts in such fund, and 
"(B) no reduction in basis shall be made under section 
7518(f) (or the corresponding provisions of such section 607) 
with respect to the withdrawal from the fund of any 
amount to which subparagraph (A) applies. 
For purposes of this paragraph, any withdrawal of deposits or 
earnings from the fund shall be treated as allocable first to 
deposits made before (and earnings received or accrued before) 
January 1, 1987. 
"(3) SPECIAL DEDUCTION FOR CERTAIN ORGANIZATIONS NOT AL-
LOWED.—The deduction determined under section 8330t)) shall 
not be allowed. 
"(d) ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION DE-
FINED.— 
"(1) IN GENERAL.—For purposes of subsection (a)(4), the term 
'alternative tax net operating loss deduction' means the net 
operating loss deduction allowable for the taxable year under 
section 172, except that— 
"(A) the amount of such deduction shall not exceed 90 
percent of alternative minimum taxable income determined 
without regard to such deduction, and 
"(B) in determining the amount of such deduction— 
"(i) the net operating loss (within the meaning of 
section 172(c)) for any loss year shall be adjusted as 
provided in paragraph (2), and 
"(ii) in the case of taxable years beginning after 
December 31, 1986, section 172(b)(2) shall be applied by 
substituting '90 percent of alternative minimum tax-
able income determined without regard to the alter-
native tax net operating loss deduction' for 'taxable 
income' each place it appears. 
"(2) ADJUSTMENTS TO NET OPERATING LOSS COMPUTATION.— 
71-194 0 - 89 - 18 : QL. 3 Part3 
100 STAT. 2326 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(A) POST-1986 LOSS YEARS.—In the case of a loss year 
beginning after December 31, 1986, the net operating loss 
for such year under section 172(c) shall— 
"(i) be determined with the adjustments provided in 
this section and section 58, and 
"(ii) be reduced by the items of tax preference deter-
mined under section 57 for such year (other than 
subsection (a)(6) thereof). 
"(B) PRE-1987 YEARS.—In the case of loss years beginning 
before January 1, 1987, the amount of the net operating loss 
which may be carried over to taxable years beginning after 
December 31, 1986, for purposes of paragraph (2), shall be 
equal to the amount which may be carried from the loss 
year to the first taxable year of the taxpayer beginning 
after December 31, 1986. 
"(e) QUALIFIED HOUSING INTEREST.—For purposes of this part— 
"(1) IN GENERAL.—The term 'qualified housing interest' 
means interest which is paid or accrued during the taxable year 
on indebtedness which is incurred in acquiring, constructing, or 
substantially rehabilitating any property which— 
"(A) is the principal residence (within the meaning of 
section 1034) of the taxpayer at the time such interest 
accrues or is paid, or 
"(B) is a qualified dwelling which is a qualified residence 
(within the meaning of section 163(h)(3)). 
Such term also includes interest on any indebtedness resulting 
from the refinancing of indebtedness meeting the requirements 
of the preceding sentence; but only to the extent that the 
amount of the indebtedness resulting from such refinancing 
does not exceed the amount of the refinanced indebtedness 
immediately before the refinancing. 
"(2) QUALIFIED DWELLING.—The term 'qualified dwelling' 
means any— 
"(A) house, 
"(B) apartment, 
"(C) condominium, or 
"(D) mobile home not used on a transient basis (within 
the meaning of section 7701(a)(19)(C)(v)), 
including all structures or other property appurtenant thereto. 
"(3) SPECIAL RULE FOR INDEBTEDNESS INCURRED BEFORE JULY i, 
1982.—The term 'qualified housing interest' includes interest 
paid or accrued on indebtedness which— 
"(A) was incurred by the taxpayer before July 1, 1982, 
and 
"(B) is secured by property which, at the time such 
indebtedness was incurred, was— 
"(i) the principal residence (within the meaning of 
section 1034) of the taxpayer, or 
"(ii) a qualified dwelling used by the taxpayer (or any 
member of his family (within the meaning of section 
267(c)(4))). 
"(f) ADJUSTMENTS FOR BOOK INCOME OF CORPORATIONS.— 
"(1) IN GENERAL.—The alternative minimum taxable income 
of any corporation for any taxable year beginning in 1987, 1988, 
or 1989 shall be increased by 50 percent of the amount (if any) 
by which— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2327 
"(A) the adjusted net book income of the corporation, 
exceeds 
"(B) the alternative minimum taxable income for the 
taxable year (determined without regard to this subsection 
and the alternative tax net operating loss deduction). 
"(2) ADJUSTED NET BOOK INCOME.—For purposes of this subsec-
tion— 
"(A) IN GENERAL.—The term 'adjusted net book income' 
means the net income or loss of the taxpayer set forth on 
the taxpayer's applicable financial statement, adjusted as 
provided in this paragraph. 
"(B) ADJUSTMENTS FOR CERTAIN TAXES.—The amount 
determined under subparagraph (A) shall be appropriately 
adjusted to disregard any Federal income taxes, or income, 
war profits, or excess profits taxes imposed by any foreign 
country or possession of the United States, which are di-
rectly or indirectly taken into account on the taxpayer's 
applicable financial statement. The preceding sentence 
shall not apply to any such taxes imposed by a foreign 
country or possession of the United States if the taxpayer 
does not choose to take, to any extent, the benefits of 
section 901. 
"(C) SPECIAL RULES FOR RELATED CORPORATIONS.— 
"(i) CONSOLIDATED RETURNS.—If the taxpayer files a 
consolidated return for any taxable year, adjusted net 
book income for such taxable year shall take into 
account items on the taxpayer's applicable financial 
statement which are properly allocable to members of 
such group included on such return. 
"(ii) TREATMENT OF DIVIDENDS.—In the case of any 
corporation which is not included on a consolidated 
return with the taxpayer, adjusted net book income 
shall take into account the earnings of such other 
corporation only to the extent of the sum of the divi-
dends received from such other corporation and other 
amounts required to be included in gross income under 
this chapter in respect of the earnings of such other 
corporation. 
"(D) STATEMENTS COVERING DIFFERENT PERIODS.—Appro-
priate adjustments shall be made in adjusted net book 
income in any case in which an applicable financial state-
ment covers a period other than the taxable year. 
"(E) SPECIAL RULE FOR COOPERATIVES.—In the case of a 
cooperative to which section 1381 applies, the amount 
determined under subparagraph (A) shall be reduced by the 
amounts referred to in section 1382(b) (relating to patron-
age dividends and per-unit retain allocations) to the extent 
such amounts were not otherwise taken into account in 
determining adjusted net book income. 
"(F) TREATMENT OF DIVIDENDS FROM 936 
CORPORATIONS.— 
"(i) IN GENERAL.—In determining the amount of ad-
justed net book income, any dividend received from a 
corporation eligible for the credit provided by section 
936 shall be increased by the amount of any withhold-
ing tax paid to a possession of the United States with 
respect to such dividend, 
"(ii) TREATMENT AS FOREIGN TAXES.— 
100 STAT. 2328 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(I) IN GENERAL.—50 percent of any withholding 
tax paid to a possession of the United States with 
respect to dividends referred to in clause (i) (to the 
extent such dividends do not exceed the excess 
referred to in paragraph (1), determined without 
regard to clause (i)) shall, for purposes of this part, 
be treated as a tax paid by the corporation receiv-
ing the dividend to a foreign country. 
"(II) TREATMENT OF TAXES IMPOSED ON 936 COR-
PORATION.—For purposes of this subparagraph, 
taxes paid by any corporation eligible for the credit 
provided by section 936 to a possession of the 
United States, shall be treated as a withholding 
tax paid with respect to any dividend paid by such 
corporation to the extent such taxes would be 
treated as paid by the corporation receiving the 
dividend under rules similar to the rules of section 
902. 
"(G) 
RULES FOR ALASKA NATIVE CORPORATIONS.—The 
amount determined under subparagraph (A) shall be appro-
priately adjusted to allow: 
'(i) cost recovery and depletion attributable to prop-
erty the basis of which is determined under section 
21(c) of the Alaska Native Claims Settlement Act (43 
U.S.C. 1620(c)), and 
"(ii) deductions for amounts payable made pursuant 
to section 7(i) or section 7(j) of such Act (43 U.S.C. 
1606(i) and 1606(j)) only at such time as the deductions 
are allowed for tax purposes. 
"(H) SECRETARIAL AUTHORITY TO ADJUST ITEMS.—Under 
regulations, adjusted net book income shall be properly 
adjusted to prevent the omission or duplication of any item. 
"(3) APPLICABLE FINANCIAL STATEMENT.—For purposes of this 
subsection— 
"(A) IN GENERAL.—The term 'applicable financial state-
ment' means, with respect to any taxable year, any state-
ment covering such taxable year— 
"(i) which is required to be filed with the Securities 
and Exchange Commission, 
"(ii) which is a certified audited income statement to 
be used for the purposes of a statement or report— 
"(I) for credit purposes, 
"(II) to shareholders, or 
"(III) for any other substantial nontax purpose, 
"(iii) which is an income statement required to be 
provided to— 
"(I) the Federal Government or any agency 
thereof, 
"(II) a State government or any agency thereof, 
or 
"(III) a political subdivision of a State or any 
agency thereof, or 
"(iv) which is an income statement to be used for the 
purposes of a statement or report— 
"(I) for credit purposes, 
"(II) to shareholders, or 
"(III) for any other substantial nontax purpose. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2329 
"(B) EARNINGS AND PROFITS USED IN CERTAIN CASES.—If— 
"(i) a taxpayer has no applicable financial statement, 
or 
"(ii) a taxpayer has only a statement described in 
subparagraph (A)(iv) and the taxpayer elects the ap-
plication of this subparagraph, 
the net income or loss set forth on the taxpayer's applicable 
financial statement shall, for purposes of paragraph (3)(A), 
be treated as being equal to the taxpayer's earnings and 
profits for the taxable year (without diminution by reason 
of distributions during the tax year). Such election, once 
made, shall remain in effect for any taxable year for which 
the taxpayer is described in this subparagraph unless re-
voked with the consent of the Secretary. 
"(C) SPECIAL RULE WHERE MORE THAN i STATEMENT.—For 
purposes of subparagraph (A), if a taxpayer has a statement 
described in more than 1 clause or subclause, the applicable 
financial statement shall be the statement described in the 
clause or subclause with the lowest number designation. 
"(4) EXCEPTION FOR CERTAIN CORPORATIONS.—This subsection 
shall not apply to any S corporation, regulated investment 
company, real estate investment trust, or HEMIC. 
Xg) ADJUSTMENTS BASED ON ADJUSTED CURRENT EARNINGS.— 
"(1) IN GENERAL.—The alternative minimum taxable income 
of any corporation for any taxable year beginning after 1989 
shall be increased by 75 percent of the excess (if any) of— 
"(A) the adjusted current earnings of the corporation, 
over 
"(B) the alternative minimum taxable income (deter-
mined without regard to this subsection and the alternative 
tax net operating loss deduction). 
"(2) ALLOWANCE OF NEGATIVE ADJUSTMENTS.— 
"(A) IN GENERAL.—The alternative minimum taxable 
income for any corporation of any taxable year beginning 
after 1989, shall be reduced by 75 percent of the excess (if 
any) of^ 
"(i) the amount referred to in subparagraph (B) of 
paragraph (1), over 
"(ii) the amount referred to in subparagraph (A) of 
paragraph (1). 
"(B) LIMITATION.—The reduction under subparagraph (A) 
for any taxable year shall not exceed the excess (if any) of— 
"(i) the aggregate increases in alternative minimum 
taxable income under paragraph (1) for prior taxable 
years, over 
"(ii) the aggregate reductions under subparagraph 
(A) of this paragraph for prior taxable years. 
"(3) ADJUSTED CURRENT EARNINGS.—For purposes of this 
subsection, the term 'adjusted current earnings' means the 
alternative minimum taxable income for the taxable year— 
"(A) determined with the adjustments provided in para-
graph (4), and 
"(B) determined without regard to this subsection and the 
alternative tax net operating loss deduction. 
"(4) ADJUSTMENTS.—In determining adjusted current earn-
ings, the following adjustments shall apply: 
"(A) DEPRECIATION.— 
100 STAT. 2330 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(i) PROPERTY PLACED IN SERVICE AFTER I989.—The 
depreciation deduction with respect to any property 
placed in service in a taxable year beginning after 1989 
shall be determined under whichever of the following 
methods yields deductions with a smaller present 
value: 
"(I) The alternative system of section 168(g), or 
"(II) The method used for book purposes, 
"(ii) PROPERTY TO WHICH NEW ACRS SYSTEM APPLIES.— 
In the case of any property to which the amendments 
made by section 201 of the Tax Reform Act of 1986 
apply and which is placed in service in a taxable year 
beginning before 1990, the depreciation deduction shall 
be determined— 
"(I) by taking into account the adjusted basis of 
such property (as determined for purposes of 
computing alternative minimum taxable income) 
as of the close of the last taxable year beginning 
before January 1, 1990, and 
"(II) by using the straight-line method over the 
remainder of the recovery period applicable to 
such property under the alternative system of sec-
tion 168(g). 
"(iii) PROPERTY TO WHICH ORIGINAL ACRS SYSTEM AP-
PLIES.—In the case of any property to which section 168 
(as in effect on the day before the date of the enactment 
of the Tax Reform Act of 1986 and without regard to 
subsection (d)(l)(A)(ii) thereof) applies, the depreciation 
deduction shall be determined— 
"(I) by taking into account the adjusted basis of 
such property (as determined for purposes of 
computing the regular tax) as of the close of the 
last taxable year beginning before January 1, 1990, 
and 
"(II) by using the straight line method over the 
remainder of the recovery period which would 
apply to such property under the alternative 
system of section 168(g). 
"(iv) PROPERTY PLACED IN SERVICE BEFORE 1981.—In 
the case of any property not described in clause (i), (ii), 
or (iii), the amount allowable as depreciation or 
amortization with respect to such property shall be 
determined in the same manner as for purposes of 
computing taxable income. 
"(v) SLOWER METHOD USED IF USED FOR BOOK PUR-
POSES.—In the case of any property to which clause (ii), 
(iii), or (iv) applies, if the depreciation method used for 
book purposes yields deductions for taxable years 
beginning after 1989 with a smaller present value than 
the method which would otherwise be used under such 
clause, the method used for book purposes shall be used 
in lieu of the method which would otherwise be used 
under such clause. 
"(B) 
INCLUSION OF ITEMS INCLUDED FOR PURPOSES OF 
COMPUTING EARNINGS AND PROFITS.— 
"(i) IN GENERAL.—In the case of any amount which is 
excluded from gross income for purposes of computing 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2331 
alternative minimum taxable income but is taken into 
account in determining the amount of earnings and 
profits— 
"(I) such amount shall be included in income in 
the same manner as if such amount were includ-
ible in gross income for purposes of computing 
alternative minimum taxable income, and 
"(II) the amount of such income shall be reduced 
by any deduction which would have been allowable 
in computing alternative minimum taxable income 
if such amount were includible in gross income, 
"(ii) INCLUSION OF BUILDUP IN LIFE INSURANCE CON-
TRACTS.—In the case of any life insurance contract— 
"(I) the income on such contract (as determined 
under section 7702(g)) for any taxable year shall be 
treated as includible in gross income for such year, 
and 
"(II) there shall be allowed as a deduction that 
portion of any premium which is attributable to 
insurance coverage, 
"(iii) INCLUSION OF INCOME ON ANNUITY CONTRACT.— 
In the case of any annuity contract, the income on such 
contract (as determined under section 72(u)(2)) shall be 
treated as includible in gross income for such year. 
"(C) DISALLOWANCE OF ITEMS NOT DEDUCTIBLE IN COMPUT-
ING EARNINGS AND PROFITS.— 
"(i) IN GENERAL.—A deduction shall not be allowed 
for any item if such item would not be deductible for 
any taxable year for purposes of computing earnings 
and profits. 
"(ii) 
SPECIAL RULE FOR IOO-PERCENT DIVIDENDS.— 
Clause (i) shall not apply to any deduction allowable 
under section 243 or 245 for a 100-percent dividend— 
"(I) if the corporation receiving such dividend 
and the corporation paying such dividend could not 
be members of the same affiliated group under 
section 1504 by reason of section 1504(b), 
"(II) but only to the extent such dividend is 
attributable to income of the paying corporation 
which is subject to tax under this chapter (deter-
mined after the application of sections 936 and 
921). 
For purposes of the preceding sentence, the term '100 
percent dividend' means any dividend if the percentage 
used for purposes of determining the amount allowable 
as a deduction under section 243 or 245 with respect to 
such dividend is 100 percent. 
"(iii) SPECIAL RULE FOR DIVIDENDS FROM SECTION 936 
COMPANIES.—In the case of any dividend received from 
a corporation eligible for the credit provided by section 
936, rules similar to the rules of subparagraph (F) of 
subsection (f)(1) shall apply, except that '75 percent' 
shall be substituted for '50 percent' in clause (ii)(I) 
thereof. 
"(D) 
CERTAIN OTHER EARNINGS AND PROFITS ADJUST-
MENTS.— 
100 STAT. 2332 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(i) IN GENERAL.—The adjustments provided in sec-
tion 312(n) shall apply; except that— 
"(I) paragraphs (1), (2), and (3) shall apply only to 
amounts paid or incurred in taxable years begin-
ning after December 31,1989, 
"(II) paragraph (4) shall apply only to taxable 
years beginning after December 31,1989, 
"(III) paragraph (5) shall apply only to install-
ment sales in taxable years beginning after Decem-
ber 31,1989, 
"(IV) paragraph (6) shall apply only to contracts 
entered into on or after March 1,1986, and 
"(V) paragraphs (7) and (8) shall not apply. 
"(ii) SPECIAL RULE FOR INTANGIBLE DRILLING COSTS 
AND MINERAL EXPLORATION AND DEVELOPMENT COSTS.— 
If— 
"(I) the present value of the deductions provided 
under subparagraph (AXii) or (BXii) of section 
312(n)(2) with respect to amounts paid or incurred 
in taxable years beginning after December 31, 
1989, exceeds 
"(II) the present value of the deductions for such 
amounts under the method used for book purposes, 
such amounts shall be deductible under the method 
used for book purposes in lieu of that provided in such 
subparagraph. 
"(E) 
DISALLOWANCE OF LOSS ON EXCHANGE OF DEBT 
POOLS.—No loss shall be recognized on the exchange of any 
pool of debt obligations for another pool of debt obligations 
having substantially the same effective interest rates and 
maturities. 
"(F) 
ACQUISITION EXPENSES OF UFE INSURANCE COMPA-
NIES.—Acquisition expenses of life insurance companies 
shall be capitalized and amortized in accordance with the 
treatment generally required under generally accepted 
accounting principles as if this subparagraph applied to all 
taxable years. 
"(G) DEPLETION.—The allowances for depletion with re-
spect to any property placed in service in a taxable year 
beginning after 1989, shall be determined under whichever 
of the following methods yields deductions with a smaller 
present value: 
"(i) cost depletion determined under section 611, or 
"(ii) the method used for book purposes. 
"(H) TREATMENT OF CERTAIN OWNERSHIP CHANGES.—If— 
"(i) there is an ownership change (within the mean-
ing of section 382) after the date of the enactment of 
the Tax Reform Act of 1986 with respect to any cor-
poration, and 
"(iiXD the aggregate adjusted bases of the eissets of 
such corporation (immediately after 
the change), 
exceed 
"(II) the value of the stock of such corporation (as 
determined for purposes of section 382), properly ad-
justed for liabilities and other relevant items, 
then the adjusted basis of each asset of such corporation (as 
of such time) shall be its proportionate share (determined 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2333 
on the basis of respective fair market values) of the amount 
referred to in clause (iiXII). 
"(5) OTHER DEFINITIONS.—For purposes of paragraph (4)— 
"(A) BOOK PURPOSES.—The term 'book purposes' means 
the treatment for purposes of preparing the applicable 
financial statement referred to in subsection (f). 
"(B) EARNINGS AND PROFITS.—The term 'earnings and 
profits' means earnings and profits computed for purposes 
of subchapter C. 
"(C) PRESENT VALUE.—Present value shall be determined 
as of the time the property is placed in service (or, if later, 
as of the beginning of the first taxable year beginning after 
1989) and under regulations prescribed by the Secretary. 
"(D) TREATMENT OF ALTERNATIVE MINIMUM TAXABLE 
INCOME.—The treatment of any item for purposes of 
computing alternative minimum taxable income shall be 
determined without regard to this subsection. 
"(6) EXCEPTION FOR CERTAIN CORPORATIONS.—This subsection 
shall not apply to any S corporation, regulated investment 
company, real estate investment trust, or REMIC. 
"SEC. 57. ITEMS OF TAX PREFERENCE. 
"(a) GENERAL RULE.—For purposes of this part, the items of tax 
preference determined under this section are— 
"(1) DEPLETION.—With respect to each property (as defined in 
section 614), the excess of the deduction for depletion allowable 
under section 611 for the taxable year over the adjusted basis of 
the property at the end of the taxable year (determined without 
regard to the depletion deduction for the taxable year). 
"(2) INTANGIBLE DRILLING COSTS.— 
"(A) IN GENERAL.—With respect to all oil, gas, and geo-
thermal properties of the taxpayer, the amount (if any) by 
which the amount of the excess intangible drilling costs 
arising in the taxable year is greater than 65 percent of the 
net income of the taxpayer from oil, gas, and geothermal 
properties for the taxable year. 
"(B) EXCESS INTANGIBLE DRILLING COSTS.—For purposes of 
subparagraph (A), the amount of the excess intangible drill-
ing costs arising in the taxable year is the excess o
f
— 
"(i) the intangible drilling and development costs 
paid or incurred in connection with oil, gas, and geo-
thermal wells (other than costs incurred in drilling a 
nonproductive well) allowable under section 263(c) or 
291(b) for the taxable year, over 
"(ii) the amount which would have been allowable for 
the taxable year if such costs had been capitalized and 
straight line recovery of intangibles (as defined in 
subsection (b)) had been used with respect to such costs. 
"(C) NET INCOME FROM OIL, GAS, AND GEOTHERMAL PROP-
ERTIES.—For purposes of subparagraph (A), the amount of 
the net income of the taxpayer from oil, gas, and geo-
thermal properties for the taxable year is the excess o
f
— 
"(i) the aggregate amount of gross income (within the 
meaning of section 613(a)) from all oil, gas, and geo-
thermal properties of the taxpayer received or accrued 
by the taxpayer during the taxable year, over 
100 STAT. 2334 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(ii) the amount of any deductions allocable to such 
properties reduced by the excess described in subpara-
graph (B) for such taxable year. 
"(D) PARAGRAPH APPLIED SEPARATELY WITH RESPECT TO 
GEOTHERMAL PROPERTIES AND OIL AND GAS PROPERTIES.—This 
paragraph shall be applied separately with respect to— 
"(i) all oil and gas properties which are not described 
in clause (ii), and 
"(ii) all properties which are geothermal deposits (as 
defined in section 613(e)(3)). 
"(3) INCENTIVE STOCK OPTIONS.— 
"(A) IN GENERAL.—With respect to the transfer of a share 
of stock pursuant to the exercise of an incentive stock 
option (as defined in section 422A), the amount by which 
the fair market value of the share at the time of exercise 
exceeds the option price. For purposes of this paragraph, 
the fair market value of a share of stock shall be deter-
mined without regard to any restriction other than a 
restriction which, by its terms, will never lapse. 
"(B) BASIS ADJUSTMENT.—In determining the amount of 
gain or loss recognized for purposes of this part on any 
disposition of a share of stock acquired pursuant to an 
exercise (in a taxable year beginning after December 31, 
1986) of an incentive stock option, the basis of such stock 
shall be increased by the amount of the excess referred to in 
subparagraph (A). 
"(4) RESERVES FOR LOSSES ON BAD DEBTS OF FINANCIAL INSTITU-
TIONS.—In the case of a financial institution to which section 
585 or 593 applies, the amount by which the deduction allowable 
for the taxable year for a reasonable addition to a reserve for 
bad debts exceeds the amount that would have been allowable 
had the institution maintained its bad debt reserve for all 
taxable years on the beisis of actual experience. 
"(5) TAX-EXEMPT INTEREST.— 
"(A) IN GENERAL.—Interest on specified private activity 
bonds reduced by any deduction (not allowable in comput-
ing the regular tax) which would have been allowable if 
such interest were includible in gross income. 
"(B) TREATMENT OF EXEMPT-INTEREST DIVIDENDS.—Under 
regulations prescribed by the Secretary, any exempt-in-
terest dividend (as defined in section 852(bX5)(A)) shall be 
treated as interest on a specified private activity bond to 
the extent of its proportionate share of the interest on such 
bonds received by the company paying such dividend. 
"(C) SPECIFIED PRIVATE ACTIVITY BONDS.— 
"(i) IN GENERAL.—For purposes of this part, the term 
'specified private activity bonds' means any private 
activity bond (as defined in section 141) issued after 
August 7, 1986. 
"(ii) EXCEPTION FOR QUALIFIED 501 (C) (3) BONDS.—For 
purposes of clause (i), the term 'private activity bond' 
shall not include any qualified 501(c)(3) bond (as defined 
in section 145). 
"(iii) EXCEPTION FOR REFUNDINGS.—For purposes of 
clause (i), the term 'private activity bond' shall not 
include any refunding bond if the refunded bond (or in 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2335 
the case of a series of refundings, the original bond) was 
issued before August 8, 1986. 
"(iv) CERTAIN BONDS ISSUED BEFORE SEPTEMBER i, 
1986.—For purposes of this subparagraph, a bond 
issued before September 1, 1986, shall be treated as 
issued before August 8, 1986, unless such bond would be 
a private activity bond i
f
— 
"(I) paragraphs (1) and (2) of section 141(b) were 
applied by substituting '25 percent' for *10 percent' 
each place it appears, 
"(II) paragraphs (3), (4), and (5) of section 141(b) 
did not apply, and 
"(III) subparagraph (B) of section 141(cXl) did not 
apply. 
"(6) APPRECIATED PROPERTY CHARITABLE DEDUCTION.— 
"(A) IN GENERAL.—The amount by which the deduction 
allowable under section 170 would be reduced if all capital 
gain property were taken into account at its adjusted basis. 
"(B) CAPITAL GAIN PROPERTY.—For purposes of subpara-
graph (A), the term 'capital gain property' has the meaning 
given to such term by section 170(b)(lXC)(iv). Such term 
shall not include any property to which an election under 
section 170(b)(l)(C)(iii) applies. 
"(7) ACCELERATED DEPRECIATION OR AMORTIZATION ON CERTAIN 
PROPERTY PLACED IN SERVICE BEFORE JANUARY 1, 1987.—The 
amounts which would be treated as items of tax preference with 
respect to the taxpayer under paragraphs (2), (3), (4), and (12) of 
this subsection (as in effect on the day before the date of the 
enactment of the Tax Reform Act of 1986). The preceding 
sentence shall not apply to any property to which section 56(a) 
(1) or (5) applies. 
"(b) STRAIGHT LINE RECOVERY OF INTANGIBLES DEFINED.—For pur-
poses of paragraph (2) of subsection (a)— 
"(1) IN GENERAL.—The term 'straight line recovery of intangi-
bles', when used with respect to intangible drilling and develop-
ment costs for any well, means (except in the case of an election 
under paragraph (2)) ratable amortization of such costs over the 
120-month period beginning with the month in which produc-
tion from such well begins. 
"(2) ELECTION.—If the taxpayer elects with respect to the 
intangible drilling and development costs for any well, the term 
'straight line recovery of intangibles' means any method which 
would be permitted for purposes of determining cost depletion 
with respect to such well and which is selected by the taxpayer 
for purposes of subsection (a)(2). 
"SEC. 
58. 
DENIAL 
OF 
CERTAIN 
LOSSES. 
"(a) DENIAL OF FARM Loss.— 
"(1) IN GENERAL.—For purposes of computing the amount of 
the alternative minimum taxable income for any taxable year 
of a taxpayer other than a corporation— 
"(A) DISALLOWANCE OF FARM LOSS.—NO loss of the tax-
payer for such taxable year from any tax shelter farm 
activity shall be allowed. 
"(B) DEDUCTION IN SUCCEEDING TAXABLE YEAR.—Any loss 
from a tax shelter farm activity disallowed under subpara-
100 STAT. 2336 
PUBLIC LAW 99-514—OCT. 22, 1986 
graph (A) shall be treated as a deduction allocable to such 
activity in the 1st succeeding taxable year. 
"(2) TAX SHELTER FARM ACTIVITY.—For purposes of this subsec-
tion, the term 'tax shelter farm activity' means— 
"(A) any farming syndicate as defined in section 464(c) (as 
modified by section 461(i)(4)(A)), and 
"(B) any other activity consisting of farming which is a 
passive activity (within the meaning of section 469(d), with-
out regard to paragraph (1)(B) thereof). 
"(3) APPLICATION TO PERSONAL SERVICE CORPORATIONS.—For 
purposes of paragraph (1), a personal service corporation (within 
the meaning of section 469(g)(1)(C)) shall be treated as a tax-
payer other than a corporation. 
"(b) DISALLOWANCE OF PASSIVE ACTIVITY LOSS.—In computing the 
alternative minimum taxable income of the taxpayer for any tax-
able year, section 469 shall apply, except that in applying section 
469— 
"(1) the adjustments of section 56 shall apply, 
"(2) any deduction to the extent such deduction is an item of 
tax preference under section 57(a) shall not be taken into 
account, and 
"(3) the provisions of section 469(1) (relating to phase-in of 
disallowance) shall not apply. 
"(c) SPECIAL RULES.—For purposes of this section— 
"(1) SPECIAL RULE FOR INSOLVENT TAXPAYERS.— 
"(A) IN GENERAL.—The amount of losses to which subsec-
tion (a) or (b) applies shall be reduced by the amount (if any) 
by which the taxpayer is insolvent as of the close of the 
taxable year. 
"(B) INSOLVENT.—For purposes of this paragraph, the 
term 'insolvent' means the excess of liabilities over the fair 
market value of assets. 
"(2) Loss ALLOWED FOR YEAR OF DISPOSITION OF FARM SHELTER 
ACTIVITY.—If the taxpayer disposes of his entire interest in any 
tax shelter farm activity during any taxable year, the amount of 
the 
loss 
attributable to such 
activity 
(determined 
after 
carryovers under subsection (a)(1)(B)) shall (to the extent other-
wise allowable) be allowed for such taxable year in computing 
alternative minimum taxable income and not treated as a loss 
from a tax shelter farm activity. 
"SEC. 59. OTHER DEPINITIONS AND SPECIAL RULES. 
"(a) ALTERNATIVE M I N I M U M TAX FOREIGN TAX CREDIT.—For pur-
poses of this part— 
"(1) IN GENERAL.—The alternative minimum tax foreign tax 
credit for any taxable year shall be the credit which would be 
determined under section 27(a) for such taxable year if— 
"(A) the amount determined under section 55(b)(1)(A) 
were the tax against which such credit was taken for 
purposes of section 904 for the taxable year and all prior 
taxable years beginning after December 31, 1986, 
"(B) section 904 were applied on the basis of alternative 
minimum taxable income instead of taxable income, and 
"(C) for purposes of section 904, any increase in alter-
native minimum taxable income by reason of section 
56(c)(1)(A) (relating to adjustment for book income) shall 
have the same proportionate source (and character) as 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2337 
alternative minimum taxable income determined without 
regard to such increase. 
"(2) LIMITATION TO 90 PERCENT OF TAX.— 
"(A) IN GENERAL.—The alternative minimum tax foreign 
tax credit for any taxable year shall not exceed the excess 
(if any) o
f
— 
"(i) the amount determined under section 55(bXlXA) 
for the taxable year, over 
"(ii) 10 percent of the amount which would be deter-
mined under section 55(bXl)(A) without regard to the 
alternative tax net operating loss deduction. 
"(B) CARRYBACK AND CARRYFORWARD.—If the alternative 
minimum tax foreign tax credit exceeds the amount deter-
mined under subparagraph (A), such excess shall, for pur-
poses of this part, be treated as an amount to which section 
904(c) applies. 
"(b) MINIMUM TAX NOT TO APPLY TO INCOME ELIGIBLE FOR SECTION 
936 CREDIT.—In the case of any corporation for which a credit is 
allowable for the taxable year under section 936, alternative mini-
mum taxable income shall not include any amount with respect to 
which the requirements of subparagraph (A) or (B) of section 
936(aXl) are met. 
"(c) TREATMENT OF ESTATES AND TRUSTS.—In the case of any estate 
or trust, the alternative minimum taxable income of such estate or 
trust and any beneficiary thereof shall be determined by applying 
part I of subchapter J with the adjustments provided in this part. 
"(d) APPORTIONMENT OF DIFFERENTLY TREATED ITEMS IN CASE OF 
CERTAIN ENTITIES.— 
"(1) IN GENERAL.—The differently treated items for the tax-
able year shall be apportioned (in accordance with regulations 
prescribed by the Secretary)— 
"(A) REGULATED INVESTMENT COMPANIES AND REAL ESTATE 
INVESTMENT TRUSTS.—In the case of a regulated investment 
company to which part I of subchapter M applies or a real 
estate investment company to which part II of subchapter 
M applies, between such company or trust and shareholders 
and holders of beneficial interest in such company or trust. 
"(B) COMMON TRUST FUNDS.—In the case of a common 
trust fund (as defined in section 584(a)), pro rata among the 
participants of such fund. 
"(2) DIFFERENTLY TREATED ITEMS.—For purposes of this sec-
tion, the term 'differently treated item' means any item of tax 
preference or any other item which is treated differently for 
purposes of this part than for purposes of computing the regular 
tax. 
"(e) OPTIONAL 10-YEAR WRITEOFF OF CERTAIN TAX PREFERENCES.— 
"(1) IN GENERAL.—For purposes of this title, any qualified 
expenditure to which an election under this paragraph applies 
shall be allowed as a deduction ratably over the 10-year period 
(3-year period in the case of circulation expenditures described 
in section 173) beginning with the taxable year in which such 
expenditure was made. 
"(2) QUALIFIED EXPENDITURE.—For purposes of this subsection, 
the term 'qualified expenditure' means any amount which, but 
for an election under this subsection, would have been allowable 
as a deduction for the taxable year in which paid or incurred 
under— 
100 STAT. 2338 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(A) section 173 (relating to circulation expenditures), 
"(B) section 174(a) (relating to research and experimental 
expenditures), 
"(C) section 263(c) (relating to intangible drilling and 
development expenditures), 
"(D) section 616(a) (relating to development expendi-
tures), or 
"(E) section 617(a) (relating to mining exploration 
expenditures). 
"(3) OTHER SECTIONS NOT APPLICABLE.—Except as provided in 
this subsection, no deduction shall be allowed under any other 
section for any qualified expenditure to which an election under 
this subsection applies. 
"(4) ELECTION.— 
"(A) IN GENERAL.—An election may be made under para-
graph (1) with respect to any portion of any qualified 
expenditure. 
"(B) REVOCABLE ONLY WITH CONSENT.—Any election 
under this subsection may be revoked only with the consent 
of the Secretary. 
"(C) PARTNERS AND SHAREHOLDERS OF S CORPORATIONS.—In 
the case of a partnership, any election under paragraph (1) 
shall be made separately by each partner with respect to 
the partner's allocable share of any qualified expenditure. 
A similar rule shall apply in the case of an S corporation 
and its shareholders. 
"(5) DISPOSITIONS.— 
"(A) APPLICATION OF SECTION 1254.—In the case of any 
disposition of property to which section 1254 applies (deter-
mined without regard to this section), any deduction under 
paragraph (1) with respect to amounts which are allocable 
to such property shall, for purposes of section 1254, be 
treated as a deduction allowable under section 263(c), 
616(a), or 617(a), whichever is appropriate. 
"(B) APPLICATION OF SECTION 617(d).—In the case of any 
disposition of mining property to which section 617(d) ap-
plies (determined without regard to this subsection), any 
deduction under paragraph (1) with respect to amounts 
which are allocable to such property shall, for purposes of 
section 617(d), be treated as a deduction allowable under 
section 617(a). 
"(6) AMOUNTS TO WHICH ELECTION APPLY NOT TREATED AS TAX 
PREFERENCE.—Any portion of any qualified expenditure to 
which an election under paragraph (1) applies shall not be 
treated as an item of tax preference under section 57(a) and 
section 56 shall not apply to such expenditure. 
"(f) COORDINATION WITH SECTION 291.—Except as otherwise pro-
vided in this part, section 291 (relating to cutback of corporate 
preferences) shall apply before the application of this part. 
"(g) TAX BENEFIT RULE.—The Secretary may prescribe regulations 
under which differently treated items shall be properly adjusted 
where the tax treatment giving rise to such items will not result in 
the reduction of the taxpayer's regular tax for any taxable year. 
"(h) COORDINATION WITH CERTAIN LIMITATIONS.—The limitations 
of sections 704(d), 465, and 1366(d) (and such other provisions as may 
be specified in regulations) shall be applied for purposes of comput-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2339 
ing the alternative minimum taxable income of the taxpayer for the 
taxable year— 
"(1) with the adjustments of section 56, and 
"(2) by not taking into account any deduction to the extent 
such deduction is an item of tax preference under section 57(a). 
"(i) SPECIAL RULE FOR INTEREST TREATED AS TAX PREFERENCE.— 
For purposes of this subtitle, interest shall not fail to be treated as 
wholly exempt from tax imposed by this title solely by reason of 
being included in alternative minimum taxable income." 
(b) CREDIT AGAINST REGULAR TAX FOR PRIOR YEAR MINIMUM TAX 
LIABILITY.—Part IV of subchapter A of chapter 1 (relating to credits 
allowable) is amended by adding at the end thereof the following 
new subpart: 
"Subpart G—Credit Against Regular Tax for Prior Year Minimum 
Tax Liability 
"Sec. 53. Credit for prior year minimum tax liability. 
"SEC. 53. CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY. 
"(a) ALLOWANCE OF CREDIT.—There shall be allowed as a credit 
against the tax imposed by this chapter for any taxable year an 
amount equal to the minimum tax credit for such taxable year. 
"(b) MINIMUM TAX CREDIT.—For purposes of subsection (a), the 
minimum tax credit for any taxable year is the excess (if any) of^ 
"(1) the adjusted net minimum tax imposed for all prior 
taxable years beginning after 1986, over 
"(2) the amount allowable as a credit under subsection (a) for 
such prior taxable years. 
"(c) LIMITATION.—The credit allowable under subsection (a) for 
any taxable year shall not exceed the excess (if any) o
f
— 
"(1) the regular tax liability of the taxpayer for such taxable 
year reduced by the sum of the credits allowable under subparts 
A, B, D, E, and F of this part, over 
"(2) the tentative minimum tax for the taxable year. 
"(d) DEFINITIONS.—For purposes of this section— 
"(1) NET MINIMUM TAX.— 
"(A) IN GENERAL.—The term 'net minimum tax' means 
the tax imposed by section 55. 
"(B) CREDIT NOT ALLOWED FOR EXCLUSION PREFERENCES.— 
"(i) ADJUSTED NET MINIMUM TAX.—The adjusted net 
minimum tax for any taxable year is— 
"(I) the amount of the net minimum tax for such 
taxable year, reduced by 
"(II) the amount which would be the net mini-
mum tax for such taxable year if the only adjust-
ments and items of tax preference taken into ac-
count were those specified in clause (ii). 
"(ii) SPECIFIED ITEMS.—The following are specified in 
this clause— 
"(I) the adjustments provided for in subsections 
(b)(1) and (c)(3) of section 56, and 
"(II) the items of tax preference described in 
paragraphs (1), (5), and (6) of section 57(a). 
In the case of taxable years beginning after 1989, the 
adjustments provided in section 56(g) shall be treated 
as specified in this clause to the extent attributable to 
100 STAT. 2340 
PUBLIC LAW 99-514—OCT. 22, 1986 
items which are excluded from gross income for any 
taxable year for purposes of the regular tax, or are not 
deductible for any taxable year under the adjusted 
earnings and profits method of section 56(g). 
"(2) TENTATIVE MINIMUM TAX.—The term 'tentative minimum 
tax' has the meaning given to such term by section 55(b)." 
(c) CREDITS NOT ALLOWABLE AGAINST MINIMUM TAX.— 
(1) PERSONAL CREDITS.— 
(A) IN GENERAL.—Subsection (a) of section 26 (relating to 
limitation based on amount of tax) is amended to read as 
follows: 
"(a) LIMITATION BASED ON AMOUNT OF TAX.—The aggregate 
amount of credits allowed by this subpart for the taxable year shall 
not exceed the excess (if any) o
f
— 
"(1) the taxpayer's regular tax liability for the taxable year, 
over 
"(2) the tentative minimum tax for the taxable year (deter-
mined without regard to the alternative minimum tax foreign 
tax credit)." 
(B) REGULAR TAX LIABILITY.—Subsection (b) of section 26 
(as amended by title II) is amended— 
(i) by striking out "this section" in the matter preced-
ing paragraph (1) and inserting in lieu thereof "this 
part", 
(ii) by striking out "tax liability" in paragraph (1) 
and inserting in lieu thereof "regular tax liability", 
(iii) by striking out subparagraph (A) of paragraph (2) 
and inserting in lieu thereof the following: 
"(A) section 55 (relating to minimum tax),", 
(iv) by striking out "and" at the end of paragraph 
(2)(H), by striking out the period at the end of para-
graph (2)(I) and inserting in lieu thereof ", and", and by 
adding at the end of paragraph (2) the following new 
subparagraph: 
"(J) sections 871(a) and 881 (relating to certain income of 
nonresident aliens and foreign corporations,", and 
(v) by striking out "TAX LIABILITY" in the subsection 
heading and inserting in lieu thereof "REGULAR TAX 
LIABILITY". 
(C) TENTATIVE MINIMUM TAX.—Subsection (c) of section 26 
is amended to read as follows: 
"(c) TENTATIVE MINIMUM TAX.—For purposes of this part, the 
term 'tentative minimum tax' means the amount determined under 
section 55(b)(1)." 
(2) CREDIT FOR CLINICAL TESTING EXPENSES.—Paragraph (2) of 
section 28(d) is amended to read as follows: 
"(2) LIMITATION BASED ON AMOUNT OF TAX.—The credit al-
lowed by this section for any taxable year shall not exceed the 
excess (if any) o
f
— 
"(A) the regular tax (reduced by the sum of the credits 
allowable under subpart A and section 27), over 
"(B) the tentative minimum tax for the taxable year." 
(3) CREDIT FOR PRODUCTION OF FUEL FROM NONCONVENTIONAL 
SOURCES.—Paragraph (5) of section 29(b) is amended to read as 
follows: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2341 
"(5) APPLICATION WITH OTHER CREDITS.—The credit allowed by 
subsection (a) for any taxable year shall not exceed the excess (if 
any) o
f
— 
"(A) the regular tax for the taxable year reduced by the 
sum of the credits allowable under subpart A and sections 
27 and 28, over 
"(B) the tentative minimum tax for the taxable year." 
(4) GENERAL BUSINESS CREDIT.—Subsection (c) of section 38 
(relating to limitation based on amount of tax), as amended by 
section 631(a), is amended by redesignating paragraph (3) as 
paragraph (4), and by striking out paragraphs (1) and (2) and 
inserting in lieu thereof the following: 
"(1) IN GENERAL.—The credit allowed under subsection (a) for 
any taxable year shall not exceed the lesser o
f
— 
"(A) the allowable portion of the taxpayer's net regular 
tax liability for the taxable year, or 
"(B) the excess (if any) of the taxpayer's net regular tax 
liability for the taxable year over the tentative minimum 
tax for the taxable year. 
"(2) ALLOWABLE PORTION OF NET REGULAR TAX LIABILITY.—For 
purposes of this subsection, the allowable portion of the tax-
payer's net regular tax liability for the taxable year is the sum 
of-
"(A) so much of the taxpayer's net regular tax liability for 
the taxable year as does not exceed $25,000, plus 
"(B) 75 percent of so much of the taxpayer's net regular 
tax liability for the taxable year as exceeds $25,000. 
For purposes of the preceding sentence, the term 'net regular 
tax liability' means the regular tax liability reduced by the sum 
of the credits allowable under subparts A and B of this part. 
"(3) REGULAR INVESTMENT TAX CREDIT MAY OFFSET 25 PERCENT 
OF MINIMUM TAX.—In the case of any C corporation, to the 
extent the credit under subsection (a) is attributable to the 
application of the regular percentage under section 46, the 
limitation of paragraph (1) shall be the greater o
f
— 
"(A) the lesser o
f
— 
"(i) the allowable portion of the taxpayer's net regu-
lar tax liability for the taxable year, or 
"(ii) the excess (if any) of the taxpayer's net regular 
tax liability for the taxable year over 75 percent of the 
tentative minimum tax for the taxable year, or 
"(B) 25 percent of the taxpayer's tentative minimum tax 
for the year." 
In no event shall this paragraph permit the allowance of a 
credit which (in combination with the alternative tax net 
operating loss deduction and the alternative minimum tax for-
eign tax credit) would reduce the tax payable under section 55 
below an amount equal to 10 percent of the amount which 
would be determined under section 55(b) without regard to the 
alternative tax net operating loss deduction and the alternative 
minimum tax foreign tax credit." 
(d) ESTIMATED TAX PROVISIONS TO APPLY TO CORPORATE MINIMUM 
TAX.— 
(1) Paragraph (1) of section 6154(c) is amended to read as 
follows: 
"(1) The amount which the corporation estimates as the sum 
of— 
100 STAT. 2342 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(A) the income tax imposed by section 11 or 1201(a), or 
subchapter L of chapter 1, whichever applies, and 
"(B) the minimum tax imposed by section 55, over" 
(2) Subparagraph (A) of section 6425(c)(1) is amended to read 
as follows: 
"(A) The sum of— 
"(i) the tax imposed by section 11 or 1201(a), or 
subchapter L of chapter 1, whichever is applicable, plus 
"(ii) the tax imposed by section 55, over". 
(3) Paragraph (1) of section 6655(f) is amended to read as 
follows: 
"(1) the sum o
f
— 
"(A) the tax imposed by section 11 or 1201(a), or sub-
chapter L of chapter 1, whichever is applicable, plus 
"(B) the tax imposed by section 55, over". 
(e) TECHNICAL AMENDMENTS.— 
(1) APPLICATION OF SECTION 381.—Subsection (c) of section 381 
is amended by adding at the end thereof the following new 
paragraph: 
"(27) CREDIT UNDER SECTION 53.—The acquiring corporation 
shall take into account (to the extent proper to carry out the 
purposes of this section and section 53, and under such regula-
tions as may be prescribed by the Secretary) the items required 
to be taken into account for purposes of section 53 in respect of 
the distributor or transferor corporation." 
(2) LIMITATION IN CASE OF CONTROLLED CORPORATIONS.— 
Subsection (a) of section 1561 (relating to limitations on certain 
multiple tax benefits in the case of certain controlled corpora-
tions) is amended— 
(A) by striking out "and" at the end of paragraph (1), by 
striking out the period at the end of paragraph (2) and 
inserting in lieu thereof ", and" and by inserting after 
paragraph (2) the following new paragraph: 
"(3) one $40,000 exemption amount for purposes of computing 
the amount of the minimum tax.", 
(B) by striking out "amounts specified in paragraph (1)" 
and inserting in lieu thereof "amounts specified in para-
graph (1) (and the amount specified in paragraph (3))", and 
(C) by adding at the end thereof the following new sen-
tence: "In applying section 55(d)(3), the alternative mini-
mum taxable income of all component members shall be 
taken into account and any decrease in the exemption 
amount shall be allocated to the component members in the 
same manner as under paragraph (3)." 
(3) TREATMENT OF SHORT TAXABLE YEARS.—Subsection (d) of 
section 443 (relating to adjustment in computing minimum tax 
for tax preference) is amended to read as follows: 
"(d) ADJUSTMENT IN COMPUTING MINIMUM TAX AND TAX PREF-
ERENCES.—If a return is made for a short period by reason of 
subsection (a)— 
"(1) the alternative minimum taxable income for the short 
period shall be placed on an annual basis by multiplying such 
amount by 12 and dividing the result by the number of months 
in the short period, and 
"(2) the amount computed under paragraph (1) of section 55(a) 
shall bear the same relation to the tax computed on the annual 
basis as the number of months in the short period bears to 12." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2343 
(4) CONFORMING AMENDMENTS.— 
(A) Paragraph (4) of section 5(a) is amended to read as 
follows: 
"(4) For alternative minimum tax, see section 55." 
(B) Paragraph (7) of section 12 is amended to read as 
follows: 
"(7) For alternative minimum tax, see section 55." 
(C) Subparagraph (D) of section 48(d)(4) is amended by 
striking out "section 57(c)(1)(B)" and inserting in lieu 
thereof "section 57(c)(1)(B) (as in effect on the day before the 
date of the enactment of the Tax Reform Act of 1986)". 
(D) Section 173(b), 174(e)(2), 263(c), and 1016(a)(24) (as 
redesignated by section 634(b)(2)) are each amended by 
striking out "section 58(i)" and inserting in lieu thereof 
"section 59(d)". 
(E) Subsection (b) of section 703 (relating to elections of 
the partnership), as amended by title V, is amended by 
striking out paragraph (1) and by redesignating paragraphs 
(2) through (4) as paragraphs (1) through (3), respectively. 
(F) Paragraph (1) of section 882(a) (relating to imposition 
of tax on income of foreign corporations connected with 
United States business) is amended by striking out "or 
1201(a)" and inserting in lieu thereof ", 55, or 1201(a)". 
(G) So much of section 897(a)(2) as precedes subparagraph 
(B) thereof is amended to read as follows: 
"(2) 21-PERCENT MINIMUM TAX ON NONRESIDENT ALIEN INDIVID-
UALS.— 
"(A) IN GENERAL.—In the case of any nonresident alien 
individual, the amount determined under section 55(b)(1)(A) 
shall not be less than 21 percent of the lesser o
f
— 
"(i) the individual's alternative minimum taxable 
income (as defined in section 55(b)(2)) for the taxable 
year, or 
"(ii) the individual's net United States real property 
gain for the taxable year." 
(H) Paragraph (2) of section 904(i) (relating to cross ref-
erences) is amended by striking out "by an individual" and 
all that follows and inserting in lieu thereof "against the 
alternative minimum tax, see section 59(a)." 
(I) Paragraph (3) of section 936(a) is amended by striking 
out subparagraph (A) and by redesignating subparagraphs 
(B), (C), and (E) as subparagraphs (A), (B), and (C), respec-
tively. 
(J) Subsection (a) of section 1363 is amended by striking 
out "and in section 58(d)". 
(K) Paragraph (2) of section 1366(f) (relating to reduction 
in pass-thru for tax imposed on capital gain) is amended by 
striking out "56 or", 
(f) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as otherwise provided in this subsec-
tion, the amendments made by this section shall apply to 
taxable years beginning after December 31, 1986. 
(2) ADJUSTMENT OF NET OPERATING LOSS.— 
(A) INDIVIDUALS.—In the case of a net operating loss of an 
individual for a taxable year beginning after December 31, 
100 STAT. 2344 
PUBLIC LAW 99-514—OCT. 22, 1986 
1982, and before January 1, 1987, for purposes of determin-
ing the amount of such loss which may be carried to a 
taxable year beginning after December 31, 1986, for pur-
poses of the minimum tax, such loss shall be adjusted in the 
manner provided in section 55(d)(2) of the Internal Revenue 
Code of 1954 as in effect on the day before the date of the 
enactment of this Act. 
(B) CORPORATIONS.—If the minimum tax of a corporation 
was deferred under section 56(b) of the Internal Revenue 
Code of 1954 (as in effect on the day before the date of the 
enactment of this Act) for any taxable year beginning 
before January 1, 1987, and the amount of such tax has not 
been paid for any taxable year beginning before January 1, 
1987, the amount of the net operating loss carryovers of 
such corporation which may be carried to taxable years 
beginning after December 31, 1986, for purposes of the 
minimum tax shall be reduced by the amount of tax pref-
erences a tax on which was so deferred. 
(3) INSTALLMENT SALES.—Section 56(a)(6) of the Internal Reve-
nue Code of 1986 (as amended by this section) shall not apply to 
any disposition to which the amendments made by section 811 
of this Act (relating to allocation of dealer's indebtedness to 
installment obligations) do not apply by reason of section 
811(c)(2) of this Act. 
(4) 
EXCEPTION 
FOR 
CHARITABLE 
CONTRIBUTIONS 
BEFORE 
AUGUST 16, 1986.—Section 57(a)(6) of the Internal Revenue Code 
of 1986 (as amended by this section) shall not apply to any 
deduction attributable to contributions made before August 16, 
1986. 
(5) BOOK INCOME.— 
(A) IN GENERAL.—In the case of a corporation to which 
this paragraph applies, the amount of any increase for any 
taxable year under section 56(c)(1)(A) of the Internal Reve-
nue Code of 1986 (as added by this section) shall be reduced 
(but not below zero) by the excess (if any) o
f
— 
(i) 50 percent of the excess of taxable income for the 
5-taxable year period ending with the taxable year 
preceding the 1st taxable year to which such section 
applies over the adjusted net book income for such 
period, over 
(ii) the aggregate amounts taken into account under 
this paragraph for preceding taxable years. 
(B) TAXPAYER TO WHOM PARAGRAPH APPLIES.—This para-
graph applies to a taxpayer which was incorporated in 
Delaware on May 31, 1912. 
(C) TERMS.—Any term used in this paragraph which is 
used in section 56 of such Code (as so added) shall have the 
same meaning as when used in such section. 
(6) CERTAIN PUBLIC UTILITY.— 
(A) In the case of investment tax credits described in 
subparagraph (B) or (C), subsection 38(c)(3)(A)(ii) of the In-
ternal Revenue Code of 1986 shall be applied by substitut-
ing "25 percent" for "75 percent", and section 38(c)(3XB) of 
the Internal Revenue Code of 1986 shall be applied by 
substituting "75 percent" for "25 percent". 
(B) If, on September 25, 1985, a regulated electric utility 
owned an undivided interest, within the range of 1,111 and 
1,149, in 
the 
"maximum 
dependable 
capacity, 
net, 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2345 
megawatts electric" of an electric generating unit located 
in Illinois or Mississippi for which a binding written con-
tract was in effect on December 31, 1980, then any invest-
ment tax credit with respect to such unit shall be described 
in this subparagraph. The aggregate amount of investment 
tax credits with respect to such unit shall be described in 
this subparagraph. 
(C) If, on September 25, 1985, a regulated electric utility 
owned an undivided interest, within the range of 1,104 and 
1,111, in the 
"maximum 
dependable 
capacity, 
net, 
megawatts electric" of an electric generating unit located 
in Louisiana for which a binding written contract was in 
effect on December 31, 1980, then any investment tax credit 
of such electric utility shall be described in this subpara-
graph. The aggregate amount of investment tax credits 
allowed solely by reason of being described by this subpara-
graph shall not exceed $20,000,000. 
SEC. 702. STUDY OF BOOK AND EARNINGS AND PROFITS ADJUSTMENTS. 
The Secretary of the Treasury or his delegate shall conduct a 
study of the operation and effect of the provisions of sections 56(f) 
and 56(g) of the Internal Revenue Code of 1986. 
TITLE VIII—ACCOUNTING PROVISIONS 
Subtitle A—General Provisions 
SEC. 801. LIMITATION ON USE OF CASH METHOD OF ACCOUNTING. 
(a) GENERAL RULE.—Subpart A of part II of subchapter E of 
chapter 1 (relating to methods of accounting) is amended by adding 
at the end thereof the following new section: 
"SEC. 448. LIMITATION ON USE OF CASH METHOD OF ACCOUNTING. 
"(a) GENERAL RULE.—Except as otherwise provided in this section, 
in the case of a— 
"(1) C corporation, 
"(2) partnership which has a C corporation as a partner, or 
"(3) tax shelter, 
taxable income shall not be computed under the cash receipts and 
disbursements method of accounting. 
"(b) EXCEPTIONS.— 
"(1) FARMING BUSINESS.—Paragraphs (1) and (2) of subsection 
(a) shall not apply to any farming business. 
"(2) QUALIFIED PERSONAL SERVICE CORPORATIONS.—Paragraphs 
(1) and (2) of subsection (a) shall not apply to a qualified 
personal service corporation, and such a corporation shall be 
treated as an individual for purposes of determining whether 
paragraph (2) of subsection (a) applies to any partnership. 
"(3) 
ENTITIES WITH GROSS RECEIPTS OF NOT MORE THAN 
$5,000,000.—Paragraphs (1) and (2) of subsection (a) shall not 
apply to any corporation or partnership for any taxable year if, 
for all prior taxable years beginning after December 31, 1985, 
such entity (or any predecessor) met the $5,000,000 gross re-
ceipts test of subsection (c). 
"(c) $5,000,000 
GROSS RECEIPTS TEST.—For purposes of this 
section— 
100 STAT. 2346 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(1) IN GENERAL.—A corporation or partnership meets the 
$5,000,000 gross receipts test of this subsection for any prior 
taxable year if the average annual gross receipts of such entity 
for the 3-taxable-year period ending with such prior taxable 
year does not exceed $5,000,000. 
"(2) AGGREGATION RULES.—All persons treated as a single 
employer under subsection (a) or (b) of section 52 or subsection 
(m) or (o) of section 414 shall be treated as one person for 
purposes of paragraph (1). 
"(3) SPECIAL RULES.—For purposes of this subsection— 
"(A) NOT IN EXISTENCE FOR ENTIRE 3-YEAR PERIOD.—If the 
entity was not in existence for the entire 3-year period 
referred to in paragraph (1), such paragraph shall be ap-
plied on the basis of the period during which such entity (or 
trade or business) was in existence. 
"(B) SHORT TAXABLE YEARS.—Gross receipts for any tax-
able year of less than 12 months shall be annualized by 
multiplying the gross receipts for the short period by 12 and 
dividing the result by the number of months in the short 
period. 
"(C) GROSS RECEIPTS.—Gross receipts for any taxable year 
shall be reduced by returns and allowances made during 
such year. 
"(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) FARMING BUSINESS.— 
"(A) IN GENERAL.—The term 'farming business' means 
the trade or business of farming (within the meaning of 
section 263A(e)(4)). 
"(B) TIMBER AND ORNAMENTAL TREES.—The term 'farming 
business' includes the raising, harvesting, or growing of 
trees to which section 263A(c)(5) applies. 
"(2) QUALIFIED PERSONAL SERVICE CORPORATION.—The term 
'qualified personal service corporation' means any corpora-
tion— 
"(A) substantially all of the activities of which involve the 
performance of services in the fields of health, law, 
engineering, architecture, accounting, actuarial science, 
performing arts, or consulting, and 
"(B) substantially all of the stock of which Qyy value) is 
held directly or indirectly by— 
"(i) employees performing services for such corpora-
tion in connection with the activities involving a field 
referred to in subparagraph (A), 
"(ii) retired employees who had performed such serv-
ices for such corporation, 
"(iii) the estate of any individual described in clause 
(i) or (ii), or 
"(iv) any other person who acquired such stock by 
reason of the death of an individual described in clause 
(i) or (ii) (but only for the 2-year period beginning on 
the date of the death of such individual). 
"(3) TAX SHELTER DEFINED.—The term 'tax shelter' has the 
meaning given such term by section 461(i)(3) (determined after 
application of paragraph (4) thereof). 
"(4) SPECIAL RULES FOR APPLICATION OF PARAGRAPH (2).—For 
purposes of paragraph (2)— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2347 / 
"(A) community property laws shall be disregarded, 
"(B) stock held by a plan described in section 401(a) which 
is exempt from tax under section 501(a) shall be treated as 
held by an employee described in paragraph (2)(B)(i), and 
"(C) at the election of the common parent of an affiliated 
group (within the meaning of section 1504(a)), all members 
of such group may be treated as 1 taxpayer for purposes of 
paragraph (2)(B) if substantially all of the activities of all 
such members involve the performance of services in the 
same field described in paragraph (2)(A). 
"(5) SPECIAL RULE FOR SERVICES.—In the case of any person 
using an accrual method of accounting with respect to amounts 
to be received for the performance of services by such person, 
such person shall not be required to accrue any portion of such 
amounts which (on the basis of experience) will not be collected. 
This paragraph shall not apply to any amount if interest is 
required to be paid on such amount or there is any penalty for 
failure to timely pay such amount. 
"(6) TREATMENT OF CERTAIN TRUSTS SUBJECT TO TAX ON UNRE-
LATED BUSINESS INCOME.—For purposes of this section, a trust 
subject to tax under section 511(b) shall be treated as a C 
corporation with respect to its activities constituting an unre-
lated trade or business. 
"(7) COORDINATION WITH SECTION 481.—In the case of any 
taxpayer required by this section to change its method of 
accounting for any taxable year— 
"(A) such change shall be treated as initiated by the 
taxpayer, 
"(B) such change shall be treated as made with the 
consent of the Secretary, and 
"(C) the period for taking into account the adjustments 
under section 481 by reason of such change— 
"(i) except as provided in clause (ii), shall not exceed 
4 years, and 
"(ii) in the case of a hospital, shall be 10 years." 
(b) COORDINATION WITH APPLICATION OF ECONOMIC PERFORMANCE 
RULES TO TAX SHELTERS.— 
(1) IN GENERAL.—So much of section 461(i) as precedes para-
graph (3) thereof is amended to read as follows: 
"(i) SPECIAL RULES FOR TAX SHELTERS.— 
"(1) RECURRING ITEM EXCEPTION NOT TO APPLY.—In the case of 
a tax shelter, economic performance shall be determined with-
out regard to paragraph (3) of subsection (h). 
"(2) SPECIAL RULE FOR SPUDDING OF OIL OR GAS WELLS.—In the 
case of a tax shelter, economic performance with respect to the 
act of drilling an oil or gas well shall be treated as having 
occurred within a taxable year if drilling of the well commences 
before the close of the 90th day after the close of the taxable 
year." 
(2) CONFORMING AMENDMENT.—Paragraph (4) of section 461(i) 
is amended to read as follows: 
"(4) SPECIAL RULES FOR FARMING.—In the case of the trade or 
business of farming (as defined in section 464(e)), in determining 
whether an entity is a tax shelter, the definition of farming 
syndicate in section 464(c) shall be substituted for subpara-
graphs (A) and (B) of paragraph (3)." 
100 STAT. 2348 
PUBLIC LAW 99-514—OCT. 22, 1986 
(c) CLERICAL AMENDMENT.—The table of sections for subpart A of 
part II of subchapter E of chapter 1 is amended by adding at the end 
thereof the following new item: 
"Sec. 448. Limitation on use of cash method of accounting." 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to taxable years 
beginning after December 31, 1986. 
(2) ELECTION TO RETAIN CASH METHOD FOR CERTAIN TRANS-
ACTIONS.—A taxpayer may elect not to have the amendments 
made by this section apply to any loan or lease, or any trans-
action with a related party (within the meaning of section 267(b) 
of the Internal Revenue Code of 1954, as in effect before the 
enactment of this Act), entered into on or before September 25, 
1985. Any election under the preceding sentence may be made 
separately with respect to each transaction. 
(3) CERTAIN CONTRACTS.—The amendments made by this sec-
tion shall not apply to— 
(A) contracts for the acquisition or transfer of real prop-
erty, and 
(B) contracts for services related to the acquisition or 
development of real property, 
but only if such contracts were entered into before September 
25, 1985, and the sole element of the contract which has not 
been performed as of September 25, 1985, is payment for such 
property or services. 
(4) TREATMENT OF AFFILIATED GROUP PROVIDING ENGINEERING 
SERVICES.—Each member of an affiliated group of corporations 
(within the meaning of section 1504(a) of the Internal Revenue 
Code of 1986) shall be allowed to use the cash receipts and 
disbursements method of accounting for any trade or business of 
providing engineering services with respect to taxable years 
ending after December 31, 1986, if the common parent of such 
group— 
(A) was incorporated in the State of Delaware in 1970, 
(B) was the successor to a corporation that was incor-
porated in the State of Illinois in 1949, and 
(C) used the completed contract method of accounting for 
a substantial part of its income from the performance of 
engineering services. 
SEC. 802. SIMPLIFIED DOLLAR-VALUE LIFO METHOD FOR CERTAIN 
SMALL BUSINESSES. 
(a) GENERAL RULE.—Section 474 (relating to election by certain 
small businesses to use one inventory pool) is amended to read as 
follows: 
"SEC. 474. SIMPLIFIED DOLLAR-VALUE LIFO METHOD FOR CERTAIN 
SMALL BUSINESSES. 
"(a) GENERAL RULE.—An eligible small business may elect to use 
the simplified dollar-value method of pricing inventories for pur-
poses of the LIFO method. 
"(b) 
SIMPLIFIED 
DOLLAR-VALUE 
METHOD 
OF PRICING 
INVEN-
TORIES.—For purposes of this section— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2349 
"(1) IN GENERAL.—The simplified dollar-value method of pric-
ing inventories is a dollar-value method of pricing inventories 
under which— 
"(A) the taxpayer maintains a separate inventory pool for 
items in each major category in the applicable Government 
price index, and 
"(B) the adjustment for each such separate pool is based 
on the change from the preceding taxable year in the 
component of such index for the major category. 
"(2) APPLICABLE GOVERNMENT PRICE INDEX.—The term 'ap-
plicable Government price index' means— 
"(A) except as provided in subparagraph (B), the Producer 
Price Index published by the Bureau of Labor Statistics, or 
"(B) in the case of a retailer using the retail method, the 
Consumer Price Index published by the Bureau of Labor 
Statistics. 
"(3) MAJOR CATEGORY.—The term 'major category' means— 
"(A) in the case of the Producer Price Index, any of the 2-
digit standard industrial classifications in the Producer 
Prices Data Report, or 
"(B) in the case of the Consumer Price Index, any of the 
general expenditure categories in the Consumer Price 
Index Detailed Report. 
"(c) ELIGIBLE SMALL BUSINESS.—For purposes of this section, a 
taxpayer is an eligible small business for any taxable year if the 
average annual gross receipts of the taxpayer for the 3 preceding 
taxable years do not exceed $5,000,000. For purposes of the preced-
ing sentence, rules similar to the rules of section 448(c)(3) shall 
apply. 
"(d) SPECIAL RULES.—For purposes of this section— 
"(1) CONTROLLED GROUPS.— 
"(A) IN GENERAL.—In the case of a taxpayer which is a 
member of a controlled group, all persons which are compo-
nent members of such group shall be treated as 1 taxpayer 
for purposes of determining the gross receipts of the tax-
payer. 
"(B) 
CONTROLLED GROUP 
DEFINED.—For 
purposes of 
subparagraph (A), persons shall be treated as being compo-
nent members of a controlled group if such persons would 
be treated as a single employer under section 52. 
"(2) ELECTION.— 
"(A) IN GENERAL.—The election under this section may be 
made without the consent of the Secretary. 
"(B) PERIOD TO WHICH ELECTION APPLIES.—The election 
under this section shall apply— 
"(i) to the taxable year for which it is made, and 
"(ii) to all subsequent taxable years for which the 
taxpayer is an eligible small business, 
unless the taxpayer secures the consent of the Secretary to 
the revocation of such election. 
"(3) LIFO METHOD.—The term 'LIFO method' means the 
method provided by section 472(b). 
"(4) TRANSITIONAL RULES.— 
"(A) IN GENERAL.—In the case of a year of change under 
this section— 
"(i) the inventory pools shall— 
100 STAT. 2350 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(I) in the case of the 1st taxable year to which 
such an election applies, be established in accord-
ance with the major categories in the applicable 
Government price index, or 
"(ID in the case of the 1st taxable year after such 
election ceases to apply, be established in the 
manner provided by regulations under section 472; 
"(ii) the aggregate dollar amount of the taxpayer's 
inventory as of the beginning of the year of change 
shall be the same as the aggregate dollar value as of 
the close of the taxable year preceding the year of 
change, and 
"(iii) the year of change shall be treated as a new 
base year in accordance with procedures provided by 
regulations under section 472. 
"(B) YEAR OF CHANGE.—For purposes of this paragraph, 
the year of change under this section is— 
"(i) the 1st taxable year to which an election under 
this section applies, or 
"(ii) in the case of a cessation of such an election, the 
1st taxable year after such election ceases to apply." 
(b) CLERICAL AMENDMENT.—The table of sections for subpart D of 
part II of subchapter E of chapter 1 is amended by striking out the 
item relating to section 474 and inserting in lieu thereof the 
following: 
"Sec. 474. Simplified dollar-value LIFO method for certain small busi-
nesses." 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
(2) TREATMENT OF TAXPAYERS WHO MADE ELECTIONS UNDER 
EXISTING SECTION 474.—The amendments made by this section 
shall not apply to any taxpayer who made an election under 
section 474 of the Internal Revenue Code of 1954 (as in effect on 
the day before the date of the enactment of this Act) for any 
period during which such election is in effect. Notwithstanding 
any provision of such section 474 (as so in effect), an election 
under such section may be revoked without the consent of the 
Secretary. 
SEC. 803. CAPITALIZATION AND INCLUSION IN INVENTORY COSTS OF 
CERTAIN EXPENSES. 
(a) GENERAL RULE.—Part IX of subchapter B of chapter 1 (relating 
to items not deductible) is amended by inserting after section 263 
the following new section: 
"SEC. 263A. CAPITALIZATION AND INCLUSION IN INVENTORY COSTS OF 
CERTAIN EXPENSES. 
"<a) NONDEDUCTIBIUTY OF CERTAIN DIRECT AND INDIRECT COSTS.— 
"(1) IN GENERAL.—In the case of any property to which this 
section applies, any costs described in paragraph (2)— 
"(A) in the case of property which is inventory in the 
hands of the taxpayer, shall be included in inventory costs, 
and 
"(B) in the case of any other property, shall be capital-
ized. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2351 
"(2) ALLOCABLE COSTS.—The costs described in this paragraph 
with respect to any property are— 
"(A) the direct costs of such property, and 
"(B) such property's proper share of those indirect costs 
(including taxes) part or all of which are allocable to such 
property. 
"(b) PROPERTY TO WHICH SECTION APPUES.—Except as otherwise 
provided in this section, this section shall apply to— 
"(1) PROPERTY PRODUCED BY TAXPAYER.—Real or tangible per-
sonal property produced by the taxpayer. 
"(2) PROPERTY ACQUIRED FOR RESALE.— 
"(A) I N GENERAL.—Real or personal property described in 
section 1221(1) which is acquired by the taxpayer for resale. 
"(B) EXCEPTION FOR TAXPAYER WITH GROSS RECEIPTS OF 
$10,000,000 OR LESS.—Subparagraph (A) shall not apply to 
any personal property acquired during any taxable year by 
the taxpayer for resale if the average annual gross receipts 
of the taxpayer (or any predecessor) for the 3-taxable year 
period ending with the taxable year preceding such taxable 
year do not exceed $10,000,000. 
"(C) AGGREGATION RULES, ETC.—For purposes of subpara-
graph (B), rules similar to the rules of paragraphs (2) and (3) 
of section 448(c) shall apply. 
For purposes of paragraph (1), the term 'tangible personal property' 
shall include a film, sound recording, video tape, book, or similar 
property. 
"(c) GENERAL EXCEPTIONS.— 
"(1) PERSONAL USE PROPERTY.—This section shall not apply to 
any property produced by the taxpayer for use by the taxpayer 
other than in a trade or business or an activity conducted for 
profit. 
"(2) RESEARCH AND EXPERIMENTAL EXPENDITURES.—This sec-
tion shall not apply to any amount allowable as a deduction 
under section 174. 
"(3) CERTAIN DEVELOPMENT AND OTHER COSTS OF OIL AND GAS 
WELLS OR OTHER MINERAL PROPERTY.—This section shall not 
apply to any cost allowable as a deduction under section 263(c), 
616(a), or 617(a). 
"(4) COORDINATION WITH LONG-TERM CONTRACT RULES.—This 
section shall not apply to any property produced by the tax-
payer pursuant to a long-term contract. 
"(5) TIMBER AND CERTAIN ORNAMENTAL TREES.—This section 
shall not apply to— 
"(A) trees raised, harvested, or grown by the taxpayer 
other than trees described in clause (ii) of subsection 
(eX4XB) (after application of the last sentence thereof), and 
"(B) any real property underlying such trees. 
"(d) EXCEPTION FOR FARMING BUSINESSES.— 
"(1) SECTION TO APPLY ONLY IF PREPRODUCTIVE PERIOD IS MORE 
THAN 2 YEARS.— 
"(A) I N GENERAL.—This section shall not apply to any 
plant or animal which is produced by the taxpayer in a 
farming business and which has a preproductive period of 2 
years or less. 
"(B) EXCEPTION FOR TAXPAYERS REQUIRED TO USE ACCRUAL 
METHOD.—Subparagraph (A) shall not apply to any corpora-
100 STAT. 2352 
PUBLIC LAW 99-514—OCT. 22, 1986 
tion, partnership, or tax shelter required to use an accrual 
method of accounting under section 447 or 448(aX3). 
"(2) 
TREATMENT OF CERTAIN PLANTS LOST BY REASON OF 
CASUALTY.— 
"(A) IN GENERAL.—If plants bearing an edible crop for 
human consumption were lost or damaged (while in the 
hands of the taxpayer) by reason of freezing temperatures, 
disease, drought, pests, or casualty, this section shall not 
apply to any costs of the taxpayer of replanting plants 
bearing the same type of crop (whether on the same parcel 
of land on which such lost or damaged plants were located 
or any other parcel of land of the same acreage in the 
United States). 
"(B) SPECIAL RULE FOR PERSON WITH MINORITY INTEREST 
WHO MATERIALLY PARTICIPATES.—Subparagraph (A) shall 
apply to amounts paid or incurred by a person (other than 
the taxpayer described in subparagraph (A)) if— 
"(i) the taxpayer described in subparagraph (A) has 
an equity interest of more than 50 percent in such 
grove, orchard, or vineyard, and 
"(ii) such other person holds any part of the remain-
ing equity interest and materially participates in the 
planting, maintenance, cultivation, or development of 
such grove, orchard, or vineyard during the 4-taxable 
year period beginning with the taxable year in which 
the grove, orchard or vineyard was lost or damaged. 
The determination of whether an individual materially partici-
pates in any activity shall be made in a manner similar to the 
manner in which such determination is made under section 
2032A(eX6). 
"(3) ELECTION TO HAVE THIS SECTION NOT APPLY.— 
"(A) IN GENERAL.—If a taxpayer makes an election under 
this paragraph, this section shall not apply to any plant or 
animal produced in any farming business carried on by 
such taxpayer. 
"(B) CERTAIN PERSONS NOT EUGIBLE.—No election may 
be 
made under this paragraph— 
"(i) by a corporation, partnership, or tax shelter, if 
such corporation, partnership, or tax shelter is re-
quired to use an accrual method of accounting under 
section 447 or 448(a)(3), or 
"(ii) with respect to the planting, cultivation, mainte-
nance, or development of pistachio trees. 
"(C) SPECIAL RULE FOR CITRUS AND ALMOND GROWERS.—An 
election under this paragraph shall not apply with respect 
to any item which is attributable to the planting, cultiva-
tion, maintenance, or development of any citrus or almond 
grove (or part thereof) and which is incurred before the 
close of the 4th taxable year beginning with the taxable 
year in which the trees were planted. For purposes of the 
preceding sentence, the portion of a citrus or almond grove 
planted in 1 taxable year shall be treated separately from 
the portion of such grove planted in another taxable year. 
"(D) ELECTION.—Unless the Secretary otherwise consents, 
an election under this paragraph may be made only for the 
taxpayer's 1st taxable year which begins after December 31, 
1986, and during which the taxpayer engages in a farming 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2353 
business. Any such election, once made, may be revoked 
only with the consent of the Secretary. 
"(e) DEFINITIONS AND SPECIAL RULES FOR PURPOSES OF SUBSECTION 
(d).-
"(1) RECAPTURE OF EXPENSED AMOUNTS ON DISPOSITION.— 
"(A) IN GENERAL.—In the case of any plant or animal 
with respect to which amounts would have been capitalized 
under subsection (a) but for an election under subsection 
(d)(3)-
"(i) such plant or animal (if not otherwise section 
1245 property) shall be treated as section 1245 property, 
and 
"(ii) for purposes of section 1245, the recapture 
amount shall be treated as a deduction allowed for 
depreciation with respect to such property. 
"(B) RECAPTURE AMOUNT.—For purposes of subparagraph 
(A), the term 'recapture amount' means any amount allow-
able as a deduction to the taxpayer which, but for an 
election under subsection (d)(3), would have been capitalized 
with respect to the plant or animal. 
"(2) EFFECTS OF ELECTION ON DEPRECIATION.— 
"(A) IN GENERAL.—If the taxpayer (or any related person) 
makes an election under subsection (d)(3), the provisions of 
section 168(g)(2) (relating to alternative depreciation) shall 
apply to all property of the taxpayer used predominantly in 
the farming business and placed in service in any taxable 
year during which any such election is in effect. 
"(B) RELATED PERSON.—For purposes of subparagraph (A), 
the term 'related person' means— 
"(i) the taxpayer and members of the taxpayer's 
family, 
"(ii) any corporation (including an S corporation) if 
50 percent or more (in value) of the stock of such 
corporation is owned (directly or through the applica-
tion of section 318) by the taxpayer or members of the 
taxpayer's family, 
"(iii) a corporation and any other corporation which 
is a member of the same controlled group described in 
section 1563(a)(1), and 
"(iv) any partnership if 50 percent or more (in value) 
of the interests in such partnership is owned directly or 
indirectly by the taxpayer or members of the tax-
payer's family. 
"(C) MEMBERS OF FAMILY.—For purposes of this para-
graph, the term 'family' means the taxpayer, the spouse of 
the taxpayer, and any of their children who have not 
attained age 18 before the close of the taxable year. 
"(3) PREPRODUCTIVE PERIOD.— 
"(A) IN GENERAL.—For purposes of this section, the term 
'preproductive period' means— 
"(i) in the case of a plant or animal which will have 
more than 1 crop or yield, the period before the 1st 
marketable crop or yield from such plant or animal, or 
"(ii) in the case of any other plant or animal, the 
period before such plant or animal is reasonably ex-
pected to be disposed of. 
100 STAT. 2354 
PUBLIC LAW 99-514-OCT. 22, 1986 
For purposes of this subparagraph, use by the taxpayer in a 
farming business of any supply produced in such business 
shall be treated as a disposition, 
"(B) RULE FOR DETERMINING PERIOD.—In the case of a 
plant grown in commercial quantities in the United States, 
the preproductive period for such plant if grown in the 
United States shall be based on the nationwide weighted 
average preproductive period for such plant. 
"(4) FARMING BUSINESS.—For purposes of this section— 
* 
"(A) IN GENERAL.—The term 'farming business' means 
the trade or business of farming. 
"(B) 
CERTAIN TRADES AND BUSINESSES INCLUDED.—The 
term 'farming business' shall include the trade or business 
of-
"(i) operating a nursery or sod farm, or 
"(ii) the raising or harvesting of trees bearing fruit, 
nuts, or other crops, or ornamental trees. 
For purposes of clause (ii), an evergreen tree which is more than 
6 years old at the time severed from the roots shall not be 
treated as an ornamental tree. 
"(5) CERTAIN INVENTORY VALUATION METHODS PERMITTED.— 
The Secretary shall by regulations permit the taxpayer to use 
reasonable inventory valuation methods to compute the amount 
required to be capitalized under subsection (a) in the case of any 
plant or animal. 
"(0 SPECIAL RULES FOR ALLOCATION OF INTEREST TO PROPERTY 
PRODUCED BY THE TAXPAYER.— 
"(1) INTEREST CAPITAUZED ONLY IN CERTAIN CASES.—Subsec-
tion (a) shall only apply to interest costs which are— 
"(A) paid or incurred during the production period, and 
"(B) allocable to property which is described in subsection 
(b)(1) and which has— 
"(i) a long useful life, 
"(ii) an estimated production period exceeding 2 
years, or 
"(iii) an estimated production period exceeding 1 year 
and a cost exceeding $1,000,000. 
"(2) ALLOCATION RULES.— 
"(A) IN GENERAL.—In determining the amount of interest 
required to be capitalized under subsection (a) with respect 
to any property— 
"(i) interest on any indebtedness directly attributable 
to production expenditures with respect to such prop-
erty shall be assigned to such property, and 
"(ii) interest on any other indebtedness shall be as-
signed to such property to the extent that the tax-
payer's interest costs could have been reduced if 
production expenditures (not attributable to indebted-
ness described in clause (i)) had not been incurred. 
"(B) 
EXCEPTION FOR QUALIFIED RESIDENCE INTEREST.— 
Subparagraph (A) shall not apply to any qualified residence 
interest (within the meaning of section 163(h)). 
"(C) SPECIAL RULE FOR FLOW-THROUGH ENTITIES.—Except 
as provided in regulations, in the case of any flow-through 
entity, this paragraph shall be applied first at the entity 
level and then at the beneficiary level. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2355 
"(3) INTEREST RELATING TO PROPERTY USED TO PRODUCE PROP-
ERTY.—This subsection shall apply to any interest on indebted-
ness incurred or continued in connection with property used to 
produce property to which this subsection applies to the extent 
such interest is allocable to the produced property. 
"(4) DEFINITIONS.—For purposes of this subsection— 
"(A) LONG USEFUL LIFE.—Property has a long useful life if 
*; 
V., 
such property is— 
"(i) real property, or 
"(ii) property with a class life of 20 years or more (as 
determined under section 168). 
"(B) PRODUCTION PERIOD.—The term 'production period' 
means, when used with respect to any property, the 
period— 
"(i) beginning on the date on which production of the 
property begins, and 
"(ii) ending on the date on which the property is 
ready to be placed in service or is ready to be held for 
sale. 
"(C) PRODUCTION EXPENDITURES.—The term 'production 
expenditures' means the costs (whether or not incurred 
during the production period) required to be capitalized 
under subsection (a) with respect to the property. 
"(g) PRODUCTION.—For purposes of this section— 
"(1) IN GENERAL.—The term 'produce' includes construct, 
build, install, manufacture, develop, or improve. 
"(2) TREATMENT OF PROPERTY PRODUCED UNDER CONTRACT FOR 
THE TAXPAYER.—The taxpayer shall be treated as producing any 
property produced for the taxpayer under a contract with the 
taxpayer; except that only costs paid or incurred by the tax-
payer (whether under such contract or otherwise) shall be taken 
into account in applying subsection (a) to the taxpayer. 
"(h) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this section, including— 
"(1) regulations to prevent the use of related parties, pass-
thru entities, or intermediaries to avoid the application of this 
section, and 
"(2) regulations providing for simplified procedures for the 
application of this section in the case of property described in 
subsection (b)(2)." 
(b) TECHNICAL AMENDMENTS.— 
(1) Section 189 is hereby repealed. 
(2)(A) Section 280 is hereby repealed. 
(B) Paragraph (5) of section 48(r) (defining sound recording) is 
amended to read as follows: 
"(5) SOUND RECORDING.—For purposes of this subsection, the 
term 'sound recording' means works which result from the 
fixation of a series of musical, spoken, or other sounds, regard-
less of the nature of the material objects (such as discs, tapes, or 
other phonorecordings) in which such sounds are embodied." 
(3) Section 312(n)(l) is amended— 
(A) by striking out "(determined without regard to section 
189) in subparagraph (B)", and 
(B) by striking out subparagraph (C) and inserting in lieu 
thereof: 
100 STAT. 2356 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(C) 
CONSTRUCTION 
PERIOD.—The term 
'construction 
period' has the meaning given the term production period 
under section 263A(f)(4)(B)." 
(4) Section 471 (relating to general rule for inventories) is 
amended— 
(A) by striking out "Whenever" and inserting in lieu 
thereof "(a) GENERAL RULE.—Whenever", and 
(B) by adding at the end thereof the following new subsec-
tion: 
"(b) CROSS REFERENCE.— 
"For rules relating to capitalization of direct and indirect costs of prop-
erty, see section 263A." 
(5) Section 267(e)(5)(D) is amended— 
(A) by striking out "low-income housing (as defined in 
paragraph (5) of section 189(e))" and inserting "property 
described in clause (i), (ii), (iii), or (iv) of section 
1250(aXlXB)", and 
(B) by striking out "low-income housing (as so defined)" 
and inserting "such property". 
(6) Section 278 is hereby repealed. 
(7XA) Subsection (b) of section 447 is amended to read as 
follows: 
"(b) PREPRODUCTIVE PERIOD OF EXPENSES.— 
"For rules requiring capitalization of certain preproductive period of 
expenses, see section 263A." 
(B) Subsection (a) of section 447 is amended by striking out 
"and with the capitalization of preproductive period of expenses 
described in subsection (b)". 
(C) Section 447(gXl) is amended by striking out " I f and 
inserting in lieu thereof "Notwithstanding subsection (a) or 
section 263A, if. 
(8) Subsection (d) of section 464 is amended to read as follows: 
"(d) EXCEPTION.—Subsection (a) shall not apply to any amount 
paid for supplies which are on hand at the close of the taxable year 
on account of fire, storm, or other casualty, or on account of disease 
or drought." 
(c) CLERICAL AMENDMENTS.— 
(1) The table of sections for part IX of subchapter B of chapter 
1 is amended by striking out the item relating to section 278 and 
by inserting after the item relating to section 263 the following: 
"Sec. 263A. Capitalization and inclusion in inventory costs of certain 
expenses." 
(2) The table of sections for part VI of subchapter B of chapter 
1 is amended by striking out the item relating to section 189. 
(3) The table of sections for part IX of subchapter B of chapter 
1 is amended by striking out the item relating to section 280. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to costs incurred 
after December 31, 1986, in taxable years ending after such 
date. 
(2) SPECIAL RULE FOR INVENTORY PROPERTY.—In the case of any 
property which is inventory in the hands of the taxpayer— 
(A) IN GENERAL.—The amendments made by this section 
shall apply to taxable years beginning after December 31, 
1986. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2357 
(B) CHANGE IN METHOD OF ACCOUNTING.—If the taxpayer 
is required by the amendments made by this section to 
change its method of accounting with respect to such prop-
erty for any taxable year— 
(i) such change shall be treated as initiated by the 
taxpayer, 
(ii) such change shall be treated as made with the 
consent of the Secretary, and 
(iii) the period for taking into account the adjust-
ments under section 481 by reason of such change shall 
not exceed 4 years. 
(3) 
SPECIAL RULE FOR SELF-CONSTRUCTED PROPERTY.—The 
amendments made by this section shall not apply to any prop-
erty which is produced by the taxpayer for use by the taxpayer 
if substantial construction had occurred before March 1, 1986. 
(4) TRANSITIONAL RULE FOR CAPITALIZATION OF INTEREST AND 
TAXES.— 
(A) 
TRANSITION PROPERTY EXEMPTED FROM 
INTEREST 
CAPiTAUZATiON.—Section 263A(f) of the Internal Revenue 
Code of 1986 (as added by this section) and the amendment 
made by subsection OaXl) shall not apply to any property— 
(i) to which the amendments made by section 201 do 
not apply by reason of sections 203(aXlXD) and (E) and 
203(aX5XA), and 
(ii) to which the amendments made by section 251 do 
not apply by reason of section 251(dX3XM). 
(B) INTEREST AND TAXES.—Section 263A of such Code shall 
not apply to property described in the matter following 
subparagraph (B) of section 207(eX2) of the Tax Equity and 
Fiscal Responsibility Act of 1982 to the extent it would 
require the capitalization of interest and taxes paid or 
incurred in connection with such property which are not 
required to be capitalized under section 189 of such Clode (as 
in effect before the amendment made by subsection (bXD). 
(5) TRANSITION RULE CONCERNING CAPITAUZATION OF INVEN-
TORY RULES.—In the case of a corporation which on the date of 
the enactment of this Act was a member of an affiliated group 
of corporations (within the meaning of section 1504(a) of the 
Internal Revenue Code of 1986), the parent of which— 
(A) was incorporated in California on April 15, 1925, 
(B) adopted LIFO accounting as of the close of the taxable 
year ended December 31,1950, and 
(C) was, on May 22, 1986, merged into a Delaware cor-
poration incorporated on March 12,1986, 
the amendments made by this section shall apply under a cut-
off method whereby the uniform capitalization rules are applied 
only in costing layers of inventory acquired during taxable 
years beginning on or after January 1,1987. 
(6) TREATMENT OF CERTAIN REHABIUTATION PROJECT.—The 
amendments made by this section shall not apply to interest 
and taxes paid or incurred with respect to the rehabilitation 
and conversion of a certified historic building which was for-
merly a factory into an apartment project with 155 units, 39 
units of which are for low-income families, if the project was 
approved for annual interest assistance on June 10, 1986, by the 
housing authority of the State in which the project is located. 
71-19A 0 - 89 - 19 : CL. 3 Part3 
100 STAT. 2358 
PUBLIC LAW 99-514—OCT. 22, 1986 
(7) SPECIAL RULE FOR CASUALTY LOSSES.—Section 263A(d)(2) of 
the Internal Revenue Code of 1986 (as added by this section) 
shall apply to expenses incurred on or after the date of the 
enactment of this Act. 
SEC. 804. MODIFICATIONS OF METHOD OF ACCOUNTING FOR LONG-TERM 
CONTRACT. 
(a) GENERAL RULE.—Subpart B of part II of subchapter E of 
chapter 1 is amended by adding at the end thereof the following new 
section: 
"SEC. 460. SPECIAL RULES FOR LONG-TERM CONTRACTS. 
"(a) PERCENTAGE OF COMPLETION-CAPITALIZED COST METHOD.— 
"(1) IN GENERAL.—In the case of any long-term contract— 
"(A) 40 percent of the items with respect to such contract 
shall be taken into account under the percentage of comple-
tion method (as modified by subsection (b)), and 
"(B) 60 percent of the items with respect to such contract 
shall be taken into account under the taxpayer's normal 
method of accounting. 
"(2) 40 PERCENT LOOK-BACK METHOD TO APPLY.—Upon comple-
tion of any long-term contract, the taxpayer shall pay (or shall 
be entitled to receive) interest determined by applying the look-
back method of subsection (b)(3) to 40 percent of the items with 
respect to the contract. 
"(b) PERCENTAGE OF COMPLETION METHOD.— 
"(1) SUBSECTION (a) NOT TO APPLY WHERE PERCENTAGE OF 
COMPLETION METHOD USED.—Subsection (a) shall not apply to 
any long-term contract with respect to which amounts includ-
ible in gross income are determined under the percentage of 
completion method. 
"(2) REQUIREMENTS OF PERCENTAGE OF COMPLETION METHOD.— 
In the case of any long-term contract with respect to which the 
percentage of completion method is used— 
"(A) the percentage of completion shall be determined by 
comparing costs allocated to the contract under subsection 
(c) and incurred before the close of the taxable year with 
the estimated total contract costs, and 
"(B) upon completion of the contract, the taxpayer shall 
pay (or shall be entitled to receive) interest computed under 
the look-back method of paragraph (3). 
"(3) LOOK-BACK METHOD.—The interest computed under the 
look-back method of this subparagraph shall be determined 
b y -
"(A) first allocating income under the contract among 
taxable years before the year in which the contract is 
completed on the basis of the actual contract price and costs 
instead of the estimated contract price and costs, 
"(B) second, determining (solely for purposes of comput-
ing such interest) the overpayment or underpayment of tax 
for each taxable year referred to in paragraph (1) which 
would result solely from the application of paragraph (1), 
and 
"(C) then using the overpayment rate established by 
section 6621, compounded daily, on the overpayment or 
underpayment determined under paragraph (1). 
"(c) ALLOCATION OF COSTS TO CONTRACT.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2359 
"(1) DIRECT AND CERTAIN INDIRECT COSTS.—In the case of a 
long-term contract, all costs (including research and experi-
mental costs) which directly benefit, or are incurred by reason 
of, the long-term contract activities of the taxpayer shall be 
allocated to such contract in the same manner as costs are 
allocated to extended period long-term contracts under section 
451 and the regulations thereunder. 
"(2) COSTS IDENTIFIED UNDER COST-PLUS AND CERTAIN FEDERAL 
CONTRACTS.—In the case of a cost-plus long-term contract or a 
Federal long-term contract, any cost not allocated to such con-
tract under paragraph (1) shall be allocated to such contract if 
such cost is identified by the taxpayer (or a related person), 
pursuant to the contract or Federal, State, or local law or 
regulation, as being attributable to such contract. 
"(3) 
ALLOCATION OF PRODUCTION PERIOD INTEREST TO CON-
TRACT.— 
"(A) IN GENERAL.—Except as provided in subparagraphs 
(B) and (C), in the case of a long-term contract, interest costs 
shall be allocated to the contract in the same manner as 
interest costs are allocated to property produced by the 
taxpayer under section 263A(f). 
"(B) PRODUCTION PERIOD.—In applying section 263A(f) for 
purposes of subparagraph (A), the production period shall 
be the period— 
"(i) beginning on the later of— 
"(I) the contract commencement date, or 
"(II) in the case of a taxpayer who uses an 
accrual method with respect to long-term con-
tracts, the date by which at least 5 percent of the 
total estimated costs (including design and plan-
ning costs) under the contract have been incurred, 
and 
"(ii) ending on the contract completion date. 
"(C) APPLICATION OF DE MINIMIS RULE.—In applying sec-
tion 263A(f) for purposes of subparagraph (A), paragraph 
(lXB)(iii) of such section shall be applied on a contract-by-
contract basis; except that, in the case of a taxpayer 
described in subparagraph (B)(i)(II) of this paragraph, 
paragraph (l)(B)(iii) of section 263A(f) shall be applied on a 
property-by-property basis. 
"(4) CERTAIN COSTS NOT INCLUDED.—This subsection shall not 
apply to any— 
"(A) independent research and development expenses, 
"(B) expenses for unsuccessful bids and proposals, and 
"(C) marketing, selling, and advertising expenses. 
"(5) INDEPENDENT RESEARCH AND DEVELOPMENT EXPENSES.— 
For purposes of paragraph (4), the term 'independent research 
and development expenses' means any expenses incurred in the 
performance of research or development, except that such term 
shall not include— 
"(A) any expenses which are directly attributable to a 
long-term contract in existence when such expenses are 
incurred, or 
"(B) any expenses under an agreement to perform re-
search or development. 
"(d) FEDERAL LONG-TERM CONTRACT.—For purposes of this sec-
tion— 
100 STAT. 2360 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(1) IN GENERAL.—The term 'Federal long-term contract' 
means any long-term contract— 
"(A) to which the United States (or any agency or 
instrumentality thereof) is a party, or 
"(B) which is a subcontract under a contract described in 
subparagraph (A). 
"(2) SPECIAL RULES FOR CERTAIN TAXABLE ENTITIES.—For pur-
poses of paragraph (1), the rules of section 168(hX2XD) (relating 
to certain taxable entities not treated as instrumentalities) shall 
apply. 
"(e) EXCEPTION FOR CERTAIN CONSTRUCTION (IJONTRACTS.— 
"(1) IN GENERAL.—Subsections (a), (b), and (cXD and (2) shall 
not apply to any construction contract entered into by a tax-
payer— 
"(A) who estimates (at the time such contract is entered 
into) that such contract will be completed within the 2-year 
period beginning on the contract commencement date of 
such contract, and 
"(B) whose average annual gross receipts for the 3 taxable 
years preceding the taxable year in which such contract is 
entered into do not exceed $10,000,000. 
"(2) DETERMINATION OF TAXPAYER'S GROSS RECEIPTS.—For pur-
poses of paragraph (1), the gross receipts o
f
— 
"(A) all trades or businesses (whether or not incor-
porated) which are under common control with the tax-
paver (within the meaning of section 52(b)), and 
(B) all members of any controlled group of corporations 
of which the taxpayer is a member, 
for the 3 taxable years of such persons preceding the taxable 
year in which the contract described in paragraph (1) is entered 
into shall be included in the gross receipts of the taxpayer for 
the period described in paragraph (IXB). The Secretary shall 
prescribe regulations which provide attribution rules that take 
into account, in addition to the persons and entities described 
in the preceding sentence, taxpayers who engage in construc-
tion contracts through partnerships, joint ventures, and 
corporations. 
"(3) CONTROLLED GROUP OF CORPORATIONS.—For purposes of 
this subsection, the term 'controlled group of corporations' has 
the meaning given to such term by section 1563(a), except that— 
"(A) more than 50 percent' shall be substituted for 'at 
leeist 80 percent' each place it appears in section 1563(aXl), 
and 
"(B) the determination shall be made without regard to 
subsections (aX4) and (eX3XC) of section 1563. 
"(4) (CONSTRUCTION CONTRACT,—For purposes of this subsec-
tion, the term 'construction contract' means any contract for 
the building, construction, reconstruction, or rehabilitation of, 
or the installation of any integral component to, or improve-
ments of, real property. 
"(f) LONG-TERM CONTRACT.—For purposes of this section— 
"(1) IN GENERAL.—The term 'long-term contract' means any 
contract for the manufacture, building, installation, or construc-
tion of property if such contract is not completed within the 
taxable year in which such contract is entered into. 
"(2) SPECIAL RULE FOR MANUFACTURING CONTRACTS.—A con-
tract for the manufacture of property shall not be treated as a 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2361 
long-term contract unless such contract involves the manufac-
ture o
f
— 
"(A) any unique item of a type which is not normally 
included in the finished goods inventory of the taxpayer, or 
"(B) any item which normally requires more than 12 
calendar months to complete (without regard to the period 
of the contract). 
"(3) AGGREGATION, ETC.—For purposes of this subsection, 
under regulations prescribed by the Secretary— 
"(A) 2 or more contracts which are interdependent (by 
reason of pricing or otherwise) may be treated as 1 contract, 
and 
"(B) a contract which is properly treated as an aggrega-
tion of separate contracts may be so treated. 
"(g) CONTRACT COMMENCEMENT DATE.—For purposes of this sec-
tion, the term 'contract commencement date' means, with respect to 
any contract, the first date on which any costs (other than bidding 
expenses or expenses incurred in connection with negotiating the 
contract) allocablie to such contract are incurred." 
(b) CHANGE IN REGULATIONS.—The Secretary of the Treasury or 
his delegate shall modify the income tax regulations relating to 
accounting for long-term contracts to carry out the provisions of 
section 460 of the Internal Revenue Code of 1986 (as added by 
subsection (a)). 
(c) CONFORMING AMENDMENT.—The table of sections for subpart B 
of part II of subchapter E of chapter 1 is amended by adding at the 
end thereof the following new item: 
"Sec. 460. Special rules for long-term contracts." 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to any contract entered into after February 28, 1986. 
(2) CLARIFICATION OF TREATMENT OF INDEPENDENT RESEARCH 
AND DEVELOPMENT EXPENSES.— 
(A) IN GENERAL.—For periods before, on, or after the date 
of enactment of this Act— 
(i) any independent research and development ex-
penses taken into account in determining the total 
contract price shall not be severable from the contract, 
and 
(ii) any independent research and development ex-
penses shall not be treated as amounts chargeable to 
capital account. 
(B) 
INDEPENDENT 
RESEARCH 
AND DEVELOPMENT EX-
PENSES.—For purposes of subparagraph (A), the term 
"independent research and development expenses" has the 
meaning given to such term by section 263A(c)(5) of the 
Internal Revenue Code of 1986, as added by this section. 
SEC. 805. REPEAL OF RESERVE FOR BAD DEBTS OF TAXPAYERS OTHER 
THAN FINANCIAL INSTITUTIONS. 
(a) GENERAL RULE.—Subsection (c) of section 166 (relating to 
reserve for bad debts) is hereby repealed. 
(b) REPEAL OF RESERVE FOR CERTAIN GUARANTEED DEBT OBLIGA-
TIONS.—Section 166 is amended by striking out subsection (f) and by 
redesignating subsection (g) as subsection (f). 
(c) TECHNICAL AMENDMENTS.— 
100 STAT. 2362 
PUBLIC LAW 99-514—OCT. 22, 1986 
(1)(A) Section 81 (relating to certain increases in suspense 
accounts) is amended to read as follows: 
"SEC. 81. INCREASE IN VACATION PAY SUSPENSE ACCOUNT. 
"There shall be included in gross income for the taxable year the 
amount of any increase in any suspense account for such taxable 
year required by paragraph (2)(B) of section 463(c) (relating to 
accrual of vacation pay)." 
(B) The table of sections for part II of subchapter B of chapter 
1 is amended by striking out the item relating to section 81 and 
inserting in lieu thereof the following: 
"Sec. 81. Increase in vacation pay suspense account." 
(2) Clause (ii) of section 108(e)(7)(A) is amended by striking out 
"subsection (a), O
t
>
)
, or (c) of section 166" and inserting in lieu 
thereof "subsection (a) or (b) of section 166". 
(3) Paragraph (7) of section 108(e) is amended by striking out 
subparagraph (B) and by redesignating subparagraphs (C), (D), 
(E), and (F) as subparagraphs (B), (C), (D), and (E), respectively. 
(4) Subparagraph (E) of section 108(e)(7) (as so redesignated) is 
amended by striking out "subparagraphs (A), (B), (C), (D), 
and (E)" and inserting in lieu thereof 
"the 
foregoing 
subparagraphs". 
(5) Paragraph (5) of section 461(h) is amended by striking out 
subparagraph (A) and by redesignating subparagraphs (B), (C), 
and (D) as subparagraphs (A), (B), and (C), respectively. 
(6) Subsection (h) of section 805 is amended by striking out 
paragraph (2) and by redesignating paragraphs (3), (4), (5), and 
(6) as paragraphs (2), (3), (4), and (5), respectively. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
(2) CHANGE IN METHOD OF ACCOUNTING.—In the case of any 
taxpayer who maintained a reserve for bad debts for such 
taxpayer's last taxable year beginning before January 1, 1987, 
and who is required by the amendments made by this section to 
change its method of accounting for any taxable year— 
(A) such change shall be treated as initiated by the 
taxpayer, 
(B) such change shall be treated as made with the consent 
of the Secretary, and 
(C) the net amount of adjustments required by section 481 
of the Internal Revenue Code of 1986 to be taken into 
account by the taxpayer shall— 
(i) in the case of a taxpayer maintaining a reserve 
under section 166(f), be reduced by the balance in the 
suspense account under section 166(f)(4) of such Code as 
of the close of such last taxable year, and 
(ii) be taken into account ratably in each of the first 4 
taxable years beginning after December 31,1986. 
SEC. 806. TAXABLE YEARS OF CERTAIN ENTITIES. 
(a) PARTNERSHIPS.— 
(1) IN GENERAL.—Paragraph (1) of section 7060t)) (relating to 
partnership's taxable year) is amended to read as follows: 
"(1) PARTNERSHIP'S TAXABLE YEAR.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2363 
"(A) PARTNERSHIP TREATED AS TAXPAYER.—The taxable 
year of a partnership shall be determined as though the 
partnership were a taxpayer. 
"(B) TAXABLE YEAR DETERMINED BY REFERENCE TO PART-
NERS.—Except as provided in subparagraph (C), a partner-
ship shall not have a taxable year other than— 
"(i) the taxable year of 1 or more of its partners who 
have an aggregate interest in partnership profits and 
capital of greater than 50 percent, 
"(ii) if there is no taxable year described in clause (i), 
the taxable year of all the principal partners of the 
partnership, or 
"(iii) if there is no taxable year described in clause (i) 
or (ii), the calendar year or such other period as the 
Secretary may prescribe in regulations. 
"(C) BUSINESS PURPOSE.—A partnership may have a tax-
able year not described in subparagraph (B) if it establishes, 
to the satisfaction of the Secretary, a business purpose 
therefor. For purposes of this subparagraph, any deferral of 
income to partners shall not be treated as a business pur-
pose." 
(2) DETERMINATION OF MAJORITY INTEREST.—Section 706(b) is 
amended by adding at the end thereof the following new para-
graph: 
"(4) APPLICATION OF MAJORITY INTEREST RULE.—Clause (i) of 
paragraph (IXB) shall not apply to any taxable year of a part-
nership unless the period which constitutes the taxable year of 
1 or more of its partners who have an aggregate interest in 
partnership profits and capital of greater than 50 percent has 
been the same for— 
"(A) the 3-taxable year period of such partner or partners 
ending on or before the beginning of such taxable year of 
the partnership, or 
"(B) if the partnership has not been in existence during 
all of such 3-taxable year period, the taxable years of such 
partner or partners ending with or within the period of 
existence. 
This paragraph shall apply without regard to whether the same 
partners or interests are taken into account in determining the 
50 percent interest during any period." 
(3) CONFORMING AMENDMENT.—The heading for section 706(b) 
is amended by striking out "ADOPTION OF". 
0
1
)
) S CORPORATION.— 
(1) IN GENERAL.—Section 1378(a) (relating to taxable year of S 
corporation) is amended to read as follows: 
"(a) GENERAL RULE.—For purposes of this subtitle, the taxable 
year of an S corporation shall be a permitted year." 
(2) BUSINESS PURPOSE.—Section 1378(b) (defining permitted 
year) is amended by adding at the end thereof the following new 
flush sentence: 
"For purposes of paragraph (2), any deferral of income to sharehold-
ers shall not be treated as a business purpose." 
(3) CONFORMING AMENDMENT.—Section 1378 is amended by 
striking out subsection (c). 
(c) PERSONAL SERVICE CORPORATION.— 
100 STAT. 2364 
PUBLIC LAW 99-514—OCT. 22, 1986 
(1) IN GENERAL.—Section 441 (relating to period for computa-
tion of taxable income) is amended by adding at the end thereof 
the following new subsection: 
"(i) TAXABLE YEAR OF PERSONAL SERVICE CORPORATIONS.— 
"(1) IN GENERAL.—For purposes of this subtitle, the taxable 
year of any personal service corporation shall be the calendar 
year unless the corporation establishes, to the satisfaction of the 
Secretary, a business purpose for having a different period for 
its taxable year. For purposes of this paragraph, any deferral of 
income to shareholders shall not be treated as a business pur-
pose. 
"(2) PERSONAL SERVICE CORPORATION.—For purposes of this 
subsection, the term 'personal service corporation' has the 
meaning given such term by section 269A03)(1), except that 
section 269A(b)(2) shall be applied— 
"(A) by substituting 'any' for 'more than 10 percent', and 
"(B) by substituting 'any' for '50 percent or more in value' 
in section 318(a)(2)(C)." 
(2) CONFORMING 
AMENDMENT.—Section 267(a) (relating to 
matching of deduction and payee income in the case of expenses 
and interest) is amended by adding at the end thereof the 
following new sentence: "For purposes of this paragraph, in the 
case of a personal service corporation (within the meaning of 
section 441(i)(2)), such corporation and any employee-owner 
(within the meaning of section 269A0t))(2), as modified by section 
441(i)(2)) shall be treated as persons specified in subsection (b)." 
(d) COORDINATION WITH 52-53 WEEK PERIOD.—Section 441(f) (relat-
ing to election of year consisting of 52-53 weeks) is amended by 
redesignating paragraph (3) as paragraph (4) and by inserting after 
paragraph (2) the following new paragraph: 
"(3) SPECIAL RULE FOR PARTNERSHIPS, S CORPORATIONS, AND 
PERSONAL SERVICE CORPORATIONS.—The Secretary may by regu-
lation provide terms and conditions for the application of this 
subsection to a partnership, S corporation, or personal service 
corporation (within the meaning of section 441(iX2))." 
(e) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
(2) CHANGE IN ACCOUNTING PERIOD.—In the case of any tax-
payer required by the amendments made by this section to 
change its accounting period for any taxable year— 
(A) such change shall be treated as initiated by the 
taxpayer, 
(B) such change shall be treated as having been made 
with the consent of the Secretary, and 
(C) with respect to any partner or shareholder of an S 
corporation which is required to include the items from 
more than 1 taxable year of the partnership or S corpora-
tion in any 1 taxable year, income in excess of expenses of 
such partnership or corporation for the short taxable year 
required by such amendments shall be taken into account 
ratably in each of the first 4 taxable years (including such 
short taxable year) beginning after December 31, 1986, 
unless such partner or shareholder elects to include all 
such income in the short taxable year. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2365 
Subparagraph (C) shall apply to a shareholder of an S corpora-
tion only if such corporation was an S corporation for a taxable 
year beginning in 1986. 
Subtitle B—Treatment of Installment 
Obligations 
SEC. 811. ALLOCATION OF INDEBTEDNESS AS PAYMENT ON INSTALL-
MENT OBLIGATION. 
(a) IN GENERAL.—Subpart B of part II of subchapter E of chapter 1 
(relating to taxable year for which item of gross income included) is 
amended by inserting after section 453B the following new section: 
"SEC. 453C. CERTAIN 
INDEBTEDNESS 
TREATED 
AS 
PAYMENT 
ON 
INSTALLMENT OBLIGATIONS. 
"(a) GENERAL RULE.—For purposes of sections 453 and 453A, if a 
taxpayer has allocable installment indebtedness for any taxable 
year, such indebtedness— 
"(1) shall be allocated on a pro rata basis to any applicable 
installment obligation of the taxpayer which— 
"(A) arises in such taxable year, and 
"(B) is outstanding as of the close of such taxable year, 
and 
"(2) shall be treated as a payment received on such obligation 
as of the close of such taxable year. 
"(b) ALLOCABLE INSTALLMENT INDEBTEDNESS.—For purposes of this 
section— 
"(1) IN GENERAL.—The term 'allocable installment indebted-
ness' means, with respect to any taxable year, the excess (if any) 
of— 
"(A) the installment percentage of the taxpayer's average 
quarterly indebtedness for such taxable year, over 
"(B) the aggregate amount treated as allocable install-
ment indebtedness with respect to applicable installment 
obligations which— 
"(i) are outstanding as of the close of such taxable 
year, but 
"(ii) did not arise during such taxable year. 
"(2) 
INSTALLMENT 
PERCENTAGE.—The 
term 
'installment 
percentage' means the percentage (not in excess of 100 percent) 
determined by dividing— 
"(A) the face amount of all applicable installment obliga-
tions of the taxpayer outstanding as of the close of the 
taxable year, by 
"(B) the sum of— 
"(i) the aggregate adjusted bases of all assets not 
described in clause (ii) held as of the close of the taxable 
year, and 
"(ii) the face amount of all installment obligations 
outstanding as of such time. 
For purposes of subparagraph (B)(i), a taxpayer may elect to 
compute the aggregate adjusted bases of all assets using the 
deduction for depreciation which is used in computing earnings 
and orofits under section 312(k). 
100 STAT. 2366 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(3) SPECIAL RULES FOR PERSONAL USE PROPERTY.—For pur-
poses of this subsection— 
"(A) for purposes of paragraph (2XB), there shall not be 
taken into account any personal use property (within the 
meaning of section 1275(b)(3)) held by an individual or any 
installment obligation arising from the sale of such prop-
erty, and 
"(B) for purposes of computing the taxpayer's average 
quarterly indebtedness under paragraph (1)(A), there shall 
not be taken into account any indebtedness with respect to 
which substantially all of the property securing such 
indebtedness is property described in subparagraph (A). 
"(4) SPECIAL RULE FOR CASUAL SALES.—If the taxpayer has 
no 
applicable installment obligations described in subclause (I) or 
(II) of subsection (e)(lXA)(i) outstanding at any time during the 
taxable year, then the taxpayer's allocable installment indebt-
edness for such taxable year shall be computed by using the 
taxpayer's indebtedness as of the close of such taxable year in 
lieu of the taxpayer's average quarterly indebtedness. 
"(c) TREATMENT OF SUBSEQUENT PAYMENTS.— 
"(1) PAYMENTS TREATED AS RECEIPT OF TAX PAID AMOUNTS.—If 
any amount is treated as received under subsection (a) (after 
application of subsection (d)(2)) with respect to any applicable 
installment obligation, subsequent payments received on such 
obligation shall not be taken into account for purposes of sec-
tions 453 and 453A to the extent that the aggregate amount of 
such subsequent payments does not exceed the aggregate 
amount treated as received on such obligation under subsection 
(a). 
"(2) REDUCTION OF ALLOCABLE INSTALLMENT INDEBTEDNESS.— 
For purposes of applying subsection Ot)XlXB) for the taxable year 
in which any payment to which paragraph (1) of this subsection 
applies was received (and for any subsequent taxable year), the 
allocable installment indebtedness with respect to the ap-
plicable installment obligation shall be reduced (but not below 
zero) by the amount of such payment not taken into account by 
reason of paragraph (1). 
"(d) LIMITATION BASED ON TOTAL CONTRACT PRICE.— 
"(1) IN GENERAL.—The amount treated as received under 
subsection (a) (after application of paragraph (2)) with respect to 
any applicable installment obligation for any taxable year shall 
not exceed the excess (if any) of— 
"(A) the total contract price, over 
"(B) any portion of the total contract price received under 
the contract before the close of such taxable year— 
"(i) including amounts so treated under subsection (a) 
for all preceding taxable years (after application of 
paragraph (2)), but 
"(ii) not including amounts not taken into account by 
reason of subsection (c). 
"(2) EXCESS ALLOCABLE INSTALLMENT INDEBTEDNESS.—If, after 
application of paragraph (1), the allocable installment indebted-
ness for any taxable year exceeds the amount which may be 
allocated to applicable installment obligations arising in (and 
outstanding as of the close of) such taxable year, such excess 
shall— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2367 
"(A) subject to the limitations of paragraph (1), be allo-
cated to applicable installment obligations outstanding as 
of the close of such taxable year which arose in preceding 
taxable years, beginning with applicable installment obliga-
tions arising in the earliest preceding taxable year, and 
"(B) be treated as a payment under subsection (aX2). 
"(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this sec-
tion— 
"(1) APPUCABLE INSTALLMENT OBLIGATION .— 
"(A) IN GENERAL.—The term 'applicable installment 
obligation' means any obligation— 
"(i) which arises from the disposition— 
"(I) after February 28, 1986, of personal property 
under the installment method by a person who 
regularly sells or otherwise disposes of personal 
property of the same type on the installment plan, 
"(II) after February 28, 1986, of real property 
under the installment method which is held by the 
taxpayer for sale to customers in the ordinary 
course of the taxpayer's trade or business, or 
"(III) after August 16, 1986, of real property 
under the installment method which is property 
used in the taxpayer's trade or business or prop-
erty held for the production of rental income, but 
only if the sales price of such property exceeds 
$150,000 (determined after application of the rule 
under the last sentence of section 1274(cX3XAXii)), 
and 
"(ii) which is held by the seller or a member of the 
same affiliated group (within the meaning of section 
1504(a), but without regard to section 15O40t>)) as the 
seller. 
"(B) EXCEPTION FOR PERSONAL USE AND FARM PROPERTY.— 
The term 'applicable installment obligation' shall not in-
clude any obligation which arises from the disposition— 
"(i) by an individual of personal use property (within 
the meaning of section 12750t)X3)), or 
"(ii) of any property used or produced in the trade or 
business of farming (within the meaning of section 
2032A(e) (4) or (5)). 
"(2) AGGREGATION RULES.—For purposes of this section, all 
persons treated as a single employer under section 52 shall be 
treated as 1 taxpayer. The Secretary shall prescribe regulations 
for the treatment under this section of transactions between 
such persons. 
"(3) AGGREGATION OF OBUGATIONS.—The Secretary may 
by 
regulations provide that all (or any portion of) applicable 
installment obligations of a taxpayer may be treated as 1 
obligation. 
"(4) EXCEPTION FOR SALES OF TIMESHARES AND RESIDENTIAL 
LOTS.— 
"(A) IN GENERAL.—If a taxpayer elects the application of 
this paragraph, this section shall not apply to any install-
ment obligation which— 
"(i) arises from a sale in the ordinary course of the 
taxpayer's trade or business to an individual o
f
— 
100 STAT. 2368 
PUBLIC LAW 99-514—OCT. 22, 1986 
« i 
"(I) a timeshare right to use or a timeshare 
ownership interest in residential real property for 
not more than 6 weeks, or a right to use specified 
campgrounds for recreational purposes, or 
"(II) any residential lot but only if the taxpayer 
(or any related person) is not to make any improve-
ments with respect to such lot, and 
"(ii) which is not guaranteed by any person other 
than an individual. 
For purposes of clause (i)(I), a timeshare right to use (or 
timeshare ownership interest in) property held by the 
spouse, children, grandchildren, or parents of an individual 
shall be treated as held by such individual. 
"(B) INTEREST ON DEFERRED TAX.—If subparagraph (A) 
applies to any installment obligation, interest shall be paid 
on the portion of any tax for any taxable year (determined 
without regard to any deduction allowable for such interest) 
which is attributable to the receipt of payments on such 
obligation in such year (other than payments received in 
the taxable year of the sale). Such interest shall be com-
puted for the period from the date of the sale to the date on 
which the payment is received using the applicable Federal 
rate under section 1274 (without regard to subsection (d) (2) 
or (3) thereof) in effect at the time of the sale, compounded 
semiannually. 
"(C) TIME FOR PAYMENT.—Any interest payable under this 
paragraph with respect to a payment shall be treated as an 
addition to tax for the taxable year in which the payment is 
received, except that the amount of such interest shall be 
taken into account in computing the amount of any deduc-
tion allowable to the taxpayer for interest paid or accrued 
during such taxable year. 
"(5) REGULATIONS.—The Secretary shall prescribe regulations 
as may be necessary to carry out the purposes of this section, 
including regulations— 
"(A) disallowing the use of the installment method in 
whole or in part for transactions in which the rules of this 
section otherwise would be avoided through the use of 
related parties, pass-through entities, or intermediaries, 
"(B) providing for the proper treatment of reserves 
(including consistent treatment with assets held in the 
reserves), and 
"(C) providing that subsection (b)(4) shall not apply where 
necessary to prevent the avoidance of the application of this 
section." 
(b) CLERICAL AMENDMENT.—The table of sections for subpart B of 
part II of subchapter E of chapter 1 is amended by inserting after 
the item relating to section 453B the following new item: 
"Sec. 453C. Certain indebtedness treated as payments on installment obliga-
tions." 
(c) EFFECTIVE DATES.— 
' 
' 
(1) IN GENERAL.—Except as otherwise provided in this section, 
the amendments made by this section shall apply to taxable 
years ending after December 31, 1986, with respect to disposi-
tions after February 28,1986. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2369 
(2) EXCEPTION FOR CERTAIN SALES OF PROPERTY BY A MANUFAC-
TURER T
O A DEALER.— 
(A) IN GENERAL.—The amendments made by this section 
shall not apply to any installment obligation arising from 
the disposition of tangible personal property by a manufac-
turer (or any affiliate) to a dealer i
f
— 
(i) the dealer is obligated to pay on such obligation 
only when the dealer resells (or rents) the property, 
(ii) the manufacturer has the right to repurchase the 
property at a fixed (or siscertainable) price after no 
later than the 9-month period beginning with the date 
of the sale, and 
(iii) such disposition is in a taxable year with respect 
to which the requirements of subparagraph (B) are met. 
(B) RECEIVABLES MUST BE AT LEAST 50 PERCENT OF TOTAL 
SALES.— 
(i) IN GENERAL.—The requirements of this subpara-
graph are met with respect to any taxable year if for 
such taxable year and the preceding taxable year the 
aggregate face amount of installment obligations de-
scribed in subparagraph (A) is at least 50 percent of the 
total sales to dealers giving rise to such obligations. 
(ii) TAXPAYER MUST FAIL FOR 2 CONSECUTIVE YEARS.— 
A taxpayer shall be treated as failing to meet the 
requirements of clause (i) only if the taxpayer fails to 
meet the 50-percent test for both the tsixable year and 
the preceding taxable year. 
(C) TRANSITION RULE.—An obligation issued before the 
date of the enactment of this Act shall be treated as de-
scribed in subparagraph (A) if, within 60 days after such 
date, the taxpayer modifies the terms of such obligation to 
conform to the requirements of subparagraph (A). 
(D) APPUCATION WITH OTHER OBUGATIONS.—In applying 
section 453C of the Internal Revenue Code of 1986 to any 
installment obligations to which the amendments made by 
this section apply, obligations described in subparagraph 
(A) shall not be treated as applicable installment obliga-
tions (within the meaning of section 453C(e)(l) of such 
Code). 
(E) OTHER REQUIREMENTS.—This paragraph shall apply 
only if the taxpayer meets the requirements of subpara-
graphs (A) and (B) for its first taxable year beginning after 
the date of the enactment of this Act. 
(3) EXCEPTION FOR CERTAIN OBUGATIONS.—In applying the 
amendments made by this section to any installment obligation 
of a corporation incorporated on January 13, 1928, the following 
indebtedness shall not be taken into account in determining the 
allocable installment indebtedness of such corporation under 
section 453C of the Internal Revenue Code of 1986 (as added by 
this section): 
(A) 12% percent subordinated debentures with a total 
face amount of $175,000,000 issued pursuant to a trust 
indenture dated as of September 1, 1985. 
(B) A revolving credit term loan in the maximum amount 
of $130,000,000 made pursuant to a revolving credit and 
security agreement dated as of September 6, 1985, payable 
100 STAT. 2370 
PUBLIC LAW 99-514—OCT. 22, 1986 
in various stages with final payment due on August 31, 
1992. 
This paragraph shall also apply to indebtedness which replaces 
indebtedness described in this paragraph if such indebtedness 
does not exceed the amount and maturity of the indebtedness it 
replaces. 
(4) SPECIAL RULE FOR RESIDENTIAL CONDOMINIUM PROJECT.— 
For purposes of applying the amendments made by this section, 
the term applicable installment obligation (within the meaning 
of section 453C(e)(l) of the Internal Revenue Code of 1986) shall 
not include any obligation arising in connection with sales from 
a residential condominium project— 
(A) for which a contract to purchase land for the project 
was entered into at least 5 years before the date of the 
enactment of this Act, 
(B) with respect to which land for the project was pur-
chased before September 26,1985, 
(C) with respect to which building permits for the project 
were obtained, 
and 
construction 
commenced, 
before 
September 26,1985, 
(D) in conjunction with which not less than 80 units of 
low-income housing are deeded to a tax-exempt organiza-
tion designated by a local government, and 
(E) with respect to which at legist $1,000,000 of expenses 
were incurred before September 26,1985. 
(D) the portion of the net adjustment taken into account 
in the 1st taxable year of the taxpayer ending after Decem-
ber 31,1986, shall not exceed 15 percent of such adjustment, 
and 
(E) the remaining portion of such adjustment shall be 
taken into account ratably in the 2nd, 3rd, and 4th years 
ending after December 31,1986. 
(5) SPECIAL RULE FOR QUAUFIED BUYOUT.—The amendments 
made by this section shall apply for taxable years ending after 
December 31,1991, to a corporation if— 
(A) such corporation was incorporated on May 25, 1984, 
for the purpose of acquiring all of the stock of another 
corporation, 
(B) such acquisition took place on October 23,1985, 
(C) in connection with such acquisition, the corporation 
incurred indebtedness of approximately $151,000,000, and 
(D) substantially all of the stock of the corporation is 
owned directly or indirectly by employees of the corpora-
tion the stock of which was acquired on October 23, 1985. 
(6) SPECIAL RULE FOR SALES OF REAL PROPERTY BY DEALERS.—In 
the case of installment obligations arising from the sale of real 
property in the ordinary course of the trade or business of the 
taxpayer, any gain attributable to allocable installment indebt-
edness allocated to any such installment obligations which arise 
(or are deemed to arise)— 
(A) in the 1st taxable year of the taxpayer ending after 
December 31, 1986, shall be taken into account ratably over 
the 3 taxable years beginning with such 1st taxable year, 
and 
(B) in the 2nd taxable year of the taxpayer ending after 
December 31, 1986, shall be taken into account ratably over 
the 2 taxable years beginning with such 2nd taxable year. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2371 
(7) 
SPECIAL RULE FOR SALES OF PERSONAL PROPERTY BY 
DEALERS.—In the case of installment obligations arising from 
the sale of personal property in the ordinary course of the trade 
or business of the taxpayer, solely for purposes of determining 
the time for pajmient of tax and interest payable with respect to 
such tax— 
(A) any increase in tax imposed by chapter 1 of the 
Internal Revenue Code of 1986 for the 1st taxable year of 
the taxpayer ending after December 31, 1986, by reason of 
the amendments made by this section shall be treated as 
imposed ratably over the 3 taxable years beginning with 
such 1st taxable year, and 
(B) any increase in tax imposed by such chapter 1 for the 
2nd taxable year of the taxpayer ending after December 31, 
1986 (determined without regard to subparagraph (A)), by 
reason of the amendments made by this section shall be 
treated as imposed ratably over the 2 taxable years begin-
ning with such 2nd taxable year. 
(8) TREATMENT OF CERTAIN INSTALLMENT OBUGATIONS.—Not-
withstanding the amendments made by subtitle B of title III, 
gain with respect to installment pajmients received pursuant to 
notes issued in accordance with a note eigreement dated as of 
August 29,1980, where— 
(A) such note agreement was executed pursuant to an 
agreement of purchsise and sale dated April 25,1980, 
(B) more than V
a of the installment payments of the 
aggregate principal of such notes have been received by 
August 29,1986, and 
(C) the last installment payment of the principal of such 
notes is due August 29,1989, 
shall be taxed at a rate of 28 percent, 
SEC. 812. DISALLOWANCE OF USE OF INSTALLMENT METHOD FOR CER-
TAIN OBLIGATIONS. 
(a) IN GENERAL.—Section 453 (relating to installment method) is 
amended by adding at the end thereof the following new subsection: 
"(j) CURRENT INCLUSION IN CASE OF REVOLVING CREDIT PLANS, 
ETC.—In the case of— 
"(1) any disposition of personal property under a revolving 
credit plan, or 
"(2) any installment obligation arising out of a sale of— 
"(A) stock or securities which are traded on an estab-
lished securities market, or 
"(B) to the extent provided in regulations, property (other 
than stock or securities) of a kind regularly traded on an 
established market, 
subsection (a) and section 453A shall not apply, and, for purposes of 
this title, all payments to be received shall be treated as received in 
the year of disposition. The Secretary may provide for the applica-
tion of this subsection in whole or in part for transactions in which 
the rules of this subsection otherwise would be avoided through the 
use of related parties, pass-thru entities, or intermediaries." 
(b) CONFORMING AMENDMENTS.— 
(1) Section 453A(aX2) (relating to installment method for 
dealers in personal property) is amended by striking out the last 
sentence thereof. 
100 STAT. 2372 
PUBLIC LAW 99-514—OCT. 22, 1986 
(2) Section 453A is amended by adding at the end thereof the 
following new subsection: 
"(c) CROSS REFERENCE.— 
"For disallowance of use of installment method for certain obligations, 
see section 453(j)." 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL,—Except as provided in paragraph (2), the 
amendment made by subsection (a) shall apply to taxable years 
beginning after December 31,1986. 
(2) CHANGE IN METHOD OF ACCOUNTING.—In the case of any 
taxpayer who made sales under a revolving credit plan and was 
on the installment method under section 453 or 453A of the 
Internal Revenue Code of 1986 for such taxpayer's last taxable 
year beginning before January 1, 1987, the amendments made 
by this section shall be treated as a change in method of 
accounting for its 1st taxable year beginning after December 31, 
1986, and— 
(A) such change shall be treated as initiated by the 
taxpayer, 
(B) such change shall be treated as having been made 
with the consent of the Secretary, and 
(C) the period for taking into account adjustments under 
section 481 of such Code by reason of such change shall not 
' 
exceed 4 years. 
Subtitle C—Other Provisions 
SEC. 821. INCOME ATTRIBUTABLE TO UTILITY SERVICES. 
(a) IN GENERAL.—Section 451 (relating to general rule for taxable 
year of inclusion) is amended by adding at the end thereof the 
following new subsection: 
"(0 SPECIAL RULE FOR UTILITY SERVICES.— 
"(1) IN GENERAL.—In the case of a taxpayer the taxable 
income of which is computed under an accrual method of 
accounting, any income attributable to the sale or furnishing of 
utility services to customers shall be included in gross income 
not later than the taxable year in which such services are 
provided to such customers. 
"(2) DEFINITION AND SPECIAL RULE.—For purposes of this 
subsection— 
"(A) UTIUTY SERVICES.—The term 'utility services' in-
cludes— 
"(i) the providing of electrical energy, water, or 
sewage disposal, 
"(ii) the furnishing of gas or steam through a local 
distribution system, 
"(iii) telephone or other communication services, and 
"(iv) the transporting of gas or steam by pipeline. 
"(B) YEAR IN WHICH SERVICES PROVIDED.—The taxable 
year in which services are treated as provided to customers 
shall not, in any manner, be determined by reference to— 
"(i) the period in which the customers' meters are 
read, or 
"(ii) the period in which the taxpayer bills (or may 
bill) the customers for such service.' 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2373 
O
t
)
) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
(2) CHANGE IN METHOD OF ACCOUNTING.—If a taxpayer is 
required by the amendments made by this section to change its 
method of accounting for any taxable year— 
(A) such change shall be treated as initiated by the 
taxpayer, 
(B) such change shall be treated as having been made 
with the consent of the Secretary, and 
(C) the adjustments under section 481 of the Internal 
Revenue Code of 1954 by reason of such change shall be 
taken into account ratably over a period no longer than the 
first 4 taxable years beginning after December 31, 1986. 
(3) SPECIAL RULE FOR CERTAIN CYCLE BILLING.—If a taxpayer 
for any taxable year beginning before August 16, 1986, for 
purposes of chapter 1 of the Internal Revenue Code of 1986 took 
into account income from services described in section 451(f) of 
such Code (as added by subsection (a)) on the bsisis of the period 
in which the customers' meters were read, then such treatment 
for such year shall be deemed to be proper. 
SEC. 822. REPEAL OF APPLICATION OF DISCHARGE OF INDEBTEDNESS 
RULES TO QUALIFIED BUSINESS INDEBTEDNESS. 
(a) GENERAL RULE.—Paragraph (1) of section 108(a) (relating to 
exclusion from gross income of income from discharge of indebted-
ness) is amended by striking out subparagraph (C), by inserting "or" 
at the end of subparagraph (A), and by striking out ", or" at the end 
of subparagraph (B) and inserting in lieu thereof a period. 
O
t
)
) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 108(a) is amended to read as 
follows: 
"(2) COORDINATION OF EXCLUSIONS.—Subparagraph (B) of para-
graph (1) shall not apply to a discharge which occurs in a title 
11 case." 
(2) Section 108 is amended by striking out subsection (c). 
(3) Section 108(d) is amended— 
(A) by striking out paragraph (4), 
(B) by striking out "subsections (a), Ot)), and (c)" each place 
it appears in the heading thereof and in the text and 
heading of paragraphs (6) and (7) and inserting in lieu 
thereof "subsections (a) and Ot>)", 
(C) by striking out the last sentence of paragraph (7)(B), 
and 
(D) by striking out "under paragraph (4) of this subsection 
or" in paragraph (9) thereof. 
(4) Section 1017(a)(2) is amended by striking out ", 03)(5), or 
(c)(1)(A)" and inserting in lieu thereof "or G))(5)". 
(5) Section 10170t))(3)(A) is amended by striking out "or 
(c)(1)(A)". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to discharges after December 31,1986. 
SEC. 823. REPEAL OF DEDUCTION FOR QUALIFIED DISCOUNT COUPONS. 
(a) GENERAL RULE.—Section 466 (relating to qualified discount 
coupons redeemed after close of taxable year) is repealed. 
O
b
) CONFORMING AMENDMENTS.— 
100 STAT. 2374 
PUBLIC LAW 99-514—OCT. 22, 1986 
(1) Paragraph (5) of section 461(h) is amended by striking out 
subparagraph (C) and by redesignating subparagraph (D) as 
subparagraph (C). 
(2) The table of contents for subpart C of part II of subchapter 
E of chapter 1 is amended by striking out the item relating to 
section 466. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
(2) CHANGE IN METHOD OF ACCOUNTING.—In the case of any 
taxpayer who elected to have section 466 of the Internal Reve-
nue Code of 1954 apply for such taxpayer's last taxable year 
beginning before January 1, 1987, and is required to change its 
method of accounting by reason of the amendments made by 
this section for any taxable year— 
(A) such change shall be treated as initiated by the 
taxpayer, 
(B) such change shall be treated as having been made 
with the consent of the Secretary, and 
(C) the net amount of adjustments required by section 481 
of the Internal Revenue Code of 1986 to be taken into 
account by the taxpayer shall— 
(i) be reduced by the balance in the suspense account 
under section 466(e) of such Code as of the close of such 
last taxable year, and 
(ii) be taken into account over a period not longer 
than 4 years. 
SEC. 824. INCLUSION IN GROSS INCOME OF CONTRIBUTIONS IN AID OF 
CONSTRUCTION. 
(a) GENERAL RULE.—Section 118 (relating to contributions to the 
capital of a corporation) is amended by striking out subsections (b) 
and (c), by redesignating subsection (d) as subsection (c), and by 
inserting after subsection (a) the following new subsection: 
"(b) CONTRIBUTIONS IN AID OF CONSTRUCTION, ETC.—For purposes 
of subsection (a), the term 'contribution to the capital of the tax-
payer' does not include any contribution in aid of construction or 
any other contribution as a customer or potential customer." 
(b) TECHNICAL AMENDMENT.—Subsection (c) of section 362 (relat-
ing to special rules for certain contributions to capital) is amended 
by striking out paragraph (3). 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except £is otherwise provided in this subsec-
tion, the amendments made by this section shall apply to 
amounts received after December 31, 1986, in taxable years 
ending after such date. 
(2) TREATMENT OF CERTAIN WATER SUPPLY PROJECTS.—The 
amendments made by this section shall not apply to amounts 
which are paid by the New Jersey Department of Environ-
mental Protection for construction of alternative water supply 
projects in zones of drinking water contamination and which 
are designated by such department as being taken into account 
under this paragraph. Not more than $4,631,000 of such 
amounts may be designated under the preceding sentence. 
(3) TREATMENT OF CERTAIN CONTRIBUTIONS BY TRANSPORTATION 
AUTHORITY.—The amendments made by this section shall not 
apply to contributions in aid of construction by a qualified 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2375 
transportation authority which were clearly identified in a 
master plan in existence on September 13, 1984, and which are 
designated by such authority as being taken into account under 
this paragraph. Not more than $68,000,000 of such contributions 
may be designated under the preceding sentence. For purposes 
of this paragraph, a qualified transportation authority is an 
entity which was created on February 20, 1967, and which was 
established by an interstate compact and consented to by Con-
gress in Public Law 89-774, 80 Stat. 1324 (1966). 
(4) TREATMENT OF CERTAIN PARTNERSHIPS.—In the case of a 
partnership with a taxable year beginning May 1, 1986, if such 
partnership realized net capital gain during the period begin-
ning on the 1st day of such taxable year and ending on May 29, 
1986, pursuant to an indemnity agreement dated May 6, 1986, 
then such partnership may elect to treat each asset to which 
such net capital gain relates as having been distributed to the 
partners of such partnership in proportion to their distributive 
share of the capital gain or loss realized by the partnership with 
respect to such asset and to treat each such asset as having been 
sold by each partner on the date of the sale of the asset by the 
partnership. If such an election is made, the consideration 
received by the partnership in connection with the sale of such 
assets shall be treated as having been received by the partners 
in connection with the deemed sale of such assets. In the case of 
a tiered partnership, for purposes of this paragraph each part-
nership shall be treated as having realized net capital gain 
equal to its proportionate share of the net capital gain of each 
partnership in which it is a partner, and the election provided 
by this paragraph shall apply to each tier. 
TITLE IX—FINANCIAL INSTITUTIONS 
SEC. 901. LIMITATIONS ON BAD DEBT RESERVES. 
(a) LARGE BANKS NOT EUGIBLE FOR BAD DEBT RESERVES.— 
(1) IN GENERAL.—Subsection (a) of section 585 (relating to 
reserves for losses on loans of banks) is amended to read as 
follows: 
"(a) RESERVE FOR BAD DEBTS.— 
"(1) IN GENERAL.—Except as provided in subsection (c), a bank 
shall be allowed a deduction for a reasonable addition to a 
reserve for bad debts. Such deduction shall be in lieu of any 
deduction under section 166(a). 
"(2) BANK.—For purposes of this section— 
"(A) IN GENERAL.—The term 'bank' means any bank (as 
defined in section 581) other than an organization to which 
section 593 applies. 
"(B) BANKING BUSINESS OF UNITED STATES BRANCH OF FOR-
EIGN CORPORATION.—The term 'bank' also includes any cor-
poration to which subparagraph (A) would apply except for 
the fact that it is a foreign corporation. In the case of any 
such foreign corporation, this section shall apply only with 
respect to loans outstanding the interest on which is effec-
tively connected with the conduct of a banking business 
within the United States." 
100 STAT. 2376 
PUBLIC LAW 99-514—OCT. 22, 1986 
(2) RESERVE DEDUCTION NOT AVAILABLE FOR LARGE BANKS.— 
Section 585 is amended by adding at the end thereof the follow-
ing new subsection: 
"(c) SECTION NOT TO APPLY TO LARGE BANKS.— 
"(1) IN GENERAL.—In the case of a large bank, this section 
shall not apply (and no deduction shall be allowed under any 
other provision of this subtitle for any addition to a reserve for 
bad debts). 
"(2) LARGE BANKS.—For purposes of this subsection, a bank is 
a large bank if, for the taxable year (or for any preceding 
taxable year beginning after December 31, 1986)— 
"(A) the average adjusted bases of all assets of such bank 
exceeded $500,000,000, or 
"(B) such bank was a member of a parent-subsidiary 
controlled group and the average adjusted bases of all 
assets of such group exceeded $500,000,000. 
"(3) 4-YEAR SPREAD OF ADJUSTMENTS.— 
"(A) IN GENERAL.—Except as provided in paragraph (4), in 
the case of any bank which for its last taxable year before 
the disqualification year maintained a reserve for bad 
debts— 
"(i) the provisions of this subsection shall be treated 
as a change in the method of accounting of such bank 
for the disqualification year, 
"(ii) such change shall be treated as having been 
made with the consent of the Secretary, and 
"(iii) the net amount of adjustments required by 
section 481(a) to be taken into account by the taxpayer 
shall be taken into account in each of the 4 taxable 
years beginning with the disqualification year with— 
"(I) the amount taken into account for the 1st of 
such taxable years being the greater of 10 percent 
of such net amount or such greater amount as the 
taxpayer may designate, and 
"(II) the amount taken into account in each of 
the 3 succeeding taxable years being equal to the 
applicable fraction (determined in accordance with 
the following table for the taxable year involved) of 
the portion of such net amount not taken into 
account under subclause (I). 
The applicable 
If the case of the— 
fraction is— 
1st succeeding year 
% 
2nd succeeding year 
V
s 
3rd succeeding year 
%. 
"(B) 
S U S P E N S I O N OF RECAPTURE FOR TAXABLE YEAR FOR 
WHICH B A N K IS FINANCIALLY TROUBLED.— 
"(i) IN GENERAL.—In the case of a bank which is a 
financially troubled bank for any taxable year— 
"(I) no adjustment shall be taken into account 
under subparagraph (A) for such taxable year, and 
"(II) such taxable year shall be disregarded in 
determining whether any other taxable year is a 
taxable year for which an adjustment is required 
to be taken into account under subparagraph (A) or 
the amount of such adjustment. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2377 
"(ii) EXCEPTION FOR ELECTIVE RECAPTURE FOR IST 
YEAR.—Clause (i) shall not apply to the 1st taxable year 
referred to in subparagraph (AXiiiXD if the taxpayer 
designates an amount in accordance with such subpara-
graph. 
"(iii) FINANCIALLY TROUBLED BANK.—For purposes of 
clause (i), the term 'financially troubled bank' means 
any bank if, for the taxable year, the nonperforming 
loan percentage of such bank exceeds 75 percent. 
"(iv) NONPERFORMING LOAN PERCENTAGE.—For pur-
poses of clause (iii), the term 'nonperforming loan 
percentage' means the percentage determined by 
dividing— 
"(I) the sum of the outstanding balances of 
nonperforming loans of the bank as of the close of 
each quarter of the taxable year, by 
"(II) the sum of the amounts of equity of the 
bank as of the close of each such quarter. 
In the case of a bank which is a member of a parent-
subsidiary controlled group for the taxable year, the 
preceding sentence shall be applied with respect to 
such group. 
"(v) 
OTHER 
DEFINITIONS.—For purposes of this 
subparagraph— 
"(I) 
NONPERFORMING 
LOANS.—The 
term 
'nonperforming loan' means any loan which is 
considered to be nonperforming by the primary 
Federal regulatory agency with respect to the 
bank. 
"(II) EQUITY.—The term 'equity' means the 
equity of the bank as determined for Federal regu-
latory purposes. 
"(C) COORDINATION WITH ESTIMATED TAX PAYMENTS.—For 
purposes of applying section 6655(dX3) with respect to any 
instiallment, the determination under subparagraph (B) of 
whether an adjustment is required to be taken into account 
under subparagraph (A) shall be made as of the last day 
prescribed for payment of such installment. 
"(4) ELECTIVE CUT-OFF METHOD.—If a bank makes an election 
under this paragraph for the disqualification year— 
"(A) the provisions of this subsection shall not be treated 
as a change in the method of accounting of the taxpayer for 
purposes of section 481, 
"(B) the taxpayer shall continue to maintain its reserve 
for loans held by the bank as of the 1st day of the disquali-
fication year and charge against such reserve any losses 
resulting from loans held by the bank as of such 1st day, 
and 
"(C) no deduction shall be allowed under this section (or 
any other provision of this subtitle) for any addition to such 
reserve for the disqualification year or any subsequent 
taxable year. 
"(5) DEFINITIONS.—For purposes of this subsection— 
"(A) PARENT-SUBSIDIARY CONTROLLED GROUP.—The term 
'parent-subsidiary controlled group' means any controlled 
group of corporations described in section 1563(aXl). In 
determining the average adjusted bases of assets held by 
100 STAT. 2378 
PUBLIC LAW 99-514—OCT. 22, 1986 
such a group, interests held by one member of such group 
in another member of such group shall be disregarded. 
"(B) DISQUALIFICATION YEAR.—The term 'disqualification 
year' means, with respect to any bank, the 1st taxable year 
beginning after December 31, 1986, for which such bank 
was a large bank if such bank maintained a reserve for bad 
debts for the preceding taxable year." 
(b) RESERVES OF DOMESTIC BUILDING 
AND LOAN 
ASSOCIATIONS, 
MUTUAL SAVINGS BANKS, AND COOPERATIVE B A N K S -
CD I N GENERAL.—Subsection (a) of section 593 (relating to 
reserves for losses on loans) is amended to read as follows: 
"(a) RESERVE FOR BAD DEBTS.— 
"(1) I N GENERAL.—Except as provided in paragraph (2), in the 
case of— 
"(A) any domestic building and loan association, 
"(B) any mutual savings bank, or 
"(C) any cooperative bank without capital stock organized 
and operated for mutual purposes and without profit, 
there shall be allowed a deduction for a reasonable addition to a 
reserve for bad debts. Such deduction shall be in lieu of any 
deduction under section 166(a). 
"(2) ORGANIZATION MUST MEET 60-PERCENT ASSET TEST OF SEC-
TION 770i(axi9).—This section shall apply to an association or 
bank referred to in paragraph (1) only if it meets the require-
ments of section 7701(a)(19)(C)." 
(2) LIMITATION ON PERCENTAGE OF TAXABLE INCOME METHOD.— 
Paragraph (2) of section 593(b) (relating to percentage of taxable 
income method) is amended— 
(A) by striking out subparagraphs (A), (B), and (C) and 
inserting in lieu thereof the following: 
"(A) I N GENERAL.—Subject to subparagraphs (B) and (C), 
the amount determined under this paragraph for the tax-
able year shall be an amount equal to 8 percent of the 
taxable income for such year. 
"(B) REDUCTION FOR AMOUNTS REFERRED TO IN PARAGRAPH 
(IKA).—The amount determined under subparagraph (A) 
shall be reduced (but not below 0) by the amount deter-
mined under paragraph (1)(A).", and 
(B) by redesignating subparagraphs (D) and (E) as sub-
paragraphs (C) and (D), respectively. 
(3) REPEAL OF PERCENTAGE METHOD OF COMPUTING RESERVES 
FOR BAD DEBTS.—SubsectioD (b) of section 593 (relating to addi-
tion to reserves for bad debts) is amended by striking out 
paragraphs (3) and (5) and by redesignating paragraph (4) as 
paragraph (3). 
(4) SECTION 593 RESERVES NOT TREATED AS PREFERENCE FOR 
PURPOSES OF SECTION 291.—Subparagraph (A) of section 291(e)(1) 
(defining financial institution preference item) is amended by 
striking out "or 593". 
(c) REPEAL OF SECTION 586.—Section 586 (relating to reserves for 
losses on loans of small business investment companies, etc.) is 
hereby repealed. 
(d) CONFORMING AMENDMENTS.— 
(1) AMENDMENT TO SECTION 585.—Paragraph (1) of section 
585(b) is amended by striking out "section 166(c)" and inserting 
in lieu thereof "subsection (a)". 
(2) AMENDMENTS TO SECTION 593.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2379 
(A) Paragraph (1) of section 593(b) is amended by striking 
out "section 166(c)" and inserting in lieu thereof "subsec-
tion (a)". 
(B) Subparagraph (B) of section 593(b)(1) is amended— 
(i) by striking out "paragraph (2), (3), or (4), which-
ever amount is the largest" and inserting in Ueu 
thereof "paragraph (2) or (3), whichever is the larger", 
and 
(ii) by striking out "paragraph (4)" in clause (i) and 
inserting in lieu thereof "paragraph (3)". 
(B) Subparagraph (D) of section 593(b)(2) (as redesignated 
by subsection (b)(2)) is amended by striking out "the ap-
plicable percentage (determined under subparagraphs (A) 
and (B))" and inserting in lieu thereof "8 percent". 
(C) Subparagraph (B) of section 593(e)(1) is amended by 
striking out "subsection (b)(4)" and inserting in lieu thereof 
"subsection (b)(3)". 
(3) BONDS, ETC., LOSSES AND GAINS OF FINANCIAL INSTITU-
TIONS.— 
(A) Paragraph (1) of section 582(c) (relating to bonds, etc., 
losses and gains of financial institutions) is amended by 
striking out "a financial institution to which section 585, 
586, or 593 applies" and inserting in lieu thereof "a finan-
cial institution referred to in paragraph (5)". 
(B) Subsection (c) of section 582 is amended by adding at 
the end thereof the following new paragraph: 
"(5) 
FINANCIAL INSTITUTIONS TO WHICH PARAGRAPH 
(i) 
APPLIES.— 
"(A) IN GENERAL.—For purposes of paragraph (1), the 
financial institutions referred to in this paragraph are— 
"(i) any bank (and any corporation which would be a 
bank except for the fact it is a foreign corporation), 
"(ii) any financial institution referred to in section 
591, 
"(iii) any small business investment company operat-
ing under the Small Business Investment Act of 1958, 
and 
"(iv) any business development corporation. 
"(B) BUSINESS DEVELOPMENT CORPORATION.—For purposes 
of subparagraph (A), the term 'business development cor-
poration' means a corporation which was created by or 
pursuant to an act of a State legislature for purposes of 
promoting, maintaining, and assisting the economy and 
industry within such State on a regional or statewide basis 
by making loans to be used in trades and businesses which 
would generally not be made by banks within such region 
or State in the ordinary course of their business (except on 
the basis of a partial participation), and which is operated 
primarily for such purposes. 
"(C) LIMITATIONS ON FOREIGN BANKS.—In the case of a 
foreign corporation referred to in subparagraph (A)(i), para-
graph (1) shall only apply to gains and losses which are 
effectively connected with the conduct of a banking busi-
ness in the United States." 
(4) OTHER CONFORMING AMENDMENTS.— 
(A) Subsection (g) of section 166 is amended by striking 
out paragraphs (3) and (4). 
100 STAT. 2380 
PUBLIC LAW 99-514—OCT. 22, 1986 
(B) Subparagraph (F) of section 172(bXl) is amended by 
striking out "to which section 585, 586, or 593 applies" and 
inserting in lieu thereof "referred to in section 582(c)(5)". 
(C) Clause (i) of section 291(e)(1)(B) is amended by striking 
out "to which section 585 or 593 applies" and inserting in 
lieu thereof "which is a bank (as defined in section 582(a)(2)) 
or to which section 593 applies". 
(D) Section 596 is amended by striking out "an amount 
equal to" and all that follows down through the period at 
the end thereof and inserting in lieu thereof "an amount 
equal to 8 percent of such total amount." 
(E) Paragraph (4) of section 856(a) is amended by striking 
out "to which section 585, 586, or 593 applies" and inserting 
in lieu thereof "referred to in section 582(c)(5)". 
(F) Subsection (c) of section 1277 is amended by striking 
out "to which section 585 or 593 applies" and inserting in 
lieu thereof "which is a bank (as defined in section 585(a)(2) 
or to which section 593 applies". 
(G) Subparagraph (B) of section 1361(b)(2) is amended by 
striking out "to which section 585 or 593 applies" and 
inserting in lieu thereof "which is a bank (as defined in 
section 585(a)(2)) or to which section 593 applies". 
(H) The table of sections for part I of subchapter H of 
chapter 1 is amended by striking out the item relating to 
section 586. 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
SEC. 902. INTEREST INCURRED TO CARRY TAX-EXEMPT BONDS. 
(a) GENERAL RULE.—Section 265 (relating to expenses and interest 
relating to tax-exempt income) is amended by adding at the end 
thereof the following new subsection: 
"(b) PRO RATA ALLOCATION OF INTEREST EXPENSE OF FINANCIAL 
INSTITUTIONS TO TAX-EXEMPT INTEREST.— 
"(1) IN GENERAL.—In the case of a financial institution, no 
deduction shall be allowed for that portion of the taxpayer's 
interest expense which is allocable to tax-exempt interest. 
"(2) ALLOCATION.—For purposes of paragraph (1), the portion 
of the taxpayer's interest expense which is allocable to tax-
exempt interest is an amount which bears the same ratio to 
such interest expense as— 
"(A) the taxpayer's average adjusted bases (within the 
meaning of section 1016) of tax-exempt obligations acquired 
after August 7,1986, bears to 
"(B) such average adjusted bases for all assets of the 
taxpayer. 
"(3) EXCEPTION FOR CERTAIN TAX-EXEMPT OBLIGATIONS.— 
"(A) IN GENERAL.—Any qualified tax-exempt obligation 
acquired after August 7, 1986, shall be treated for purposes 
of paragraph (2) and section 291(e)(1)(B) as if it were ac-
quired on August 7, 1986. 
"(B) QUALIFIED TAX-EXEMPT OBLIGATION.—For purposes of 
subparagraph (A), the term 'qualified tax-exempt obliga-
tion' means a tax-exempt obligation which— 
"(i) is not a private activity bond (as defined in 
section 141), and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2381 
"(ii) is designated by the issuer for purposes of this 
paragraph. 
For purposes of the preceding sentence and subparagraph 
(C), a qualified 501(c)(3) bond (as defined in section 145) shall 
not be treated as a private activity bond. 
"(C) LIMITATION ON ISSUER.—An obligation issued by an 
issuer during any calendar year shall not be treated as a 
qualified tax-exempt obligation unless the reasonably 
anticipated amount of qualified tax-exempt obligations 
(other than private activity bonds) which will be issued by 
such issuer during such calendar year does not exceed 
$10,000,000. 
"(D) OVERALL $10,000,000 LIMITATION.—Not more than 
$10,000,000 of obligations issued by an issuer during any 
calendar year may be designated by such issuer for pur-
poses of this paragraph. 
"(E) AGGREGATION OF ISSUERS.—For purposes of subpara-
graphs (C) and (D), an issuer and all subordinate entities 
thereof shall be treated as 1 issuer. 
"(4) DEFINITIONS.—For purposes of this subsection— 
"(A) INTEREST EXPENSE.—The term 'interest expense' 
means the aggregate amount allowable to the taxpayer as a 
deduction for interest for the taxable year (determined 
without regard to this subsection and section 291). For 
purposes of the preceding sentence, the term 'interest' in-
cludes amounts (whether or not designated as interest) paid 
in 
respect 
of deposits, 
investment 
certificates, or 
withdrawable or repurchasable shares. 
"(B) TAX-EXEMPT OBLIGATION.—The term 'tax-exempt 
obligation' means any obligation the interest on which is 
wholly exempt from taxes imposed by this subtitle. Such 
term includes shares of stock of a regulated investment 
company which during the taxable year of the holder 
thereof distributes exempt-interest dividends. 
"(5) FINANCIAL INSTITUTION.—For purposes of this subsection, 
the term 'financial institution' means any person who— 
"(A) accepts deposits from the public in the ordinary 
course of such person's trade or business, and is subject to 
Federal or State supervision as a financial institution, or 
"(B) is a corporation described in section 585(aX2). 
"(6) SPECIAL RULES.— 
"(A) COORDINATION WITH SUBSECTION (a).—If interest on 
any indebtedness is disallowed under subsection (a) with 
respect to any tax-exempt obligation— 
"(i) such disallowed interest shall not be taken into 
account for purposes of applying this subsection, and 
"(ii) for purposes of applying paragraph (2), the ad-
justed basis of such tax-exempt obligation shall be 
reduced (but not below zero) by the amount of such 
indebtedness. 
"(B) COORDINATION WITH SECTION 263A.—This section 
shall be applied before the application of section 263A 
(relating to capitalization of certain expenses where tax-
payer produces property)." 
(b) REPEAL OF SPECIAL TREATMENT FOR CERTAIN FINANCIAL 
INSTITUTIONS.—Paragraph (2) of section 265 (as in effect on the day 
100 STAT. 2382 
PUBLIC LAW 99-514—OCT. 22, 1986 
before the date of the enactment of this Act) is amended by striking 
out the second sentence. 
(c) TERMINATION 
OF REDUCTION 
IN DEDUCTION 
FOR INTEREST 
ALLOCABLE TO TAX-EXEMPT OBLIGATIONS UNDER SECTION 291.— 
(1) IN GENERAL.—Clause (i) of section 291(e)(1)(B) (relating to 
interest on debt to carry tax-exempt obligations acquired after 
December 31, 1982) is amended by striking out "after Decem-
ber 31, 1982" and inserting in lieu thereof "after December 31, 
1982, and before August 8, 1986". 
(2) TECHNICAL AMENDMENTS.—Subparagraph (B) of section 
291(e)(1) is amended— 
(A) by striking out "(but for this paragraph)" in clause (i) 
and inserting in lieu thereof "(but for this paragraph or 
section 265(b))", 
(B) by striking out "without regard to this section" in 
clause (ii) and inserting in lieu thereof "without regard to 
this section and section 265(b)", 
(C) by striking out "AFTER DECEMBER 
3 1 , 1982" in the 
subparagraph heading and inserting in lieu thereof "AFTER 
DECEMBER 31, 1982, AND BEFORE AUGUST 8, 1986", and 
(D) by adding at the end thereof the following new clause: 
"(iv) 
APPLICATION 
OF SUBPARAGRAPH 
TO CERTAIN 
OBLIGATIONS ISSUED AFTER AUGUST 7, 1986.— 
"For application of this subparagraph to certain obligations issued after 
August 7, 1986, see section 265(b)(3)." 
(d) CLERICAL AMENDMENT.—Section 265 is amended by striking 
out "No deduction shall be allowed for—" and inserting in lieu 
thereof the following: 
"(a) GENERAL RULE.—No deduction shall be allowed for—". 
(e) CONFORMING AMENDMENTS.— 
(1) Section 163(h)(12) is amended by striking out "section 
265(2)" and inserting in lieu thereof "section 265(a)(2)". 
(2) Section 1277(c) is amended by striking out "section 265(5)" 
and inserting in lieu thereof "section 265(a)(5)". 
(D EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to taxable years 
ending after December 31, 1986. 
(2) OBLIGATIONS 
ACQUIRED 
PURSUANT TO CERTAIN 
COMMIT-
MENTS.—For purposes of sections 265(b) and 291(e)(1)(B) of the 
Internal 
Revenue Code of 1986, any tax-exempt 
obligation 
which is acquired after August 7, 1986, pursuant to a direct or 
indirect written commitment— 
(A) to purchase or repurchase such obligation, and 
(B) entered into on or before September 25, 1985, 
shall be treated as an obligation acquired before August 8, 1986. 
(3) TRANSITIONAL RULES.—For purposes of sections 265(b) and 
291(e)(1)(B) of the Internal Revenue Code of 1986, obligations 
with respect to any of the following projects shall be treated as 
obligations acquired before August 8, 1986, in the hands of the 
first and any subsequent financial institution acquiring such 
obligations: 
(A) Park Forest, Illinois, redevelopment project. 
(B) Clinton, Tennessee, Carriage Trace project. 
(C) Savannah, Georgia, Mall Terrace Warehouse project. 
(D) Chattanooga, Tennessee, Warehouse Row project. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2383 
(E) Dalton, Georgia, Towne Square project. 
(F) Milwaukee, Wisconsin, Standard Electric Supply Com-
pany—distribution company. 
(G) Wausau, Wisconsin, urban renewal project. 
(H) Cassville, Missouri, UDAG project. 
(I) Outlook Envelope Company—plant expansion. 
(J) Woodstock, Connecticut, Crabtree Warehouse partner-
ship. 
(K) Louisville, Kentucky, Speed Mansion renovation 
project. 
(L) Charleston, South Carolina, waterfront project. 
(M) New Orleans, Louisiana, Upper Pontabla Building 
renovation. 
(N) Woodward Wight Building. 
(O) Minneapolis, Minnesota, Miller Milling Company— 
flour mill project. 
(P) Birmingham, Alabama, Club Apartments. 
(Q) Charlotte, North Carolina—qualified mortgage bonds 
acquired by NCNB bank ($5,250,000). 
(R) Grand Rapids, Michigan, Central Bank project. 
(S) Ruppman Marketing Services, Inc.—building project. 
(4) 
ADDITIONAL 
TRANSITIONAL 
RULE.—Obligations 
issued 
pursuant to an allocation of a State's volume limitation for 
private activity bonds, which allocation was made by Executive 
Order 25 signed by the Governor of the State on May 22, 1986 
(as such order may be amended before January 1, 1987), shall be 
treated as acquired on or before August 7, 1986, in the hands of 
the first and any subsequent financial institution acquiring 
such obligation. The aggregate face amount of obligations to 
which this subparagraph applies shall not exceed $200,000,000. 
SEC. 903. TERMINATION OF SPECIAL 10-YEAR CARRYBACK RULES FOR 
CERTAIN FINANCIAL INSTITUTIONS; NEW SPECIAL CARRY-
OVER RULES FOR CERTAIN LOSSES. 
(a) TERMINATION OF SPECIAL 10-YEAR CARRYBACK RULES FOR CER-
TAIN FINANCIAL INSTITUTIONS.— 
(1) Subparagraph (F) of section 172(b)(1) (relating to years to 
which loss may be carried) is amended by striking out "after 
December 31, 1975," and inserting in lieu thereof "after Decem-
ber 31,1975, and before January 1,1987,". 
(2) Subparagraph (G) of section 172(b)(1) is amended by strik-
ing out "after December 31, 1969," and inserting in lieu thereof 
"after December 31,1969, and before January 1,1987,". 
(3) Subparagraph (H) of section 172(b)(1) is amended— 
(A) by striking out "after December 31, 1981," and insert-
ing in lieu thereof "after December 31, 1981, and before 
January 1,1987,", and 
(B) by striking out "after December 31, 1984," and insert-
ing in lieu thereof "after December 31, 1984, and before 
January 1,1987,". 
(b) SPECIAL 10-YEAR CARRYBACK FOR BAD DEBT LOSSES OF COMMER-
CIAL BANKS; ADDITIONAL 3-YEAR CARRYFORWARD FOR LOSSES OF 
THRIFT INSTITUTIONS.— 
(1) IN GENERAL.—Paragraph (1) of section 172(b) (relating to 
year to which loss may be carried) is amended by adding at the 
end thereof the following new subparagraphs: 
100 STAT. 2384 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(L) BAD DEBT LOSSES OF COMMERCIAL BANKS.—In the case 
of any bank (as defined in section 585(a)(2)), the portion of 
the net operating loss for any taxable year beginning after 
December 31, 1986, and before January 1, 1994, which is 
attributable to the deduction allowed under section 166(a) 
shall be a net operating loss carryback to each of the 10 
taxable years preceding the taxable year of the loss and a 
net operating loss carryover to each of the 5 taxable years 
following the taxable year of such loss. 
"(M) LOSSES OF THRIFT INSTITUTIONS.—In the case of an 
organization to which section 593 applies, in lieu of apply-
ing subparagraph (F), a net operating loss for any taxable 
year beginning after December 31, 1981, and before Janu-
ary 1, 1986, shall be a net operating loss carryback to each 
of the 10 taxable years preceding the taxable year of such 
loss and shall be a net operating loss carryover to each of 
the 8 taxable years following the taxable year of such loss." 
(2) TECHNICAL AMENDMENTS.— 
(A) Subparagraph (A) of section 172(b)(1) is amended by 
striking out "and (K)" and inserting in lieu thereof "(K), (L), 
and (M)". 
(B) Subparagraph (B) of section 1720t>Xl) is amended by 
striking out "and (J)" and inserting in lieu thereof "(J), (L), 
and (M)". 
(C) Section 172 is amended by redesignating subsection (1) 
as subsection (m) and by inserting after subsection (k) the 
following new subsection: 
"(1) 
RULES RELATING TO BAD DEBT LOSSES OF COMMERCIAL 
BANKS.—For purposes of this section— 
"(1) PORTION ATTRIBUTABLE TO DEDUCTION FOR BAD DEBTS.— 
The portion of the net operating loss for any taxable year which 
is attributable to the deduction allowed under section 166(a) 
shall be the excess of— 
"(i) the net operating loss for such taxable year, over 
"(ii) the net operating loss for such taxable year deter-
mined without regard to the amount allowed as a deduction 
under section 166(a) for such taxable year. 
"(2) COORDINATION WITH SUBSECTION (b)(2).—In applying 
paragraph (2) of subsection (b), the portion of the net operating 
loss for any taxable year which is attributable to the deduction 
allowed under section 166(a) shall be treated in a manner 
similar to the manner in which a foreign expropriation loss is 
treated." 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to losses incurred 
in taxable years beginning after December 31,1986. 
(2) ADDITIONAL CARRYFORWARD PERIOD FOR LOSSES OF THRIFT 
INSTITUTIONS.—Subparagraph (M) of section 1720))(1) of the In-
ternal Revenue Code of 1986 (as added by this section) shall 
apply to losses incurred in taxable years beginning after Decem-
ber 31,1981. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2385 
SEC. 904. REPEAL OF SPECIAL REORGANIZATION RULES FOR FINANCIAL 
INSTITUTIONS. 
(a) GENERAL RULE.—Subparagraph (D) of section 368(a)(3) (relating 
to agency receivership proceedings which involve financial institu-
tions) is amended to read as follows: 
"(D) 
AGENCY 
RECEIVERSHIP PROCEEDINGS WHICH 
INVOLVE 
FINANCIAL INSTITUTIONS.—For purposes of subparagraphs (A) 
and (B), in the case of a receivership, foreclosure, or similar 
proceeding before a Federal or State agency involving a finan-
cial institution referred to in section 581 or 591, the agency shall 
be treated as a court." 
(b) REPEAL OF SPECIAL TREATMENT FOR F S L I C FINANCIAL ASSIST-
ANCE.— 
(1) Section 597 (relating to FSLIC financial assistance) is 
hereby repealed. 
(2) The table of sections for part II of subchapter H of chapter 
1 is amended by striking out the item relating to section 597. 
(c) EFFECTIVE DATES.— 
(1) SUBSECTION (a).—The amendments made by subsection (a) 
shall apply to acquisitions after December 31, 1988, in taxable 
years ending after such date. 
(2) SUBSECTION (b) .— 
(A) IN GENERAL.—The amendments made by subsection 
(b) shall apply to transfers after December 31, 1988, in 
taxable years ending after such date; except that such 
amendments shall not apply to transfers after such date 
pursuant to an acquisition to which the amendments made 
by subsection (a) do not apply. 
(B) CLARIFICATION OF TREATMENT OF AMOUNTS EXCLUDED 
UNDER SECTION 597.—Section 265(a)(1) of the Internal Reve-
nue Code of 1986 (as amended by this title) shall not deny 
any deduction by reason of such deduction being allocable 
to amounts excluded from gross income under section 597 of 
the Internal Revenue Code of 1954 (as in effect on the day 
before the date of the enactment of this Act). 
SEC. 905. TREATMENT OF LOSSES ON DEPOSITS OR ACCOUNTS IN INSOL-
VENT FINANCIAL INSTITUTIONS. 
(a) IN GENERAL.—Section 165 (relating to losses^ is amended by 
redesignating subsection (1) as subsection (m) and by inserting after 
subsection (k) the following new subsection: 
"(1) TREATMENT OF CERTAIN LOSSES IN INSOLVENT FINANCIAL 
INSTITUTIONS.— 
"(1) IN GENERAL.—If— 
"(A) as of the close of the taxable year, it can reasonably 
be estimated that there is a loss on a qualified individual's 
deposit in a qualified financial institution, and 
"(B) such loss is on account of the bankruptcy or insol-
vency of such institution, 
then the taxpayer may elect to treat the amount so estimated as 
a loss described in subsection (c)(3) incurred during the taxable 
year. 
"(2) QUALIFIED INDIVIDUAL DEFINED.—For purposes of this 
subsection, the term 'qualified individual' means any individ-
ual, except an individual— 
"(A) who owns at least 1 percent in value of the outstand-
ing stock of the qualified financial institution, 
100 STAT. 2386 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(B) who is an officer of the qualified financial institu-
tion, 
"(C) who is a sibling (whether by the whole or half blood), 
spouse, aunt, uncle, nephew, niece, ancestor, or lineal 
descendant of an individual described in subparagraph (A) 
or (B), or 
"(D) who otherwise is a related person (as defined in 
section 267(b)) with respect to an individual described in 
subparagraph (A) or (B). 
"(3) QUALIFIED FINANCIAL INSTITUTION.—For purposes of this 
subsection, the term 'qualified financial institution' means— 
"(A) any bank (as defined in section 581), 
"(B) any institution described in section 591, 
"(C) any credit union the deposits or accounts in which 
are insured under Federal or State law or are protected or 
guaranteed under State law, or 
"(D) any similar institution chartered and supervised 
under Federal or State law, 
"(4) DEPOSIT.—For purposes of this subsection, the term 'de-
posit' 
means 
any deposit, 
withdrawable 
account, 
or 
withdrawable or repurchasable share. 
"(5) ELECTION.—Any election by the taxpayer under this 
subsection may be revoked only with the consent of the Sec-
retary and shall apply to all losses of the taxpayer on deposits in 
the institution with respect to which such election was made. 
"(6) COORDINATION WITH SECTION 166.—Section 166 shall not 
apply to any loss to which an election under this subsection 
applies." 
(b) INTEREST ON FROZEN DEPOSITS.—Section 451 (relating to gen-
eral rule for taxable year of inclusion) is amended by adding at the 
end thereof the following new subsection: 
"(f) TREATMENT OF INTEREST ON FROZEN DEPOSITS IN CERTAIN 
FINANCIAL INSTITUTIONS.— 
"(1) IN GENERAL.—In the case of interest credited during any 
calendar year on a frozen deposit in a qualified financial institu-
tion, the amount of such interest includible in the gross income 
of a qualified individual shall not exceed the sum o
f
— 
"(A) the net amount withdrawn by such individual from 
such deposit during such calendar year, and 
"(B) the amount of such deposit which is withdrawable as 
of the close of the taxable year (determined without regard 
to any penalty for premature withdrawals of a time de-
posit). 
"(2) INTEREST TESTED EACH YEAR.—Any interest not included 
in gross income by reason of paragraph (1) shall be treated as 
credited in the next calendar year. 
"(3) DEFERRAL OF INTEREST DEDUCTION.—No deduction shall be 
allowed to any qualified financial institution for interest not 
includible in gross income under paragraph (1) until such in-
terest is includible in gross income. 
"(4) FROZEN DEPOSIT.—For purposes of this subsection, the 
term 'frozen deposit' means any deposit if, as of the close of the 
calendar year, any portion of such deposit may not be with-
drawn because o
f
— 
"(A) the bankruptcy or insolvency of the qualified finan-
cial institution (or threat thereof), or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2387 
"(B) any requirement imposed by the State in which such 
institution is located by reason of the bankruptcy or insol-
vency (or threat thereof) of 1 or more financial institutions 
in the State. 
"(5) OTHER DEFINITIONS.—For purposes of this subsection, the 
terms 'qualified individual', 'qualified financial institution', and 
'deposit' have the same respective meanings as when used in 
section 165(1)." 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to taxable years 
beginning after December 31, 1982. 
(2) SPECIAL RULES FOR SUBSECTION (b).— 
(A) The amendment made by subsection (b) shall apply to 
taxable years beginning after December 31, 1982, and 
before January 1, 1987, only if the qualified individual 
elects to have such amendment apply for all such taxable 
years. 
(B) In the case of interest attributable to the period 
beginning January 1, 1983, and ending December 31, 1987, 
the interest deduction of financial institutions shall be 
determined without regard to paragraph (3) of section 451(f) 
of the Internal Revenue Code of 1986 (as added by subsec-
tion (b)). 
TITLE X—INSURANCE PRODUCTS AND 
COMPANIES 
Subtitle A—Policyholder Issues 
SEC. 1001. REPEAL OF EXCLUSION FOR INTEREST ON INSTALLMENT PAY-
MENTS OF LIFE INSURANCE PROCEEDS. 
(a) IN GENERAL.—The second sentence of paragraph (1) of section 
101(d) (relating to pa3rment of life insurance proceeds at a date later 
than death) is amended to read as follows: "There shall be excluded 
from the gross income of such beneficiary in the taxable year 
received any amount determined by such proration." 
(b) DETERMINATION OF AMOUNT HELD BY INSURER.—Clause (ii) of 
section 101(dX2XB) is amended to read as follows: 
"(ii) as discounted on the bsisis of the interest rate 
used by the insurer in calculating payments under the 
agreement and mortality tables prescribed by the Sec-
retary." 
(c) TECHNICAL AMENDMENTS.— 
(1) Subsection (d) of section 101 is amended by striking out 
paragraph (3) and by redesignating paragraph (4) as paragraph 
(3). 
(2) Subparagraph (B) of section 101(dX2) is amended by strik-
ing out "is equal" and inserting in lieu thereof "equal". 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
apply to amounts received with respect to deaths occurring after the 
date of the enactment of this section in taxable years ending after 
such date. 
100 STAT. 2388 
PUBLIC LAW 99-514—OCT. 22, 1986 
SEC. 1002. EXCLUSION FROM INCOME WITH RESPECT TO STRUCTURED 
SETTLEMENTS LIMITED TO CASES INVOLVING PHYSICAL 
INJURY. 
(a) IN GENERAL.—Subsection (c) of section 130 (relating to certain 
personal insurance liability assignments) is amended by inserting 
"(in a case involving physical injury or physical sickness)" after 
"personal injury or sickness". 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to assignments entered into after December 31, 1986, in 
taxable years ending after such date. 
SEC. 1003. DENIAL OF DEDUCTION FOR INTEREST ON LOANS FROM CER-
TAIN LIFE INSURANCE CONTRACTS. 
(a) IN GENERAL.—Section 264(a) (relating to disallowance of deduc-
tion for certain amounts paid in connection with insurance con-
tracts) is amended by adding after paragraph (3) the following new 
paragraph: 
"(4) Any interest paid or accrued on any indebtedness with 
respect to 1 or more life insurance policies owned by the tax-
payer covering the life of any individual who— 
"(A) is an officer or employee of, or 
"(B) is financially interested in, 
any trade or business carried on by the taxpayer to the extent 
that the aggregate amount of such indebtedness with respect to 
policies covering such individual exceeds $50,000." 
(b) CONFORMING AMENDMENT.—Section 264(a) is amended by 
adding at the end thereof the following new sentence: "Paragraph 
(4) shall apply with respect to contracts purchased after June 20, 
1986." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to contracts purchased after June 20, 1986, in taxable years 
ending after such date. 
SEC. 1004. DEDUCTION FOR NONBUSINESS CASUALTY LOSSES COVERED 
BY INSURANCE ALLOWABLE ONLY IF CLAIM FILED. 
(a) IN GENERAL.—Paragraph (4) of section 165(h) (relating to treat-
ment of casualty gains and losses) is amended by adding at the end 
thereof the following new subparagraph: 
"(E) CLAIM REQUIRED TO BE FILED IN CERTAIN CASES.—Any 
loss of an individual described in subsection (cX3) to the 
extent covered by insurance shall be taken into account 
under this section only if the individual files a timely 
insurance claim with respect to such loss." 
O
t
)
) EFFECTIVE DATE.—The amendment made by this section shall 
apply to losses sustained in taxable years beginning after Decem-
ber 31, 1986. 
Subtitle B—Life Insurance Companies 
SEC. 1011. REPEAL OF SPECIAL LIFE INSURANCE COMPANY DEDUCTION. 
(a) IN GENERAL.—Section 806 is amended by striking out subsec-
tion (a) and by redesignating subsections (b), (c), and (d), as subsec-
tions (a), Ot)), and (c), respectively. 
(b) TECHNICAL AND CONFORMING AMENDMENTS.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2389 
(1) Sections 453B(eX2XB) and 465(cX7XDXv) are each amended 
by striking out "section 806(cX3)" and inserting in lieu thereof 
"section 806a)X3)". 
(2) Section 804 is amended by adding "and" at the end of 
paragraph (1) and by striking out paragraphs (2) and (3) and 
inserting in lieu thereof the following: 
"(2) the small life insurance company deduction (if any) deter-
mined under section 806(a)." 
(3) Subparagraph (C) of section 801(aX2) is amended— 
(A) by striking out "the amounts allowable as deductions 
under paragraphs (2) and (3)" and inserting in lieu thereof 
"the amount allowable as a deduction under paragraph 
(2)", and 
(B) by striking out "SPECIAL UFE INSURANCE COMPANY 
DEDUCTION AND" in the heading. 
(4) Clause (i) of section 805(aX4XB) and clause (iii) of section 
80503X3XA) are each amended by striking out "the special life 
insurance company deduction and". 
(5) Paragraph (1) of section 806(b), as redesignated by subsec-
tion (a), is amended by striking out "without regard to—" and 
all that follows and inserting in lieu thereof "without regard to 
the small life insurance company deduction." 
(6) Paragraph (1) of section 806(c), as redesignated by subsec-
tion (a), is amended— 
(A) by striking out "subsections (a) and (b)" and inserting 
in lieu thereof "subsection (a)", 
(B) by striking out "any special life insurance company 
deduction and", and 
(C) by striking out "SPECIAL LIFE INSURANCE COMPANY 
DEDUCTION AND SMALL" in the heading and inserting in lieu 
thereof "SMALL". 
(7) Paragraph (2) of section 806(c), as redesignated by subsec-
tion (a), is amended by striking out "subsection (bX3)" and 
inserting in lieu thereof "subsection (aX3)". 
(8) Subsection (c) of section 806, as redesignated by subsection 
(a), is amended by striking out paragraph (4) and by redesignat-
ing paragraph (5) as paragraph (4). 
(9) Subparagraph (A) of section 813(aX4) is amended by strik-
ing out "section 806(bX3)(C)" and inserting in lieu thereof "sec-
tion 806(aX3XC)". 
(10) Clause (ii) of section 815(cX2XA) is amended by striking 
out "special deductions" and inserting in lieu thereof "small life 
insurance company deduction." 
(IIXA) The section heading of section 806 is amended by 
striking out "SPECIAL DEDUCTIONS" and inserting in lieu thereof 
"SMALL LIFE INSURANCE COMPANY DEDUCTION". 
(B) The table of sections for subpart C of part I of subchapter 
L of chapter 1 is amended by striking out "Special deductions" 
in the item relating to section 806 and inserting in lieu thereof 
"Small life insurance company deduction". 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to taxable years beginning after December 31, 1986. 
(2) SPECIAL RULE.—Section 217(k) of the Tax Reform Act of 
1984 is amended— 
71-19/, 0 - 89 - 20 : QL. 3 Part3 
100 STAT. 2390 
PUBLIC LAW 99-514—OCT. 22, 1986 
(A) by striking out "the special deductions under section 
806" and inserting in lieu thereof "the small life insurance 
company deduction under sectiorf 806(a)", and 
(B) by adding at the end thereof the following: "For 
purposes of determining taxable income, the amount of any 
income, gain, loss, or deduction attributable to the owner-
ship of such stock shall be an amount equal to 46 times the 
amount of such income, gain, loss, or deduction, divided by 
36.8." 
(d) TREATMENT OF CERTAIN MARKET DISCOUNT BONDS.— 
f 1) IN GENERAL.—Notwithstanding the amendments made by 
subtitle B of title III, any gain recognized by a qualified life 
insurance company on the redemption at maturity of any bond 
which was issued before July 19, 1984, and acquired by such 
company on or before September 25, 1985, shall be subject to tax 
at the rate of 28 percent. 
(2) QUALIFIED LIFE INSURANCE COMPANY.—For purposes of 
paragraph (1), the term "qualified life insurance company" 
means any of the following companies: Aetna, Provident Life 
and Accident, Massachusetts Mutual, Mutual Benefit, Connecti-
cut Mutual, Phoenix Mutual, John Hancock, New England Life, 
Pennsylvania Mutual, Transamerica, Northwestern, Provident 
Mutual, Prudential, Mutual of Omaha, and Metropolitan. 
SEC. 1012. REPEAL OF TAX-EXEMPT STATUS FOR CERTAIN ORGANIZA-
TIONS PROVIDING COMMERCIAL-TYPE INSURANCE, 
(a) IN GENERAL.—Section 501 (relating to exemption from tax on 
corporations, certain trusts, etc.) is amended by redesignating 
subsection (m) as subsection (n) and by inserting after subsection (1) 
the following new subsection: 
"(m) 
CERTAIN 
ORGANIZATIONS 
PROVIDING 
COMMERCIAL-TYPE 
INSURANCE NOT EXEMPT FROM TAX.— 
"(1) DENIAL OF TAX EXEMPTION WHERE PROVIDING COMMERCIAL-
TYPE 
INSURANCE 
IS SUBSTANTIAL 
PART OF ACTIVITIES.—An 
organization described in paragraph (3) or (4) of subsection (c) 
shall be exempt from tax under subsection (a) only if no 
substantial part of its activities consists of providing commer-
cial-type insurance. 
"(2) OTHER ORGANIZATIONS TAXED AS INSURANCE COMPANIES ON 
INSURANCE BUSINESS.—In the case of an organization described 
in paragraph (3) or (4) of subsection (c) which is exempt from tax 
under subsection (a) after the application of paragraph (1) of 
this subsection— 
"(A) the activity of providing commercial-type insurance 
shall be treated as an unrelated trade or business (as 
defined in section 513), and 
"(B) in lieu of the tax imposed by section 511 with respect 
to such activity, such organization shall be treated as an 
insurance company for purposes of applying subchapter L 
with respect to such activity. 
"(3) COMMERCIAL-TYPE INSURANCE.—For purposes of this 
subsection, the term 'commercial-type insurance' shall not in-
clude— 
"(A) insurance provided at substantially below cost to a 
class of charitable recipients. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2391 
"(B) incidental health insurance provided by a health 
maintenance organization of a kind customarily provided 
by such organizations, 
"(C) property or casualty insurance provided (directly or 
through an organization described in section 414(e)(3)(B)(ii)) 
by a church or convention or association of churches for 
such church or convention or association of churches, and 
"(D) providing retirement or welfare benefits (or both) by 
a church or a convention or association of churches (directly 
or through an organization described in section 414(e)(3)(A) 
or 414(e)(3)(B)(ii)) for the employees (including employees 
described in section 414(e)(3)(B)) of such church or conven-
tion or association of churches or the beneficiaries of such 
employees. 
"(4) INSURANCE INCLUDES ANNUITIES.—For purposes of this 
subsection, the issuance of annuity contracts shall be treated as 
providing insurance." 
(b) TREATMENT OF BLUE CROSS AND BLUE SHIELD ORGANIZATIONS 
AND SIMILAR ORGANIZATIONS.— 
(1) IN GENERAL.—Part III of subchapter L of chapter 1 is 
amended by adding at the end thereof the following new section: 
"SEC. 833. TREATMENT OF BLUE CROSS AND BLUE SHIELD ORGANIZA-
TIONS. ETC. 
"(a) GENERAL RULE.—In the case of any organization to which this 
section applies— 
"(1) TREATED AS STOCK COMPANY.—Such organization shall be 
taxable under this part in the same manner as if it were a stock 
insurance company. 
"(2) SPECIAL DEDUCTION ALLOWED.—The deduction determined 
under subsection (b) for any taxable year shall be allowed. 
"(3) 
REDUCTIONS IN UNEARNED PREMIUM RESERVES NOT TO 
APPLY.—Subparagraph (B) of paragraph (4) of section 832(b) 
shall be applied by substituting '100 percent' for '80 percent', 
and subparagraph (C) of such paragraph (4) shall not apply. 
"(b) AMOUNT OF DEDUCTION.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), the 
deduction determined under this subsection for any taxable 
year is the excess (if any) o
f
— 
"(A) 25 percent of the sum of— 
"(i) the claims incurred during the taxable year, and 
"(ii) the expenses incurred during the taxable year in 
connection with the administration, adjustment, or 
settlement of claims, over 
"(B) the adjusted surplus as of the beginning of the 
taxable year. 
"(2) LIMITATION.—The deduction determined under paragraph 
(1) for any taxable year shall not exceed taxable income for such 
taxable year (determined without regard to such deduction). 
"(3) ADJUSTED SURPLUS.—For purposes of this subsection— 
"(A) IN GENERAL.—The adjusted surplus as of the begin-
ning of any taxable year is an amount equal to the adjusted 
surplus as of the beginning of the preceding taxable year— 
"(i) increased by the amount of any adjusted taxable 
income for such preceding taxable year, or 
"(ii) decreased by the amount of any adjusted net 
operating loss for such preceding taxable year. 
100 STAT. 2392 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(B) SPECIAL RULE.—The adjusted surplus as of the begin-
ning of the organization's 1st taxable year beginning after 
December 31, 1986, shall be its surplus as of such time. For 
purposes of the preceding sentence and subsection (c)(3XC), 
the term 'surplus' means the excess of the total assets over 
total liabilities as shown on the annual statement. 
"(C) ADJUSTED TAXABLE INCOME.—The term 'adjusted tax-
able income' means taxable income determined— 
"(i) without regard to the deduction determined 
under this subsection, 
"(ii) without regard to any carr3rforward or carryback 
to such taxable year, and 
"(iii) by increasing gross income by an amount equal 
to the net exempt income for the taxable year. 
"(D) ADJUSTED NET OPERATING LOSS.—The term 'adjusted 
net operating loss' means the net operating loss for any 
taxable year determined with the adjustments set forth in 
subparagraph (C). 
"(E) NET EXEMPT INCOME.—The term 'net exempt income' 
means— 
"(i) any tax-exempt interest received or accrued 
during the taxable year, reduced by any amount (not 
otherwise deductible) which would have been allowable 
as a deduction for the taxable year if such interest were 
not tax-exempt, and 
"(ii) the aggregate amount allowed as a deduction for 
the taxable year under sections 243, 244, and 245. 
The amount determined under clause (ii) shall be reduced 
by the amount of any decrease in deductions allowable for 
the taxable year by reason of section 832(bX5XB) to the 
extent such decrease is attributable to deductions under 
sections 243, 244, and 245. 
"(4) ONLY HEALTH-RELATED ITEMS TAKEN INTO ACCOUNT.—Any 
determination under this subsection shall be made by only 
taking into account items attributable to the health-related 
business of the taxpayer. 
"(c) ORGANIZATIONS TO WHICH SECTION APPLIES.— 
"(1) IN GENERAL.—This section shall apply to— 
"(A) any existing Blue Cross or Blue Shield organization, 
and 
"(B) any other organization meeting the requirements of 
paragraph (3). 
"(2) EXISTING BLUE CROSS OR BLUE SHIELD ORGANIZATION.—The 
term 'existing Blue Cross or Blue Shield organization' means 
any Blue Cross or Blue Shield organization i
f
— 
"(A) such organization was in existence on August 16, 
1986, 
"(B) such organization is determined to be exempt from 
tax for its last taxable year beginning before January 1, 
1987, and 
"(C) no material change has occurred in the operations of 
such organization or in its structure after August 16, 1986, 
and before the close of the taxable year. 
To the extent permitted by the Secretary, any successor to an 
organization meeting the requirements of the preceding sen-
tence, and any organization resulting from the merger or 
consolidation of organizations each of which met such require-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2393 
ments, shall be treated as an existing Blue Cross or Blue Shield 
organization. 
"(3) OTHER ORGANIZATIONS.— 
"(A) IN GENERAL.—An organization meets the require-
ments of this paragraph for any taxable year i
f
— 
"(i) substantially all the activities of such organiza-
tion involve the providing of health insurance, 
"(ii) at least 10 percent of the health insurance pro-
vided by such organization is provided to individuals 
and small groups (not taking into account any medi-
care supplemental coverage), 
"(iii) such organization provides continuous full-year 
open enrollment (including conversions) for individuals 
and small groups, 
"(iv) such organization's policies covering individuals 
provide full coverage of pre-existing conditions of high-
risk individuals without a price differential (with a 
reasonable waiting period), and coverage is provided 
without regard to age, income, or employment status of 
individuals under age 65, 
"(v) at least 35 percent of its premiums are deter-
mined on a community rated basis, and 
"(vi) no part of its net earnings inures to the benefit 
of any private shareholder or individual. 
"(B) SMALL GROUP DEFINED.—For purposes of subpara-
graph (A), the term 'small group' means the lesser o
f
— 
"(i) 15 individuals, or 
"(ii) the number of individuals required for a small 
group under applicable State law. 
"(C) SPECIAL RULE FOR DETERMINING ADJUSTED SURPLUS.— 
For purposes of subsection (b), the adjusted surplus of any 
organization meeting the requirements of this paragraph as 
of the beginning of the 1st taxable year for which it meets 
such requirements shall be its surplus as of such time." 
(2) CLERICAL AMENDMENT.—The table of sections for such part 
III is amended by adding at the end thereof the following new 
item: 
"Sec. 833. Treatment of Blue Cross and Blue Shield organizations, etc." 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
(2) STUDY OF FRATERNAL BENEFICIARY ASSOCIATIONS.—The Sec-
retary of the Treasury or his delegate shall conduct a study of 
organizations described in section 501(cX8) of the Internal Reve-
nue Code of 1986 and which received gross annual insurance 
premiums in excess of $25,000,000 for the taxable years of such 
organizations which ended during 1984. Not later than Jan-
uary 1, 1988, the Secretary of the Treasury shall submit to the 
Committee on Ways and Means of the House of Representa-
tives, the Committee on Finance of the Senate, and the Joint 
Committee on Taxation the results of such study, together with 
such recommendations as he determines to be appropriate. The 
Secretary of the Treasury shall have authority to require the 
furnishing of such information as may be necessary to carry out 
the purposes of this paragraph. 
100 STAT. 2394 
PUBLIC LAW 99-514—OCT. 22, 1986 
(3) SPECIAL RULES FOR EXISTING BLUE CROSS OR BLUE SHIELD 
ORGANIZATIONS.— 
(A) IN GENERAL.—In the case of any existing Blue Cross 
or Blue Shield organization (as defined in section 833(c)(2) of 
the Internal Revenue Code of 1986 as added by this sec-
tion)— 
(i) no adjustment shall be made under section 481 (or 
any other provision) of such Code on account of a 
change in its method of accounting for its 1st taxable 
year beginning after December 31, 1986, and 
(ii) for purposes of determining gain or loss, the 
adjusted basis of any asset held on the 1st day of such 
taxable year shall be treated as equal to its fair market 
value as of such day. 
(B) TREATMENT OF CERTAIN DISTRIBUTIONS.—For purposes 
of section 833(b)(3)(B), the surplus of any organization as of 
the beginning of its 1st taxable year beginning after Decem-
ber 31, 1986, shall be increased by the amount of any 
distribution (other than to policyholders) made by such 
organization after August 16, 1986, and before the begin-
ning of such taxable year. 
(C) RESERVE WEAKENING AFTER AUGUST 16, 1986.—Any 
reserve weakening after August 16, 1986, by an existing 
Blue Cross or Blue Shield organization shall be treated as 
occurring in such organization's 1st taxable year beginning 
after December 31,1986. 
(4) OTHER SPECIAL RULES.— 
(A) The amendments made by this section shall not apply 
with respect to that portion of the business of Mutual of 
America which is attributable to pension business. 
(B) The amendments made by this section shall not apply 
to that portion of the business of the Teachers Insurance 
Annuity Association-College Retirement Equities Fund 
which is attributable to pension business. 
(C) The amendments made by this section shall not apply 
to— 
(i) the retirement fund of the YMCA, 
(ii) the Missouri Hospital Association, 
(iii) administrative services performed by municipal 
leagues, and 
(iv) dental benefit coverage provided by Delta Dental 
Plans Association through contracts with independent 
professional service providers so long as the provision 
of such coverage is the principal activity of such 
Association. 
(D) For purposes of this paragraph, the term "pension 
business" means the administration of any plan described 
in section 401(a) of the Internal Revenue Code of 1954 which 
includes a trust exempt from tax under section 501(a), any 
plan under which amounts are contributed by an individ-
ual's employer for an annuity contract described in section 
403(b) of such Code, any individual retirement plan de-
scribed in section 408 of such Code, and any eligible de-
ferred compensation plan to which section 457(a) of such 
Code applies. 
„ , ,^_—^ ;., w ~,-^ -, 
. --
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2395 
SEC. 1013. OPERATIONS LOSS DEDUCTION OF INSOLVENT COMPANIES 
MAY OFFSET DISTRIBUTIONS FROM POLICYHOLDERS SUR-
PLUS ACCOUNT. 
(a) IN GENERAL.—If— 
(1) on November 15, 1985, a life insurance company was 
insolvent, 
(2) pursuant to the order of any court of competent jurisdic-
tion in a title 11 or similar case (as defined in section 368(a)(3) of 
the Internal Revenue Code of 1954), such company is liquidated, 
and 
(3) as a result of such liquidation, the tax imposed by section 
801 of such Code for any taxable year (hereinafter in this 
subsection referred to as the "liquidation year") would (but for 
this subsection) be increased under section 815(a) of such Code, 
then the amount described in section 815(a)(2) of such Code shall be 
reduced by the loss from operations (if any) for the liquidation year, 
and by the unused operations loss carryovers (if any) to the liquida-
tion year (determined after the application of section 810 of such 
Code for such year). No carryover of any loss from operations of such 
company arising during the liquidation year (or any prior taxable 
year) shall be allowable for any taxable year succeeding the liquida-
tion year. 
(b) DEFINITIONS.—For purposes of subsection (a)— 
(1) INSOLVENT.—The term "insolvent" means the excess of 
liabilities over the fair market value of assets. 
(2) Loss FROM OPERATIONS.—The term "loss from operations" 
has the meaning given such term by section 810(c) of such Code. 
(c) EFFECTIVE DATE.—This section shall apply to liquidations on or 
after November 15, 1985, in taxable years ending after such date. 
Subtitle C—Property and Casualty Insurance 
Companies 
SEC. 1021. INCLUSION IN INCOME OF 20 PERCENT OF UNEARNED PRE-
MIUM RESERVE. 
(a) IN GENERAL.—The first sentence of paragraph (4) of section 
832(b) (defining premiums earned) is amended by striking out 
subparagraph (B) and inserting in lieu thereof the following: 
"(B) To the result so obtained, add 80 percent of the 
unearned premiums on outstanding business at the end of 
the preceding taxable year and deduct 80 percent of the 
unearned premiums on outstanding business at the end of 
the taxable year. 
"(C) To the result so obtained, in the case of a taxable 
year beginning after December 31, 1986, and before Janu-
ary 1, 1993, add an amount equal to dVs percent of un-
earned premiums on outstanding business at the end of the 
most recent taxable year beginning before January 1, 
1987." 
(b) SPECIAL RULES.—Subsection (b) of section 832 is amended by 
adding at the end thereof the following new paragraph: 
"(7) SPECIAL RULES FOR APPLYING PARAGRAPH (4).— 
"(A) 
REDUCTION NOT TO APPLY TO LIFE INSURANCE RE-
SERVES.—Subparagraph (B) of paragraph (4) shall be applied 
with respect to amounts included in unearned premiums 
100 STAT. 2396 
PUBLIC LAW 99-514—OCT. 22, 1986 
under the 2nd sentence of such paragraph by substituting 
'100 percent' for '80 percent' each place it appears in such 
subparagraph (B), and subparagraph (C) of paragraph (4) 
shall be applied by not taking such amounts into account. 
"(B) SPECIAL TREATMENT OF PREMIUMS ATTRIBUTABLE TO 
INSURING CERTAIN SECURITIES.—In the case of premiums 
attributable to insurance against default in the payment of 
principal or interest on securities described in section 
165(g)(2)(C) with maturities of more than 5 years— 
"(i) subparagraph (B) of paragraph (4) shall be ap-
plied by substituting '90 percent' for '80 percent' each 
place it appears, and 
"(ii) subparagraph (C) of paragraph (4) shall be ap-
plied by substituting ' 1 % percent' for 'SVa percent'. 
"(C) TERMINATION AS NONLIFE INSURANCE COMPANY.— 
Except as provided in section 381(c)(22) (relating to 
carryovers in certain corporate readjustments), if, for any 
taxable year beginning before January 1, 1993, the tax-
payer ceases to be an insurance company taxable under this 
part, the aggregate adjustments which would be made 
under paragraph (4)(C) for such taxable year and subse-
quent taxable years but for such cessation shall be made for 
the taxable year preceding such cessation year. 
"(8) SPECIAL RULES FOR APPLYING PARAGRAPH (4) TO TITLE 
INSURANCE PREMIUMS.— 
"(A) IN GENERAL.—In the case of premiums attributable 
to title insurance— 
"(i) subparagraph (B) of paragraph (4) shall be ap-
plied by substituting 'the discounted unearned pre-
miums' for '80 percent of the unearned premiums' each 
i 
place it appears, and 
"(ii) subparagraph (C) of paragraph (4) shall not 
apply. 
"(B) METHOD OF DISCOUNTING.—For purposes of subpara-
graph (A), the amount of the discounted unearned pre-
miums as of the end of any taxable year shall be the 
present value of such premiums (as of such time and sepa-
rately with respect to premiums received in each calendar 
year) determined by using— 
"(i) the amount of the undiscounted unearned pre-
miums at such time, 
"(ii) the applicable interest rate, and 
"(iii) the applicable statutory premium recognition 
pattern. 
"(C) DETERMINATION OF APPLICABLE FACTORS.—In deter-
mining the amount of the discounted unearned premiums 
as of the end of any taxable year— 
"(i) UNDISCOUNTED UNEARNED PREMIUMS.—The term 
'undiscounted unearned premiums' means the un-
earned premiums shown in the yearly statement filed 
by the taxpayer for the year ending with or within such 
taxable year. 
"(ii) APPLICABLE INTEREST RATE.—The term 'ap-
plicable interest rate' means the annual rate deter-
mined under 846(c)(2) for the calendar year in which 
the premiums are received. 
,„ ,..^^„. -
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2397 
"(iii) APPLICABLE STATUTORY PREMIUM RECOGNITION 
PATTERN.—The term 'applicable statutory premium 
recognition pattern' means the statutory premium rec-
ognition pattern— 
"(I) which is in effect for the calendar year in 
which the premiums are received, and 
"(II) which is based on the statutory premium 
recognition pattern which applies to premiums re-
ceived by the taxpayer in such calendar year. 
For purposes of the preceding sentence, premiums re-
ceived during any calendar year shall be treated as 
received in the middle of such year." 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendment made by this section shall 
apply to taxable years beginning after December 31,1986. 
(2) SPECIAL TRANSITIONAL RULE FOR TITLE INSURANCE COMPA-
NIES.—For the 1st taxable year beginning after December 31, 
1986, in the case of premiums attributable to title insurance— 
(A) IN GENERAL.—The unearned premiums at the end of 
the preceding taxable year as defined in paragraph (4) of 
section 832(b) shall be determined as if the amendments 
made by this section had applied to such unearned pre-
miums in the preceding taxable year and by using the 
interest rate and premium recognition pattern applicable to 
years ending in calendar year 1987. 
(B) FRESH START.—Except as provided in subparagraph 
(C), any difference between— 
(i) the amount determined to be unearned premiums 
for the year preceding the first taxable year of a title 
insurance company beginning after December 31, 1986, 
determined without regard to subparagraph (A), and 
(ii) such amount determined with regard to subpara-
graph (A), 
shall not be taken into account for purposes of the Internal 
Revenue Code of 1986. 
(C) EFFECT ON EARNINGS AND PROFITS.—The earnings and 
profits of any insurance company for its 1st taxable year 
beginning after December 31, 1986, shall be increased by 
the amount of the difference determined under subpara-
graph (A) with respect to such company. 
SEC. 1022. TREATMENT OF CERTAIN DIVIDENDS AND TAX-EXEMPT 
INTEREST. 
(a) IN GENERAL.—Paragraph (5) of section 8320t)) (defining losses 
incurred) is amended to read as follows: 
"(5) LOSSES INCURRED.— 
"(A) IN GENERAL.—The term 'losses incurred' means 
losses incurred during the taxable year on insurance con-
tracts, computed as follows: 
"(i) "To losses paid during the taxable year, add sal-
vage and reinsurance recoverable outstanding at the 
end of the preceding taxable year and deduct salvage 
and reinsurance recoverable outstanding at the end of 
the taxable year. 
"(ii) To the result so obtained, add all unpaid losses 
outstanding at the end of the taxable year and deduct 
100 STAT. 2398 
PUBLIC LAW 99-514—OCT. 22, 1986 
unpaid losses outstanding at the end of the preceding 
taxable year. 
"(B) REDUCTION OF DEDUCTION.—The amount which would 
(but for this subparagraph) be taken into account under 
subparagraph (A) shall be reduced by an amount equal to 
15 percent of the sum of— 
"(i) tax-exempt interest received or accrued during 
such taxable year, and 
"(ii) the aggregate amount of deductions provided by 
sections 243, 244, and 245 for— 
"(I) dividends (other than 100 percent dividends) 
received during the taxable year, and 
"(II) 100 percent dividends received during the 
taxable year to the extent attributable to prorated 
amounts. 
In the case of a 100 percent dividend paid by an insurance 
company, the portion attributable to prorated amounts 
shall be determined under subparagraph (E)(ii). 
"(C) EXCEPTION FOR INVESTMENTS MADE BEFORE AUGUST 8, 
1986.— 
"(i) IN GENERAL.—Except as provided in clause (ii), 
subparagraph (B) shall not apply to any dividend or 
interest received or accrued on any stock or obligation 
acquired before August 8,1986. 
"(ii) SPECIAL RULE FOR lOO PERCENT DIVIDENDS.—For 
purposes of clause (i), the portion of any 100 percent 
dividend which is attributable to prorated amounts 
shall be treated £is received with respect to stock ac-
quired on the later of— 
"(I) the date the payor acquired the stock or 
obligation to which the prorated amounts are 
attributable, or 
"(II) the 1st day on which the payor and payee 
were members of the same affiliated group (as 
defined in section 243(b)(5)). 
"(D) DEFINITIONS.—For purposes of this paragraph— 
"(i) 
PRORATED 
AMOUNTS.—The 
term 
'prorated 
amounts' means tax-exempt interest and dividends 
with respect to which a deduction is allowable under 
section 243, 244, or 245 (other than 100 percent divi-
dends), 
"(ii) 100 PERCENT DIVIDEND.— 
"(I) IN GENERAL.—The term '100 percent divi-
dend' means any dividend if the percentage used 
for purposes of determining the deduction allow-
able under section 243, 244, or 2450t>) is 100 percent. 
"(II) 
CERTAIN DIVIDENDS RECEIVED BY FOREIGN 
CORPORATIONS.—A dividend received by a foreign 
corporation from a domestic corporation which 
would be a 100 percent dividend if section 
15O40t>X3) did not apply for purposes of applying 
section 243(bX5) shall be treated as a 100 percent 
dividend. 
"(E) SPECIAL RULES FOR DIVIDENDS SUBJECT TO PRORATION 
AT SUBSIDIARY LEVEL.— 
"(i) IN GENERAL.—In the case of any 100 percent 
dividend paid to an insurance company to which this 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2399 
part applies by any insurance company, the amount of 
the decrease in the deductions of the payee company by 
reason of the portion of such dividend attributable to 
prorated amounts shall be reduced (but not below zero) 
by the amount of the decrease in the deductions (or 
increase in income) of the payor company attributable 
to the application of this section or section 805(aX4XA) 
to such amounts. 
"(ii) PORTION OF DIVIDEND ATTRIBUTABLE TO PRORATED 
AMOUNTS.—For purposes of this subparagraph, in 
determining the portion of any dividend attributable to 
prorated amounts— 
"(I) any dividend by the paying corporation shall 
be treated as paid first out of earnings and profits 
attributable to prorated amounts (to the extent 
thereof), and 
"(II) by determining the portion of earnings and 
profits so attributable without any reduction for 
the tax imposed by this chapter." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to taxable years beginning after December 31,1986. 
SEC. 1023. DISCOUNTING OF UNPAID LOSSES AND CERTAIN UNPAID 
EXPENSES. 
(a) LIMITATION OF DEDUCTION IN THE CASE OF PROPERTY AND 
CASUALTY INSURANCE COMPANIES.— 
(1) LOSSES INCURRED.—Clause (ii) of section 832(bX5XA) (defin-
ing losses incurred), as amended by section 1022, is amended to 
read as follows: 
"(ii) To the result so obtained, add all unpaid losses 
on life insurance contracts plus all discounted unpaid 
losses (as defined in section 846) outstanding at the end 
of the taxable year and deduct unpaid losses on life 
insurance contracts plus all discounted unpaid losses 
outstanding at the end of the preceding taxable year." 
(2) EXPENSES INCURRED.—Section 832(bX6) (defining expenses 
incurred) is amended by inserting after the 1st sentence: "For 
purposes of this subchapter, the term 'expenses unpaid' shall 
not include any unpaid loss adjustment expenses shown on the 
annual statement, but such unpaid loss adjustment expenses 
shall be included in unpaid losses." 
(h) LIMITATION OF DEDUCTION IN THE CASE OF LIFE INSURANCE 
COMPANIES.—Section 807(c) (relating to reserves and similar items 
taken into account) is amended by adding at the end thereof the 
following new sentence: "For purposes of paragraph (2) and section 
805(aXl), the amount of the unpaid losses (other than losses on life 
insurance contracts) shall be the amount of the discounted unpaid 
losses as defined in section 846." 
(c) DISCOUNTED UNPAID LOSSES DEFINED.—Part IV of subchapter L 
of chapter 1 (relating to provisions of general application) is amended 
by adding at the end thereof the following new section: 
"SEC. 846. DISCOUNTED UNPAID LOSSES DEFINED. 
"(a) DISCOUNTED LOSSES DETERMINED.— 
"(1) SEPARATELY COMPUTED FOR EACH ACCIDENT YEAR.—The 
amount of the discounted unpaid losses as of the end of any 
taxable year shall be the sum of the discounted unpaid losses (as 
100 STAT. 2400 
PUBLIC LAW 99-514—OCT. 22, 1986 
of such time) separately computed under this section with 
respect to unpaid losses in each line of business attributable to 
each accident year. 
"(2) METHOD OF DISCOUNTING.—The amount of the discounted 
unpaid losses as of the end of any taxable year attributable to 
any accident year shall be the present value of such losses (as of 
such time) determined by using— 
"(A) the amount of the undiscounted unpaid losses as of 
such time, 
"(B) the applicable interest rate, and 
"(C) the applicable loss payment pattern. 
"(3) LIMITATION ON AMOUNT OF DISCOUNTED LOSSES.—In no 
event shall the amount of the discounted unpaid losses with 
respect to any line of business attributable to any accident year 
exceed the aggregate amount of unpaid losses with respect to 
such line of business for such accident year included on the 
annual statement filed by the taxpayer for the year ending with 
or within the taxable year. 
"(4) DETERMINATION OF APPLICABLE FACTORS.—In determining 
the amount of the discounted unpaid losses attributable to any 
accident year— 
"(A) the applicable interest rate shall be the interest rate 
determined under subsection (c) for the calendar year with 
which such accident year ends, and 
"(B) the applicable loss payment pattern shall be the loss 
payment pattern determined under subsection (d) which is 
in effect for the calendar year with which such accident 
year ends. 
"(b) DETERMINATION OF UNDISCOUNTED UNPAID LOSSES.—For pur-
poses of this section— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, the term 'undiscounted unpaid losses' means the 
unpaid losses shown in the annual statement filed by the 
taxpayer for the year ending with or within the taxable year of 
the taxpayer. 
"(2) ADJUSTMENT IF LOSSES DISCOUNTED ON ANNUAL STATE-
MENT.—If— 
"(A) the amount of unpaid losses shown in the annual 
statement is determined on a discounted basis, and 
"(B) the extent to which the losses were discounted can be 
determined on the basis of information disclosed on or with 
the annual statement, 
the amount of the unpaid losses shall be determined without 
regard to any reduction attributable to such discounting. 
"(c) RATE OF INTEREST.— 
"(1) IN GENERAL.—For purposes of this section, the rate of 
interest determined under this subsection shall be the annual 
rate determined by the Secretary under paragraph (2). 
"(2) DETERMINATION OF ANNUAL RATE.— 
"(A) IN GENERAL.—The annual rate determined by the 
Secretary under this paragraph for any calendar year shall 
be a rate equal to the average of the applicable Federal 
mid-term rates (as defined in section 1274(d) but based on 
annual compounding) effective as of the beginning of each 
of the calendar months in the test period. 
"(B) TEST PERIOD.—For purposes of subparagraph (A), the 
test period is the most recent 60-calendar-month period 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2401 
ending before the beginning of the calendar year for which 
the determination is made; except that there shall be ex-
cluded from the test period any month beginning before 
August 1, 1986. 
"(d) Loss PAYMENT PATTERN.— 
"(1) IN GENERAL.—For each determination year, the Secretary 
shall determine a loss payment pattern for each line of business 
by reference to the historical loss payment pattern applicable to 
such line of business. Any loss payment pattern determined by 
the Secretary shall apply to the accident year ending with the 
determination year and to each of the 4 succeeding accident 
years. 
"(2) METHOD OF DETERMINATION.—Determinations under para-
graph (1) for any determination year shall be made by the 
Secretary— 
"(A) by using the aggregate experience reported on the 
annual statements of insurance companies, 
"(B) on the basis of the most recent published aggregate 
data from such annual statements relating to loss payment 
patterns available on the 1st day of the determination year, 
"(C) as if all losses paid or treated as paid during any year 
are paid in the middle of such year, and 
"(D) in accordance with the computational rules pre-
scribed in paragraph (3). 
"(3) COMPUTATIONAL RULES.—For purposes of this subsec-
tion— 
"(A) IN GENERAL.—Except as otherwise provided in this 
paragraph, the loss payment pattern for any line of busi-
ness shall be based on the assumption that all losses are 
paid— 
"(i) during the accident year and the 3 calendar years 
following the accident year, or 
"(ii) in the case of any line of business reported in the 
schedule or schedules of the annual statement relating 
to auto liability, other liability, medical malpractice, 
workers' compensation, and multiple peril lines, during 
the accident year and the 10 calendar years following 
the accident year. 
"(B) TREATMENT OF CERTAIN LOSSES.—Except as otherwise 
provided in this paragraph— 
"(i) in the case of any line of business not described in 
subparagraph (A)(ii), losses paid after the 1st year fol-
lowing the accident year shall be treated as paid 
equally in the 2nd and 3rd year following the accident 
year, and 
"(ii) in the case of a line of business described in 
subparagraph (A)(ii), losses paid after the close of the 
period applicable under subparagraph (A)(ii) shall be 
treated as paid in the last year of such period. 
"(C) SPECIAL RULE FOR CERTAIN LONG-TAIL LINES.—In the 
case of any long-tail line of business— 
"(i) the period taken into account under subpara-
graph (A)(ii) shall be extended (but not by more than 5 
years) to the extent required under clause (ii), and 
"(ii) the amount of losses which would have been 
treated as paid in the 10th year after the accident year 
shall be treated as paid in such 10th year and each 
100 STAT. 2402 
PUBLIC LAW 99-514—OCT. 22, 1986 
subsequent year in an amount equal to the amount of 
the losses treated as paid in the 9th year after the 
accident year (or, if lesser, the portion of the unpaid 
losses not theretofore taken into account). 
Notwithstanding clause (ii), to the extent such unpaid losses 
have not been treated as paid before the last year of the 
extension, they shall be treated as paid in such last year. 
"(D) LONG-TAIL LINE OF BUSINESS.—-For purposes of 
subparagraph (C), the term 'long-tail line of business' 
means any line of business described in subparagraph (AXii) 
if the amount of losses which (without regard to subpara-
graph (O) would be treated as paid in the 10th year after 
the accident year exceeds the losses treated as paid in the 
9th year after the accident year. 
"(E) SPECIAL RULE FOR INTERNATIONAL AND REINSURANCE 
LINES OF BUSINESS.—Except as otherwise provided by regu-
lations, any determination made under subsection (a) with 
respect to unpaid losses relating to the international or 
reinsurance lines of business shall be made using, in lieu of 
the loss payment pattern applicable to the respective lines 
of business, a pattern determined by the Secretary under 
paragraphs (1) and (2) based on the combined losses for all 
lines of business described in subparagraph (A)(ii). 
"(F) ADJUSTMENTS IF LOSS EXPERIENCE INFORMATION 
AVAILABLE FOR LONGER PERIODS.—The Secretary shall make 
appropriate adjustments in the application of this para-
graph if annual statement data with respect to payment of 
losses is available for longer periods after the accident year 
than the periods assumed under the rules of this para-
graph. 
"(G) SPECIAL RULE FOR 9TH YEAR IF NEGATIVE OR ZERO.—If 
the amount of the losses treated as paid in the 9th year 
after the accident year is zero or a negative amount, sub-
paragraphs (C)(ii) and (D) shall be applied by substituting 
the average of the losses treated as paid in the 7th, 8th, and 
9th years after the accident year for the losses treated as 
paid in the 9th year after the accident year. 
"(4) DETERMINATION YEAR.—For purposes of this section, the 
term 'determination year' means calendar year 1987 and each 
5th calendar year thereafter. 
"(e) ELECTION To USE COMPANY'S HISTORICAL PAYMENT PAT-
TERN.— 
"(1) IN GENERAL.—The taxpayer may elect to apply subsection 
(a)(2)(C) with respect to all lines of business by using a loss 
payment pattern determined by reference to the taxpayer's loss 
payment pattern for the most recent calendar year for which an 
annual statement was filed before the beginning of the accident 
year. Any such determination shall be made with the applica-
tion of the rules of paragraphs (2XC) and (3) of subsection (d). 
"(2) ELECTION.— 
"(A) IN GENERAL.—An election under paragraph (1) shall 
be made separately with respect to each determination year 
under subsection (d). 
"(B) PERIOD FOR WHICH ELECTION IN EFFECT.—Unless re-
voked with the consent of the Secretary, an election under 
paragraph (1) with respect to any determination year shall 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2403 
apply to accident years ending with the determination year 
and to each of the 4 succeeding accident years. 
"(C) TIME FOR MAKING ELECTION.—An election under 
paragraph (1) with respect to any determination year shall 
be made on the taxpayer's return for the taxable year in 
which (or with which) the determination year ends. 
"(3) No ELECTION FOR INTERNATIONAL O
R REINSURANCE BUSI-
NESS.—No election under this subsection shall apply to any 
international or reinsurance line of business. 
"(4) REGULATIONS.—The Secretary shall prescribe such regu-
lations as may be necessary or appropriate to carry out the 
purposes of this subsection including— 
"(A) regulations providing that a taxpayer may not make 
an election under this subsection if such taxpayer does not 
have sufficient historical experience for the line of business 
to determine a loss payment pattern, and 
"(B) regulations to prevent the avoidance (through the 
use of separate corporations or otherwise) of the require-
ment of this subsection that an election under this subsec-
tion applies to all lines of business of the taxpayer. 
"(f) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) ACCIDENT YEAR.—The term 'accident year' means the 
calendar year in which the incident occurs which gives rise to 
the related unpaid loss. 
"(2) UNPAID LOSS ADJUSTMENT EXPENSES.—The term 'unpaid 
losses' includes any unpaid loss adjustment expenses shown on 
the annual statement. 
"(3) ANNUAL STATEMENT.—The term 'annual 
statement' 
means the annual statement approved by the National Associa-
tion of Insurance Commissioners which the taxpayer is required 
to file with insurance regulatory authorities of a State. 
"(4) LINE OF BUSINESS.—The term 'line of business' means a 
category for the reporting of loss payment patterns determined 
on the basis of the annual statement for fire and casualty 
insurance companies for the calendar year ending with or 
within the taxable year, except that the multiple peril lines 
shall be treated as a single line of business. 
"(5) MULTIPLE PERIL LINES.—The term 'multiple peril lines' 
means the lines of business relating to farmowners multiple 
peril, homeowners multiple peril, commercial multiple peril, 
ocean marine, aircraft (all perils) and boiler and machinery. 
"(6) SPECIAL RULE FOR CERTAIN ACCIDENT AND HEALTH INSUR-
ANCE LINES OF BUSINESS.—Any determination under subsection 
(a) with respect to unpaid losses relating to accident and health 
insurance lines of businesses (other than credit disability insur-
ance) shall be made— 
"(A) in the case of unpaid losses relating to disability 
income, by using the general rules prescribed under section 
807(d) applicable to noncancellable accident and health 
insurance contracts and using a mortality or morbidity 
table reflecting the taxpayer's experience; except that— 
"(i) the prevailing State assumed interest rate shall 
be the rate in effect for the year in which the loss 
occurred rather than the year in which the contract 
was issued, and 
100 STAT. 2404 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(ii) the limitation of subsection (a)(3) shall apply in 
lieu of the limitation of the last sentence of section 
807(d)(1), and 
"(B) in all other cases, by using an assumption (in lieu of 
a loss payment pattern) that unpaid losses are paid during 
the year following the accident year. 
"(g) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this section, including— 
"(1) regulations providing proper treatment of allocated re-
insurance, and 
"(2) regulations providing proper treatment of salvage and 
reinsurance recoverable attributable to unpaid losses." 
(d) CLERICAL AMENDMENT.—The table of sections for such part IV 
is amended by adding at the end thereof the following new item: 
"Sec. 846. Discounted unpaid losses defined." 
(e) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to taxable years beginning after December 31, 1986. 
(2) TRANSITIONAL RULE.—For the first taxable year beginning 
after December 31, 1986— 
(A) the unpaid losses and the expenses unpaid (as defined 
in paragraphs (5)(B) and (6) of section 832(b) of the Internal 
Revenue Code of 1986) at the end of the preceding taxable 
year, and 
(B) the unpaid losses as defined in sections 807(c)(2) and 
805(a)(1) of such Code at the end of the preceding taxable 
year, 
shall be determined as if the amendments made by this section 
had applied to such unpaid losses and expenses unpaid in the 
preceding taxable year and by using the interest rate and loss 
payment patterns applicable to accident years ending with 
calendar year 1987. For subsequent taxable years, such amend-
ments shall be applied with respect to such unpaid losses and 
expenses unpaid by using the interest rate and loss payment 
patterns applicable to accident years ending with calendar year 
1987. 
(3) FRESH START.— 
(A) IN GENERAL.—Except as otherwise provided in this 
paragraph, any difference between— 
(i) the amount determined to be the unpaid losses 
and expenses unpaid for the year preceding the 1st 
taxable year of an insurance company beginning after 
December 31, 1986, determined without regard to para-
graph (2), and 
(ii) such amount determined with regard to para-
graph (2), 
shall not be taken into account for purposes of the Internal 
Revenue Code of 1986. 
(B) RESERVE STRENGTHENING IN YEARS AFTER 
I985.— 
Subparagraph 
(A) shall 
not 
apply 
to 
any 
reserve 
strengthening in a taxable year beginning in 1986, and such 
strengthening shall be treated as occurring in the tax-
payer's 1st taxable year beginning after December 31, 1986. 
(C) EFFECT ON EARNINGS AND PROFITS.—The earnings and 
profits of any insurance company for its 1st taxable year 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2405 
beginning after December 31, 1986, shall be increased by 
the amount of the difference determined under subpara-
graph (A) with respect to such company. 
SEC. 1024. REPEAL OF PROTECTION AGAINST LOSS ACCOUNT; REVISION 
OF SPECIAL TREATMENT FOR SMALL COMPANIES; COMBINA-
TION OF PARTS II AND III. 
(a) GENERAL RULE.—Subchapter L of chapter 1 is amended as 
follows: 
(1) Part II (other than sections 822 and 826) is hereby re-
pealed. 
(2) Parts III and IV are hereby redesignated as parts II and 
III, respectively. 
(3) Section 822 (relating to determination of taxable invest-
ment income) and section 826 (relating to election by reciprocal) 
are hereby redesignated as sections 834 and 835, respectively, 
and transferred to the end of part II (as redesignated by para-
graph (2)). 
(4) Section 831 is amended to read as follows: 
"SEC. 83L TAX O
N INSURANCE COMPANIES OTHER THAN LIFE INSUR-
ANCE COMPANIES. 
"(a) GENERAL RULE.—Taxes computed as provided in section 11 
shall be imposed for each taxable year on the taxable income of 
every insurance company other than a life insurance company. 
"(b) ALTERNATIVE TAX FOR CERTAIN SMALL COMPANIES.— 
"(1) IN GENERAL.—In lieu of the tax otherwise applicable 
under subsection (a), there is hereby imposed for each taxable 
year on the income of every insurance company to which this 
subsection applies a tax computed by multiplying the taxable 
investment income of such company for such taxable year by 
the rates provided in section 11(b). 
"(2) COMPANIES TO WHICH THIS SUBSECTION APPLIES.— 
"(A) IN GENERAL.—This subsection shall apply to every 
insurance company other than life (including interinsurers 
and reciprocal underwriters) i
f
— 
"(i) the net written premiums (or, if greater, direct 
written premiums) for the taxable year exceed $350,000 
but do not exceed $1,200,000, and 
"(ii) such company elects the application of this 
subsection for such taxable year. 
"(B) CONTROLLED GROUP RULES.— 
"(i) IN GENERAL.—For purposes of subparagraph (A), 
in determining whether any company is described in 
clause (i) of subparagraph (A), such company shall be 
treated as receiving during the taxable year amounts 
described in such clause (i) which are received during 
such year by all other companies which are members of 
the same controlled group as the insurance company 
for which the determination is being made. 
"(ii) CONTROLLED GROUP.—For purposes of clause (i), 
the term 'controlled group' means any controlled group 
of corporations (as defined in section 1563(a)); except 
that— 
"(I) 'more than 50 percent' shall be substituted 
for 'at least 80 percent' each place it appears in 
section 1563(a), and 
100 STAT. 2406 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(II) subsections (a)(4) and (b)(2)(D) of section 1563 
shall not apply. 
"(c) CROSS REFERENCES.— 
"(1) For alternative tax in case of capital gains, see section 1201(a). 
"(2) For taxation of foreign corporations carrying on an insurance busi-
ness within the United States, see section 842. 
"(3) For exemption from tax for certain insurance companies other 
than life, see section 501(c)(15)." 
(b) REVISION OF EXEMPTION FROM TAX.—Paragraph (15) of section 
501(c) (relating to list of exempt organizations) is amended to read as 
follows: 
"(15)(A) Insurance companies or associations other than life 
(including interinsurers and reciprocal underwriters) if the net 
written premiums (or, if greater, direct written premiums) for 
the taxable year do not exceed $350,000. 
"(B) For purposes of subparagraph (A), in determining 
whether any company or association is described in subpara-
graph (A), such company or association shall be treated as 
receiving during the taxable year amounts described in 
subparagraph (A) which are received during such year by all 
other companies or associations which are members of the same 
controlled group as the insurance company or association for 
which the determination is being made. 
"(C) For purposes of subparagraph (B), the term 'controlled 
group' 
has 
the 
meaning 
given 
such 
term 
by 
section 
831(b)(2)(B)(ii)." 
(c) CONFORMING AMENDMENTS.— 
(1) Subparagraph (C) of section 832(b)(1) is amended by strik-
ing out "a mutual fire insurance company described in section 
831(a)(3)(A)" and inserting in lieu thereof "a mutual fire insur-
ance company exclusively issuing perpetual policies". 
(2) Subparagraph (D) of section 832(b)(1) is amended to read as 
follows: 
"(D) in the case of a mutual fire or flood insurance 
company whose principal business is the issuance of 
policies— 
"(i) for which the premium deposits are the same 
(regardless of the length of the term for which the 
policies are written), and 
"(ii) under which the unabsorbed portion of such 
premium deposits not required for losses, expenses, or 
establishment of reserves is returned or credited to the 
policyholder on cancellation or expiration of the policy, 
an amount equal to 2 percent of the premiums earned on 
insurance contracts during the taxable year with respect to 
such policies after deduction of premium deposits returned 
or credited during the same taxable year, and". 
(3) Paragraph (4) of section 8320t)) is amended— 
(A) by striking out "section 831(a)(3)(B)" each place it 
appears and inserting in lieu thereof "paragraph (1)(D)", 
and 
(B) by striking out the last sentence and inserting in lieu 
thereof the following: "Premiums paid by the subscriber of 
a mutual flood insurance company described in paragraph 
(1)(D) or issuing exclusively perpetual policies shall be 
treated, for purposes of computing the taxable income of 
such subscriber, in the same manner as premiums paid by a 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2407 
policyholder to a mutual fire insurance company described 
in subparagraph (C) or (D) of paragraph (1)." 
(4) Paragraph (5) of section 832(c) is amended by striking out 
"section 822(b)" and inserting in lieu thereof "section 834(b)". 
(5) Paragraph (11) of section 832(c) is amended— 
(A) by striking out "section 831(a)(3XA)" and inserting in 
lieu thereof "subsection (bXlXC)", and 
(B) by striking out "section 831(aX3XB)" and inserting in 
lieu thereof "subsection (bXlXD)". 
(6) Section 832 is amended by adding at the end thereof the 
following new subsection: 
"(f) INTERINSURERS.—In the case of a mutual insurance company 
which is an interinsurer or reciprocal underwriter— 
"(1) there shall be allowed as a deduction the increase for the 
taxable year in savings credited to subscriber accounts, or 
"(2) there shall be included as an item of gross income the 
decrease for the taxable year in savings credited to subscriber 
accounts. 
For purposes of the preceding sentence, the term 'savings credited to 
subscriber accounts' means such portion of the surplus as is credited 
to the individual accounts of subscribers before the 16th day of the 
3rd month following the close of the taxable year, but only if the 
company would be obligated to pay such amount promptly to such 
subscriber if he terminated his contract at the close of the compa-
ny's taxable year. For purposes of determining his taxable income, 
the subscriber shall treat any such savings credited to his account as 
a dividend paid or declared.' 
(7) Subsection (a) of section 834 (as redesignated by subsection 
(a)) is amended to read as follows: 
"(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)." 
(8) Subsection (d) of section 834 (as so redesignated) is 
amended— 
(A) by striking out "section 821" each place it appears 
and inserting in lieu thereof "section 831", and 
(B) by inserting before the period at the end of the last 
sentence of paragraph (2) the following: "except in the case 
of discount which is original issue discount (as defined in 
section 1273)". 
(9) Section 835 (as redesignated by subsection (a)) is 
amended— 
(A) by striking out subsection (d) and by redesignating 
subsections (e), (f), (g), and (h) as subsections (d), (e), (0, and 
(g), respectively, and 
(B) by amending subsection (e) (as so redesignated) to read 
as follows: 
"(e) BENEFITS OF GRADUATED RATES DENIED.—Any increase in the 
taxable income of a reciprocal attributable to the limits provided in 
subsection (b) shall be taxed at the highest rate of tax specified in 
section 11(b)." 
(10) Section 841 is amended— 
(A) by striking out "section 801, 821, or 831" and inserting 
in lieu thereof "section 801 or 831", 
(B) by inserting "and" at the end of paragraph (1), 
(C) by striking out paragraph (2), and 
(D) by redesignating paragraph (3) as paragraph (2). 
100 STAT. 2408 
PUBLIC LAW 99-514—OCT. 22, 1986 
(11) Section 842 is amended by striking out "part I, II, or III" 
and inserting in lieu thereof "part I or 11". 
(12) Section 844 is amended by striking out subsections (a) and 
(b) and inserting in lieu thereof the following: 
"(a) GENERAL RULE.—If an insurance company— 
"(1) is subject to the tax imposed by part I or II of this 
subchapter for the taxable year, and 
"(2) was subject to the tax imposed by a different part of this 
subchapter for the taxable year, 
then any operations loss carryover under section 810 (or the cor-
responding provisions of prior law) or net operating loss carryover 
under section 172 (as the case may be) arising in such prior taxable 
year shall be included in its operations loss deduction under section 
810(a) or net operating loss deduction under section 832(c)(10), as the 
case may be. 
"Ot)) LIMITATION.—Tne amount included under section 810(a) or 
832(c)(10) (as the case may be) by reason of the application of 
subsection (a) shall not exceed the amount that would have con-
stituted the loss carryover under such section if for all relevant 
taxable years the company had been subject to the tax imposed by 
the part referred to in subsection (a)(1) rather than the part referred 
to in subsection (a)(2). For purposes of applying the preceding sen-
tence, section 810(b)(1)(C) (relating to additional years to which 
losses may be carried by new life insurance companies) shall not 
apply." 
(13) Section 891 is amended by striking out "821,". 
(14) Subsection (a) of section 1201 is amended by striking out 
"821(a) or (c) and 831(a)" and inserting in lieu thereof "831(a) or 
0))". 
(15) Paragraph (2) of section 1504flt>) is amended by striking 
out "or 821'" 
(16) Paragraph (2)(A) of section 1504(c) is amended by striking 
out "or 821". 
(17) Subparagraph (D) of section 1563(b)(2) is amended by 
striking out "or section 821". 
(18) The table of sections for part II of subchapter L of chapter 
1 (£is redesignated by subsection (a)) is amended by adding at the 
end thereof the following new items: 
"Sec. 834. Determination of taxable investment income. 
"Sec. 835. Election by reciprocal." 
(d) TRANSITIONAL RULES.— 
(1) TREATMENT OF AMOUNTS IN PROTECTION AGAINST LOSS AC-
COUNT.—In the case of any insurance company which had a 
protection against loss account for its last taxable year begin-
ning before January 1, 1987, there shall be included in the gross 
income of such company for any taxable year beginning after 
December 31,1986, the amount which would have been included 
in gross income for such taxable year under section 824 of the 
Internal Revenue Code of 1954 (as in effect on the day before the 
date of the enactment of this Act). For purposes of the preceding 
sentence, no addition to such account shall be made for any 
taxable year beginning after December 31,1986. 
(2) TRANSITIONAL RULE FOR UNUSED LOSS CARRYOVER UNDER 
SECTION 825.—Any unused loss carryover under section 825 of 
the Internal Revenue Code of 1954 (as in effect on the day before 
the date of the enactment of this Act) which— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2409 
(A) is from a taxable year beginning before January 1, 
1987, and 
(B) could have been carried under such section to a 
taxable year beginning after December 31, 1986, but for the 
repeal made by subsection (a)(1), 
shall be included in the net operating loss deduction under 
section 832(c)(10) of such Code without regard to the limitations 
of section 844(b) of such Code. 
(e) EFFECTIVE DATE.—The amendments made by this section (and 
the provisions of subsection (d)) shall apply to taxable years begin-
ning after December 31, 1986. 
SEC. 1025. STUDY OF TREATMENT OF PROPERTY AND CASUALTY INSUR-
ANCE COMPANIES. 
The Secretary of the Treasury or his delegate shall conduct a 
study of^ 
(1) the treatment of policyholder dividends by mutual prop-
erty and casualty insurance companies, 
(2) the treatment of property and casualty insurance compa-
nies under the minimum tax, and 
(3) the operation and effect of, and revenue raised by, the 
amendments made by this subtitle. 
Not later than January 1, 1989, such Secretary shall submit to the 
Committee on Ways and Means of the House of Representatives, the 
Committee on Finance of the Senate, and the Joint Committee on 
Taxation, the results of such study, together with such recommenda-
tions as he determines to be appropriate. The Secretary of the 
Treasury shall have authority to require the furnishing of such 
information as may be necessary to carry out the purposes of this 
section. 
Subtitle D—Miscellaneous Provisions 
SEC. 1031. PHYSICIANS' AND SURGEONS' MUTUAL PROTECTION AND 
INTERINDEMNITY ARRANGEMENTS OR ASSOCIATIONS. 
(a) CERTAIN PHYSICIANS' AND SURGEONS' MUTUAL PROTECTION AND 
INTERINDEMNITY ARRANGEMENTS OR ASSOCIATIONS.— 
(1) TREATMENT OF ARRANGEMENTS OR ASSOCIATIONS.— 
(A) CAPITAL CONTRIBUTIONS.—There shall not be included 
in the gross income of any eligible physicians' and surgeons' 
mutual protection and interindemnity arrangement or 
association any initial payment made during any taxable 
year to such arrangement or association by a member 
joining such arrangement or association which— 
(i) does not release such member from obligations to 
pay current or future dues, assessments, or premiums; 
and 
(ii) is a condition precedent to receiving benefits of 
membership. 
Such initial payment shall be included in the gross income 
of such arrangement or association for such taxable year if 
it is reasonable to expect that such payment will be deduct-
ible pursuant to paragraph (2) by any member of such 
arrangement or association. 
(B) RETURN OF CONTRIBUTIONS.— 
100 STAT. 2410 
PUBLIC LAW 99-514—OCT. 22, 1986 
(i) IN GENERAL.—The repayment to any member of 
any amount of any payment excluded under subpara-
graph (A) shall not be treated as policyholder dividend, 
and is not deductible by the arrangement or associa-
tion. 
(ii) SOURCE OF RETURNS.—Except in the case of the 
termination of a member's interest in the arrangement 
or association, any amount distributed to any member 
shall be treated as paid out of surplus in excess of 
amounts excluded under subparagraph (A). 
(2) DEDUCTION FOR MEMBERS OF ELIGIBLE ARRANGEMENTS OR 
ASSOCIATIONS.— 
(A) PAYMENT AS TRADE OR BUSINESS ExtENSES.—To the 
extent not otherwise allowable under this title, any 
member of any eligible arrangement or association may 
treat any initial payment made during a taxable year to 
such arrangement or association as an ordinary and nec-
essary expense incurred in connection with a trade or 
business for purposes of the deduction allowable under 
section 162, to the extent such payment does not exceed the 
amount which would be payable to an independent insur-
ance company for similar annual insurance coverage (as 
determined by the Secretary), and further reduced by any 
annual dues, assessments, or premiums paid during such 
taxable year. Such deduction shall not be allowable as to 
any initial payment made to an eligible arrangement or 
association by any person who is a member of any other 
eligible arrangement or association on or after the effective 
date of the Tax Reform Act of 1986. Any excess amount not 
allowed as a deduction for the taxable year in which such 
payment was made pursuant to the limitation contained in 
the 1st sentence of this subparagraph shall, subject to such 
limitation, be allowable as a deduction in any of the 5 
succeeding taxable years, in order of time, to the extent not 
previously allowed as a deduction under this sentence. 
(B) REFUNDS OF INITIAL PAYMENTS.—Any amount attrib-
utable to any initial payment to such arrangement or 
association described in paragraph (1) which is later re-
funded for any reason shall be included in the gross income 
of the recipient in the taxable year received, to the extent a 
deduction for such payment was allowed. Any amount re-
funded in excess of such payment shall be included in gross 
income except to the extent otherwise excluded from 
income by this title. 
(3) EUGIBLE ARRANGEMENTS OR ASSOCIATIONS.—The terms "eli-
gible 
physicans' 
and surgeons' 
mutual 
protection and 
interindemnity arrangement or association" and "eligible 
arrangement or association" mean and are limited to any 
mutual protection and interindemnity arrangement or associa-
tion that provides only medical malpractice liability protection 
for its members or medical malpractice liability protection in 
conjunction with protection against other liability claims in-
curred in the course of, or related to, the professional practice of 
a physician or surgeon and which— 
(A) was operative and was providing such protection, or 
had received a permit for the offer and sale of member-
ships, under the laws of any State before January 1, 1984, 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2411 
(B) is not subject to regulation by any State insurance 
department, 
(C) has a right to make unlimited assessments against all 
members to cover current claims and losses, and 
(D) is not a member of, nor subject to protection by, any 
insurance guaranty plan or association of any State. 
(b) EFFECTIVE DATE.—The provisions of subsection (a) shall apply 
to payments made to and receipts of physicians' and surgeons' 
mutual protection and interindemnity arrangements or associa-
tions, and refunds of payments by such arrangements or associa-
tions, after the date of the enactment of this Act, in taxable years 
ending after such date. 
TITLE XI—PENSIONS AND DEFERRED 
COMPENSATION; EMPLOYEE BENEFITS; 
EMPLOYEE STOCK OWNERSHIP PLANS 
Subtitle A—Pensions and Deferred 
Compensation 
PART I—LIMITATIONS ON TAX-DEFERRED SAVINGS 
Subpart A—Rules Applicable to IRAs 
SEC. 1101. LIMITATIONS ON IRA DEDUCTIONS FOR ACTIVE PARTICIPANTS 
IN CERTAIN PENSION PLANS. 
(a) LIMITATIONS ON DEDUCTIONS FOR ACTIVE PARTICIPANTS.— 
(1) IN GENERAL.—Section 219 (relating to deduction for retire-
ment savings) is amended by redesignating subsection (g) as 
subsection (h) and by adding after subsection (0 the following 
new subsection: 
"(g) LIMITATION ON DEDUCTION FOR ACTIVE PARTICIPANTS IN CER-
TAIN PENSION PLANS.— 
"(1) IN GENERAL.—If (for any part of any plan year ending 
with or within a taxable year) an individual or the individual's 
spouse is an active participant, each of the dollar limitations 
contained in subsections (b)(1)(A) and (c)(2) for such taxable year 
shall be reduced (but not below zero) by the amount determined 
under paragraph (2). 
"(2) AMOUNT OF REDUCTION.— 
"(A) IN GENERAL.—The amount determined under this 
paragraph with respect to any dollar limitation shall be the 
amount which bears the same ratio to such limitation as— 
"(i) the excess o
f
— 
"(I) the taxpayer's adjusted gross income for such 
taxable year, over 
"(II) the applicable dollar amount, bears to 
"(ii) $10,000. 
"(B) No REDUCTION BELOW $200 UNTIL COMPLETE PHASE-
OUT.—No dollar limitation shall be reduced below $200 
under paragraph (1) unless (without regard to this subpara-
graph) such limitation is reduced to zero. 
100 STAT. 2412 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(C) ROUNDING.—Any amount determined under this 
paragraph which is not a multiple of $10 shall be rounded 
to the next lowest $10. 
(3) ADJUSTED GROSS INCOME; APPLICABLE DOLLAR AMOUNT.— 
For purposes of this subsection— 
"(A) ADJUSTED GROSS INCOME.—Adjusted gross income of 
any taxpayer shall be determined— 
"(i) after application of sections 86 and 469, and 
"(ii) without regard to section 911 or the deduction 
allowable under this section. 
"(B) APPLICABLE DOLLAR AMOUNT.—The term 'applicable 
dollar amount' means— 
"(i) in the case of a taxpayer filing a joint return, 
$40,000, 
"(ii) in the case of any other taxpayer (other than a 
married individual filing a separate return), $25,000, 
and 
"(iii) in the case of a married individual filing a 
separate return, zero. 
'(4) SPECIAL RULE FOR MARRIED INDIVIDUALS FILING SEPA-
RATELY.—In the case of a married individual filing a separate 
return for any taxable year, paragraph (1) shall be applied 
without regard to whether such individual's spouse is an active 
participant for any plan year ending with or within such tax-
able year. 
"(5) ACTIVE PARTICIPANT.—For purposes of this subsection, the 
term 'active participant' means, with respect to any plan year, 
an individual— 
"(A) who is an active participant in— 
"(i) a plan described in section 401(a) which includes 
a trust exempt from tax under section 501(a), 
"(ii) an annuity plan described in section 403(a), 
"(iii) a plan established for its employees by the 
United States, by a State or political subdivision 
thereof, or by an agency or instrumentality of any of 
the foregoing, 
"(iv) an annuity contract described in section 403(b), 
or 
"(v) a simplified employee pension (within the mean-
ing of section 408(k)), or 
"(B) who makes deductible contributions to a trust de-
scribed in section 501(c)(18). 
The determination of whether an individual is an active partici-
pant shall be made without regard to whether or not such 
individual's rights under a plan, trust, or contract are non-
forfeitable. An eligible deferred compensation plan (within the 
meaning of section 4570t))) shall not be treated as a plan de-
scribed in subparagraph (A)(iii). 
"(6) 
CERTAIN INDIVIDUALS NOT TREATED AS ACTIVE PARTICI-
PANTS.—For purposes of this subsection, any individual de-
scribed in any of the following subparagraphs shall not be 
treated as an active participant for any taxable year solely 
because of any participation so described: 
"(A) MEMBERS OF RESERVE COMPONENTS.—Participation in 
a plan described in subparagraph (A)(iii) of paragraph (5) by 
reason of service as a member of a reserve component of the 
Armed Forces (as defined in section 261(a) of title 10), unless 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2413 
such individual has served in excess of 90 days on active 
duty (other than active duty for training) during the year. 
"(B) VOLUNTEER FIREFIGHTERS.—A volunteer firefighter— 
"(i) who is a participant in a plan described in 
subparagraph (A)(iii) of paragraph (5) based on his 
activity as a volunteer firefighter, and 
"(ii) whose accrued benefit as of the beginning of the 
taxable year is not more than an annual benefit of 
$1,800 (when expressed as a single life annuity 
commencing at age 65)." 
(2) CONFORMING AMENDMENT.—Section 219(0(3) is amended to 
read as follows: 
"(3) TIME WHEN CONTRIBUTIONS DEEMED MADE.—For purposes 
of this section, a taxpayer shall be deemed to have made a 
contribution to an individual retirement plan on the last day of 
the preceding taxable year if the contribution is made on ac-
count of such taxable year and is made not later than the time 
prescribed by law for filing the return for such taxable year (not 
including extensions thereof)." 
(b) REPEAL OF DEDUCTION FOR QUAUFIED VOLUNTARY EMPLOYEE 
CONTRIBUTIONS.— 
(1) IN GENERAL.—Subsection (e) of section 219 (relating to 
defining retirement savings contributions) is amended to read 
as follows: 
"(e) QUALIFIED RETIREMENT CONTRIBUTION.—For purposes of this 
section, the term 'qualified retirement contribution' means— 
"(1) any amount paid in cash for the taxable year by or on 
behalf of an individual to an individual retirement plan for such 
, 
individual's benefit, and 
"(2) any amount contributed on behalf of any individual to a 
plan described in section 501(cX18)." 
(2) CONFORMING AMENDMENTS.— 
(A) Section 219(b) is amended by striking out para-
graph (3). 
(B) Paragraph (3) of section 72(p) is amended to read as 
follows: 
"(3) QUALIFIED EMPLOYER PLAN, ETC.—For purposes of this 
subsection— 
"(A) QUAUFIED EMPLOYER PLAN.— 
"(i) IN GENERAL.—The term 'qualified employer plan' 
means— 
"(I) a plan described in section 401(a) which in-
cludes a trust exempt from tax under section 
501(a), 
"(II) an annuity plan described in section 403(a), 
and 
"(III) a plan under which amounts are contrib-
uted by an individual's employer for an annuity 
contract described in section 403(b). 
"(ii) SPECIAL RULES.—The term 'qualified employer 
plan'— 
"(I) shall include any plan which was (or was 
determined to be) a qualified employer plan or a 
government plan, but 
"(II) shall not include a plan described in subsec-
tion (eX7). 
100 STAT. 2414 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(B) GOVERNMENT PLAN.—The term 'government plan' 
means any plan, whether or not qualified, established and 
maintained for its employees by the United States, by a 
State or political subdivision thereof, or by an agency or 
instrumentality of any of the foregoing." 
(C) Paragraph (5) of section 72(o) is amended— 
(i) by inserting "and made for a taxable year begin-
ning before January 1, 1987," after "date" in subpara-
graph (A), 
(ii) by striking out "section 219(e)(3)" in subpara-
graph (C) and inserting in lieu thereof "subsection 
(p)(3)(A)(i)", and 
(iii) by striking out "section 219(e)(4)" in subpara-
graph (D) and inserting in lieu thereof "subsection 
(p)(3)(B)". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to contributions for taxable years beginning after Decem-
ber 31, 1986. 
SEC. 1102. NONDEDUCTIBLE CONTRIBUTIONS MAY BE MADE TO INDIVID-
UAL RETIREMENT PLANS. 
(a) IN GENERAL.—Section 408 (relating to individual retirement 
accounts) is amended by redesignating subsection (o) as subsection 
(p) and by inserting after subsection (n) the following new 
subsection: 
"(o) DEFINITIONS AND RULES RELATING TO NONDEDUCTIBLE CON-
TRIBUTIONS T
O INDIVIDUAL RETIREMENT PLANS.— 
"(1) IN GENERAL.—Subject to the provisions of this subsection, 
designated nondeductible contributions may be made on behalf 
of an individual to an individual retirement plan. 
"(2) LIMITS ON AMOUNTS WHICH MAY BE CONTRIBUTED.— 
"(A) IN GENERAL.—The amount of the designated non-
deductible contributions made on behalf of any individual 
for any taxable year shall not exceed the nondeductible 
limit for such taxable year. 
"(B) 
NONDEDUCTIBLE 
LIMIT.—For 
purposes 
of 
this 
paragraph— 
"(i) IN GENERAL.—The term 'nondeductible limit' 
means the excess o
f
— 
"(I) the amount allowable as a deduction under 
section 219 (determined without regard to section 
219(g)), over 
"(II) the amount allowable as a deduction under 
section 219 (determined with regard to section 
219(g)). 
"(ii) TAXPAYER MAY ELECT TO TREAT DEDUCTIBLE CON-
TRIBUTIONS AS NONDEDUCTIBLE.—If a taxpayer elects 
not to deduct an amount which (without regard to this 
clause) is allowable as a deduction under section 219 for 
any taxable year, the nondeductible limit for such 
taxable year shall be increased by such amount. 
"(C) DESIGNATED NONDEDUCTIBLE CONTRIBUTIONS.— 
"(i) IN GENERAL.—For purposes of this paragraph, the 
term 'designated nondeductible contribution' means 
any contribution to an individual retirement plan for 
the taxable year which is designated (in such manner 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2415 
as the Secretary may prescribe) as a contribution for 
which a deduction is not allowable under section 219. 
"(ii) DESIGNATION.—Any designation under clause (i) 
shall be made on the return of tax imposed by chapter 
1 for the taxable year. 
"(3) TIME WHEN CONTRIBUTIONS MADE.—In determining for 
which taxable year a designated nondeductible contribution is 
made, the rule of section 219(f)(3) shall apply. 
"(4) INDIVIDUAL REQUIRED TO REPORT AMOUNT OF DESIGNATED 
NONDEDUCTIBLE CONTRIBUTIONS.— 
"(A) IN GENERAL.—Any individual who— 
"(i) makes a designated nondeductible contribution to 
any individual retirement plan for any taxable year, or 
"(ii) receives any amount from any individual retire-
ment plan for any taxable year, 
shall include on his return of the tax imposed by chapter 1 for 
such taxable year and any succeeding taxable year (or on such 
other form as the Secretary may prescribe for any such taxable 
year) information described in subparagraph (B). 
"(B) INFORMATION REQUIRED TO BE SUPPUED.—The follow-
ing information is described in this subparagraph: 
"(i) The amount of designated nondeductible con-
tributions for the taxable year, 
"(ii) The amount of distributions from individual 
retirement plans for the taxable year, 
"(iii) The excess (if any) of— 
"(I) the aggregate amount of designated non-
deductible contributions for all preceding taxable 
years, over 
"(II) the aggregate amount of distributions from 
individual retirement plans which was excludable 
from gross income for such taxable years. 
"(iv) The aggregate balance of all individual retire-
u 
ment plans of the individual as of the close of the 
calendar year with or within which the taxable year 
ends. 
"(v) Such other information as the Secretary may 
prescribe. 
"(C) PENALTY FOR REPORTING CONTRIBUTIONS NOT MADE.— 
"For penalty where individual reports designated nondeductible contri-
butions not made, see section 6693(b)." 
(b) EXCESS CONTRIBUTIONS.— 
(1) APPUCATION OF TAX.—Section 4973(b) (defining excess con-
tributions) is amended by adding at the end thereof the follow-
ing new sentence: "For purposes of paragraphs (1)(B) and (2)(C), 
the amount allowable as a deduction under section 219 (after 
application of section 408(oX2)(B)(ii)) shall be increased by the 
nondeductible limit under section 408(o)(2)(B). 
(2) RETURN OF EXCESS CONTRIBUTIONS.—Paragraph (5) of sec-
tion 408(d) (relating to tax treatment of distributions) is amend-
ed by adding at the end thereof the following new sentence: For 
purposes of this paragraph, the amount allowable as a deduc-
tion 
under 
section 
219 
(after 
application 
of 
section 
408(oX2XBXii)) shall be increased by the nondeductible limit 
under section 408(oX2XB)." 
100 STAT. 2416 
PUBLIC LAW 99-514—OCT. 22, 1986 
(c) TREATMENT OF DISTRIBUTIONS.—Paragraphs (1) and (2) of sec-
tion 408(d) (relating to tax treatment of distributions) are amended 
to read as follows: 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, any amount paid or distributed out of an individual 
retirement plan shall be included in gross income by the payee 
or distributee, as the case may be, in the manner provided 
under section 72. 
"(2) SPECIAL RULES FOR APPLYING SECTION 72.—For purposes of 
applying section 72 to any amount described in paragraph (1)— 
"(A) all individual retirement plans shall be treated as 1 
contract, 
"(B) all distributions during any taxable year shall be 
treated as 1 distribution, and 
"(C) the value of the contract, income on the contract, 
and investment in the contract shall be computed as of the 
close of the calendar year with or within which the taxable 
year ends. 
For purposes of subparagraph (C), the value of the contract shall 
be increased by the amount of any distributions during the 
calendar year." 
(d) PENALTY FOR REPORTING NONDEDUCTIBLE CONTRIBUTIONS NOT 
MADE.— 
(1) IN GENERAL.—Section 6693 (relating to failure to provide 
reports on individual retirement accounts or annuities) is 
amended by redesignating subsection (b) as subsection (c) and by 
inserting after subsection (a) the following new subsection: 
"(b) OVERSTATEMENT OF DESIGNATED NONDEDUCTIBLE CONTRIBU-
TIONS.—Any individual who— 
"(1) is required to furnish information under section 408(o)(4) 
as to the amount of designated nondeductible contributions 
made for any taxable year, and 
"(2) overstates the amount of such contributions made for 
such taxable year, 
shall pay a penalty of $100 for each such overstatement unless it is 
shown that such overstatement is due to reasonable cause." 
(2) CONFORMING AMENDMENTS.— 
(A) Section 6693(c), as redesignated by paragraph (1), is 
amended by striking out "subsection (a)" and inserting in 
lieu thereof "this section". 
(B) The heading for section 6693 is amended by inserting 
"; OVERSTATEMENT OF DESIGNATED NONDEDUCTIBLE CON-
TRIBUTIONS" after "ANNUITIES". 
(C) The item relating to section 6693 in the table of 
sections for subchapter B of chapter 68 is amended by 
inserting "; overstatement of designated nondeductible con-
tributions" after "annuities". 
(e) SPECIAL RULES RELATING TO REQUIREMENTS OF TRUSTEES OF 
INDIVIDUAL RETIREMENT PLANS.— 
(1) WITHHOLDING.—Subparagraph (B) of section 3405(d)(1) 
(relating to exceptions) is amended by adding at the end thereof 
the following new flush sentence: 
"For purposes of clause (ii), any distribution or payment 
from or under an individual retirement plan shall be treat-
ed as includible in gross income." 
(2) 
TIME FOR REPORTING INFORMATION WITH RESPECT TO 
INDIVIDUAL RETIREMENT PLANS.—The last sentence of section 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2417 
408(i) (relating to reports) is amended to read as follows: "The 
reports required by this subsection— 
"(1) shall be filed at such time and in such manner as the 
Secretary prescribes in such regulations, and 
"(2) shall be furnished to individuals— 
"(A) not later than January 31 of the calendar year 
following the calendar year to which such reports relate, 
and 
"(B) in such manner as the Secretary prescribes in such 
regulations." 
(f) CONFORMING AMENDMENT.—Section 219(f) (relating to defini-
tions and special rules) is amended by adding at the end thereof the 
following new paragraph: 
"(7) ELECTION NOT TO DEDUCT CONTRIBUTIONS.— 
"For election not to deduct contributions to individual retirement plans, 
see section 408(o)(2)(B)(ii)." 
(g) EFFECTIVE DATE.—The amendments made by this section shall 
apply to contributions and distributions for taxable years beginning 
after December 31,1986. 
SEC. 1103. SPOUSAL DEDUCTION ALLOWED WHERE SPOUSE HAS SMALL 
AMOUNT OF EARNED INCOME. 
(a) IN GENERAL.—Subparagraph (B) of section 219(cXl) (relating to 
special rules for certain married individuals) is amended to read as 
follows: 
"(B) whose spouse— 
"(i) has no compensation (determined without regard 
to section 911) for the taxable year, or 
"(ii) elects to be treated for purposes of subsection 
(bXlXB) as having no compensation for the taxable 
year," 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to taxable years beginning before, on, or after December 31, 
1985. 
Subpart B—Other Provisions 
SEC. 1105. $7,000 LIMITATION ON ELECTIVE DEFERRALS. 
(a) GENERAL RULE.—Section 402 (relating to taxability of bene-
ficiary of employees' trust) is amended by adding at the end thereof 
the following new subsection: 
"(g) LIMITATION ON EXCLUSION FOR ELECTIVE DEFERRALS.— 
"(1) IN GENERAL.—Notwithstanding subsections (aX8) and 
(hXlXB), the elective deferrals of any individual for any taxable 
year shall be included in such individual's gross income to the 
extent the amount of such deferrals for the taxable year exceeds 
$7,000. 
"(2) REQUIRED DISTRIBUTION OF EXCESS DEFERRALS.— 
"(A) IN GENERAL.—If any amount (hereinafter in this 
paragraph referred to as 'excess deferrals') is included in 
the gross income of an individual under paragraph (1) for 
any taxable year— 
"(i) not later than the 1st March 1 following the close 
of the taxable year, the individual may allocate the 
amount of such excess deferrals among the plans under 
which the deferrals were made and may notify each 
such plan of the portion allocated to it, and 
100 STAT. 2418 
PUBLIC LAW 99-514—OCT. 22, 1986 
ar'T* 
- • 
"(ii) not later than the 1st April 15 following the close 
of the taxable year, each such plan may distribute to 
•jiit 
the individual the amount allocated to it under clause 
(i) (and any income allocable to such amount). 
The distribution described in clause (ii) may be made not-
withstanding any other provision of law. 
"(B) 
TREATMENT 
OF 
DISTRIBUTION 
UNDER 
SECTION 
401 (k).—Except to the extent provided under rules pre-
scribed by the Secretary, notwithstanding the distribution 
of any portion of an excess deferral from a plan under 
subparagraph (A)(ii), such portion shall, for purposes of 
applying section 401(k)(3)(A)(ii), be treated as an employer 
contribution. 
"(C) TAXATION OF DISTRIBUTION.—In the case of a distribu-
tion to which subparagraph (A) applies— 
"(i) except as provided in clause (ii), such distribution 
shall not be included in gross income (and no tax shall 
be imposed under section 72(t)), and 
"(ii) any income on the excess deferral shall, for 
purposes of this chapter, be treated as earned and 
received in the taxable year in which such excess defer-
ral is made. 
"(3) ELECTIVE DEFERRALS.—For purposes of this paragraph, 
the term 'elective deferrals' means, with respect to any taxable 
year, the sum o
f
— 
"(A) any employer contribution under a qualified cash or 
deferred arrangement (as defined in section 401(k)) to the 
extent not includible in gross income for the taxable year 
under subsection (a)(8) (determined without regard to this 
subsection), 
"(B) any employer contribution to the extent not includ-
ible in gross income for the taxable year under subsection 
(h)(1)(B) (determined without regard to this subsection), and 
"(C) any employer contribution to purchase an annuity 
contract under section 403(b) under a salary reduction 
agreement (within the meaning of section 3121(a)(5)(D)). 
"(4) 
INCREASE IN LIMIT FOR AMOUNTS CONTRIBUTED UNDER 
SECTION 403 (b) CONTRACTS.—The limitation under paragraph (1) 
shall be increased (but not to an amount in excess of $9,500) by 
the amount of any employer contributions for the taxable year 
described in paragraph (3)(C). 
"(5) COST-OF-LIVING ADJUSTMENT.—The Secretary shall adjust 
the $7,000 amount under paragraph (1) at the same time and in 
the same manner as under section 415(d). 
"(6) DISREGARD OF COMMUNITY PROPERTY LAWS.—This subsec-
tion shall be applied without regard to community property 
laws. 
"(7) COORDINATION WITH SECTION 72.—For purposes of apply-
ing section 72, any amount includible in gross income for any 
taxable year under this subsection but which is not distributed 
from the plan during such taxable year shall not be treated as 
investment in the contract. 
"(8) SPECIAL RULE FOR CERTAIN ORGANIZATIONS.— 
"(A) IN GENERAL.—In the case of a qualified employee of a 
qualified organization, with respect to employer contribu-
tions described in paragraph (3XC) made by such organiza-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2419 
tion, the limitation of paragraph (1) for any taxable year 
shall be increased by whichever of the following is the least: 
"(i) $3,000, 
"(ii) $15,000 reduced by amounts not included in 
gross income for prior taxable years by reason of this 
paragraph, or 
"(iii) the excess of $5,000 multiplied by the number of 
years of service of the employee with the qualified 
organization over the employer contributions described 
in paragraph (3) made by the organization on behalf of 
such employee for prior taxable years. 
"(B) QUALIFIED ORGANIZATION.—For purposes of this para-
graph, the term 'qualified organization' means any edu-
cational organization, hospital, home health service agency, 
health and welfare service agency, church, or convention or 
association of churches. Such term includes any organiza-
tion described in section 414(e)(3)(B)(ii). Terms used in this 
subparagraph shall have the same meaning as when used 
in section 415(c)(4). 
"(C) QUALIFIED EMPLOYEE.—For purposes of this para-
graph, the term 'qualified employee' means any employee 
who has completed 15 years of service with the qualified 
organization.' 
(b) 
REPORTING 
REQUIREMENTS.—Section 
6051(a) (relating 
to 
requirements of receipts for employees) is amended by striking 
"and" at the end of paragraph (6), by striking the period at the end 
of paragraph (7), and by inserting after paragraph (7) the following 
new paragraph: 
"(8) the total amount of elective deferrals (within the meaning 
of section 402(g)(3)) and compensation deferred under section 
457." 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendment made by subsection (a) shall apply to taxable years 
beginning after December 31, 1986. 
(2) DEFERRALS UNDER COLLECTIVE BARGAINING AGREEMENTS.— 
In the case of a plan maintained pursuant to 1 or more collec-
tive bargaining agreements between employee representatives 
and 1 or more employers ratified before March 1, 1986, the 
amendment made by subsection (a) shall not apply to contribu-
tions made pursuant to such an agreement for taxable years 
beginning before the earlier of— 
(A) the date on which the last of such collective bargain-
ing agreements terminates (determined without regard to 
any extension thereof after February 28, 1986), or 
(B) January 1, 1989. 
Such contributions shall be taken into account for purposes of 
applying the amendment made by this section to other plans. 
(3) DISTRIBUTIONS MADE BEFORE PLAN AMENDMENT.— 
(A) IN GENERAL.—If a plan amendment is required to 
allow the plan to make any distribution described in section 
402(gX2)(A)(ii) of the Internal Revenue Code of 1986, any 
such distribution which is made before the close of the 1st 
plan year for which such amendment is required to be in 
effect under section 1140 shall be treated as made in accord-
ance with the provisions of such plan. 
(B) DISTRIBUTIONS PURSUANT TO MODEL AMENDMENT.— 
100 STAT. 2420 
PUBLIC LAW 99-514—OCT. 22, 1986 
(i) SECRETARY TO PRESCRIBE AMENDMENT.—The Sec-
retary of the Treasury or his delegate shall prescribe 
an amendment which allows a plan to make any dis-
tribution described in section 402(g)(2)(A)(ii) of such 
-r 
Code. 
(ii) ADOPTION BY PLAN.—If a plan adopts the amend-
ment prescribed under clause (i) and makes a distribu-
tion in accordance with such amendment, 
such 
distribution shall be treated as made in accordance 
with the provisions of the plan. 
(4) SPECIAL RULE FOR TAXABLE YEARS OF PARTNERSHIPS WHICH 
INCLUDE JANUARY 1, 1987.—In the case of the taxable year of 
any partnership which begins before January 1, 1987, and ends 
after January 1, 1987, elective deferrals (within the meaning of 
section 402(g)(3) of the Internal Revenue Code of 1986) made on 
behalf of a partner for such taxable year shall, for purposes of 
section 402(g)(3) of such Code, be treated as having been made 
ratably during such taxable year. 
(5) CASH OR DEFERRED ARRANGEMENTS.—The amendments 
made by this section shall not apply to employer contributions 
made during 1987 and attributable to services performed during 
1986 under a qualified cash or deferred arrangement (as defined 
in section 401(k) of the Internal Revenue Code of 1986) if, under 
the terms of such arrangement as in effect on August 16, 1986— 
(A) the employee makes an election with respect to such 
contribution before January 1, 1987, and 
(B) the employer identifies the amount of such contribu-
tion before January 1,1987. 
SEC. 1106. ADJUSTMENTS TO LIMITATIONS ON CONTRIBUTIONS AND 
BENEFITS UNDER QUALIFIED PLANS. 
(a) ADJUSTMENT OF ANNUAL CONTRIBUTION LIMITS.—Subpara-
graph (A) of section 415(c)(1) (relating to limitation for defined 
contribution plans) is amended to read as follows: 
"(A) $30,000 (or, if greater, V^, of the dollar limitation in 
effect under subsection Ot))(l)(A)), or". 
O
t
)
) ADJUSTMENT OF DEFINED BENEFIT PLAN LIMITS.— 
(1) USE OF SOCIAL SECURITY RETIREMENT AGE.— 
(A) IN GENERAL.—Subparagraphs (C) and (D) of section 
415(b)(2) are each amended— 
(i) by striking out "age 62" and "age 65" each place 
they appear and inserting in lieu thereof "the social 
security retirement age", and 
(ii) by striking out the last sentence of subparagraph 
(C) and inserting in lieu thereof the following: "The 
reduction under this subparagraph shall be made in 
such manner as the Secretary may prescribe which is 
consistent with the reduction for old-age insurance 
benefits commencing before the social security retire-
ment age under the Social Security Act." 
(B) DEFINITION OF SOCIAL SECURITY RETIREMENT AGE.— 
Section 415(b) is amended by adding at the end thereof the 
following new paragraph: 
"(8) SOCIAL SECURITY RETIREMENT AGE DEFINED.—For purposes 
of this subsection, the term 'social security retirement age' 
~ 
means the age used as the retirement age under section 216(1) of 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2421 
the Social Security Act, except that such section shall be 
applied— 
"(A) without regard to the age increase factor, and 
"(B) as if the earlv retirement age under section 216(1)(2) 
of such Act were 62.' 
(2) SPECIAL RULES FOR GOVERNMENTAL AND TAX-EXEMPT PLANS 
i 
AND QUAUFIED POUCE AND FIREFIGHTERS.—Paragraph (2) of sec-
5 
tion 415(b) (relating to annual benefit) is amended by adding at 
the end thereof the following new subparagraphs: 
I 
"(F) PLANS MAINTAINED BY GOVERNMENTS AND TAX-
EXEMPT ORGANIZATIONS.—In the case of a governmental 
I 
plan (within the meaning of section 414(d)), a plan main-
tained by an organization (other than a governmental unit) 
> 
exempt from tax under this subtitle, or a qualified mer-
chant marine plan— 
i,^ 
"(i) subparagraph (G) shall be applied— 
X 
"(I) by substituting 'age 62' for 'social security 
retirement age' each place it appears, and 
a 
:f 
"(II) as if the last sentence thereof read as fol-
lows: 'The reduction under this subparagraph shall 
: 
not reduce the limitation of paragraph (1)(A) below 
(i) $75,000 if the benefit begins at or after age 55, or 
, • 
(ii) if the benefit begins before age 55, the equiva-
f 
lent of the $75,000 limitation for age 55.', and 
E 
"(ii) subparagraph (D) shall be applied by substitut-
ing 'age 65' for 'social security retirement age' each 
M.<:. 
place it appears. 
For purposes of this subparagraph, the term 'qualified mer-
chant marine plan' means a plan in existence on January 1, 
1986, the participants in which are merchant marine offi-
cers holding licenses issued by the Secretary of Transpor-
tation under title 46, United States Code. 
m.oir 
"(G) SPECIAL UMITATION FOR QUAUFIED POLICE OR FIRE-
FIGHTERS.—In the case of a qualified participant— 
' ' 
"(i) subparagraph (G) shall not reduce the limitation 
of paragraph (IXA) to an amount less than $50,000, and 
"(ii) the rules of subparagraph (F) shall apply. 
The Secretary shall adjust the $50,000 amount in clause (i) 
lol in 
at the same time and in the same manner as under section 
415(d). 
if ii J 
"(H) QUAUFIED PARTICIPANT DEFINED.—For purposes of 
subparagraph (G), the term 'qualified participant' means a 
p} 
participant— 
"(i) in a defined benefit plan which is maintained by 
f 
a State or political subdivision thereof, 
"(ii) with respect to whom the period of service taken 
into account in determining the amount of the benefit 
under such defined benefit plan includes at least 20 
years of service of the participant— 
"(I) as a full-time employee of any police depart-
ment or fire department which is organized and 
operated by the State or political subdivision 
;;:.* f 
maintaining such defined benefit plan to provide 
police protection, firefighting services, or emer-
gency medical services for any area within the 
jurisdiction of such State or political subdivision, 
or 
100 STAT. 2422 
PUBLIC LAW 99-514—OCT. 22, 1986 
tjci »
> '- 
•
— 
"(II) as a member of the Armed Forces of the 
United States." 
(3) TREATMENT OF AIRLINE PILOTS.—Subsection O
t
>
) of section 
I;' 415 (relating to Umitation for defined benefit plans) is amended 
by adding at the end thereof the following new paragraph: 
"(9) SPECIAL RULE FOR COMMERCIAL AIRLINE PILOTS.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
Ift , f (B), in the case of any participant who is a commercial 
airline pilot— 
XAT 
"(i) the rule of paragraph (2)(F)(i)(II) shall apply, and 
= 
"(ii) if, as of the time of the participant's retirement, 
regulations 
prescribed 
by 
the 
Federal 
Aviation 
; ; 
Administration require an individual to separate from 
•^&ir> b-- 
service as a commercial airline pilot after attaining 
any age occurring on or after age 60 and before the 
social security retirement age, paragraph (2)(C) (after 
¥Ji'>y V 
application of clause (i)) shall be applied by substituting 
such age for the social security retirement age. 
"(B) INDIVIDUALS WHO SEPARATE FROM SERVICE BEFORE AGE 
60.—If a participant described in subparagraph (A) sepa-
rates from service before age 60, the rules of paragraph 
(2)(F) shall apply." 
(4) SPECIAL ELECTIONS FOR SECTION 403(b) CONTRACTS.—Sub-
paragraphs (A), (B), and (C) of section 415(c)(4) are each amended 
by inserting "a health and welfare service agency," after "a 
home health service agency,". 
(c) CONTRIBUTIONS TO COST-OF-LIVING 
ARRANGEMENTS 
UNDER 
DEFINED BENEFIT PLANS.— 
(1) IN GENERAL.—Section 415(k) (relating to special rules for 
limitations on benefits and contributions under qualified plans) 
is amended by adding at the end thereof the following new 
paragraph: 
-35! 
"(2) CONTRIBUTIONS TO PROVIDE COST-OF-LIVING PROTECTION 
UNDER DEFINED BENEFIT PLANS.— 
f
; 
"(A) IN GENERAL.—In the case of a defined benefit plan 
ttfii -. 
which maintains a qualified cost-of-living arrangement— 
"(i) any contribution made directly by an employee 
under such arrangement— 
"(I) shall not be treated as an annual addition for 
purposes of subsection (c), but 
••-• ' ,c r . ' 
"(II) shall be so treated for purposes of subsection 
. 
(e), and 
"(ii) any benefit under such arrangement which is 
\-c!f; • '. 
, allocable to an employer contribution which was trans-
ferred from a defined contribution plan and to which 
the requirements of subsection (c) were applied shall, 
^ , 
for purposes of subsection (b), be treated as a benefit 
%M JaB*^! 
derived from an employee contribution (and subsec-
tions (c) and (e) shall not again apply to such contribu-
.jjf: 
tion by reason of such transfer). 
"(B) QUAUFIED COST-OF-UVING ARRANGEMENT DEFINED.— 
For purposes of this paragraph, the term 'qualified cost-of-
living arrangement' means an arrangement under a de-
fined benefit plan which— 
^fij 
"(i) provides a cost-of-living adjustment to a benefit 
jiQu 
.t'i 
provided under such plan or a separate plan subject to 
the requirements of section 412, and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2423 
.,^„ 
"(ii) meets the requirements of subparagraphs (C), 
(D), (E), and (F) and such other requirements as the 
Secretary may prescribe. 
"(C) 
DETERMINATION 
OF 
AMOUNT 
OF 
BENEFIT.—An 
arrangement meets the requirement of this subparagraph 
only if the cost-of-living adjustment of participants is 
based— 
"(i) on increases in the cost-of-living after the annuity 
starting date, and 
"(ii) on average cost-of-living increases determined by 
^. 
reference to 1 or more indexes prescribed by the Sec-
retary, except that the arrangement may provide that 
the increase for any year will not be less than 3 percent 
of the retirement benefit (determined without regard to 
the arrangement). 
"(D) ARRANGEMENT ELECTIVE; TIME FOR ELECTION.—An 
arrangement meets the requirements of this subparagraph 
only if it is elective, it is available under the same terms to 
all participants, and it provides that such election may be 
made in— 
"(i) the year in which the participant— 
"(I) attains the earliest retirement age under the 
defined benefit plan (determined without regard to 
any requirement of separation from service), or 
"(II) separates from service, or 
"(ii) both such years. 
•%mi 
"^E) NONDISCRIMINATION REQUIREMENTS.—An arrange-
ment shall not meet the requirements of this subparagraph 
^c, 
if the Secretary finds that a pattern of discrimination exists 
with respect to participation. 
.^\. 
"(F) SPECIAL RULES FOR KEY EMPLOYEES.— 
"(i) IN GENERAL.—An arrangement shall not meet 
the requirements of this paragraph if any key em-
ployee is eligible to participate. 
"(ii) KEY EMPLOYEE.—For purposes of this subpara-
graph, the term 'key employee' has the meaning given 
such term by section 416(iXl), except that in the case of 
a plan other than a top-heavy plan (within the meaning 
of section 416(g)), such term shall not include an 
individual who is a key employee solely by reason of 
section 416(iXlXAXi)." 
(2) CERTAIN TRANSFERS TO DEFINED BENEFIT PLANS NOT TAKEN 
INTO ACCOUNT FOR PURPOSES OF LUMP SUM DISTRIBUTION.—SEC-
tion 402(e)(4) (relating to special rules for lump sum distribu-
tions) is amended by adding at the end thereof the following 
new subparagraph: 
"(N) 
TRANSFERS TO COST-OF-LIVING ARRANGEMENT NOT 
TREATED AS DISTRIBUTION.—For purposes of this subsection, 
the balance to the credit of an employee under a defined 
contribution plan shall not include any amount transferred 
from such defined contribution plan to a qualified cost-of-
3" - 
living arrangement (within the meaning of section 415(kX2)) 
under a defined benefit plan." 
(d) LIMITATION ON AMOUNT OF ANNUAL COMPENSATION WHICH 
MAY BE TAKEN INTO ACCOUNT.— 
(1) IN GENERAL.—Subsection (a) of section 401 (relating to 
qualified pension, profit-sharing, and stock bonus plans) is 
100 STAT. 2424 
PUBLIC LAW 99-514—OCT. 22, 1986 
amended by inserting after paragraph (16) the following new 
paragraph: 
"(17) A trust shall not constitute a qualified trust under this 
section unless, under the plan of which such trust is a part, the 
annual compensation of each employee taken into account 
under the plan for any year does not exceed $200,000. The 
Secretary shall adjust the $200,000 amount at the same time 
and in the same manner as under section 415(d)." 
(2) DEDUCTION FOR EMPLOYER CONTRIBUTIONS.—Section 404 
(relating to deduction for contributions of employers to plans) is 
amended by adding at the end thereof the following new subsec-
tion: 
"(1) LIMITATION ON AMOUNT OF ANNUAL COMPENSATION TAKEN 
INTO ACCOUNT.—For purposes of applying the limitations of this 
section, the amount of annual compensation of each employee taken 
into account under the plan for any year shall not exceed $200,000. 
The Secretary shall adjust the $2(30,000 amount at the same time 
and in the same manner as under section 415(d)." 
,. (3) CONFORMING AMENDMENTS.— 
(A) Subsection (a) of section 416 is amended by inserting 
"and" at the end of paragraph (1), by striking out ", and" at 
fff 
the end of paragraph (2) and inserting in lieu thereof a 
period, and by striking out paragraph (3). 
(B)(i) Subsection (d) of section 416 is hereby repealed. 
(ii) Section 416(c)(2)(B) is amended by striking out clause 
(ii) and by redesignating clause (iii) as clause (ii). 
(C) Paragraph (3) of section 818(a) is amended by inserting 
"(17)," after "(16),". 
(e) TREATMENT OF EMPLOYEE CONTRIBUTIONS FOR PURPOSES OF 
DETERMINING ANNUAL ADDITION.— 
(1) IN GENERAL.—Subparagraph (B) of section 415(c)(2) (defin-
ing annual addition) is amended to read as follows: 
"(B) the employee contributions, and". 
(2) ANNUAL COMPENSATION LIMIT NOT TO APPLY TO CONTRIBU-
TIONS F
O
R POST-RETIREMENT MEDICAL BENEFITS.—Section 415(c)(2) 
is amended by adding at the end thereof the following new 
sentence: "Subparagraph (B) of paragraph (1) shall not apply to 
any contribution for medical benefits (within the meaning of 
section 419A(f)(2)) after separation from service which is treated 
as an annual addition." 
(f) PHASE-IN OF LIMITATION FOR DEFINED BENEFIT PLANS BASED ON 
YEARS OF PARTICIPATION.—Paragraph (5) of section 415(b) (relating 
to reduction for service less than 10 years) is amended to read as 
follows: 
"(5) REDUCTION FOR PARTICIPATION OR SERVICE OF LESS THAN lo 
YEARS.— 
"(A) DOLLAR LIMITATION.—In the case of an employee who 
has less than 10 years of participation in a defined benefit 
plan, the limitation referred to in paragraph (1)(A) shall be 
the limitation determined under such paragraph (without 
regard to this paragraph) multiplied by a fraction— 
"(i) the numerator of which is the number of years 
(or part thereof) of participation in the defined benefit 
f:, ^ ' 
plan of the employer, and 
"(ii) the denominator of which is 10. 
"(B) COMPENSATION AND BENEFITS LIMITATIONS.—The 
provisions of subparagraph (A) shall apply to the limita-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2425 
t, 
tions under paragraphs dXB) and (4), except that such 
subparagraph shall be applied with respect to years of 
service with an employer rather than years of participation 
in a plan. 
"(C) LIMITATION 
ON REDUCTION.—In no event shall 
subparagraph (A) or (B) reduce the limitations referred to 
, 
in paragraphs (1) and (4) to an amount less than Vio of such 
limitation (determined without regard to this paragraph). 
"(D) APPLICATION TO CHANGES IN BENEFIT STRUCTURE.—To 
the extent provided in regulations, this paragraph shall be 
applied separately with respect to each change in the bene-
fit structure of a plan." 
(g) CONFORMING AMENDMENTS.— 
(1) Paragraph (1) of section 415(d) is amended by inserting 
"and" at the end of subparagraph (A), by striking out subpara-
graph (B), and by redesignating subparagraph (C) as paragraph 
(B). 
(2) Paragraph (2) of section 415(d) is amended— 
(A) by striking out "subparagraphs (A) and (B)" and 
inserting in lieu thereof "subparagraph (A)", and 
(B) by striking out "subparagraph (C)" and inserting in 
lieu thereof "subparagraph (B)". 
(3) Paragraph (3) of section 415(d) is amended by striking out 
"subparagraph (A) or (B)" and inserting in lieu thereof 
"subparagraph (A)". 
(h) PLANS MAY INCORPORATE SECTION 415 LIMITATIONS BY REF-
ERENCE.—Notwithstanding any other provision of law, except as 
provided in regulations prescribed by the Secretary of the Treasury 
or his delegate, a plan may incorporate by reference the limitations 
under section 415 of the Internal Revenue Code of 1986. 
(i) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to years begin-
ning after December 31,1986. 
(2) COLLECTIVE BARGAINING AGREEMENTS.—In the case of a 
plan maintained pursuant to 1 or more collective bargaining 
agreements between employee representatives and 1 or more 
employers ratified before March 1, 1986, the amendments made 
by this section (other than subsection (d)) shall not apply to 
contributions or benefits pursuant to such agreement in years 
beginning before the earlier of— 
(A) the date on which the last of such collective bargain-
ing agreements terminates (determined without regard to 
any extension thereof after February 28, 1986), or 
(B) January 1,1989. 
(3) RIGHT TO HIGHER ACCRUED DEFINED BENEFIT PRESERVED.— 
(A) IN GENERAL.—In the case of an individual who is a 
participant (as of the 1st day of the 1st year to which the 
amendments made by this section apply) in a defined bene-
fit plan which is in existence on May 6, 1986, and with 
respect to which the requirements of section 415 of the 
Internal Revenue Code of 1986 have been met for all plan 
years, if such individual's current accrued benefit under the 
plan exceeds the limitation of subsection (b) of section 415 of 
such Code (as amended by this section), then (in the case of 
such plan), for purposes of subsections (b) and (e) of such 
section, the limitation of such subsection (b)(1)(A) with re-
100 STAT. 2426 
PUBLIC LAW 99-514—OCT. 22, 1986 
i^ry' 
spect to such individual shall be equal to such current 
accrued benefit. 
(B) CURRENT ACCRUED BENEFIT DEFINED.— 
(i) IN GENERAL.—For purposes of this paragraph, the 
'' 
' 
term "current accrued benefit" means the individual's 
accrued benefit (at the close of the last year to which 
the amendments made by this section do not apply) 
when expressed as an annual benefit (within the mean-
ing of section 415(b)(2) of such Code). 
(ii) SPECIAL RULE.—For purposes of determining the 
amount of any individual's current accrued benefit— 
(I) no change in the terms and conditions of the 
^ ., ,,• .fi 
plan after May 5,1986, and 
'*'' 
'" 
(II) no cost-of-living adjustment occurring after 
May 5, 1986, 
''' 
shall be taken into account. For purposes of subclause 
(I), any change in the terms and conditions of the plan 
|j0, 
pursuant to a collective bargaining agreement ratified 
before May 6, 1986, shall be treated as a change made 
SIS ; 
before May 6,1986. 
(4) TRANSITION RULE WHERE THE SUM OF DEFINED CONTRIBU-
TION AND DEFINED BENEFIT PLAN FRACTIONS EXCEEDS 1.0.—In the 
case of a plan which satisfied the requirements of section 415 of 
the Internal Revenue Code of 1986 for its last year beginning 
before January 1, 1987, the Secretary of the Treasury or his 
delegate shall prescribe regulations under which an amount is 
subtracted from the numerator of the defined contribution plan 
fraction (not exceeding such numerator) so that the sum of the 
defined benefit plan fraction and the defined contribution plan 
fraction computed under section 415(e)(1) of such Code does not 
exceed 1.0 for such year. 
(5) EFFECTIVE DATE FOR SUBSECTION (d).— 
u f
. 
,, 
(A) IN GENERAL.—Except as provided in subparagraph (B), 
*' " 
the amendment made by subsection (d) shall apply to bene-
fits accruing in years beginning after December 31, 1988. 
(B) COLLECTIVE BARGAINING AGREEMENTS.—In the case of 
a plan described in paragraph (2), the amendments made by 
subsection (d) shall apply to benefits accruing in years 
beginning on or after the earlier o
f
— 
(i) the later o
f
— 
(I) the date determined under paragraph (2)(A), 
or 
(II) January 1,1989, or 
- f
, 
(ii) January 1, 1991. 
(6) SPECIAL RULE FOR AMENDMENT MADE BY SUBSECTION (e).— 
The amendment made by subsection (e) shall not require the 
recomputation, for purposes of section 415(e) of the Internal 
Revenue Code of 1986, of the annual addition for any year 
beginning before 1987. 
SEC. 1107. MODIFICATIONS OF SECTION 457. 
(a) GENERAL RULE.—Section 457 (relating to deferred compensa-
tion plans with respect to service for State and local governments) is 
amended to read as follows: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2427 
"SEC. 457. DEFERRED COMPENSATION PLANS OF STATE AND LOCAL 
GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS. 
"(a) YEAR OF INCLUSION IN GROSS INCOME.—In the case of a 
participant in an eligible deferred compensation plan, any amount 
of compensation deferred under the plan, and any income attrib-
utable to the amounts so deferred, shall be includible in gross 
income only for the taxable year in which such compensation or 
other income is paid or otherwise made available to the participant 
or other beneficiary. 
"(b) ELIGIBLE DEFERRED COMPENSATION PLAN DEFINED.—For pur-
poses of this section, the term 'eligible deferred compensation plan' 
means a plan established and maintained by an eligible employer— 
"(1) in which only individuals who perform service for the 
employer may be participants, 
^
^ 
"(2) which provides that (except as provided in paragraph (3)) 
the maximum amount which may be deferred under the plan 
for the taxable year shall not exceed the lesser of— 
- — 
"(A) $7,500, or 
"(B) 33 V
b percent of the participant's includible com-
pensation, 
^ ' 
"(3) which may provide that, for 1 or more of the participant's 
last 3 taxable years ending before he attains normal retirement 
age under the plan, the ceiling set forth in paragraph (2) shall 
be the lesser o
f
— 
- 
"(A) $15,000, or 
"(B) the sum of— 
"(i) the plan ceiling established for purposes of para-
'* ~ 
graph (2) for the taxable year (determined without 
regard to this paragraph), plus 
^"" ' 
"(ii) so much of the plan ceiling established for pur-
poses of paragraph (2) for taxable years before the 
taxable year as has not previously been used under 
paragraph (2) or this paragraph, 
"(4) which provides that compensation will be deferred for 
any calendar month only if an agreement providing for such 
deferral has been entered into before the beginning of such 
month, 
"(5) which meets the distribution requirements of subsection 
;• 
(d), and 
^' 
"(6) which provides that— 
"(A) all amounts of compensation deferred under the 
" t "' 
plan, 
^ • 
"(B) all property and rights purchased with such 
amounts, and 
«£!'3 
"(C) all income attributable to such amounts, property, or 
rights, 
^ 
shall remain (until made available to the participant or other 
-
^ 
beneficiary) solely the property and rights of the employer 
(without being restricted to the provision of benefits under the 
plan), subject only to the claims of the employer's general 
creditors. 
A plan which is established and maintained by an employer which is 
described in subsection (eXlXA) and which is administered in a 
manner which is inconsistent with the requirements of any of -he 
preceding paragraphs shall be treated as not meeting the require-
ments of such paragraph as of the 1st plan year beginning more 
100 STAT. 2428 
PUBLIC LAW 99-514—OCT. 22, 1986 
than 180 days after the date of notification by the Secretary of the 
inconsistency unless the employer corrects the inconsistency before 
the 1st day of such plan year. 
"(c) INDIVIDUALS WHO ARE PARTICIPANTS IN MORE THAN 1 PLAN.— 
"(1) IN GENERAL.—The maximum amount of the compensa-
tion of any one individual which may be deferred under subsec-
tion (a) during any taxable year shall not exceed $7,500 (as 
modified by any adjustment provided under subsection (b)(3)). 
"(2) COORDINATION WITH CERTAIN OTHER DEFERRALS.—In apply-
^ 
ing paragraph (1) of this subsection and paragraphs (2) and (3) of 
subsection (b)— 
"(A) any amount excluded from gross income under sec-
ar. ~,.t tion 4030?) for the taxable year, and 
"(B) any amount— 
/. X . 
"(i) excluded from gross income under section 
',. .'^' ^ 
402(a)(8) or section 402(h)(1)(B) for the taxable year, or 
'' ' "
" 
"(ii) with respect to which a deduction is allowable by 
reason of a contribution to an organization described in 
section 501(c)(18) for the taxable year, 
shall be treated as an amount deferred under subsection (a). In 
^,,^, applying section 402(g)(8)(A)(iii) or 403(b)(2)(A)(ii), an amount 
deferred under subsection (a) for any year of service shall be 
taken into account as if described in section 402(g)(3)(C) or 
4030t))(2)(A)(ii), respectively. Subparagraph (B) shall not apply in 
the case of a participant in a rural electric cooperative plan (as 
defined in section 401(k)(7)). 
"(d) DISTRIBUTION REQUIREMENTS.— 
^.j 
"(1) IN GENERAL.—For purposes of subsection (b)(5), a plan 
""'^ meets the distribution requirements of this subsection i
f
— 
"(A) the plan provides that amounts payable under the 
plan will be made available to participants or other bene-
^^_, . 
ficiaries 
not earlier than when the participant is separated 
from service with the employer or is faced with an un-
,^ ^ ,, 
foreseeable emergency (determined in the manner pre-
' ^
* 
scribed by the Secretary by regulation), and 
"(B) the plan meets the minimum distribution require-
ments of paragraph (2). 
; 
"(2) MINIMUM DISTRIBUTION REQUIREMENTS.—A plan meets 
the minimum distribution requirements of this paragraph if 
such plan meets the requirements of subparagraphs (A), (B), and 
"(A) APPLICATION OF SECTION 401(a)(9).—A plan meets the 
^,, j„ 
requirements of this subparagraph if the plan meets the 
requirements of section 401(a)(9). 
•
f
c
> ¥rr 
'^^^ ADDITIONAL DISTRIBUTION REQUIREMENTS.—A plan 
meets the requirements of this subparagraph if— 
,; ,j \j 
,, 
"(i) in the case of a distribution beginning before the 
"
^ * 
death of the participant, such distribution will be made 
in a form under which— 
"(I) at least % of the total amount payable with 
respect to the participant will be paid during the 
life expectancy of such participant (determined as 
of the commencement of the distribution), and 
"(II) any amount not distributed to the partici-
pant during his life will be distributed after the 
^ , 
death of the participant at least as rapidly as 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2429 
under the method of distributions being used under 
subclause (I) as of the date of his death, or 
"(ii) in the case of a distribution which does not begin 
before the death of the participant, the entire amount 
payable with respect to the participant will be paid 
during a period not to exceed 15 years (or the life 
expectancy of the surviving spouse if such spouse is the 
beneficiary). 
1 
"(C) NoNiNCREASiNG BENEFITS.—A plan 
meets the 
l- 
requirements of this subparagraph if any distribution pay-
able over a period of more than 1 year can only be made in 
substantially nonincreasing amounts (paid not less fre-
quently than annually). 
"(e) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) 
ELIGIBLE 
EMPLOYER.—The term 
'eligible 
employer' 
means— 
"(A) a State, political subdivision of a State, and any 
agency or instrumentality of a State or political subdivision 
of a State, and 
, ^^, 
"(B) any other organization (other than a governmental 
unit) exempt from tax under this subtitle. 
"(2) PERFORMANCE OF SERVICE.—The performance of service 
includes performance of service as an independent contractor 
and the person (or governmental unit) for whom such services 
are performed shall be treated as the employer, 
i 
"(3) PARTICIPANT.—The term 'participant' means an individ-
ual who is eligible to defer compensation under the plan. 
"(4) BENEFICIARY.—The term 'beneficiary' means a bene-
ficiary of the participant, his estate, or any other person whose 
interest in the plan is derived from the participant. 
"(5) INCLUDIBLE COMPENSATION.—The term 'includible com-
pensation' means compensation for service performed for the 
employer which (taking into account the provisions of this 
section and other provisions of this chapter) is currently includ-
ible in gross income. 
"(6) COMPENSATION TAKEN INTO ACCOUNT AT PRESENT VALUE.— 
Compensation shall be taken into account at its present value. 
"(7) COMMUNITY PROPERTY LAWS.—The amount of includible 
compensation shall be determined without regard to any 
community property laws. 
"(8) INCOME ATTRIBUTABLE.—Gains from the disposition of 
property shall be treated as income attributable to such prop-
ertv. 
' (9) BENEFITS NOT TREATED AS MADE AVAILABLE BY REASON OF 
CERTAIN ELECTIONS.—If^ 
"(A) the total amount payable to a participant under the 
e 
plan does not exceed $3,500, and 
"(B) no additional amounts may be deferred under the 
plan with respect to the participant, 
the amount payable to the participant under the plan shall not 
be treated as made available merely because such participant 
may elect to receive a lump sum payable within 60 days of the 
election. 
"(10) TRANSFERS BETWEEN PLANS.—A participant shall not be 
required to include in gross income any portion of the entire 
amount payable to such participant solely by reason of the 
100 STAT. 2430 
PUBLIC LAW 99-514—OCT. 22, 1986 
""''^ transfer of such portion from 1 eligible deferred compensation 
plan to another eligible deferred compensation plan. 
"(f) TAX TREATMENT OF PARTICIPANTS WHERE PLAN OR ARRANGE-
MENT OF EMPLOYER IS NOT ELIGIBLE.— 
"(1) IN GENERAL.—In the case of a plan of an eligible employer 
providing for a deferral of compensation, if such plan is not an 
eligible deferred compensation plan, then— 
"(A) the compensation shall be included in the gross 
income of the participant or beneficiary for the 1st taxable 
year in which there is no substantial risk of forfeiture of 
the rights to such compensation, and 
an 
"(B) the tax treatment of any amount made available 
under the plan to a participant or beneficiary shall be 
aid 
determined under section 72 (relating to annuities, etc.). 
"(2) EXCEPTIONS.—Paragraph (1) shall not apply to— 
' * 
"(A) a plan described in section 401(a) which includes a 
trust exempt from tax under section 501(a), 
vii 
"(B) an annuity plan or contract described in section 403, 
ic; 
"(C) that portion of any plan which consists of a transfer 
of property described in section 83, and 
*Blt 
"(D) that portion of any plan which consists of a trust to 
which section 4O20t>) applies. 
"(3) DEFINITIONS.—For purposes of this subsection— 
"(A) PLAN INCLUDES ARRANGEMENTS, ETC.—The term 
* " ' * '• 'plan' includes any agreement or arrangement. 
"(B) SUBSTANTIAL RISK OF FORFEITURE.—The rights of a 
-bK 
person to compensation are subject to a substantial risk of 
forfeiture if such person's rights to such compensation are 
conditioned upon the future performance of substantial 
services by any individual." 
(b) CLERICAL AMENDMENT.—The table of sections for subpart B of 
part II of subchapter E of chapter 1 is amended by striking out the 
item relating to section 457 and inserting in lieu thereof the 
following: 
"Sec. 457. Deferred compensation plans of State and local governments and 
tax-exempt organizations." 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to taxable years 
beginning after December 31,1988. 
(2) TRANSFERS AND CASH-OUTS.—Paragraphs (9) and (10) of 
section 457(e) of the Internal Revenue Code of 1986 (as amended 
by this section) shall apply to taxable years beginning after 
December 31,1986. 
(3) APPLICATION TO TAX-EXEMPT ORGANIZATIONS.— 
ftri 
(A) IN GENERAL.—Except as provided in subparagraph (B), 
the application of section 457 of the Internal Revenue Code 
•:i:ts 
of 1986 by reason of the amendments made by this section 
to eligible deferred compensation plans established and 
1 
maintained by organizations exempt from tax shall apply to 
taxable years beginning after December 31,1986. 
(B) EXISTING DEFERRALS AND ARRANGEMENTS.—Section 
457 of such Code shall not apply to amounts deferred under 
• 1 > a plan described in subparagraph (A) which— 
(i) were deferred from taxable years beginning before 
i *j 
January 1,1987, or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2431 
(ii) are deferred from taxable years beginning after 
December 31, 1986, pursuant to an agreement which— 
(I) was in writing on August 16, 1986, 
(II) on such date provides for a deferral for each 
taxable year covered by the agreement of a fixed 
amount or of an amount determined pursuant to a 
T 
fixed 
formula. 
te 
Clause (ii) shall not apply to any taxable year ending after 
c: 
the date on which any modification to the amount or 
28 
formula described in subclause (II) is effective. Amounts 
described in the first sentence shall be taken into account 
' s-'^ 
for applying section 457 to other amounts deferred under 
any eligible deferred compensation plan. 
(4) DEFERRED COMPENSATION PLANS FOR STATE JUDGES.—The 
amendments made by this section shall not apply to any quali-
in fied State judicial plan (as defined in section 131(c)(3)(B) of the 
Revenue Act of 1978 as amended by section 252 of the Tax 
Equity and Fiscal Responsibility Act of 1982). 
(5) 
SPECIAL RULE FOR CERTAIN DEFERRED COMPENSATION 
PLANS.—The amendments made by this section shall not apply 
^
'
f 
to employees on August 16,1986, o
f
— 
w 
(A) a deferred compensation plan of a nonprofit corpora-
tion organized under the laws of the State of Alabama with 
•fissm 
respect to which the Internal Revenue Service issued a 
ruling dated March 17, 1976, that the plan would not affect 
' 
the tax-exempt status of the corporation, or 
t: . 
(B) to a deferred compensation plan with respect to which 
a letter dated November 6, 1975, submitted the original 
plan to the Internal Revenue Service, an amendment was 
submitted on November 19, 1975, and the Internal Revenue 
Service responded with a letter dated December 24, 1975, 
but only with respect to deferrals under such plan. 
SEC. 1108. SPECIAL RULES FOR SIMPLIFIED EMPLOYEE PENSIONS. 
(a) SALARY REDUCTION ARRANGEMENTS PERMITTED.—Section 408(k) 
(relating to simplified employee pension defined) is amended by 
inserting after paragraph (5) the following new paragraph: 
"(6) EMPLOYEE MAY ELECT SALARY REDUCTION ARRANGEMENT.— 
"(A) IN GENERAL.—A simplified employee pension shall 
L
f • 
not fail to meet the requirements of this subsection for a 
year merely because, under the terms of the pension— 
n 
"(i) an employee may elect to have the employer 
ii, 
make payments— 
ft3 V 
"(I) as elective employer contributions to the 
simplified employee pension on behalf of the em-
ployee, or 
"(II) to the employee directly in cash, 
"(ii) an election described in clause (i)(I) is made or is 
•r 
* 
' 
in effect with respect to not less than 50 percent of the 
employees of the employer, and 
"(iii) the deferral percentage for such year of each 
highly compensated employee eligible to participate is 
not more than the product derived by multiplying the 
average of the deferral percentages for such year of all 
employees (other than highly compensated employees) 
eligible to participate by 1.25. 
100 STAT. 2432 
PUBLIC LAW 99-514—OCT. 22, 1986 
%enB.~k. 
"(B) EXCEPTION WHERE MORE THAN 25 EMPLOYEES.—This 
flajfiv 
paragraph shall not apply with respect to any year in the 
case of a simplified employee pension maintained by an 
employer with more than 25 employees at any time during 
the preceding year. 
i. "^ 
"(C) DISTRIBUTIONS OF EXCESS CONTRIBUTIONS.— 
"(i) IN GENERAL.—Rules similar to the rules of section 
••''•'' y 
401(k)(8) shall apply to any excess contribution under 
.; -
^
^ 
this paragraph. Any excess contribution under a sim-
plified employee pension shall be treated as an excess 
contribution for purposes of section 4979. 
"(ii) EXCESS CONTRIBUTION.—For purposes of clause 
(i), the term 'excess contribution' means, with respect 
'J '^ 
• to a highly compensated employee, the excess of elec-
tive employer contributions under this paragraph over 
the maximum amount of such contributions allowable 
. ' 
under subparagraph (A)(iii). 
"(D) DEFERRAL PERCENTAGE.—For purposes of this para-
.' 
graph, the deferral percentage for an employee for a year 
I' .
»
- 
shall be the ratio o
f
— 
"(i) the amount of elective employer contributions 
" tf\-^.'-.. actually paid over to the simplified employee pension 
' 
on behalf of the employee for the year, to 
"(ii) the employee's compensation (within the mean-
ing of section 414(s)) for the year. 
"(E) EXCEPTION FOR STATE AND LOCAL AND TAX-EXEMPT 
rf"sW 
PENSIONS.—This paragraph shall not apply to a simplified 
employee pension maintained by— 
"(i) a State or local government or political subdivi-
sion thereof, or any agency or instrumentality thereof, 
or 
"(ii) an organization exempt from tax under this title. 
"(F) HIGHLY COMPENSATED EMPLOYEE.—For purposes of 
this paragraph, the term 'highly compensated employee' 
has the meaning given such term by section 414(q)." 
(b) EXCLUSION FROM GROSS INCOME.—Section 402 (relating to teix-
ability of beneficiary of employees' trust), as amended by section 
1105(a), is amended by inserting at the end thereof the following 
new subsection: 
"(h) SPECIAL RULES FOR SIMPUFIED EMPLOYEE PENSIONS.—For pur-
poses of this chapter— 
"(1) IN GENERAL.—Except as provided in paragraph (2), con-
tributions made by an employer on behalf of an employee to an 
b'» 
individual retirement plan pursuant to a simplified employee 
T 
pension (as defined in section 408(k))— 
"(A) shall not be treated as distributed or made available 
to the employee or as contributions made by the employee, 
: '»'f'v and 
t''' >• 
"(B) if such contributions are made pursuant to an 
arrangement under section 408(k)(6) under which an em-
i^uir 
ployee may elect to have the employer make contributions 
to the simplified employee pension on behalf of the em-
ployee, shall not be treated £is distributed or made available 
or £is contributions made by the employee merely because 
' " 
the simplified employee pension includes provisions for 
such election. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2433 
"(2) 
LIMITATIONS ON EMPLOYER CONTRIBUTIONS.—Contribu-
tions made by an employer to a simplified employee pension 
with respect to an employee for any year shall be treated as 
distributed or made available to such employee and as contribu-
tions made by the employee to the extent such contributions 
exceed the lesser o
f
— 
,4 ., 
"(A) 15 percent of the compensation (within the meaning 
of section 414(s)) from such employer includible in the 
employee's gross income for the year (determined without 
regard to the employer contributions to the simplified em-
ployee pension), or 
'. 
"(B) the limitation in effect under section 415(c)(1)(A), 
>•}?.• 
reduced in the case of any highly compensated employee 
(within the meaning of section 414(q)) by the amount taken 
into account with respect to such employee under section 
^? 
408(k)(3)(D). 
"(3) DISTRIBUTIONS.—Any amount paid or distributed out of 
an individual retirement plan pursuant to a simplified em-
ployee pension shall be included in gross income by the payee or 
distributee, as the case may be, in accordance with the provi-
sions of section 408(d)." 
(c) DEDUCTIBILITY OF CONTRIBUTIONS.—Subparagraphs (A) and (B) 
of section 404(h)(1) (relating to special rules for simplified employee 
pensions) are amended to read as follows: 
"(A) Contributions made for a year are deductible— 
"(i) in the case of a simplified employee pension 
maintained on a calendar year basis, for the taxable 
year with or within which the calendar year ends, or 
t,.r 
"(ii) in the case of a simplified employee pension 
.,- 
. 
which is maintained on the basis of the taxable year of 
the employer, for such taxable year. 
"(B) Contributions shall be treated for purposes of this 
subsection as if they were made for a taxable year if such 
( 
contributions are made on account of such taxable year and 
are made not later than the time prescribed by law for 
filing the return for such taxable year (including extensions 
thereof)." 
(d) PARTICIPATION REQUIREMENTS.—Paragraph (2) of section 408(k) 
(relating to participation requirements) is amended to read as fol-
lows: 
"(2) PARTICIPATION REQUIREMENTS.—This paragraph is satis-
fied with respect to a simplified employee pension for a year 
only if for such year the employer contributes to the simplified 
^ 
employee pension of each employee who— 
i^, jj^^ 
"(A) has attained age 21, 
"(B) has performed service for the employer during at 
least 3 of the immediately preceding 5 years, and 
"(C) received at least $300 in compensation (within the 
meaning of section 414(q)(7)) from the employer for the 
year. 
,, 
For purposes of this paragraph, there shall be excluded from 
consideration employees described in subparagraph (A) or (C) of 
section 410(b)(3). For purposes of any arrangement described in 
subsection (k)(6), any employee who is eligible to have employer 
contributions made on the employee's behalf under such 
arrangement shall be treated as if such a contribution was 
made.' 
100 STAT. 2434 
PUBLIC LAW 99-514—OCT. 22, 1986 
(e) CoST-OF-LiviNG ADJUSTMENTS.—Section 408(k) is amended by 
adding at the end thereof the following new paragraph: 
"(8) COST-OF-LIVING ADJUSTMENT.—The Secretary shall adjust 
the $300 amount in paragraph (2)(C) and the $200,000 amount in 
paragraph (3)(C) at the same time and in the same manner as 
under section 415(d)." 
(f) COMPUTATION PERIOD.—Section 408(k)(7) is amended by adding 
at the end thereof the following new subparagraph: 
"(C) YEAR.—The term 'year' means— 
me OJi 
"(i) the calendar year, or 
"(ii) if the employer elects, subject to such terms and 
, j \ I 
conditions as the Secretary may prescribe, to maintain 
the simplified employee pension on the basis of the 
employer's taxable year." 
(g) CONFORMING AMENDMENTS.— 
(1) Section 408(k)(3) (relating to nondiscrimination require-
ments) is amended— 
m 
(A) by striking out all that follows "in favor o f in 
subparagraph (A) and inserting in lieu thereof "any highly 
•i-f 
compensated employee (within the meaning of section 
414(q)).", 
(S: tir 
(B) in subparagraph (O— 
» 
•>*•!;• ' 
(i) by inserting "and except as provided in subpara-
graph (D)," after "subparagraph (A),", 
(ii) by inserting "(other than contributions under an 
arrangement described in paragraph (6))" after "em-
ployer contributions to simplified employee pensions", 
and 
' ' 
(iii) by striking out the last sentence thereof, and 
(C) by striking out subparagraphs (D) and (E) and insert-
ing in lieu thereof: 
' •
+ 
"(D) PERMITTED DISPARITY.—For purposes of subpara-
' 
graph (C), the rules of section 401(1)(2) shall apply to con-
' '• 
• 
tributions to simplified employee pensions (other than 
contributions under an arrangement described in para-
-t 
graph (6))." 
(2) Paragraph (2) of section 219(b) is amended to read as 
follows: 
"(2) SPECIAL RULE FOR EMPLOYER CONTRIBUTIONS UNDER SIM-
PLIFIED EMPLOYEE PENSIONS.—This section shall not apply with 
*' 
respect to an employer contribution to a simplified employee 
pension." 
(3) Section 219(c)(2)(B) is amended by striking out "(deter-
mined without regard to so much of the employer contributions 
to a simplified employee pension as is allowable by reason of 
^
® 
paragraph (2) of subsection (b))". 
(4) Section 408(k)(3)(A) is amended by striking out "calendar". 
(5) Section 415(c)(2) is amended by striking out "allowable as a 
deduction under section 219(a), and without regard to deductible 
employee contributions within the meaning of section 72(o)(5)" 
f 
and inserting in lieu thereof "which are excludable from gross 
''! 
income under section 408(k)(6)". 
(6) Section 408(k), as amended by subsection (e), is amended by 
adding at the end thereof the following new paragraph: 
"(9) CROSS REFERENCE.— 
"For excise tax on certain excess contributions, see section 4979." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2435 
(7) Section 3121(a)(5) is amended by striking out subparagraph 
(C) and inserting in lieu thereof the following subparagraph: 
"(C) under a simplified employee pension (as defined in 
section 408(k)(l)), other than any contributions described in 
section 408(k)(6),". 
(8) Section 3306(b)(5) is amended by striking out subparagraph 
(C) and inserting in lieu thereof the following subparagraph: 
J 
"(C) under a simplified employee pension (as defined in 
section 408(k)(l)), other than any contributions described in 
section 408(k)(6),". 
(h) EFFECTIVE DATE.—The amendments made by this section shall 
apply to years beginning after December 31, 1986. 
SEC. 1109. DEDUCTIBLE CONTRIBUTIONS PERMITTED UNDER SECTION 
501(c)(18)PLAN. 
(a) IN GENERAL.—Section 501(c)(18) is amended by striking out 
"and" at the end of subparagraph (B), by striking out the period at 
the end of subparagraph (C) and inserting in lieu thereof ", and" and 
by adding at the end thereof the following new subparagraph: 
"(D) in the case of a plan under which an employee may 
designate certain contributions as deductible— 
^^' ' 
"(i) such contributions do not exceed the amount 
with respect to which a deduction is allowable under 
^ 
section 219(b)(3), 
*-• • 
"(ii) requirements similar to the requirements of sec-
tion 401(k)(3)(A)(ii) are met with respect to such elective 
,y 
contributions, and 
[' 
"(iii) such contributions are treated as elective defer-
rals for purposes of section 402(g) (other than para-
graph (4) thereof). 
For purposes of subparagraph (D)(ii), rules similar to the rules 
of section 401(k)(8) shall apply. For purposes of section 4979, any 
excess contribution under clause (ii) shall be treated as an 
excess contribution under a cash or deferred arrangement." 
(b) LIMITATION ON DEDUCTION.—Section 219(b), as amended by 
section 1101(b), is amended by adding at the end thereof the follow-
ing new paragraph: 
"(3) PLANS UNDER SECTION SOKCXIS).—Notwithstanding para-
graph (1), the amount allowable as a deduction under subsection 
(a) with respect to any contributions on behalf of an employee to 
a plan described in section 501(c)(18) shall not exceed the lesser 
of-
"(A) $7,000, or 
"(B) an amount equal to 25 percent of the compensation 
ifiiii 
(gg defined in section 415(c)(3)) includible in the individual's 
gross income for such taxable year." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31, 1986. 
PART II—NONDISCRIMINATION REQUIREMENTS 
SEC. nil. APPLICATION 
OF 
NONDISCRIMINATION RULES TO IN-
TEGRATED PLANS. 
(a) IN GENERAL.—Section 401(1) (relating to nondiscriminatory 
coordination of defined contribution plans with OASDI) is amended 
to read as follows: 
"(1) PERMITTED DISPARITY IN PLAN CONTRIBUTIONS OR BENEFITS.— 
100 STAT. 2436 
PUBLIC LAW 99-514-OCT. 22, 1986 
lirjft 
"(1) IN GENERAL.—The requirements of this subsection are 
met with respect to a plan i
f
— 
"(A) in the case of a defined contribution plan, the 
t t>, - 
requirements of paragraph (2) are met, and 
"(B) in the case of a defined benefit plan, the require-
ments of paragraph (3) are met. 
"(2) DEFINED CONTRIBUTION PLAN.— 
"(A) IN GENERAL.—A defined contribution plan meets the 
requirements of this paragraph if the excess contribution 
percentage does not exceed the base contribution percent-
age by more than the lesser of— 
"(i) the base contribution percentage, or 
' • ' 
' ' 
; , . , , . . . 
"(ii) the greater of— 
"(I) 5.7 percentage points, or 
"(II) the percentage equal to the portion of the 
' ' 
rate of tax under section 3111(a) (in effect as of the 
' 
beginning of the year) which is attributable to old-
age insurance. 
"(B) CONTRIBUTION PERCENTAGES.—For purposes of this 
paragraph— 
"(i) EXCESS CONTRIBUTION PERCENTAGE.—The term 
•i ' ' ' •' 
'excess contribution percentage' means the percentage 
' - ' 
of compensation which is contributed under the plan 
with respect to that portion of each participant's com-
- . <
s ; 
pensation in excess of the integration level. 
"(ii) BASE CONTRIBUTION PERCENTAGE.—The term 
'base contribution percentage' means the percentage of 
compensation contributed under the plan with respect 
to that portion of each participant's compensation not 
in excess of the integration level. 
"(3) DEFINED BENEFIT PLAN.—A defined benefit plan meets the 
requirements of this paragraph if— 
"(A) EXCESS PLANS.— 
"(i) IN GENERAL.—In the case of a plan other than an 
offset plan— 
"(I) the excess benefit percentage does not exceed 
the base benefit percentage by more than the 
' * ^ 
maximum excess allowance, 
"(II) any optional form of benefit, preretirement 
benefit, actuarial factor, or other benefit or feature 
'• 
provided with respect to compensation in excess of 
the integration level is provided with respect to 
compensation not in excess of such level, and 
V-^^ 
i'^^ 
"(III) benefits are based on average annual 
•' 
" - ' 
compensation. 
"(ii) BENEFIT PERCENTAGES.—For purposes of this 
ii.'.rt'i ':•• 
subparagraph, the excess and base benefit percentages 
shall be computed in the same manner as the excess 
and base contribution percentages under paragraph 
•- 
(2XB), except that such determination shall be made on 
^ 
the basis of benefits rather than contributions. 
''"• 
"(B) OFFSET PLANS.—In the case of an offset plan, the plan 
provides that— 
"(i) a participant's accrued benefit attributable to 
employer contributions (within the meaning of section 
411(cXl)) may not be reduced (by reason of the offset) by 
8f« 4?i 
more than the maximum offset allowance, and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2437 
"(ii) 
benefits 
are based 
on average 
annual 
compensation. 
"(4) DEFINITIONS RELATING TO PARAGRAPH (3).—For purposes 
of paragraph (3)— 
"(A) 
MAXIMUM 
EXCESS 
ALLOWANCE.—The 
maximum 
excess allowance is equal to— 
"(i) in the case of benefits attributable to any year of 
BSrii/i 
service with the employer taken into account under the 
'/sm ; 
plan, % of a percentage point, and 
"(ii) in the case of total benefits, % of a percentage 
effi a- 
point, multiplied by the participant's years of service 
(not in excess of 35) with the employer taken into 
-1-3'•'& 
account under the plan. 
In no event shall the maximum excess allowance exceed the 
i. 
base benefit percentage. 
1 
"(B) MAXIMUM OFFSET ALLOWANCE.—The maximum offset 
-! 
allowance is equal to— 
' j , . 
"(i) in the case of benefits attributable to any year of 
service with the employer taken into account under the 
plan, % percent of the participant's final average com-
pensation, and 
fiiO'. 
"(ii) in the case of total benefits, % percent of the 
participant's final average compensation, multiplied by 
f^lf 
the participant's years of service (not in excess of 35) 
with the employer taken into account under the plan. 
S 
. 
In no event shall the maximum offset allowance exceed 50 
percent of the benefit which would have accrued without 
i 
regard to the offset reduction. 
"(C) REDUCTIONS.— 
"(i) IN GENERAL.—The Secretary shall prescribe regu-
i 
lations requiring the reduction of the % percentage 
factor under subparagraph (A) or (B)— 
"(I) in the case of a plan other than an offset 
plan which has an integration level in excess of 
covered compensation, or 
"(II) with respect to any participant in an offset 
plan who has final average compensation in excess 
of covered compensation. 
"(ii) BASIS OF REDUCTIONS.—Any reductions under 
clause (i) shall be based on the percentages of com-
pensation replaced by the employer-derived portions of 
primary insurance amounts under the Social Security 
Act for participants with compensation in excess of 
covered compensation. 
"(D) OFFSET PLAN.—The term 'offset plan' means any 
,;. .;.! 
plan with respect to which the benefit attributable to em-
-
<
* ; 
ployer contributions for each participant is reduced by an 
amount specified in the plan. 
"(5) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of 
this subsection— 
"(A) INTEGRATION LEVEL.— 
"(i) IN GENERAL.—The term 'integration level' means 
the amount of compensation specified under the plan 
(by dollar amount or formula) at or below which the 
j; 
rate at which contributions or benefits are provided 
(expressed as a percentage) is less than such rate above 
^u 
oj 
such amount. 
100 STAT. 2438 
PUBLIC LAW 99-514—OCT. 22, 1986 
'rv .,iu 
-i 
"(ii) LIMITATION.—The integration level for any year 
may not exceed the contribution and benefit base in 
i.'"-.'..;^>jc - . effect under section 230 of the Social Security Act for 
such year. 
.' frr 
. 
"(iii) LEVEL TO APPLY TO ALL PARTICIPANTS.—A plan's 
integration level shall apply with respect to all partici-
'•0 lu 
pants in the plan. 
)fi-' ^'.b. 
"(iv) MULTIPLE INTEGRATION LEVEUS.—Under rules 
prescribed by the Secretary, a defined benefit plan may 
specify multiple integration levels. 
"(B) COMPENSATION.—The term 'compensation' has the 
vim =r meaning given such term by section 414(s). 
"(C) AVERAGE ANNUAL COMPENSATION.—The term 'aver-
;?? t .i age annual compensation' means the greater of— 
"(i) the participant's final average compensation 
feijlo n 
(determined without regard to subparagraph (D)(ii)), or 
"(ii) the participant's highest average annual com-
% 
\' 
pensation for any other period of at least 3 consecutive 
-i 
years. 
"(D) FINAL AVERAGE COMPENSATION.— 
"(i) IN GENERAL.—The term 'final average compensa-
(s? r • . tion' means the participant's average annual com-
pensation for— 
"(I) the 3-consecutive year period ending with 
the current year, or 
"(II) if shorter, the participant's full period of 
.•JO i !V' . ,; 
service. 
"(ii) LIMITATION.—A participant's final average com-
pensation shall be determined by not taking into ac-
.'-'•;:-. -r 
count in any year compensation in excess of the con-
'^ii^ji -' 
tribution and benefit base in effect under section 230 of 
the Social Security Act for such year. 
^ 
"(E) COVERED COMPENSATION.— 
"(i) IN GENERAL.—The term 'covered compensation' 
means, with respect to an employee, the average of the 
• -=^'^' 
contribution and benefit bases in effect under section 
230 of the Social Security Act for each year in the 35-
year period ending with the year in which the em-
* ' ^' 
ployee attains age 65. 
"(ii) COMPUTATION FOR ANY YEAR.—For purposes of 
clause (i), the determination for any year preceding the 
year in which the employee attains age 65 shall be 
made by sissuming that there is no increase in the bases 
described in clause (i) after the determination year and 
before the employee attains age 65. 
"(F) REGULATIONS.—The Secretary shall prescribe such 
regulations as are necessary or appropriate to carry out the 
purposes of this subsection, including— 
" B9r' i 
"(i) in the case of a defined benefit plan which pro-
vides for unreduced benefits commencing before the 
social security retirement age (as defined in section 
- ' 
415(bX8)), rules providing for the reduction of the maxi-
mum excess allowance and the maximum offset allow-
ance, and 
"(ii) in the case of an employee covered by 2 or more 
--f"'''^ ' plans of the employer which fail to meet the require-
ments of subsection (aX4) (without regard to this 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2439 
subsection), rules preventing the multiple use of the 
disparity permitted under this subsection with respect 
to any employee. 
For purposes of clause (i), unreduced benefits shall not 
include benefits for disability (within the meaning of sec-
tion 223(d) of the Social Security Act). 
"(6) SPECIAL RULE FOR PLAN MAINTAINED BY RAILROADS.—In 
determining whether a plan which includes employees of a 
railroad employer who are entitled to benefits under the Rail-
road Retirement Act of 1974 meets the requirements of this 
subsection, rules similar to the rules set forth in this subsection 
shall apply. Such rules shall take into account the employer-
derived portion of the employees' tier 2 railroad retirement 
benefits and any supplemental annuity under the Railroad 
Retirement Act of 1974." 
(b) CONFORMING AMENDMENT.—Paragraph (5) of section 401(a) is 
amended to read as follows: 
"(5) SPECIAL RULES RELATING TO NONDISCRIMINATION REQUIRE-
MENTS.— 
"(A) SALARIED OR CLERICAL EMPLOYEES.—A classification 
shall not be considered discriminatory within the meaning 
of paragraph (4) or section 410(b)(2)(A)(i) merely because it 
is limited to salaried or clerical employees. 
"(B) CONTRIBUTIONS AND BENEFITS MAY BEAR UNIFORM 
RELATIONSHIP TO COMPENSATION.—A plan shall not be 
i 
considered discriminatory within the meaning of paragraph 
(4) merely because the contributions or benefits of, or on 
behalf of, the employees under the plan bear a uniform 
relationship to the compensation (within the meaning of 
section 414(s)) of such employees. 
"(C) CERTAIN DISPARITY PERMITTED.—A plan shall not be 
W' < 
considered discriminatory within the meaning of paragraph 
(4) merely because the contributions or benefits of, or on 
— - 
behalf of, the employees under the plan favor highly com-
pensated employees (as defined in section 414(q)) in the 
manner permitted under subsection (1). 
"(D) INTEGRATED DEFINED BENEFIT PLAN.— 
"(i) IN GENERAL.—A defined benefit plan shall not be 
^ * 
considered discriminatory within the meaning of para-
graph (4) merely because the plan provides that the 
employer-derived accrued retirement benefit for any 
participant under the plan may not exceed the excess 
^- 
(if any) of— 
"(I) the participant's final pay with the em-
ployer, over 
"(II) the employer-derived retirement benefit cre-
ated under Federal law attributable to service by 
y, i ^ 
the participant with the employer. 
For purposes of this clause, the employer-derived 
'
^ " 
retirement benefit created under Federal law shall be 
treated as accruing ratably over 35 years. 
"(ii) FINAL PAY.—For purposes of this subparagraph, 
the participant's final pay is the compensation (as de-
fined in section 414(qX7)) paid to the participant by the 
employer for any year— 
100 STAT. 2440 
PUBLIC LAW 99-514—OCT. 22, 1986 
-. ^ ' ' 
jaii 
' 
"(I) which ends during the 5-year period ending 
- " - - ^ 
with the year in which the participant separated 
from service for the employer, and 
* 
"(II) for which the participant's total compensa-
'"• 
tion from the employer was highest. 
"(E) 
2 OR MORE PLANS TREATED AS SINGLE PLAN.—For 
I 
purposes of determining whether 2 or more plans of an 
employer satisfy the requirements of paragraph (4) when 
considered as a single plan— 
"(i) CONTRIBUTIONS.—If the amount of contributions 
i 
on behalf of the employees allowed as a deduction 
under section 404 for the taxable year with respect to 
such plans, taken together, bears a uniform relation-
(.,.; ..1 • 
ship to the compensation (within the meaning of sec-
tion 414(s)) of such employees, the plans shall not be 
I *i '*)^ 
considered discriminatory merely because the rights of 
employees to, or derived from, the employer contribu-
c .
4 •rrt'^T 
tions under the separate plans do not become non-
forfeitable at the same rate. 
"(ii) BENEFITS.—If the employees' rights to benefits 
under the separate plans do not become nonforfeitable 
i 
at the same rate, but the levels of benefits provided by 
the separate plans satisfy the requirements of regula-
. , 
tions prescribed by the Secretary to take account of the 
4. 
, 
differences in such rates, the plans shall not be consid-
ered discriminatory merely because of the difference in 
such rates." 
1 (c) EFFECTIVE DATE.— 
T
^ 
(1) SUBSECTION (a).—The amendments made by subsection (a) 
shall apply to benefits attributable to plan years beginning after 
December 31, 1988. 
(2) SUBSECTION (b).—The amendments made by subsection (b) 
shall apply to years beginning after December 31, 1988. 
(3) SPECIAL RULE FOR COLLECTIVE BARGAINING AGREEMENTS.— 
' 
In the case of a plan maintained pursuant to 1 or more collec-
"
" 
tive bargaining agreements between employee representatives 
and 1 or more employers ratified before March 1, 1986, the 
. 
amendments made by this section shall not apply to benefits 
pursuant to, and individuals covered by, any such agreement in 
plan years beginning before the earlier o
f
— 
(A) the later of— 
(i) January 1, 1989, or 
(ii) the date on which the last of such collective 
bargaining agreements terminates (determined without 
*
^
'
* ' 
regard to any extension thereof after February 28, 
1986), or 
(B) January 1,1991. 
SEC. 1112. MINIMUM COVERAGE REQUIREMENTS FOR QUALIFIED PLANS. 
(a) IN GENERAL.—Subsection (b) of section 410 (relating to eligi-
bility requirements) is amended to read as follows: 
"(b) MINIMUM COVERAGE REQUIREMENTS.— 
"(1) IN GENERAL.—A trust shall not constitute a qualified 
trust under section 401(a) unless such trust is designated by the 
employer as part of a plan which meets 1 of the following 
requirements: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2441 
"(A) The plan benefits at least 70 percent of employees 
who are not highly compensated employees. 
"(B) The plan benefits— 
"(i) a percentage of employees who are not highly 
compensated employees which is at least 70 percent of 
"(ii) the percentage of highly compensated employees 
benefiting under the plan. 
"(C) The plan meets the requirements of paragraph (2). 
'(2) AVERAGE BENEFIT PERCENTAGE TEST.— 
"(A) IN GENERAL.—A plan shall be treated as meeting the 
requirements of this paragraph if— 
"(i) the plan benefits such employees as qualify under 
a classification set up by the employer and found by the 
Secretary not to be discriminatory in favor of highly 
compensated employees, and 
"(ii) the average benefit percentage for employees 
who are not highly compensated employees is at least 
70 percent of the average benefit percentage for highly 
compensated employees. 
"(B) AVERAGE BENEFIT PERCENTAGE.—For purposes of this 
paragraph, the term 'average benefit percentage' means, 
with respect to any group, the average of the benefit 
percentages calculated separately with respect to each em-
ployee in such group (whether or not a participant in any 
plan). 
"(C) BENEFIT PERCENTAGE.—For purposes of this para-
graph— 
"(i) IN GENERAL.—The term 'benefit percentage' 
means the employer-provided contribution or benefit of 
an employee under all qualified plans maintained by 
the employer, expressed as a percentage of such 
employee's compensation (within the meaning of sec-
tion 414(s)). 
"(ii) 
PERIOD FOR COMPUTING PERCENTAGE.—At 
the 
election of an employer, the benefit percentage for any 
plan year shall be computed on the basis of contribu-
tions or benefits for— 
"(I) such plan year, or 
"(II) any consecutive plan year period (not 
greater than 3 years) which ends with such plan 
year and which is specified in such election. 
An election under this clause, once made, may be revoked 
or modified only with the consent of the Secretary. 
"(D) EMPLOYEES TAKEN INTO ACCOUNT.—For purposes of 
determining who is an employee for purposes of determin-
ing the average benefit percentage under subparagraph 
(B)-
"(i) except as provided in clause (ii), paragraph (4)(A) 
shall not apply, or 
"(ii) if the employer elects, paragraph (4)(A) shall be 
applied by using the lowest age and service require-
ments of all qualified plans maintained by the em-
ployer. 
"(E) QUALIFIED PLAN.—For purposes of this paragraph, 
the term 'qualified plan' means any plan which (without 
regard to this subsection) meets the requirements of section 
401(a). 
100 STAT. 2442 
PUBLIC LAW 99-514—OCT. 22, 1986 
J
- - V "(3) EXCLUSION OF CERTAIN EMPLOYEES.—For purposes of this 
subsection, there shall be excluded from consideration— 
"(A) employees who are included in a unit of employees 
; 
covered by an agreement which the Secretary of Labor 
finds to be a collective bargaining agreement between em-
ployee representatives and one or more employers, if there 
is evidence that retirement benefits were the subject of 
^ 
good faith bargaining between such employee representa-
tives and such employer or employers, 
iitu 
«(g) jjj ^Yie case of a trust established or maintained 
pursuant to an agreement which the Secretary of Labor 
finds to be a collective bargaining agreement between air 
pilots represented in accordance with title II of the Railway 
Labor Act and one or more employers, all employees not 
covered by such agreement, and 
, •'* 
"(C) employees who are nonresident aliens and who re-
ceive no earned income (within the meaning of section 
911(d)(2)) from the employer which constitutes income from 
^,.> 
sources within the United States (within the meaning of 
section 861(a)(3)). 
Subparagraph (A) shall not apply with respect to coverage of 
employees under a plan pursuant to an agreement under such 
subparagraph. Subparagraph (B) shall not apply in the case of a 
plan which provides contributions or benefits for employees 
whose principal duties are not customarily performed aboard 
aircraft in flight. 
"(4) EXCLUSION OF EMPLOYEES NOT MEETING AGE AND SERVICE 
REQUIREMENTS.— 
?,:.^ir 
"(A) IN GENERAL.—If a plan— 
^; a 
"(i) prescribes minimum age and service require-
-mt o ;
< 
ments as a condition of participation, and 
"(ii) excludes all employees not meeting such require-
5f 
ments from participation, 
then such employees shall be excluded from consideration 
-iji! 
for purposes of this subsection. 
"(B) REQUIREMENTS MAY BE MET SEPARATELY WITH RESPECT 
T
O EXCLUDED GROUP.—If employees do not meet the mini-
Ion) 
mum age or service requirements of subsection (a)(1) (with-
fifiiq 
out regard to subparagraph (B) thereof) and are covered 
under a plan of the employer which meets the requirements 
bBMi: 
of paragraph (1) separately with respect to such employees, 
such employees may be excluded from consideration in 
determining whether any plan of the employer meets the 
requirements of paragraph (1). 
m?-r 
"(5) LINE OF BUSINESS EXCEPTION.— 
"(A) IN GENERAL.—If, under section 414(r), an employer is 
U:¥.i 
treated as operating separate lines of business for a year, 
the employer may apply the requirements of this subsection 
for such year separately with respect to employees in each 
separate line of business. 
-m J 
"(B) PLAN MUST BE NONDISCRIMINATORY.—Subparagraph 
(A) shall not apply with respect to any plan maintained by 
an employer unless such plan benefits such employees as 
' 
qualify under a classification set up by the employer and 
found by the Secretary not to be discriminatory in favor of 
highly compensated employees. 
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2443 
"(6) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
subsection— 
"(A) HIGHLY COMPENSATED EMPLOYEE.—The term 'highly 
compensated employee' has the meaning given such term 
HI • i 
by section 414(q). 
"(B) AGGREGATION RULES.—An employer may elect to 
designate— 
"(i) 2 or more trusts, 
"(ii) 1 or more trusts and 1 or more annuity plans, or 
"(iii) 2 or more annuity plans, 
as part of 1 plan intended to qualify under section 401(a) to 
determine whether the requirements of this subsection are 
aili ' 
met with respect to such trusts or annuity plans. If an 
employer elects to treat any trusts or annuity plans as 1 
plan under this subparagraph, such trusts or annuity plans 
-^ 
shall be treated as 1 plan for purposes of section 401(a)(4). 
"(C) SPECIAL RULES FOR CERTAIN DISPOSITIONS OR ACQUISI-
TIONS.— 
* 
"(i) IN GENERAL.—If a person becomes, or ceases to 
> 
be, a member of a group described in subsection (b), (c), 
(m), or (o) of section 414, then the requirements of this 
.; 
subsection shall be treated as having been met during 
i 
the transition period with respect to any plan covering 
•i 
employees of such person or any other member of such 
group i
f
— 
I, 
"(I) such requirements were met immediately 
-eiH , r 
before each such change, and 
"(II) the coverage under such plan is not signifl-
9 
cantly changed during the transition period (other 
oj 
, 
than by reason of the change in members of a 
group). 
iH 
"(ii) TRANSITION PERIOD.—For purposes of clause (i), 
the term 'transition period' means the period— 
/> 
"(I) beginning on the date of the change in mem-
s 
hers of a group, and 
n 
"(II) ending on the last day of the 1st plan year 
beginning after the date of such change. 
I 
"(D) SPECIAL RULE FOR CERTAIN EMPLOYEE STOCK OWNER-
SHIP PLANS.—A trust which is part of a tax credit employee 
stock ownership plan which is the only plan of an employer 
intended to qualify under section 401(a) shall not be treated 
as not a qualified trust under section 401(a) solely because it 
fails to meet the requirements of this subsection i
f
— 
"(i) such plan benefits 50 percent or more of all the 
employees who are eligible under a nondiscriminatory 
j^^ •, 
classification under the plan, and 
"(ii) the sum of the amounts allocated to each partici-
pant's account for the year does not exceed 2 percent of 
l-t^-^..^,. 
the compensation of that participant for the year. 
"(E) ELIGIBIUTY TO CONTRIBUTE.—In the case of contribu-
tions which are subject to section 401(k) or 401(m), employ-
ees who are eligible to contribute (or elect to have contribu-
tions made on their behalf) shall be treated as benefiting 
under the plan (other than for purposes of paragraph 
(2)(A)(ii)). 
100 STAT. 2444 
PUBLIC LAW 99-514—OCT. 22, 1986 
sldi >
< 
"(F) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out 
the purposes of this subsection." 
(b) ADDITIONAL PARTICIPATION REQUIREMENTS.—Section 401(a) 
(relating to qualification requirements) is amended by adding at the 
end thereof the following new paragraph: 
"(26) ADDITIONAL PARTICIPATION REQUIREMENTS.— 
"(A) IN GENERAL.—A trust shall not constitute a qualified 
trust under this subsection unless such trust is part of a 
plan which on each day of the plan year benefits the lesser 
of— 
*'. 
"(i) 50 employees of the employer, or 
"(ii) 40 percent or more of all employees of the 
employer. 
"(B) TREATMENT OF EXCLUDABLE EMPLOYEES.— 
"(i) IN GENERAL.—A plan may exclude from consider-
\y 
. ation under this paragraph employees described in 
paragraphs (3) and (4)(A) of section 410(b). 
• ,: n-j^f' 
"(ii) SEPARATE APPLICATION FOR CERTAIN EXCLUDABLE 
EMPLOYEES.—If 
employees 
described 
in 
section 
410(b)(4)(B) are covered under a plan which meets the 
requirements of subparagraph (A) separately with re-
spect to such employees, such employees may be ex-
;
- >;• 
eluded from consideration in determining whether any 
plan of the employer meets such requirements if^ 
I 
' 
"(I) the benefits for such employees are provided 
under the same plan as benefits for other em-
. ployees, 
f'jri 
' ' 
• 
. 
"(II) the benefits provided to such employees are 
:• . 
not greater than comparable benefits provided to 
other employees under the plan, and 
. ^j.. 
"(Ill) no highly compensated employee (within 
the meaning of section 414(q)) is included in the 
group of such employees for more than 1 year. 
"(C) ELIGIBILITY TO PARTICIPATE.—In the case of contribu-
"< -/'i •. tions under section 401(k) or 401(m), employees who are 
eligible to contribute (or may elect to have contributions 
?; 
made on their behalf) shall be treated as benefiting under 
the plan. 
"(D) SPECIAL RULE FOR COLLECTIVE BARGAINING UNITS.— 
Except to the extent provided in regulations, a plan cover-
• ing only employees described in section 4100t))(3)(A) may 
exclude from consideration any employees who are not 
included in the unit or units in which the covered employ-
ees are included. 
"(E) 
PARAGRAPH 
NOT TO APPLY TO MULTIEMPLOYER 
• "r- PLANS.—Except to the extent provided in regulations, this 
10 : 
paragraph shall not apply to employees in a multiemployer 
plan (within the meaning of section 414(f)) who are covered 
* 
by collective bargaining agreements. 
"(F) REGULATIONS.—The Secretary may by regulation 
provide that any separate benefit structure, any separate 
trust, or any other separate arrangement is to be treated as 
a separate plan for purposes of applying this paragraph." 
(c) PLANS FAILING TO MEET REQUIREMENTS OF SECTION 410(b).— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2445 
(1) IN GENERAL.—Subsection (b) of section 402 (relating to 
taxability of beneficiary of nonexempt trust) is amended by 
adding at the end thereof the following new paragraph: 
"(2) FAILURE TO MEET REQUIREMENTS OF SECTION 4i0(b).— 
"(A) IN GENERAL.—In the case of a trust which is not 
exempt from tax under section 501(a) solely because such 
trust is part of a plan which fails to meet the requirements 
of section 410(b)— 
"(i) such trust shall be treated as exempt from tax 
under section 501(a) for purposes of applying paragraph 
(1) to employees who are not highly compensated 
employees, and 
"(ii) paragraph (1) shall be applied to the vested 
accrued benefit (other than employee contributions) of 
any highly compensated employee as of the close of the 
employer's taxable year described in paragraph (1) 
(rather than contributions made during such year). 
"(B) FAILURE IN MORE THAN i YEAR.—If a plan fails to 
meet the requirements of section 410(b) for more than 1 
taxable year, any portion of the vested accrued benefit to 
which subparagraph (A) applies shall be included in gross 
income only once. 
"(C) HIGHLY COMPENSATED EMPLOYEE.—For purposes of 
this paragraph, the term 'highly compensated employee' 
has the meaning given such term by section 414(q)." 
(2) CONFORMING AMENDMENT.—The heading for section 402(b) 
is amended to read as follows: 
"(b) TAXABILITY OF BENEFICIARY OF NONEXEMPT TRUST.— 
"(1) IN GENERAL.—". 
(d) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) Section 401(k)(3)(A) is amended by striking out "subpara-
graph (A) or (B) o f before "section 410(b)(1)". 
(2) Section 404(a)(2) is amended by striking out "and (22)" and 
inserting in lieu thereof "(22), and (26)". 
(3) Sections 4060t))(l) and 4070t))(l) are each amended by strik-
ing out "(without regard to paragraph (1)(A) thereof)' after 
"section 410(b)". 
(4) Section 818(a)(3) is amended by striking out "and (22)" and 
inserting in lieu thereof "(22), and (26)". 
(e) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to plan years beginning after December 31,1988. 
(2) SPECIAL RULE FOR COLLECTIVE BARGAINING AGREEMENTS.— 
In the case of a plan maintained pursuant to 1 or more collec-
tive bargaining agreements between employee representatives 
and 1 or more employers ratified before March 1, 1986, the 
amendments made by this section shall not apply to employees 
covered by any such agreement in plan years beginning before 
the earlier o
f
— 
(A) the later o
f
— 
(i) January 1,1989, or 
• I 
(ii) the date on which the last of such collective 
• 
bargaining agreement terminates (determined without 
regard to any extension thereof after February 28, 
1986), or 
(B) January 1, 1991. 
(3) WAIVER OF EXCISE TAX ON REVERSIONS.— 
100 STAT. 2446 
PUBLIC LAW 99-514—OCT. 22, 1986 
^
K
^ ^n.ir>. 
(A) I N GENERAL. 
If 
'=•.<:,;,,•:-,,*> 
. * ^ ^ i v ; ^ . • . - , -.. . .!. 
•jd Dsfef 
(i) a plan is in existence on August 16,1986, 
(ii) such plan would fail to meet the requirements of 
section 401(a)(26) of the Internal Revenue Code of 1986 
: " 
(as added by subsection (b)) if such section were in 
effect for the plan year including August 16, 1986, and 
(iii) there is no transfer of assets to or liabilities from 
a plan or merger or spinoff or merger involving such 
^' • 
plan after August 16, 1986, 
then no tax shall be imposed under section 4980 of such 
Code on any employer reversion by reason of the termi-
nation or merger of such plan before the 1st year to which 
' *•' 
the amendment made by subsection 0^) applies. 
(B) DETERMINATION OF AMOUNT OF REVERSION.—For pur-
poses of the Internal Revenue Code of 1986, in determining 
the present value of the accrued benefit of any highly 
compensated employee (within the meaning of section 
414(q) of such Code) on the termination or merger of any 
plan to which subparagraph (A) applies, the plan shall use 
the highest interest rate which may be used for calculating 
-' "
^ 
present value under section 41 l(a)(ll)(B) of such Code. 
(C) SPECIAL RULE FOR PLANS WHICH MAY NOT TERMINATE.— 
To the extent provided in regulations prescribed by the 
Secretary of the Treasury or his delegate, if a plan is 
^ 
_ prohibited from terminating under title IV of the Employee 
*' 
' Retirement Income Security Act of 1974 before the 1st year 
to which the amendment made by subsection (b) applies, 
subparagraph (A) shall be applied by substituting "the 1st 
year in which the plan is able to terminate" for "the 1st 
r. ^. 
year to which the amendment made by subsection (b) 
applies . 
SEC. 1113. MINIMUM VESTING STANDARDS. 
(a) IN GENERAL.—Paragraph (2) of section 411(a) (relating to mini-
mum vesting standards) is amended to read as follows: 
"(2) EMPLOYER CONTRIBUTIONS.—A plan satisfies the require-
j^^g ments of this paragraph if it satisfies the requirements of 
subparagraph (A), (B), or (C). 
"(A) 5-YEAR VESTING.—A plan satisfies the requirements 
rr.,,.. 
j^ of this subparagraph if an employee who has completed at 
least 5 years of service has a nonforfeitable right to 100 
«. ., percent of the employee's accrued benefit derived from 
employer contributions. 
"(B) 3 T
O 7 Y
E
A
R VESTING.—A plan Satisfies the require-
ments of this subparagraph if an employee has a nonforfeit-
able right to a percentage of the employee's accrued benefit 
derived from employer contributions determined under the 
following table: 
The nonforfeitable 
"Years of service: 
,.<(-.• 
percentage is: 
3 
;:.....::.:.:.:..... 
20 
4 
40 
5 
60 
,...;, 
6 
80 
7 or more 
100. 
"(C) MULTIEMPLOYER PLANS.—A plan satisfies the require-
ments of this subparagraph i
f
— 
s;7V«-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2447 
"(i) the plan is a multiemployer plan (within the 
meaning of section 414(f)), and 
"(ii) under the plan— 
"(I) an employee who is covered pursuant to a 
collective bargaining agreement described in sec-
tion 414(f)(1)(B) and who has completed at least 10 
j & :, 
years of service has a nonforfeitable right to 100 
percent of the employee's accrued benefit derived 
from employer contributions, and 
' > - 
"(II) the requirements of subparagraph (A) or (B) 
^\ •. i 
are met with respect to employees not described in 
subclause (I)." 
(b) REPEAL OF CLASS YEAR VESTING.—Paragraph (4) of section 
411(d) (relating to class year vesting) is hereby repealed. 
(c) MODIFICATION OF MINIMUM PARTICIPATION STANDARDS.—Clause 
(i) of section 410(a)(1)(B) (relating to special rules for certain plans) is 
amended by striking out "3 years" each place it appears and insert-
ing in lieu thereof "2 years". 
(d) CONFORMING AMENDMENTS.— 
(A) The heading for section 410(a)(5)(B) is amended by striking 
out "3-year" and inserting in lieu thereof "2-year". 
(B) Section 411(a)(10)(B) is amended by striking out "5 years" 
and inserting in lieu thereof "3 years". 
(e) AMENDMENTS TO ERISA.— 
(1) IN GENERAL.—Paragraph (2) of section 203(a) of the Em-
ployee Retirement Income Security Act of 1974 (29 U.S.C. 
1053(a)(2)) is amended to read as follows: 
"(2) A plan satisfies the requirements of this paragraph if it 
satisfies the following requirements of subparagraph (A), (B), or 
(C). 
"(A) A plan satisfies the requirements of this subpara-
graph if an employee who has completed at least 5 years of 
service has a nonforfeitable right to 100 percent of the 
employee's accrued benefit derived from employer contribu-
tions. 
"(B) A plan satisfies the requirements of this subpara-
ai 'i 
graph if an employee has a nonforfeitable right to a 
percentage of the employee's accrued benefit derived from 
^s^ 
employer contributions determined under the following 
table: 
The nonforfeitable 
"Years of service: 
percentage is: 
3 
20 
0fI9 »i .. 
4 
40 
5 
'.'. 
Z 
'.'..'.'.'. 
Z 
'.ZZ 
Z". 
ZZ.. 
60 
6 
80 
7 or more 
100. 
"(C) A plan satisfies the requirements of this subpara-
graph if— 
"(i) the plan is a multiemployer plan (within the 
sjo-sic e 
meaning of section 3(37)), and 
"(ii) under the plan— 
3 r f ; ^ 
"(I) an employee who is covered pursuant to a 
iw" i' 
collective bargaining agreement described in sec-
tion 414(fKl)(B) and who has completed at least 10 
years of service has a nonforfeitable right to 100 
percent of the employee's accrued benefit derived 
from employer contributions, and 
100 STAT. 2448 
PUBLIC LAW 99-514—OCT. 22, 1986 
.HI « ?t / , ,;i; 
"(11) the requirements of subparagraph (A) or (B) 
are met with respect to employees not described in 
subclause (I)." 
(2) REPEAL OP CLASS YEAR VESTING.—Subsection (c) of section 
203 of such Act is amended by striking out paragraph (3). 
(3) MINIMUM PARTICIPATION STANDARDS.—Section 202(B)(i) of 
such Act is amended by striking out "3 years" each place it 
appears and inserting in lieu thereof "2 years". 
(4) CONFORMING AMENDMENTS.— 
(A) MINIMUM VESTING STANDARDS.—Section 203(c)(1)(B) of 
such Act is amended by striking out "5 years" and inserting 
in lieu thereof "3 years". 
(B) BENEFIT ACCRUAL REQUIREMENTS.—Subsection (i) of 
section 204 of such Act (29 U.S.C. 1054(i)) is amended to 
read as follows: 
"(i) CROSS REFERENCE.— 
"For special rules relating to plan provisions adopted to preclude dis-
crimination, see section 203(c)(2).". 
(e) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to plan years 
? beginning after December 31,1988. 
(2) SPECIAL RULE FOR COLLECTIVE BARGAINING AGREEMENTS.— 
In the case of a plan maintained pursuant to 1 or more collec-
tive bargaining agreements between employee representatives 
and 1 or more employers ratified before March 1, 1986, the 
amendments made by this section shall not apply to employees 
Ji 
covered by any such agreement in plan years beginning before 
ic the earlier of— 
•-'••- 
• c:---.-- -^ 
-:^-
(A) the later o
f
— 
' 
(i) January 1,1989, or 
(ii) the date on which the last of such collective 
bargaining agreements terminates (determined without 
' 
regard to any extension thereof after February 28, 
1986), or 
•^ 
(B) January 1,1991. 
B 
(3) PARTICIPATION REQUIRED.—The amendments made by this 
section shall not apply to any employee who does not have 1 
«•' hour of service in any plan year to which the amendments made 
by this section apply. 
SEC. 1114. DEFINITION OF HIGHLY COMPENSATED EMPLOYEE. 
(a) GENERAL RULE.—Section 414 is amended by adding at the end 
thereof the following new subsection: 
"(q) HIGHLY COMPENSATED EMPLOYEE.— 
"(1) IN GENERAL.—The term 'highly compensated employee' 
K means any employee who, during the year or the preceding 
year— 
if; 
"(A) was at any time a 5-percent owner, 
"(B) received compensation from the employer in excess 
of $75,000, 
., <
; t 
"(C) received compensation from the employer in excess 
of $50,000 and was in the top-paid group of employees for 
such year, or 
*
» 
"(D) was at any time an officer and received compensa-
>
H - ,•-- tion greater than 150 percent of the amount in effect under 
section 415(c)(lXA) for such year. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2449 
"(2) SPECIAL RULE FOR CURRENT YEAR.—In the case of the year 
for which the relevant determination is being made, an em-
ployee not described in subparagraph (B), (C), or (D) of para-
graph (1) for the preceding year (without regard to this para-
graph) shall not be treated as described in subparagraph (B), (C), 
or (D) of paragraph (1) unless such employee is a member of the 
group consisting of the 100 employees paid the greatest com-
pensation during the year for which such determination is being 
made. 
"(3) 5-PERCENT OWNER.—An employee shall be treated as a 5-
percent owner for any year if at any time during such year such 
employee was a 5-percent owner (as defined in section 416(i)(l)) 
of the employer. 
"(4) TOP-PAID GROUP.—An employee is in the top-paid group of 
employees for any year if such employee is in the group consist-
ing of the top 20 percent of the employees when ranked on the 
basis of compensation paid during such year. 
"(5) SPECIAL RULES FOR TREATMENT OF OFFICERS.— 
"(A) NOT MORE THAN 50 OFFICERS TAKEN INTO ACCOUNT.— 
For purposes of paragraph (1)(D), no more than 50 employ-
ees (or, if lesser, the greater of 3 employees or 10 percent of 
the employees) shall be treated as officers. 
•' 
"(B) AT LEAST i OFFICER TAKEN INTO ACCOUNT.—If for 
any 
year no officer of the employer is described in paragraph 
(1)(D), the highest paid officer of the employer for such year 
shall be treated as described in such paragraph. 
"(6) TREATMENT OF CERTAIN FAMILY MEMBERS.— 
"(A) IN GENERAL.—If any individual is a member of the 
family of a 5-percent owner or of a highly compensated 
employee in the group consisting of the 10 highly com-
pensated employees paid the greatest compensation during 
the year, then— 
"(i) such individual shall not be considered a separate 
employee, and 
"(ii) any compensation paid to such individual (and 
any applicable contribution or benefit on behalf of such 
A 
individual) shall be treated as if it were paid to (or on 
behalf of) the 5-percent owner or highly compensated 
employee. 
"(B) FAMILY.—For purposes of subparagraph (A), the 
term 'family' means, with respect to any employee, such 
employee's spouse and lineal ascendants or descendants 
and the spouses of such lineal ascendants or descendants. 
"(7) COMPENSATION.—For purposes of this subsection— 
"(A) IN GENERAL.—The term 'compensation' means com-
pensation within the meaning of section 415(c)(3). 
> 
"(B) CERTAIN PROVISIONS NOT TAKEN INTO ACCOUNT.—The 
determination under subparagraph (A) shall be made— 
"(i) without regard to sections 125, 402(a)(8), and 
402(h)(1)(B), and 
"(ii) in the case of employer contributions made 
* 
pursuant to a salary reduction agreement, without 
regard to section 403(b). 
"(8) EXCLUDED EMPLOYEES.—For purposes of subsection (r) and 
for purposes of determining the number of employees in the top-
paid group under paragraph (4), the following employees shall 
be excluded— 
100 STAT. 2450 
PUBLIC LAW 99-514—OCT. 22, 1986 
J ^, , 
"(A) employees who have not completed 6 months of 
service, 
"(B) employees who normally work less than 11 Vz hours 
per week, 
"(C) employees who normally work during not more than 
. ^ 
6 months during any year, 
. ,
^ 
"(D) employees who have not attained age 21, 
Jr* 
"(E) except to the extent provided in regulations, employ-
ees who are included in a unit of employees covered by an 
agreement which the Secretary of Labor finds to be a 
j
> , 
collective bargaining agreement between employee rep-
resentatives and the employer, and 
"(F) employees who are nonresident aliens and who re-
ceive no earned income (within the meaning of section 
911(d)(2)) from the employer which constitutes income from 
sources within the United States (within the meaning of 
section 861(a)(3)). 
The employer may elect to apply subparagraph (A), (B), (C), or 
(D) by substituting a shorter period of service, smaller number 
..,. 
of hours or months, or lower age for the period of service, 
•\r 
number of hours or months, or age (as the C£ise may be) than 
that specified in such subparagraph. 
"(9) FORMER EMPLOYEES.—A former employee shall be treated 
as a highly compensated employee if— 
,^t; , 
"(A) such employee was a highly compensated employee 
when such employee separated from service, or 
"(B) such employee was a highly compensated employee 
ijii '• 
at any time after attaining age 55. 
I
f 
"(10) COORDINATION WITH OTHER PROVISIONS.—Subsections (b), 
(c), (m), (n), and (o) shall be applied before the application of this 
•4. section." 
-• : 
; 
(b) CONFORMING AMENDMENTS.— 
e' 
(1) Section 1060t))(l) is amended by striking out "highly com-
pensated individual (within the meaning of section 105(h)(5))" 
b 
and inserting in lieu thereof "highly compensated employee 
(within the meaning of section 414(q))". 
(2) Section 117(dX3), as amended by section 123 of this Act, is 
amended— 
(A) by striking out "officer, owner, or", 
.t 
(B) by striking out "officers, owners, or", and 
r' 
(C) by inserting at the end thereof the following new 
sentence: "For purposes of this paragraph, the term 'highly 
compensated employee' has the meaning given such term 
by section 414(q).' 
-{•; '•• (3)(A) Section 120(c)(1) is amended by striking out "officers, 
shareholders, self-employed individuals, or highly compensated" 
9 
and inserting in lieu thereof "highly compensated employees 
(within the meaning of section 414(q))". 
r 
(B) Section 120(d)(1) is amended— 
(i) by striking out "The term 'self-employed individual' 
<^br.fi- 
means, and the" and inserting in lieu thereof "The", and 
u- , 
(ii) by striking out "SELF-EMPLOYED INDIVIDUAL;" in the 
heading thereof. 
h 
(4) Sections 127(bX2) and 129(dX2) are each amended by strik-
< 
ing out "officers, owners, or highly compensated," and inserting 
Vi- in lieu thereof "highly compensated employees (within the 
•eaning of section 414(q))". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2451 
(5)(A) Sections 132 (e)(2) and (h)(1) are each amended— 
(i) by striking out "officer, owner, or", and 
(ii) by striking out "officers, owners, or". 
(B) Section 132(h) is amended by adding at the end thereof the 
following new paragraph: 
"(7) HIGHLY COMPENSATED EMPLOYEE.—For purposes of this 
section, the term 'highly compensated employee' has the mean-
ing given such term by section 414(q)." 
(6) Section 274(e)(5) is amended by striking out "officers, 
shareholders or other owners, or highly compensated em-
ployees" and inserting in lieu thereof "highly compensated 
employees (within the meaning of section 414(q))". 
(7) Section 401(a)(4) is amended to read as follows: 
"(4) if the contributions or benefits provided under the plan do 
not discriminate in favor of highly compensated employees 
(within the meaning of section 414(q)). For purposes of this 
paragraph, there shall be excluded from consideration em-
ployees described in section 410(b)(3) (A) and (C)." 
(8) Section 404A(g)(l)(A) is amended by striking out "an offi-
cer, shareholder, or highly compensated" and inserting in lieu 
thereof "a highly compensated employee (within the meaning of 
section 414(q))". 
(9)(A) Section 406(b)(1)(A) is amended by striking out "an 
officer, shareholder, or person whose principal duties consist of 
supervising the work of other employees of a foreign affiliate of 
such American employer" and insert in lieu thereof "a highly 
compensated employee (within the meaning of section 414(q))". 
(B) Section 407(b)(1)(A) is amended by striking out "an officer, 
shareholder, or person whose principal duties consist of super-
vising the work of other employees of a domestic subsidiary" 
and insert in lieu thereof "a highly compensated employee 
(within the meaning of section 414(q))". 
(C) Sections 406(b)(1)(B) and 407(b)(1)(B) are each amended by 
inserting "(as so defined)" after "employee". 
(10) Subparagraphs (A) and (B) of section 411(d)(1) are each 
amended by striking out "officers, shareholders, or highly com-
pensated" and inserting in lieu thereof "highly compensated 
employees (within the meaning of section 414(q))". 
(11) Clause (ii) of section 414(m)(2)(B) is amended by striking 
out "officers, highly compensated employees, or owners" and 
inserting in lieu thereof "highly compensated employees (within 
the meaning of section 414(q))". 
(12) Section 415(c)(3)(C)(ii) is amended by striking out "an 
officer, owner, or highly compensated" and inserting in lieu 
thereof "a highly compensated employee (within the meaning of 
section 414(q))". 
(13) Section 4230t))(4)(D) is amended by striking out "officers, 
persons whose principal duties consist of supervising the work 
of other employees, or highly compensated employees" and 
inserting in lieu thereof "highly compensated employees (within 
the meaning of section 414(q))". 
(14) Clauses (ii) and (iii) of section 501(c)(17) and subpara-
graphs (B) and (C) of section 501(c)(18) are each amended by 
striking out "officers, shareholders, persons whose principal 
duties consists of supervising the work of other employees, or 
highly compensated employees" and inserting in lieu thereof 
100 STAT. 2452 
PUBLIC LAW 99-514—OCT. 22, 1986 
"highly compensated employees (within the meaning of section 
414(q))". 
(15)(A) Section 4975(d)(1)(B) is amended by striking out 
f
:
; it "highly compensated employees, officers, or shareholders" and 
inserting in lieu thereof "highly compensated employees (within 
the meaning of section 414(q))". 
(B) Section 408(b)(1)(B) of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1108(b)(1)) is amended by striking 
out "highly compensated employees, officers, or shareholders" 
and inserting in lieu thereof "highly compensated employees 
i 
(within the meaning of section 414(q) of the Internal Revenue 
Code of 1986)". 
(16) Paragraph (5) of section 5O50t)) is amended to read as 
,.;. 
follows: 
"(5) HIGHLY COMPENSATED INDIVIDUAL.—For purposes of this 
subsection, the determination as to whether an individual is a 
.jj.^ highly compensated individual shall be made under rules simi-
lar to the rules for determining whether an individual is a 
highly compensated employee (within the meaning of section 
414(q))." 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
.J, amendment made by this section shall apply to years beginning 
•" after December 31,1986. 
(2) CONFORMING AMENDMENTS TO EMPLOYEE BENEFIT PROVI-
SIONS.—The amendments made by paragraphs (2), (3), (4), (5), 
and (16) of subsection (b) shall apply to years beginning after 
December 31,1987. 
(3) CONFORMING AMENDMENTS TO PENSION PROVISIONS.—The 
amendments made by paragraphs (7), (8), (9), (10), (11), (12), and 
(15) of subsection (b) shall apply to years beginning after Decem-
ber 31, 1988. 
(4) 
SPECIAL RULE FOR DETERMINING HIGHLY COMPENSATED 
^ ' 
EMPLOYEES.—For purposes of sections 401(k) and 401(m) of the 
Internal Revenue Code of 1986, in the case of an employer 
incorporated on December 15, 1924, if more than 50 percent of 
its employees in the top-paid group (within the meaning of 
section 414(q)(4) of such Code) earn less than $25,000 (indexed at 
the same time and in the same manner as under section 415(d) 
of such Code), then the highly compensated employees shall 
. 
include employees described in section 414(q)(l)(C) of such Code 
determined without regard to the level of compensation of such 
employees. 
SEC. 1115. SEPARATE LINES OF BUSINESS; COMPENSATION. 
> 
(a) IN GENERAL.—Section 414 is amended by adding at the end 
thereof the following new subsections: 
"(r) SPECIAL RULES FOR SEPARATE LINE OF BUSINESS.— 
(1) IN GENERAL.—For purposes of sections 89 and 410(b), an 
employer shall be treated as operating separate lines of business 
during any year if the employer for bona fide business reasons 
operates separate lines of business. 
i
"
" 
"(2) LINE OF BUSINESS MUST HAVE 50 EMPLOYEES, ETC.—A line 
of business shall not be treated as separate under paragraph (1) 
unless— 
1' 
"(A) such line of business has at least 50 employees who 
Im 
are not excluded under subsection (q)(8). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2453 
"(B) the employer notifies the Secretary that such line of 
business is being treated as separate for purposes of para-
graph (1), and 
"(C) such line of business meets guidelines prescribed 
by the Secretary or the employer receives a determin-
ation from the Secretary that such line of business may be 
treated as separate for purposes of paragraph (1). 
"(3) SAFE HARBOR RULE.—The requirements of subparagraph 
(C) of paragraph (2) shall not apply to any line of business if the 
highly compensated employee percentage with respect to such 
line of business is— 
"(A) not less than one-half, and 
"(B) not more than twice, 
the percentage which highly compensated employees are of all 
employees of the employer. An employer shall be treated as 
meeting the requirements of subparagraph (A) if at least 10 
percent of all highly compensated employees of the employer 
perform services solely for such line of business. 
"(4) HIGHLY COMPENSATED EMPLOYEE PERCENTAGE DEFINED.— 
For purposes of this subsection, the term 'highly compensated 
employee percentage' means the percentage which highly com-
pensated employees performing services for the line of business 
are of all employees performing services for the line of business. 
"(5) ALLOCATION OF BENEFITS TO LINE OF BUSINESS.—For pur-
poses of this subsection, benefits which are attributable to 
services provided to a line of business shall be treated as 
provided by such line of business. 
"(6) HEADQUARTERS PERSONNEL, ETC.—The Secretary shall pre-
scribe rules providing for— 
"(A) the allocation of headquarters personnel among the 
lines of business of the employer, and 
"(B) the treatment of other employees providing services 
for more than 1 line of business of the employer or not in 
lines of business meeting the requirements of paragraph (2). 
"(7) SEPARATE OPERATING UNITS.—For purposes of this subsec-
tion, the term 'separate line of business includes an operating 
unit in a separate geographic area separately operated for a 
bona fide business reason. 
"(8) AFFIUATED SERVICE GROUPS.—This subsection shall not 
apply in the case of any affiliated service group (within the 
meaning of section 414(m)). 
'(s) COMPENSATION.—For purposes of this part— 
"(1) IN GENERAL.—The term 'compensation' means compensa-
tion for service performed for an employer which (taking into 
account the provisions of this chapter) is currently includible in 
gross income. 
"(2) SELF-EMPLOYED INDIVIDUALS.—The Secretary shall pre-
scribe regulations for the determination of the compensation of 
an employee who is a self-employed individual (within the 
meaning of section 401(c)(1)) which are based on the principles 
of paragraph (1). 
"(3) EMPLOYER MAY ELECT TO TREAT CERTAIN DEFERRALS AS 
COMPENSATION.—An employer may elect to include as com-
pensation any amount which is contributed by the employer 
pursuant to a salary reduction agreement and which is not 
includible in the gross income of an employee under section 125, 
402(aX8), 402(h), or 4030)). 
100 STAT. 2454 
PUBLIC LAW 99-514—OCT. 22, 1986 
to « 
"(4) ALTERNATIVE DETERMINATION OF COMPENSATION.—The 
*ii Secretary shall by regulation provide for alternative methods of 
determining compensation which may be used by an employer, 
except that such regulations shall provide that an employer 
may not use an alternative method if the use of such method 
discriminates in favor of highly compensated employees (within 
the meaning of subsection (q))." 
(b) EFFECTIVE DATES.—The amendment made by subsection (a) 
shall apply to years beginning after December 31,1986. 
Subpart B—Other Provisions 
* 
SEC. 1116. CASH OR DEFERRED ARRANGEMENTS. 
(a) GENERAL RULE.—Subparagraph (A) of section 401(k)(3) (relat-
ing to application of participation and discrimination standards) is 
amended— 
(1) by striking out "1.5" in clause (ii)(I) and inserting in lieu 
.. 
thereof "1.25", 
(2) by striking out "3 percentage points" in clause (ii)(II) and 
inserting in lieu thereof "2 percentage points", and 
(3) by striking out "2.5" in clause (ii)(II) and inserting in lieu 
thereof "2". 
(b) WITHDRAWAL AND OTHER RESTRICTIONS.— 
(1) WITHDRAWALS.—Paragraph (2)(B) of section 401(k) (defln-
.^- J ing qualified cash or deferred arrangement) is amended to read 
as follows: 
..3^Q 
"(B) under which— 
"(i) amounts held by the trust which are attributable 
mii Bit i. fi ; *o employer contributions made pursuant to the 
employee's election may not be distributable to partici-
^^r,n,i=^o r 
pants or other beneficiaries earlier than— 
"(I) separation from service, death, or disability, 
"(II) termination of the plan without establish-
ment of a successor plan, 
"(III) the date of the sale by a corporation of 
u: . >it 
.t 
substantially all of the assets (within the meaning 
of section 409(d)(2)) used by such corporation in a 
>-. 
. 
. 
trade or business of such corporation with respect 
..^4 
to an employee who continues employment with 
the corporation acquiring such assets, 
"(IV) the date of the sale by a corporation of such 
corporation's interest in a subsidiary (within the 
; 
meaning of section 409(d)(3)) with respect to an 
employee who continues employment with such 
subsidiary, 
^•,,i ' ,:; ," - 
"(V) in the case of a profit-sharing or stock bonus 
plan, the attainment of age 59 ¥2, or 
"(VI) in the case of contributions to a profit-
8
1
^ ^i-.„ = 
.
_ sharing or stock bonus plan to which section 
402(a)(8) applies, upon hardship of the employee, 
8
A > 
and 
:i 
"(ii) amounts will not be distributable merely by 
• 
reason of the completion of a stated period of participa-
tion or the lapse of a fixed number of years; and". 
An^l 
(2) N O T MORE THAN 1 YEAR OF SERVICE MAY BE REQUIRED.— 
Paragraph (2) of section 401(k) is amended by striking out "and" 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2455 
at the end of subparagraph (B), by striking out the period at the 
end of subparagraph (C) and inserting in lieu thereof ", and", 
and by adding at the end thereof the following new subpara-
graph: 
"(D) which does not require, as a condition of participa-
tion in the arrangement, that an employee complete a 
period of service with the employer (or employers) 
maintaining the plan extending beyond the period per-
mitted under section 410(a)(1) (determined without regard 
to subparagraph (B)(i) thereof)." 
(3) OTHER REQUIREMENTS.—Subsection (k) of section 401 is 
amended by redesignating paragraphs (4), (5), and (6) as para-
graphs (5), (6), and (7), respectively, and by inserting after 
paragraph (3) the following new paragraph: 
"(4) OTHER REQUIREMENTS.— 
"(A) BENEFITS (OTHER THAN MATCHING CONTRIBUTIONS) 
MUST NOT BE C O N T I N G E N T ON ELECTION TO DEFER.—A Cash Or 
deferred arrangement of any employer shall not be treated 
as a qualified cash or deferred arrangement if any other 
benefit provided by such employer is conditioned (directly 
or indirectly) on the employee electing to have the em-
ployer make or not make contributions under the arrange-
ment in lieu of receiving cash. The preceding sentence shall 
not apply to any matching contribution (as defined in sec-
tion 401(m)) made by reason of such an election. 
"(B) 
STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT 
ORGANIZATIONS NOT ELIGIBLE.—A cash or deferred arrange-
ment shall not be treated as a qualified cash or deferred 
arrangement if it is part of a plan maintained by— 
"(i) a State or local government or political subdivi-
sion thereof, or any agency or instrumentality thereof, 
or 
"(ii) any organization exempt from tax under this 
subtitle. 
"(C) COORDINATION WITH OTHER PLANS.—Except as 
pro-
' 
vided in section 401(m), any employer contribution made 
pursuant to an employee's election under a qualified cash 
' 
or deferred arrangement shall not be taken into account for 
purposes of determining whether any other plan meets the 
requirements of section 401(a) or 410(b). This subparagraph 
shall not apply for purposes of determining whether a plan 
meets 
the 
average 
benefit 
requirement 
of 
section 
410(b)(2)(A)(ii)." 
(4) AGGREGATION RULE.—The last sentence of subparagraph 
(A) of section 401(k)(3) (relating to application of participation 
and discrimination standards) is amended by striking out "any 
employee" and inserting in lieu thereof "any highly com-
pensated employee". 
(c) PLAN NOT DISQUALIFIED IF EXCESS CONTRIBUTIONS DISTRIBUTED 
BEFORE THE END OF FOLLOWING PLAN YEAR.— 
(1) IN GENERAL.—Subsection (k) of section 401 is amended by 
adding at the end thereof the following new paragraph: 
"(8) ARRANGEMENT NOT DISQUALIFIED IF EXCESS CONTRIBUTIONS 
DISTRIBUTED.— 
"(A) IN GENERAL.—A cash or deferred arrangement shall 
not be treated as failing to meet the requirements of clause 
USi 
100 STAT. 2456 
PUBLIC LAW 99-514—OCT. 22, 1986 
/ '" 
(ii) of paragraph (3)(A) for any plan year if, before the close 
• ' 
of the following plan year— 
"(i) the amount of the excess contributions for such 
plan year (and any income allocable to such contribu-
'•''•• 
"
^ 
tions) is distributed, or 
"(ii) to the extent provided in regulations, the em-
ployee elects to treat the amount of the excess contribu-
tions as an amount distributed to the employee and 
then contributed by the employee to the plan. 
Any distribution of excess contributions (and income) may 
be made without regard to any other provision of law. 
"(B) EXCESS CONTRIBUTIONS.—For purposes of subpara-
graph (A), the term 'excess contributions' means, with re-
spect to any plan year, the excess of— 
"(i) the aggregate amount of employer contributions 
<^*'p 
-•• actually paid over to the trust on behalf of highly 
compensated employees for such plan year, over 
"(ii) the maximum amount of such contributions per-
mitted under the limitations of clause (ii) of paragraph 
(3)(A) (determined by reducing contributions made on 
behalf of highly compensated employees in order of the 
actual deferral percentages beginning with the highest 
of such percentages). 
"(C) METHOD OF DISTRIBUTING EXCESS CONTRIBUTIONS.— 
Any distribution of the excess contributions for any plan 
year shall be made to highly compensated employees on the 
basis of the respective portions of the excess contributions 
attributable to each of such employees. 
"(D) ADDITIONAL TAX UNDER SECTION 72(t) NOT TO APPLY.— 
i ' • 
No tax shall be imposed under section 72(t) on any amount 
•' * 
required to be distributed under this paragraph. 
"(E) CROSS REFERENCE.— 
"For excise tax on certain excess contributions, see section 4979." 
.,, 
(2) TECHNICAL AMENDMENT.—Clause (ii) of section 401(k)(3)(A) 
is amended by striking out "paragraph (4)" and inserting in lieu 
thereof "paragraph (5)". 
(d) DEFINITIONS OF HIGHLY COMPENSATED EMPLOYEE AND COM-
PENSATION.— 
(1) HIGHLY COMPENSATED EMPLOYEE.—Paragraph (5) of section 
401(k), as redesignated by this Act, is amended to read as 
^, 
follows: 
"(5) HIGHLY COMPENSATED EMPLOYEE.—For purposes of this 
subsection, the term 'highly compensated employee' has the 
meaning given such term by section 414(q)." 
(2) COMPENSATION.—Section 401(k), as amended by this Act, is 
amended by adding at the end thereof the following new para-
graph: 
"(9) COMPENSATION.—For purposes of this subsection, the 
*"^ term 'compensation' has the meaning given such term by sec-
_> , tion414(s)/' 
(3) CONFORMING AMENDMENT.—Subparagraph (B) of section 
401(k)(3) is amended by striking out the last sentence thereof. 
(e) NONDISCRIMINATION STANDARDS.—Section 401(k)(3) is amended 
by adding at the end thereof the following new subparagraph: 
"(C) For purposes of subparagraph (B), the employer con-
tributions on behalf of any employee— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2457 
"(i) shall include any employer contributions made 
pursuant to the employee's election under paragraph 
(2), and 
"(ii) under such rules as the Secretary may prescribe, 
may, at the election of the employer, include— 
"(I) matching 
contributions 
(as defined 
in 
401(m)(4)(A)) which meets the requirements of 
paragraph (2) (B) and (C), and 
"(II) qualified nonelective contributions (within 
the meaning of section 401(m)(4)(C))." 
(f) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to years begin-
ning after December 31,1988. 
(2) NONDISCRIMINATION RULES.— 
(A) IN GENERAL.—Except as provided in subparagraph (B), 
the amendments made by subsections (a), (b)(4), and (d), and 
the provisions of section 401(k)(4)(B) of the Internal Reve-
nue Code of 1986 (as added by this section), shall apply to 
years beginning after December 31,1986. 
(B) TRANSITION RULES FOR CERTAIN GOVERNMENTAL AND 
TAX-EXEMPT PLANS.—Subparagraph (B) of section 401(k)(4) of 
the Internal Revenue Code of 1986 (relating to governments 
and tax-exempt organizations not eligible for cash or de-
ferred arrangements), as added by this section, shall not 
apply to any cash or deferred arrangement adopted by— 
(i) a State or local government (or political subdivi-
sion thereof) before May 6,1986, or 
(ii) a tax-exempt organization before July 2, 1986. 
In the case of an arrangement described in clause (i), the 
amendments made by subsections (a), (b)(4), and (d) shall 
apply to years beginning after December 31,1988. 
(3) AGGREGATION AND EXCESS CONTRIBUTIONS.—The amend-
ments made by subsections (c) and (e) shall apply to years 
beginning after December 31,1986. 
(4) COLLECTIVE BARGAINING AGREEMENTS.— 
(A) IN GENERAL.—In the case of a plan maintained pursu-
ant to 1 or more collective bargaining agreements between 
employee representatives and 1 or more employers ratified 
before March 1, 1986, the amendments made by this section 
shall not apply to years beginning before the earlier o
f
— 
(i) the later o
f
^
— 
(I) January 1, 1989, or 
, 
(II) the date on which the last of such collective 
bargaining agreements terminates (determined 
without regard to any extension thereof after Feb-
ruary 28,1986), or 
(ii) January 1,1991. 
: 
(B) SPECIAL RULE FOR NONDISCRIMINATION RULES.—In the 
case of a plan described in subparagraph (A), the amend-
ments and provisions described in paragraph (2) shall not 
apply to years beginning before the earlier o
f
— 
(i) the date determined under subparagraph (A)(i)(II), 
or 
(ii) January 1,1989. 
, 
(5) SPECIAL RULE FOR QUAUFIED OFFSET ARRANGEMENTS.— 
100 STAT. 2458 
PUBLIC LAW 99-514—OCT. 22, 1986 
fjDS'.! 
! ^^) jj^ GENERAL.—A cash or deferred arrangement shall 
^^ 
not be treated as failing to meet the requirements of section 
^. 
401(k)(4) of the Internal Revenue Code of 1986 (as added by 
rS'^i' 
^jj|g section) to the extent such arrangement is part of a 
qualified offset arrangement consisting of such cash or 
„
*
" 
deferred arrangement and a defined benefit plan. 
^^' 
(B) QUALIFIED OFFSET ARRANGEMENT.—For purposes of 
subparagraph (A), a cash or deferred arrangement is part of 
^^^- 
a qualified offset arrangement with a defined benefit plan 
to the extent such offset arrangement satisfies each of the 
following conditions with respect to the employer maintain-
* • 
ing the arrangement on April 16, 1986, and at all times 
'-*« 
thereafter: 
(i) The benefit under the defined benefit plan is 
, 
directly and uniformly conditioned on the initial elec-
- J . u J 
^j^g deferrals (up to 4 percent of compensation). 
(ii) The benefit provided under the defined benefit 
plan (before the offset) is at least 60 percent of an 
A
.
. t,-uiMt 
employee's cumulative elective deferrals (up to 4 per-
cent of compensation). 
(iii) The benefit under the defined benefit plan is 
reduced by the benefit attributable to the employee's 
elective deferrals under the plan (up to 4 percent of 
compensation) and the income allocable thereto. The 
^•' 
interest rate used to calculate the reduction shall not 
" "/:" 
exceed 
the greater 
of the rate 
under 
section 
• ;iH5 ; 
411(a)(ll)(B)(ii) of such Code or the interest rate ap-
,., ,, 
plicable under section 411(c)(2)(C)(iii) of such Code, 
<;. n
*
: i 
taking into account section 411(c)(2)(D) of such Code. 
For purposes of applying section 401(k)(3) of such Code to 
the cash or deferred arrangement, the benefits under the 
defined benefit plan conditioned on initial elective deferrals 
j ^ ^ ' 
may be treated as matching contributions under such rules 
''*' 
as the Secretary of the Treasury or his delegate may pre-
scribe. The Secretary shall provide rules for the application 
of this paragraph in the case of successor plans. 
(C) DEFINITION OF EMPLOYER.—For purposes of this para-
graph, the term "employer" includes any research and 
development center which is federally funded and engaged 
in cancer research, but only with respect to employees of 
contractor-operators whose salaries are reimbursed as 
direct costs against the operator's contract to perform work 
at such center. 
S--U (g) WITHDRAWALS ON SALE OF ASSETS.—Subclauses (II), (III), 
and (IV) of section 401(k)(2)(B)(i) of the Internal Revenue Code of 
1986 (as added by subsection (b)(1)) shall apply to distributions 
after December 31, 1984. 
(7) DISTRIBUTIONS BEFORE PLAN AMENDMENT.— 
(A) IN GENERAL.—If a plan amendment is required to 
allow a plan to make any distribution described in section 
.o« 
401(k)(8) of the Internal Revenue Code of 1986, any such 
„^.^^ 
distribution which is made before the close of the 1st plan 
' •' 
year for which such amendment is required to be in effect 
under section 1140, shall be treated as made in accordance 
with the provisions of such plan. 
(B) DISTRIBUTIONS PURSUANT TO MODEL AMENDMENT.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2459 
(i) SECRETARY TO PRESCRIBE AMENDMENT.—The Sec-
retary of the Treasury or his delegate shall prescribe 
an amendment which allows a plan to make any dis-
tribution described in section 401(k)(8) of such Code. 
(ii) ADOPTION BY PLAN.—If a plan adopts the amend-
ment prescribed under clause (i) and makes a distribu-
tion in accordance with such amendment, such dis-
tribution shall be treated as made in accordance with 
the provisions of the plan. 
SEC. 1117. NONDISCRIMINATION 
REQUIREMENTS 
FOR 
EMPLOYER 
MATCHING 
CONTRIBUTIONS AND EMPLOYEE CONTRIBU-
TIONS. 
(a) GENERAL RULE.—Section 401 (relating to qualified pension, 
profit-sharing, and stock bonus plans) is amended by redesignating 
subsections (m) and (n) as subsections (n) and (o), respectively, and 
by inserting after subsection (1) the following new subsection: 
"(m) NONDISCRIMINATION TEST FOR MATCHING CONTRIBUTIONS AND 
EMPLOYEE CONTRIBUTIONS.— 
"(1) IN GENERAL.—A plan shall be treated as meeting the 
requirements of subsection (a)(4) with respect to the amount of 
any matching contribution or employee contribution for any 
' 
plan year only if the contribution percentage requirement of 
paragraph (2) of this subsection is met for such plan year. 
"(2) REQUIREMENTS.— 
1 
"(A) CONTRIBUTION PERCENTAGE REQUIREMENT.—A plan 
-i 
meets the contribution percentage requirement of this 
paragraph for any plan year only if the contribution 
fiof' 
percentage for eligible highly compensated employees does 
^ 
not exceed the greater o
f
— 
* 
"(i) 125 percent of such percentage for all other 
[ 
eligible employees, or 
1 
"(ii) the lesser of 200 percent of such percentage for 
all other eligible employees, or such percentage for all 
-OH a 
other eligible employees plus 2 percentage points. 
"(B) MULTIPLE PLANS TREATED AS A SINGLE PLAN.—If two 
2 V 
or more plans of an employer to which matching contribu-
tions, employee contributions, or elective deferrals are 
made are treated as one plan for purposes of section 410(b), 
1
^ 
such plans shall be treated as one plan for purposes of this 
i 
subsection. If a highly compensated employee participates 
!• 
in two or more plans of an employer to which such con-
1: 
tributions are made, all such contributions shall be aggre-
gated for purposes of this subsection. 
: 
"(3) CONTRIBUTION PERCENTAGE.—For purposes of paragraph 
(2), the contribution percentage for a specified group of em-
ployees for a plan year shall be the average of the ratios 
(calculated separately for each employee in such group) o
f
— 
I. 
"(A) the sum of the matching contributions and employee 
contributions paid under the plan on behalf of each such 
i! 
employee for such plan year, to 
"(B) the employee's compensation (within the meaning of 
section 414(s)) for such plan year. 
Under regulations, an employer may elect to take into account 
(in computing the contribution percentage) elective deferrals 
and qualified nonelective contributions under the plan or any 
other plan of the employer. 
100 STAT. 2460 
PUBLIC LAW 99-514—OCT. 22, 1986 
n 
"(4) DEFINITIONS.—For purposes of this subsection— 
"(A) MATCHING CONTRIBUTION.—The term 'matching con-
tribution' means— 
"(i) any employer contribution made to the plan on 
behalf of an employee on account of an employee con-
; 
tribution made by such employee, and 
i _ / 
"(ii) any employer contribution made to the plan on 
fil V
. 
behalf of an employee on account of an employee's 
elective deferral. 
"(B) ELECTIVE DEFERRAL.—The term 'elective deferral' 
*'*" 
means any employer contribution described in section 
- • 
402(g)(3)(A). 
"(C) QUALIFIED NONELECTIVE CONTRIBUTIONS.—The term 
, 
'qualified nonelective contribution' means any employer 
contribution (other than a matching contribution) with re-
spect to which— 
"(i) the employee may not elect to have the contribu-
ciMA'>-; 
tion paid to the employee in cash instead of being 
contributed to the plan, and 
'^n-'i 
f' 
"(ii) the requirements of subparagraphs (B) and (C) of 
subsection (k)(2) are met. 
"(5) EMPLOYEES TAKEN INTO CONSIDERATION.— 
"(A) IN GENERAL.—Any employee who is eligible to make 
an employee contribution (or, if the employer takes elective 
contributions into account, elective contributions) or to re-
- r 
ceive a matching contribution under the plan being tested 
under paragraph (1) shall be considered an eligible em-
ployee for purposes of this subsection. 
ri 
"(B) CERTAIN NONPARTICIPANTS.—If an employee con-
tribution is required as a condition of participation in the 
f J; 
plan, any employee who would be a participant in the plan 
if such employee made such a contribution shall be treated 
'i6\ 
as an eligible employee on behalf of whom no employer 
i ' 
contributions are made. 
"(6) PLAN NOT DISQUAUFIED IF EXCESS AGGREGATE CONTRIBU-
TIONS DISTRIBUTED BEFORE END OF FOLLOWING PLAN YEAR.— 
"(A) IN GENERAL.—A plan shall not be treated as failing 
to meet the requirements of paragraph (1) for any plan year 
if, before the close of the following plan year, the amount of 
the excess aggregate contributions for such plan year (and 
any income allocable to such contributions) is distributed 
(or, if forfeitable, is forfeited). Such contributions (and such 
i 
income) may be distributed without regard to any other 
provision of law. 
"(B) EXCESS AGGREGATE CONTRIBUTIONS.—For purposes of 
subparagraph (A), the term 'excess aggregate contributions' 
means, with respect to any plan year, the excess o
f
— 
"(i) the aggregate amount of the matching contribu-
s«', 
tions and employee contributions (and any qualified 
AofM u i; 
nonelective contribution or elective contribution taken 
into account in computing the contribution percentage) 
'k--^-:AC.'-''::' actually made on behalf of highly compensated em-
ployees for such plan year, over 
' (ii) the maximum amount of such contributions per-
mitted under the limitations of paragraph (2)(A) (deter-
Yn VJ 
mined by reducing contributions made on behalf of 
highly compensated employees in order of their con-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2461 
if -fc. 
tribution percentages beginning with the highest of 
such percentages). 
"(C) METHOD OF DISTRIBUTING EXCESS CONTRIBUTIONS.— 
Any distribution of the excess aggregate contributions for 
any plan year shall be made to highly compensated employ-
ees on the basis of the respective portions of such amounts 
attributable to each of such employees. Forfeitures of excess 
aggregate contributions may not be allocated to partici-
pants whose contributions are reduced under this para-
^«' 
graph. 
"(D) 
COORDINATION WITH SUBSECTION (k) 
AND 402(g).— 
The determination of the amount of excess aggregate con-
tributions with respect to a plan shall be made after— 
• • 
"(i) first determining the excess deferrals (within the 
meaning of section 402(g)), and 
"(ii) then determining the excess contributions under 
' -
"
^ - 
subsection (k). 
"(7) TREATMENT OF DISTRIBUTIONS.— 
" 
' 
"(A) ADDITIONAL TAX OF SECTION 72(t) NOT APPLICABLE.— 
No tax shall be imposed under section 72(t) on any amount 
required to be distributed under paragraph (8). 
"(B) EXCLUSION OF EMPLOYEE CONTRIBUTIONS.—Any dis-
tribution attributable to employee contributions shall not 
be included in gross income except to the extent attrib-
utable to income on such contributions. 
"(8) HIGHLY COMPENSATED EMPLOYEE.—For purposes of this 
subsection, the term 'highly compensated employee' has the 
^ 
meaning given to such term by section 414(q). 
"(9) REGULATIONS.—The Secretary shall prescribe such regu-
, 
lations as may be necessary to carry out the purposes of this 
4 
subsection and subsection (k) including— 
"(A) such regulations as may be necessary to prevent the 
multiple use of the alternative limitation with respect to 
any highly compensated employee, and 
^ 
"(B) regulations permitting appropriate aggregation of 
plans and contributions. 
t 
For purposes of the preceding sentence, the term 'alternative 
limitation' means the limitation of section 401(k)(3)(A)(ii)(II) and 
the limitation of paragraph (2)(A)(ii) of this subsection. 
' 
"(10) CROSS REFERENCE.— 
"For excise tax on certain excess contributions, see section 4979." 
; 
(b) EXCISE TAX ON EXCESS CONTRIBUTIONS.— 
(1) IN GENERAL.—Chapter 43 (relating to qualified pension, 
a 
etc. plans) is amended by adding at the end thereof the follow-
ing new section: 
"SEC. 4979. TAX ON CERTAIN EXCESS CONTRIBUTIONS. 
"(a) GENERAL RULE.—In the case of any plan, there is hereby 
imposed a tax for the taxable year equal to 10 percent of the sum 
of-
. 
"(1) any excess contributions under a cash or deferred 
f 
arrangement which is part of such plan for the plan year ending 
in such taxable year, and 
^. 
"(2) any excess aggregate contributions under the plan for the 
plan year ending in such taxable year. 
100 STAT. 2462 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(b) LIABILITY FOR TAX.—The tax imposed by subsection (a) shall 
be paid by the employer. 
"(c) EXCESS CONTRIBUTIONS.—For purposes of this section, the 
term 'excess contributions' has the meaning given such term by 
sections 401(k)(8)(B), 403(b), 408(k)(8)(B), and 501(c)(18). 
"(d) EXCESS AGGREGATE CONTRIBUTION.—For purposes of this sec-
tion, the term 'excess aggregate contribution' has the meaning given 
to such term by section 401(m)(6)(B). 
"(e) PLAN.—For purposes of this section, the term 'plan' means— 
"(1) a plan described in section 401(a) which includes a trust 
exempt from tax under section 501(a), 
,: 
"(2) any annuity plan described in section 403(a), 
"(3) any annuity contract described in section 4030)), 
: 
"(4) a simplified employee pension of an employer which 
satisfies the requirements of section 408(k), and 
"(5) a plan described in section 501(c)(18). 
Such term includes any plan which, at any time, has been deter-
mined by the Secretary to be such a plan. 
"(f) No TAX WHERE EXCESS DISTRIBUTED WITHIN 2y2 MONTHS OF 
CLOSE OF YEAR.— 
"(1) IN GENERAL.—No tax shall be imposed under this section 
; on any excess contribution or excess aggregate contribution, as 
the case may be, to the extent such contribution (together with 
any income allocable thereto) is distributed (or, if forfeitable, is 
forfeited) before the close of the first 2y2 months of the follow-
i ing plan year. 
: 
"(2) INCLUDED IN PRIOR YEAR.—Any amount distributed as 
provided in paragraph (1) shall be treated as received and 
^. earned by the recipient in his taxable year for which such 
"^/^ contribution was made." 
*'' 
(2) CLERICAL AMENDMENT.—The table of sections for chapter 
, 43 is amended by adding at the end thereof the following new 
^' 
item: 
"Sec. 4979. Tax on certain excess contributions." 
(c) TECHNICAL AMENDMENT.—Paragraph (2) of section 414(k) 
(relating to certain plans) is amended by striking out "and 415 
(relating to limitations on benefits and contributions under qualified 
plans)" and inserting in lieu thereof ", 415 (relating to limitations on 
benefits and contributions under qualified plans), and 401(m) (relat-
ing to nondiscrimination tests for matching requirements and em-
ployee contributions)". 
(d) EFFECTIVE DATE.— 
•>/-><. 
^ 
i 
(1) IN GENERAL.—The amendments made by this section shall 
•^' apply to plan years beginning after December 31, 1986. 
^
^
'
^ 
(2) COLLECTIVE BARGAINING AGREEMENTS.—In the case of a 
plan maintained pursuant to 1 or more collective bargaining 
agreements between employee representatives and 1 or more 
employers ratified before March 1, 1986, the amendments made 
by this section shall not apply to plan years beginning before 
the earlier o
f
— 
(A) January 1, 1989, or 
1. ' jl T 
(B) the date on which the last of such collective bargain-
j» ihi-^ 
ing agreements terminates (determined without regard to 
any extension thereof after February 28, 1986). 
i^ 
(3) ANNUITY CONTRACTS.—In the case of an annuity contract 
under section 403(b) of the Internal Revenue Code of 1986— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2463 
u 
(A) the amendments made by this section shall apply to 
plan years beginning after December 31, 1988, and 
(B) in the case of a collective bargaining agreement de-
scribed in paragraph (2), the amendments made by this 
section shall not apply to years beginning before the earlier 
of— 
.i?.^i li ^
, J 
(i) the later o
f
— 
(I) January 1, 1989, or 
f.r •» 
(II) the date determined under paragraph (2)(B), 
•niix 
or 
ii ;' 
(ii) January 1,1991. 
SEC. 1118. BENEFITS TREATED AS ACCRUING RATABLY FOR PURPOSES 
OF DETERMINING WHETHER PLAN IS TOP-HEAVY. 
(a) GENERAL RULE.—Paragraph (4) of section 416(g) (defining top-
heavy plan) is amended by adding at the end thereof the following 
new subparagraph: 
"(F) ACCRUED BENEFITS TREATED AS ACCRUING RATABLY.— 
" 
The accrued benefit of any employee (other than a key 
«' 
employee) shall be determined— 
"
^ 
"(i) under the method which is used for accrual 
puj.pQggg fQj. QJJ plans of the employer, or 
,, , 
"(ii) if there is no method described in clause (i), as if 
I! -aa 
such benefit accrued not more rapidly than the slowest 
accrual rate permitted under section 411(b)(1)(C)." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to plan years beginning after December 31,1986. 
SEC. 1119. MODIFICATION OF RULES FOR BENEFIT FORFEITURES. 
(a) GENERAL RULE.—Paragraph (8) of section 401(a) (relating to 
qualified pension, profit-sharing, and stock bonus plans) is amended 
by striking out "pension plan" and inserting in lieu thereof "defined 
benefit plan". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to plan years beginning after December 31,1985. 
SEC. 1120. NONDISCRIMINATION REQUIREMENTS FOR TAX-SHELTERED 
ANNUITIES. 
(a) GENERAL RULE.—Paragraph (1) of section 403(b) is amended by 
striking out "and" at the end of subparagraph (B), by inserting 
"and" at the end of subparagraph (C), and by inserting after 
subparagraph (C) the following new subparagraph: 
"(D) except in the case of a contract purchased by a 
church, such contract is purchased under a plan which 
meets the nondiscrimination requirements of paragraph 
(10).". 
(b) NONDISCRIMINATION REQUIREMENTS.—Subsection (b) of section 
403 is amended by adding at the end thereof the following new 
paragraph: 
"(10) NONDISCRIMINATION REQUIREMENTS.— 
' 
"(A) IN GENERAL.—For purposes of paragraph (1)(D), a 
plan meets the nondiscrimination requirements of this 
paragraph i
f
— 
"(i) with respect to contributions not made pursuant 
'« • 
to a salary reduction agreement, such plan meets the 
requirements of paragraphs (4), (5), and (26) of section 
100 STAT. 2464 
PUBLIC LAW 99-514—OCT. 22, 1986 
oj ;iqcjj '•-:- 401(a) and section 410(b) in the same manner as if such 
plan were described in section 401(a), and 
<.;; 
• 
"(ii) all employees of the organization may elect to 
^1,1 
have the employer make contributions of more than 
i^fi 
r; , 
$200 pursuant to a salary reduction agreement if any 
employee of the organization may elect to have the 
organization make contributions for such contracts 
pursuant to such agreement. 
.v| ^ 
For purposes of clause (ii), there may be excluded any 
employee who is a participant in an eligible deferred com-
pensation plan (within the meaning of section 457) or a 
qualified cash or deferred arrangement of the organization 
i-iiSffv f or another annuity contract described in this subsection. 
Any nonresident alien described in section 410(b)(3)(C) may 
also be excluded. For purposes of this subparagraph, stu-
dents who normally work less than 20 hours per week may 
(subject to the conditions applicable under section 410(b)(4)) 
« 
. , be excluded. 
"(B) CHURCH.—For purposes of paragraph (1)(D), the term 
'church' has the meaning given to such term by section 
. , .. 
3121(w)(3)(A). Such term shall include any qualified church-
controlled 
organization 
(as 
defined 
in 
section 
3121(w)(3)(B))." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to years beginning after December 31, 1988. 
PART III—TREATMENT OF DISTRIBUTIONS 
SEC. 1121. MINIMUM DISTRIBUTION REQUIREMENTS. 
' ' 
' 
• 
(a) EXCISE TAX ON FAILURE To DISTRIBUTE.— 
(1) IN GENERAL.—Section 4974 is amended to read as follows: 
"SEC. 4974. EXCISE TAX ON CERTAIN ACCUMULATIONS IN QUALIFIED 
RETIREMENT PLANS. 
"(a) GENERAL RULE.—If the amount distributed during the taxable 
year of the payee under any qualified retirement plan or any 
eligible deferred compensation plan (as defined in section 457(b)) is 
less than the minimum required distribution for such taxable year, 
there is hereby imposed a tax equal to 50 percent of the amount by 
which such minimum required distribution exceeds the actual 
amount distributed during the taxable year. The tax imposed by this 
section shall be paid by the payee. 
"Ot)) MINIMUM REQUIRED DISTRIBUTION.—For purposes of this sec-
tion, the term 'minimum required distribution' means the minimum 
amount required to be distributed during a taxable year under 
section 401(a)(9), 403(b)(10), 408(a)(6), 408(b)(3), or 457(d)(2), as the 
case may be, as determined under regulations prescribed by the 
Secretary. 
"(c) QUAUFIED RETIREMENT PLAN.—For purposes of this section, 
the term 'qualified retirement plan' means— 
"(1) a plan described in section 401(a) which includes a trust 
E
i
= exempt from tax under section 501(a), 
"(2) an annuity plan described in section 403(a), 
+ 
"(3) an annuity contract described in section 403(b), 
"(4) an individual retirement account described in section 
: , 408(a), or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2465 
"(5) an individual retirement annuity described in section 
408(b). 
Such term includes any plan, contract, account, or annuity which, at 
any time, has been determined by the Secretary to be such a plan, 
contract, account, or annuity. 
"(d) WAIVER OF TAX IN CERTAIN CASES.—If the taxpayer estab-
lishes to the satisfaction of the Secretary that— 
"(1) the shortfall described in subsection (a) in the amount 
distributed during any taxable year was due to reasonable 
error, and 
"(2) reasonable steps are being taken to remedy the shortfall, 
the Secretary may waive the tax imposed by subsection (a) for the 
taxable year." 
(2) CLERICAL AMENDMENT.—The table of sections for chapter 
43 is amended by striking out the item relating to section 4974 
and inserting in lieu thereof the following: 
"Sec. 4974. Excise tax on certain accumulations in qualified retirement 
plans." 
(b) UNIFORM REQUIRED BEGINNING DATE.—Subparagraph (C) of 
section 401(a)(9) (defining required beginning date) is amended to 
read as follows: 
"(C) REQUIRED BEGINNING DATE.—For purposes of this 
paragraph, the term 'required beginning date' means April 
J 
1 of the calendar year following the calendar year in which 
the employee attains age 70V2." 
(c) CONFORMING AMENDMENTS.— 
(1) Subparagraph (F) of section 402(a)(5) is amended to read as 
follows: 
^^ 
"(F) TRANSFER TREATED AS ROLLOVER CONTRIBUTION UNDER 
SECTION 408.—For purposes of this title, a transfer described 
in subparagraph (A) to an eligible retirement plan de-
,^ 
scribed in subclause (I) or (II) of subparagraph (E)(iv) shall 
' 
be treated as a rollover contribution described in section 
! 
408(d)(3)." 
(2) Clause (ii) of section 408(d)(3)(A) is amended by striking out 
the third and fourth parenthetical phrases. 
(d) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to years begin-
ning after December 31, 1988. 
(2) SUBSECTION (C) .—The amendments made by subsection (c) 
shall apply to years beginning after December 31, 1986. 
(3) COLLECTIVE BARGAINING AGREEMENTS.—In the case of a 
plan maintained pursuant to 1 or more collective bargaining 
" 
agreements between employee representatives and 1 or more 
employers ratified before March 1, 1986, the amendments made 
by this section shall not apply to distributions to individuals 
covered by such agreements in plan years beginning before the 
earlier o
f
— 
« 
(A) the later o
f
— 
(i) the date on which the last of such collective 
"•' • ~ 
bargaining agreements terminates (determined without 
regard to any extension thereof after February 28, 
1986), or 
(ii) January 1, 1989, or 
(B) January 1,1991. 
100 STAT. 2466 
PUBLIC LAW 99-514—OCT. 22, 1986 
J 
(4) TRANSITION RULES.— 
(A) The amendments made by subsections (a) and (b) shall 
f
. 
not apply with respect to any benefits with respect to which 
, ,. , 
a designation is in effect under section 242(b)(2) of the Tax 
Equity and Fiscal Responsibility Act of 1982. 
rv, 
(B)(i) Except as provided in clause (ii), the amendment 
made by subsection (b) shall not apply in the case of any 
individual who has attained age lOVz before January 1, 
1988. 
(ii) Clause (i) shall not apply to any individual who is a 5-
,i ]: . percent owner (as defined in section 416(i) of the Internal 
sti '• Revenue Code of 1986), at any time during— 
(I) the plan year ending with or within the calendar 
year in which such owner attains age 66 V2, and 
(II) any subsequent plan year. 
SEC. 1122. TAXATION OF DISTRIBUTIONS. 
' ' * ' 
(a) LIMITATIONS ON SPECIAL AVERAGING PROVISIONS.— 
(1) AVERAGING PROVISIONS LIMITED TO 1 LUMP SUM DISTRIBU-
TION AFTER AGE 59 y2.—Subparagraph (B) of section 402(e)(4) 
(relating to election of lump sum treatment) is amended to read 
as follows: 
"(B) AVERAGING TO APPLY TO i LUMP SUM DISTRIBUTION 
AFTER AGE 59¥2. —Paragraph (1) shall apply to a lump sum 
distribution with respect to an employee under subpara-
graph (A) only i
f
— 
"(i) such amount is received on or after the taxpayer 
' 
' ' 
has attained age 59 y2, and 
"(ii) the taxpayer elects for the taxable year to have 
'/'' 
all such amounts received during such taxable year so 
treated. 
Not more than 1 election may be made under this subpara-
graph by any taxpayer with respect to any employee. No 
election may be made under this subparagraph by any 
J 
taxpayer other than an individual, an estate, or a trust. In 
' • * the case of a lump sum distribution made with respect to an 
employee to 2 or more trusts, the election under this 
subparagraph shall be made by the personal representative 
of the taxpayer." 
(2) 
5-YEAR AVERAGING IN UEU OF 10-YEAR AVERAGING.— 
^^. Subparagraph (C) of section 402(e)(1) (relating to initial separate 
tax) is amended— 
(A) by striking out "10 times" and inserting in lieu 
thereof "5 times", and 
(B) by striking out "one-tenth" and inserting in lieu 
thereof" 1/5". 
(h) REPEAL OF CAPITAL GAINS TREATMENT.— 
(1) IN GENERAL.—The following provisions are hereby re-
pealed: 
(A) Paragraph (2) of section 402(a) (relating to capital 
gains treatment for portion of lump sum distribution). 
(B) Paragraph (2) of section 403(a) (relating to capital 
gains treatment for certain distributions). 
(2) TECHNICAL AMENDMENTS.— 
(A) Clause (iii) of section 402(aX5XD) is amended to read 
as follows: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2467 
"(iii) DENIAL OF IO-YEAR AVERAGING FOR SUBSEQUENT 
DISTRIBUTIONS.—If an election under clause (i) is made 
with respect to any partial distribution paid to any 
employee, paragraphs (1) and (3) of subsection (e) shall 
not apply to any distribution (paid after such partial 
distribution) of the balance to the credit of such em-
ployee under the plan under which such partial dis-
tribution was made (or under any other plan which, 
under subsection (e)(4)(C), would be aggregated with 
such plan)." 
(B) Paragraph (1) of section 402(e) is amended— 
(i) by striking out subparagraph (B) and by re-
designating subparagraphs (C), (D), and (E) as subpara-
graphs (B), (C), and (D), respectively, and 
- 
(ii) by striking out "The initial separate tax" in 
subparagraph (B) (as so redesignated) and inserting in 
, 
lieu thereof "The amount of tax imposed by subpara-
graph (A)", and 
(iii) by striking out "INITIAL SEPARATE" in the head-
' ' • ' 
ing of subparagraph (B) (as so redesignated) and insert-
ing in lieu thereof "AMOUNT OF TAX". 
(C) Paragraph (3) of section 402(e) is amended by striking 
out "the ordinary income portion" and inserting in lieu 
thereof "total taxable amount". 
(D) Paragraph (4) of section 402(e) is amended by striking 
out subparagraph (E). 
(E) Subparagraph (H) of section 402(e)(4) is amended by 
striking out "(but not for purposes of subsection (a)(2) or 
section 403(a)(2)(A))". 
(c) AMENDMENTS TO SECTION 72.— 
(1) REPEAL OF SPECIAL RULE FOR EMPLOYEES' ANNUITIES.— 
Subsection (d) of section 72 (relating to employee's annuities 
where employee's contributions recoverable in 3 years) is 
hereby repealed. 
(2) AMOUNT EXCLUDED UNDER EXCLUSION RATIO LIMITED TO 
EMPLOYEE'S INVESTMENT IN THE CONTRACT.—Subsection (b) of 
section 72 (relating to exclusion ratio) is amended to read as 
follows: 
"(b) EXCLUSION RATIO.— 
"(1) IN GENERAL.—Gross income does not include that part of 
any amount received as an annuity under an annuity, endow-
ment, or life insurance contract which bears the same ratio to 
such amount as the investment in the contract (as of the 
annuity starting date) bears to the expected return under the 
contract (as of such date). 
"(2) EXCLUSION LIMITED TO INVESTMENT.—The portion of any 
amount received as an annuity which is excluded from gross 
income under paragraph (1) shall not exceed the unrecovered 
investment in the contract immediately before the receipt of 
such amount. 
"(3) 
DEDUCTION WHERE ANNUITY PAYMENTS CEASE BEFORE 
ENTIRE INVESTMENT RECOVERED.— 
"(A) IN GENERAL.—If— 
"(i) after the annuity starting date, payments as an 
annuity under the contract cease by reason of the 
death of an annuitant, and 
100 STAT. 2468 
PUBLIC LAW 99-514—OCT. 22, 1986 
" •! i;.<- 
"(ii) as of the date of such cessation, there is unre-
covered investment in the contract, 
the amount of such unrecovered investment (in excess of 
any amount specified in subsection (e)(5) which was not 
included in gross income) shall be allowed as a deduction to 
the annuitant for his last taxable year. 
"(B) PAYMENTS TO OTHER PERSONS.—In the case of any 
, . , 
contract which provides for payments meeting the require-
rt 
ments of subparagraphs (B) and (C) of subsection (c)(2), the 
deduction under subparagraph (A) shall be allowed to the 
person entitled to such payments for the taxable year in 
. -
r 
which such payments are received. 
%^'i.e' 
"(C) N E T OPERATING LOSS DEDUCTIONS PROVIDED.—For pur-
poses of section 172, a deduction allowed under this para-
^ j 
graph shall be treated as if it were attributable to a trade or 
business of the taxpayer. 
,j,,, 
"(4) UNRECOVERED INVESTMENT.—For purposes of this subsec-
tion, the unrecovered investment in the contract as of any date 
^,.t.. is— 
"(A) the investment in the contract as of the annuity 
starting date, reduced by 
^
< 
^ 
"(B) the aggregate amount received under the contract on 
;,,' 
or after such annuity starting date and before the date as of 
which the determination is being made, to the extent such 
amount was excludable from gross income under this sub-
^
•
•
^
^ 
title." 
(3) AMOUNTS NOT RECEIVED AS ANNUITIES ALLOCATED ON A PRO 
RATA BASIS.— 
(A) IN GENERAL.—Subsection (e) of section 72 is amended 
by adding at the end thereof the following new paragraphs: 
"(8) EXTENSION OF PARAGRAPH (2)(b) TO QUALIFIED PLANS.— 
"(A) IN GENERAL.—Notwithstanding any other provision 
of this subsection (other than paragraph (7)), in the case of 
any amount received before the annuity starting date from 
a trust or contract described in paragraph (5)(D), paragraph 
^'/"^ 
(2)(B) shall apply to such amounts. 
' 
' 
"(B) ALLOCATION OF AMOUNT RECEIVED.—For purposes of 
' ^ 
' 
paragraph (2)(B), the amount allocated to the investment in 
the contract shall be the portion of the amount described in 
^ 
subparagraph (A) which bears the same ratio to such 
amount as the investment in the contract bears to the 
account balance. The determination under the preceding 
sentence shall be made as of the time of the distribution or 
at such other time as the Secretary may prescribe. 
'-*''" 
"(C) TREATMENT OF FORFEITABLE RIGHTS.—If an employee 
does not have a nonforfeitable right to any amount under 
any trust or contract to which subparagraph (A) applies, 
such amount shall not be treated as part of the account 
balance. 
' 
"(D) INVESTMENT IN THE CONTRACT BEFORE I987.—In the 
case of a plan which on May 5, 1986, permitted withdrawal 
- 
"'^' 
of any employee contributions before separation from serv-
ice, subparagraph (A) shall apply only to the extent that 
amounts received before the annuity starting date (when 
LU >'^ 
increased by amounts previously received under the con-
' 
' 
tract after December 31, 1986) exceed the investment in the 
contract as of December 31, 1986. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2469 
' 
"(9) 
TREATMENT OF EMPLOYEE CONTRIBUTIONS AS SEPARATE 
CONTRACT.—Any employee contributions (and any income 
allocable thereto) under a defined contribution plan shall be 
treated as a separate contract for purposes of this subsection." 
(B) CONFORMING AMENDMENT.—Subparagraph (D) of sec-
tion 72(e)(5) is amended by striking out "paragraph (7)" and 
r 
inserting in lieu thereof "paragraphs (7) and (8)". 
(d) BENEFICIARY OF QUALIFIED ANNUITIES TAXED ONLY WHEN 
AMOUNTS ACTUALLY RECEIVED.— 
(1) Paragraph (1) of section 403(a) (relating to taxability of 
beneficiary under a qualified annuity plan) is amended to read 
as follows: 
"(1) DISTRIBUTEE TAXABLE UNDER SECTION 72.—If an annuity 
contract is purchased by an employer for an employee under a 
plan which meets the requirements of section 404(a)(2) (whether 
-' 
or not the employer deducts the amounts paid for the contract 
under such section), the amount actually distributed to any 
distributee under the contract shall be taxable to the distributee 
(in the year in which so distributed) under section 72 (relating to 
annuities)." 
(2) The second sentence of section 4030t))(l) (relating to tax-
ability of beneficiary under annuity purchased by section 
501(c)(3) organization or public school) is amended to read as 
follows: "The amount actually distributed to any distributee 
under such contract shall be taxable to the distributee (in the 
year in which so distributed) under section 72 (relating to 
annuities)." 
(3) The last sentence of section 403(c) (relating to taxability of 
beneficiary under nonqualified annuities or under annuities 
purchased by exempt organizations) is amended to read as 
follows: "In the case of any portion of any contract which is 
attributable to premiums to which this subsection applies, the 
amount actually paid or made available under such contract to 
any beneficiary which is attributable to such premiums shall be 
taxable to the beneficiary (in the year in which so paid or made 
available) under section 72 (relating to annuities)." 
(e) SPECIAL RULES FOR ROLLOVER DISTRIBUTIONS.— 
, 
(1) PARTIAL ROLLOVERS.—Clause (i) of section 402(a)(5)(D) 
(relating to requirements for partial distributions) is amended 
to read as follows: 
X 
"(i) REQUIREMENTS.—Subparagraph (A) shall apply to 
a partial distribution only if the employee elects to 
f,. v
^ . 
have subparagraph (A) apply to such distribution and 
such distribution would be a lump sum distribution if 
I 
subsection (e)(4)(A) were applied— 
"(I) by substituting '50 percent of the balance to 
the credit of an employee' for 'the balance to the 
, ,; y 
credit of an employee', 
"(II) without regard to clause (ii) thereof, the 
sr I- / 
second sentence thereof, and subparagraph (B) of 
subsection (e)(4). 
Any distribution described in section 401(a)(28)(B)(ii) 
shall be treated as meeting the requirements of this 
i 
clause." 
(2) EXTENSION OF ROLLOVER PERIOD FOR FROZEN DEPOSITS — 
100 STAT. 2470 
PUBLIC LAW 99-514—OCT. 22, 1986 
(A) I N GENERAL.—Section 402(a)(6) (relating to special 
rollover rules) is amended by adding at the end thereof the 
following new subparagraph: 
"(H) SPECIAL RULE FOR FROZEN DEPOSITS.— 
"(i) I N GENERAL.—The 60-day period described in 
paragraph (5)(C) shall not— 
"(I) include any period during which the amount 
' ' : 
transferred to the employee is a frozen deposit, or 
"(II) end earlier than 10 days after such amount 
ceases to be a frozen deposit. 
"(ii) FROZEN DEPOSIT.—For purposes of this subpara-
graph, the term 'frozen deposit' means any deposit 
which may not be withdrawn because of— 
"(I) the bankruptcy or insolvency of any finan-
cial institution, or 
j 
"(II) any requirement imposed by the State in 
which such institution is located by reason of the 
bankruptcy or insolvency (or threat thereof) of 1 or 
,-..., 
more financial institutions in such State." 
— « 
^g^ 
INDIVIDUAL 
RETIREMENT 
PLANS.—Section 
408(d)(3) 
(relating to rollover contribution) is amended by adding at 
the end thereof the following new subparagraph: 
"(F) FROZEN DEPOSITS.—For purposes of this paragraph, 
rules similar to the rules of section 402(a)(6)(H) (relating to 
frozen deposits) shall apply." 
(g) N E T UNREALIZED APPRECIATION.—Section 402(e)(4)(J) (relating 
to unrealized appreciation of employer securities) is amended by 
adding at the end thereof the following new sentence: "To the extent 
provided by the Secretary, a taxpayer may elect before any distribu-
tion not to have this paragraph apply with respect to such distribu-
tion." 
(h) EFFECTIVE DATES.— 
(1) I N GENERAL.—Except as otherwise provided in this subsec-
tion, the amendments made by this section shall apply to 
amounts distributed after December 31, 1986, in taxable years 
ending after such date. 
(2) SUBSECTION (c).— 
(A) SUBSECTION (C)(1).—The amendment made by subsec-
tion (c)(1) shall apply to individuals whose annuity starting 
' 
•^' 
date is after July 1, 1986. 
(B) SUBSECTION (C)(2).—The amendment made by subsec-
tion (c)(2) shall apply to individuals whose annuity starting 
date is after December 31, 1986. 
(C) SPECIAL RULE FOR AMOUNTS NOT RECEIVED AS ANNU-
ITIES.—In the case of any plan not described in section 
72(e)(8)(D) of the Internal Revenue Code of 1986 (as added 
'^;* 
by subsection (c)(3)), the amendments made by subsection 
'^ 
(c)(3) shall apply to amounts received after July 1, 1986. 
(3) SPECIAL RULE FOR INDIVIDUALS WHO ATTAINED AGE SO 
BEFORE JANUARY 1, 1986.— 
(A) I N GENERAL.—In the case of a lump sum distribution 
to which this paragraph applies— 
(i) the existing capital gains provisions shall continue 
to apply, and 
(ii) the requirement of subparagraph (B) of section 
••''•-• 402(e)(4) of the Internal Revenue Code of 1986 (as 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2471 
T.-, 
amended by subsection (a)) that the distribution be 
received after attaining age 59 ¥2 shall not apply. 
(B) COMPUTATION OF TAX.—If subparagraph (A) applies to 
any lump sum distribution of any taxpayer for any taxable 
year, the tax imposed by section 1 of the Internal Revenue 
Code of 1986 on such taxpayer for such taxable year shall 
f 
be equal to the sum o
f
— 
(i) the tax imposed by such section 1 on the taxable 
(] 
income of the taxpayer (reduced by the portion of such 
lump sum distribution to which clause (ii) applies), plus 
(ii) 20 percent of the portion of such lump sum dis-
tribution to which the existing capital gains provisions 
continue to apply by reason of this paragraph. 
(C) LUMP SUM DISTRIBUTIONS TO WHICH PARAGRAPH AP-
PLIES.—This paragraph shall apply to any lump sum dis-
tribution i
f
— 
(i) such lump sum distribution is received by an 
.
*
! 5<, 
individual who has attained age 50 before January 1, 
" 
1986, and 
(ii) the taxpayer makes an election under this para-
graph. 
Not more than 1 election may be made under this para-
*' ' 
graph with respect to an employee. An election under this 
subparagraph shall be treated as an election under section 
m^A, 
402(e)(4)(B) of such Code with respect to any other lump 
sum distribution. 
(4) 5-YEAR PHASE-OUT OF CAPITAL GAINS TREATMENT.— 
(A) Notwithstanding the amendment made by subsection 
Ot)), if the taxpayer elects the application of this paragraph 
_(, 
with respect to any distribution after December 31, 1986, 
and before January 1, 1992, the phase-out percentage of the 
amount which would have been treated, without regard to 
this subparagraph, as long-term capital gain under the 
existing capital gains provisions shall be treated as long-
term capital gain. 
iei/< 
(B) For purposes of this paragraph— 
In the case of distributions 
The phase-out 
Sfi' 
during calendar year: 
percentage is: 
1987 
100 
5 . i^ 
1988 
95 
'^•^'^^ 
1989 
75 
1990 
50 
-:•-':--• 
1991 
25. 
(C) No more than 1 election may be made under this 
paragraph with respect to an employee. An election under 
this paragraph shall be treated as an election under section 
402(e)(4)(B) of the Internal Revenue Code of 1986 with 
respect to any other lump sum distribution. 
(5) ELECTION OF IO-YEAR AVERAGING.—An individual who has 
attained age 50 before January 1, 1986, and elects the applica-
tion of paragraph (3) or section 402(e)(1) of the Internal Revenue 
Code of 1986 (as amended by this Act) may elect to have such 
section applied by substituting "10 times" for "5 times" and 
"Vio" for "Vs" in subparagraph (B) thereof. For purposes of the 
preceding sentence, section 402(e)(1) of such Code shall be ap-
plied by using the rate of tax in effect under section 1 of the 
• l O i . S 
100 STAT. 2472 
PUBLIC LAW 99-514—OCT. 22, 1986 
Internal Revenue Code of 1954 for taxable years beginning 
during 1986. 
(6) EXISTING CAPITAL GAIN PROVISIONS.—For purposes of para-
graphs (3) and (4), the term 'existing capital gains provisions' 
means the provisions of paragraph (2) of section 402(a) of the 
Internal Revenue Code of 1954 (as in effect on the day before the 
date of the enactment of this Act) and paragraph (2) of section 
403(a) of such Code (as so in effect). 
(7) SUBSECTION (d).—The amendments made by subsection (d) 
shall apply to taxable years beginning after December 31, 1985. 
(8) FROZEN DEPOSITS.—The amendments made by subsection 
(e)(2) shall apply to amounts transferred to an employee before, 
on, or after the date of the enactment of this Act, except that in 
the case of an amount transferred on or before such date, the 
60-day period referred to in section 402(a)(5)(C) of the Internal 
Revenue Code of 1986 shall not expire before the 60th day after 
the date of the enactment of this Act. 
SEC. 1123. UNIFORM ADDITIONAL TAX ON EARLY DISTRIBUTIONS FROM 
QUALIFIED RETIREMENT PLANS. 
(a) IN GENERAL.—Section 72 (relating to annuities; certain pro-
ceeds of endowment and life insurance contracts) is amended by 
redesignating subsection (t) as subsection (u) and by inserting after 
subsection (s) the following new subsection: 
"(t) 10-PERCENT ADDITIONAL TAX ON EARLY DISTRIBUTIONS FROM 
QUALIFIED RETIREMENT PLANS.— 
"(1) IMPOSITION OF ADDITIONAL TAX.—If any taxpayer receives 
any amount from a qualified retirement plan (as defined in 
section 4974(c)), the taxpayer's tax under this chapter for the 
taxable year in which such amount is received shall be in-
creased by an amount equal to 10 percent of the portion of such 
amount which is includible in gross income. 
"(2) SUBSECTION NOT TO APPLY TO CERTAIN DISTRIBUTIONS.— 
Except as provided in paragraphs (3) and (4), paragraph (1) shall 
not apply to any of the following distributions: 
"(A) IN GENERAL.—Distributions which are— 
"(i) made on or after the date on which the employee 
: ; ...ffKi 
attains age 59y2, 
'••i^'•• 
"(ii) made to a beneficiary (or to the estate of the 
employee) on or after the death of the employee, 
: 
"(iii) attributable to the employee's being disabled 
ft,; 
within the meaning of subsection (m)(7), 
"(iv) part of a series of substantially equal periodic 
payments (not less frequently than annually) made for 
the life (or life expectancy) of the employee or the joint 
lives (or joint life expectancies) of such employee and 
his beneficiary, 
"(v) made to an employee after separation from serv-
ice on account of early retirement under the plan after 
'" 
attainment of age 55, or 
"(vi) dividends paid with respect to stock of a corpora-
tion which are described in section 404(k). 
"(B) MEDICAL EXPENSES.—Distributions made to the em-
^ 
ployee (other than distributions described in subparagraph 
(A) or (O) to the extent such distributions do not exceed the 
amount allowable as a deduction under section 213 to the 
employee for amounts paid during the taxable year for 
P U B L I C L A W 99-514—OCT. 22, 1986 
100 STAT. 2473 
medical care (determined without regard to whether the 
employee itemizes deductions for such taxable year). 
"(C) CERTAIN PLANS.— 
"(i) IN GENERAL.—Except as provided in clause (ii), 
any distribution made before January 1, 1990, to an 
employee from an employee stock ownership plan de-
^^ .'i; 
fined 
in section 4975(e)(7) to the extent that, on aver-
age, a majority of assets in the plan have been invested 
in employer securities (as defined in section 409(1)) for 
the 5-plan-year period preceding the plan year in which 
the distribution is made. 
"(ii) BENEFITS DISTRIBUTED MUST BE INVESTED IN EM-
PLOYER SECURITIES FOR 5 YEARS.—Clause (i) shall not 
apply to any distribution which is attributable to assets 
which have not been invested in employer securities at 
all times during the period referred to in clause (i). 
"(D) PAYMENTS TO ALTERNATE PAYEES PURSUANT TO QUALI-
• X 
FiED DOMESTIC RELATIONS ORDERS.—Any distribution to an 
alternate payee pursuant to a qualified domestic relations 
order (within the meaning of section 414(p)(l)). 
"(3) LIMITATIONS.— 
"(A) 
CERTAIN EXCEPTIONS NOT TO APPLY TO INDIVIDUAL 
J 
RETIREMENT PLANS.—Subparagraphs (A)(v), (B), and (C) of 
paragraph (2) shall not apply to distributions from 
an 
individual retirement plan. 
"(B) 
PERIODIC PAYMENTS UNDER QUALIFIED PLANS MUST 
BEGIN AFTER SEPARATION.—Paragraph (2)(A)(iv) shall not 
apply to any amount paid from a trust described in section 
401(a) which is exempt from tax under section 501(a) or 
from a contract described in section 72(e)(5)(D)(ii) unless the 
series of payments begins after the employee separates 
from service. 
"(4) CHANGE IN SUBSTANTIALLY EQUAL PAYMENTS.— 
"(A) IN GENERAL.—If— 
"(i) paragraph (1) does not apply to a distribution by 
reason of paragraph (2)(A)(iv), and 
"(ii) the series of payments under such paragraph are 
subsequently modified (other than by reason of death 
or disability)— 
, 
"(I) before the close of the 5-year period begin-
''' • • 
ning with the date of the first payment and after 
the employee attains age 59 y2, or 
"(II) before the employee attains age 59 V2, 
the taxpayer's tax for the 1st taxable year in which such 
modification occurs shall be increased by an amount, deter-
mined under regulations, equal to the tax which (but for 
paragraph (2)(A)(iv)) would have been imposed, plus interest 
for the deferral period. 
"(B) DEFERRAL PERIOD.—For purposes of this paragraph, 
the term 'deferral period' means the period beginning with 
the taxable year in which (without regard to paragraph 
(2)(A)(iv)) the distribution would have been includible in 
gross income and ending with the taxable year in which the 
modification described in subparagraph (A) occurs. 
"(5) EMPLOYEE.—For purposes of this subsection, the term 
'employee' includes any participant, and in the case of an 
100 STAT. 2474 
PUBLIC LAW 99-514—OCT. 22, 1986 
individual retirement plan, the individual for whose benefit 
such plan was established." 
(b) CONFORMING CHANGES TO TAX ON PREMATURE DISTRIBUTIONS 
FROM ANNUITY CONTRACTS; EXCEPTION FOR QUALIFIED FUNDING 
ASSETS.— 
(1) INCREASE IN RATE.—Section 72(q) is amended— 
(A) by striking out "5 percent" in paragraph (1) thereof 
and inserting in lieu thereof "10 percent", and 
(B) by striking out "5-PERCENT" in the heading thereof 
•'" 
and inserting in lieu thereof "10-PERCENT". 
(2) PERIODIC PAYMENTS.—Subparagraph (D) of section 72(q)(2) 
is amended to read as follows: 
"(D) which is a part of a series of substantially equal 
periodic payments (not less frequently than annually) made 
for the life (or life expectancy) of the taxpayer or the joint 
lives (or joint life expectancies) of such taxpayer and his 
beneficiary." 
(3) ADDITIONAL TAX.—Section 72(q) is amended by adding at 
the end thereof the following new paragraph: 
"(3) CHANGE IN SUBSTANTIALLY EQUAL PAYMENTS.—If— 
"(A) paragraph (1) does not apply to a distribution by 
j : \ \ 
reason of paragraph (2)(D), and 
lo 
"(B) the series of payments under such paragraph are 
au 
subsequently modified (other than by reason of death or 
disability)— 
"(i) before the close of the 5-year period beginning on 
the date of the first payment and after the employee 
attains age 59y2, or 
"(ii) before the employee attains age 59y2, 
the taxpayer's tax for the 1st taxable year in which such 
modification occurs shall be increased by an amount, deter 
mined under regulations, equal to the tax which (but for para 
graph (2)(D)) would have been imposed, plus interest for the 
deferral period (within the meaning of subsection (t)(4)(B))." 
(3) Paragraph (2) of section 72(q) is amended by striking out 
"This subsection" and inserting in lieu thereof "Paragraph (1)". 
— 
(4) Section 72(q)(2), as amended by this Act, is amended by 
striking out "or" at the end of subparagraph (G), by striking out 
the period at the end of subparagraph (H), and by adding at the 
end thereof the following new subparagraphs: 
"(I) under an immediate annuity contract (within the 
meaning of section 72(u)(4)), or 
"(J) which is purchased by an employer upon the termi-
|. 
nation of a plan described in section 401(a) or 403(a) and 
which is held by the employer until such time as the 
employee separates from service." 
_. 
(c) AMENDMENTS TO SECTION 403(b).— 
(1) IN GENERAL.—Subsection (b) of section 403 (relating to 
taxability of beneficiary under annuity purchased by section 
501(c)(3) organization or public school) is amended by adding at 
the end thereof the following new paragriaph: 
"(11) REQUIREMENT THAT DISTRIBUTIONS NOT BEGIN BEFORE AGE 
59Vs, SEPARATION FROM SERVICE, DEATH, OR DISABILITY.—This 
subsection shall not apply to any annuity contract unless under 
such contract distributions attributable to contributions made 
pursuant to a salary reduction agreement (within the meaning 
of section 402(g)(3)(C)) may be paid only— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2475 
"(A) when the employee attains age 59 ¥2, separates from 
service, dies, or becomes disabled (within the meaning of 
section 72(m)(7)), or 
"(B) in the case of hardship. 
Such contract may not provide for the distribution of any 
income attributable to such contributions in the case of 
hardship." 
(2) CUSTODIAL ACCOUNTS.—Clause (ii) of section 403(b)(7) (relat-
ing to amounts treated as contributions) is amended by insert-
ing "in the case of contributions made pursuant to a salary 
reduction 
agreement 
(within 
the 
meaning 
of 
section 
3121(a)(1)(D))," before "encounters". 
(d) TECHNICAL AMENDMENTS.— 
(1) Subparagraph (A) of section 72(m)(5) is amended to read as 
follows: 
"(A) This paragraph applies to amounts which are re-
'; 
ceived from a qualified trust described in section 401(a) or 
under a plan described in section 403(a) at any time by an 
individual who is, or has been, a 5-percent owner, or by a 
' 
successor of such an individual, but only to the extent such 
amounts are determined, under regulations prescribed by 
the Secretary, to exceed the benefits provided for such 
individual under the plan formula." 
(2) Subsection (f) of section 408 is hereby repealed. 
(e) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as otherwise provided in this subsec-
tion, the amendments made by this section shall apply to 
taxable years beginning after December 31, 1986. 
(2) SUBSECTION (C) .—The amendments made by subsection (c) 
' 
shall apply to taxable years beginning after December 31, 1988. 
(3) EXCEPTION WHERE DISTRIBUTION COMMENCES.—The amend-
ments made by this section shall not apply to distributions to 
^ any employee from a plan maintained by any employer i
f
— 
^ 
(A) as of March 1, 1986, the employee separated from 
service with the employer, 
• 
(B) as of March 1, 1986, the accrued benefit of the em-
ployee was in pay status pursuant to a written election 
providing a specific schedule for the distribution of the 
entire accrued benefit of the employee, and 
^- 
(C) such distribution is made pursuant to such written 
t 
election. 
(4) TRANSITION RULE.—The amendments made by this section 
* 
shall not apply with respect to any benefits with respect to 
which a designation is in effect under section 242(b)(2) of the 
Tax Equity and Fiscal Responsibility Act of 1982. 
SEC. 1124. ELECTION TO TREAT CERTAIN LUMP SUM DISTRIBUTIONS RE-
CEIVED DURING 1987 AS RECEIVED DURING 1986. 
(a) IN GENERAL.—If an employee separates from service during 
1986 and receives a lump sum distribution (within the meaning of 
section 402(e)(4)(A) of such Code) after December 31,1986, and before 
March 16,1987, on account of such separation from service, then, for 
purposes of the Internal Revenue Code of 1986, such employee may 
elect to treat such lump sum distribution as if it were received when 
such employee separated from service. 
Ot)) SPECIAL RULE FOR TERMINATED PLAN.—In the case of an em-
ployee who receives a distribution from a terminated plan which 
100 STAT. 2476 
PUBLIC LAW 99-514—OCT. 22, 1986 
was maintained by a corporation organized under the laws of the 
State of Nevada, the principal place of business of which is Denver, 
Colorado, and which filed for relief from creditors under the United 
States Bankruptcy Code on August 28, 1986, the employee may treat 
a lump sum distribution received from such plan before June 30, 
1987, as if it were received in 1986. " ' 
^^ u j ^ - i u i s 
. . . 
PART IV—MISCELLANEOUS PROVISIONS 
SEC. 1131. ADJUSTMENTS TO SECTION 404 LIMITATIONS. 
(a) 
ELIMINATION 
OF 
LIMIT 
CARRYFORWARD 
OF 
SECTION 
404(a)(3)(A).—Subparagraph (A) of section 404(a)(3) (relating to limits 
on deductible contributions to stock bonus and profit-sharing trusts) 
is amended to read as follows: 
"(A) LIMITS ON DEDUCTIBLE CONTRIBUTIONS.— 
;^ 
"(i) IN GENERAL.—In the taxable year when paid, if 
j , / 
the contributions are paid into a stock bonus or profit-
sharing trust, and if such taxable year ends within or 
with a taxable year of the trust with respect to which 
the trust is exempt under section 501(a), in an amount 
;lt>i V 
^ot in excess of 15 percent of the compensation other-
wise paid or accrued during the taxable year to the 
beneficiaries under the stock bonus or profit-sharing 
plan. 
;.>i^ 
. 
"(ii) 
CARRYOVER OF 
EXCESS 
CONTRIBUTIONS.—Any 
ci v'15 
amount paid into the trust in any taxable year in 
excess of the limitation of clause (i) (or the correspond-
ing provision of prior law) shall be deductible in the 
succeeding taxable years in order of time, but the 
amount so deductible under this clause in any 1 such 
succeeding taxable year together with the amount 
allowable under clause (i) shall not exceed 15 percent of 
the compensation otherwise paid or accrued during 
such taxable year to the beneficiaries under the plan. 
•r. • ' : 
"(iii) 
CERTAIN 
RETIREMENT PLANS 
EXCLUDED.—For 
purposes of this subparagraph, the term 'stock bonus or 
. - . 
profit-sharing trust' shall not include any trust de-
signed to provide benefits upon retirement and cover-
•' 
ing a period of years, if under the plan the amounts to 
be contributed by the employer can be determined 
actuarially as provided in paragraph (1). 
-' 
"(iv) 2 OR MORE TRUSTS TREATED AS 1 TRUST.—If the 
:u 
.. 
contributions are made to 2 or more stock bonus or 
profit-sharing trusts, such trusts shall be considered a 
,, ,,, . 
single trust for purposes of applying the limitations in 
this subparagraph. 
"(v) P R E - 8 7 LIMITATION CARRYFORWARDS.— 
:- itr' 
' 
"(I) IN GENERAL.—The limitation of clause (i) for 
any taxable year shall be increased by the unused 
pre-87 limitation carryforwards Ot>ut not to an 
amount in excess of 25 percent of the compensation 
described in clause (i)). 
»/, 
.rv ; 
. 
"(II) 
UNUSED 
PRE-87 
LIMITATION 
CARRYFOR-
WARDS.—For purposes of subclause (I), the term 
' 
'unused pre-87 limitation carryforwards' 
means 
^ i 
the amount by which the limitation of the first 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2477 
u 
^ 
% 
sentence of this subparagraph (as in effect on the 
day before the date of the enactment of the Tax 
Reform Act of 1986) for any taxable year beginning 
before January 1, 1987, exceeded the amount paid 
, : 
to the trust for such taxable year (to the extent 
such excess was not taken into account in prior 
taxable years)." 
(b) COMBINED LIMIT TO APPLY TO COMBINATIONS OF DEFINED CON-
TRIBUTION PLANS AND DEFINED BENEFIT PLANS.—Paragraph (7) of 
section 404(a) is amended to read as follows: 
"(7) LIMITATION ON DEDUCTIONS WHERE COMBINATION OF DE-
FINED CONTRIBUTION PLAN AND DEFINED BENEFIT PLAN.— 
"(A) IN GENERAL.—If amounts are deductible under the 
foregoing provisions of this subsection (other than para-
nr I f 
graph (5)) in connection with 1 or more defined contribution 
plans and 1 or more defined benefit plans, the total amount 
deductible in a taxable year under such plans shall not 
exceed the greater o
f
— 
,, . „ 
"(i) 25 percent of the compensation otherwise paid or 
''^ "*" 
accrued during the taxable year to the beneficiaries 
,. ^ 
^ 
under such plans, or 
-"--"*" ''"'' 
"(ii) the amount of contributions made to or under 
the defined benefit plans to the extent such contri-
butions do not exceed the amount of employer 
•' 
contributions necessary to satisfy the minimum fund-
^
-
, , 
ing standard provided by section 412 with respect to 
Kk. 
VI 
^j^y such defined benefit plans for the plan year which 
"" ' -" 
ends with or within such taxable year (or for any prior 
plan year), 
A defined contribution plan which is a pension plan shall 
•' " 
not be treated as failing to provide definitely determinable 
benefits merely by limiting employer contributions to 
amounts deductible under this section. 
^ 
"(B) CARRYOVER OF CONTRIBUTIONS IN EXCESS OF THE 
* 
DEDUCTIBLE LIMIT.—Any amount paid under the plans in 
• 
any taxable year in excess of the limitation of subpara-
graph (A) shall be deductible in the succeeding taxable 
years in order of time, but the amount so deductible under 
" 
this subparagraph in any 1 such succeeding taxable year 
together with the amount allowable under subparagraph 
19 r 
(A) shall not exceed 25 percent of the compensation other-
wise paid or accrued during such taxable year to the bene-
ils^^i 
ficiaries under the plans. 
"(C) PARAGRAPH NOT TO APPLY IN CERTAIN CASES.—This 
paragraph shall not have the effect of reducing the amount 
(/7 :-*/• otherwise deductible under paragraphs (1), (2), and (3), if no 
employee is a beneficiary under more than 1 trust or under 
a trust and an annuity plan, 
\ 
"(D) SECTION 4i2(i) PLANS.—For purposes of this para-
graph, any plan described in section 412(i) shall be treated 
as a defined benefit plan." 
(c) EXCISE TAX ON NONDEDUCTIBLE CONTRIBUTIONS TO QUALIFIED 
EMPLOYER PLANS,— 
(1) IN GENERAL,—Chapter 43 (relating to qualified pension, 
etc, plans) is amended by inserting after section 4971 the 
following new section: 
100 STAT. 2478 
PUBLIC LAW 99-514—OCT. 22, 1986 
"SEC. 4972. TAX ON NONDEDUCTIBLE CONTRIBUTIONS TO QUALIFIED 
EMPLOYER PLANS. 
"(a) TAX IMPOSED.—In the case of any qualified employer plan, 
there is hereby imposed a tax equal to 10 percent of the nondeduct-
ible contributions under the plan (determined as of the close of the 
taxable year of the employer). 
"0?) EMPLOYER LIABLE FOR TAX.—The tax imposed by this section 
shall be paid by the employer making the contributions. 
"(c) NONDEDUCTIBLE CONTRIBUTIONS.—For purposes of this section, 
the term 'nondeductible contributions' means, with respect to any 
qualified employer plan, the sum of— 
"(1) the excess (if any) of— 
"(A) the amount contributed for the taxable year by the 
employer to or under such plan, over 
"(B) the amount allowable as a deduction under section 
404 for such contributions, and 
o n 
tt^2) the amount determined under this subsection for the 
preceding taxable year reduced by the sum of^ 
"(A) the portion of the amount so determined returned to 
the employer during the taxable year, and 
"(B) the portion of the amount so determined deductible 
under section 404 for the taxable year. 
"(d) DEFINITIONS.—For purposes of this section— 
"(1) QUALIFIED EMPLOYER PLAN.—The term 'qualified em-
ployer plan' means— 
"(A) any plan meeting the requirements of section 401(a) 
which includes a trust exempt from the tax under section 
'' 
501(a), 
P 
"(B) an annuity plan described in section 403(a), and 
ll\r, 
"^^^ ^^y simplified employee pension (within the mean-
.;^j" 
ing of section 408(k)). 
"(2) EMPLOYER.—In the case of a plan which provides con-
tributions or benefits for employees some or all of whom are 
self-employed 
individuals within the meaning of section 
401(cXl), the term 'employer' means the person treated as the 
employer under section 401(c)(4)," 
(2) CLERICAL AMENDMENT.—The table of sections for chapter 
43 is amended by inserting after the item relating to section 
4971 the following item: 
"Sec. 4972. Tax on nondeductible contributions to qualified employer 
plans." 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
SEC. 1132. EXCISE TAX ON REVERSION OF QUALIFIED PLAN ASSETS TO 
EMPLOYER. 
(a) GENERAL RULE.—Chapter 43 (relating to qualified pension, etc., 
plans) is amended by adding at the end thereof the following new 
section: 
"SEC. 4980. TAX ON REVERSION OF QUALIFIED PLAN ASSETS TO 
EMPLOYER. 
"(a) IMPOSITION OF TAX.—There is hereby imposed a tax of 10 
percent of the amount of any employer reversion from a qualified 
plan. 
I^v 
'i0Y<,^ 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2479 
"(b) LIABILITY FOR TAX.—The tax imposed by subsection (a) shall 
be paid by the employer maintaining the plan. 
"(c) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) QUALIFIED PLAN.—The term 'qualified plan' means any 
plan meeting the requirements of section 401(a) or 403(a), other 
than— 
V 
"(A) a plan maintained by an employer if such employer 
1 
r has, at all times, been exempt from tax under this subtitle, 
or 
"(B) a governmental plan (within the meaning of section 
414(d)). 
Such term shall include any plan which, at any time, has been 
determined by the Secretary to be a qualified plan. 
"(2) EMPLOYER REVERSION.— 
"(A) IN GENERAL.—The term 'employer reversion' means 
the amount of cash and the fair market value of other 
property received (directly or indirectly) by an employer 
from the qualified plan. 
"(B) EXCEPTIONS.—The term 'employer reversion' shall 
not include— 
"(i) except as provided in regulations, any amount 
distributed to or on behalf of any employee (or his 
' 
" 
beneficiaries) if such amount could have been so 
distributed before termination of such plan without 
violating any provision of section 401, or 
"(ii) any distribution to the employer which is allow-
able under section 401(a)(2)— 
^^*-^*' 
"(I) in the case of a multiemployer plan, by 
reason of mistakes of law or fact or the return of 
^
_ "i; '"*.'• 
any withdrawal liability payment, 
' 
^ 
• 
"(II) in the case of a plan other than a multiem-
ployer plan, by reason of mistake of fact, or 
^' 
"(III) in the case of any plan, by reason of the 
*
" 
failure of the plan to initially qualify or the failure 
of contributions to be deductible. 
"(3) EXCEPTION FOR EMPLOYEE STOCK OWNERSHIP PLANS.— 
• 
f
^ r 
"(A) IN GENERAL.—If, upon an employer reversion from a 
l.fcjjrf 
qualified plan, any applicable amount is transferred from 
such plan to an employee stock ownership plan described in 
:«ii<i«j 
section 4975(e)(7), such amount shall not be treated as an 
^
y 
employer reversion for purposes of this section (or includ-
* 
ible in the gross income of the employer) i
f
— 
"(i) the requirements of subparagraphs (B), (C), and 
(D) are met, and 
"(ii) under the plan, employer securities to which 
subparagraph (B) applies must remain in the plan until 
«*5ir.r: 
> 
distHbution to participants in accordance with the 
provisions of such plan. 
"(B) INVESTMENT IN EMPLOYER SECURITIES.—The require-
ments of this subparagraph are met if, within 90 days after 
the transfer (or such longer period as the Secretary may 
prescribe), the amount transferred is invested in employer 
securities (as defined in section 409(1)) or used to repay 
loans used to purchase such securities. 
"(C) ALLOCATION REQUIREMENTS.—The requirements of 
this subparagraph are met if the portion of the amount 
100 STAT. 2480 
PUBLIC LAW 99-514—OCT. 22, 1986 
transferred which is not allocated (by reason of the limita-
tions of section 415) under the plan to accounts of partici-
MJ.. 
pants in the plan year in which the transfer occurs— 
"(i) is credited to a suspense account and allocated 
from such account to accounts of participants no less 
rapidly than ratably over a period not to exceed 7 
years, and 
"(ii) when allocated to accounts of participants under 
the plan, is treated as an employer contribution for 
purposes of section 415(c), except that— 
'• • • 
^ 
"(I) the annual addition (as determined under 
section 415(c)) attributable to each such allocation 
'' ' 
shall not exceed the value of such securities as of 
the time such securities were credited to such sus-
pense account, and 
! 
' 
"(II) no additional employer contributions shall 
: 
be permitted to an employee stock ownership plan 
described in subparagraph (A) of the employer 
before the allocation of such amount, 
'"' 
"(D) PARTICIPANTS.—The requirements of this subpara-
graph are met if at least half of the participants in the 
]" ' 
qualified plan are participants in the employee stock 
ownership plan (as of the close of the 1st plan year for 
!., •, 
which an allocation of the securities is required). 
"(E) APPLICABLE AMOUNT.—For purposes of this para-
,,. 5, . graph, the term 'applicable amount' means any amount 
which— 
"(i) is transferred after March 31, 1985, and before 
• . . 
January 1,1989, or 
"(ii) is transferred after December 31, 1988, pursuant 
to a termination which occurs after March 31, 1985, 
and before January 1,1989." 
(b) CLERICAL AMENDMENT.—The table of sections for chapter 43 is 
amended by adding at the end thereof the following new item: 
"Sec. 4980. Tax on reversion of qualified plan assets to employer." 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to reversions occurring after December 31,1985. 
-j^ 
(2) EXCEPTION WHERE TERMINATION DATE OCCURRED BEFORE 
^. JANUARY 1, 1986.— 
(A) IN GENERAL.—Except as provided in subparagraph (B), 
ij,u^ 
the amendments made by this section shall not apply to any 
reversion after December 31, 1985, which occurs pursuant 
:- ^ 
to a plan termination where the termination date is before 
'i , , January 1,1986. 
,,•'' 
,. 
(B) ELECTION TO HAVE AMENDMENTS APPLY.—A corpora-
tion may elect to have the amendments made by this 
.. t,. 
section apply to any reversion after 1985 pursuant to a plan 
termination occurring before 1986 if such corporation was 
incorporated in the State of Delaware in March, 1978, and 
V 
became a parent corporation of the consolidated group on 
September 19, 1978, pursuant to a merger agreement 
recorded in the State of Nevada on November 19, 1978. 
i.; 
(3) TERMINATION DATE.—For purposes of paragraph (2), the 
L 
term "termination date" is the date of the termination (within 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2481 
the meaning of section 411(d)(3) of the Internal Revenue Code of 
1986) of the plan. 
(4) TRANSITION RULE FOR CERTAIN TERMINATIONS.— 
(A) IN GENERAL.—In the case of a taxpayer to which this 
paragraph applies, the amendments made by this section 
shall not apply to any termination occurring before the 
date which is 1 year after the date of the enactment of this 
Act. 
(B) TAXPAYERS TO WHOM PARAGRAPH APPLIES.—This para-
graph shall apply to— 
(i) a corporation incorporated on June 13, 1917, which 
has its principal place of business in Bartlesville, Okla-
homa, 
(ii) a corporation incorporated on January 17, 1917, 
which is located in Coatesville, Pennsylvania, 
; 
(iii) a corporation incorporated on January 23, 1928, 
' 
' 
which has its principal place of business in New York, 
New York, 
' 
(iv) a corporation incorporated on April 23, 1956, 
which has its principal place of business in Dallas, 
Texas, and 
(v) a corporation incorporated in the State of Nevada, 
the principal place of business of which is in Denver, 
Colorado, and which filed for relief from creditors 
under the United States Bankruptcy Code on Au-
gust 28, 1986. 
SEC. 1133. TAX ON EXCESS DISTRIBUTIONS. 
(a) GENERAL RULE.—Chapter 43 (relating to tax on pension, etc., 
plans) is amended by adding at the end thereof the following new 
section: 
"SEC. 4981A. TAX ON EXCESS DISTRIBUTIONS FROM QUALIFIED RETIRE-
MENT PLANS. 
"(a) GENERAL RULE.—There is hereby imposed a tax equal to 15 
percent of the excess distributions with respect to any individual 
during any calendar year. 
"(b) LIABILITY FOR TAX.—The individual with respect to whom the 
excess distributions are made shall be liable for the tax imposed by 
subsection (a). The amount of the tax imposed by subsection (a) shall 
be reduced by the amount (if any) of the tax imposed by section 72(t) 
to the extent attributable to such excess distributions. 
"(c) EXCESS DISTRIBUTIONS.—For purposes of this section— 
"(1) IN GENERAL.—The term 'excess distributions' means the 
aggregate amount of the retirement distributions with respect 
to any individual during any calendar year to the extent such 
amount exceeds $112,500 (adjusted at the same time and in the 
same manner as under section 415(d)). 
"(2) EXCLUSION OF CERTAIN DISTRIBUTIONS.—The following dis-
tributions shall not be taken into account under paragraph (1): 
"(A) Any retirement distribution with respect to an 
individual made after the death of such individual. 
•M 
"(B) Any retirement distribution with respect to an 
individual payable to an alternate payee pursuant to a 
* 
qualified domestic relations order (within the meaning of 
' 
section 414(p)) if includible in income of the alternate 
payee. 
100 STAT. 2482 
PUBLIC LAW 99-514—OCT. 22, 1986 
io sbit. 
"(C) Any retirement distribution with respect to an 
individual which is attributable to the employee's invest-
ment in the contract (as defined in section 72(f)). 
is^" 
"(D) Any retirement distribution to the extent not in-
cluded in gross income by reason of a rollover contribution. 
Any distribution described in subparagraph (B) shall be treated 
as a retirement distribution to the person to whom paid for 
purposes of this section. 
"(3) AGGREGATION OF PAYMENTS.—If retirement distributions 
with respect to any individual during any calendar year are 
ri 
received by the individual and 1 or more other persons, all such 
K distributions shall be aggregated for purposes of determining 
the amount of the excess distributions for the calendar year. 
j;»i 
"(4) SPECIAL RULE WHERE TAXPAYER ELECTS INCOME AVERAG-
ING.—If the retirement distributions with respect to any 
individual during any calendar year include a lump sum dis-
tribution to which an election under section 402(e)(4)(B) 
applies— 
'i 
"(A) paragraph (1) shall be applied separately with 
respect to such lump sum distribution and other retirement 
distributions, and 
^^, 
"(B) the limitation under paragraph (1) with respect to 
such lump sum distribution shall be equal to 5 times the 
J 
amount of such limitation determined without regard to 
.j' 
this subparagraph. 
"(5) SPECIAL RULE FOR ACCRUED BENEFITS AS OF AUGUST i, 
1986.— 
"(A) IN GENERAL.—If the employee elects on a return filed 
,.o*'i ( for a taxable year ending before January 1, 1989 to have 
^Q.^ x. this paragraph apply, the portion of any retirement dis-
tribution which is attributable (as determined under rules 
prescribed by the Secretary) to the accrued benefit of an 
-iSii 'i 
employee as of August 1, 1986, shall be taken into account 
for purposes of paragraph (1), but no tax shall be imposed 
?, r cj i under this section with respect to such portion of such 
IfcAibit' 
distribution. 
"(B) LIMITATION.—An employee may not make an elec-
tion under subparagraph (A) unless the accrued benefit of 
such employee as of August 1, 1986, exceeds $562,500. 
"(C) TAXPAYER NOT MAKING ELECTION.—If an employee 
does not elect the application of this paragraph, paragraph 
(1) shall be applied by substituting $150,000 for such dollar 
limitation unless such dollar limitation is greater than 
$150,000. 
"(d) INCREASE IN ESTATE TAX IF INDIVIDUAL DIES WITH EXCESS 
ACCUMULATION.— 
"(1) IN GENERAL.—The tax imposed by chapter 11 with respect 
to the estate of any individual shall be increased by an amount 
31 equal to 15 percent of the individual's excess retirement 
i I 
accumulation. 
nf 
"(2) No CREDIT ALLOWABLE.—No credit shall be allowable 
under section 2010 with respect to any portion of the tax 
imposed by chapter 11 attributable to the increase under para-
graph (1). 
: , 
"(3) EXCESS RETIREMENT ACCUMULATION.—For purposes of 
5; paragraph (1), the term 'excess retirement accumulation' means 
the excess (if any) o
f
— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2483 
"(A) the value of the individual's interests in qualified 
employer plans and individual retirement plans as of the 
date of the decedent's death (or, in the case of an election 
under section 2032, the applicable valuation date prescribed 
by such section), over 
"(B) the present value (as determined under rules pre-
scribed by the Secretary as of the valuation date prescribed 
in subparagraph (A)) of an annuity for a term certain— 
"(i) with annual payments equal to the limitation of 
0ort- 
subsection (c) (as in effect for the year in which the 
^ 
death occurs), and 
"(ii) payable for a period equal to the life expectancy 
of the individual immediately before his death. 
"(e) RETIREMENT DISTRIBUTIONS.—For purposes of this section— 
"(1) IN GENERAL.—The term 'retirement distribution' means, 
with respect to any individual, the amount distributed during 
the taxable year under— 
"(A) any qualified employer plan with respect to which 
such individual is or was the employee, and 
"(B) any individual retirement plan. 
"(2) QuAUFiED EMPLOYER PLAN.—The term 'qualified em-
ployer plan' means— 
"(A) any plan described in section 401(a) which includes a 
trust exempt from tax under section 501(a), 
"(B) an annuity plan described in section 403(a), or 
^'' 
"(C) an annuity contract described in section 4030k)). 
Such term includes any plan or contract which, at any time, has 
been determined by the Secretary to be such a plan or 
contract." 
(b) CLERICAL AMENDMENT.—The table of sections for chapter 43 is 
amended by adding at the end thereof the following new item: 
"Sec. 4981A. Tax on excess distributions from qualifled retirement plans." 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to distributions 
made after December 31,1986. 
(2) ESTATE TAX.—Section 4981A(d) of the Internal Revenue 
Code of 1986 (as added by subsection (a)) shall apply to the 
estates of decedents dying after December 31,1986. 
(3) PLAN TERMINATIONS BEFORE 1987.—The amendments made 
by this section shall not apply to distributions before January 1, 
,|j 
1988, which are made on account of the termination of a 
qualified employer plan if such termination occurred before 
January 1,1987. 
SEC. 1134. TREATMENT OF LOANS. 
(a) $50,000 LIMITATION REDUCED BY BALANCE OF CERTAIN PRECED-
ING LOANS.—Clause (i) of section 72(pX2XA) (relating to exceptions 
for certain loans) is amended to read as follows: 
"(i) $50,000, reduced by the excess (if any) of— 
"(I) the highest outstanding balance of loans 
XliuniiJ, 
r 
from the plan during the 1-year period ending on 
the day before the date on which such loan was 
* 
made, over 
; 
"(II) the outstanding balance of loans from the 
s? i « 
plan on the date on which such loan was made, or". 
100 STAT. 2484 
PUBLIC LAW 99-514—OCT. 22, 1986 
(b) LEVEL AMORTIZATION OF LOAN REQUIRED.—Paragraph (2) of 
section 72(p) is amended by redesignating subparagraph (C) as 
subparagraph (D) and inserting after subparagraph (B) the following 
new subparagraph: 
"(C) REQUIREMENT OF LEVEL AMORTIZATION.—Except as 
provided in regulations, this paragraph shall not apply to 
any loan unless substantially level amortization of such 
loan (with payments not less frequently than quarterly) is 
required over the term of the loan." 
(c) DENIAL OF INTEREST DEDUCTION IN CERTAIN CASES.—Subsection 
(p) of section 72 is amended by redesignating paragraphs (3) and (4) 
as paragraphs (4) and (5), respectively and by inserting after para-
graph (2) the following new paragraph: 
"(3) DENIAL OF INTEREST DEDUCTIONS IN CERTAIN CASES.— 
"(A) IN GENERAL.—No deduction otherwise allowable 
under this chapter shall be allowed under this chapter for 
^., ,^, 
any interest paid or accrued on any loan described in 
subparagraph (B). 
"(B) LOANS TO WHICH SUBPARAGRAPH (A) APPLIES.— 
For purposes of subparagraph (A), a loan is described in this 
subparagraph— 
• - i >.i;.n 
"^^^ ^^ paragraph (1) does not apply to such loan by 
reason of paragraph (2), and 
"(ii) if— 
"(I) such loan is made to a key employee (as 
^5 
defined in section 416(i)), or 
1 
,; 
"(II) such loan is secured by amounts attrib-
utable to elective 401(k) or 403(b) deferrals (as de-
fined in section 402(g)(3))." 
(d) EXCEPTION FOR HOME LOANS LIMITED TO ACQUISITION OF PRIN-
CIPAL RESIDENCE.—Clause (ii) of section 72(p)(2)(B) is amended to 
read as follows: 
"(ii) EXCEPTION FOR HOME LOANS.—Clause (i) shall not 
apply to any loan used to acquire any dwelling unit 
'•'"•' ^^' 
which within a reasonable time is to be used (deter-
mined at the time the loan is made) as the principal 
residence of the participant." 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
apply to loans made, renewed, renegotiated, modified, or extended 
after December 31,1986. 
SEC. 1135. DEFERRED 
ANNUITIES 
AVAILABLE 
ONLY 
TO NATURAL 
PERSONS. 
(a) GENERAL RULE.—Section 72, as amended by section 1223, is 
amended by redesignating subsection (u) as subsection (v) and by 
inserting after subsection (t) the following new subsection: 
"(u) TREATMENT OF ANNUITY CONTRACTS NOT HELD BY NATURAL 
PERSONS.— 
"(1) IN GENERAL.—If any annuity contract is held by a person 
;, V who is not a natural person— 
J 
"(A) such contract shall not be treated as an annuity 
6ii*!> 
» 
contract for purposes of this subtitle, and 
"(B) the income on the contract for any taxable year of 
••lit 05 
the policyholder shall be treated as ordinary income re-
"71, --:' ceived or accrued by the owner during such taxable year. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2485 
For purposes of this paragraph, holding by a trust or other 
entity as an agent for a natural person shall not be taken into 
account. 
"(2) INCOME ON THE CONTRACT.— 
"(A) IN GENERAL.—For purposes of paragraph (1), the 
term 'income on the contract' means, with respect to any 
taxable year of the policyholder, the excess of— 
"(i) the sum of the net surrender value of the con-
tract as of the close of the taxable year plus all distribu-
tions under the contract received during the taxable 
year or any prior taxable year, reduced by 
. , 
"(ii) the sum of the amount of net premiums under 
the contract for the taxable year and prior taxable 
years and amounts includible in gross income for prior 
. , 
taxable years with respect to such contract under this 
subsection. 
Where necessary to prevent the avoidance of this subsec-
* 
tion, the Secretary may substitute 'fair market value of the 
cjntract' for 'net surrender value of the contract' each 
'-." 
place it appears in the preceding sentence. 
"(B) NET PREMIUMS.—For purposes of this paragraph, the 
term 'net premiums' means the amount of premiums paid 
under the contract reduced by any policyholder dividends. 
"(3) EXCEPTIONS.—This subsection shall not apply to any 
annuity contract which— 
"(A) is acquired by the estate of a decedent by reason of 
the death of the decedent, 
"(B) is held under a plan described in section 401(a) or 
403(a), under a program described in section 403(b), or 
under an individual retirement plan, 
'••' 
"(C) is a qualified funding asset (as defined in section 
*
»
- ' 
130(d), but without regard to whether there is a qualified 
assignment), 
"(D) which is purchased by an employer upon the termi-
{.;,• 
nation of a plan described in section 401(a) or 403(a) and 
"' 
which is held by the employer until such time as the 
employee separates from service, or 
"(E) which is an immediate annuity. 
"(4) IMMEDIATE ANNUITY.—For purposes of this subsection, the 
term 'immediate annuity' means an annuity— 
"(A) which is purchased with a single premium or annu-
ity consideration, and 
., 
"(B) the annuity starting date (as defined in subsection 
(c)(4)) of which commences no later than 1 year from the 
date of the purchase of the annuity." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to contributions to annuity contracts after February 28, 
1986. 
SEC. 1136. PROFITS NOT REQUIRED FOR PROFIT-SHARING PLANS. 
(a) IN GENERAL.—Subsection (a) of section 401, as amended by 
section 1112(b), is amended by inserting after paragraph (26) the 
following new paragraph: 
"(27) The determination of whether the plan under which any 
contributions are made is a profit-sharing plan shall be made 
without regard to current or accumulated profits of the 
71-194 0 - 89 - 23 : QL. 3 Part3 
100 STAT. 2486 
PUBLIC LAW 99-514—OCT. 22, 1986 
employer and without regard to whether the employer is a tax-
exempt organization." 
(b) CONFORMING AMENDMENTS.—Section 404(a)(2) and 818(a)(3), as 
amended by this Act, are each amended by striking out "and (26)" 
and inserting in lieu thereof "(26), and (27)". 
(c) EFFECTIVE DATE.—The amendment made by subsection (a) shall 
apply to years beginning after December 31, 1985. 
SEC. 1137. REQUIREMENT THAT COLLECTIVE BARGAINING AGREEMENTS 
BE BONA FIDE. 
Paragraph (46) of section 7701(a) (relating to determination of 
whether there is a collective bargaining agreement) is amended by 
adding at the end thereof the following new sentence: "An agree-
ment shall not be treated as a collective bargaining agreement 
unless it is a bona fide agreement between bona fide employee 
representatives and 1 or more employers." 
SEC. 1138. PENALTY ON UNDERPAYMENTS ATTRIBUTABLE TO OVER-
STATEMENT OF PENSION LIABILITIES. 
(a) GENERAL RULE.—Subchapter A of chapter 68 (relating to addi-
tions to tax) is amended by inserting after section 6659 the following 
new section: 
"SEC. 6659A. ADDITION TO TAX IN CASE OF OVERSTATEMENTS OF PEN-
SION LIABILITIES. 
"(a) ADDITION TO TAX.—In the case of an underpayment of the tax 
imposed by chapter 1 on any taxpayer for the taxable year which is 
attributable to an overstatement of pension liabilities, there shall be 
added to such tax an amount equal to the applicable percentage of 
the underpayment so attributable. 
"(b) APPLICABLE PERCENTAGE DEFINED.—For purposes of subsec-
tion (a), the applicable percentage shall be determined under the 
following table: 
"If the valuation claimed is the 
following percent of the correct 
,;=':; »; '^ -, 
The applicable 
valuation— 
percentage is: 
150 percent or more but not more than 200 percent 
10 
More than 200 percent but not more than 250 f)ercent 
20 
More than 250 percent 
30. 
"(c) OVERSTATEMENT OF PENSION LIABILITIES.—For purposes of this 
section, there is an overstatement of pension liabilities if the actuar-
ial determination of the liabilities taken into account for purposes of 
computing the deduction under paragraph (1) or (2) of section 404(a) 
exceeds the amount determined to be the correct amount of such 
liability. 
"(d) UNDERPAYMENT MUST BE AT LEAST $1,000.—This section shall 
not apply if the underpayment for the taxable year attributable to 
valuation overstatements is less than $1,000. 
"(e) AUTHORITY TO WAIVE.—The Secretary may waive all or any 
part of the addition to the tax provided by this section on a showing 
by the taxpayer that there was a reasonable basis for the valuation 
claimed on the return and that such claim was made in good faith." 
(b) CLERICAL AMENDMENT.—The table of sections for subchapter A 
of chapter 68 is amended by inserting after the item relating to 
section 6659 the following new item: 
"Sec. 6659A. Addition to tax in case of overstatements of pension liabil-
ities." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2487 
(c) EFFECTIVE DATE.—The amendment made by this section shall 
apply to overstatements made after the date of the enactment of this 
Act. 
SEC. 1139. INTEREST RATE ASSUMPTIONS. 
(a) IN GENERAL.—Subparagraph (B) of section 411(aXll) is 
amended to read as follows: 
"(B) DETERMINATION OF PRESENT VALUE.— 
"(i) IN GENERAL.—For purposes of subparagraph (A), 
the present value shall be calculated— 
"(I) by using an interest rate no greater than the 
' 
'' 
applicable interest rate if the vested accrued bene-
fit (using such rate) is not in excess of $25,000, and 
"(II) by using an interest rate no greater than 
, 
120 percent of the applicable interest rate if the 
*^' '\ 
^ 
vested accrued benefit exceeds $25,000 (as deter-
• 
mined under subclause (I)). 
In no event shall the present value determined under 
subclause (II) be less than $25,000. 
"(ii) 
APPLICABLE INTEREST RATE.—For purposes of 
.,,. . 
clause (i), the term 'applicable interest rate' means the 
interest rate which would be used (as of the date of the 
distribution) by the Pension Benefit Guaranty Corpora-
tion for purposes of determining the present value of a 
lump sum distribution on plan termination." 
O
t
>
) CONFORMING AMENDMENT.—Paragraph (3) of section 417(e) 
(relating to determination of present value) is amended to read as 
follows: 
"(3) DETERMINATION OF PRESENT VALUE.— 
"(A) IN GENERAL.—For purposes of paragraphs (1) and (2), 
the present value shall be calculated— 
"(i) by using an interest rate no greater than the 
applicable interest rate if the vested accrued benefit 
(using such rate) is not in excess of $25,000, and 
"(ii) by using an interest rate no greater than 120 
percent of the applicable interest rate if the vested 
accrued benefit exceeds $25,000 (as determined under 
clause (i)). 
In no event shall the present value determined under subclause 
(II) be less than $25,000. 
"(B) 
APPUCABLE 
INTEREST 
RATE.—For 
purposes 
of 
subparagraph (A), the term 'applicable interest rate' means 
the interest rate which would be used (as of the date of the 
distribution) by the Pension Benefit Guaranty Corporation 
for purposes of determining the present value of a lump 
sum distribution on plan termination." 
(c) AMENDMENTS TO ERISA.— 
(1) IN GENERAL.—Paragraph (2) of section 203(e) of the Em-
ployee Retirement Income Security Act of 1974 (29 U.S.C. 
1053(e)(2)) is amended to read as follows: 
"(2XA) For purposes of paragraph (1), the present value shall 
be calculated— 
"(i) by using an interest rate no greater than the ap-
plicable interest rate if the vested accrued benefit (using 
such rate) is not in excess of $25,000, and 
100 STAT. 2488 
PUBLIC LAW 99-514—OCT. 22, 1986 
• j«-ia 
"(ii) by using an interest rate no greater than 120 percent 
as ' 
of the applicable interest rate if the vested accrued benefit 
exceeds $25,000 (as determined under clause (i)). 
In no event shall the present value determined under subclause 
(II) be less than $25,000. 
gj 
"(B) APPLICABLE INTEREST RATE.—For purposes of subpara-
graph (A), the term 'applicable interest rate' means the interest 
rate which would be used (as of the date of the distribution) by 
,
% the Pension Benefit Guaranty Corporation for purposes of deter-
mining the present value of a lump sum distribution on plan 
>
,
. termination." 
1
^ 
(2) CONFORMING AMENDMENT.—Paragraph (3) of section 205(g) 
of such Act (29 U.S.C. 1055(g)(3)) is amended to read as follows: 
"(3)(A) For purposes of paragraphs (1) and (2), the present 
value shall be calculated— 
"(i) by using an interest rate no greater than the ap-
plicable interest rate if the vested accrued benefit (using 
such rate) is not in excess of $25,000, and 
"(ii) by using an interest rate no greater than 120 percent 
of the applicable interest rate if the vested accrued benefit 
exceeds $25,000 (as determined under clause (i)). 
In no event shall the present value determined under subclause 
(II) be less than $25,000. 
"(B) For purposes of subparagraph (A), the term 'applicable in-
terest rate' means the interest rate which would be used (as of the 
date of the distribution) by the Pension Benefit Guaranty Corpora-
tion for purposes of determining the present value of a lump sum 
distribution on plan termination.", 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
, 
apply to distributions in plan years beginning after Decem-
ber 31, 1984, except that such amendments shall not apply to 
any distributions in plan years beginning after December 31, 
1984, and before January 1, 1987, if such distributions were 
made in accordance with the requirements of the regulations 
issued under the Retirement Equity Act of 1984. 
(2) REDUCTION IN ACCRUED BENEFITS.— 
(A) IN GENERAL.—If a plan— 
(i) adopts a plan amendment before the close of the 
^, . . 
first 
plan year beginning on or before January 1, 1989, 
which provides for the calculation of the present value 
of the accrued benefits in the manner provided by the 
amendments made by this section, and 
(ii) the plan reduces the accrued benefits for any plan 
year to v/hich such plan amendment applies in accord-
ance with such plan amendment, 
•
^ 
such reduction shall not be treated as a violation of section 
411(d)(6) of the Internal Revenue Code of 1986 or section 
204(g) of the Employee Retirement Income Security Act of 
1974 (29 U.S.C. 1054(g)). 
(B) SPECIAL RULE.—In the case of a plan maintained by a 
corporation incorporated on April 11, 1934, which is 
headquartered in 'Tarrant County, Texas— 
(i) such plan may be amended to remove the option of 
y 
an employee to receive a lump sum distribution (within 
« - 
the meaning of section 402(e)(5) of such Code) if such 
amendment— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2489 
(I) is adopted within 1 year of the date of the 
enactment of this Act, and 
(II) is not effective until 2 years after the employ-
ees are notified of such amendment, and 
(ii) the present value of any vested accrued benefit of 
such plan determined during the 3-year period begin-
j ' . , . 
ning on the date of the enactment of this Act shall be 
determined under the applicable interest rate (within 
the meaning of section 411(a)(ll)(B)(ii) of such Code), 
>;, 
except that if such value (as so determined) exceeds 
$50,()00, then the value of any excess over $50,000 shall 
* ' 
be determined by using the interest rate specified in 
the plan as of August 16, 1986. 
SEC. 1140. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989. 
(a) IN GENERAL.—If any amendment made by this subtitle or 
subtitle C requires an amendment to any plan, such plan amend-
ment shall not be required to be made before the first plan year 
beginning on or after January 1, 1989, i
f
— 
(1) during the period after such amendment takes effect and 
before such first plan year, the plan is operated in accordance 
with the requirements of such amendment or in accordance 
with an amendment prescribed by the Secretary and adopted by 
the plan, and 
(2) such plan amendment applies retroactively to the period 
after such amendment takes effect and such first plan year. 
A pension plan shall not be treated as failing to provide definitely 
determinable benefits or contributions, or to be operated in accord-
ance with the provisions of the plan, merely because it operates in 
accordance with this provision. 
O
b
) MODEL AMENDMENT.— 
(1) SECRETARY TO PRESCRIBE AMENDMENT.—The Secretary of 
the Treasury or his delegate shall prescribe an amendment or 
amendments which allow a plan to meet the requirements of 
any amendment made by this subtitle or subtitle C— 
(A) which requires an amendment to such plan, and 
' 
(B) is effective before the first plan year beginning after 
December 31,1988. 
(2) ADOPTION BY PLAN.—If a plan adopts the amendment or 
amendments prescribed under paragraph (1) and operates in 
accordance with such amendment or amendments, such plan 
shall not be treated as failing to provide definitely determinable 
benefits or contributions or to be operated in accordance with 
the provisions of the plan. 
(c) SPECIAL RULE FOR COLLECTIVELY BARGAINED PLANS.—In 
the 
case of a plan maintained pursuant to 1 or more collective bargain-
ing agreements between employee representatives and 1 or more 
employers ratified before March 1, 1986, subsection (a) shall be 
applied by substituting for the first plan year beginning on or after 
January 1, 1989, the first plan year beginning after the earlier o
f
— 
(1) the later of— 
(A) January 1, 1989, or 
(B) the date on which the last of such collective bargain-
ing agreements terminate (determined without regard to 
any extension thereof after February 28,1986), or 
(2) January 1,1991. 
100 STAT. 2490 
PUBLIC LAW 99-514—OCT. 22, 1986 
SEC. 1141. ISSUANCE OF FINAL REGULATIONS. 
!) 
The Secretary of the Treasury or his delegate shall issue before 
February 1, 1988, such final regulations as may be necessary to 
carry out the amendments made by— 
(1) section 1111, relating to application of nondiscrimination 
rules to integrated plans, 
a 
(2) section 1112, relating to coverage requirements for quali-
R fied plans, 
(3) section 1113, relating to minimum vesting standards, 
f 
(4) section 1114, relating to the definition of highly com-
pensated employee, 
J 
(5) section 1115, relating to separate lines of business and the 
definition of compensation, 
(6) section 1116, relating to rules for section 401(k) plans, 
(7) section 1117, relating to nondiscrimination requirements 
I for employer matching and employer contribution, 
(8) section 1120, relating to nondiscrimination requirements 
"i for tax sheltered annuities, and 
(9) section 1133, relating to tax on excess distributions. 
SEC. 1142. SECRETARY TO ACCEPT APPLICATIONS WITH RESPECT TO SEC-
TION 401(k) PLANS. 
The Secretary of the Treasury or his delegate shall, not later than 
May 1, 1987, begin accepting applications for opinion letters with 
respect to master and prototype plans for qualified cash or deferred 
arrangements under section 401(k) of the Internal Revenue Code of 
1986. 
SEC. 1143. TREATMENT OF CERTAIN FISHERMEN AS SELF-EMPLOYED 
INDIVIDUALS. 
(a) IN GENERAL.—Section 401(c) is amended by adding at the end 
thereof the following new paragraph: 
"(6) SPECIAL RULE FOR CERTAIN FISHERMEN.—For purposes of 
this subsection, the term 'self-employed individual' includes an 
individual described in section 3121(b)(20) (relating to certain 
fishermen)." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1986. 
SEC. 1144. ACQUISITION OF GOLD AND SILVER COINS BY INDIVIDUAL 
RETIREMENT ACCOUNTS. 
(a) IN GENERAL.—Section 408(m) (relating to investment in collect-
ibles treated as distributions) is amended by adding at the end 
thereof the following new paragraph: 
"(3) EXCEPTION FOR CERTAIN COINS.—In the case of an individ-
ual retirement account, paragraph (2) shall not apply to any 
"
^ gold coin described in paragraph (7), (8), (9), or (10) of section 
' 
5112(a) of title 31 or any silver coin described in section 5112(e) 
'" of title 31." 
(h) EFFECTIVE DATE.—The amendment made by this section shall 
apply to acquisitions after December 31, 1986. 
SEC. 1145. REQUIREMENT OF JOINT AND SURVIVOR ANNUITIES AND 
PRERETIREMENT SURVIVOR ANNUITIES NOT TO APPLY TO 
CERTAIN PLAN. 
(a) IN GENERAL.—Section 401(a)(ll) (relating to requirement of 
joint and survivor annuity and preretirement survivor annuity) is 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2491 
amended by redesignating subparagraph (D) as subparagraph (E) 
and by inserting after subparagraph (C) the following new subpara-
graph: 
"(E) EXCEPTION FOR PLANS DESCRIBED IN SECTION 404(C).—This 
paragraph shall not apply to a plan which the Secretary has 
determined is a plan described in section 404(c) (or a continu-
ation thereof) in which participation is substantially limited to 
individuals who, before January 1, 1976, ceased employment 
covered by the plan." 
(b) AMENDMENTS TO THE EMPLOYEE RETIREMENT INCOME SECURITY 
ACT OF 1974.—Section 205(b) of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1082(b)) is amended by adding at the 
end thereof the following new paragraph: 
"(3) This section shall not apply to a plan which the Secretary 
of the Treasury or his delegate has determined is a plan de-
' 
scribed in section 404(c) of the Internal Revenue Code of 1986 (or 
a continuation thereof) in which participation is substantially 
limited to individuals who, before January 1, 1976, ceased 
employment covered by the plan." 
(c) AMENDMENTS TO RETIREMENT EQUITY ACT.—Section 303 of the 
Retirement Equity Act of 1984 is amended by adding at the end 
thereof the following new subsection: 
"(f) The amendments made by section 301 of this Act shall not 
apply to the termination of a defined benefit plan if such termi-
nation— 
"(1) is pursuant to a resolution directing the termination of 
such plan which was adopted by the Board of Directors of a 
corporation on July 24, 1984, and 
"(2) occurred on November 30, 1984." 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
apply as if included in the amendments made by the Retirement 
Equity Act of 1984. 
SEC. 1146. TREATMENT OF LEASED EMPLOYEES. 
(a) MODIFICATIONS OF LEASED EMPLOYEE PROVISIONS.— 
5 
(1) GENERAL RULE.—Paragraph (5) of section 414(n) (relating 
to safe harbor exemption) is amended to read as follows: 
i( 
"(5) SAFE HARBOR.— 
"(A) IN GENERAL.—In the case of requirements described 
in subparagraphs (A) and (B) of paragraph (3), this subsec-
tion shall not apply to any leased employee with respect to 
services performed for a recipient i
f
— 
i 
"(i) such employee is covered by a plan which is 
maintained by the leasing organization and meets the 
requirements of subparagraph (B), and 
,. , 
"(ii) leased employees (determined without regard to 
this paragraph) do not constitute more than 20 percent 
of the recipient's nonhighly compensated work force. 
"(B) PLAN REQUIREMENTS.—A plan meets the require-
^ 
ments of this subparagraph i
f
— 
"(i) such plan is a money purchase pension plan with 
a nonintegrated employer contribution rate for each 
.^„ 
participant of at least 10 percent of compensation, 
"(ii) such plan provides for full and immediate vest-
ing, and 
"(iii) each employee of the leasing organization (other 
than employees who perform substantially all of their 
100 STAT. 2492 
PUBLIC LAW 99-514—OCT. 22, 1986 
•^ 
. jf 
services for the leasing organization) immediately 
'^'^'^''' 
participates in such plan. 
Clause (iii) shall not apply to any individual whose com-
pensation from the leasing organization in each plan year 
during the 4-year period ending with the plan year is less 
than $1,000. 
,; 
"(C) DEFINITIONS.—For purposes of this paragraph— 
* 
"(i) 
HIGHLY 
COMPENSATED EMPLOYEE.—The term 
'highly compensated employee' has the meaning given 
such term by section 414(q). 
"(ii) 
NONHIGHLY COMPENSATED WORK FORCE.—The 
term 'nonhighly compensated work force' means the 
aggregate number of individuals (other than highly 
compensated employees)— 
"(I) who are employees of the recipient (without 
, ,, 
regard to this subsection) and have performed serv-
. . _ . 
ices for the recipient (or for the recipient and 
related persons) on a substantially full-time basis 
o.!, 
for a period of at least 1 year, or 
•rjf, , 
"(II) who are leased employees with respect to 
the recipient (determined without regard to this 
paragraph), 
"(iii) COMPENSATION.—The term 'compensation' has 
the same meaning as when used in section 415; except 
that such term shall include— 
"(I) any employer contribution under a qualified 
cash or deferred arrangement to the extent not 
included in gross income under section 402(a)(8) or 
402(h)(1)(B), 
V 
'. 
1 
"(II) any amount which the employee would have 
received in cash but for an election under a cafe-
teria plan (within the meaning of section 125), and 
"(III) any amount contributed to an annuity con-
tract described in section 4030t>) pursuant to a 
salary reduction agreement (within the meaning of 
section 3121(a)(5)(D))." 
(2) CLARIFICATION OF YEARS OF SERVICE.—Paragraph (4) of 
section 414(n) is amended to read as follows: 
"(4) TIME WHEN FIRST CONSIDERED AS EMPLOYEE.— 
"(A) IN GENERAL.—In the case of any leased employee, 
paragraph (1) shall apply only for purposes of determining 
whether the requirements listed in paragraph (3) are met 
'• for periods after the close of the period referred to in 
paragraph (2)(B). 
"(B) YEARS OF SERVICE.—In the case of a person who is an 
employee of the recipient (whether by reason of this subsec-
tion or otherwise), for purposes of the requirements listed in 
paragraph (3), years of service for the recipient shall be 
determined by taking into account any period for which 
such employee would have been a leased employee but for 
the requirements of paragraph (2)(B)." 
(3) CONFORMING AMENDMENT.—Paragraph (6) of section 414(n) 
is amended to read as follows: 
"(6) OTHER RULES.—For purposes of this subsection— 
^ 
"(A) RELATED PERSONS.—The term 'related persons' has 
"
^ 
the same meaning as when used ii. section 103(bX6XC). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2493 
"(B) EMPLOYEES OF ENTITIES UNDER COMMON CONTROL.— 
The rules of subsections (b), (c), (m), and (o) shall apply." 
(b) MINIMIZING RECORDKEEPING REQUIREMENTS.— 
(1) IN GENERAL.—Subsection (o) of section 414 (relating to 
regulations) is amended by adding at the end thereof the follow-
ing new sentence: 
"The regulations prescribed under subsection (n) shall include provi-
sions to minimize the recordkeeping requirements of subsection (n) 
in the case of an employer which has no top-heavy plans (within the 
meaning of section 416(g)) and which uses the services of persons 
(other than employees) for an insignificant percentage of the 
employer's total workload." 
(2) CONFORMING AMENDMENT.—Section 414(n)(l) is amended 
by striking out "except to the extent otherwise provided in 
regulations,". 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to taxable years 
beginning after December 31, 1983. 
(2) SUBSECTION (axi).—The amendment made by subsection 
(a)(1) shall apply to services performed after December 31, 1986. 
(3) RECORDKEEPING REQUIREMENTS.—In the case of years 
beginning before the date of the enactment of this Act, the last 
sentence of section 414(o) shall be applied without regard to the 
requirement that an insignificant percentage of the workload be 
performed by persons other than employees. 
SEC. 1147. TAX TREATMENT OF FEDERAL THRIFT SAVINGS FUND. 
(a) IN GENERAL.—Section 7701 is amended by redesignating 
subsection (j) as subsection (k) and by inserting after subsection (i) 
the following new subsection: 
"(j) TAX TREATMENT OF FEDERAL THRIFT SAVINGS FUND.— 
"(1) IN GENERAL.—For purposes of this title— 
"(A) the Thrift Savings Fund shall be treated as a trust 
described in section 401(a) which is exempt from taxation 
under section 501(a); 
*' •• 
"(B) any contribution to, or distribution from, the Thrift 
Savings Fund shall be treated in the same manner as 
contributions to or distributions from such a trust; and 
1 
"(C) subject to the provisions of paragraph (2) and any 
dollar limitation on the application of section 402(a)(8), 
contributions to the Thrift Savings Fund shall not be 
treated as distributed or made available to an employee or 
. 
Member nor as a contribution made to the Fund by an 
employee or Member merely because the employee or 
Member has, under the provisions of subchapter III of 
chapter 84 of title 5, United States Code, and section 8351 of 
such title 5, an election whether the contribution will be 
made to the Thrift Savings Fund or received by the em-
ployee or Member in cash. 
"(2) 
NONDISCRIMINATION REQUIREMENTS.—Paragraph (1)(C) 
shall not apply to the Thrift Savings Fund unless the Fund 
meets the antidiscrimination requirements (other than any 
requirement relating to coverage) applicable to arrangements 
described in section 401(k) and to matching contributions. Rules 
similar to the rules of sections 401(k)(8) and 401(m)(8) (relating 
100 STAT. 2494 
PUBLIC LAW 99-514—OCT. 22, 1986 
to no disqualification if excess contributions distributed) shall 
apply for purposes of the preceding sentence. 
"(3) COORDINATION WITH SOCIAL SECURITY ACT.—Paragraph (1) 
shall not be construed to provide that any amount of the 
employee's or Member's basic pay which is contributed to the 
Thrift Savings Fund shall not be included in the term 'wages' 
for the purposes of section 209 of the Social Security Act or 
section 3121(a) of this title. 
"(4) DEFINITIONS.—For purposes of this subsection, the terms 
'Member', 'employee', and 'Thrift Savings Fund' shall have the 
same respective meanings as when used in subchapter III of 
chapter 84 of title 5, United States Code. 
"(5) COORDINATION WITH OTHER PROVISIONS OF LAW.—No provi-
sion of law not contained in this title shall apply for purposes of 
determining the treatment under this title of the Thrift Savings 
Fund or any contribution to, or distribution from, such Fund." 
(b) 
CONFORMING 
AMENDMENT.—Section 
3121(v)(3) 
(defining 
exempt governmental deferred compensation plan) is amended by 
striking out "and" at the end of subparagraph (A), by striking out 
the period at the end of subparagraph (B), and inserting in lieu 
thereof ", and", and by inserting after subparagraph (B) the follow-
ing new subparagraph: 
"(C) the Thrift Saving Fund (within the meaning of sub-
chapter III of chapter 84 of title 5, United States Code)." 
Subtitle B—Employee Benefit Provisions 
PART I—NONDISCRIMINATION RULES FOR CER-
TAIN STATUTORY EMPLOYEE BENEFIT PLANS 
SEC. 1151. NONDISCRIMINATION RULES FOR COVERAGE AND BENEFITS 
UNDER CERTAIN STATUTORY EMPLOYEE BENEFIT PLANS. 
(a) GENERAL RULE.—Part II of subchapter B of chapter 1 (relating 
to items specifically included in gross income) is amended by adding 
at the end thereof the following new section: 
"SEC. 89. BENEFITS PROVIDED UNDER CERTAIN EMPLOYEE BENEFIT 
PLANS. 
"(a) BENEFITS UNDER DISCRIMINATORY PLANS.— 
"(1) IN GENERAL.—Notwithstanding any provision of part III 
of this subchapter, gross income of a highly compensated em-
ployee who is a participant in a discriminatory employee benefit 
plan during any plan year shall include an amount equal to 
such employee's excess benefit under such plan for such plan 
year. 
"(2) YEAR OF INCLUSION.—Any amount included in gross 
income under paragraph (1) shall be taken into account for the 
taxable year of the employee with or within which the plan year 
ends. 
"(b) EXCESS BENEFIT.—For purposes of this section— 
"(1) IN GENERAL.—The excess benefit of any highly com-
pensated employee is the excess of such employee's employer-
provided benefit under the plan over the highest permitted 
benefit. 
"(2) HIGHEST PERMITTED BENEFIT.—For purposes of paragraph 
(1), the highest permitted benefit under any plan shall be 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2495 
determined by reducing the nontaxable benefits of highly com-
pensated employees (beginning with the employees with the 
greatest nontaxable benefits) until such plan would not be 
treated as a discriminatory employee benefit plan if such re-
duced benefits were taken into account. 
"(3) PLANS OF SAME TYPE.—In computing the excess benefit 
with respect to any benefit, there shall be taken into account all 
plans of the employer of the same type. 
"(4) NONTAXABLE BENEFITS.—For purposes of this subsection, 
the term 'nontaxable benefit' means any benefit provided under 
a plan to which this section applies which (without regard to 
subsection (a)(1)) is excludable from gross income under this 
chapter. 
"(c) DISCRIMINATORY EMPLOYEE BENEFIT PLAN.—For purposes of 
this section, the term 'discriminatory employee benefit plan' means 
any statutory employee benefit plan unless such plan meets the— 
"(1) eligibility requirements of subsection (d), and 
"(2) benefit requirements of subsection (e). 
"(d) ELIGIBILITY REQUIREMENTS.— 
"(1) IN GENERAL.—A plan meets the eligibility requirements 
of this subsection for any plan year i
f
— 
"(A) at least 90 percent of all employees who are not 
highly compensated employees— 
"(i) are eligible to participate in such plan (or in any 
other plan of the employer of the same type), and 
"(ii) would (if they participated) have available under 
such plans an employer-provided benefit which is at 
least 50 percent of the largest employer-provided bene-
fit available under all such plans of the employer to 
any highly compensated employee, 
>i 
"(B) at least 50 percent of the employees eligible to 
participate in such plan are not highly compensated 
employees, and 
"(C) such plan does not contain any provision relating to 
eligibility to participate which Ot)y its terms or otherwise) 
discriminates in favor of highly compensated employees. 
"(2) ALTERNATIVE EUGIBIUTY PERCENTAGE TEST.—A plan shall 
be treated as meeting the requirements of paragraph (1)(B) i
f
— 
"(A) the percentage determined by dividing the number 
> 
of highly compensated employees eligible to participate in 
the plan by the total number of highly compensated 
employees, does not exceed 
"(B) the percentage similarly determined with'riespect to 
employees who are not highly compensated employees. 
"(e) BENEFIT REQUIREMENTS.— 
"(1) IN GENERAL.—A plan meets the benefit requirements of 
this subsection for any plan year if the average employer-
provided benefit received by employees other than highly com-
pensated employees under all plans of the employer of the same 
type is at least 75 percent of the average employer-provided 
benefit received by highly compensated employees under all 
plans of the employer of the same type. 
"(2) AVERAGE EMPLOYER-PROVIDED BENEFIT.—For purposes of 
this subsection, the term 'average employer-provided benefit' 
means, with respect to highly compensated employees, an 
amount equal to— 
100 STAT. 2496 
PUBLIC LAW 99-514—OCT. 22, 1986 
f 
"(A) the aggregate employer-provided benefits received 
by highly compensated employees under all plans of the 
A: 
type being tested, divided by 
"(B) the number of highly compensated employees 
(whether or not covered under such plans). 
The average employer-provided benefit with respect to employ-
ees other than highly compensated employees shall be deter-
mined in the same manner as the average employer-provided 
benefit for highly compensated employees. 
"(f) SPECIAL RULE WHERE HEALTH OR GROUP-TERM PLAN MEETS 80-
PERCENT COVERAGE TEST.—If at least 80 percent of the employees 
who are not highly compensated employees are covered under a 
health plan or group-term life insurance plan during the plan year, 
such plan shall be treated as meeting the requirements of subsec-
tions (d) and (e) for such year. The preceding sentence shall not 
apply if the plan does not meet the requirements of subsection 
(d)(1)(C) (relating to nondiscriminatory provisions). 
"(g) OPERATING RULES.— 
"(1) AGGREGATION OF COMPARABLE HEALTH PLANS.—In the case 
of health plans maintained by an employer— 
"(A) IN GENERAL.—An employer may treat a group of 
joii 
comparable plans as 1 plan for purposes of applying subsec-
tions (d)(1)(B), (d)(2) and (f). 
"(B) COMPARABLE PLANS.—For purposes of subparagraph 
(A), a group of comparable plans is any group (selected by 
the employer) of plans of the same type if the smallest 
employer-provided benefit available to any participant in 
any such plan is at least 95 percent of the largest employer-
provided benefit available to any participant in any such 
plan. 
nt 
"(2) SPECIAL RULES FOR APPLYING BENEFIT REQUIREMENTS TO 
HEALTH PLANS.— 
"(A) ELECTION.—For purposes of determining whether 
the requirements of subsection (e) are met with respect to 
health plans, the employer may elect— 
"(i) to disregard any employee if such employee and 
his spouse and dependents (if any) are covered by a 
health plan providing core benefits maintained by an-
other employer, and 
"(ii) to apply subsection (e) separately with respect to 
^j 
coverage of spouses or dependents by such plans and to 
take into account with respect to such coverage only 
,
>
^ ,5 
employees with a spouse or dependents who are not 
covered by a health plan providing core benefits main-
tained by another employer. 
1
, ;^t 
"(B) SWORN STATEMENTS.—Any employer who elects the 
application of subparagraph (A) shall obtain and maintain, 
in such manner as the Secretary may prescribe, adequate 
sworn statements to demonstrate whether individuals 
have— 
.
^ ^
i
, >
: . 
"(i) a spouse or dependents, and 
"(ii) core health benefits under a plan of another 
employer. 
The Secretary shall provide a method for meeting the 
as 
requirements of this subparagraph through the use of valid 
sampling techniques. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2497 
"(C) PRESUMPTION WHERE NO STATEMENT.—In the absence 
of a statement described in subparagraph (B)— 
"(i) an employee who is not a highly compensated 
employee shall be treated— 
"(I) as not covered by another plan of another 
employer providing core benefits, and 
"(II) as having a spouse and dependents not cov-
ered by another plan of another employer provid-
ing core benefits, and 
"(ii) a highly compensated 
employee shall 
be 
treated— 
"(I) as covered by another plan of another 
employer providing core benefits, and 
"(II) as not having a spouse or dependents. 
"(D) CERTAIN INDIVIDUALS MAY NOT BE DISREGARDED.—In 
the case of a highly compensated employee who receives 
employer-provided benefits under all health plans of the 
employer which are more than 133 V
b percent of the average 
employer-provided benefit under such plan for employees 
other than highly compensated employees, the employer 
may not disregard such employee, or his spouse or depend-
ents for purposes of clause (i) or (ii) of subparagraph (A). 
"(3) 
EMPLOYER-PROVIDED BENEFIT.—For purposes of this 
section— 
"(A) IN GENERAL.—Except as provided in subsection (k), 
an employee's employer-provided benefit under any statu-
tory employee benefit plan is— 
"(i) in the case of any health or group-term life 
insurance plan, the value of the coverage, or 
"(ii) in the case of any other plan, the value of the 
benefits, 
provided during the plan year to or on behalf of such 
employee to the extent attributable to contributions made 
by the employer. 
"(B) SPECIAL RULE FOR HEALTH PLANS.—The value of the 
coverage provided by any health plan shall be determined 
under procedures prescribed by the Secretary which shall— 
;: 
"(i) set forth the values of various standard types of 
coverage involving a representative group, and 
"(ii) provide for adjustments to take into account the 
specific coverage and group involved. 
£ 
"(C) SPECIAL RULE FOR GROUP-TERM LIFE PLANS.— 
"(i) IN GENERAL.—Except as provided in clause (ii), in 
cj 
determining the value of coverage under a group-term 
life insurance plan, the amount taken into account for 
> , 
any employee shall be based on the cost of the insur-
ance determined under section 79(c) for an employee 
ff. 
who is age 40. 
"(ii) EXCESS BENEFIT.—For purposes of subsection (b), 
the excess benefit with respect to coverage under a 
group-term life insurance plan shall be equal to the 
greater of— 
"(I) the cost of such excess benefit (expressed as 
dollars of coverage) determined without regard to 
section 79(c), or 
"(II) such cost determined with regard to section 
79(c). 
100 STAT. 2498 
PUBLIC LAW 99-514—OCT. 22, 1986 
+; J 
"(D) SALARY REDUCTIONS.—Except for purposes of subsec-
tions (dXlXAXii) and Q)(5), any salary reduction shall be 
fc »' 
treated as an employer-provided benefit. 
"(4) ELECTION TO TEST PLANS OF DIFFERENT TYPES TOGETHER.— 
*^ 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the employer may elect to treat all plans of the types 
^ 
specified in such election as plans of the same type for 
-£? 
purposes of applying subsection (e). 
"(B) EXCEPTION FOR HEALTH PLANS.—Subparagraph (A) 
'' 
shall not apply for purposes of determining whether any 
health plan meets the requirements of subsection (e); except 
'•*' 
that benefits provided under health plans which meet such 
requirements may be taken into account in determining 
J 
whether plans of other types meet the requirements of 
subsection (e). 
"(5) SEPARATE LINE OF BUSINESS EXCEPTION.—If, under section 
414(r), an employer is treated as operating separate lines of 
business for a year, the employer may apply the preceding 
provisions of this section separately with respect to employees 
in each such separate line of business. The preceding sentence 
shall not apply to any plan unless such plan is available to a 
group of employees as qualify under a classification set up by 
the employer and found by the Secretary not to be discrimina-
tory in favor of highly compensated employees. 
"(6) SPECIAL RULE FOR APPLYING ELIGIBILITY REQUIREMENTS 
AND 80-PERCENT TEST TO HEALTH PLANS.—For purposes of deter-
mining whether the requirements of subsection (dXl)(AXii) or of 
subsection (f) are met with respect to health plans, the employer 
may elect— 
"(A) to apply this section separately with respect to cov-
,; 
erage of spouses and dependents by such plans, and 
4 i 
"(B) to take into account with respect to such coverage 
only those employees with a spouse or dependent (deter-
mined under rules similar to the rules of paragraphs (2) (B) 
and (O). 
"(h) EXCLUDED EMPLOYEES.— 
"(1) IN GENERAL.—The following employees shall be excluded 
from consideration under this section: 
"(A) Employees who have not completed 1 year of service 
(or in the case of core benefits under a health plan, 6 
months of service). An employee shall be excluded from 
consideration until the 1st day of the 1st month beginning 
after completion of the period of service required under the 
preceding sentence. 
"(B) Employees who normally work less than 17y2 hours 
per week. 
"(C) Employees who normally work during not more than 
< 
6 months during any year. 
& 
"(D) Employees who have not attained age 21. 
"(E) Employees who are included in, a unit of employees 
covered by an agreement which the Secretary finds to be a 
- 
collective bargaining agreement between employee rep-
* 
resentatives and 1 or more employers if there is evidence 
that the type of benefits provided under the plan was the 
nw 
subject of good faith bargaining between the employee 
representatives and such employer or employers. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2499 
"(F) Employees who are nonresident aliens and who re-
ceive no earned income (within the meaning of section 
911(d)(2)) from the employer which constitutes income from 
sources within the United States (within the meaning of 
section 861(a)(3)). 
Subparagraphs (A), (B), (C), and (D) shall be applied by substitut-
ing a shorter period of service, smaller number of hours or 
months, or lower age specified in the plan for the period of 
service, number of hours or months, or age (as the case may be) 
specified in such subparagraph. 
"(2) CERTAIN EXCLUSIONS NOT TO APPLY IF EXCLUDED EMPLOYEES 
COVERED.—Except to the extent provided in regulations, employ-
ees shall not be excluded from consideration under any subpara-
graph of paragraph (1) (other than subparagraph (F)) unless no 
employee described in such subparagraph (determined with 
regard to the last sentence of paragraph (1)) is eligible under the 
plan. 
"(3) EXCLUSION MUST APPLY TO ALL PLANS.— 
"(A) IN GENERAL.—An exclusion shall apply under any 
subparagraph of paragraph (1) (other than subparagraph 
(F) thereof) only if the exclusion applies to all statutory 
employee benefit plans of the employer of the same type. In 
the case of a cafeteria plan, all benefits under the cafeteria 
plan shall be treated as provided under plans of the same 
type. 
"(B) EXCEPTION.—Subparagraph (A) shall not apply to 
any difference in waiting periods for core and noncore 
benefits provided by health plans. 
"(4) EXCEPTION FOR SEPARATE LINE OF BUSINESS.—If any line of 
business is treated separately under subsection (hX5), then para-
graphs (2) and (3) shall be applied separately to such line of 
business. 
"(5) REQUIREMENTS MAY BE MET SEPARATELY WITH RESPECT TO 
EXCLUDED GROUP.—Notwithstanding paragraphs (2) and (3), if 
employees do not meet minimum age or service requirements 
described in paragraph (1) (without regard to the last sentence 
thereof) and are covered under a plan of the employer which 
meets the requirements of this section separately with respect 
to such employees, such employees may be excluded from 
consideration in determining whether any plan of the employer 
meets the requirements of this section. 
"(i) STATUTORY EMPLOYEE BENEFIT PLAN.—For purposes of this 
section— 
"(1) IN GENERAL.—The term 'statutory employee benefit plan' 
means— 
"(A) an accident or health plan (within the meaning of 
section 105(e)), and 
"(B) any plan of an employer for providing group-term 
life insurance (within the meaning of section 79). 
"(2) EMPLOYER MAY ELECT TO TREAT OTHER PLANS AS STATUTORY 
EMPLOYEE BENEFIT PLAN.—An employer may elect to treat any 
of the following plans as statutory employee benefit plans: 
"(A) A qualified group legal services plan (within the 
meaning of section 120(b)). 
"(B) An educational assistance program (within the 
meaning of section 1270t))). 
100 STAT. 2500 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(C) A dependent care assistance program (within the 
meaning of section 129(d)). 
An election under this paragraph with respect to any plan shall 
apply with respect to all plans of the same type as such plan. 
"(3) PLANS OF THE SAME TYPE.—2 or more plans shall be 
treated as of the same type if such plans are described in the 
same subparagraph of paragraph (1) or (2). 
"(j) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) HIGHLY COMPENSATED EMPLOYEE.—The term 'highly com-
v 
pensated employee' has the meaning given such term by section 
414(q). 
"(2) HEALTH PLAN.—The term 'health plan' means any plan 
described in paragraph (1)(A) of subsection (i). 
"(3) TREATMENT OF FORMER EMPLOYEES.—Except to the extent 
provided in regulations, this section shall be applied separately 
to former employees under requirements similar to the require-
ments that apply to employees. 
"(4) GROUP-TERM LIFE INSURANCE PLANS.— 
"(A) IN GENERAL.—Any group-term life insurance plan 
shall not be treated as 2 or more separate plans merely 
because the amount of life insurance under the plan on 
behalf of employees bears a uniform relationship to the 
compensation (within the meaning of section 414(s)) of such 
employees. 
"(B) 
LIMITATION ON COMPENSATION.—For purposes 
of 
subparagraph (A), compensation in excess of the amount 
applicable under section 401(a)(17) shall not be taken into 
account. 
"(C) LIMITATION.—This paragraph shall not apply to any 
, 
plan if such plan is combined with plans of other types 
pursuant to an election under subsection (g)(4). 
"(5) 
SPECIAL RULE FOR EMPLOYEES WORKING LESS THAN 30 
HOURS PER WEEK.—Any health plan shall not fail to meet the 
requirements of this section merely because the employer-pro-
vided benefit is proportionately reduced for employees who 
normally work less than 30 hours per week. The preceding 
sentence shall apply only where the average work week of 
employees who are not highly compensated employees is 30 
hours or more. 
"(6) TREATMENT OF SELF-EMPLOYED INDIVIDUALS.—In the case 
of a statutory employee benefit plan described in subparagraph 
a^'l (A), (B), or (C) of subsection (i)(2)— 
"(A) TREATMENT AS EMPLOYEE, ETC.—The term 'employee' 
includes any self-employed individual (as defined in section 
401(c)(1)), and the term 'compensation' includes such 
ti 
individual's earned income (as defined in section 401(c)(2)). 
"(B) EMPLOYER.—An individual who owns the entire in-
11 
terest in an unincorporated trade or business shall be 
treated as his own employer. A partnership shall be treated 
as the employer of each partner who is treated as an 
employee under subparagraph (A). 
"(7) 
CERTAIN 
PLANS TREATED AS 
MEETING 
OTHER 
NON-
DISCRIMINATION REQUIREMENTS.—If an employer makes an elec-
I 
tion under subsection (i)(2) to have this section apply to any plan 
5;i; and such plan meets the requirements of this section, such plan 
shall be treated as meeting any other nondiscrimination 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2501 
requirement imposed on such plan (other than any requirement 
under section 120(c)(3), 127(b)(3), or 129(d)(4)). 
"(8) SPECIAL RULES FOR CERTAIN DISPOSITIONS OR ACQUISI-
TIONS.— 
"(A) IN GENERAL.—If a person becomes, or ceases to be, a 
member of a group described in subsection (b), (c), (m), or (o) 
of section 414, then the requirements of this section shall be 
treated as having been met during the transition period 
, 
with respect to any plan covering employees of such person 
or any other member of such group i
f
— 
"(i) such requirements were met immediately before 
each such change, and 
"(ii) the coverage under such plan is not significantly 
changed during the transition period (other than by 
reason of the change in members of a group). 
"(B) TRANSITION PERIOD.—For purposes of subparagraph 
(A), the term 'transition period' means the period— 
"(i) beginning on the date of the change in members 
of a group, and 
"(ii) ending on the last day of the 1st plan year 
beginning after the date of such change. 
"(9) COORDINATION WITH MEDICARE, ETC.—^If a plan may be 
coordinated with health benefits provided under any Federal, 
State, or foreign law or under any other health plan covering 
the employee or family member of the employee, such plan 
shall not fail to meet the requirements of this section with 
respect to health benefits merely because the amount of such 
benefits provided to any employee or family member of any 
employee are coordinated in a manner which does not discrimi-
nate in favor of highly compensated employees. 
"(10) DiSABIUTY BENEFITS.— 
"(A) IN GENERAL.—If a plan may be coordinated with 
disability benefits provided under any Federal, State, or 
foreign law or under any other plan covering the employee, 
such plan shall not fail to meet the requirements of this 
section with respect to disability benefits merely because 
the amount of such benefits provided to an employee are 
coordinated in a manner which does not discriminate in 
favor of highly compensated employees. 
"(B) 
CERTAIN 
DISABIUTY 
PLANS 
EXEMPT 
FROM 
NON-
DISCRIMINATION RULES.—Subsection (a) shall not apply to 
any disability coverage other than disability coverage the 
benefits of which are excludable from gross income under 
section 1050t)) or (c). 
"(11) SEPARATE APPLICATION IN THE CASE OF OPTIONS.—Each 
option or different benefit shall be treated as a separate plan, 
'(k) REQUIREMENT THAT PLAN BE IN WRITING, ETC.— 
"(1) IN GENERAL.—Notwithstanding any provision of part III 
of this subchapter, gross income of an employee shall include an 
amount equal to such employee's employer-provided benefit for 
the taxable year under an employee benefit plan to which this 
subsection applies unless, except to the extent provided in 
regulations— 
"(A) such plan is in writing, 
"(B) the employees' rights under such plan are legally 
enforceable, 
100 STAT. 2502 
PUBLIC LAW 99-514—OCT. 22, 1986 
ji.'if* 
«(Q employees are provided reasonable notification of 
benefits available in the plan, 
-
? I 
<
<
^
j
)
^ such plan is maintained for the exclusive benefit of 
employees, and 
' 
"(E) such plan was established with the intention of being 
maintained for an indefinite period of time. 
Such inclusion shall be in lieu of any inclusion under subsection 
(a) with respect to such plan. 
"(2) PLANS TO WHICH SUBSECTION APPLIES.—This subsection 
shall apply to— 
"(A) any statutory employee benefit plan, 
"(B) a qualified tuition reduction program (within the 
';. * 
meaning of section 117(d)), 
V' 
"(C) a cafeteria plan (within the meaning of section 125), 
j ^ 
"(D) a fringe benefit program providing no-additional-cost 
' 
services, qualified employee discounts, or employer-oper-
r 
ated eating facilities which are excludable from gross 
' 
" 
income under section 132, and 
"(E) a plan to which section 505 applies. 
"
*
^ ' 
"(3) SPECIAL RULE FOR DETERMINING INCLUSION.—For purposes 
of paragraph (1), an employee's employer-provided belnefit shall 
be the value of the benefits provided to the employee. 
"(4) PLANS TO WHICH CONTRIBUTIONS ARE MADE BY MORE THAN 
1 EMPLOYER.—For purposes of paragraph (1)(D), in the case of a 
plan to which contributions are made by more than 1 employer, 
each employer shall be treated as employing employees of all 
other employers. 
"(1) REPORTING REQUIREMENTS.— 
"(1) IN GENERAL.—If an employee of an employer maintaining 
a plan is required to include any amount in gross income under 
this section for any plan year ending with or within a calendar 
year, the employer shall separately include such amount on the 
statement which the employer is required to provide the em-
ployee under section 6051(a) (and any statement required to be 
furnished under section 6051(d)). 
, 
"(2) PENALTY.— 
-
"For penalty for failing to report, see section 6652(1). 
"(m) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this section, including regulations providing for appropriate 
adjustments in case of individuals not employees of the employer 
throughout the plan year." 
(b) PENALTY FOR FAIUNG TO REPORT.—Section 6652 (relating to 
failure to file information returns, registration statements, etc.) is 
amended by redesignating subsection (1) as subsection (m) and by 
inserting after subsection (k) the following new subsection: 
"(1) 
INFORMATION 
WITH 
RESPECT 
TO 
INCLUDIBLE EMPLOYEE 
BENEFITS.— 
"(1) IN GENERAL.—In the case of each failure to include any 
amount on any statement under section 6051(a) or 6051(d) which 
is required to be so included under section 89(1), there shall be 
paid, on notice and demand of the Secretary and in the same 
manner as tax, the amount determined under paragraph (2). 
"(2) AMOUNT OF ADDITIONAL TAX.—The amount determined 
under this paragraph shall be equal to the product of— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2503 
"(A) the highest rate of tax imposed by section 1 for 
taxable years beginning in the calendar year to which the 
return or statement relates, multiplied by 
"(B) the employer-provided benefit (within the meaning 
of section 89 without regard to subsection (g)(3) thereof) 
with respect to the employee to whom such failure relates. 
"(3) REASONABLE CAUSE EXCEPTION.—Paragraph (1) shall not 
h 
apply to any failure if it is shown that such failure is due to 
reasonable cause. 
"(4) 
COORDINATION WITH OTHER PENALTIES.—Any penalty 
under this subsection shall be in addition to any other penalty 
under this section or section 6678 with respect to any failure. 
"(5) ONLY i ADDITION PER EMPLOYEE PER YEAR.—Paragraph (1) 
shall be applied only once if there is more than 1 failure with 
respect to any amount." 
(c) REPEAL OF CERTAIN EXISTING NONDISCRIMINATION RULES.— 
(1) DISCRIMINATORY GROUP-TERM LIFE INSURANCE PLANS.— 
Subsection (d) of section 79 is amended to read as follows: 
"(d) NONDISCRIMINATION REQUIREMENTS.—In the case of a group-
term life insurance plan which is a discriminatory employee benefit 
plan, subsection (a)(1) shall apply only to the extent provided in 
section 89." 
(2) 
DISCRIMINATORY 
SELF-INSURED 
MEDICAL 
EXPENSE RE-
IMBURSEMENT PLANS.—Section 105 (relating to amounts received 
under accident and health plans) is amended by striking out 
subsection (h) and by redesignating subsection (i) as subsection 
(h). 
(3) QUALIFIED GROUP LEGAL SERVICES PLANS.—Section 120(b) 
(defining qualified group legal services plan) is amended to read 
as follows: 
"
O
t
>
) QUALIFIED GROUP LEGAL SERVICES PLAN.—For purposes of 
this section, a qualified group legal services plan is a separate plan 
of an employer— 
"(1) under which the employer provides specified personal 
legal services to employees (or their spouses or dependents) 
through the prepayment of, or the provision in advance for, any 
portion of the legal fees for such services, and 
"(2) which meets the requirements of subsection (c) and sec-
tion 89(k)." 
(4) EDUCATIONAL ASSISTANCE PROGRAMS.—Section 127(b) (relat-
ing to educational assistance programs) is amended— 
(A) by striking out paragraph (1) and inserting in lieu 
thereof the following new paragraph: 
"(1) IN GENERAL.—For purposes of this section, an educational 
assistance program is a plan of an employer— 
"(A) under which the employer provides employees with 
educational assistance, and 
"(B) which meets the requirements of paragraphs (2) 
Iji^j. 
through (5) and section 89(k).", and 
(B) by striking out paragraph (6) thereof. 
(5) DEPENDENT CARE ASSISTANCE PROGRAMS.—Section 129(d) 
(relating to dependent care assistance program) is amended— 
(A) by striking out paragraph (1) and inserting in lieu 
thereof the following new paragraph: 
"(1) IN GENERAL.—For purposes of this section, a dependent 
care assistance program is a plan of an employer— 
100 STAT. 2504 
PUBLIC LAW 99-514—OCT. 22, 1986 
>
"
' 1 
"(A) under which the employer provides employees with 
jf < 
dependent care assistance, and 
"(B) which meets the requirements of paragraphs (2) 
through (6) and section 89(k).", and 
(B) by striking out paragraph (6) thereof, and redesignat-
ing paragraph (7) as paragraph (6). 
(d) COORDINATION WITH CAFETERIA PLANS.— 
(1) IN GENERAL.—Section 125 (relating to cafeteria plans) is 
amended to read as follows: 
"SEC. 125. CAFETERIA PLANS. 
"(a) GENERAL RULE.—In the case of a cafeteria plan— 
"(1) amounts shall not be included in gross income of a 
participant in such plan solely because, under the plan, the 
participant may choose among the benefits of the plan, and 
"(2) if the plan fails to meet the requirements of subsection (b) 
for any plan year— 
"(A) paragraph (1) shall not apply, and 
"(B) notwithstanding any other provision of part III of 
this subchapter, any qualified benefits received under such 
^ . cafeteria plan by a highly compensated employee for such 
plan year shall be included in the gross income of such 
employee for the taxable year with or within which such 
plan year ends. 
"(b) PROHIBITION AGAINST DISCRIMINATION AS TO ELIGIBILITY TO 
PARTICIPATE.— 
"(1) HIGHLY 
COMPENSATED EMPLOYEES.—A plan shall be 
treated as failing to meet the requirements of this subsection 
unless the plan is available to a group of employees as qualify 
under a classification set up by the employer and which the 
Secretary find not to be discriminatory in favor of highly com-
pensated employees. 
"(2) KEY EMPLOYEES.—In the case of a key employee (within 
the meaning of section 416(i)(l)), a plan shall be treated as 
failing to meet the requirements of this subsection if the quali-
fied benefits provided to key employees under the plan exceed 
25 percent of the aggregate of such benefits provided for all 
employees under the plan. For purposes of the preceding sen-
* tence, qualified benefits shall be determined without regard to 
the last sentence of subsection (e). 
^ 
"(3) EXCLUDABLE EMPLOYEES.—For purposes of this subsection, 
there may be excluded from consideration employees who may 
be excluded from consideration under section 89(h). 
"(c) CAFETERIA PLAN DEFINED.—For purposes of this section— 
"(1) IN GENERAL.—The term 'cafeteria plan' means a plan 
which meets the requirements of section 89(k) and under 
* 
which— 
"(A) all participants are employees, and 
* 2:} 
"(B) the participants may choose— 
"(i) among 2 or more benefits consisting of cash and 
qualified benefits, or 
"(ii) among 2 or more qualified benefits. 
"(2) DEFERRED COMPENSATION PLANS EXCLUDED.— 
"(A) IN GENERAL.—The term 'cafeteria plan' does not 
include any plan which provides for deferred compensation. 
\:f-.\'u.' 
"(B) 
EXCEPTION 
FOR CASH 
AND DEFERRED 
ARRANGE-
MENTS.—Subparagraph (A) shall not apply to a profit-shar-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2505 
ing or stock bonus plan which includes a qualified cash or 
deferred arrangement (as defined in section 401(k)(2)) to the 
extent of amounts which a covered employee may elect to 
have the employer pay as contributions to a trust under 
such plan on behalf of the employee. 
"(C) EXCEPTION FOR CERTAIN PLANS MAINTAINED BY EDU-
CATIONAL INSTITUTIONS.—Subparagraph (A) shall not apply 
to a plan maintained by an educational organization de-
scribed in section 170(b)(l)(A)(ii) to the extent of amounts 
which a covered employee may elect to have the employer 
pay as contributions for post-retirement group life insur-
ance i
f
— 
"(i) all contributions for such insurance must be 
• J 
made before retirement, and 
"(ii) such life insurance does not have a cash surren-
der value at any time. 
For purposes of section 79, any life insurance described in 
the preceding sentence shall be treated as group-term life 
insurance. 
"(d) HIGHLY COMPENSATED EMPLOYEE.—For purposes of this sec-
tion, the term 'highly compensated employee' has the meaning 
given such term by section 414(q). 
"(e) QUALIFIED BENEFITS DEFINED.—For purposes of this section— 
"(1) IN GENERAL.—The term 'qualified benefit' means any 
benefit which, with the application of subsection (a), is not 
includible in the gross income of the employee by reason of an 
express provision of this chapter (other than section 117, 124, 
127, or 132). 
"(2) CERTAIN BENEFITS INCLUDED.—The term 'qualified bene-
fits' includes— 
"(A) any group-term life insurance which is includible in 
gross income only because it exceeds the dollar limitation of 
section 79, and 
"(B) any other benefit permitted under regulations. 
"(f) COLLECTIVELY BARGAINED PLAN NOT CONSIDERED DISCRIMINA-
TORY.—For purposes of this section, a plan shall not be treated as 
discriminatory if the plan is maintained under an agreement which 
the Secretary finds to be a collective bargaining agreement between 
employee representatives and one or more employers. 
"(g) CROSS REFERENCES.— 
"For reporting and recordkeeping requirements, see section 6039D." 
(2) APPLICATION WITH EMPLOYMENT TAXES.— 
(A) Section 3121(a)(5) is amended by striking out "or" at 
the end of subparagraph (E), by inserting "or" at the end of 
subparagraph (F), and by inserting after subparagraph (F) 
the following new subparagraph: 
"(G) under a cafeteria plan (within the meaning of section 
125)," 
(B) Section 3306(b)(5) is amended by striking out "or" at 
the end of subparagraph (E), by inserting "or" at the end of 
subparagraph (F), and by inserting after subparagraph (F) 
the following new subparagraph: 
v:i 
"(G) under a cafeteria plan (within the meaning of section 
125)," 
^ 
(C) Section 209(e) of the Social Security Act is amended by 
inserting before the semicolon at the end thereof the follow-
100 STAT. 2506 
PUBLIC LAW 99-514—OCT. 22, 1986 
•*{> ' 
ing: ", or (9) under a cafeteria plan (within the meaning of 
section 125 of the Internal Revenue Code of 1986)". 
(e) SPECIAL RULES FOR CONTROLLED GROUPS, ETC.— 
(1) IN GENERAL.—Section 414 is amended by adding at the^ end 
thereof the following new subsection: 
"(t) APPLICATION OF CONTROLLED GROUP RULES TO CERTAIN EM-
PLOYEE BENEFITS.— 
"(1) IN GENERAL.—All employees who are treated as employed 
by a single employer under subsection (b), (c), or (m) of section 
414 shall be treated as employed by a single employer for 
purposes of an applicable section. The provisions of subsection 
(o) of section 414 shall apply with respect to the requirements of 
an applicable section. 
"(2) APPLICABLE SECTION.—For purposes of this subsection, the 
term 'applicable section' means section 79, 89, 106, 117(d), 120, 
125, 127,129, 132, 274(j), or 505." 
(2) CONFORMING AMENDMENTS.— 
(A) Section 132(g) (relating to special rules relating to 
employer) is amended to read as follows: 
"(g) RECIPROCAL AGREEMENTS.—For purposes of paragraph (1) of 
subsection (a), any service provided by an employer to an employee 
of another employer shall be treated as provided by the employer of 
such employee i
f
— 
"(1) such service is provided pursuant to a written agreement 
between such employers, and 
"(2) neither of such employers incurs any substantial addi-
tional costs (including foregone revenue) in providing such serv-
ice or pursuant to such agreement." 
,
,
^ 
(B) Paragraph (4) of section 505(b) (relating to aggregation 
rules) is amended to read as follows: 
"(4) AGGREGATION RULES.—At the election of the employer, 2 
or more plans of such employer may be treated as 1 plan for 
purposes of this subsection." 
(f) BENEFITS TEST FOR DEPENDENT CARE ASSISTANCE PROGRAMS.— 
Section 129(d) (relating to dependent care assistance program) is 
amended by adding at the end thereof the following new paragraph: 
"(8) BENEFITS.— 
"(A) IN GENERAL.—A plan meets the requirements of this 
paragraph if the average benefits provided to employees 
who are not highly compensated employees is at least 55 
percent of the average benefits provided to highly com-
pensated employees. 
"(B) SALARY REDUCTION AGREEMENTS.—For purposes of 
-; 
subparagraph (A), in the case of any benefits provided 
through a salary reduction agreement, there shall be dis-
• 1 
regarded any employees whose compensation (within the 
meaning of section 415(q)(7)) is less than $25,000." 
(g) DEFINITION OF EXCLUDABLE EMPLOYEE.— 
(1) Section 120(c)(2) is amended by striking out the last sen-
tence thereof and inserting in lieu thereof "For purposes of 
this paragraph, there may be excluded from consideration 
employees who may be excluded from consideration under sec-
tion 89(h)." 
c 
(2) Section 117(d) is amended by adding at the end thereof the 
following new paragraph: 
"(4) EXCLUSION OF CERTAIN EMPLOYEES.—For purposes of 
this subsection, there may be excluded from consideration 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2507 
employees who may be excluded from consideration under sec-
tion 89(h)." 
(3) Section 127(b)(2) is amended by striking out the last sen-
tence thereof and inserting in lieu thereof: "For purposes of 
this paragraph, there may be excluded from consideration 
employees who may be excluded from consideration under sec-
tion 89(h)." 
(4) Section 129(d)(3) is amended by striking out the last sen-
tence thereof and inserting in lieu thereof: "For purposes of 
this paragraph, there may be excluded from consideration 
employees who may be excluded from consideration under sec-
tion 89(h)." 
(5) Section 132(h)(1) is amended by adding at the end thereof 
the following new sentence: "For purposes of this paragraph 
and subsection (e), there may be excluded from consideration 
employees who may be excluded from consideration under sec-
tion 89(h)." 
(6) Paragraph (2) of section 505(b) is amended to read as 
follows: 
"(2) EXCLUSION OF CERTAIN EMPLOYEES.—For purposes of para-
graph (1), there may be excluded from consideration employees 
who may be excluded from consideration under section 89(h)." 
(h) REPORTING REQUIREMENTS.— 
(1) IN GENERAL.—Section 6039D(d) is amended to read as 
follows: 
"(d) DEFINITIONS.—For purposes of this section— 
"(1) SPECIFIED FRINGE BENEFIT PLAN.—The term 'specified 
fringe benefit plan' means any plan under section 79, 105, 106, 
120,125,127, or 129. 
"(2) APPLICABLE EXCLUSION.—The term 'applicable exclusion' 
means, with respect to any specified fringe benefit plan, the 
section specified under paragraph (1) under which benefits 
under such plan are excludable from gross income." 
(2) INFORMATION REQUIRED TO BE REPORTED.—Section 6039D(a) 
is amended by striking out "and" at the end of paragraph (4), by 
striking out the period at the end of paragraph (5) and inserting 
in lieu thereof ", and", and by inserting after paragraph (5) the 
following new paragraph: 
"(6) the number of highly compensated employees among the 
employees described in paragraphs (1), (2), and (3)." 
(3) ADDITIONAL INFORMATION.—Section 6039B(c) is amended 
by adding at the end thereof the following new sentence: "The 
Secretary may require returns under this subsection only from 
a representative group of employers." 
(i) CONFORMING AMENDMENTS TO SECTION 414(n).— 
(1) Paragraph (1) of section 414(n) is amended by striking out 
"pension requirements" and inserting in lieu thereof "require-
ments". 
(2) Subparagraph (B) of section 414(nX2) is amended by insert-
ing "(6 months in the case of core health benefits)" after "1 
year". 
(3) Paragraph (3) of section 414(n) is amended— 
(A) by striking out "Pension requirements" and inserting 
in lieu thereof "Requirements", 
(B) by striking out "pension requirements" and inserting 
in lieu thereof "requirements", and 
100 STAT. 2508 
PUBLIC LAW 99-514—OCT. 22, 1986 
* *
^
F '^ >
' (C) by striking out "and" at the end of subparagraph (A), 
by striking out the period at the end of subparagraph (B) 
and inserting in lieu thereof ", and", and by adding at the 
end thereof the following new subparagraph: 
"(C) sections 79, 89, 106, 117(d), 120, 125, 127, 129, 132, 
2740"), and 505." 
(j) OTHER CONFORMING AMENDMENTS.— 
(1) The table of sections for part II of subchapter B of chapter 
1 is amended by adding at the end thereof the following new 
item: 
"Sec. 89. Benefits provided under certain employee benefit plans." 
(2) Subsection (a) of section 106 (relating to contributions by 
employer to accident and health plans) is amended to read as 
follows: 
"(a) IN GENERAL.—Gross income of an employee does not include 
employer-provided coverage under an accident or health plan." 
(3) Section 505(b) is amended by adding at the end thereof the 
following new paragraph: 
"(6) COMPENSATION.—For purposes of this subsection, the 
term 'compensation' has the meaning given such term by sec-
tion 414(s)." 
(k) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to years beginning after the later of — 
(A) December 31,1987, or 
(B) the earlier o
f
— 
, , 
(i) the date which is 3 months after the date on which 
the Secretary of the Treasury or his delegate issues 
such regulations as are necessary to carry out the 
provisions of section 89 of the Internal Revenue Code of 
1986 (as added by this section), or 
(ii) December 31,1988. 
(2) SPECIAL RULE FOR COLLECTIVE BARGAINING PLAN.—In the 
case of a plan maintained pursuant to 1 or more collective 
bargaining agreements between employee representatives and 1 
or more employers ratified before March 1, 1986, the amend-
ments made by this section shall not apply to employees covered 
by such an agreement in years beginning before the earlier of^ 
(A) the date on which the last of such collective bargain-
ing agreements terminates (determined without regard to 
any extension thereof after February 28,1986), or 
(B) January 1,1991. 
A plan shall not be required to take into account employees to 
which the preceding sentence applies for purposes of applying 
section 89 of the Internal Revenue Code of 1986 (as added by 
this section) to employees to which the preceding sentence does 
not apply for any year preceding the year described in the 
preceding sentence. 
(3) EXCEPTION FOR CERTAIN GROUP-TERM INSURANCE PLANS.—In 
the case of a plan described in section 223(d)(2) of the Tax 
Reform Act of 1984, such plan shall be treated as meeting the 
requirements of section 89 of the Internal Revenue Code of 1986 
(as added by this section) with respect to individuals described 
in section 223(d)(2) of such Act. An employer may elect to 
disregard such individuals in applying section 89 of such Code 
(as so added) to other employees of the employer. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2509 
(4) SPECIAL RULE FOR CHURCH PLANS.—In the case of a church 
plan (within the meaning of section 414(e)(3) of the Internal 
Revenue Code of 1986) maintaining an insured accident and 
health plan, the amendments made by this section shall apply 
to years beginning after December 31, 1988. 
(5) CAFETERIA PLANS.—The amendments made by subsection 
(d)(2) shall apply to taxable years beginning after December 31, 
1983. 
PART II—OTHER PROVISIONS 
SEC. 1161. DEDUCTIBILITY OF HEALTH INSURANCE COSTS OF SELF-EM-
PLOYED INDIVIDUALS. 
(a) GENERAL RULE.—Section 162 (relating to trade or business 
expenses), as amended by this Act, is amended by redesignating 
subsection (n) as subsection (m) and by inserting after subsection (1) 
the following new subsection: 
"(m) SPECIAL RULES FOR HEALTH INSURANCE COSTS OF SELF-EM-
PLOYED INDIVIDUALS.— 
"(1) IN GENERAL.—In the case of an individual who is an 
employee within the meaning of section 401(c)(1), there shall be 
allowed as a deduction under this section an amount equal to 25 
percent of the amount paid during the taxable year for insur-
ance which constitutes medical care for the taxpayer, his 
spouse, and dependents. 
"(2) LIMITATIONS.— 
"(A) DOLLAR AMOUNT.—No deduction shall be allowed 
under paragraph (1) to the extent that the amount of such 
deduction exceeds the taxpayer's earned income (within the 
meaning of section 401(c)). 
"(B) REQUIRED COVERAGE.—Paragraph (1) shall not apply 
to any taxpayer for any taxable year unless coverage is 
provided under 1 or more plans meeting the requirements 
of section 89, treating such coverage as an employer-pro-
vided benefit. 
"(C) OTHER COVERAGE.—Paragraph (1) shall not apply to 
any taxpayer who is eligible to participate in any subsidized 
health plan maintained by any employer of the taxpayer or 
of the spouse of the taxpayer. 
"(3) COORDINATION WITH MEDICAL DEDUCTION.—Any amount 
paid by a taxpayer for insurance to which paragraph (1) applies 
shall not be taken into account in computing the amount 
allowable to the taxpayer as a deduction under section 213(a). 
"(4) TERMINATION.—This subsection shall not apply to any 
taxable year beginning after December 31, 1989." 
O
b
) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendment made by this section shall 
apply to taxable years beginning after December 31, 1986. 
(2) TRANSITIONAL RULE.—In the case of any year to which 
section 89 of the Internal Revenue Code of 1986 does not apply, 
section 162(m)(2)(B) of such Code shall be applied by substituting 
any nondiscrimination requirements otherwise applicable for 
the requirements of section 89 of such Code. 
(3) ASSISTANCE.—The Secretary of the Treasury or his dele-
gate shall provide guidance to self-employed individuals to 
assist them in meeting the requirements of section 89 of the 
100 STAT. 2510 
PUBLIC LAW 99-514—OCT. 22, 1986 
Internal Revenue Code of 1986 with respect to coverage re-
quired by the amendments made by this section. 
SEC. 1162. 2-YEAR EXTENSION OF EXCLUSIONS FOR EDUCATIONAL 
ASSISTANCE PROGRAMS AND GROUP LEGAL PLANS. 
(a) EDUCATIONAL ASSISTANCE PROGRAMS.— 
(1) EXTENSION.—Subsection (d) of section 127 (relating to 
termination of exclusion for amounts received under edu-
cational assistance programs) is amended by striking out "1985" 
and inserting in lieu thereof "1987". 
(2) INCREASE IN AMOUNT.—Paragraph (2) of section 127(a) is 
amended by striking out "$5,000" each place it appears in the 
text and the heading thereof and inserting in lieu thereof 
"$5,250". 
(b) GROUP LEGAL PLANS.—Subsection (e) of section 120 (relating to 
termination of exclusion for amounts received under qualified group 
legal services plans) is amended by striking out "1985 and inserting 
in lieu thereof "1987". 
(c) EFFECTIVE DATES.— 
(1) SUBSECTION (a).—The amendments made by subsection (a) 
shall apply to taxable years beginning after December 31, 1985. 
(2) SUBSECTION (b).—The amendment made by subsection (b) 
shall apply to years ending after December 31,1985. 
(3) CAFETERIA PLAN WITH GROUP LEGAL BENEFITS.—If, within 
60 days after the date of the enactment of this Act, an employee 
elects under a cafeteria plan under section 125 of the Internal 
Revenue Code of 1986 coverage for group legal benefits to which 
section 120 of such Code applies, such election may, at the 
election of the taxpayer, apply to all legal services provided 
during 1986. The preceding sentence shall not apply to any plan 
which on August 16, 1986, offered such group legal benefits 
under such plan. 
SEC. 1163. $5,000 LIMIT ON DEPENDENT CARE ASSISTANCE EXCLUSION. 
(a) GENERAL RULE.—Subsection (a) of section 129 (relating to 
dependent care assistance programs) is amended to read as follows: 
"(a) EXCLUSION.— 
"(1) IN GENERAL.—Gross income of an employee does not 
include amounts paid or incurred by the employer for depend-
ent care assistance provided to such employee if the assistance 
is furnished pursuant to a program which is described in subsec-
tion (d). 
"(2) LIMITATION OF EXCLUSION.—The aggregate amount ex-
cluded from the gross income of the taxpayer under this section 
for any taxable year shall not exceed $5,000 ($2,500 in the case 
of a separate return by a married individual). 
For purposes of the preceding sentence, marital status shall be 
determined under the rules of paragraphs (3) and (4) of section 
21(e)." 
0>) TREATMENT OF ONSITE FACIUTIES.—Subsection (e) of section 129 
is amended by adding at the end thereof the following new para-
graph: 
"(8) TREATMENT OF ONSITE FACILITIES.—In the case of an onsite 
facility, except to the extent provided in regulations, the 
amount excluded with respect to any dependent shall be based 
on— 
"(A) utilization, and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2511 
"(B) the value of the services provided." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
SEC. 1164. TAX TREATMENT OF FACULTY HOUSING. 
(a) IN GENERAL.—Section 119 (relating to meals or lodging fur-
nished for the convenience of the employer) is amended by adding at 
the end thereof the following new subsection: 
"(d) LODGING FURNISHED BY CERTAIN EDUCATIONAL INSTITUTIONS 
T
O EMPLOYEES.— 
"(1) IN GENERAL.—In the case of an employee of an edu-
cational institution, gross income shall not include the value of 
qualified campus lodging furnished to such employee during the 
taxable year. 
"(2) EXCEPTION IN CASES OF INADEQUATE RENT.—Paragraph (1) 
shall not apply to the extent of the excess of— 
"(A) the lesser of^ 
"(i) 5 percent of the appraised value (as of the close of 
the calendar year in which the taxable year begins) of 
the qualified campus lodging, or 
"(ii) the average of the rentals paid by individuals 
(other than employees or students of the educational 
institution) during such calendar year for lodging pro-
vided by the educational institution which is com-
parable to the qualified campus lodging provided to the 
employee, over 
"(B) the rent paid by the employee for the qualified 
campus lodging during such calendar year. 
"(3) QuAUFiED CAMPUS LODGING.—For purposes of this subsec-
tion, the term 'qualified campus lodging' means lodging to 
which subsection (a) does not apply and which is— 
"(A) located on, or in the proximity of, a campus of the 
educational institution, and 
"(B) furnished to the employee, his spouse, and any of his 
dependents by or on behalf of such institution for use as a 
residence. 
"(4) EDUCATIONAL INSTITUTION.—For purposes of this para-
graph, the term 'educational institution means an institution 
described in section 170(b)(lXAXii).". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1985. 
SEC. 1165. LIMITATION ON ACCRUAL OF VACATION PAY. 
(a) GENERAL RULE.—Paragraph (1) of section 463(a) (relating to 
accrual of vacation pay) is amended by striking out "and expected to 
be paid during the taxable year or within 12 months following the 
close of the taxable year" and inserting in lieu thereof "and paid 
during the taxable year or within ^Vz months following the close of 
the taxable year". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1986. 
SEC. 1166. TREATMENT OF CERTAIN FULL-TIME LIFE INSURANCE SALES-
MEN. 
(a) GENERAL RULE.—Paragraph (20) of section 7701(a) (defining 
employee) is amended by striking out "and 106" and inserting in 
lieu thereof "106, and 125". 
100 STAT. 2512 
PUBLIC LAW 99-514—OCT. 22, 1986 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to yfears beginning after December 31, 1985. 
SEC. 1167. EXTENSION OF DUE DATE FOR STUDY OF WELFARE BENEFIT 
PLANS. 
Section 560(b) of the Tax Reform Act of 1984 is amended by 
striking out "February 1, 1985" and inserting in lieu thereof "the 
date which is 1 year after the date of the enactment of the Tax 
Reform Act of 1986". 
SEC. 1168. EXCLUSION FROM GROSS INCOME OF CERTAIN MILITARY 
BENEFITS. 
(a) EXCLUSION FROM GROSS INCOME.—Part III of subchapter B of 
chapter 1 (relating to items specifically excluded from gross income) 
is amended by redesignating section 134 as section 135 and by 
inserting after section 133 the following new section: 
"SEC. 134. CERTAIN MILITARY BENEFITS. 
"(a) GENERAL RULE.—Gross income shall not include any qualified 
military benefit. 
"(b) QUALIFIED MILITARY BENEFIT.—For purposes of this section— 
"(1) IN GENERAL.—The term 'qualified military benefit' means 
any allowance or in-kind benefit which— 
"(A) is received by any member or former member of the 
uniformed services of the United States or any dependent of 
such member by reason of such member's status or service 
p,^j J 
as a member of such uniformed services, and 
"(B) was excludable from gross income on September 9, 
1986, under any provision of law or regulation thereunder 
which was in effect on such date (other than a provision of 
this title). 
"(2) No OTHER BENEFIT TO BE EXCLUDABLE EXCEPT AS PROVIDED 
BY THIS TITLE.—Notwithstanding any other provision of law, no 
benefit shall be treated as a qualified military benefit unless 
such benefit— 
"(A) is a benefit described in paragraph (1), or 
"(B) is excludable from gross income under this title 
without regard to any provision of law which is not con-
tained in this title and which is not contained in a revenue 
Act. 
"(3) LIMITATIONS ON MODIFICATIONS.— 
"(A) I N GENERAL.—Except as provided in subparagraph 
(B), no modification or adjustment of any qualified military 
benefit after September 9, 1986, under any provision of law 
or regulation described in paragraph (1) shall be taken into 
account. 
"(B) EXCEPTION FOR CERTAIN ADJUSTMENTS TO CASH BENE-
1^ 
FITS.—Subparagraph (A) shall not apply to any adjustment 
to any qualified military benefit payable in cash which— 
"(i) is pursuant to a provision of law or regulation (as 
in effect on September 9,1986), and 
"(ii) is determined by reference to any fluctuation in 
cost, price, currency, or other similar index." 
(b) The table of sections for part III of subchapter B of chapter 1 is 
amended by striking out the item relating to section 134 and 
inserting in lieu thereof the following new items: 
"Sec. 134. Certain military benefits. 
"Sec. 135. Cross references to other Acts." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2513 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
Subtitle C—Changes Relating to Employee 
Stock Ownership Plans 
SEC. 1171. REPEAL OF EMPLOYEE STOCK OWNERSHIP CREDIT. 
(a) IN GENERAL.—Section 41 (relating to employee stock ownership 
credit) is hereby repealed. 
(b) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) Subsection (b) of section 38 is amended by striking out 
paragraph (4), by striking out ", plus" at the end of paragraph 
(3) and inserting in lieu thereof a period, and by inserting 
"plus" at the end of paragraph (2). 
(2) Subsection (d) of section 38 is amended— 
(A) by striking out "196(a), and 404(i)" and inserting in 
lieu thereof "and 196(a)", and 
(B) by striking out "41(a),". 
(3) Subsection (c) of section 56 is amended by striking out the 
last sentence. 
(4) Subparagraph (B) of section 108(b)(2) is amended by strik-
ing out the last sentence. 
(5) Paragraph (21) of section 401(a) is hereby repealed. 
(6) Subsection (i) of section 404 (relating to deductibility of 
unused portions of employee stock ownership credit) is hereby 
repealed. 
(7)(A) Section 6699 (relating to assessable penalties relating to 
tax credit employee stock ownership plan) is hereby repealed. 
(B) The table of sections for subchapter B of chapter 68 is 
amended by striking out the item relating to section 6699. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to compensation 
paid or accrued after December 31, 1986, in taxable years 
ending after such date. 
(2) SECTIONS 404(i) AND 6699 TO CONTINUE TO APPLY TO PRE-1987 
CREDITS.—The provisions of sections 404(i) and 6699 of the In-
ternal Revenue Code of 1986 shall continue to apply with 
respect to credits under section 41 of such Code attributable to 
compensation paid or accrued before January 1, 1987 (or under 
section 38 of such Code with respect to qualified investment 
before January 1,1983). 
SEC. 1172. ESTATE TAX DEDUCTION FOR PROCEEDS FROM SALES OF EM-
PLOYER SECURITIES. 
(a) IN GENERAL.—Part IV of subchapter A of chapter 11 (relating 
to taxable estate) is amended by adding at the end thereof the 
following new section: 
"SEC. 2057. SALES OF EMPLOYER SECURITIES TO EMPLOYEE STOCK 
OWNERSHIP PLANS OR WORKER-OWNED COOPERATIVES. 
"(a) GENERAL RULE.—For purposes of the tax imposed by section 
2001, the value of the taxable estate shall be determined by deduct-
100 STAT. 2514 
PUBLIC LAW 99-514—OCT. 22, 1986 
ing from the value of the gross estate an amount equal to 50 percent 
of the qualified proceeds of a qualified sale of employer securities. 
"(b) QUALIFIED SALE.—For purposes of this section, the term 
'qualified sale' means any sale of employer securities by the execu-
tor of an estate to— 
"(1) an employee stock ownership plan is described in section 
4975(e)(7), or 
"(2) an eligible worker-owned cooperative (within the mean-
ing of section 1042(c)). 
"(c) QUALIFIED PROCEEDS.—For purposes of this section— 
"(1) IN GENERAL.—The term 'qualified proceeds' means the 
amount received by the estate from the sale of employer securi-
ties at any time before the date on which the return of the tax 
imposed by section 2001 is required to be filed (including any 
extensions). 
"(2) PROCEEDS FROM CERTAIN SECURITIES NOT QUALIFIED.—The 
term 'qualified proceeds' shall not include the proceeds from the 
sale of any employer securities if such securities were received 
by the decedent— 
"(A) in a distribution from a plan exempt from tax under 
^.41 
section 501(a) which meets the requirements of section 
401(a), or 
"(B) as a transfer pursuant to an option or other right to 
acquire stock to which section 83, 422, 422A, 423, or 424 
applies. 
"(d) WRITTEN STATEMENT REQUIRED.— 
"(1) IN GENERAL.—No deduction shall be allowed under 
subsection (a) unless the executor of the estate of the decedent 
files with the Secretary the statement described in paragraph 
(2). 
"(2) STATEMENT.—A statement is described in this paragraph 
if it is a verified written statement o
f
— 
"(A) the employer whose employees are covered by the 
,; 
plan described in subsection (b)(1), or 
;, 
"(B) any authorized officer of the cooperative described in 
subsection Ot>)(2), 
consenting to the application of section 4979A with respect to 
such employer or cooperative. 
"(e) EMPLOYER SECURITIES.—For purposes of this section, the term 
'employer securities' has the meaning given such term by section 
409(1). 
"(f) TERMINATION.—This section shall not apply to any sale after 
December 31,1991." 
(b) CONFORMING AMENDMENTS.— 
(1) Section 409(n)(l) is amended— 
(A) by inserting "or section 2057" after "section 1042", 
(B) by inserting "or any decedent if the executor of the 
estate of such decedent makes a qualified sale to which 
'fj 
section 2057 applies," after "securities" in subparagraph 
•is 
(A)(i) thereof, and 
(C) by inserting "or the decedent" after "taxpayer" in 
f
j ;
,
c 
subparagraph iA)iii) thereof 
(2) Section 4979A is amended— 
(A) by inserting "or section 2057" after "section 1042" in 
*
• \ 
subsection Ot))(l) thereof, and 
'j'n.4 
(B) H
j
y inserting "or section 2057(d)" after 
"section 
1042(b)(8XB)" in subsection (c) thereof. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2515 
(3) The table of sections for part IV of subchapter A of chapter 
11 is amended by adding at the end thereof the following new 
item: 
"Sec. 2057. Sales of employer securities to employee stock ownership plans 
or worker-owned cooperatives." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to sales after the date of the enactment of this Act with 
respect to which an election is made by the executor of an estate 
who is required to file the return of the tax imposed by the Internal 
Revenue Code of 1986 on a date (including extensions) after the date 
of the enactment of this Act. 
SEC. 1173. PROVISIONS RELATING TO LOANS USED TO ACQUIRE EM-
PLOYER SECURITIES. 
(a) DEDUCTION FOR DIVIDENDS PAID T O REPAY LOANS.— 
(1) I N GENERAL.—Paragraph (2) of section 404(k) (relating to 
dividend paid deductions) is amended by striking out "or" at the 
end of subparagraph (A), by striking out the period at the end of 
subparagraph (B) and inserting in lieu thereof ", or", and by 
inserting at the end thereof the following new subparagraph: 
"(C) the dividend with respect to employer securities is 
used to make payments on a loan described in section 
404(a)(9)." 
(2) CONFORMING AMENDMENT.—Section 404(k) is amended by 
adding at the end thereof the following new sentence: "Any 
deduction under paragraph (2)(C) shall be allowable in the 
taxable year of the corporation in which the dividend is used to 
repay the loan described in such paragraph." 
(b) SECURITIES ACQUISITION LOANS.— 
(1) APPUCATION TO INTEREST RECEIVED BY RIC.— 
(A) I N GENERAL.—Section 133(a) (relating to exclusion for 
interest on certain loans used to acquire employer securi-
rsp, 
ties) is amended by striking out "or" at the end of para-
graph (2), by inserting "or" at the end of paragraph (3), and 
by adding at the end thereof the following new paragraph: 
"(4) a regulated investment company (as defined in section 
851).". 
(B) 
CONFORMING 
AMENDMENT.—Section 
852(bX5) 
is 
amended by adding at the end thereof the following new 
subparagraph: 
"(C) INTEREST ON CERTAIN LOANS USED TO ACQUIRE EM-
PLOYER SECURITIES.—For purposes of this paragraph— 
"(i) 50 percent of the amount of any loan of the 
regulated investment company which qualifies as a 
securities acquisition loan (as defined in section 133) 
shall be treated as an obligation described in section 
103(a), and 
"(ii) 50 percent of the interest received on such loan 
shall be treated as interest excludable from 
gross 
income under section 103." 
(2) SECURITIES ACQUISITION LOAN.—Section 133(bXl) (defining 
securities acquisition loan) is amended to read as follows: 
"(1) I N GENERAL.—For purposes of this section, the term 
'securities acquisition loan' means— 
"(A) any loan to a corporation or to an employee stock 
ownership plan to the extent that the proceeds are used to 
100 STAT. 2516 
PUBLIC LAW 99-514—OCT. 22, 1986 
acquire employer securities for the plan, or are used to 
refinance such a loan, or 
"(B) any loan to a corporation to the extent that, within 
30 days, employer securities are transferred to the plan in 
an amount equal to the proceeds of such loan and such 
securities are allocable to accounts of plan participants 
within 1 year of the date of such loan, except that this 
subparagraph shall not apply to any loan the commitment 
period of which exceeds 7 years. 
For purposes of this paragraph, the term 'employer securities' 
has the meaning given such term by section 409(1)." 
(c) EFFECTIVE DATES.— 
(1) DIVIDENDS.—The amendments made by subsection (a) shall 
apply to dividends paid in taxable years beginning after the 
date of the enactment of this Act. 
(2) SUBSECTION (b).— 
(A) The amendments made by subsection (b)(1) shall 
apply to loans used to acquire employer securities after the 
date of the enactment of this Act, including loans used to 
refinance loans used to acquire employer securities before 
such date if such loans were used to acquire employer 
securities after May 23,1984. 
(B)(i) Section 133(b)(1)(A) of the Internal Revenue Code of 
i' 
1986, as amended by subsection (b)(2), shall apply to any 
loan used to refinance a loan which— 
' 
(I) met the requirements of section 1330t))(l) (as in 
effect when such loan was entered into), and 
(II) was used to acquire securities after July 18, 1984. 
(ii) If a loan described in clause (i) has a term of greater 
than 7 years, clause (i) shall apply only to interest accruing 
on such loan during the first 7 years. 
(C) Section 133(b)(1)(B) of the Internal Revenue Code of 
1986, as added by - subsection (b)(2), shall apply to loans 
incurred after the date of enactment of this Act. 
SEC. 1174. REQUIREMENTS FOR EMPLOYEE STOCK OWNERSHIP PLANS. 
(a) DISTRIBUTIONS ON PLAN TERMINATIONS PERMITTED.— 
(1) IN GENERAL.—Paragraph (1) of section 409(d) (requiring 
that employer securities must stay in the plan) is amended by 
striking out "or separation from service" and inserting in lieu 
* 
thereof "separation from service, or termination of the plan". 
(2) EFFECTIVE DATE.—The amendment made by this subsection 
shall apply to plan terminations after December 31,1984. 
OJ) DISTRIBUTION AND PAYMENT REQUIREMENTS.— 
(1) IN GENERAL.—Section 409 (relating to qualifications for 
employee stock ownership plans) is amended by redesignating 
,,, 
subsection (o) as subsection (p) and by inserting after subsection 
(n) the following new subsection: 
"(o) DISTRIBUTION AND PAYMENT REQUIREMENTS.—A plan meets 
the requirements of this subsection i
f
— 
"(1) DISTRIBUTION REQUIREMENT.— 
,,, 
"(A) IN GENERAL.—The plan provides that, unless the 
participant otherwise elects, the distribution of the partici-
pant's account balance in the plan will commence not later 
: i 
than 1 year after the close of the plan year— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2517 
"(i) in which the participant separates from service 
by reason of the attainment of normal retirement age 
under the plan, disability, or death, or 
"(ii) which is the 5th plan year following the plan 
year in which the participant otherwise separates from 
service, except that this clause shall not apply if the 
participant is reemployed by the employer before such 
year. 
"(B) EXCEPTION FOR CERTAIN FINANCED SECURITIES.—For 
purposes of this subsection, the account balance of a partici-
pant shall not include any employer securities acquired 
with the proceeds of the loan described in section 404(aX9) 
until the close of the plan year in which such loan is repaid 
in full. 
"(C) LIMITED DISTRIBUTION PERIOD.—The plan provides 
that, unless the participant elects otherwise, the distribu-
tion of the participant's account balance will be in substan-
tially equal periodic payments (not less frequently than 
annually) over a period not longer than the greater o
f
— 
"(i) 5 years, or 
"(ii) in the case of a participant with an account 
balance in excess of $500,000, 5 years plus 1 additional 
year (but not more than 5 additional years) for each 
$100,000 or fraction thereof by which such balance 
exceeds $500,000. 
"(2) CosT-OF-uviNG ADJUSTMENT.—The Secretary shall adjust 
the dollar amounts under paragraph (1)(C) at the same time and 
in the same manner as under section 415(d)." 
(2) CONFORMING AMENDMENTS.—Sections 409(a)(3) is amended 
by striking out "and (h)" and inserting in lieu thereof "(h), and 
(o)". 
(3) EFFECTIVE DATE.—The amendments made by this subsec-
tion shall apply to distributions attributable to stock acquired 
after December 31,1986. 
(c) PUT OPTION REQUIREMENTS.— 
(1) PAYMENT REQUIREMENT.— 
(A) IN GENERAL.—Subsection (h) of section 409 (relating to 
right to demand employer securities; put option) is 
amended by adding at the end thereof the following new 
paragraphs: 
"(5) PAYMENT REQUIREMENT FOR TOTAL DISTRIBUTION.—If an 
employer is required to repurchase employer securities which 
are distributed to the employee as part of a total distribution, 
the requirements of paragraph (1)(B) shall be treated as met if— 
"(A) the amount to be paid for the employer securities is 
paid in substantially equal periodic payments (not less 
frequently than annually) over a period beginning not later 
than 30 days after the exercise of the put option described 
in paragraph (4) and not exceeding 5 years, and 
"(B) there is adequate security provided and reasonable 
interest paid on the unpaid amounts referred to in subpara-
graph (A). 
For purposes of this paragraph, the term 'total distribution' 
means the distribution within 1 taxable year to the recipient of 
the balance to the credit of the recipient's account. 
"(6) 
PAYMENT 
REQUIREMENT 
FOR INSTALLMENT 
DISTRIBU 
TiONS.—If an employer is required to repurchase employer secu-
71-194 
0 
- 
89 
- 
2A : 
QL. 
3 Part3 
100 STAT. 2518 
PUBLIC LAW 99-514—OCT. 22, 1986 
s'^ rities as part of an installment distribution, the requirements of 
'^ 
paragraph (IXB) shall be treated as met if the amount to be paid 
for the employer securities is paid not later than 30 days after 
the exercise of the put option described in paragraph (4)." 
(B) EFFECTIVE DATE.—The amendment made by this para-
graph shall apply to distributions attributable to stock 
acquired after December 31, 1986, except that a plan may 
elect to have such amendment apply to all distributions 
V ; 
after the date of the enactment of this Act. 
(2) PUT OPTION REQUIREMENT EXTENDED TO STOCK BONUS 
PLANS.— 
(A) IN GENERAL.—Section 401(aX23) is amended to read as 
follows: 
, 
"(23) A stock bonus plan shall not be treated as meeting the 
requirements of this section unless such plan meets the require-
ments of subsections (h) and (o) of section 409, except that in 
appl)ang section 409(h) for purposes of this paragraph, the term 
> 'employer securities' shall include any securities of the em-
ployer held by the plan." 
(B) EFFECTIVE DATE.—The amendment made by this para-
graph shall apply to distributions attributable to stock 
acquired after December 31,1986. 
(d) NONDISCRIMINATION REQUIREMENTS.— 
(1) IN GENERAL.—Subparagraph (A) of section 415(cX6) is 
, j^, amended by striking out "the group of employees consisting of 
I .J officers, shareholders owning more than 10 percent of the 
employer's stock (determined under subparagraph (BXiv)), or 
employees described in subparagraph (BXiii)" and inserting in 
lieu thereof "highly compensated employees (within the mean-
ing of section 414(q))". 
^ 
(2) CONFORMING AMENDMENTS.— 
->-v^ 
(A) Subparagraph (B) of section 415(cX6) is amended by 
striking out clauses (iii) and (iv) thereof. 
(B) Subparagraph (C) of section 415(cX6) is amended by 
striking out "the group of employees consisting of officers, 
vi 
shareholders owning more than 10 percent of the employ-
t 
er's stock (determined under subparagraph (BXiv)), or 
;f; ji 
employees described in subparagraph (BXiii)" and inserting 
in lieu thereof "highly compensated employees (within the 
f H 
meaning of section 414(q))". 
(3) EFFECTIVE DATE.—The amendments made by this subsec-
1 tion shall apply to years beginning after December 31, 1986. 
SEC. 1175. ADDITIONAL QUALIFICATION REQUIREMENTS. 
(a) 
ADDITIONAL QUAUFICATION 
REQUIREMENTS FOR EMPLOYEE 
STOCK OWNERSHIP PLANS.— 
(1) IN GENERAL.—Subsection (a) of section 401 (relating to 
qualified pension, profit-sharing, and stock bonus plans), as 
amended by this Act, is amended by inserting after paragraph 
(27) the following new paragraph: 
"(28) ADDITIONAL REQUIREMENTS RELATING TO EMPLOYEE STOCK 
J1 
OWNERSHIP PLANS.— 
<
r s: 
"(A) IN GENERAL.—In the case of a trust which is part of 
an employee stock ownership plan (within the meaning of 
' i' 
section 4975(eX7)) or a plan which meets the requirements 
-i 
of section 409(a), such trust shall not constitute a qualified 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2519 
^ f 
trust under this section unless such plan meets the require-
ments of subparagraphs (B) and (C). 
"(B) DIVERSIFICATION OF INVESTMENTS.— 
"(i) IN GENERAL.—A plan meets the requirements of 
-,.. 
this subparagraph if each qualified participant in the 
plan may elect within 90 days after the close of each 
plan year in the qualified election period to direct the 
i; 
plan as to the investment of at least 25 percent of the 
participant's account in the plan (to the extent such 
portion exceeds the amount to which a prior election 
under this subparagraph applies). In the case of the 
,
%
^ 
election year in which the participant can make his 
last election, the preceding sentence shall be applied by 
substituting '50 percent' for '25 percent'. 
"(ii) METHOD OF MEETING REQUIREMENTS.—A plan 
shall be treated as meeting the requirements of clause 
(i) if-
"(I) the portion of the participant's account cov-
ered by the election under clause (i) is distributed 
within 90 days after the period during which the 
: .t. J 
election may be made, or 
"(II) the plan offers at least 3 investment options 
,.. 
(not inconsistent with regulations prescribed by 
the Secretary) to each participant making an elec-
tion under clause (i). 
. p 
"(iii) QUAUFIED PARTICIPANT.—For purposes of this 
subparagraph, the term 'qualified participant' means 
any employee who has completed at least 10 years of 
participation under the plan and has attained age 55. 
"(iv) QUALIFIED ELECTION PERIOD.—For purposes of 
this subparagraph, the term 'qualified election period' 
; 
means the 5-plan-year period beginning with the plan 
year after the plan year in which the participant at-
tains age 55 (or, if later, beginning with the plan year 
after the 1st plan year in which the individual 1st 
became a qualified participant). 
,ir«: 
"^^^ U^^ ^^ INDEPENDENT APPRAISER.—A plan meets the 
requirements of this subparsigraph if all valuations of em-
ployer securities which are not readily tradable on an 
established securities market with respect to activities car-
ried on by the plan are by an independent appraiser. For 
purposes of the preceding sentence, the term 'independent 
appraiser' means any appraiser meeting requirements simi-
lar to the requirements of the regulations prescribed under 
b 
section 170(aXl)." 
o 
(2) EFFECTIVE DATE.—The amendment made by this subsection 
shall apply to stock acquired after December 31,1986. 
SEC. 1176. SPECIAL ESOP REQUIREMENTS. 
(a) IN GENERAL.—Section 401(aX22) (relating to qualified pension, 
profit sharing and stock bonus plans) is amended by inserting at the 
end thereof the following new sentence: "The requirements of 
subsection (e) of section 409 shall not apply to any employees of an 
employer who are participants in any defined contribution plan 
established and maintained by such employer if the stock of such 
employer is not publicly traded and the trade or business of such 
100 STAT. 2520 
PUBLIC LAW 99-514—OCT. 22, 1986 
employer consists of publishing on a regular basis a newspaper for 
general circulation." 
(b) Section 409(1) is amended by adding at the end thereof the 
following new paragraph: 
"(4) NONVOTING COMMON STOCK MAY BE ACQUIRED IN CERTAIN 
CASES.—Nonvoting common stock of an employer described in 
the last sentence of section 401(aX22) shall be treated as em-
ployer securities if an employer has a class of nonvoting 
common stock outstanding and the specific shares that the plan 
' 
acquires have been issued and outstanding for at least 24 
months." 
(c) EFFECTIVE DATES.—The amendment made by subsection (a) 
shall be effective December 31, 1986. The amendment made by 
subsection Ot)) shall apply to acquisitions of securities after Decem-
ber 31,1986. 
SEC. 1177. TRANSITION RULES. 
(a) SECTION 1171.—The amendments made by section 1171 shall 
not apply in the case of a tax credit employee stock ownership plan 
if— 
(1) such plan was favorably approved on September 23, 1983, 
by employees, and 
(2) not later than January 11, 1984, the employer of such 
employees was 100 percent owned by such plan. 
(b) SUBTITLE NOT TO APPLY TO CERTAIN NEWSPAPER.—The amend-
ments made by this subtitle shall not apply to any daily news-
paper— 
(1) which was first published on December 17, 1855, and which 
^" began publication under its current name in 1954, and 
» 
(2) which is published in a constitutional home rule city 
^ 
(within the meaning of section 143(d)(3XC) of the Internal Reve-
- 
nue Code of 1986) which has a population of less than 2,500,000. 
TITLE XII—FOREIGN TAX PROVISIONS 
Subtitle A—Foreign Tax Credit ModiHcations 
SEC. 1201. SEPARATE APPLICATION OF SECTION 904 WITH RESPECT TO 
CERTAIN CATEGORIES OF INCOME. 
(a) GENERAL RULE.—Paragraph (1) of section 904(d) (relating to 
separate application of section 904 with respect to certain income) is 
amended by striking out subparagraph (A), by redesignating sub-
paragraphs (B), (C), (D), and (E) £is subparagraphs (F), (G), (H), and 
(I), respectively, and by inserting before subparagraph (F) (as so 
redesignated) the following new subparagraphs: 
"(A) passive income, 
"(B) high withholding tax interest, 
"(C) financial services income, 
"(D) shipping income, 
"(E) dividends from each noncontrolled section 902 
corporation,". 
(b) CATEGORIES DEFINED.—Subsection (d) of section 904 is amended 
by striking out paragraphs (2) and (3) and inserting in lieu thereof 
the following new paragraphs: 
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2521 
"(2) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
subsection— 
"(A) PASSIVE INCOME.— 
"(i) I N GENERAL.—Except as otherwise provided in 
this subparagraph, the term 'passive income' means 
any income received or accrued by any person which is 
of a kind which would be foreign personal holding 
company income (as defined in section 954(c)). 
"(ii) CERTAIN AMOUNTS INCLUDED.—The term 'passive 
income' includes any amount 
includible in gross 
income under section 551 or section 1293 (relating to 
certain passive foreign investment companies). 
;. 
"(iii) EXCEPTIONS.—The term 'passive income' shall 
not include— 
>? 
"(I) any income described in a subparagraph of 
paragraph (1) other than subparagraph (A), 
"(II) any export financing interest, 
"(III) any high-taxed income, and 
"(IV) any foreign oil and gas extraction income 
(as defined in section 907(c)). 
"(B) H I G H WITHHOLDING TAX INTEREST.— 
"(i) I N GENERAL.—Except as otherwise provided in 
this subparagraph, the term 'high withholding tax in-
terest' means any interest if— 
"(I) such interest is subject to a withholding tax 
of a foreign country or possession of the United 
States (or other tax determined on a gross basis), 
and 
"(II) the rate of such tax applicable to such 
interest is at least 5 percent. 
"(ii) EXCEPTION FOR EXPORT FINANCING.—The term 
'high withholding tax interest' shall not include any 
export financing interest. 
"(iii) REGULATIONS.—The Secretary may by regula-
tions 
provide 
that 
amounts (not otherwise 
high 
withholding tax interest) shall be treated as high 
withholding tax interest where necessary to prevent 
avoidance of the purposes of this subparagraph. 
"(C) FINANCIAL SERVICES INCOME.— 
"(i) I N GENERAL.—Except as otherwise provided in 
this subparagraph, the term 'financial services income' 
means income received or accrued by any person which 
is not passive income (determined without regard to 
subparagraph (A)(iii)(I)) and which— 
"(I) is derived in the active conduct of a banking, 
financing, or similar business, or derived from the 
investment by an insurance company of its un-
earned premiums or reserves ordinary and nec-
essary for the proper conduct of its insurance busi-
ness, or 
"(II) is of a kind which would be insurance 
income as defined in section 953(a) determined 
without regard to those provisions of paragraph 
(1)(A) of such section which limit insurance income 
to income from countries other than the country in 
which the corporation was created or organized. 
100 STAT. 2522 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(ii) SPECIAL RULE IF ENTITY PREDOMINANTLY ENGAGED 
IN BANKING, ETC., BUSINESS.—If, for any taxable year, 
an entity is predominantly engaged in the active con-
duct of a banking, insurance, financing, or similar 
business, the term 'financial services income' includes 
' ' 
any passive income (determined without regard to 
U 
subparagraph (AXiiiXD) of such corporation for such 
taxable year. In the case of any entity described in the 
" 
preceding sentence, the term 'shipping income' shall 
not include any income treated as financial services 
. ^ ;.' 
income under the preceding sentence. 
"(iii) EXCEPTION FOR EXPORT FINANCING.—The term 
[ ' 
e • 'financial services income' does not include any export 
financing interest. 
5; . 
"(iv) HIGH WITHHOLDING TAX INTEREST.—The term 
'financial services income' does not include any high 
withholding teix interest. 
"(D) SHIPPING INCOME.—The term 'shipping income' 
>
r 
means any income received or accrued by any person which 
is of a kind which would be foreign base company shipping 
income (as defined in section 954(0). 
"(E) N O N C O N T R O L L E D SECTION 902 CORPORATION.— 
"(i) IN GENERAL.—The term 'noncontrolled section 
902 corporation' means any foreign corporation with 
,<... 
respect to which the taxpayer meets the stock owner-
ship requirements of section 902(a) (or, for purposes of 
applying paragraph (3), the requirements of section 
902(b)). A controlled foreign corporation shall not be 
, 
. ' treated as a noncontrolled section 902 corporation with 
respect to any distribution out of its earnings and 
profits for periods during which it was a controlled 
. 
foreign corporation. 
"(ii) SPECIAL RULE FOR TAXES ON HIGH-WITHHOLDING 
TAX 
INTEREST.—If a 
foreign 
corporation 
is a 
noncontrolled section 902 corporation with respect to 
the taxpayer, taxes on high withholding tax interest (to 
the extent imposed at a rate in excess of 5 percent) 
shall not be treated as foreign taxes for purposes of 
determining the amount of foreign taxes deemed paid 
by the taxpayer under section 902. 
"(F) HIGH-TAXED INCOME.—The term 'high-taxed income' 
., 
means any income which (but for this subparagraph) would 
be passive income if the sum of— 
"(i) the foreign income taxes paid or accrued by the 
taxpayer with respect to such income, and 
"(ii) the foreign income taxes deemed paid by the 
taxpayer with respect to such income under section 902 
or 960, 
. ' 
exceeds the highest rate of tax specified in section 1 or 11 
^' 
(whichever applies) multiplied by the amount of such 
income (determined with regard to section 78). For purposes 
of the preceding sentence, the term 'foreign income taxes' 
'; 
means any income, war profits, or excess profits tax im-
posed by any foreign country or possession of the United 
States. 
"(G) EXPORT FINANCING INTEREST.—For purposes of this 
paragraph, the term 'export financing interest' means any 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2523 
interest derived from financing the sale (or other disposi-
tion) for use or consumption outside the United States of 
any property— 
"(i) which is manufactured, produced, grown, or ex-
tracted in the United States by the taxpayer or a 
related person, and 
*'(ii) not more than 50 percent of the fair market 
value of which is attributable to products imported into 
the United States. 
^ 
For purposes of clause (ii), the fair market value of any 
property imported into the United States shall be its ap-
praised value, as determined by the Secretary under section 
402 of the Tariff Act of 1930 (19 U.S.C. 1401a) in connection 
with its importation. 
"(H) RELATED PERSON.—For purposes of this paragraph, 
as 
the term 'related person' has the meaning given such term 
by section 954(d)(3), except that such section shall be ap-
r 
plied by substituting 'the person with respect to whom the 
t 
determination is being made' for 'controlled foreign cor-
poration' each place it appears. 
ch- 
"(I) TRANSITIONAL RULE.—For purposes of paragraph (1)— 
"(i) taxes paid or accrued in a taxable year beginning 
before January 1, 1987, with respect to income which 
was described in subparagraph (A) of paragraph (1) (as 
in effect on the day before the date of the enactment of 
the Tax Reform Act of 1986) shall be treated as taxes 
paid or accrued with respect to income described in 
subparagraph (A) of paragraph (1) (as in effect after 
such date), 
"(ii) taxes paid or accrued in a taxable year begin-
ning before January 1, 1987, with respect to income 
which was described in subparagraph (E) of paragraph 
(1) (as in effect on the day before the date of the 
enactment of the Tax Reform Act of 1986) shall be 
treated as taxes paid or accrued with respect to income 
* 
described in subparagraph (I) of paragraph (1) (as in 
effect after such date) except to the extent that— 
* 
"(I) the taxpayer establishes to the satisfaction of 
the Secretary that such taxes were paid or accrued 
"' 
with respect to shipping income, or 
"(II) in the case of an entity meeting the require-
ments of subparagraph (CXii), the taxpayer estab-
lishes to the satisfaction of the Secretary that such 
> 
taxes were paid or accrued with respect to finan-
nl - ^ 
cial services income, and 
"(iii) taxes paid or accrued in a taxable year begin-
3
>
c
* ill- u 
ning before January 1, 1987, with respect to income 
described in any other subparagraph of paragraph (1) 
-rr • 
(as so in effect before such date) shall be treated as 
ri, 
taxes paid or accrued with respect to income described 
in the corresponding subparagraph of paragraph (1) (as 
r 
so in effect after such date). 
"(3) LOOK-THRU IN CASE OF CONTROLLED FOREIGN CORPORA-
TIONS.— 
"(A) IN GENERAL.—Except as otherwise provided in this 
paragraph, dividends, interest, rents, and royalties received 
or accrued by the taxpayer from a controlled foreign 
100 STAT. 2524 
PUBLIC LAW 99-514—OCT. 22, 1986 
corporation in which the taxpayer is a United States share-
" 
holder shall not be treated as income in a separate cat-
egory. 
"(B) SUBPART F INCLUSIONS.—Any amount included in 
gross income under section 951(a)(1)(A) shall be treated as 
, income in a separate category to the extent the amount so 
" 
included is attributable to income in such category. 
"(C) INTEREST, RENTS, AND ROYALTIES.—Any interest, rent, 
or royalty which is received or accrued from a controlled 
foreign corporation in which the taxpayer is a United 
States shareholder shall be treated as income in a separate 
J, 
category to the extent it is properly allocable (under regu-
lations prescribed by the Secretary) to income of the 
controlled foreign corporation in such category. 
"(D) DIVIDENDS.—Any dividend paid out of the earnings 
and profits of any controlled foreign corporation in which 
the taxpayer is a United States shareholder shall be treated 
as income in a separate category in proportion to the ratio 
of— 
"(i) the portion of the earnings and profits attrib-
utable to income in such category, to 
"(ii) the total amount of earnings and profits. 
:' 
"(E) LOOK-THRU APPLIES ONLY WHERE SUBPART F APPLIES.— 
If a controlled foreign corporation meets the requirements 
of section 954(b)(3)(A) (relating to de minimis rule) for any 
taxable year, for purposes of this paragraph, none of its 
income for such taxable year shall be treated as income in a 
separate category. Solely for purposes of applying subpara-
graph (D), income (other than high withholding tax interest 
and dividends from a noncontrolled section 902 corporation) 
of a controlled foreign corporation shall not be treated as 
income in a separate category if the requirements of section 
954(b)(4) are met with respect to such income. 
"(F) SEPARATE CATEGORY.—For purposes of this para-
graph, the term 'separate category' means any category of 
income described in subparagraph (A), (B), (C), (D), or (E) of 
paragraph (1). 
"(G) DIVIDEND.—For purposes of this paragraph, the term 
'dividend' includes any amount included in gross income in 
section 951(a)(1)(B). Any amount included in gross income 
under section 78 to the extent attributable to amounts 
included in gross income in section 951(a)(1)(A) shall not be 
treated as a dividend but shall be treated as included in 
gross income under section 951(a)(1)(A). 
"(4) CONTROLLED FOREIGN CORPORATION; UNITED STATES SHARE-
^ HOLDER.—For purposes of this subsection— 
"(A) CONTROLLED FOREIGN CORPORATION.—The term 'con-
trolled foreign corporation' has the meaning given such 
-: 
term by section 957 (taking into account section 953(c)). 
"(B) UNITED STATES SHAREHOLDER.—The term 'United 
States shareholder' has the meaning given such term by 
section 951(b) (taking into account section 953(c)). 
"(5) REGULATIONS.—The Secretary shall prescribe such regu-
*' lations as may be necessary or appropriate for the purposes of 
this subsection, including regulations— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2525 
"(A) for the application of paragraph (3) and subsection 
(f)(5) in the case of income paid (or loans made) through 1 or 
more entities or between 2 or more chains of entities, 
"(B) preventing the manipulation of the character of 
income the effect of which is to avoid the purposes of this 
subsection, and 
"(C) providing that rules similar to the rules of paragraph 
i 
(3)(C) shall apply to interest, rents, and royalties received or 
accrued from entities which would be controlled foreign 
corporations if they were foreign corporations." 
(c) SOURCE RULE.—Paragraph (5) of section 954(b) (relating to 
deductions) is amended by adding at the end thereof the following 
new sentence: "Except to the extent provided in regulations pre-
scribed by the Secretary, any interest which is paid or accrued by 
the controlled foreign corporation to any United States shareholder 
in such corporation (or any controlled foreign corporation related to 
such a shareholder) shall be allocated first to foreign personal 
holding company income which is passive income (within the mean-
ing of section 904(d)(2)) of such corporation to the extent thereof. The 
Secretary may, by regulations, provide that the preceding sentence 
shall apply also to interest paid or accrued to other persons." 
(d) TECHNICAL AMENDMENTS.— 
(1) The subsection heading of section 904(d) is amended to 
read as follows: 
"(d) SEPARATE APPLICATION OF SECTION WITH RESPECT TO CERTAIN 
CATEGORIES OF INCOME.—". 
(2) Subparagraph (I) of section 904(d)(1) (as redesignated by 
subsection (a)) is amended by striking out "in subparagraph (A), 
(B), (C), or (D)" and inserting in lieu thereof "in any of the 
preceding subparagraphs". 
(3) Paragraph (1) of section 904(d) is amended by inserting 
"and sections 902, 907, and 960" after "subsections (a), O
t
>
)
, and 
(c)". 
(4) Clause (i) of section 864(d)(5)(A) is amended to read as 
follows: 
"(i) Subparagraphs (A)(iii)(II), (B)(ii), and (C)(iii) of 
section 904(d)(2) (relating to exceptions for export 
financing interest)." 
(e) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendments made by this section shall apply to taxable years 
beginning after December 31, 1986. 
(2) QUALIFIED LOANS.— 
(A) IN GENERAL.—The following shall not be treated as 
high withholding tax interest for purposes of applying 
section 904(d) of the Internal Revenue Code of 1986 (as 
amended by this section): 
(i) Any interest received or accrued by any taxpayer 
during any taxable year beginning after December 31, 
1986, and before January 1, 1990, on any pre-1990 
qualified loan, and 
(ii) The phase-out percentage of any interest received 
or accrued by any taxpayer during any taxable year 
beginning after December 31, 1989 on any post-1989 
qualified loan. 
(B) PHASE-OUT PERCENTAGE.—For purposes of subpara-
graph (A) the phase-out percentage is— 
100 STAT. 2526 
PUBLIC LAW 99-514—OCT. 22, 1986 
In the case of the following taxable 
The phase out 
years beginning after 12/31/89: 
percentage is: 
1st 
80 
2nd 
60 
3rd 
40 
>^;f . 
4th 
20 
5th or succeeding 
0 
(C) PRE-1990 QUAUFIED LOAN.—For purposes of subpara-
graph (A), the term "pre-1990 qualified loan" means, with 
respect to any taxable year beginning before January 1, 
1990, any qualified loan outstanding at any time during 
such taxable year to the extent that the total amount of 
^' 
foreign taxes which would be creditable (without regard to 
*
* 
the limitation of section 904 of the Internal Revenue Code 
5" 
of 1986) with respect to all qualified loans outstanding at 
/If 
any time during such taxable year does not exceed the 
:'" 
applicable credit limit for such taxable year. 
(D) POST-1989 QUALIFIED LOANS.—For purposes of Subpara-
graph (A), the term "post-1989 qualified loan" means any 
qualified loan outstanding as of the close of the 1st taxable 
year of the taxpayer beginning after December 31, 1988, to 
the extent that the total amount of foreign taxes which 
yl 
would be creditable (without regard to the limitation of 
section 904 of the Internal Revenue Code of 1986) with 
respect to all qualified loans outstanding as of the close of 
such taxable year does not exceed the applicable credit 
limit for post-1989 qualified loans. 
(E) CLASSIFICATION OF QUALIFIED LOANS.—For purposes of 
jf 
this paragraph, if the foreign taxes creditable for any tax-
able year beginning before January 1, 1990, with respect to 
Sc 
any qualified loan, when added to the aggregate amount of 
•
s 
foreign taxes creditable for such taxable year with respect 
to qualified loans entered into by the taxpayer before the 
^ 
date on which such qualified loan was entered into, exceed 
the applicable credit limit, then that portion of a qualified 
*
^ 
loan which causes the taxpayer to exceed the applicable 
^
*
' 
credit limit shall not be treated as a pre-1990 or post-1989 
qualified loan, as the case may be. 
(F) APPUCABLE CREDIT UMIT.— 
(i) IN GENERAL.—The applicable credit limit shall be 
equal to— 
(I) except as provided in subclause (II), 110 per-
cent of the base credit amount multiplied by the 
applicable interest rate adjustment for the taxable 
' '„ 
, 
year, and 
(II) in the case of post-1989 qualified loans, the 
,,.,, 
amount determined under subclause (I) (without 
t, 
i ^, 
regard to the interest rate adjustment) multiplied 
*v 
,;^. ,. 
by the interest rate adjustment for post-1989 quali-
fied loans. 
, . 
(ii) BASE CREDIT AMOUNT.—The base credit amount of 
; .., 
a taxpayer shall be an amount equal to the principal 
i'i'-i'' 
amount of qualified loans held by such taxpayer on 
November 16, 1985, multiplied by the product o
f
— 
: i -^ 
(I) the interest rate applicable to such loan on 
November 16,1985, and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2527 
(II) the foreign withholding tax rate applicable to 
interest payable with respect to such loan on 
November 16, 1985. 
(G) INTEREST RATE ADJUSTMENT.— 
(i) IN GENERAL.—Except as provided in clause (ii), the 
applicable interest rate adjustment shall equal the 
ratio of the weighted average 6-month London Inter-
bank Offered Rate (LIBOR) for the taxable year in 
question to LIBOR on November 15, 1985. 
(ii) PosT-1989 QUALIFIED LOANS.—The applicable in-
terest rate adjustment for post-1989 qualified loans 
shall be equal to the ratio of LIBOR on the last day of 
the taxpayer's 1st taxable year beginning after Decem-
ber 31, 1988 to LIBOR on November 15, 1985. 
(H) QUALIFIED LOAN.—For purposes of this subsection, the 
term "qualified loan" means any loan made by the tax-
payer to any of the following countries or any resident 
thereof for use in such country: 
(i) Argentina. 
(xvii) Morocco. 
(ii) Bolivia. 
(xviii) Mozambique. 
(iii) Brazil. 
(xix) Niger. 
(iv) Chile. 
(xx) Nigeria. 
(v) Colombia. 
(xxi) Panama. 
(vi) Costa Rica. 
(xxii) Peru. 
(vii) The Dominican 
(xxiii) The Philippines. 
Republic. 
(xxiv) Romania. 
(viii) Ecuador. 
(xxv) Senegal. 
(ix) Guyana. 
(xxvi) Sierra Leone. 
(x) Honduras. 
(xxvii) The Sudan. 
(xi) The Ivory Coast. 
(xviii) Togo. 
(xii) Jamaica. 
(xxix) Uruguay, 
(xiii) Liberia. 
(xxx) Venezuela, 
(xiv) Madagascar. 
(xxxi) Yugoslavia. 
(xv) Malawi. 
(xxxii) Zaire, 
(xvi) Mexico. 
(xxxiii) Zambia. 
(I) No BENEFIT FOR INCREASED WITHHOLDING TAXES.—No 
benefit shall be allowable by reason of this paragraph for 
any foreign withholding tax imposed on interest payable 
with respect to any qualified loan to the extent the rate of 
such tax exceeds the foreign withholding tax rate ap-
plicable to interest payable with respect to such loan on 
November 16, 1985. 
(3) SPECIAL RULE FOR TAXPAYER WITH OVERALL FOREIGN LOSS.— 
(A) IN GENERAL.—If a taxpayer incorporated on June 20, 
1928, the principal headquarters of which is in Minneapolis, 
Minnesota, sustained an overall foreign loss (as defined in 
section 904(f)(2) of the Internal Revenue Code of 1954) in 
taxable years beginning before January 1, 1986, in connec-
tion with 2 separate trades or businesses which the tax-
payer had, during 1985, substantially disposed of in tax-free 
transactions pursuant to section 355 of such Code, then an 
amount, not to exceed $40,000,000 of foreign source income, 
which, but for this paragraph, would not be treated as 
overall limitation income, shall be so treated. 
100 STAT. 2528 
PUBLIC LAW 99-514—OCT. 22, 1986 
: ' 
(B) SUBSTANTIAL DISPOSITION.—For purposes of this para-
•ic 
graph, a taxpayer shall be treated as having substantially 
disposed of a trade or business if the retained portion of 
such business had sales of less than 10 percent of the 
i
^ 
annual sales of such business for taxable years ending in 
,d 
1985. 
SEC. 1202. DEEMED PAID CREDIT UNDER SECTIONS 902 AND 960 DETER-
MINED ON ACCUMULATED BASIS. 
(a) GENERAL RULE.—Section 902 (relating to credit for corporate 
stockholder in foreign corporation) is amended to read as follows: 
"SEC. 902. DEEMED PAID CREDIT WHERE DOMESTIC CORPORATION 
OWNS 10 PERCENT OR MORE OF VOTING STOCK OF FOR-
EIGN CORPORATION. 
"(a) TAXES PAID BY FOREIGN CORPORATION TREATED AS PAID BY 
DOMESTIC CORPORATION.—For purposes of this subpart, a domestic 
corporation which owns 10 percent or more of the voting stock of a 
foreign corporation from which it receives dividends in any taxable 
year shall be deemed to have paid the same proportion of such 
foreign corporation's post-1986 foreign income taxes as— 
"(1) the amount of such dividends (determined without regard 
to section 78), bears to 
"(2) such 
foreign 
corporation's 
post-1986 
undistributed 
earnings. 
"0)) DEEMED TAXES INCREASED IN CASE OF CERTAIN 2ND AND 3RD 
TIER FOREIGN CORPORATIONS.— 
"(1) 2ND TIER.—If the foreign corporation described in subsec-
tion (a) (hereinafter in this section referred to as the '1st tier 
corporation') owns 10 percent or more of the voting stock of a 
2nd foreign corporation from which it receives dividends in any 
taxable year, the 1st tier corporation shall be deemed to have 
paid the same proportion of such 2nd foreign corporation's post-
1986 foreign income taxes as would be determined under subsec-
tion (a) if such 1st tier corporation were a domestic corporation. 
"(2) 3RD TIER.—If such 1st tier corporation owns 10 percent or 
more of the voting stock of a 2nd foreign corporation which, in 
turn, owns 10 percent or more of the voting stock of a 3rd 
foreign corporation from which the 2nd corporation receives 
dividends in any taxable year, such 2nd foreign corporation 
shall be deemed to have paid the same proportion of such 3rd 
foreign corporation's post-1986 foreign income taxes as would be 
determined under subsection (a) if such 2nd foreign corporation 
were a domestic corporation. 
"(3) 5 PERCENT S
T
O
C
K REQUIREMENT.—For purposes of this 
subpart— 
"(A) FOR 2ND TIER.—Paragraph (1) shall not apply unless 
the percentage of voting stock owned by the domestic cor-
f
* 
poration in the 1st tier corporation and the percentage of 
voting stock owned by the 1st tier corporation in the 2nd 
foreign corporation when multiplied together equal at least 
5 percent. 
"(B) FOR 3RD TIER.—Paragraph (2) shall not apply unless 
the percentage arrived at for purposes of applying para-
graph (1) when multiplied by the percentage of voting stock 
owned by the 2nd foreign corporation in the 3rd foreign 
corporation is equal to at least 5 percent. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2529 
"(c) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) POST-1986 UNDISTRIBUTED EARNINGS.—The term 'post-1986 
undistributed earnings' means the amount of the earnings and 
profits of the foreign corporation (computed in accordance with 
sections 964 and 986) accumulated in taxable years beginning 
after December 31,1986— 
"(A) as of the close of the taxable year of the foreign 
corporation in which the dividend is distributed, and 
"(B) without diminution by reason of dividends distrib-
uted during such taxable year. 
"(2) POST-1986 FOREIGN INCOME TAXES.—The term 'post-1986 
foreign income taxes' means the sum of— 
"(A) the foreign income taxes with respect to the taxable 
year of the foreign corporation in which the dividend is 
distributed, and 
"(B) the foreign income taxes with respect to prior tax-
able years beginning after December 31, 1986, to the extent 
•' 
such foreign taxes were not deemed paid with respect to 
dividends distributed by the foreign corporation in prior 
taxable years. 
"(3) SPECIAL RULE WHERE DOMESTIC CORPORATION ACQUIRES lo 
PERCENT 
OF 
FOREIGN CORPORATION AFTER DECEMBER 31, 
1986.— 
"(A) IN GENERAL.—If the 1st day on which the ownership 
requirements of subparagraph (B) are met with respect to 
any foreign corporation is in a taxable year of such corpora-
tion beginning after December 31,1986, the post-1986 undis-
tributed earnings and the post-1986 foreign income taxes of 
such foreign corporation shall be determined by taking into 
account only periods beginning on and after the 1st day of 
the 1st taxable year in which such ownership requirements 
-- 5 4
,
s 
are met. 
"(B) OWNERSHIP REQUIREMENTS.—The ownership require-
ments of this subparagraph are met with respect to any 
foreign corporation if— 
. 
"(i) 10 percent or more of the voting stock of such 
i ' 
foreign corporation is owned by a domestic corporation, 
"(ii) the requirements of subsection (bX3XA) are met 
with respect to such foreign corporation and 10 percent 
or more of the voting stock of such foreign corporation 
is owned by another foreign corporation described in 
clause (i), or 
"(iii) the requirements of subsection (bX3XB) are met 
with respect to such foreign corporation and 10 percent 
or more of the voting stock of such foreign corporation 
is owned by another foreign corporation described in 
clause (ii). 
"(4) FOREIGN INCOME TAXES.— 
i 
"(A) IN GENERAL.—The term 'foreign income taxes' 
means any income, war profits, or excess profits taxes paid 
by the foreign corporation to any foreign country or posses-
sion of the United States. 
"(B) TREATMENT OF DEEMED TAXES.—Except for purposes 
of determining the amount of the post-1986 foreign income 
' 
taxes of a 3rd foreign corporation referred to in subsection 
(bX2), the term 'foreign income taxes' includes any such 
100 STAT. 2530 
PUBLIC LAW 99-514—OCT. 22, 1986 
•ifLt T taxes deemed to be paid by the foreign corporation under 
this section. 
a^ii 
"(5) ACCOUNTING PERIODS.—In the case of a foreign corpora-
tion the income, war profits, and excess profits taxes of which 
are determined on the basis of an accounting period of less than 
2j4,, 1 year, the word 'year' as used in this subsection shall be 
construed to mean such accounting period. 
"(6) 
TREATMENT OF DISTRIBUTIONS FROM EARNINGS BEFORE 
1987.— 
. ,;^ 
"(A) IN GENERAL.—In the case of any dividend paid by a 
foreign corporation out of accumulated profits (as defined in 
,:, ys - this section as in effect on the day before the date of the 
enactment of the Tax Reform Act of 1986) for taxable years 
beginning before the 1st taxable year taken into account in 
p; |
_
^ 
determining the post-1986 undistributed earnings of such 
corporation— 
,
^ • ,, 
"(i) this section (as amended by the Tax Reform Act 
of 1986) shall not apply, but 
. /; 
* 
"(ii) this section (as in effect on the day before the 
' 
• 
date of the enactment of such Act) shall apply. 
' 
"(B) DIVIDENDS PAID FIRST OUT OF POST-1986 EARNINGS.— 
, 
. Any dividend in a taxable year beginning after Decem-
ber 31, 1986, shall be treated as made out of post-1986 
undistributed earnings to the extent thereof. 
"(7) REGULATIONS.—The Secretary shall provide such regula-
tions as may be necessary or appropriate to carry out the 
provisions of this section and secton 960, including provisions 
which provide for the separate application of this section to 
reflect the separate application of section 904 to separate types 
of income and loss. 
"(d) CROSS REFERENCES.— 
"(1) For inclusion in gross income of an amount equal to taxes deemed 
,,,. 
paid under subsection (a), see section 78. 
^
^ 
"(2) For application of subsections (a) and (b) with respect to taxes 
deemed paid in a prior taxable year by a United States shareholder with 
respect to a controlled foreign corporation, see section 960. 
"(3) For reduction of credit with respect to dividends paid out of post-
1986 undistributed earnings for years for which certain information is not 
furnished, see section 6038." 
(b) SECTION 960 CREDIT DETERMINED ON ACCUMULATED BASIS.—The 
first sentence of section 960(a)(1) (relating to taxes paid by a foreign 
corporation) is amended by striking out "then" and all that follows 
down through the period at the end thereof and inserting in lieu 
thereof the following: 
"then, except to the extent provided in regulations, such domes-
tic corporation shall be deemed to have paid a portion of such 
, . foreign corporation's post-1986 foreign income taxes determined 
under section 902 in the same manner as if the amount so 
included were a dividend paid by such foreign corporation 
(determined by applying section 902(c) in accordance with 
section 904(d)(3)(B))." 
(c) TECHNICAL AMENDMENTS.— 
(1) Subparagraph (B) of section 6038(a)(1) (relating to informa-
tion with respect to certain foreign corporations) is amended to 
read as follows: 
"(B) the post-1986 undistributed earnings (as defined in 
section 902(c)) of such foreign corporation,". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2531 
(2) Subparagraph (C) of section 6038(cX4) (relating to penalty 
of reducing foreign tax credit) is amended by striking out all 
that follows "the amount o f and inserting in lieu thereof "post-
1986 undistributed earnings." 
(d) CLERICAL AMENDMENT.—The table of sections for subpart A of 
part III of subchapter N of chapter 1 is amended by striking out the 
item relating to section 902 and inserting in lieu thereof the 
following: 
"Sec. 902. Deemed paid credit where domestic corporation owns 10 percent 
or more of voting stock of foreign corporation." 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
apply to distributions by foreign corporations out of, and to inclu-
sions under section 951(a) of the Internal Revenue Code of 1986 
attributable to, earnings and profits for taxable years beginning 
after December 31,1986. 
SEC. 1203. CLARIFICATION OF TREATMENT OF SEPARATE LIMITATION 
LOSSES. 
(a) GENERAL RULE.—Subsection (f) of section 904 (relating to recap-
ture of overall foreign loss) is amended by adding at the end thereof 
the following new paragraph: 
"(5) TREATMENT OF SEPARATE UMITATION LOSSES.— 
"(A) IN GENERAL.—The amount of the separate limitation 
losses for any taxable year shall reduce income from 
sources within the United States for such teixable year only 
to the extent the aggregate amount of such losses exceeds 
the aggregate amount of the separate limitation incomes 
for such taxable year. 
• 
"(B) ALLOCATION OF LOSSES.—The separate limitation 
:) b 
losses for any taxable year (to the extent such losses do not 
exceed the separate limitation incomes for such year) shall 
be allocated among (and operate to reduce) such incomes on 
-::.,-' 
a proportionate basis. 
"(C) RECHARACTERIZATION OF SUBSEQUENT INCOME.—If— 
,.„ 
"(i) a separate limitation loss from any income cat-
'!,, 
egory (hereinafter in this subparagraph referred to as 
'the loss category') was allocated to income from any 
other category under subparagraph (B), and 
» 
"(ii) the loss category has income for a subsequent 
taxable year, 
such income (to the extent it does not exceed the aggregate 
separate limitation losses from the loss category not pre-
viously recharacterized under this subparagraph) shall be 
recharacterized as income from such other category in 
proportion to the prior reductions under subparagraph (B) 
in such other category not previously taken into account 
under this subparagraph. Nothing in the preceding sen-
tence shall be construed as recharacterizing any tax. 
"(D) SPECIAL RULES FOR LOSSES FROM SOURCES IN THE 
UNITED STATES.—Any loss from sources in the United States 
for any taxable year (to the extent such loss does not exceed 
the separate limitation incomes from such year) shall be 
• 
allocated among (and operate to reduce) such incomes on a 
proportionate basis. This subparagraph shall be applied 
* 
after subparagraph (B). 
H' i 
"(E) DEFINITIONS.—For purposes of this paragraph— 
100 STAT. 2532 
PUBLIC LAW 99-514—OCT. 22, 1986 
-4j\ , .. 
"(i) INCOME CATEGORY.—The term 'income category' 
means each separate category of income described in 
subsection (d)(1). 
"(ii) SEPARATE LIMITATION INCOME.—The term 'sepa-
j, , -.. 
rate limitation income' means, with respect to any 
income category, the taxable income from sources out-
side the United States, separately computed for such 
category, 
"(iii) SEPARATE LIMITATION LOSS.—The term 'separate 
• 
•'^ 
limitation loss' means, with respect to any income 
category, the loss from such category determined under 
the principles of section 907(c)(4)(B).'^ 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to losses incurred in taxable years beginning after 
December 31, 1986. 
SEC. 1204. FOREIGN TAXES USED TO PROVIDE SUBSIDIES. 
(a) TREATMENT OF CERTAIN SUBSIDIES.—Section 901 (relating to 
credit for foreign taxes) is amended by redesignating subsection (i) 
as subsection (j) and by inserting after subsection (h) the following 
new subsection: 
"(i) TAXES USED TO PROVIDE SUBSIDIES.—Any income, war profits, 
or excess profits tax shall not be treated as a tax for purposes of this 
title to the extent— 
"(1) the amount of such tax is used (directly or indirectly) by 
the country imposing such tax to provide a subsidy by any 
means to the taxpayer, a related person (within the meaning of 
section 482), or any party to the transaction or to a related 
transaction, and 
"(2) such subsidy is determined (directly or indirectly) by 
reference to the amount of such tax, or the base used to 
compute the amount of such tax." 
0)) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to foreign taxes paid or accrued in taxable years begin-
ning after December 31, 1986, 
SEC. 1205. LIMITATION ON CARRYBACK OF FOREIGN TAX CREDITS TO 
TAXABLE YEARS BEGINNING BEFORE 1987. 
(a) DETERMINATION OF EXCESS CREDITS.— 
(1) IN GENERAL.—Any taxes paid or accrued in a taxable year 
beginning after 1986 may be treated under section 904(c) of the 
Internal Revenue Code of 1954 as paid or accrued in a taxable 
year beginning before 1987 only to the extent such taxes would 
be so treated if the tax imposed by chapter 1 of such Code for 
the taxable year beginning after 1986 were determined by 
applying section 1 or 11 of such Code (as the case may be) as in 
1 
effect on the day before the date of the enactment of this Act. 
; ^ 
(2) ADJUSTMENTS.—Under regulations prescribed by the Sec-
retary of the Treasury or his delegate proper adjustments shall 
be made in the application of paragraph (1) to take into 
account— 
(A) the repeal of the zero bracket amount, and 
(B) the changes in the treatment of capital gains. 
(b) COORDINATION WITH SEPARATE BASKETS.—Any taxes paid or 
accrued in a taxable year beginning after 1986 which (after the 
application of subsection (a)) are treated as paid or accrued in a 
taxable year beginning before 1987 shall be treated as imposed on 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2533 
income described in section 904(d)(1)(E) of the Internal Revenue 
Code of 1954 (as in effect on the day before the date of the enactment 
of this Act). No taxes paid or accrued in a taxable year beginning 
after 1986 with respect to high withholding tax interest (as defined 
in section 904(d)(2)(B) of the Internal Revenue Code of 1986 as 
amended by this Act) may be treated as paid or accrued in a taxable 
year beginning before 1987. 
Subtitle B—Source Rules 
i 
SEC, 1211. DETERMINATION OF SOURCE IN CASE OF SALES OF PERSONAL 
PROPERTY. 
(a) PERSONAL PROPERTY SOURCE RULES.—Part I of subchapter N of 
chapter 1 (relating to determination of source of income) is amended 
by adding at the end thereof the following new section: 
"SEC. 
8
6
5
. 
SOURCE 
RULES 
FOR 
PERSONAL 
PROPERTY 
SALES. 
"(a) GENERAL RULE.—Except as otherwise provided in this section, 
income from the sale of personal property— 
"(1) by a United States resident shall be sourced in the United 
States, or 
"(2) by a nonresident shall be sourced outside the United 
States. 
"(b) EXCEPTION FOR INVENTORY PROPERTY.—In the case of income 
derived from the sale of inventory property— 
"(1) this section shall not apply, and 
"(2) such income shall be sourced under the rules of sections 
861(a)(6), 862(a)(6), and 863(b). 
"(c) EXCEPTION FOR DEPRECIABLE PERSONAL PROPERTY.— 
"(1) IN GENERAL.—Gain (not in excess of the depreciation 
adjustments) from the sale of depreciable personal property 
shall be allocated between sources in the United States and 
sources outside the United States— 
"(A) by treating the same proportion of such gain as 
sourced in the United States as the United States deprecia-
tion adjustments with respect to such property bear to the 
total depreciation adjustments, and 
"(B) by treating the remaining portion of such gain as 
sourced outside the United States. 
"(2) GAIN IN EXCESS OF DEPRECIATION.—Gain (in excess of the 
depreciation adjustments) from the sale of depreciable personal 
property shall be sourced as if such property were inventory 
property. 
"(3) UNITED STATES DEPRECIATION ADJUSTMENTS.—For pur-
poses of this subsection— 
"(A) IN GENERAL.—The term 'United States depreciation 
adjustments' means the portion of the depreciation adjust-
ments to the adjusted basis of the property which are 
attributable to the depreciation deductions allowable in 
computing taxable income from sources in the United 
States. 
"(B) SPECIAL RULE FOR CERTAIN PROPERTY.—Except in the 
case of property of a kind described in section 48(a)(2)(B), if, 
for any taxable year— 
"(i) such property is used predominantly in the 
United States, or 
100 STAT. 2534 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(ii) such property is used predominantly outside the 
United States, 
all of the depreciation deductions allowable for such year 
shall be treated as having been allocated to income from 
sources in the United States (or, where clause (ii) applies, 
from sources outside the United States). 
"(4) OTHER DEFINITIONS.—For purposes of this subsection— 
"(A) DEPRECIABLE PERSONAL PROPERTY.—The term 'depre-
ciable personal property' means any personal property if 
the adjusted basis of such property includes depreciation 
J, 
adjustments. 
"(B) DEPRECIATION ADJUSTMENTS.—The term 'deprecia-
tion adjustments' means adjustments reflected in the ad-
justed basis of any property on account of depreciation 
deductions (whether allowed with respect to such property 
or other property and whether allowed to the taxpayer or to 
any other person). 
^ ; 
: 
"(C) DEPRECIATION DEDUCTIONS.—The term 'depreciation 
deductions' means any deductions for depreciation or 
^, 
amortization or any other deduction allowable under any 
provision of this chapter which treats an otherwise capital 
expenditure as a deductible expense. 
"(d) EXCEPTION FOR INTANGIBLES.— 
"(1) IN GENERAL.—In the case of any sale of an intangible— 
"(A) this section shall apply only to the extent the pay-
ments in consideration of such sale are not contingent on 
vr > s *^he productivity, use, or disposition of the intangible, and 
"(B) to the extent such payments are so contingent, the 
source of such pajnnents shall be determined under this 
. . 
part in the same manner as if such payments were 
royalties. 
"(2) INTANGIBLE.—For purposes of paragraph (1), the term 
'intangible' means any patent, copyright, secret process or for-
mula, goodwill, trademark, trade brand, or other like property. 
"(3) SPECIAL RULE IN THE CASE OF GOODWILL.—To the extent 
this section applies to the sale of goodwill, payments in consider-
ation of such sale shall be treated as from sources in the country 
in which such goodwill was generated. 
"(e) SPECIAL RULES FOR SALES THROUGH OFFICES OR FIXED PLACES 
OF BUSINESS.— 
"(1) SALES BY RESIDENTS.— 
"(A) IN GENERAL.—In the case of income not sourced 
' 
under subsection (b), (c), (d), or (f), if a United States resi-
., 
dent maintains an office or other fixed place of business 
outside the United States, income from sales of personal 
property attributable to such office or other fixed place of 
business shall be sourced outside the United States. 
"(B) TAX MUST BE IMPOSED.—Subparagraph (A) shall not 
^ 
apply unless an income tax equal to at least 10 percent of 
the income from the sale is actually paid to a foreign 
country with respect to such income. 
"(2) SALES BY NONRESIDENTS.— 
"(A) IN GENERAL.—Notwithstanding any other provisions 
of this part, if a nonresident maintains an office or other 
.1 
fixed 
place of business in the United States, income from 
any sale of personal property (including inventory property) 
attributable to such office or other fixed place of business 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2535 
shall be sourced in the United States. The preceding sen-
tence shall not apply for purposes of section 971 (defining 
export trade corporation). 
"(B) EXCEPTIONS.—Subparagraph (A) shall not apply to— 
"(i) any sale of inventory property which is sold for 
, 
use, disposition, or consumption outside the United 
States if an office or other fixed place of business of the 
taxpayer outside the United States materially partici-
pated in the sale, or 
"(ii) any amount included in gross income under 
section 951(aXl)(A). 
"(3) SALES ATTRIBUTABLE TO AN OFFICE OR OTHER FIXED PLACE 
OF BUSINESS.—The principles of section 864(c)(5) shall apply in 
determining whether a taxpayer has an office or other fixed 
place of business and whether a sale is attributable to such an 
office or other fixed place of business. 
"(0 STOCK OF AFFIUATES.—If— 
"(1) a United States resident sells stock in an affiliate which is 
a foreign corporation, 
"(2) such affiliate is engaged in the active conduct of a trade 
or business, and 
"(3) such sale occurs in the foreign country in which the 
affiliate derived more than 50 percent of its gross income for the 
3-year period ending with the close of the affiliate's taxable year 
immediately preceding the year during which such sale 
occurred, 
any gain from such sale shall be sourced outside the United States. 
"(g) UNITED STATES RESIDENT; NONRESIDENT.—For purposes of this 
section— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection— 
"(A) UNITED STATES RESIDENT.—The term 'United States 
resident' means— 
"(i) any individual who has a tax home (as defined in 
section 911(d)(3)) in the United States, and 
"(ii) any corporation, partnership, trust, or estate 
which is a United States person (as defined in section 
7701(a)(30)). 
"(B) NONRESIDENT.—The term 'nonresident' means any 
person other than a United States resident. 
"(2) SPECIAL RULES FOR UNITED STATES CITIZENS AND RESIDENT 
AUENS.—For purposes of this section, a United States citizen or 
resident alien shall not be treated as a nonresident with respect 
to any sale of personal property unless an income tax equal to 
at least 10 percent of the gain derived from such sale is actually 
i 
paid to a foreign country with respect to that gain. 
"(h) OTHER DEFINITIONS.—For purposes of this section— 
"(1) INVENTORY PROPERTY.—The term 'inventory property' 
means personal property described in paragraph (1) of section 
1221. 
"(2) SALE INCLUDES EXCHANGE.—The term 'sale' includes an 
exchange or any other disposition. 
"(3) TREATMENT OF POSSESSIONS.—Any possession of the 
United States shall be treated as a foreign country. 
"(4) AFFILIATE.—The term 'affiliate' means a member of the 
. 
same affiliated group (within the meaning of section 1504(a) 
without regard to section 15040t))). 
100 STAT. 2536 
PUBLIC LAW 99-514—OCT. 22, 1986 
i 
"(i) REGULATIONS.—The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purpose of this 
section, including regulations— 
"(1) relating to the treatment of losses from sales of personal 
' 
property, and 
"(2) applying the rules of this section to income derived from 
trading in futures contracts, forward contracts, options con-
tracts, and other instruments. 
"0") CROSS REFERENCES.— 
"(1) For provisions relating to the characterization as dividends for 
source purposes of gains from the sale of stock in certain foreign corpora-
tions, see section 1248. 
"(2) For sourcing of income from certain foreign currency transactions, 
see section 988." 
(b) CONFORMING AMENDMENTS.— 
(1) Each of the following provisions are amended by striking 
out "personal property" and inserting in lieu thereof "inventory 
property (within the meaning of section 865(h)(1))": 
(A) Paragraphs (2) and (3) of section 863(b). 
"'" 
(B) Paragraph (6) of section 861(a). 
(C) Paragraph (6) of section 862(a). 
(2) Subparagraph (B) of section 864(c)(4) is amended by adding 
"or" at the end of clause (i), by striking out "; or" at the end of 
clause (ii) and inserting in lieu thereof a period, and by striking 
out clause (iii). 
(3) Paragraph (3) of section 904(b) is amended by striking out 
subparagraphs (C) and (D) and redesignating subparagraphs (E) 
and (F) as subparagraphs (C) and (D), respectively. 
(4) Subparagraph (D) of section 871(a)(1) is amended by strik-
ing out "or from payments which are treated as being so 
contingent under subsection (e),". 
(5) Subsection (e) of section 871 is hereby repealed. 
f 
(6) Paragraph (4) of section 881(a) is amended by striking out 
"or from payments which are treated as being so contingent 
under section 871(e),". 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to taxable years 
beginning after December 31, 1986. 
(2) SPECIAL RULE FOR FOREIGN PERSONS.—In the case of any 
foreign person other than any controlled foreign corporations 
(within the meaning of section 957(a) of the Internal Revenue 
Code of 1954), the amendments made by this section shall apply 
to transactions entered into after March 18, 1986. 
(d) STUDY.—The Secretary of the Treasury or his delegate shall 
conduct a study of the source rules for sales of inventory property. 
Not later than September 30, 1987, the Secretary of the Treasury or 
his delegate shall submit to the Committee on Ways and Means of 
the House of Representatives and the Committee on Finance of the 
Senate a report of such study (together with such recommendations 
as he may deem advisable). 
SEC. 1212. SPECIAL RULES FOR TRANSPORTATION INCOME. 
(a) GENERAL RULE.—Paragraph (2) of section 863(c) (relating to 
special rule for certain transportation income) is amended to read as 
follows: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2537 
"(2) OTHER TRANSPORTATION HAVING UNITED STATES CONNEC-
TION.— 
"(A) IN GENERAL.—50 percent of all transportation 
income attributable to transportation which— 
' 
"(i) is not described in paragraph (1), and 
"(ii) begins or ends in the United States, 
shall be treated as from sources in the United States. 
"(B) 
SPECIAL RULE FOR PERSONAL SERVICE INCOME.— 
Subparagraph (A) shall not apply to any transportation 
income which is income derived from personal services 
performed by the taxpayer, unless such income is attrib-
utable to transportation which— 
"(i) begins in the United States and ends in a posses-
sion of the United States, or 
"(ii) begins in a possession of the United States and 
ends in the United States." 
(b) 4 PERCENT TAX ON GROSS TRANSPORTATION INCOME.— 
(1) IN GENERAL.—Part II of subchapter N of chapter 1 (relat-
ing to nonresident alien individuals and foreign corporations) is 
amended by redesignating subpart C as subpart D and by 
inserting after subpart B the following new subpart: 
"Subpart C—Tax on Gross Transportation Income 
"Sec. 887. Imposition of tax on gross transportation income of nonresident 
aliens and foreign corporations. 
"SEC. 887. IMPOSITION OF TAX ON GROSS TRANSPORTATION INCOME OF 
NONRESIDENT ALIENS AND FOREIGN CORPORATIONS. 
"(a) IMPOSITION OF TAX.—In the case of any nonresident alien 
individual or foreign corporation, there is hereby imposed for each 
taxable year a tax equal to 4 percent of such individual's or corpora-
tion's United States source gross transportation income for such 
taxable year. 
"(b) UNITED STATES SOURCE GROSS TRANSPORTATION INCOME.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), the 
term 'United States source gross transportation income' means 
any gross income which is transportation income (as defined in 
section 863(cX3)) to the extent such income is treated as from 
sources in the United States under section 863(c). 
"(2) EXCEPTION FOR CERTAIN INCOME EFFECTIVELY CONNECTED 
WITH BUSINESS IN THE UNITED STATES.—The term 'United States 
source gross transportation income' shall not include any 
income taxable under section 871(b) or 882. 
"(3) DETERMINATION OF EFFECTIVELY CONNECTED INCOME.—For 
purposes of this chapter, transportation income of any taxpayer 
shall not be treated as effectively connected with the conduct of 
a trade or business in the United States unless— 
"(A) the taxpayer has a fixed place of business in the 
• 
United States involved in the earning of transportation 
income, and 
"(B) substantially all of the United States source gross 
transportation income (determined without regard to para-
graph (2)) of the taxpayer is attributable to regularly sched-
uled transportation (or, in the case of income from the 
leasing of a vessel or aircraft, is attributable to a fixed place 
of business in the United States). 
100 STAT. 2538 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(c) COORDINATION WITH OTHER PROVISIONS.—Any income taxable 
under this section shall not be taxable under section 871, 881, or 
882." 
(2) CLERICAL AMENDMENT.—The table of subparts for part II of 
subchapter N is amended by striking out the item relating to 
subpart C and inserting in lieu thereof the following: 
"Subpart C. Tax on gross transportation income. 
"Subpart D. Miscellaneous provisions." 
• '« • 
i. 
(c) LIMITATION ON EXCLUSION OF TRANSPORTATION INCOME.— 
(1) Subsection (b) of section 872 (relating to exclusions) is 
amended by striking out paragraphs (1) and (2) and inserting in 
lieu thereof the following: 
"(1) SHIPS OPERATED BY CERTAIN NONRESIDENTS.—Gross income 
derived by an individual resident of a foreign country from the 
operation of a ship or ships if such foreign country grants an 
equivalent exemption to citizens of the United States and to 
corporations organized in the United States. 
"(2) AIRCRAFT OPERATED BY CERTAIN NONRESIDENTS.—Gross 
income derived by an individual resident of a foreign country 
from the operation of aircraft if such foreign country grants an 
equivalent exemption to citizens of the United States and to 
corporations organized in the United States." 
(2) Section 872(b) is amended by adding at the end thereof the 
following new paragraphs: 
"(5) CERTAIN RENTAL INCOME.—Income to which paragraphs 
(1) and (2) apply shall include income which is derived from the 
rental on a full or bareboat basis of a ship or ships or aircraft, as 
the case may be. 
"(6) APPLICATION TO DIFFERENT TYPES OF TRANSPORTATION.— 
The Secretary may provide that this subsection be applied 
separately with respect to income from different types of 
transportation." 
(3) Subsection (a) of section 883 (relating to exclusions from 
gross income) is amended by striking out paragraphs (1) and (2) 
and by inserting in lieu thereof the following: 
"(1) SHIPS OPERATED BY CERTAIN FOREIGN CORPORATIONS.— 
Gross income derived by a corporation organized in a foreign 
country from the operation of a ship or ships if such foreign 
country grants an equivalent exemption to citizens of the 
United States and to corporations organized in the United 
States. 
"(2) AIRCRAFT OPERATED BY CERTAIN FOREIGN CORPORATIONS.— 
Gross income derived by a corporation organized in a foreign 
country from the operation of aircraft if such foreign country 
grants an equivalent exemption to citizens of the United States 
and to corporations organized in the United States." 
(4) Section 883(a) is amended by adding at the end thereof the 
following new paragraph: 
"(4) SPECIAL RULES.—The rules of paragraphs (5) and (6) of 
section 872(b) shall apply for purposes of this subsection." 
(5) Section 883 is amended by adding at the end thereof the 
following new subsection: 
"(c) TREATMENT OF CERTAIN FOREIGN CORPORATIONS.— 
"(1) IN GENERAL.—Paragraphs (1) and (2) of subsection (a) 
shall not apply to any foreign corporation if 50 percent or more 
of the value of the stock of such corporation is owned by 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2539 
individuals who are not residents of such foreign country or 
another foreign country meeting the requirements of such para-
graphs (1) and (2). 
"(2) TREATMENT OF CONTROLLED FOREIGN 
CORPORATIONS.— 
Paragraph (1) shall not apply to any foreign corporation which 
is a controlled foreign corporation (as defined in section 957(a)). 
"(3) EXCEPTION FOR PUBLICLY TRADED CORPORATIONS.—Para-
graph (1) shall not apply to any foreign corporation— 
"(A) the stock of which is primarily and regularly traded 
on an established securities market in the foreign country 
in which such corporation is organized, or 
"(B) which is wholly owned (either directly or indirectly) 
by 
another 
corporation 
meeting the requirements of 
subparagraph (A) and is organized in the same foreign 
country as such other corporation. 
"(4) STOCK OWNERSHIP THROUGH ENTITIES.—For purposes of 
paragraph (1), stock owned (directly or indirectly) by or for a 
corporation, partnership, trust, or estate shall be treated as 
being owned proportionately by its shareholders, partners, or 
beneficiaries. Stock considered to be owned by a person by 
reason of the application of the preceding sentence shall, for 
purposes of applying such sentence, be treated as actually 
owned by such person." 
(d) REPEAL OF SPECIAL TREATMENT FOR LEASED AIRCRAFT, ETC.— 
Section 861 is amended by striking out subsection (e) and by 
redesignating subsection (f) as subsection (e). 
(e) CONFORMING AMENDMENT.—Section 863(b)(1) is amended by 
striking out "transportation or other services" and inserting in lieu 
thereof "services". 
(0 EFFECTIVE DATES.— 
(1) I N GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to taxable years 
beginning after December 31, 1986. 
(2) SPECIAL RULE FOR CERTAIN LEASED PROPERTY.—The amend-
ments made by subsections (a) and (d) shall not apply to any 
income attributable to property held by the taxpayer on Janu-
ary 1, 1986, if such property was first leased by the taxpayer 
before January 1, 1986, in a lease to which section 863(c)(2)(B) or 
861(e) of the Internal Revenue Code of 1954 (as in effect on the 
day before the date of the enactment of this Act) applied. 
(3) SPECIAL RULE FOR CERTAIN SHIPS LEASED BY THE UNITED 
STATES NAVY.— 
(A) IN GENERAL.—In the case of any property described in 
subparagraph 
(B), paragraph 
(2) shall be applied by 
substituting "1987" for "1986" each place it appears. 
(B) PROPERTY TO WHICH PARAGRAPH APPLIES.—Property 
described in this subparagraph consists of 4 ships which are 
to be leased by the United States Navy and which are the 
subject of Internal Revenue Service rulings bearing the 
following dates and which involved the following amount of 
financing, 
respectively: 
March .
% 1986 
$176,844,000 
•' 
February 5, 1986 
64,567,000 
April 22, 1986 
64,598,000 
May 22, 1986 
175,300,000. 
100 STAT. 2540 
P U B L I C L A W 99-514—OCT. 22, 1986 
SEC. 1213. SOURCE RULE FOR SPACE AND CERTAIN OCEAN ACTIVITIES. 
(a) GENERAL RULE.—Section 863 (relating to items not specified in 
section 861 or 862) is amended by adding at the end thereof the 
following new subsections: 
"(d) SOURCE RULES FOR SPACE AND CERTAIN OCEAN ACTIVITIES.— 
"(1) I N GENERAL.—Except as provided in regulations, any 
income derived from a space or ocean activity— 
"(A) if derived by a United States person, shall be sourced 
in the United States, and 
"(B) if derived by a person other than a United States 
person, shall be sourced outside the United States. 
"(2) 
SPACE 
OR OCEAN 
ACTIVITY.—For 
purposes 
of 
para-
graph (D— 
"(A) I N GENERAL.—The term 'space or ocean activity' 
vj^, 
means— 
,r 
"(i) any activity conducted in space, and 
'^^. 
"(ii) any activity conducted on or under water not 
r 
within the jurisdiction (as recognized by the United 
, \i 
States) of a foreign country, possession of the United 
States, or the United States. 
I 
Such term includes any activity conducted in Antarctica. 
"(B) EXCEPTION FOR CERTAIN ACTIVITIES.—The term 'space 
or ocean activity' shall not include— 
"(i) any activity giving rise to transportation income 
(as defined in section 863(c)), 
; 
^ 
"(ii) any activity giving rise to international commu-
''* .'^ ^ 
nications income (as defined in subsection (e)(2)), and 
*
^ 
' 
"(iii) any activity with respect to mines, oil and gas 
wells, or other natural deposits to the extent within the 
United States or any foreign country or possession of 
the United States (as defined in section 638). 
•' 
For purposes of applying section 638, the jurisdiction of any 
foreign country shall not include any jurisdiction not recog-
'"' 
nized by the United States. 
"(e) INTERNATIONAL COMMUNICATIONS INCOME.— 
"(1) SOURCE RULES.— 
' 
"(A) UNITED STATES PERSONS.—In the case of any United 
States person, 50 percent of any international communica-
tions income shall be sourced in the United States and 50 
percent of such income shall be sourced outside the United 
States. 
"(B) FOREIGN PERSONS.— 
"(i) IN GENERAL.—Except as provided in regulations 
or clause (ii), in the case of any person other than a 
United States person, any international communica-
tions income shall be sourced outside the United States. 
"(ii) 
SPECIAL 
RULE FOR INCOME 
ATTRIBUTABLE TO 
OFFICE OR FIXED PLACE OF BUSINESS IN THE UNITED 
STATES.—In the case of any person (other than a United 
States person) who maintains an office or other fixed 
place of business in the United States, any inter-
national communications income attributable to such 
;• 
office or other fixed place of business shall be sourced 
in the United States. 
"(2) DEFINITION.—For purposes of this section, the term 'inter-
national communications income' includes all income derived 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2541 
from the transmission of communications or data from the 
United States to any foreign country or from any foreign coun-
try to the United States." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1986. 
SEC. 1214. LIMITATIONS ON SPECIAL TREATMENT OF 80-20 CORPORA-
TIONS. 
(a) INTEREST PAYMENTS.— 
(1) IN GENERAL.—Subparagraph (B) of section 861(a)(1) (relat-
ing to interest) is amended to read as follows: 
"(B) interest from a resident alien individual or domestic 
corporation, if such individual or corporation meets the 80-
percent foreign business requirements of subsection (c)(1),". 
(2) FOREIGN BUSINESS REQUIREMENTS.—Subsection (c) of sec-
tion 861 is amended to read as follows: 
"(c) FOREIGN BUSINESS REQUIREMENTS.— 
"(1) FOREIGN BUSINESS REQUIREMENTS.— 
"(A) IN GENERAL.—An individual or corporation meets 
the 80-percent foreign business requirements of this para-
graph if it is shown to the satisfaction of the Secretary that 
at least 80 percent of the gross income frpm all sources of 
such individual or corporation for the Resting period is 
active foreign business income. 
"(B) ACTIVE FOREIGN BUSINESS INCOME.—For purposes of 
subparagraph (A), the term 'active foreign business income' 
means gross income which— 
"(i) is derived from sources outside the United States 
(as determined under this subchapter), and 
^'' '^ 
"(ii) is attributable to the active conduct of a trade or 
business in a foreign country or possession of the 
> n ; 
United States by the individual or corporation (or by a 
subsidiary or chain of subsidiaries of such corporation). 
"(C) TESTING PERIOD.—For purposes of this subsection, the 
term 'testing period' means the 3-year period ending with 
the close of the taxable year of the individual or corporation 
preceding the payment (or such part of such period as may 
be applicable). If the individual or corporation has no gross 
income for such 3-year period (or part thereof), the testing 
period shall be the taxable year in which the payment is 
made. 
"(2) LOOK-THRU WHERE RELATED PERSON RECEIVES INTEREST.— 
* 
"(A) IN GENERAL.—In the case of interest received by a 
related person from a resident alien individual or domestic 
corporation 
meeting 
the 
80-percent 
foreign 
business 
requirements of paragraph (1), subsection (aXl)(A) shall 
apply only to a percentage of such interest equal to the 
percentage which— 
"(i) the gross income of such individual or corpora-
'~' 
tion for the testing period from sources outside the 
United States (as determined under this subchapter), is 
of 
' ' 
"(ii) the total gross income of such individual or 
corporation for the testing period. 
"(B) RELATED PERSON.—For purposes of this paragraph, 
the term 'related person' has the meaning given such term 
by section 954(dX3), except that— 
100 STAT. 2542 
PUBLIC LAW 99-514—OCT. 22, 1986 
;j ., 
. . 
"(i) such section shall be applied by substituting 'the 
:'t -. jj 
individual or corporation making the payment' for 
'controlled foreign corporation' each place it appears, 
and 
"(ii) such section shall be applied by substituting '10 
percent' for '50 percent' each place it appears." 
(b) TREATMENT 
OF DIVIDENDS.—Subparagraph 
(A) of section 
861(a)(2) (relating to dividends) is amended to read as follows: 
"(A) from a domestic corporation other than a corpora-
tion which has an election in effect under section 936, or". 
(c) WITHHOLDING TAX N O T T O APPLY TO CERTAIN INTEREST AND 
DIVIDENDS.— 
(1) NONRESIDENT ALIENS.—Section 871 (relating to tax on non-
resident aliens) is amended by redesignating subsection (i) as 
subsection (j) and by inserting after subsection (h) the following 
new subsection: 
"(i) TAX N O T T O APPLY TO CERTAIN INTEREST AND DIVIDENDS.— 
"(1) I N GENERAL.—No tax shall be imposed under paragraph 
(1)(A) or (1)(C) of subsection (a) on any amount described in 
paragraph (2). 
"(2) 
AMOUNTS 
TO WHICH 
PARAGRAPH 
( D 
APPUES.—The 
amounts described in this paragraph are as follows: 
,,, 
"(A) Interest on deposits, if such interest is not effectively 
connected with the conduct of a trade or business within 
the United States. 
"(B) A percentage of any dividend paid by a domestic 
corporation 
meeting 
the 
80-percent 
foreign 
business 
3;jc 
requirements of section 861(cXl) equal to the percentage 
determined for purposes of section 861(cX2)(A). 
, 
"(C) Income derived by a foreign central bank of issue 
from bankers' acceptances. 
"(3) DEPOSITS.—For purposes of paragraph (2), the term 
'deposits' means amounts which are— 
"(A) deposits with persons carrying on the banking busi-
ness, 
"(B) deposits or withdrawable accounts with 
savings 
institutions chartered and supervised as savings and loan 
or similar associations under Federal or State law, but only 
to the extent that amounts paid or credited on such deposits 
; 
or accounts are deductible under section 591 (determined 
without regard to sections 265 and 291) in computing the 
taxable income of such institutions, and 
"(C) amounts held by an insurance company under an 
agreement to pay interest thereon." 
(2) FOREIGN CORPORATIONS.—Section 881 (relating to tax on 
foreign corporations) is amended by redesignating subsection (d) 
as subsection (e) and by inserting after subsection (c) the follow-
ing new subsection: 
"(d) TAX N O T T O APPLY TO CERTAIN INTEREST AND DIVIDENDS.—No 
t£ix shall be imposed under paragraph (1) or (3) of subsection (a) on 
any amount described in section 871(i)(2)." 
(3) WITHHOLDING TAX.—Subsection (c) of section 1441 (relating 
to exceptions) is amended by adding at the end thereof the 
following new pargigraph: 
"(10) EXCEPTION FOR CERTAIN INTEREST AND DIVIDENDS.—No 
tax shall be required to be deducted and withheld under subsec-
tion (a) from any amount described in section 871(iX2)." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2543 
(4) REPORTING REQUIREMENTS.—Subparagraph (B) of section 
6049(b)(5) is amended by striking out "or" at the end of clause 
(ii), by striking out the period at the end of clause (iii) and 
inserting in lieu thereof ", or", and by adding at the end thereof 
the following new clause: 
"(iv) such amount is described in section 871(i)(2)." 
(5) CONFORMING AMENDMENTS.— 
(A) Paragraph (1) of section 861(a) (as amended by subsec-
tion (a)) is amended by striking out subparagraphs (A) and 
(E) and by redesignating subparagraphs (B), (C), (D), (F), (G), 
and (H) as subparagraphs (A), (B), (C), (D), (E), and (F), 
respectively. 
•
"
^ * * 
(B) Subparagraph (D) of section 861(a)(1) (as so redesig-
nated) is amended by striking out "paragraph (2) of subsec-
tion (c)" and inserting in lieu thereof "subparagraph (B) of 
section 871(i)(3)". 
xul* 
(C) Subsection (d) of section 861 is amended to read as 
follows: 
"(d) SPECIAL RULE FOR APPLICATION OF SUBSECTION (a)(2)(B).—For 
purposes of subsection (a)(2)(B), if the foreign corporation has no 
gross income from any source for the 3-year period (or part thereof) 
specified, the requirements of such subsection shall be applied with 
respect to the taxable year of such corporation in which the pay-
ment of the dividend is made." 
(d) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to payments after December 31,1986. 
(2) TREATMENT OF CERTAIN INTEREST.— 
(A) IN GENERAL.—The amendments made by this section 
shall not apply to any interest paid or accrued on any 
obligation outstanding on December 31,1985. The preceding 
sentence shall not apply to any interest paid pursuant to 
any extension or renewal of such an obligation agreed to 
after December 31,1985. 
(B) SPECIAL RULE FOR RELATED PAYEE.—If the payee of any 
interest to which subparagraph (A) applies is related 
(within the meaning of section 904(d)(2)(G) of the Internal 
Revenue Code of 1986) to the payor, such interest shall be 
treated for purposes of section 904 of such Code as if the 
payor were a controlled foreign corporation (within the 
meaning of section 957(a) of such Code). 
(3) TRANSITIONAL RULE.— 
(A) YEARS BEFORE 1988.—In applying the amendments 
made by this section to any payment made by a corporation 
in a taxable year of such corporation beginning before 
January 1, 1988, the requirements of clause (ii) of section 
861(c)(1)(B) of the Internal Revenue Code of 1986 (relating to 
active business requirements), as amended by this section, 
shall not apply to gross income of such corporation for 
taxable years beginning before January 1,1987. 
(B) YEARS AFTER 1987.—In applying the amendments 
/ 
made by this section to any payment made by a corporation 
in a taxable year of such corporation beginning after 
" 
December 31, 1987, the testing period for purposes of sec-
tion 861(c) of such Code (as so amended) shall not include 
any taxable year beginning before January 1,1987. 
, 
••:• (4) CERTAIN DIVIDENDS.— 
100 STAT. 2544 
PUBLIC LAW 99-514—OCT. 22, 1986 
1^,^;* 
(A) IJJ QEj^Ejj^L.—The amendments made by this section 
shall not apply to any dividend paid before January 1, 1991, 
by a qualified corporation with respect to stock which was 
uw 
outstanding on May 31, 1985. 
(B) QUALIFIED CORPORATION.—For purposes of subpara-
^ a 
graph (A), the term 'qualified corporation' means any busi-
ness systems corporation which— 
(i) was incorporated in Delaware in February, 1979, 
(ii) is headquartered in Garden City, New York, and 
(iii) the parent corporation of which is a resident of 
Sweden. 
SEC. 1215. RULES FOR ALLOCATING INTEREST. ETC., TO FOREIGN SOURCE 
INCOME. 
(a) GENERAL RULE.—Section 864 (relating to definitions) is amended 
by adding at the end thereof the following new subsection: 
"(e) RULES FOR ALLOCATING INTEREST, ETC.—For purposes of this 
subchapter (except as provided in regulations)— 
"(1) TREATMENT OF AFFILIATED GROUPS.—The taxable income 
of each member of an affiliated group from sources outside the 
United States shall be determined by allocating and apportion-
ing interest expense of each member as if all members of such 
group were a single corporation. 
"(2) GROSS INCOME METHOD MAY NOT BE USED FOR INTEREST.— 
All allocations and apportionments of interest expense shall be 
made on the basis of assets rather than gross income. 
"(3) TAX-EXEMPT ASSETS NOT TAKEN INTO ACCOUNT.—For pur-
poses of allocating and apportioning any deductible expense, 
any tax-exempt asset (and any income from such an asset) shall 
not be taken into account. A similar rule shall apply in the case 
of any dividend (other than a qualifying dividend as defined in 
section 243(b)) for which a deduction is allowable under section 
243 or 245(a) and any stock the dividends on which would be so 
deductible and would not be qualifying dividends (as so defined). 
"(4) BASIS OF STOCK IN CERTAIN CORPORATIONS ADJUSTED FOR 
EARNINGS AND PROFITS CHANGES.—For purposes of allocating 
and apportioning expenses on the basis of assets, the adjusted 
basis of any asset which is stocl^ in a corporation which is not 
included in the affiliated group and in which members of the 
affiliated group own 10 percent or more of the total combined 
voting power of all classes of stock entitled to vote in such 
corporation shall be— 
"(A) increased by the amount of the earnings and profits 
of such corporation attributable to such stock and accumu-
lated during the period the taxpayer held such stock, or 
"(B) reduced (but not below zero) by any deficit in earn-
ings and profits of such corporation attributable to such 
stock for such period. 
"(5) AFFILIATED GROUP.—For purposes of this subsection— 
"(A) I N GENERAL.—Except as provided in subparagraph 
'j'if 
(B), the term 'affiliated group' has the meaning given such 
term by section 1504 (determined without regard to para-
graph (4) of section 1504(b)). 
"(B) TREATMENT OF CERTAIN FINANCIAL INSTITUTIONS.— 
For purposes of subparagraph (A), any corporation de-
scribed in subparagraph (C) shall be treated as an includible 
corporation for purposes of section 1504 only for purposes of 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2545 
Bl 
applying such section separately to corporations so 
described. 
"(C) DESCRIPTION.—A corporation is described in this 
subparagraph i
f
— 
"(i) such corporation is a financial institution de-
scribed in section 581 or 591, 
"(ii) the business of such financial institution is 
predominantly with persons other than related persons 
(within the meaning of subsection (d)(4)) or their cus-
tomers, and 
"(iii) such financial institution is required by State or 
Federal law to be operated separately from any other 
entity which is not such an institution. 
"(6) ALLOCATION AND APPORTIONMENT OF OTHER EXPENSES.— 
Expenses other than interest which are not directly allocable 
and apportioned to any specific income producing activity shall 
be allocated and apportioned as if all members of the affiliated 
group were a single corporation. 
"(7) REGULATIONS.—The Secretary shall prescribe such regu-
lations as may be necessary or appropriate to carry out the 
purposes of this section, including regulations providing— 
"(A) for the resourcing of income of any member of an 
affiliated group or modifications to the consolidated return 
regulations to the extent such resourcing or modification is 
necessary to carry out the purposes of this section, 
"(B) for direct allocation of interest expense incurred to 
carry out an integrated financial transaction to any in-
terest (or interest-type income) derived from such trans-
action, and 
"(C) for the apportionment of expenses allocated to for-
/' 
eign source income among the members of the affiliated 
':•: 
group and various categories of income described in section 
904(d)(1)." 
(b) CLERICAL AMENDMENTS.— 
(1) The section heading for section 864 is amended to read as 
follows: 
SEC. 864. DEFINITIONS AND SPECIAL RULES." 
(2) The table of sections for part I of subchapter N of chapter 1 
is amended by striking out the item relating to section 864 and 
inserting in lieu thereof the following: 
"Sec. 864. Definitions and special rules." 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as otherwise provided in this subsec-
tion, the amendments made by this section shall apply to 
taxable years beginning after December 31, 1986. 
(2) TRANSITIONAL RULES.— 
(A) GENERAL PHASE-IN.—Except as provided in subpara-
graph (B), in the case of the 1st 3 taxable years of the 
taxpayer beginning after December 31, 1986, the amend-
ments made by this section shall apply only to the ap-
' 
plicable percentage (determined under the following table) 
of the interest expenses paid or accrued by the taxpayer 
during the taxable year with respect to an aggregate 
'\- ^ 
amount of indebtedness which does not exceed the aggre-
100 STAT. 2546 
PUBLIC LAW 99-514—OCT. 22, 1986 
OS 
gate amount of indebtedness outstanding on November 16, 
1985: 
^'^' 
•"••'' ''•" ' ' > - ^ ' • ' = ' • » > • ?*!:• ^ '•"- -• ' 
••'-• • • ^ • s 
The applicable 
In the case of the: 
percentage is: 
,^js, 
1st taxable year 
25 
2nd 
taxable year 
50 
3rd 
taxable year 
75. 
s>r 
- • 
(B) CONSOLIDATION RULE NOT TO APPLY TO CERTAIN IN-
.^,,^ 
TEREST.— 
(
i
) 
INTEREST 
ATTRIBUTABLE TO 
INCREASE 
IN 
INDEBTED-
,. . 
NESS FROM JANUARY 1, 1984, THROUGH MAY 28, 1985.—In 
. >,|,,. ,j 
the case of the first 5 taxable years of the taxpayer 
beginning after December 31, 1986, with respect to 
, , ^. 
interest expenses attributable to the excess o
f
— 
(I) the amount of the outstanding debt of the 
taxpayer on May 29, 1985, over 
(II) the amount of the outstanding debt of the 
taxpayer on December 31, 1983, 
paragraph (1) of section 864(e) of the Internal Revenue 
Code of 1986 (as added by this section) shall apply only 
to the applicable percentage (determined under the 
. 
•>. 
following table) of such interest expenses paid or ac-
crued by the taxpayer during the taxable year: 
The 
applicable 
In the case of the: 
percentage is: 
1st taxable year 
16% 
"
^ 
2nd taxable year 
SSVa 
"'i- 
3rd taxable year 
50 
..; j-fj 
•,; . 
4th taxable year 
66% 
5th 
taxable year 
83%. 
(ii) INTEREST ATTRIBUTABLE TO INCREASE I N INDEBTED-
NESS FROM JANUARY 1, 1983, THROUGH DECEMBER 31, 
1983.—In the case of the first 4 taxable years of the 
taxpayer beginning after December 31, 1986, with re-
spect to interest expenses attributable to the excess 
Hi.br.-; 
of-
(I) the amount of the outstanding debt of the 
taxpayer on January 1, 1984, over 
(II) the amount of the outstanding debt of the 
•;. 
taxpayer on December 31,1982, 
tu 
4 ' 
paragraph (1) of section 864(e) of the Internal Revenue 
Code of 1986 (as added by this section) shall apply only 
to the applicable percentage (determined under the 
following table) of such interest expenses paid or ac-
crued by the taxpayer during the taxable year: 
^
c
^ ' 
The applicable 
•', . 
In the case of the: 
percentage is: 
1st taxable year 
20 
2nd 
taxable year 
40 
3rd 
taxable year 
60 
".i" ' 
4th taxable year 
:... 
80. 
(iii) ORDERING RULE.—For purposes of this subpara-
graph, indebtedness outstanding on November 16, 1985, 
shall be treated as attributable first to any excess 
described in clause (i), then to any excess described in 
clause (ii), and then to other indebtedness. 
(iv) TREATMENT OF AFFILIATED GROUP.—For purposes 
of this subparagraph, all members of the same affili-
v / 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2547 
ated group of corporations (as defined in section 
864(e)(5)(A) of the Internal Revenue Code of 1986, as 
added by this section) shall be treated as one taxpayer 
whether or not such members filed a consolidated 
return. 
(C) SPECIAL RULE.—In the case of the first 9 taxable years 
beginning after December 31, 1986, the following applicable 
percentages shall be applied (in lieu of those set forth in 
subparagraph (A)) to interest expenses paid or accrued with 
respect to the amount of indebtedness described in subpara-
graph (D) or (E): 
The applicable 
In the case of the: 
percentage is: 
1st taxable year 
10 
2nd taxable year 
20 
3rd taxable year 
30 
4th taxable year 
40 
5th taxable year 
50 
6th taxable year 
60 
7th taxable year 
70 
8th taxable year 
80 
9th taxable year 
90. 
(D) 
INDEBTEDNESS 
OUTSTANDING 
O N M A Y 29, 
1985.— 
Indebtedness is described in this subparagraph if it is 
indebtedness (which was outstanding on May 29, 1985) of a 
corporation incorporated on June 13, 1917, which has its 
principal place of business in Bartlesville, Oklahoma. 
(E) INDEBTEDNESS OUTSTANDING ON MAY 29, 1985.—Indebt-
edness is described in this subparagraph if it is indebted-
ness (which was outstanding on May 29, 1985) of a member 
of an affiliated group (as defined in section 1504(a)), the 
common parent of which was incorporated on August 26, 
1926, and has its principal place of business in Harrison, 
New York. 
(3) SPECIAL RULE.— 
(A) IN GENERAL.—In the case of a qualified corporation, in 
lieu of applying paragraph (2), the amendments made by 
this section shall not apply to interest expenses allocable to 
any indebtedness to the extent such indebtedness does not 
exceed $500,000,000 i
f
— 
(i) the indebtedness was incurred to develop or im-
prove existing property that is owned by the taxpayer 
on November 16, 1985, and was acquired with the 
intent to develop or improve the property, 
(ii) the loan agreement with respect to the indebted-
ness provides that the funds are to be utilized for 
purposes of developing or improving the above prop-
erty, and 
(iii) the debt to equity ratio of the companies that join 
in the filing of the consolidated return is less than 15 
percent. 
(B) QUALIFIED CORPORATION.—For purposes of subpara-
graph (A), the term "qualified corporation" means a cor-
poration— 
(i) which was incorporated in Delaware on June 29, 
1964, 
(ii) the principal subsidiary of which is a resident of 
Arkansas, and 
100 STAT. 2548 
PUBLIC LAW 99-514—OCT. 22, 1986 
I 
I 
(iii) which is a member of an affiliated group the 
y 
average daily United States production of oil of which 
i 
is less than 50,000 barrels and the average daily United 
States refining of which is less than 150,000 barrels. 
(4) SPECIAL RULES FOR SUBSIDIARY.—The amendments made by 
this section shall not apply to interest on up to the applicable 
dollar amount of indebtedness of a subsidiary incorporated on 
February 11, 1975, the indebtedness of which on May 6, 1986, 
included— 
i 
(A) $100,000,000 face amount of 11% percent notes due in 
1990, 
(B) $100,000,000 of 8% percent notes due in 1989, 
(C) 6% percent Japanese yen notes due in 1991, and 
(D) 5% percent Swiss franc bonds due in 1994. 
For purposes of this paragraph, the term "applicable dollar 
amount" means $600,000,000 in the case of taxable years 
beginning in 1987 through 1991, $500,000,000 in the case of the 
taxable year beginning in 1992, $400,000,000 in the case of the 
taxable year beginning in 1993, $300,000,000 in the case of the 
taxable year beginning in 1994, $200,000,000 in the case of the 
taxable year beginning in 1995, $100,000,000 in the case of the 
taxable year beginning in 1996, and zero in the case of taxable 
years beginning after 1996. 
(5) SPECIAL RULE FOR FINANCIAL CORPORATION.—For purposes 
of section 864(e)(5) of the Internal Revenue Code of 1986 (as 
added by this section), a corporation shall be treated as de-
scribed in subparagraph (C) of such section for any taxable year 
, 
i
f
— 
(A) such corporation is a Delaware corporation incor-
porated on August 20, 1959, and 
(B) such corporation was primarily engaged in the financ-
ing of dealer inventory or consumer purchases on May 29, 
1985, and at all times thereafter before the close of the 
taxable year. 
(6) SPECIAL RULES FOR ALLOCATING GENERAL A N D ADMINISTRA-
TIVE EXPENSES.— 
(A) IN GENERAL.—In the case of an affiliated group of 
domestic corporations the common parent of which has its 
principal office in New Brunswick, New Jersey, and has a 
certificate of organization which was filed with the Sec-
retary of the State of New Jersey on November 10, 1887, the 
amendments made by this section shall not apply to the 
phase-in percentage of general and administrative expenses 
paid or incurred in its 1st 3 taxable years beginning after 
.,.:.. 
December 31, 1986. 
(B) PHASE-IN PERCENTAGE.—For purposes of subparagraph 
(A): 
In the case of taxable 
The phase-in 
f , 
years beginning in: 
- 
,.. 
. , - . 
percentage is: 
' 
* 
1987 
75 
1988 
50 
1989 
25. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2549 
SEC. 1216. 1-YEAR MODIFICATION IN REGULATIONS PROVIDING FOR 
ALLOCATION OF RESEARCH AND EXPERIMENTAL EXPENDI-
TURES. 
(a) GENERAL RULE.—For purposes of section 861(b), section 8620)), 
and section 863(b) of the Internal Revenue Code of 1954, notwith-
standing section 864(e) of such Code— 
(1) 50 percent of all amounts allowable as a deduction for 
qualified research and experimental expenditures shall be 
apportioned to income from sources within the United States 
and deducted from such income in determining the amount of 
taxable income from sources within the United States, and 
(2) the remaining portion of such amounts shall be appor-
tioned on the basis of gross sales or gross income. 
The preceding sentence shall not apply to any expenditures de-
scribed in section 1.861-8(e)(3)(i)(B) of the Income Tax Regulations. 
(b) QuAUFiED RESEARCH AND EXPERIMENTAL EXPENDITURES.—For 
purposes of this section— 
(1) IN GENERAL.—The term "qualified research and experi-
mental expenditures" means amounts— 
(A) which are research and experimental expenditures 
within the meaning of section 174 of such Code, and 
: 
(B) which are attributable to activities conducted in the 
United States. 
(2) TREATMENT OF DEPRECIATION, ETC.—Rules similar to the 
rules of section 174(c) of such Code shall apply. 
(c) EFFECTIVE DATE.—This section shall apply to taxable years 
beginning after August 1, 1986, and on or before August 1, 1987. 
Subtitle C—Taxation of Income Earned 
Through Foreign Corporations 
SEC. 1221. INCOME SUBJECT TO CURRENT TAXATION. 
(a) 
DEFINITION 
OF 
FOREIGN 
PERSONAL 
HOLDING 
COMPANY 
INCOME.— 
(1) IN GENERAL.—Subsection (c) of section 954 (defining foreign 
personal holding company income) is amended to read as fol-
lows: 
"(c) FOREIGN PERSONAL HOLDING COMPANY INCOME.— 
"(1) IN GENERAL.—For purposes of subsection (a)(1), the term 
'foreign personal holding company income' means the portion of 
the gross income which consists of: 
"(A) 
DIVIDENDS, ETC.—Dividends, interest, 
royalties, 
rents, and annuities. 
"(B) CERTAIN PROPERTY TRANSACTIONS.—The excess of 
gains over losses from the sale or exchange of property— 
"(i) which gives rise to income described in subpara-
graph (A) (after application of paragraph (2)(A)), or 
"(ii) which does not give rise to any income. 
This subparagraph shall not apply to gain from the sale or 
exchange of any property which, in the hands of the tax-
payer, is property described in section 1221(1) or to gain 
from the sale or exchange of any property by a regular 
dealer in such property. 
"(C) COMMODITIES TRANSACTIONS.—The excess of gains 
over losses from transactions (including futures, forward. 
71-194 0 - 89 - 25 : QL. 3 Part3 
100 STAT. 2550 
PUBLIC LAW 99-514—OCT. 22, 1986 
and similar transactions) in any commodities. This subpara-
• ii 
graph shall not apply to gains or losses which— 
"(i) arise out of bona fide hedging transactions 
^1 
reasonably necessary to the conduct of any business by 
.j^ 
a producer, processor, merchant, or handler of a 
commodity in the manner in which such business is 
^^' . ,; 
customarily and usually conducted by others, 
"(ii) are active business gains or losses from the sale 
of commodities, but only if substantially all of the 
controlled foreign corporation's business is as an active 
producer, processor, merchant, or handler of commod-
ities, or 
"(iii) are foreign currency gains or losses (as defined 
in section 9880))) attributable to any section 988 trans-
actions. 
"(D) FOREIGN CURRENCY GAINS.—The excess of foreign 
currency gains over foreign currency losses (as defined in 
,,., 
section 988(b)) attributable to any section 988 transactions. 
This subparagraph shall not apply in the case of any trans-
^,^.. 
action directly related to the business needs of the con-
trolled foreign corporation. 
^^<j 
"(E) 
INCOME 
EQUIVALENT TO INTEREST.—Any income 
equivalent to interest, including income from commitment 
^, 
fees (or similar amounts) for loans actually made. 
"(2) EXCEPTION FOR CERTAIN AMOUNTS.— 
"(A) RENTS AND ROYALTIES DERIVED IN ACTIVE BUSINESS.— 
- Pi 
Foreign personal holding company income shall not include 
rents and royalties which are derived in the active conduct 
of a trade or business and which are received from a person 
other than a related person (within the meaning of subsec-
tion (d)(3)). 
"(B) CERTAIN EXPORT FINANCING.—Foreign personal hold-
ing company income shall not include any interest which is 
derived in the conduct of a banking business and which is 
?;/-, 
export financing interest (as defined in section 904(d)(2)(G)). 
"(3) CERTAIN INCOME RECEIVED FROM RELATED PERSONS.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the term 'foreign personal holding company income' 
does not include— 
"(i) dividends and interest received from a related 
.. 
person which (I) is created or organized under the laws 
t 
of the same foreign country under the laws of which 
the controlled foreign corporation is created or orga-
5j.;ifj ;; 
nized, and (II) has a substantial part of its assets used 
in its trade or business located in such same foreign 
., 
country, and 
"(ii) rents and royalties received from a related 
3. J 
person for the use of, or the privilege of using, property 
j ^ 
within the country under the laws of which the con-
trolled foreign corporation is created or organized. 
"(B) EXCEPTION NOT TO APPLY TO ITEMS WHICH REDUCE 
SUBPART F INCOME.—Subparagraph (A) shall not apply in 
the case of any interest, rent, or royalty to the extent such 
interest, rent, or royalty reduces the payor's subpart F 
income." 
(2) CONFORMING AMENDMENT.—Subparagraph (A) of section 
864(d)(5) (relating to certain provisions not to apply) is amended 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2551 
by striking out clauses (iii) and (iv) and inserting in lieu thereof 
the following: 
"(iii) Subparagraph (B) of section 954(cX2) (relating to 
certain export financing). 
"(iv) Clause (i) of section 954(cX3XA) (relating to cer-
tain income received from related persons)." 
(b) DEFINITION OF INSURANCE INCOME.— 
(1) IN GENERAL.—Subsection (a) of section 953 (defining 
income derived from the insurance of United States risks) is 
amended to read as follows: 
"(a) GENERAL RULE.—For purposes of section 952(aXl), the term 
'insurance income' means any income which— 
"(1) is attributable to the issuing (or reinsuring) of any insur-
ance or annuity contract— 
"(A) in connection with property in, liability arising out 
of activity in, or in connection with the lives or health of 
residents of, a country other than the country under the 
If/ 
laws of which the controlled foreign corporation is created 
or organized, or 
"(B) in connection with risks not described in subpara-
graph (A) as the result of any arrangement whereby an-
other corporation receives a substantially equal amount of 
premiums or other consideration in respect of issuing (or 
reinsuring) a contract described in subparagraph (A), and 
"(2) would (subject to the modifications provided by para-
graphs (1) and (2) of subsection (b)) be taxed under subchapter L 
of this chapter if such income were the income of a domestic 
insurance company." 
(2) SPECIAL RULE FOR CERTAIN CAPTIVE INSURANCE COMPA-
NIES.—Section 953 is amended by adding at the end thereof the 
following new subsection: 
"(c) SPECIAL RULE FOR CERTAIN CAPTIVE INSURANCE COMPANIES.— 
"(1) IN GENERAL.—For purposes only of taking into account 
«„. related person insurance income— 
"(A) the term 'United States shareholder' means, with 
respect to any foreign corporation, a United States person 
(as defined in section 957(c)) who owns (within the meaning 
of section 958(a)) any stock of the foreign corporation, and 
"(B) the term 'controlled foreign corporation' has the 
meaning given to such term by section 957(a) determined by 
substituting '25 percent or more' for 'more than 50 percent. 
lu; 
"(2) RELATED PERSON INSURANCE INCOME.—For purposes of 
this subsection, the term 'related person insurance income' 
means any insurance income attributable to a policy of insur-
.-. 
ance or reinsurance with respect to which the primary insured 
is a United States shareholder in the foreign corporation or a 
related person (within the meaning of section 954(d)(3)) to such a 
shareholder. 
"(3) EXCEPTIONS.— 
"(A) CORPORATIONS NOT HELD BY INSUREDS.—Paragraph 
(1) shall not apply to any foreign corporation if at all times 
during the taxable year of such foreign corporation— 
"(i) less than 20 percent of the total combined voting 
power of all classes of stock of such corporation entitled 
to vote, and 
i V • ; 
"(ii) less than 20 percent of the total value of such 
corporation, 
100 STAT. 2552 
PUBLIC LAW 99-514—OCT. 22, 1986 
l©s ' 
is owned (directly or indirectly under the principles of 
section 883(c)(4)) by persons who are the primary insured 
<4 >' 
under any policy of insurance or reinsurance issued by such 
corporation or who are related persons (within the meaning 
-It, ^ 
of section 954(d)(3)) to any such primary insured. 
"(B) DE MINIMIS EXCEPTION.—Paragraph (1) shall not 
apply to any foreign corporation for a taxable year of such 
It 
corporation if the related person insurance income of such 
corporation for such taxable year is less than 20 percent of 
its insurance income for such taxable year determined 
J: • 
without regard to those provisions of subsection (aXD which 
limit insurance income to income from countries other than 
:
« 
the country in which the corporation was created or orga-
nized. 
"(C) 
ELECTION TO TREAT INCOME AS EFFECTIVELY CON-
1 
NECTED.—Paragraph (1) shall not apply to any foreign cor-
: 
poration for any taxable year if— 
^' 
"(i) such corporation elects (at such time and in such 
manner as the Secretary may prescribe)— 
- '^ 
•
> 
"(I) to treat its related person insurance income 
for such taxable year as income effectively con-
*
c 
nected with the conduct of a trade or business in 
the United States, and 
b'i 
"(II) to waive all benefits with respect to related 
person insurance income under any income tax 
t-i 
treaty between the United States and any foreign 
•
> -:: i . 
country, and 
"(ii) such corporation meets such requirements as the 
Secretary shall prescribe to ensure that the tax im-
> 
posed by this chapter on such income is paid. 
"(D) SPECIAL RULES FOR SUBPARAGRAPH (C) .— 
- 
'^•< 
"(i) ELECTION 
IRREVOCABLE.—Any election 
under 
*
• . 'M V subparagraph (C) shall apply to the taxable year for 
which made and all subsequent taxable years unless 
revoked with the consent of the Secretary. 
(ii) EXEMPTION FROM TAX IMPOSED BY SECTION 4371.— 
The tax imposed by section 4371 shall not apply with 
respect to any related person insurance income treated 
as effectively connected with the conduct of a trade or 
business within the United States under subparagraph 
(C). 
' 
"(4) TREATMENT OF MUTUAL INSURANCE COMPANIES.—In the 
case of a mutual insurance company— 
-
"
» 
"(A) this subsection shall apply, 
"(B) policyholders of such company shall be treated as 
f 
shareholders, and 
j'»' 
"(C) appropriate adjustments in the application of this 
subpart shall be made under regulations prescribed by the 
Secretary. 
"(5) REGULATIONS.—The Secretary shall prescribe such regu-
" 
lations as may be necessary to carry out the purposes of this 
subsection, including regulations preventing the^ avoidance of 
>. this subsection through cross insurance arrangements or other-
wise." 
(3) CONFORMING AMENDMENTS.— 
(A) Paragraph (1) of section 952(a) (defining subpart F 
income) is amended to read as follows: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2553 
"(1) insurance income (as defined under section 953),". 
(B) Subsection (e) of section 954 is amended by striking 
out the last sentence. 
(C) Subsection (b) of section 957 is amended by striking 
out "income derived from insurance of United States risks" 
and inserting in lieu thereof "insurance income". 
(D) The section heading for section 953 is amended to 
read as follows: 
"SEC. 953. INSURANCE INCOME." 
(E) The table of sections for subpart F of part III of 
subchapter N of chapter 1 is amended by striking out the 
item relating to section 953 and inserting in lieu thereof the 
following: 
"Sec. 953. Insurance income." 
(c) REPEAL OF EXCLUSION FOR REINVESTED SHIPPING INCOME.— 
(1) IN GENERAL.—Paragraph (2) of section 9540?) (relating to 
exclusion for reinvested shipping income) is hereby repealed. 
(2) SPACE AND CERTAIN OCEAN ACTIVITIES INCLUDED.—Subsec-
tion if) of section 954 (defining foreign base company shipping 
income) is amended by adding at the end thereof the following 
new sentence: 
"Such term includes any income derived from a space or ocean 
activity (as defined in section 863(d)(2))." 
(3) CONFORMING AMENDMENTS.— 
(A)(i) Section 954 is amended by striking out subsection 
(g) and by redesignating subsection (h) as subsection (g). 
ofy f 
(ii) Paragraph (5) of section 954(a) is amended by striking 
out "determined under subsection (h)" and inserting in lieu 
thereof "determined under subsection (g)". 
(B) Subparagraph (A) of section 955(a)(1) is amended by 
striking out "all prior taxable years" and inserting in lieu 
thereof "all prior taxable years beginning before 1987". 
(C) Subparagraph (A) of section 955(a)(2) is amended by 
striking out "at the close of the preceding taxable year" and 
inserting in lieu thereof "as of the close of the last taxable 
year beginning before 1987". 
(d) EXCEPTION WHERE FOREIGN CORPORATION NOT AVAILED OF TO 
REDUCE TAX.—Paragraph (4) of section 954(b) (relating to exception 
for foreign corporations not availed of to reduce taxes) is amended to 
read as follows: 
"(4) EXCEPTION FOR CERTAIN INCOME SUBJECT TO HIGH FOREIGN 
TAXES.—For purposes of subsection (a) and section 953, foreign 
base company income and insurance income shall not include 
in any item of income received by a controlled foreign corporation 
if the taxpayer establishes to the satisfaction of the Secretary 
-B" that such income was subject to an effective rate of income tax 
imposed by a foreign country greater than 90 percent of the 
maximum rate of tax specified in section 11. The preceding 
sentence shall not apply to foreign base company oil-related 
income described in subsection (a)(5)." 
(e) DEFINITION OF RELATED PERSON.— 
(1) Paragraph (3) of section 954(d) (defining related person) is 
amended by striking out subparagraphs (A), (B), and (C), and 
inserting in lieu thereof the following: 
100 STAT. 2554 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(A) such person is an individual, corporation, partner-
&aL\; 
ship, trust, or estate which controls, or is controlled by, the 
controlled foreign corporation, or 
"(B) such person is a corporation, partnership, trust, or 
estate which is controlled by the same person or persons 
which control the controlled foreign corporation." 
e 
(2) Paragraph (3) of section 954(d) is amended by striking out 
the last 2 sentences and inserting in lieu thereof the following: 
"For purposes of the preceding sentence, control means, with 
respect to a corporation, the ownership, directly or indirectly, of 
1 
stock possessing 50 percent or more of the total voting power of 
5 
all classes of stock entitled to vote or of the total value of stock 
B of such corporation. In the case of a partnership, trust, or estate, 
control means the ownership, directly or indirectly, of 50 per-
cent or more (by value) of the beneficial interests in such 
partnership, trust, or estate. For purposes of this paragraph, 
rules similar to the rules of section 958 shall apply." 
(f) REPEAL OF CERTAIN LIMITATIONS ON AMOUNT OF SUBPART F 
INCOME.—Section 952 (defining subpart F income) is amended by 
striking out subsections (c) and (d) and inserting in lieu thereof the 
following: 
"(c) LIMITATION.— 
"
^ • • " - - ^"^ 'r .''^a Ti 
-^l' -v.^/,. :/ ., ..-.,. ^T. 
"(1) IN GENERAL.— 
riBm'. 
"(A) SUBPART F INCOME LIMITED TO CURRENT EARNINGS 
AND PROFITS.—For purposes of subsection (a), the subpart F 
income of any controlled foreign corporation for any tax-
''• 
able year shall not exceed the earnings and profits of such 
' 
corporation for such taxable year. 
"(B) CERTAIN PRIOR YEAR DEFICITS MAY BE TAKEN INTO 
ACCOUNT.— 
"(i) IN GENERAL.—The amount included in the gross 
income of any United States shareholder under section 
951(aXl)(AXi) for any taxable year and attributable to a 
qualified activity shall be reduced by the amount of 
< 
such shareholder's pro rata share of any qualified 
deficit. 
"(ii) QUAUFIED DEFICIT.—The term 'qualified deficit' 
means any deficit in earnings and profits of the con-
^ 
trolled foreign corporation for any prior taxable year 
which began after December 31, 1986, and for which 
the controlled foreign corporation was a controlled for-
eign corporation; but only to the extent such deficit— 
"(I) is attributable to the same qualified activity 
as the activity giving rise to the income being 
^' 
offset, and 
"(II) has not previously been taken into account 
V
. 
under this subparagraph. 
5, 
"(iii) QUALIFIED ACTIVITY.—For purposes of this para-
i 
graph, the term 'qualified activity' means any activity 
'^. 
giving rise to— 
i 
"(I) foreign base company shipping income, 
"(II) foreign base company oil related income, 
"(III) in the case of a qualified insurance com-
' 
, tr 
pany, insurance income or 
' ' ~ 
"(IV) in the case of a qualified financial institu-
tion, foreign personal holding company income. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2555 
"(iv) PRO RATA SHARE.—For purposes of this para-
t 
graph, the shareholder's pro rata share of any deficit 
for any prior taxable year shall be determined under 
rules similar to rules under section 951(a)(2) for which-
n ^ 
ever of the following yields the smaller share: 
"(I) the close of the taxable year, or 
.i^< 1 
"(II) the close of the taxable year in which the 
deficit arose. 
"(v) QUALIFIED INSURANCE COMPANY.—For purposes 
of this subparagraph, the term 'qualified insurance 
company' means any controlled foreign corporation 
predominantly engaged in the active conduct of an 
insurance business in the taxable year and in the prior 
^r t 
taxable years in which the deficit arose. 
"(vi) QUALIFIED FINANCIAL INSTITUTION.—For pur-
poses of this paragraph, the term 'qualified financial 
;, 
institution' means any controlled foreign corporation 
^
^ 
predominantly engaged in the active conduct of a bank-
.J 
ing, financing, or similar business in the taxable year 
'(\ 
and in the prior taxable year in which the deficit arose. 
"(2) RECHARACTERIZATION IN SUBSEQUENT TAXABLE YEARS.—If 
the subpart F income of any controlled foreign corporation for 
any taxable year was reduced by reason of paragraph (1)(A), any 
excess of the earnings and profits of such corporation for any 
subsequent taxable year over the subpart F income of such 
foreign 
corporation 
for 
such 
taxable 
year 
shall 
be 
recharacterized as subpart F income under rules similar to the 
rules applicable under section 904(f)(5)." 
(g) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as otherwise provided in this subsec-
, 
tion, the amendments made by this section shall apply to 
taxable years of foreign corporations beginning after Decem-
' 
her 31, 1986. 
r 
(2) SPECIAL RULE FOR REPEAL OF EXCLUSION FOR REINVESTMENT 
' 
SHIPPING INCOME.— 
(A) IN GENERAL.—In the case of any qualified controlled 
foreign corporation— 
(i) the amendments made by subsection (c) shall 
apply to taxable years ending on or after January 1, 
- 
1992, and 
(ii) sections 955(a)(1)(A) and 955(a)(2)(A) of the In-
^ 
ternal Revenue Code of 1986 (as amended by subsection 
(c)(3)) shall be applied by substituting "ending before 
1992" for "beginning before 1987". 
^ 
(B) QUALIFIED CONTROLLED FOREIGN CORPORATION.—For 
purposes of subparagraph (A), the term "qualified con-
trolled foreign corporation" means any controlled foreign 
corporation (as defined in section 957 of such Code)— 
(i) if the United States agent of such corporation is a 
domestic corporation incorporated on March 13, 1951, 
and 
-^n 
(ii)if_ 
(I) the certificate of incorporation of such cor-
poration is dated July 23, 1963, and 
!'' :. • 
• 
(II) such corporation has a wholly owned subsidi-
ary and its certificate of incorporation is dated 
November 2,1965. 
100 STAT. 2556 
PUBLIC LAW 99-514—OCT. 22, 1986 
(3) EXCEPTION FOR CERTAIN REINSURANCE CONTRACTS.— 
(A) IN GENERAL.—In the case of the 1st 3 taxable years of 
a qualified controlled foreign insurer beginning after 
' M
, 
December 31, 1986, the amendments made by this section 
shall not apply to the phase-in percentage of any qualified 
reinsurance income. 
9fi ri) 
(B) PHASE-IN PERCENTAGE.—For purposes of subparagraph 
(A): 
' * 
In the case of taxable 
The phase-in 
years beginning in: 
percentage is: 
1987 
75 
1988 
• 
.. 
50 
1989 
25. 
(C) QUALIFIED CONTROLLED FOREIGN INSURER.—For 
pur-
* ' poses of this paragraph, the term "qualified controlled 
' 
foreign insurer" means— 
(i) any controlled foreign corporation which on 
August 16, 1986, was a member of an affiliated group 
(as defined in section 1504(a) of the Internal Revenue 
Code of 1986 without regard to subsection (b)(3) thereof) 
^ 
which had as its common parent a corporation incor-
porated in Delaware on July 9, 1967, with executive 
"
* 
offices in New York, New York, or 
(ii) any controlled foreign corporation which on 
August 16, 1986, was a member of an affiliated group 
(as so defined) which had as its common parent a 
''corporation incorporated in Delaware on March 31, 
1982, with executive offices in Philadelphia, Pennsylva-
nia. 
(D) QUALIFIED REINSURANCE INCOME.—For purposes of 
this paragraph, the term 'qualified reinsurance income' 
means any insurance income attributable to risks (other 
than risks described in section 953(a) or 954(e) of such Code 
as in effect on the day before the date of the enactment of 
this Act) assumed as of August 16, 1986, under a reinsur-
ance contract in effect on such date. For purposes of the 
preceding sentence, insurance income shall mean the 
underwriting income (as defined in section 832(b)(3) of such 
Code) and investment income derived from an amount of 
assets (to be segregated and separately identified) equiva-
lent to the ordinary and necessary insurance reserves and 
necessary surplus equal to V
s of earned premium attrib-
utable to such contracts. 
SEC. 1222. TESTING CONTROLLED FOREIGN CORPORATIONS AND FOREIGN 
PERSONAL HOLDING COMPANIES BY VALUE AND VOTING 
POWER. 
(a) DEFINITION OF CONTROLLED FOREIGN CORPORATION.— 
^, 
(1) IN GENERAL.—Subsection (a) of section 957 (defining con-
trolled foreign corporation) is amended to read as follows: 
"(a) GENERAL RULE.—For purposes of this subpart, the term 'con-
trolled foreign corporation' means any foreign corporation if more 
than 50 percent o
f
— 
"(1) the total combined voting power of all classes of stock of 
r>ii such corporation entitled to vote, or 
"(2) the total value of the stock of such corporation, 
"i« * 
-'Tit 
ikir, 
-nl 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2557 
is owned (within the meaning of section 958(a)), or is considered as 
owned by applying the rules of ownership of section 958(b), by 
United States shareholders on any day during the taxable year of 
such foreign corporation." 
(2) SPECIAL RULE FOR INSURANCE.—Subsection (b) of section 
957 is amended by striking out "all classes of stock" and insert-
ing in lieu thereof "all classes of stock (or more than 25 percent 
of the total value of stock)". 
(b) DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY.—Para-
graph (2) of section 552(a) (defining foreign personal holding com-
pany) is amended to read as follows: 
"(2) STOCK OWNERSHIP REQUIREMENT.—At any time during the 
taxable year more than 50 percent o
f
— 
"(A) the total combined voting power of all classes of 
stock of such corporation entitled to vote, or 
"(B) the total value of the stock of such corporation, 
is owned (directly or indirectly) by or for not more than 5 
,j 
individuals who are citizens or residents of the United States 
;: 
(hereinafter in this part referred to as the 'United States 
group')." 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after 
I 
December 31, 1986; except that for purposes of applying sections 
951(a)(1)(B) and 956 of the Internal Revenue Code of 1986, such 
amendments shall take effect on August 16, 1986. 
(2) TRANSITIONAL RULE.—In the case of any corporation 
treated as a controlled foreign corporation by reason of the 
amendments made by this section, property acquired before 
August 16, 1986, shall not be taken into account under section 
956(b) of the Internal Revenue Code of 1986. 
(3) SPECIAL RULE FOR BENEFICIARY OF TRUST.—In the case of an 
{
, individual— 
(A) who is a beneficiary of a trust which was established 
on December 7, 1979, under the laws of a foreign jurisdic-
tion, and 
(B) who was not a citizen or resident of the United States 
on the date the trust was established, 
amounts which are included in the gross income of such bene-
ficiary under section 951(a) of the Internal Revenue Code of 
1986 with respect to stock held by the trust (and treated as 
distributed to the trust) shall be treated as the first amounts 
which are distributed by the trust to such beneficiary and as 
amounts to which section 959(a) of such Code applies. 
SEC. 1223. SUBPART F DE MINIMIS RULE. 
(a) GENERAL RULE.—Paragraph (3) of section 954(b) (relating to 
special rule where foreign base company income is less than 10 
percent or more than 70 percent of gross income) is amended to read 
as follows: 
"(3) DE MINIMIS, ETC., RULES.—For purposes of subsection (a) 
and section 953— 
"(A) DE MINIMIS RULE.—If the sum of foreign base com-
pany income (determined without regard to paragraph (5)) 
s
^
j
t
j
) 
and the gross insurance income for the taxable year is less 
than the lesser o
f
— 
"(i) 5 percent of gross income, or 
"(ii) $1,000,000, 
100 STAT. 2558 
PUBLIC LAW 99-514—OCT. 22, 1986 
. fc < no part of the gross income for the taxable year shall be 
treated as foreign base company income or insurance 
lo 
income. 
"(B) 
FOREIGN 
BASE COMPANY 
INCOME AND INSURANCE 
noi* 
INCOME IN EXCESS OF 70 PERCENT OF GROSS INCOME.—If the 
sum of the foreign base company income (determined with-
.1. 
out regard to paragraph (5)) and the gross insurance income 
for the taxable year exceeds 70 percent of gross income, the 
/ *t- * 
entire gross income for the taxable year shall, subject to the 
•.T.t. ^ 
provisions of paragraphs (4) and (5), be treated as foreign 
base company income or insurance income (whichever is 
s r ' >r 
appropriate). 
"(C) GROSS INSURANCE INCOME.—For purposes of subpara-
- ^
;
*
• 
graphs (A) and (B), the term 'gross insurance income' means 
any item of gross income taken into account in determining 
insurance income under section 953." 
(b) TECHNICAL AMENDMENTS.— 
(1) Clause (ii) of section 864(d)(5)(A) is amended by striking out 
"less than 10 percent" and inserting in lieu thereof "less than 5 
percent or $1,000,000". 
(2) Clause (i) of section 881(c)(4)(A) is amended by striking out 
" 
"less than 10 percent" and inserting in lieu thereof "less than 5 
percent or $1,000,000". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
SEC. 1224. REPEAL OF SPECIAL TREATMENT OF POSSESSIONS CORPORA-
TIONS. 
(a) GENERAL RULE.—Section 957 (defining controlled foreign cor-
porations; United States persons) is amended by striking out subsec-
tion (c) and by redesignating subsection (d) as subsection (c). 
(b) EFFECTIVE DATES.— 
(1) I N GENERAL.—The amendment made by subsection (a) 
be shall apply to taxable years of foreign corporations beginning 
'
> after December 31, 1986; except that for purposes of applying 
sections 951(a)(1)(B) and 956 of the Internal Revenue Code of 
s 1986. such amendments shall take effect on August 16, 1986. 
(2) TRANSITIONAL 
RULE.—In the case of any corporation 
' 
treated as a controlled foreign corporation by reason of the 
*'> amendment made by subsection (a), property acquired before 
August 16, 1986, shall not be taken into account under section 
9560?) of the Internal Revenue Code of 1986. 
SEC. 1225. ONLY EFFECTIVELY CONNECTED CAPITAL GAINS AND LOSSES 
OF FOREIGN CORPORATIONS TAKEN INTO ACCOUNT FOR 
PURPOSES OF ACCUMULATED EARNINGS TAX AND PER-
54 
, 
SONAL HOLDING COMPANY PROVISIONS. 
(a) ACCUMULATED EARNINGS TAX.—Subsection Ot)) of section 535 
(relating to adjustments to taxable income) is amended by adding at 
the end thereof the following new paragraph: 
"(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." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2559 
OJ) PERSONAL HOLDING COMPANY PROVISIONS.—Subsection (b) of 
section 545 (relating to adjustments to taxable income) is amended 
by adding at the end thereof the following new paragraph: 
"(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) EFFECTIVE DATE.—The amendments made by this section shall 
apply to gains and losses realized on or after March 1, 1986. 
SEC. 1226. DEDUCTIONS FOR DIVIDENDS RECEIVED FROM CERTAIN FOR-
EIGN CORPORATIONS. 
(a) GENERAL RULE.—Subsection (a) of section 245 is amended to 
read as follows: 
"(a) 
DIVIDENDS FROM 
10-PERCENT OWNED FOREIGN CORPORA-
TIONS.— 
"(1) IN GENERAL.—In the case of dividends received by a 
corporation from a qualified 10-percent owned foreign corpora-
tion, there shall be allowed as a deduction an amount equal to 
the percent (specified in section 243 for the taxable year) of the 
U.S.-source portion of such dividends. 
"(2) QUALIFIED IO-PERCENT OWNED FOREIGN CORPORATION.— 
For purposes of this subsection, the term 'qualified 10-percent 
owned foreign corporation' means any foreign corporation 
(other than a foreign personal holding company or passive 
foreign investment company) if at least 10 percent of the stock 
of such corporation (by vote and value) is owned by the tax-
payer. 
(3) U.S.-SOURCE PORTION.—For purposes of this subsection, 
the U.S.-source portion of any dividend is an amount which 
bears the same ratio to such dividend as— 
"(A) the post-1986 undistributed U.S. earnings, bears to 
"(B) the total post-1986 undistributed earnings. 
"(4) PosT-1986 UNDISTRIBUTED EARNINGS.—For purposes of this 
subsection, the term 'post-1986 undistributed earnings' has the 
meaning given to such term by section 902(c)(1). 
"(5) PoST-1986 UNDISTRIBUTED U.S. EARNINGS.—For purpoSeS of 
this subsection, the term 'post-1986 undistributed U.S. earnings' 
means the portion of the post-1986 undistributed earnings 
which is attributable to— 
"(A) income of the qualified 10-percent owned foreign 
corporation which is effectively connected with the conduct 
^ 
of a trade or business within the United States and subject 
" 
to tax under this chapter, or 
, _
, 
"(B) any dividend received (directly or through a wholly 
Zip 
owned foreign corporation) from a domestic corporation at 
least 80 percent of the stock of which Osy vote and value) is 
owned (directly or through such wholly owned foreign cor-
poration) by the qualified 
10-percent owned 
foreign 
*' 
corporation. 
"(6) SPECIAL RULE.—If the 1st day on which the requirements 
of paragraph (2) are met with respect to any foreign corporation 
is in a taxable year of such corporation beginning after Decem-
ber 31, 1986, the post-1986 undistributed earnings and the post-
1986 undistributed U.S. earnings of such corporation shall be 
100 STAT. 2560 
PUBLIC LAW 99-514—OCT. 22, 1986 
determined by only taking into account periods beginning on 
and after the 1st day of the 1st taxable year in which such 
requirements are met. 
"(7) COORDINATION WITH SUBSECTION (b).—Earnings and prof-
its of any qualified 10-percent owned foreign corporation for any 
taxable year shall not be taken into account under this subsec-
tion if the deduction provided by subsection (b) would be allow-
able with respect to dividends paid out of such earnings and 
profits. 
"(8) COORDINATION WITH SECTION 902.—In the case of a divi-
dend received by a corporation from a qualified 10-percent 
owned foreign corporation, no credit shall be allowed under 
section 901 for any taxes treated as paid under section 902 with 
respect to the U.S.-source portion of such dividend. 
"(9) COORDINATION WITH SECTION 904.—For purposes of section 
904, the U.S.-source portion of any dividend received by a 
corporation from a qualified 10-percent owned foreign corpora-
tion shall be treated as from sources in the United States." 
(b) TECHNICAL AMENDMENT.—Subsection (d) of section 959 is 
amended by striking out the period at the end thereof and inserting 
in lieu thereof "; except that such distributions shall immediately 
reduce earnings and profits." 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to distributions out of earnings and profits for 
taxable years beginning after December 31, 1986. 
(2) SUBSECTION (b).—The amendment made by subsection (b) 
shall apply to distributions after the date of the enactment of 
this Act. 
SEC. 1227. SPECIAL RULE FOR APPLICATION OF SECTION 954 TO CERTAIN 
DIVIDENDS. 
(a) IN GENERAL.—For purposes of section 954(c)(3)(A) of the In-
ternal Revenue Code of 1986, any dividends received by a qualified 
controlled foreign corporation (within the meaning of section 951 of 
such Code) during any of its 1st 5 taxable years beginning after 
December 31, 1986, with respect to its 32.7 percent interest in a 
Brazilian corporation shall be treated as if such Brazilian corpora-
tion were a related person to the qualified controlled foreign cor-
poration to the extent the Brazilian corporation's income is attrib-
utable to its interest in the trade or business of mining in Brazil. 
(h) QUALIFIED CONTROLLED FOREIGN CORPORATION.—For purposes 
of this section, a qualified controlled foreign corporation is a cor-
poration the greater than 99 percent shareholder of which is a 
company originally incorporated in Montana on July 9, 1951 (the 
name of which was changed on August 10,1966). 
(c) EFFECTIVE DATE.—The amendment made by this section shall 
apply to dividends received after December 31, 1986. 
SEC. 1228. SPECIAL RULE FOR APPLYING SECTION 897. 
(a) IN GENERAL.—For purposes of section 897 of the Internal 
Revenue Code of 1986, gain shall not be recognized on the transfer, 
sale, exchange, or other disposition, of shares of stock of a United 
States real property holding company, i
f
— 
(1) such United States real property holding company is a 
Delaware corporation incorporated on January 17, 1984, 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2561 
(2) the transfer, sale, exchange, or other disposition is to any 
member of a qualified ownership group, 
(3) the recipient of the share of stock elects, for purposes of 
such section 897, a carryover basis in the transferred shares, 
and 
(4) an election under this section applies to such transfer, sale, 
exchange, or other disposition. 
(b) MEMBER OF A QUALIFIED OWNERSHIP GROUP.—For purposes of 
this section, the term "member of a qualified ownership group" 
means a corporation incorporated on June 16, 1890, under the laws 
of the Netherlands or a corporation incorporated on October 18, 
1897, under the laws of the United Kingdom or any corporation 
owned directly or indirectly by either or both such corporations. 
(c) ELECTION.—An election under this section shall be made at 
such time and in such manner as the Secretary of the Treasury or 
his delegate may prescribe, and an election under this section may 
only be made with respect to 1 transfer, sale, exchange, or other 
disposition. 
(d) EFFECTIVE DATE.—The provisions of this section shall take 
effect on the date of the enactment of this section. 
Subtitle D—Special Tax Provisions for United 
States Persons 
SEC. 1231. MODIFICATIONS TO SECTION 936. 
(a) TREATMENT OF INTANGIBLES.— 
(1) COST 
SHARING 
METHOD.—Section 
936(h)(5)(C)(i)(I) is 
amended— 
(A) by striking out "the same proportion of the cost" and 
inserting in lieu thereof "the same proportion of 110 per-
cent of the cost", and 
(B) by adding at the end thereof the following new sen-
tence: "In the case of intangible property described in 
subsection (h)(3)(B)(i) which the electing corporation is 
treated £is owning under subclause (II), in no event shall the 
i , 
payment required under this subclause be less than the 
inclusion or payment which would be required under sec-
tion 367(d)(2)(A)(ii) or section 482 if the electing corporation 
were a foreign corporation." 
(2) 
PROFIT 
SPUT 
METHOD.—Section 
936(h)(5)(C)(ii)(II) 
is 
amended by striking out "the third sentence thereof)" and 
inserting in lieu thereof "the third and fourth sentences thereof, 
but substituting '120 percent' for '110 percent' in the second 
sentence thereof)". 
Qo) MODIFICATION OF REQUIREMENT THAT AMOUNTS BE RECEIVED IN 
THE UNITED STATES.—Subsection (h) of section 936 is amended by 
adding at the end thereof the following new sentence: "This subsec-
tion shall not apply to any amount described in subsection (a)(l)(A)(i) 
received from a person who is not a related person (within the 
meaning of subsection (h)(3) but without regard to subparagraphs 
(D)(ii)(I) and (E)(i) thereof) with respect to the domestic corporation." 
(c) TREATMENT OF CERTAIN INVESTMENT INCOME AS QUAUFIED 
POSSESSION SOURCE INVESTMENT INCOME.—Subsection (d) of section 
936 is amended by adding at the end thereof the following new 
paragraph: 
100 STAT. 2562 
PUBLIC LAW 99-514—OCT. 22, 1986 
- 
"(4) INVESTMENT IN QUALIFIED CARIBBEAN BASIN COUNTRIES.— 
"(A) IN GENERAL.—For purposes of paragraph (2)(B), an 
tf ;: 
investment in a financial institution shall, subject to such 
conditions as the Secretary may prescribe by regulations, 
be treated as for use in Puerto Rico to the extent used by 
i! ;? 
such financial institution (or by the Government Develop-
ment Bank for Puerto Rico or the Puerto Rico Economic 
Development Bank)— 
"(i) for investment, consistent with the goals and 
purposes of the Caribbean Basin Economic Recovery 
Act, in— 
"(I) active business assets in a qualified Carib-
bean Basin country, or 
; 
"(II) development projects in a qualified Carib-
oo 
bean Basin country, and 
"(ii) in accordance with a specific authorization 
•'5 , 
granted by the Government Development Bank for 
Puerto Rico pursuant to regulations issued by the Sec-
.jf X 
retary of the Treasury of Puerto Rico. 
A similar rule shall apply in the case of a direct investment 
in the Government Development Bank for Puerto Rico or 
i 
the Puerto Rico Economic Development Bank. 
iJ9 
"(B) QUALIFIED CARIBBEAN BASIN COUNTRY.—For purposes 
of this subsection, the term 'qualified Caribbean Basin 
country' means any beneficiary country (within the mean-
ing of section 212(a)(1)(A) of the Caribbean Basin Economic 
Recovery Act) which meets the requirements of clauses (i) 
and (ii) of section 274(h)(6)(A). 
Ki 
"(C) ADDITIONAL REQUIREMENTS.—Subparagraph (A) shall 
not apply to any investment made by a financial institution 
(or by the Government Development Bank for Puerto Rico 
or the Puerto Rico Economic Development Bank) unless— 
"(i) the person in whose trade or business such invest-
nrife 
ment is made (or such other recipient of the invest-
f.' * 
ment) and the financial institution or such Bank certify 
to the Secretary and the Secretary of the Treasury of 
Puerto Rico that the proceeds of the loan will be 
promptly used to acquire active business assets or to 
make other authorized expenditures, and 
"(ii) the financial institution (or the Government 
Development Bank for Puerto Rico or the Puerto Rico 
;;: 
'' 
Economic Development Bank) and the recipient of the 
t«; 
investment funds agree to permit the Secretary and the 
Secretary of the Treasury of Puerto Rico to examine 
such of their books and records as may be necessary to 
ensure that the requirements of this paragraph are 
met." 
(d) INCREASE IN AMOUNT OF GROSS INCOME WHICH MUST BE FROM 
TRADE OR BUSINESS.— 
(1) IN GENERAL.—Subparagraph (B) of section 936(a)(2) is 
amended by striking out "65 percent" and inserting in lieu 
thereof "75 percent". 
(2) CONFORMING AMENDMENT.—Paragraph (2) of section 936(a) 
is amended by striking out subparagraph (C). 
(e) TREATMENT OF CERTAIN ROYALTY PAYMENTS.— 
" 
(1) IN GENERAL.—Section 482 (relating to allocation of income 
and deductions among taxpayers) is amended by adding at the 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2563 
end thereof the following new sentence: "In the case of any 
transfer (or license) of intangible property (within the meaning 
of section 936(h)(3)(B)), the income with respect to such transfer 
or license shall be commensurate with the income attributable 
to the intangible." 
(2) TECHNICAL AMENDMENT.—Subparagraph (A) of section 
367(d)(2) (relating to transfers of intangibles treated as transfer 
pursuant to sale for contingent payments) is amended by adding 
at the end thereof the following new sentence: 
"The amounts taken into account under clause (ii) shall be 
commensurate with the income attributable to the intangi-
ble." 
(0 TECHNICAL CORRECTION TO PROFIT-SPLIT RULES.—The last sen-
tence of section 936(h)(5)(C)(ii)(II) is amended by striking out "all 
products produced and types of service rendered" and inserting in 
lieu thereof "all products and types of services, within such product 
area, produced or rendered", 
(g) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in paragraphs (2) and (3), 
the amendments made by this section shall apply to taxable 
years beginning after December 31, 1986. 
(2) SPECIAL RULE FOR TRANSFER OF INTANGIBLES.— 
(A) IN GENERAL.—The amendments made by subsection 
(e) shall apply to taxable years beginning after Decem-
ber 31, 1986, but only with respect to transfers after Novem-
ber 16, 1985, or licenses granted after such date (or before 
such date with respect to property not in existence or owned 
by the taxpayer on such date). 
(B) SPECIAL RULE FOR SECTION 936.—For purposes of sec-
tion 936(h)(5)(C) of the Internal Revenue Code of 1986 the 
amendments made by subsection (e) shall apply to taxable 
years beginning after December 31, 1986, without regard to 
when the transfer (or license) was made. 
(3) SUBSECTION (f).—The amendment made by subsection (f) 
shall apply to taxable years beginning after December 31, 1982. 
(4) TRANSITIONAL RULE.—In the case of a corporation— 
(A) with respect to which an election under section 936 of 
the Internal Revenue Code of 1986 (relating to possessions 
tax credit) is in effect, 
(B) which produced an end-product form in Puerto Rico 
on or before September 3, 1982, 
(C) which began manufacturing a component of such 
K
, 
product in Puerto Rico in its taxable year beginning in 
1983, and 
(D) with respect to which a Puerto Rican tax exemption 
was granted on June 27, 1983, 
,; 
such corporation shall treat such component as a separate 
product for such taxable year for purposes of determining 
whether such corporation had a significant business presence in 
Puerto Rico with respect to such product and its income with 
respect to such product. 
SEC. 1232. TREATMENT OF CERTAIN PERSONS IN PANAMA. 
(a) GENERAL RULE.—Nothing in the Panama Canal Treaty (or in 
any agreement implementing such Treaty) shall be construed as 
exempting (in whole or in part) any citizen or resident of the United 
States from any tax under the Internal Revenue Code of 1954 or 
100 STAT. 2564 
PUBLIC LAW 99-514—OCT. 22, 1986 
1986. The preceding sentence shall apply to all taxable years 
whether beginning before, on, or after the date of the enactment of 
this Act (or in the case of any tax not imposed with respect to a 
taxable year, to taxable events after the date of enactment of this 
Act.) 
(b) TREATMENT OF EMPLOYEES OF PANAMA CANAL COMMISSION AND 
DEPARTMENT OF DEFENSE FOR PURPOSES OF SECTION 912.—Employees 
of the Panama Canal Commission and civilian employees of the 
Defense Department of the United States stationed in Panama may 
exclude from gross income allowances which are comparable to the 
allowances excludable under section 912(1) of the Internal Revenue 
Code of 1986 by employees of the State Department of the United 
States stationed in Panama. The preceding sentence shall apply to 
taxable years beginning after December 31, 1986. 
SEC. 1233. PROVISIONS RELATING TO SECTION 911 EXCLUSION. 
(a) REDUCTION IN SECTION 911 EXCLUSION.—Subparagraph (A) of 
section 911(b)(2) (relating to limitation on foreign earned income) is 
amended to read as follows: 
"(A) IN GENERAL.—The foreign earned income of an 
individual which may be excluded under subsection (a)(1) 
for any taxable year shall not exceed the amount of foreign 
earned income computed on a daily basis at an annual rate 
of $70,000." 
(b) SECTION 911 EXCLUSION NOT AVAILABLE TO INDIVIDUALS VIO-
LATING FEDERAL TRAVEL AND OTHER RESTRICTIONS.—Section 911(d) 
(relating to definitions and special rules) is amended by redesignat-
ing paragraph (8) as paragraph (9) and by inserting after paragraph 
(7) the following new paragraph: 
"(8) LIMITATION ON INCOME EARNED IN RESTRICTED COUNTRY.— 
"(A) IN GENERAL.—If travel (or any transaction in connec-
tion with such travel) with respect to any foreign country is 
subject to the regulations described in subparagraph (B) 
during any period— 
"(i) the term 'foreign earned income' shall not in-
clude any income from sources within such country 
attributable to services performed during such period, 
"(ii) the term 'housing expenses' shall not include 
any expenses allocable to such period for housing in 
^' - •
*
^
' 
such country or for housing of the spouse or dependents 
of the taxpayer in another country while the taxpayer 
'* •''" 
' 
is present in such country, and 
"(iii) an individual shall not be treated as a bona fide 
resident of, or as present in, a foreign country for any 
• ' ' ' 
day during which such individual was present in such 
country during such period. 
"(B) REGULATIONS.—For purposes of this paragraph, regu-
lations are described in this subparagraph if such 
regulations— 
' 
"(i) have been adopted pursuant to the Trading With 
the Enemy Act (50 U.S.C. App. 1 et seq.), or the Inter-
national Emergency Economic Powers Act (50 U.S.C. 
1701 et seq.), and 
"(ii) include provisions generally prohibiting citizens 
and residents of the United States from engaging in 
'-• 
transactions related to travel to, from, or within a 
'•' 
foreign country. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2565 
"(C) EXCEPTION.—Subparagraph (A) shall not apply to 
any individual during any period in which such individual's 
activities are not in violation of the regulations described in 
subparagraph (B)." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31, 1986. 
SEC. 1234. FOREIGN COMPLIANCE PROVISIONS. 
(a) INFORMATION RETURNS.— 
(1) IN GENERAL.—Subpart A of part III of subchapter A of 
chapter 61 (relating to information concerning persons subject 
to special provisions) is amended by inserting after section 
6039D the following new section: 
"SEC. 6039E. INFORMATION CONCERNING RESIDENT STATUS. 
"(a) GENERAL RULE.—Notwithstanding any other provision of law, 
any individual who— 
"(1) applies for a United States passport (or a renewal 
thereof), or 
"(2) applies to be lawfully accorded the privilege of residing 
permanently in the United States as an immigrant in accord-
ance with the immigration laws, 
shall include with any such application a statement which includes 
the information described in subsection (b). 
"(b) INFORMATION TO BE PROVIDED.—Information required under 
subsection (a) shall include— 
"(1) the taxpayer's TIN (if any), 
"(2) in the case of a passport applicant, any foreign country in 
which such individual is residing, 
"(3) in the case of an individual seeking permanent residence, 
information with respect to whether such individual is required 
to file a return of the tax imposed by chapter 1 for such 
individual's most recent 3 taxable years, and 
"(4) such other information as the Secretary may prescribe. 
"(c) PENALTY.—Any individual failing to provide a statement 
required under subsection (a) shall be subject to a penalty equal to 
$500 for each such failure, unless it is shown that such failure is due 
to reasonable cause and not to willful neglect. 
"(d) INFORMATION TO BE PROVIDED TO SECRETARY.—Notwithstand-
ing any other provision of law, any agency of the United States 
which collects (or is required to collect) the statement under subsec-
tion (a) shall— 
"(1) provide any such statement to the Secretary, and 
"(2) provide to the Secretary the name (and any other identi-
fying information) of any individual refusing to comply with the 
provisions of subsection (a). 
"(e) EXEMPTION.—The Secretary may by regulations exempt any 
class of individuals from the requirements of this section if he 
determines that applying this section to such individuals is not 
necessary to carry out the purposes of this section." 
(2) CONFORMING AMENDMENT.—The table of sections for sub-
part A of part III of subchapter A of chapter 61 is amended by 
inserting after the item relating to section 6039D the following 
new item: 
"Sec. 6039E. Information concerning resident status." 
100 STAT. 2566 
PUBLIC I^AW 99-514—OCT. 22, 1986 
(3) EFFECTIVE DATE.—The amendments made by this subsec-
tion shall apply to applications submitted after December 81, 
1987 (or, if earlier, the effective date which shall not be earlier 
than January 1, 1987) of the initial regulations issued under 
section 6039E of the Internal Revenue Code of 1986 as added by 
this subsection), 
(b) WITHHOLDING ON CERTAIN DEFERRED PAYMENTS OUTSIDE THE 
UNITED STATES.— 
(1) IN GENERAL.—Subsection (d) of section 3405 (relating to 
definitions and special rules) is amended by adding at the end 
thereof the following new paragraph: 
"(13) ELECTION MAY NOT BE MADE WITH RESPECT TO CERTAIN 
PAYMENTS OUTSIDE THE UNITED STATES.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), in the case of any periodic payment or nonperiodic 
distribution which is to be delivered outside of the United 
""^ 
States, no election may be made under subsection (a)(2) or 
. ^ 
(b)(3) with respect to such payment. 
,'sw- 
"(g) EXCEPTION.—Subparagraph (A) shall not apply if the 
recipient certifies to the payor, in such manner as the 
^.. "'•:•' Secretary may prescribe, that such person is not— 
^•''' 
"(i) a United States citizen who is a bona fide resi-
dent of a foreign country, or 
^*^- 
"(ii) an individual to whom section 877 applies." 
(2) EFFECTIVE DATE.—The amendment made by this subsection 
shall apply to payments after December 31, 1986. 
SEC. 1235. TREATMENT OF CERTAIN PASSIVE FOREIGN INVESTMENT 
COMPANIES. 
(a) GENERAL RULE.—Subchapter P of chapter 1 is amended by 
adding at the end thereof the following new part: 
"PART VI—TREATMENT OF CERTAIN PASSIVE FOREIGN 
INVESTMENT COMPANIES 
"Subpart A. Interest on tax deferral. 
"Subpart B. Treatment of qualified electing funds. 
' . 
" 
"Subpart C. General provisions. 
'' 
' • '
'
• 
•'•''' 
"Subpart A—Interest on Tax Deferral 
''•: 
"Sec. 1291. Interest on tax deferral. 
> 
: 
*'• 
. 
i 
"SEC. 1291. INTEREST ON TAX DEFERRAL. 
"(a) TREATMENT OF DISTRIBUTIONS AND STOCK DISPOSITIONS.— 
"(1) DISTRIBUTIONS.—If a United States person receives an 
excess distribution in respect of stock in a passive foreign 
investment company, then— 
"(A) the amount of the excess distribution shall be allo-
cated ratably to each day in the taxpayer's holding period 
for the stock, 
- 
"(B) with respect to such excess distribution, the tax-
payer's gross income for the current year shall include (as 
ordinary income) only the amounts allocated 
under 
subparagraph (A) to— 
"(i) the current year, or 
• •
* • 
.' . 
>
. 
"(ii) any period in the taxpayer's holding period 
before the 1st day of the 1st taxable year of the com-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2567 
pany for which it was a passive foreign investment 
company (or, if later, January 1, 1987), and 
"(C) the tax imposed by this chapter for the current year 
shall be increased by the deferred tax amount (determined 
under subsection (c)). 
"(2) DISPOSITIONS.—If the taxpayer disposes of stock in a 
passive foreign investment company, then the rules of para-
graph (1) shall apply to any gain recognized on such disposition 
in the same manner as if such gain were an excess distribution. 
,j., 
"(3) DEFINITIONS.—For purposes of this section— 
"(A) HOLDING PERIOD.—The taxpayer's holding period 
shall be determined under section 1223; except that, in the 
case of an excess distribution, such holding period shall be 
treated as ending on the date of such distribution. 
"(B) CURRENT YEAR.—The term 'current year' means the 
taxable year in which the excess distribution or disposition 
occurs. 
"(4) COORDINATION WITH SECTION 904.—Subparagraph (B) of 
paragraph (1) shall not apply for purposes of section 904. 
"(5) SECTION 902 NOT TO APPLY.—Section 902 shall not apply to 
any dividend paid by a passive foreign investment company 
unless such company is a qualified electing fund. 
"(b) EXCESS DISTRIBUTION.— 
"(1) IN GENERAL.—For purposes of this section, the term 
'excess distribution' means any distribution in respect of stock 
received during any taxable year to the extent such distribution 
does not exceed its ratable portion of the total excess distribu-
tion (if any) for such taxable year. 
"(2) 
TOTAL 
EXCESS 
DISTRIBUTION.—For purposes of this 
subsection— 
"(A) IN GENERAL.—The term 'total excess distribution' 
means the excess (if any) o
f
— 
"(i) the amount of the distributions in respect of the 
stock received by the taxpayer during the taxable year, 
over 
"(ii) 125 percent of the average amount received in 
respect of such stock by the taxpayer during the 3 
preceding taxable years (or, if shorter, the portion of 
J!}e !«^ 
the taxpayer's holding period before the taxable year). 
"(B) No EXCESS FOR IST YEAR.—The total excess distribu-
tions with respect to any stock shall be zero for the taxable 
year in which the taxpayer's holding period in such stock 
begins. 
• 
"(3) ADJUSTMENTS.—Under regulations prescribed by the Sec-
retary— 
"(A) determinations under this subsection shall be made 
on a share-by-share basis, except that shares with the same 
holding period may be aggregated, 
"(B) proper adjustments shall be made for stock splits and 
; V , , 
stock dividends, 
"(C) if the taxpayer does not hold the stock during the 
BiiUi-: entire taxable year, distributions received during such year 
shall be annualized, 
"(D) if the taxpayer's holding period includes periods 
during which the stock was held by another person, dis-
tributions received by such other person shall be taken into 
account as if received by the taxpayer, and 
1o 
100 STAT. 2568 
PUBLIC LAW 99-514—OCT. 22, 1986 
«r,v, : 
"(E) if the distributions are received in a foreign cur-
rency, determinations under this subsection shall be made 
'' ' ' 
in such currency and the amount of any excess distribution 
.K.' ,. 
determined in such currency shall be translated into 
dollars. 
"(c) DEFERRED TAX AMOUNT.—For purposes of this section— 
"(1) IN GENERAL.—The term 'deferred tax amount' means, 
with respect to any distribution or disposition to which subsec-
tion (a) applies, an amount equal to the sum o
f
— 
"(A) the aggregate increases in taxes described in para-
graph (2), plus 
"(B) the aggregate amount of interest (determined in the 
no 
manner provided under paragraph (3)) on such increases in 
tax. 
"(2) AGGREGATE INCREASES IN TAXES.—For purposes of para-
graph (1)(A), the aggregate increases in taxes shall be deter-
mined by multiplying each amount allocated under subsection 
(a)(1)(A) to any taxable year (other than any taxable year re-
ferred to in subsection (a)(1)(B)) by the highest rate of tax in 
effect for such taxable year under section 1 or 11, whichever 
applies. 
"(3) COMPUTATION OF INTEREST.— 
"(A) IN GENERAL.—The amount of interest referred to in 
paragraph (1)(B) on any increase determined under para-
graph (2) for any taxable year shall be determined for the 
period— 
"(i) beginning on the due date for such taxable year, 
"(ii) ending on the due date for the taxable year with 
^. ,
^ 
or within which the distribution or disposition occurs, 
by using the rates and method applicable under section 
, 6621 for underpayments of tax for such period. 
"(B) DUE DATE.—For purposes of this subsection, the term 
'due date' means the date prescribed by law (determined 
without regard to extensions) for filing the return of the tax 
imposed by this chapter for the taxable year. 
'(d) COORDINATION WITH SUBPART B.— 
"(1) IN GENERAL.—This section shall not apply with respect 
to— 
"(A) any distribution paid by a passive foreign investment 
. 
company during a taxable year for which such company is a 
qualified electing fund, and 
"(B) any disposition of stock in a passive foreign invest-
ment company if such company is a qualified electing fund 
for each of its taxable years— 
"(i) which begins after December 31, 1986, and for 
which such company is a passive foreign investment 
company, and 
"(ii) which includes any portion of the taxpayer's 
holding period. 
"(2) ELECTION TO RECOGNIZE GAIN WHERE COMPANY BECOMES 
QUALIFIED ELECTING FUND.— 
"(A) IN GENERAL.—If^ 
"(i) a passive foreign investment company becomes a 
: 
qualified electing fund for a taxable year which begins 
after December 31,1986, 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2569 
"(ii) the taxpayer holds stock in such company on the 
first day of such taxable year, and 
"(iii) the taxpayer establishes to the satisfaction of 
the Secretary the fair market value of such stock on 
such first day, 
the taxpayer may elect to recognize gain as if he sold such 
stock on such first day for such fair market value. 
"(B) ADJUSTMENTS.—In the case of any stock to which 
subparagraph (A) applies— 
"(i) the adjusted basis of such stock shall be increased 
7/ 
by the gain recognized under subparagraph (A), and 
"(ii) the taxpayer's holding period in such stock shall 
be treated as beginning on the first day referred to in 
subparagraph (A). 
"(e) CERTAIN BASIS, ETC., RULES MADE APPLICABLE.—Rules similar 
to the rules of subsections (c), (d), (e), and if) of section 1246 shall 
apply for purposes of this section; except that— 
"(1) the reduction under subsection (e) of such section shall be 
the excess of the basis determined under section 1014 over the 
adjusted basis of the stock immediately before the decedent's 
death, and 
"(2) such a reduction shall not apply in the case of a decedent 
who was not a nonresident alien at all times during his holding 
period in the stock. 
"(f) NoNRECOGNiTiON PROVISIONS.—To the extent provided in 
regulations, gain shall be recognized on any disposition of stock in a 
passive foreign investment company. 
"Subpart B—Treatment of Qualified Electing Funds 
"Sec. 1293. Current taxation of income from qualified electing funds. 
"Sec. 1294. Election to extend time for payment of tax on undistributed 
earnings. 
"Sec. 129.5. Qualified electing fund. 
"SEC. 1
2
9
.
3
. 
CURRENT 
TAXATION 
OF 
INCOME 
FROM QUALIFIED 
ELECTING 
FUNDS. 
"(a) INCLUSION.— 
"(1) IN GENERAL.—Every United States person who owns (or is 
treated under section 1297(a) as owning) stock of a qualified 
electing fund at any time during the taxable year of such fund 
shall include in gross income— 
"(A) as ordinary income, such shareholder's pro rata 
share of the ordinary earnings of such fund for such year, 
iJ 
and 
"(B) as long-term capital gain, such shareholder's pro 
rata share of the net capital gain of such fund for such year. 
"(2) YEAR OF INCLUSION.—The inclusion under paragraph (1) 
shall be for the taxable year of the shareholder in which or with 
which the taxable year of the fund ends. 
"(b) PRO RATA SHARE.—The pro rata share referred to in subsec-
tion (a) in the case of any shareholder is the amount which would 
have been distributed with respect to the shareholder's stock if, on 
each day during the taxable year of the fund, the fund had distrib-
uted to each shareholder a pro rata share of that day's ratable share 
of the fund's ordinary earnings and net capital gain for such year. 
"(c) PREVIOUSLY TAXED AMOUNTS DISTRIBUTED TAX FREE.—If the 
taxpayer establishes to the satisfaction of the Secretary that any 
100 STAT. 2570 
PUBLIC LAW 99-514—OCT. 22, 1986 
amount distributed by a passive foreign investment company is paid 
out of earnings and profits of the company which were included 
under subsection (a) in the income of any United States person, such 
amount shall be treated as a distribution which is not a dividend. 
"(d) BASIS ADJUSTMENTS.—The basis of the taxpayer's stock in a 
passive foreign investment company shall be— 
"(1) increased by any amount which is included in the income 
> < of the taxpayer under subsection (a) with respect to such stock, 
and 
• 
"(2) decreased by any amount distributed with respect to such 
stock which is not includible in the income of the taxpayer by 
reason of subsection (c). 
A similar rule shall apply also in the case of any property if by 
reason of holding such property the taxpayer is treated under 
section 1297(a) as owning stock in a qualified electing fund. 
"(e) ORDINARY EARNINGS.—For purposes of this section— 
"(1) ORDINARY EARNINGS.—The term 'ordinary earnings' 
f^ means the excess of the earnings and profits of the qualified 
^•' electing fund for the taxable year over its net capital gain for 
such taxable year. 
^, 
"(2) LIMITATION ON NET CAPITAL GAIN.—A qualified electing 
fund's net capital gain for any taxable year shall not exceed its 
earnings and profits for such taxable year. 
"(f) FOREIGN TAX CREDIT ALLOWED IN THE CASE OF 10-PERCENT 
CORPORATE SHAREHOLDER.—For purposes of section 960— 
"(1) any amount included in the gross income under subsec-
tion (a) shall be treated as if it were included under section 
951(a), and 
"(2) any amount excluded from gross income under subsection 
(c) shall be treated in the same manner as amounts excluded 
'' 
from gross income under section 959. 
"SEC. 1294. ELECTION TO EXTEND TIME FOR PAYMENT OF TAX ON UNDIS-
TRIBUTED EARNINGS. 
"(a) EXTENSION ALLOWED BY ELECTION.— 
"(1) IN GENERAL.—At the election of the taxpayer, the time for 
p
.
? payment of any undistributed PFIC earnings tax liability of the 
taxpayer for the taxable year shall be extended to the extent 
i 
and subject to the limitations provided in this section. 
"(2) ELECTION NOT PERMITTED WHERE AMOUNTS OTHERWISE 
jv INCLUDIBLE UNDER SECTION 551 O
R 951.—The taxpayer may not 
; make an election under paragraph (1) with respect to the 
undistributed PFIC earnings tax liability attributable to a quali-
0 fied electing fund for the taxable year i
f
— 
"(A) any amount is includible in the gross income of the 
t' 
taxpayer under section 551 with respect to such fund for 
riji 
; such taxable year, or 
"(B) any amount is includible in the gross income of the 
•->'' 
taxpayer under section 951 with respect to such fund for 
such taxable year. 
"0)) DEFINITIONS.—For purposes of this section— 
"(1) UNDISTRIBUTED PFIC EARNINGS TAX UABIUTY.—The term 
' 
'undistributed PFIC earnings tax liability' means, in the case of 
' 
any taxpayer, the excess of— 
• 
"(A) the tax imposed by this chapter for the taxable year, 
over 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2571 
"(B) the tax which would be imposed by this chapter for 
such year without regard to the inclusion in gross income 
under section 1293 of the undistributed earnings of a quali-
fied electing fund. 
"(2) 
UNDISTRIBUTED EARNINGS.—The term 
'undistributed 
earnings' means, with respect to any qualified electing fund, the 
excess (if any) o
f
— 
"(A) the amount includible in gross income by reason of 
section 1293(a) for the taxable year, over 
"(B) the amount not includible in gross income by reason 
of section 1293(c) for such taxable year. 
"(c) TERMINATION OF EXTENSION.— 
"(1) DISTRIBUTIONS.— 
^,, 
"(A) IN GENERAL.—If a distribution is not includible in 
gross income for the taxable year by reason of section 
1293(c), then the extension under subsection (a) for payment 
of the undistributed PFIC earnings tax liability with re-
spect to the earnings to which such distribution is attrib-
utable shall expire on the last date prescribed by law 
(determined without regard to extensions) for filing the 
return of tax for such taxable year. 
"(B) ORDERING RULE.—For purposes of subparagraph (A), 
a distribution shall be treated as made from the most 
recently accumulated earnings and profits. 
"(2) DISPOSITIONS, ETC.—If— 
"(A) stock in a passive foreign inv^tment company is 
disposed of during the taxable year, or 
.;..,... 
"(B) a passive foreign investment company ceases to be a 
qualified electing fund, 
all extensions under subsection (a) for payment of undistributed 
PFIC earnings tax liability attributable to such stock (or, in the 
case of such a cessation, attributable to any stock in such 
company) which had not expired before the date of such disposi-
tion or cessation shall expire on the last date prescribed by law 
(determined without regard to extensions) for filing the return 
of tax for the taxable year in which such disposition or cessation 
occurs. 
"(3) JEOPARDY.—If the Secretary believes that collection of an 
amount to which an extension under this section relates is in 
jeopardy, the Secretary shall immediately terminate such 
extension with respect to such amount, and notice and demand 
shall be made by him for payment of such amount. 
"(d) ELECTION.—The election under subsection (a) shall be made 
not later than the time prescribed by law (including extensions) for 
filing the return of tax imposed by this chapter for the taxable year. 
"(e) AUTHORITY TO REQUIRE BOND.—Section 6165 shall apply to 
any extension under this section as though the Secretary were 
extending the time for payment of the tax. 
"SEC. 1295. QUALIFIED ELECTING FUND. 
"(a) GENERAL RULE.—For purposes of this part, the term 'qualified 
electing fund' means any passive foreign investment company i
f
— 
"(1) an election under subsection (b) applies to such company 
for the taxable year, and 
"(2) such company complies for such taxable year with such 
requirements as the Secretary may prescribe for purposes o
f
— 
100 STAT. 2572 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(A) determining the ordinary earnings and net capital 
gain of such company for the taxable year, 
"(B) ascertaining the ownership of its outstanding stock, 
and 
"(C) otherwise carrying out the purposes of this subpart. 
"(b) ELECTION.— 
"(1) IN GENERAL.—A passive foreign investment company may 
make an election under this subsection for any taxable year. 
Such an election, once made, shall apply to all subsequent 
taxable years of such company for which such company is a 
passive foreign investment company unless revoked with the 
consent of the Secretary. 
"(2) WHEN MADE.—An election under this subsection may be 
made for any taxable year at any time before the 15th day of 
the 3rd month of the following taxable year. 
"Subpart C—General Provisions 
"Sec. 1296. Passive foreign investment company. 
"Sec. 1297. Special rules. 
"SEC. 1296. PASSIVE FOREIGN INVESTMENT COMPANY. 
"(a) IN GENERAL.—For purposes of this part, except as otherwise 
provided in this subpart the term 'passive foreign investment com-
pany' means any foreign corporation i
f
— 
"(1) 75 percent or more of the gross income of such corpora-
tion for the taxable year is passive income, or 
"' ' 
"(2) the average percentage of assets (by value) held by such 
corporation during the taxable year which produce passive 
income or which are held for the production of passive income is 
at least 50 percent. 
"(b) PASSIVE INCOME.—For purposes of this section— 
"(1) IN GENERAL.—Except as provided in paragraph (2), the 
term 'passive income' has the meaning given such term by 
section 904(d)(2)(A) without regard to the exceptions contained 
in clause (iii) thereof. 
"(2) EXCEPTION FOR CERTAIN BANKS AND INSURANCE COMPA-
NIES.—Except as provided in regulations, the term 'passive 
income' does not include any income— 
"(A) derived in the active conduct of a banking business 
by an institution licensed to do business as a bank in the 
United States (or, to the extent provided in regulations, by 
any other corporation), or 
"(B) derived in the active conduct of an insurance busi-
ness by a corporation which would be subject to tax under 
subchapter L if it were a domestic corporation. 
"(c) LOOK-THRU IN THE CASE OF 25-PERCENT OWNED CORPORA-
TIONS.—If a foreign corporation owns at least 25 percent (by value) 
of the stock of another corporation, for purposes of determining 
whether such foreign corporation is a passive foreign investment 
company, such foreign corporation shall be treated as if it— 
"(1) held its proportionate share of the assets of such other 
corporation, and 
"(2) received directly its proportionate share of the income of 
J' such other corporation. 
.
.
.
.
. 
i 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2573 
"(d) SECTION 1247 CORPORATIONS.—For purposes of this part, the 
term 'passive foreign investment company' does not include any 
foreign investment company to which section 1247 applies. 
"SEC. 1297. SPECIAL RULES. 
"(a) ATTRIBUTION OF OWNERSHIP.—For purposes of this part— 
"(1) ATTRIBUTION TO UNITED STATES PERSONS.—This subsec-
tion— 
"(A) shall apply to the extent that the effect is to treat 
stock of a passive foreign investment company as owned by 
a United States person, and 
"(B) except to the extent provided in regulations, shall 
not apply to treat stock owned (or treated as owned under 
' 
this subsection) by a United States person as owned by any 
other person. 
"(2) CORPORATIONS.— 
"(A) IN GENERAL.—If 50 percent or more in value of the 
stock of a corporation is owned, directly or indirectly, by or 
for any person, such person shall be considered as owning 
the stock owned directly or indirectly by or for such cor-
poration in that proportion which the value of the stock 
which such person so owns bears to the value of all stock in 
the corporation. 
"(B) 50-PERCENT UMITATION NOT TO APPLY TO PFIC.—For 
purposes of determining whether a shareholder of a passive 
foreign investment company is treated as owning stock 
owned directly or indirectly by or for such company, 
subparagraph (A) shall be applied without regard to the 50-
percent limitation contained therein. 
"(3) PARTNERSHIPS, ETC.—Stock owned, directly or indirectly, 
by or for a partnership, estate, or trust shall be considered as 
being owned proportionately by its partners or beneficiaries. 
"(4) SUCCESSIVE APPUCATION.—Stock considered to be owned 
by a person by reason of the application of paragraph (2) or (3) 
shall, for purposes of applying such paragraphs, be considered 
as actually owned by such person. 
"(b) OTHER SPECIAL RULES.—For purposes of this part— 
"(1) TIME FOR DETERMINATION.—Stock held by a taxpayer 
shall be treated as stock in a passive foreign investment com-
pany if, at any time during the holding period of the taxpayer 
with respect to such stock, such corporation (or any predecessor) 
was a passive foreign investment corporation which was not a 
qualified electing fund. The preceding sentence shall not apply 
if the taxpayer elects to recognize gain (as of the last day of the 
last taxable year for which the company was a passive foreign 
investment company) under rules similar to the rules of section 
1291(d)(2). 
"(2) CERTAIN CORPORATIONS NOT TREATED AS PFIC'S DURING 
START-UP YEAR.—A Corporation shall not be treated as a passive 
foreign investment company for the first taxable year such 
corporation has gross income (hereinafter in this paragraph 
referred to as the 'start-up year') if^ 
"(A) no predecessor of such corporation was a passive 
foreign investment company, 
"(B) it is established to the satisfaction of the Secretary 
that such corporation will not be a passive foreign invest-
100 STAT. 2574 
PUBLIC LAW 99-514—OCT. 22, 1986 
*tfi 
ment company for either of the 1st 2 taxable years follow-
•
f fi! ing the start-up year, and 
"(C) such corporation is not a passive foreign investment 
company for either of the 1st 2 taxable years following the 
start-up year. 
"(3) CERTAIN CORPORATIONS CHANGING BUSINESSES.—A cor-
poration shall not be treated as a passive foreign investment 
company for any taxable year i
f
— 
"(A) such corporation (and any predecessor) was not a 
yt, 
passive foreign investment corporation for any prior tax-
able year, 
"(B) it is established to the satisfaction of the Secretary 
that— 
%
n
*
3 cl 
"(i) substantially all of the passive income of the 
corporation for the taxable year is attributable to pro-
ceeds from the disposition of 1 or more active trades or 
" ^ 
businesses, and 
"(ii) such corporation will not be a passive foreign 
investment company for either of the 1st 2 taxable 
years following such taxable year, and 
"(C) such corporation is not a passive foreign investment 
company for either of such 2 taxable years. 
"(4) SEPARATE INTERESTS TREATED AS SEPARATE CORPORA-
TIONS.—Under regulations prescribed by the Secretary, where 
necessary to carry out the purposes of this part, separate classes 
of stock (or other interests) in a corporation shall be treated as 
interests in separate corporations. 
"(5) APPLICATION OF SECTION WHERE STOCK HELD BY OTHER 
ENTITY.—Under regulations, in any case in which a United 
States person is treated as holding stock in a passive foreign 
investment company by reason of subsection (a), any disposition 
by the United States person or the person holding such stock 
which results in the United States person being treated as no 
longer holding such stock, shall be treated as a disposition by 
the United States person with respect to stock in the passive 
foreign investment company. 
"(6) DISPOSITIONS.—If a taxpayer uses any stock in a passive 
foreign investment company as security for a loan, the taxpayer 
shall be treated as having disposed of such stock. 
"(7) COORDINATION WITH SECTION 1246.—Section 1246 shall not 
apply to earnings and profits of any company for any taxable 
year beginning after December 31, 1986, if such company is a 
passive foreign investment company for such taxable year. 
"(c) REGULATIONS.—The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
part." 
(b) COORDINATION OF SECTION 1246 WITH SECTION 1248.—Section 
1246 is amended by redesignating subsection (f) as subsection (g) and 
by inserting after subsection (e) the following new subsection: 
"(f) COORDINATION WITH SECTION 1248.—This section shall not 
apply to any gain to the extent such gain is treated as ordinary 
income under section 1248 (determined without regard to section 
1248(g)(3))." 
(c) COORDINATION WITH SUBPART F.—Section 951 (relating to 
amounts included in gross income of United States shareholders) is 
amended by adding at the end thereof the following new subsection: 
"(f) COORDINATION WITH PASSIVE FOREIGN INVESTMENT COMPANY 
PROVISIONS.—If, but for this subsection, an amount would be in-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2575 
eluded in the gross income of a United States shareholder for any 
taxable year both under subsection (a)(l)(A)(i) and under section 
1293 (relating to current taxation of income from certain passive 
foreign investment companies), such amount shall be included in the 
gross income of such shareholder only under subsection (a)(1)(A)." 
(d) EXTENSION OF STATUTE OF LIMITATION.—Section 6503 (relating 
to suspension of running of period of limitation) is amended by 
redesignating subsection (j) as subsection (k) and by inserting after 
subsection (i) the following new subsection: 
"(j) EXTENSION OF TIME FOR PAYMENT OF UNDISTRIBUTED P F I C 
EARNINGS TAX LIABILITY.—The running of any period of limitations 
for collection of any amount of undistributed PFIC earnings tax 
liability (as defined in section 1294(b)) shall be suspended for the 
period of any extension of time under section 1294 for payment of 
such amount." 
(e) COORDINATION WITH FOREIGN PERSONAL HOLDING COMPANY 
PROVISIONS.—Section 551 is amended by redesignating subsection (g) 
as subsection (h) and by inserting after subsection (f) the following 
new subsection: 
"(g) COORDINATION WITH PASSIVE FOREIGN INVESTMENT COMPANY 
PROVISIONS.—If, but for this subsection, an amount would be in-
cluded in the gross income of any person under subsection (a) and 
under section 1293 (relating to current taxation of income from 
certain passive foreign investment companies), such amount shall be 
included in the gross income of such person only under subsection 
(a)." 
(f) OTHER TECHNICAL AMENDMENTS.— 
(1) Subsection (b) of section 532 (relating to exceptions from 
accumulated earnings tax) is amended by striking out "or" at 
the end of paragraph (2), by striking out the period at the end of 
paragraph (3) and inserting in lieu thereof ", or", and by adding 
at the end thereof the following new paragraph: 
"(4) a passive foreign investment company (as defined in 
section 1296)." 
(2) Subsection (c) of section 542 (relating to exceptions from 
personal holding company provisions) is amended by striking 
out "and" at the end of paragraph (8), by striking out the period 
at the end of paragraph (9) and inserting in lieu thereof "; and", 
and by adding at the end thereof the following new paragraph: 
"(10) a passive foreign investment company (as defined in 
section 1296)." 
(3) The second sentence of section 851(b) is amended— 
(A) by striking out "section 951(a)(l)(A)(i)" and inserting 
in lieu thereof "section 951(a)(l)(A)(i) or 1293(a)", and 
(B) by striking out "section 959(a)(1)" and inserting in lieu 
thereof "section 959(a)(1) or 1293(c) (as the case may be)". 
(4)(A) Subparagraph (A) of section 904(g)(1) is amended by 
striking out "or" at the end of clause (i), by striking out the 
period at the end of clause (ii) and inserting in lieu thereof ", 
or", and by adding at the end thereof the following new clause: 
"(iii) section 1293 (relating to current taxation of 
income from qualified funds)." 
(B) The paragraph heading of section 904(g)(2) is amended by 
striking out "HOLDING COMPANY" and inserting in lieu thereof 
"HOLDING OR PASSIVE FOREIGN INVESTMENT COMPANY". 
100 STAT. 2576 
PUBLIC LAW 99-514—OCT. 22, 1986 
(g) CLERICAL AMENDMENT.—The table of parts for subchapter P of 
chapter 1 is amended by adding at the end thereof the following new 
item: 
"Part VI. Treatment of certain passive foreign investment companies." 
(h) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after 
December 31,1986. 
SEC. 1236. TREATMENT OF INTEREST ON OBLIGATIONS OF THE UNITED 
STATES RECEIVED BY BANKS ORGANIZED IN GUAM. 
(a) IN GENERAL.—Subsection (e) of section 882 (relating to interest 
on United States obligations received by banks organized in posses-
sions) is amended by adding at the end thereof the following 
sentence: 
"The preceding sentence shall not apply to any Guam corporation 
which is treated as not being a foreign corporation by section 
881(b)(1) for the taxable year." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after November 16, 1985. 
Subtitle E—Treatment of Foreign Taxpayers 
SEC. 1241. BRANCH PROFITS TAX. 
(a) GENERAL RULE.—Subpart B of part II of subchapter N of 
chapter 1 (relating to foreign corporations) is amended by re-
designating section 884 as section 885 and by inserting after section 
883 the following new section: 
"SEC. 884. BRANCH PROFITS TAX. 
"(a) IMPOSITION OF TAX.—In addition to the tax imposed by section 
882 for any taxable year, there is hereby imposed on any foreign 
corporation a tax equal to 30 percent of the dividend equivalent 
amount for the taxable year. 
"(b) DIVIDEND EQUIVALENT AMOUNT.—For purposes of subsection 
(a), the term 'dividend equivalent amount' means the foreign cor-
poration's effectively connected earnings and profits for the taxable 
year adiusted as provided in this subsection: 
(1) REDUCTION FOR INCREASE IN U.S. NET EQUITY.—If— 
"(A) the U.S. net equity of the foreign corporation as of 
the close of the taxable year, exceeds 
"(B) the U.S. net equity of the foreign corporation as of 
the close of the preceding taxable year, 
the effectively connected earnings and profits for the taxable 
year shall be reduced (but not below zero) by the amount of such 
excess. 
"(2) INCREASE FOR DECREASE IN NET EQUITY.— 
"(A) IN GENERAL.—If^ 
"(i) the U.S. net equity of the foreign corporation as 
of the close of the preceding taxable year, exceeds 
"(ii) the U.S. net equity of the foreign corporation as 
of the close of the taxable year, 
the effectively connected earnings and profits for the tax-
> * 
able year shall be increased by the amount of such excess. 
'mri 
"(B) LIMITATION.—The increase under subparagraph (A) 
for any taxable year shall not exceed the aggregate reduc-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2577 
tions under paragraph (1) for prior taxable years to the 
extent not previously taken into account under subpara-
graph (A). 
"(c) U.S. NET EQUITY.—For purposes of this section— 
"(1) IN GENERAL.—The term 'U.S. net equity' means— 
"(A) U.S. assets, reduced (including below zero) by 
"(B) U.S. liabilities. 
"(2) U.S. ASSETS AND U.S. LIABILITIES.—For purposes of para-
graph (D— 
"(A) U.S. ASSETS.—The term 'U.S. assets' means the 
money and aggregate adjusted bases of property of the 
foreign corporation treated as connected with the conduct 
of a trade or business in the United States under regula-
tions prescribed by the Secretary. For purposes of the 
preceding sentence, the adjusted basis of any property shall 
be its adjusted basis for purposes of computing earnings and 
profits. 
"(B) U.S. LIABILITIES.—The term 'U.S. liabilities' means 
the liabilities of the foreign corporation treated as con-
nected with the conduct of a trade or business in the United 
States under regulations prescribed by the Secretary. 
"(C) REGULATIONS TO BE CONSISTENT WITH ALLOCATION OF 
DEDUCTIONS.—The regulations prescribed under subpara-
graphs (A) and (B) shall be consistent with the allocation of 
deductions under section 882(c)(1). 
"(d) EFFECTIVELY CONNECTED EARNINGS AND PROFITS.—For pur-
poses of this section— 
"(1) IN GENERAL.—The term 'effectively connected earnings 
and profits' means earnings and profits (without diminution by 
reason of any distributions made during the taxable year) which 
are attributable to income which is effectively connected (or 
treated as effectively connected) with the conduct of a trade or 
business within the United States. 
"(2) EXCEPTION FOR CERTAIN INCOME.—The term 'effectively 
connected earnings and profits' shall not include any earnings 
and profits attributable to— 
"(A) income not includible in gross income under para-
graph (1) or (2) of section 883(a), 
"(B) income treated as effectively connected with the 
conduct of a trade or business within the United States 
under section 921(d) or 926(b), 
"(C) gain on the disposition of a United States real prop-
erty interest described in section 897(c)(l)(A)(ii), or 
' (D) income treated as effectively connected with the 
conduct of a trade or business within the United States 
under section 953(c)(3)(C). 
Property and liabilities of the foreign corporation treated as 
connected with such income under regulations prescribed by the 
Secretary shall not be taken into account in determining the 
U.S. assets or U.S. liabilities of the foreign corporation. 
"(e) COORDINATION WITH INCOME TAX TREATIES; ETC.— 
"(1) LIMITATION ON TREATY EXEMPTION.—No income tax treaty 
between the United States and a foreign country shall exempt 
any foreign corporation from the tax imposed by subsection (a; 
(or reduce the amount thereof) unless— 
"(A) such foreign corporation is a quEdified resident of 
such foreign country, or 
100 STAT. 2578 
PUBLIC LAW 99-514-OCT. 22, 1986 
"(B) such foreign corporation is not a qualified resident of 
such foreign country but such income tax treaty permits a 
withholding 
tax 
on 
dividends 
described 
in 
section 
861(a)(2)(B) which are paid by such foreign corporation. 
"(2) TREATY MODIFICATIONS.—If a foreign corporation is a 
qualified resident of a foreign country with which the United 
States has an income tax treaty— 
"(A) the rate of tax under subsection (a) shall be the rate 
of tax specified in such treaty— 
"(i) on branch profits if so specified, or 
"(ii) if not so specified, on dividends paid by a domes-
tic corporation to a corporation resident in such coun-
try which wholly owns such domestic corporation, and 
"(B) any other limitations under such treaty on the tax 
imposed by subsection (a) shall apply. 
"(3) COORDINATION WITH 2ND TIER WITHHOLDING TAX.— 
"(A) IN GENERAL.—If a foreign corporation is not exempt 
for any taxable year from the tax imposed by subsection (a) 
by reason of a treaty, no tax shall be imposed by section 
871(a), 881(a), 1441, or 1442 on any dividends paid by such 
corporation during the taxable year. 
"(B) LIMITATION ON CERTAIN TREATY BENEFITS.—No for-
eign corporation which is not a qualified resident of a 
foreign country shall be entitled to claim benefits under 
any income tax treaty between the United States and such 
foreign country with respect to dividends— 
"(i) which are paid by such foreign corporation and 
with respect to which such foreign corporation is other-
wise required to deduct and withhold tax under section 
1441 or 1442, or 
"(ii) which are received by such foreign corporation 
and are described in section 861(a)(2)(B). 
"(4) QUALIFIED RESIDENT.—For purposes of this subsection— 
"(A) IN GENERAL.—Except as otherwise provided in this 
paragraph, the term 'qualified resident' means, with re-
spect to any foreign country, any foreign corporation which 
is a resident of such foreign country unless— 
"(i) more than 50 percent (by value) of the stock of 
;j 
such foreign corporation is owned (within the meaning 
of section 883(c)(4)) by individuals who are not residents 
ac 
of such foreign country and who are not United States 
citizens or resident aliens, or 
e • 
"(ii) 50 percent or more of its income is used (directly 
or indirectly) to meet liabilities to persons who are not 
residents of such foreign country or the United States. 
"(B) SPECIAL RULE FOR PUBLICLY TRADED CORPORATIONS.— 
A foreign corporation which is a resident of a foreign 
country shall be treated as a qualified resident of such 
foreign country i
f
— 
"(i) the stock of such corporation is primarily and 
regularly traded on an established securities market in 
such foreign country, or 
. 1 ' 
"(ii) such corporation is wholly owned (either directly 
or indirectly) by another foreign corporation which is 
if tn. 
organized in such foreign country and the stock of 
which is so traded. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2579 
^ 
"(C) SECRETARIAL AUTHORITY.—The Secretary may, in his 
sole discretion, treat a foreign corporation as being a 
qualified resident of a foreign country if such corporation 
establishes to the satisfaction of the Secretary that such 
corporation meets such requirements as the Secretary may 
establish to ensure that individuals who are not residents of 
such foreign country do not use the treaty between such 
foreign country and the United States in a manner 
inconsistent with the purposes of this subsection. 
"(f) 
TREATMENT OF INTEREST ALLOCABLE TO EFFECTIVELY CON-
NECTED INCOME.— 
"(1) IN GENERAL.—In the case of a foreign corporation en-
gaged in a trade or business in the United States, for purposes 
i 
of sections 871, 881,1441, and 1442— 
"(A) any interest paid by such trade or business in the 
, 
United States shall be treated as if it were paid by a 
domestic corporation, and 
"(B) to the extent the amount of interest allowable as a 
deduction under section 882 in computing the effectively 
% P' 
connected taxable income of such foreign corporation ex-
ceeds the interest described in subparagraph (A), such for-
eign corporation shall be liable for tax under section 881(a) 
in the same manner as if such excess were interest paid to 
such foreign corporation by a wholly owned domestic cor-
poration on the last day of such foreign corporation's tax-
able year. 
Rules similar to the rules of subsection (eX3XB) shall apply to 
interest described in the preceding sentence. 
"(2) EFFECTIVELY CONNECTED TAXABLE INCOME.—For purposes 
of this subsection, the term 'effectively connected taxable 
income' means tsixable income which is effectively connected (or 
treated as effectively connected) with the conduct of a trade or 
business within the United States. 
"(g) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this section, including regulations providing for appropriate 
adjustments in the determination of the dividend equivalent amount 
in connection with the distribution to shareholders or transfer to a 
controlled corporation of the taxpayer's U.S. assets and other adjust-
ments in such determination as are necessary or appropriate to 
carry out the purposes of this section." 
(b) AMENDMENTS TO INTEREST AND DIVIDEND SOURCING RULES.— 
(1) INTEREST.—Paragraph (1) of section 861(a) (as amended by 
section 1214) is amended— 
>R 
(A) by striking out "residents, corporate or otherwise," in 
i: 
the matter preceding subparagraph (A) and inserting in 
lieu thereof "noncorporate residents or domestic corpora-
ilaite f 
tions", and 
(B) by striking out subparagraphs (B) and (C) and by 
redesignating subparagraphs (D), (E), and (F) as subpara-
*
*
*
-
• 
graphs (B), (C), and (D), respectively. 
(2) DIVIDENDS.—Subparagraph (B) of section 861(a)(2) is 
amended— 
(A) by striking out "50 percent" and inserting in lieu 
thereof "25 percent", and 
f 
(B) by striking out "effectively connected" each place it 
vd J •» 
appears and inserting in lieu thereof "effectively connected 
100 STAT. 2580 
PUBLIC LAW 99-514—OCT. 22, 1986 
£ 
(or treated as effectively connected other than under sec-
tion 884(d)(2))". 
(c) DISALLOWANCE OF CREDIT.—Subsection (b) of section 906 is 
amended by adding at the end thereof the following new paragraph: 
"(6) No credit shall be allowed under this section against the 
tax imposed by section 884." 
(d) CLERICAL AMENDMENT.—The table of sections for subpart B of 
part II of subchapter N of chapter 1 is amended by striking out 
the item relating to section 884 and inserting in lieu thereof the 
following: 
^,. ^
» 
. . . 
"Sec. 884. Branch profits tax. 
^ 
"Sec. 885. Cross references." 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
SEC. 1242. TREATMENT OF DEFERRED PAYMENTS AND APPRECIATION 
ARISING OUT OF BUSINESS CONDUCTED WITHIN THE UNITED 
STATES. 
(a) GENERAL RULE.—Subsection (c) of section 864 (defining effec-
tively connected income) is amended by adding at the end thereof 
the following new paragraphs: 
"(6) TREATMENT OF CERTAIN DEFERRED PAYMENTS, ETC.—For 
purposes of this title, any income or gain of a nonresident alien 
individual or a foreign corporation for any taxable year which is 
attributable to a sale or exchange of property or the perform-
* ance of services (or any other transaction) in any other taxable 
year shall be treated as effectively connected with the conduct 
of a trade or business within the United States if it would have 
been so treated if such income or gain were taken into account 
in such other taxable year. 
"(7) TREATMENT OF CERTAIN PROPERTY TRANSACTIONS.—For 
purposes of this title, if any property ceases to be used or held 
for use in connection with the conduct of a trade or business 
within the United States, the determination of whether any 
income or gain attributable to a sale or exchange of such 
property occurring within 10 years after such cessation is effec-
tively connected with the conduct of a trade or business within 
the United States shall be made as if such sale or exchange 
occurred immediately before such cessation." 
(b) CONFORMING AMENDMENTS.—Paragraph (1) of section 864(c) is 
amended— 
(1) by striking out "and (4)" in subparagraph (A) and inserting 
in lieu thereof "(4), (6), and (7)", and 
(2) by striking out "as provided in" in subparagraph (B) and 
inserting in lieu thereof "as provided in paragraph (6) or (7) or 
in". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
SEC. 1243. TREATMENT UNDER SECTION 877 OF PROPERTY RECEIVED IN 
TAX-FREE EXCHANGES, ETC. 
(a) GENERAL RULE.—Subsection (c) of section 877 (relating to 
expatriation to avoid tax) is amended by adding at the end thereof 
the following new sentence: 
"For purposes of this section, gain on the sale or exchange of 
property which has a basis determined in whole or in part by 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2581 
reference to property described in paragraph (1) or (2) shall be 
treated as gain described in paragraph (1) or (2)." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to sales or exchanges of property received in exchanges 
after September 25, 1985. 
SEC. 1244. STUDY OF UNITED STATES REINSURANCE INDUSTRY. 
The Secretary of the Treasury or his delegate shall conduct a 
study to determine whether United States reinsurance corporations 
are placed at a significant competitive disadvantage with foreign 
reinsurance corporations by existing treaties between the United 
States and foreign countries. The Secretary shall report before 
January 1, 1988, the results of such study to the Committee on 
Finance of the United States Senate and the Committee on Ways 
and Means of the House of Representatives. 
SEC. 1245. INFORMATION WITH RESPECT TO CERTAIN FOREIGN-OWNED 
CORPORATIONS. 
(a) IN GENERAL.—Paragraph (1) of section 6038A(b) (relating to 
certain required information) is amended— 
(1) by striking out "each corporation" in the matter preceding 
subparagraph (A) and inserting in lieu thereof "each person", 
and 
(2) by striking out subparagraph (A) and inserting in lieu 
thereof the following: 
"(A) is a related party to the reporting corporation, and". 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 6038A(b) is amended by striking 
out "each corporation" and inserting in lieu thereof "each 
person". 
'' 
(2) Paragraph (3) of section 6038A(b) is amended to read as 
*
' 
follows: 
; 
"(3) transactions between the reporting corporation and each 
' 
foreign person which is a related party to the reporting 
corporation." 
* 
(3) Subsection (b) of section 6038A is amended by striking out 
"and" at the end of paragraph (2), by striking out the period at 
the end of paragraph (3) and inserting in lieu thereof ", and", 
and by adding at the end thereof the following new paragraph: 
' 
"(4) such information as the Secretary may require for pur-
poses of carrying out the provisions of section 453C." 
(4) Paragraph (2) of section 6038A(c) is amended to read as 
s 
follows: 
? 
"(2) RELATED PARTY.—The term 'related party' means— 
"(A) any person who is related to the reporting corpora-
tion within the meaning of section 267(b) or 707(b)(1), and 
"(B) any other person who is related (within the meaning 
of section 482) to the reporting corporation." 
(5) Paragraph (1) of section 6038(a) is amended by striking out 
"and" at the end of subparagraph (D), by striking out the period 
at the end of subparagraph (E) and inserting in lieu thereof 
", and", and by inserting after subparagraph (E) the following 
I 
new subparagraph: 
"(F) such information as the Secretary may require for 
i 
purposes of carrying out the provisions of section 453C." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31, 1986. 
71-19A 0 - 89 - 26 : QL. 3 Part3 
100 STAT. 2582 
PUBLIC LAW 99-514—OCT. 22, 1986 
SEC. 1246. WITHHOLDING TAX ON AMOUNTS PAID BY PARTNERSHIPS TO 
FOREIGN PARTNERS. 
(a) IN GENERAL,—Subchapter A of chapter 3 (relating to withhold-
ing of tax on nonresident) is amended by adding at the end thereof 
the following new section: 
"SEC. 1446. WITHHOLDING TAX ON AMOUNTS PAID BY PARTNERSHIPS TO 
FOREIGN PARTNERS. 
"(a) GENERAL RULE.—Except as provided in this section, if a 
partnership has any income, gain, or loss which is effectively con-
nected or treated as effectively connected with the conduct of a 
trade or business within the United States, any person described in 
section 1441(a) shall be required to deduct and withhold a tax equal 
to 20 percent of any amount distributed to a partner which is not a 
United States person. 
"(]o) LIMITATION IF LESS THAN 80 PERCENT OF GROSS INCOME IS 
EFFECTIVELY CONNECTED WITH UNITED STATES TRADE OR BUSINESS.— 
"(1) IN GENERAL.—If the effectively connected percentage is 
less than 80 percent, only the effectively connected percentage 
of any distribution shall be taken into account under subsection 
4" (a). 
"(2) EFFECTIVELY CONNECTED PERCENTAGE.—For purposes of 
paragraph (1) the term 'effectively connected percentage' means 
^" the percentage of the gross income of the partnership for the 3 
j^^ taxable years preceding the taxable year of the distribution 
"which is effectively connected (or treated as effectively con-
„ ^ nected) with the conduct of a trade or business within the 
' United States. 
. ,^. 
,,,,,_ 
.^,. ,.,. '.•,.:••...-•,--^r} 
-'H--^ 
••• 
"(c) EXCEPTIONS.— 
' ^-« 
'- 
-• 
. . . 
,<•. 
^
^
^ 
"(1) AMOUNTS ON WHICH TAX WITHHELD.—Subsection (a) shall 
not apply to that portion of any distribution with respect to 
which a tax is required to be deducted and withheld under 
section 1441 or 1442 (or would be required to be deducted and 
withheld but for a treaty). 
"(2) PARTNERSHIPS WITH CERTAIN ALLOCATIONS.—Except as 
provided in regulations, subsection (a) shall not apply to any 
partnership with respect to which substantially all income from 
sources within the United States and substantially all income 
.-, which is effectively connected with the conduct of a trade or 
business within the United States is properly allocated to 
jfi United States persons. 
"(3) COORDINATION WITH SECTION 1445.—Under regulations 
proper adjustments shall be made in the amount required to be 
-! deducted and withheld under subsection (a) for amounts de-
ducted and withheld under section 1445. 
"(d) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this section." 
(b) COORDINATION WITH SECTION 6401(b).—Paragraph (2) of section 
6401(b) (relating to excessive credits treated as overpayments) is 
amended by adding at the end thereof the following new sentence: 
"The preceding sentence shall not apply to any amount deducted 
and withheld under section 1446." 
(c) CONFORMING AMENDMENT.—The table of sections for sub-
chapter A of chapter 3 is amended by adding at the end thereof the 
following new item: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2583 
"Sec. 1446. Withholding tax on amounts paid by partnerships to foreign 
partners." 
(d) EFFECTIVE DATE.—The amendment made by this section shall 
apply to distributions after December 31, 1987 (or, if earlier, the 
effective date (which shall not be earlier than January 1, 1987) of 
the initial regulations issued under section 1446 of the Internal 
Revenue Code of 1986 as added by this section). 
; 
SEC. 1247. INCOME OF FOREIGN GOVERNMENTS. 
(a) SPECIAL RULE.—Section 892 (relating to income of foreign 
governments and of international organizations) is amended to read 
as follows: 
"SEC. 892. INCOME OF FOREIGN GOVERNMENTS AND OF INTERNATIONAL 
ORGANIZATIONS. 
"(a) FOREIGN GOVERNMENTS.— 
"(1) IN GENERAL.—The income of foreign governments re-
ceived from— 
"(A) investments in the United States in— 
"(i) stocks, bonds, or other domestic securities owned 
by such foreign governments, or 
"(ii) financial instruments held in the execution of 
governmental financial or monetary policy, or 
"(B) interest on deposits in banks in the United States of 
' 
moneys belonging to such foreign governments, 
shall not be included in gross income and shall be exempt from 
taxation under this subtitle. 
"(2) INCOME RECEIVED DIRECTLY OR INDIRECTLY FROM COMMER-
CIAL ACTIVITIES.— 
„„^ 
"(A) IN GENERAL.—Paragraph (1) shall not apply to any 
A 
income— 
"(i) derived from the conduct of any commercial 
.;,. 
activity (whether within or outside the United States), 
or 
"(ii) received from or by a controlled commercial 
entity. 
"(B) CONTROLLED COMMERCIAL ENTITY.—For purposes of 
., 
subparagraph (A), the term 'controlled commercial entity' 
means any entity engaged in commercial 
activities 
(whether within or outside the United States) if the 
government— 
"(i) holds (directly or indirectly) any interest in such 
vji':^ .
^ 
entity which (by value or voting interest) is 50 percent 
or more of the total of such interests in such entity, or 
liens, fi: 
"(ii) holds (directly or indirectly) any other interest in 
such entity which provides the foreign government 
with effective control of such entity. 
For purposes of the preceding sentence, a central bank of 
issue shall be treated as a controlled commercial entity 
only if engaged in commercial activities within the United 
States. 
"(b) INTERNATIONAL ORGANIZATIONS.—The income of international 
organizations received from investments in the United States in 
stocks, bonds, or other domestic securities owned by such inter-
national organizations, or from interest on deposits in banks in the 
United States of moneys belonging to such international organiza-
tions, or from any other source within the United States, shall not 
100 STAT. 2584 
PUBLIC LAW 99-514—OCT. 22, 1986 
be included in gross income and shall be exempt from taxation 
under this subtitle. 
"(c) REGULATIONS.—The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to amounts received on or after July 1, 1986, except that 
no amount shall be required to be deducted and withheld by reason 
of the amendment made by subsection (a) from any payment made 
before the date of the enactment of this Act. 
SEC. 1248. LIMITATION ON COST OF PROPERTY IMPORTED FROM RE-
LATED PERSONS. 
(a) IN GENERAL.—Part IV of subchapter O of chapter 1 (relating to 
special rules for determination of basis) is amended by inserting 
after section 1059 the following new section: 
"SEC. 1059A. LIMITATION ON TAXPAYERS BASIS OR INVENTORY COST IN 
PROPERTY IMPORTED FROM RELATED PERSONS. 
"(a) IN GENERAL.—If any property is imported into the United 
States in a transaction (directly or indirectly) between related per-
sons (within the meaning of section 482), the amount of any costs— 
"(1) which are taken into account in computing the basis or 
inventory cost of such property by the purchaser, and 
"(2) which are also taken into account in computing the 
customs value of such property, 
shall not, for purposes of computing such basis or inventory cost for 
purposes of this chapter, be greater than the amount of such costs 
taken into account in computing such customs value. 
"(b) CUSTOMS VALUE; IMPORT.—For purposes of this section— 
"(1) CUSTOMS VALUE.—The term 'customs value' means the 
value taken into account for purposes of determining the 
amount of any customs duties or any other duties which may be 
imposed on the importation of any property. 
"(2) IMPORT.—Except as provided in regulations, the term 
'import' means the entering, or withdrawal from warehouse, for 
consumption." 
(h) CONFORMING AMENDMENT.—The table of sections for part IV of 
subchapter O of chapter 1 is amended by inserting after the item 
relating to section 1059 and inserting in lieu thereof the following 
new item: 
"Sec. 1059A. Limitation on taxpayer's basis or inventory cost in property 
imported from related persons." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to transactions entered into after March 18, 1986. 
SEC. 1249. TREATMENT OF DUAL RESIDENCE CORPORATIONS. 
(a) GENERAL RULE.—Section 1503 (relating to consolidated return) 
is amended by adding at the end thereof the following new 
subsection: 
"(d) DUAL CONSOLIDATED Loss.— 
"(1) IN GENERAL.—The dual consolidated loss for any taxable 
year of any corporation shall not be allowed to reduce the 
taxable income of any other member of the affiliated group for 
- 
the taxable year or any other taxable year. 
i_i. . "(2) DUAL CONSOLIDATED LOSS.—For purposes of this section— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2585 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the term 'dual consoUdated loss' means any net operat-
ing loss of a domestic corporation which is subject to an 
income tax of a foreign country on its income without 
regard to whether such income is from sources in or outside 
of such foreign country, or is subject to such a tax on a 
fi" r3 residence basis. 
"(B) SPECIAL RULE WHERE LOSS NOT USED UNDER FOREIGN 
V 
-
c . LAW.—To the extent provided in regulations, the term 'dual 
consolidated loss' shall not include any loss which, under 
,, 
. the foreign income tax law, does not offset the income of 
any foreign corporation." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to net operating losses for taxable years beginning after 
December 31, 1986. 
Subtitle F—Foreign Currency Transactions 
SEC. 1261. TREATMENT OF FOREIGN CURRENCY TRANSACTIONS. 
(a) GENERAL RULE.—Part III of subchapter N of chapter 1 is 
amended by adding at the end thereof the following new subpart: 
"Subpart J—Foreign Currency Transactions 
->f 
"Sec. 985. Functional currency. 
"Sec. 986. Determination of foreign corporanon's earnings and profits and 
foreign taxes. 
'•' 
"Sec. 987. Branch transactions. 
"Sec. 988. Treatment of certain foreign currency transactions. 
"Sec. 989. Other definitions and special rules. 
"SEC. 985. FUNCTIONAL CURRENCY. 
"(a) IN GENERAL.—Unless otherwise provided in regulations, all 
determinations under this subtitle shall be made in the taxpayer's 
functional currency. 
"(b) FUNCTIONAL CURRENCY.— 
"(1) IN GENERAL.—For purposes of this subtitle, the term 
'functional currency' means— 
"(A) except as provided in subparagraph (B), the dollar, or 
"(B) in the case of a qualified business unit, the currency 
of the economic environment in which a significant part of 
such unit's activities are conducted and which is used by 
such unit in keeping its books and records. 
"(2) FUNCTIONAL CURRENCY WHERE ACTIVITIES PRIMARILY CON-
DUCTED IN DOLLARS.—The functional currency of any qualified 
1
- business unit shall be the dollar if activities of such unit are 
primarily conducted in dollars. 
"(3) ELECTION.—To the extent provided in regulations, the 
taxpayer may elect to use the dollar as the functional currency 
for any qualified business unit i
f
— 
"(A) such unit keeps its books and records in dollars, or 
"(B) the taxpayer uses a method of accounting that 
:: 
approximates a separate transactions method. 
Any such election shall apply to the taxable year for which 
made and all subsequent taxable years unless revoked with the 
consent of the Secretary. 
100 STAT. 2586 
PUBLIC LAW 99-514—OCT. 22, 1986 
sin, t t "(4) CHANGE IN FUNCTIONAL CURRENCY TREATED AS A CHANGE 
IN METHOD OF ACCOUNTING.—Any change in the functional cur-
^ 
rency shall be treated as a change in the taxpayer's method of 
^ 
accounting for purposes of section 481 under procedures to be 
established by the Secretary. 
"SEC. 986. DETERMINATION OF FOREIGN CORPORATION'S EARNINGS AND 
PROFITS AND FOREIGN TAXES. 
"(a) EARNINGS AND PROFITS AND DISTRIBUTIONS.—For purposes of 
determining the tax under this subtitle— 
"(1) of any shareholder of any foreign corporation, the earn-
ings and profits of such corporation shall be determined in the 
''' 
corporation's functional currency, and 
"(2) in the case of any United States person, the earnings and 
profits determined under paragraph (1) (when 
distributed, 
deemed distributed, or otherwise taken into account under this 
subtitle) shall (if necessary) be translated into dollars using the 
appropriate exchange rate. 
"(b) FOREIGN TAXES.— 
"(1) IN GENERAL.—In determining the amount of foreign taxes 
^; 
deemed paid under section 902 or 960— 
"(A) any foreign income taxes paid by a foreign corpora-
tion shall be translated into dollars using the exchange 
rates as of the time of payment, and 
"(B) any adjustment to the amount of foreign income 
taxes paid by a foreign corporation shall be translated into 
" "^ 
dollars using— 
"(i) except as provided in clause (ii), the appropriate 
exchange rate as of when such adjustment is made, and 
"(ii) in the case of any refund or credit of foreign 
taxes, using the exchange rate as of the time of original 
payment of such foreign income taxes. 
«i 
"(2) FOREIGN INCOME TAXES.—For purposes of paragraph (1), 
'foreign income taxes' means any income, war profits, or excess 
profits taxes paid to any foreign country or to any possession of 
the United States. 
ft: "(c) PREVIOUSLY TAXED EARNINGS AND PROFITS.— 
"(1) I N GENERAL.—Foreign currency gain or loss with respect 
to distributions of previously taxed earnings and profits (as 
; 
described in section 959 or 1293(c)) attributable to movements in 
exchange rates between the times of deemed and actual dis-
tribution shall be recognized and treated as ordinary income or 
loss from the same source as the associated income inclusion. 
-n 
"(2) DISTRIBUTIONS THROUGH TIERS.—The Secretary shall pre-
fa- scribe regulations with respect to the treatment of distributions 
of previously taxed earnings and profits through tiers of foreign 
corporations. 
, 
v^ 
.; v 
,
,
> 
^ , 
"SEC. 987. BRANCH TRANSACTIONS. 
"In the case of any taxpayer having 1 or more qualified business 
units with a functional currency other than the dollar, taxable 
income of such taxpayer shall be determined— 
"(1) by computing the taxable income or loss separately for 
each such unit in its functional currency, 
* 
"(2) by translating the income or loss separately computed 
under paragraph (1) at the appropriate exchange rate. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2587 
"(3) by making proper adjustments (as prescribed by the 
Secretary) for transfers of property between qualified business 
units of the taxpayer having different functional currencies, 
including— 
"(A) treating post-1986 remittances from each such unit 
as made on a pro rata basis out of post-1986 accumulated 
earnings, and 
"(B) treating gain or loss determined under this para-
graph as ordinary income or loss, respectively, and sourcing 
'ir 
such gain or loss by reference to the source of the income 
giving rise to post-1986 accumulated earnings, and 
.: 
"(4) by translating foreign income taxes paid by each qualified 
.: 
business unit of the taxpayer in the same manner as provided 
under section 986(b). 
"SEC. 
9
8
8
. 
TREATMENT 
OF 
CERTAIN 
FOREIGN 
CURRENCY 
TRANSACTIONS. 
"(a) GENERAL RULE.— 
liBi 
"(1) TREATMENT AS ORDINARY INCOME OR LOSS.— 
"(A) IN GENERAL.—Except as otherwise provided in this 
section, any foreign currency gain or loss attributable to a 
section 988 transaction shall be computed separately and 
to », 2 
treated as ordinary income or loss (as the case may be). 
"(B) SPECIAL RULE FOR FORWARD CONTRACTS, ETC.—Except 
as provided in regulations, a taxpayer may elect to treat 
any foreign currency gain or loss attributable to a forward 
contract, a futures contract, or option described in subsec-
tion (c)(l)(B)(iii) which is a capital asset in the hands of the 
taxpayer and which is not a part of a straddle (within the 
,f, 
meaning of section 1092(c), without regard to paragraph (4) 
r 
thereofi as capital gain or loss (as the case may be) if the 
taxpayer makes such election and identifies such trans-
action before the close of the day on which such transaction 
;;: 
is entered into (or such earlier time as the Secretary may 
prescribe). 
"(2) GAIN OR LOSS TREATED AS INTEREST FOR CERTAIN PUR-
POSES.—To the extent provided in regulations, any amount 
treated as ordinary income or loss under paragraph (1) shall be 
treated as interest income or expense (as the case may be). 
"(3) SOURCE.— 
;:,/;- 
"(A) IN GENERAL.—Except as otherwise provided in regu-
lations, in the case of any amount treated as ordinary 
income or loss under paragraph (1) (without regard to 
_ i „. 
paragraph (1)(B)), the source of such amount shall be deter-
mined by reference to the residence of the taxpayer or the 
qualified business unit of the taxpayer on whose books the 
asset, liability, or item of income or expense is properly 
n 
reflected. 
i^if 
"(B) RESIDENCE.—For purposes of this subpart— 
gi ly 
"(i) IN GENERAL.—The residence of any person shall 
be— 
'iim iBs' 
"(I) in the case of an individual, the country in 
which such individual's tax home (as defined in 
• . i ic, n 
section 911(d)(3)) is located, 
"(II) in the case of any corporation, partnership, 
trust, or estate which is a United States person (as 
^ , 
.L 
defined in section 7701(a)(30)), the United States, 
and 
W^iVi 
100 STAT. 2588 
PUBLIC LAW 99-514—OCT. 22, 1986 
'3jii- " 
•'-'• 
-' 
"(III) in the case of any corporation, partnership, 
trust, or estate which is not a United States person, 
,vf, 
a country other than the United States. 
"(ii) EXCEPTION.—In the case of a qualified business 
.-; 
. > 
unit of any taxpayer (including an individual), the 
• :\ii'v :n 
residence of such unit shall be the country in which the 
principal place of business of such qualified business 
-'.. -
, , 
unit is located. 
"(C) SPECIAL RULE FOR CERTAIN RELATED PARTY LOANS.— 
Except to the extent provided in regulations, in the case of 
a loan by a United States person or a related person to a 10-
percent owned foreign corporation which is denominated in 
a currency other than the dollar and bears interest at a 
rate at least 10 percentage points higher than the Federal 
mid-term rate (determined under section 1274(d)) at the 
time such loan is entered into, the following rules shall 
apply: 
"(i) For purposes of section 904 only, such loan shall 
V '• 
be marked to market on an annual basis. 
"(ii) Any interest income earned with respect to such 
loan for the taxable year shall be treated as income 
from sources within the United States to the extent of 
.1 
any loss attributable to clause (i). 
r- - 
For purposes of this subparagraph, the term 'related 
, . -. 
person' has the meaning given such term by section 
954(d)(3), except that such section shall be applied by 
substituting 'United States person' for 'controlled foreign 
corporation' each place such term appears. 
"(D) 10-PERCENT OWNED FOREIGN CORPORATION.—The term 
'10-percent owned foreign corporation' means any foreign 
J 
corporation in which the United States person owns di-
rectly or indirectly at least 10 percent of the voting stock. 
"Ot)) FOREIGN CURRENCY GAIN OR LOSS.—For purposes of this 
section— 
"(1) FOREIGN CURRENCY GAIN.—The term 'foreign currency 
gain' means any gain from a section 988 transaction to the 
extent such gain does not exceed gain realized by reason of 
V changes in exchange rates on or after the booking date and 
before the payment date. 
"(2) FOREIGN CURRENCY LOSS.—The term 'foreign currency 
loss' means any loss from a section 988 transaction to the extent 
such loss does not exceed the loss realized by reason of changes 
in exchange rates on or after the booking date and before the 
payment date. 
"(c) OTHER DEFINITIONS.—For purposes of this section— 
v;i 
"(1) SECTION 988 TRANSACTION.— 
"(A) IN GENERAL.—The term 'section 988 transaction' 
means any transaction described in subparagraph (B) if the 
' 
amount which the taxpayer is entitled to receive (or is 
required to pay) by reason of such transaction— 
•'• '. 
"(i) is denominated in terms of a nonfunctional cur-
rency, or 
"(ii) is determined by reference to the value of 1 or 
qlii-.^ I 
more nonfunctional currencies. 
"(B) 
DESCRIPTION OF TRANSACTIONS.—For purposes of 
subparagraph (A), the following transactions are described 
in this subparagraph: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2589 
"(i) The acquisition of a debt instrument or becoming 
the obligor under a debt instrument. 
"(ii) Accruing (or otherwise taking into account) for 
purposes of this subtitle any item of expense or gross 
income or receipts which is to be paid or received after 
the date on which so accrued or taken into account, 
"(iii) Entering into or acquiring any forward con-
tract, futures contract, option, or similar financial in-
strument if such instrument is not marked to market 
at the close of the taxable year under section 1256. 
The Secretary may prescribe regulations excluding from 
the application of clause (ii) any class of items the taking 
into account of which is not necessary to carry out the 
purposes of this section by reason of the small amounts or 
short periods involved, or otherwise. 
"(C) SPECIAL RULES FOR DISPOSITION OF NONFUNCTIONAL 
CURRENCY.— 
i' 
"(i) IN GENERAL.—In the case of any disposition of 
any nonfunctional currency— 
"(I) such disposition shall be treated as a section 
988 transaction, and 
"(II) for purposes of determining the foreign cur-
i 
rency gain or loss from such transaction, para-
, .. , 
graphs (1) and (2) of subsection (b) shall be applied 
/jj -. 
by substituting 'acquisition date' for 'booking date' 
and 'disposition' for 'payment date', 
"(ii) 
NONFUNCTIONAL CURRENCY.—For purposes of 
this section, the term 'nonfunctional currency' includes 
coin or currency, and nonfunctional currency denomi-
,„ 
nated demand or time deposits or similar instruments 
issued by a bank or other financial institution. 
"(2) BOOKING DATE.—The term 'booking date' means— 
"(A) in the case of a transaction described in paragraph 
dXBXi), the date of acquisition or on which the taxpayer 
becomes the obligor, 
"(B) in the case of a transaction described in paragraph 
(IXBXii), the date on which accrued or otherwise taken into 
account, or 
"(C) in the case of a transaction described in paragraph 
•- 
(IXBXiii), the date on which the position is entered into or 
acquired. 
"(3) PAYMENT DATE.—The term 'payment date' means— 
"(A) in the case of a transaction described in paragraph 
-' 
(IXB) (i) or (ii), the date on which payment is made or 
received, or 
"(B) in the case of a transaction described in paragraph 
(lXB)(iii), the date payment is made or received or the 
'; ,
< 
date the taxpayer's rights with respect to the position are 
terminated. 
"(4) DEBT INSTRUMENT.—The term 'debt instrument' means a 
bond, debenture, note, or certificate or other evidence of indebt 
edness. To the extent provided in regulations, such term shall 
include preferred stock. 
"(d) TREATMENT OF 988 HEDGING TRANSACTIONS.— 
"(1) IN GENERAL.—To the extent provided in regulations, if 
any section 988 transaction is part of a 988 hedging transaction, 
all transactions which are part of such 988 hedging transaction 
100 STAT. 2590 
PUBLIC LAW 99-514—OCT. 22, 1986 
W 
shall be integrated and treated as a single transaction or other-
wise treated consistently for purposes of this section. For pur-
^- 
poses of the preceding sentence, the determination of whether 
- 
any transaction is a section 988 transaction shall be determined 
'^ 
without regard to whether such transaction would otherwise be 
marked-to-market under section 1256 and such term shall not 
' 
include any transaction with respect to which an election is 
made under subsection (a)(1)(B). Sections 1092 and 1256 shall 
'.:^ not apply to a transaction covered by this subsection. 
"(2) 988 HEDGING TRANSACTION.—For purposes of paragraph 
(1), the term '988 hedging transaction' means any transaction— 
^., 
"(A) entered into by the taxpayer primarily— 
^^^' 
"(i) to reduce risk of currency fluctuations with re-
spect to property which is held or to be held by the 
. ,, s .,«j-.,. . 
taxpayer, or 
"(ii) to reduce risk of currency fluctuations with 
to fi* ;*'•'-' 
respect to borrowings made or to be made, or obliga-
tions incurred or to be incurred, by the taxpayer, and 
5 ;;• 
"(B) identified by the Secretary or the taxpayer as being a 
988 hedging transaction. 
"(e) APPLICATION TO INDIVIDUALS.—This section shall apply to 
section 988 transactions entered into by an individual only to the 
extent expenses properly allocable to such transactions meet the 
requirements of section 162 or 212 (other than that part of section 
212 dealing with expenses incurred in connection with taxes). 
"SEC. 989. OTHER DEFINITIONS AND SPECIAL RULES. 
"(a) QUALIFIED BUSINESS UNIT.—For purposes of this subpart, the 
term 'qualified business unit' means any separate and clearly identi-
fied unit of a trade or business of a taxpayer which maintains 
separate books and records. 
"(b) APPROPRIATE EXCHANGE RATE.—Except as provided in regula-
tions, for purposes of this subpart, the term 'appropriate exchange 
rate' means— 
"(1) in the case of an actual distribution of earnings and 
profits, the spot rate on the date such distribution is included in 
income, 
* • 
"(2) in the case of an actual or deemed sale or exchange of 
stock in a foreign corporation treated as a dividend under 
section 1248, the spot rate on the date the deemed dividend is 
^1^. included in income, 
.
J
* * 
"(3) in the case of any amounts included in income under 
section 951(a), 551(a), or 1293(a), the weighted average exchange 
iin rate for the taxable year of the foreign corporation, or 
;., 
"(4) in the case of any other qualified business unit of a 
yi 
taxpayer, the weighted average exchange rate for the taxable 
year of such qualified business unit. 
"(c) REGULATIONS.—The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
subpart, including regulations— 
"(1) setting forth procedures to be followed by taxpayers with 
qualified business units using a net worth method of accounting 
before the enactment of this subpart, 
"(2) limiting the recognition of foreign currency loss on cer-
" tain remittances from qualified business units, ^"" 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2591 
"(3) providing for the recharacterization of interest and prin-
cipal payments with respect to obligations denominated in cer-
tain hyperinflationary currencies, 
"(4) providing for alternative adjustments to the application 
of section 905(c), and 
'C 
"(5) providing for the appropriate treatment of related party 
transactions (including transactions between qualified business 
units of the same taxpayer)." 
(b) APPLICATION OF SECTION 1092 TO FOREIGN CURRENCY.—Section 
1092(d) is amended by adding at the end thereof the following new 
paragraph: 
"(7) SPECIAL RULES FOR FOREIGN CURRENCY.— 
• '' 
"(A) POSITION TO INCLUDE INTEREST IN CERTAIN DEBT.—For 
purposes of paragraph (2), an obligor's interest in a 
nonfunctional currency denominated debt obligation is 
;*" 
treated as a position in the nonfunctional currency. 
'
^
* 
"(B) ACTIVELY TRADED REQUIREMENT.—For purposes of 
paragraph (1), foreign currency for which there is an active 
" ' 
interbank market is presumed to be actively traded." 
(c) REPEAL OF SPECIAL TREATMENT OF BANKS FOR HEDGING EXCEP-
TION.—Subsection (e) of section 1256 (relating to mark to market not 
to apply to hedging transactions) is amended by striking out para-
graph (4) and by redesignating paragraph (5) as paragraph (4). 
(d) CLERICAL AMENDMENT.—The table of subparts for part III of 
subchapter N of chapter 1 is amended by adding at the end thereof 
the following new item: 
"Subpart J. Foreign currency transactions." 
(e) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to taxable years 
beginning after December 31, 1986. 
(2) SPECIAL RULES FOR PURPOSES OF SECTIONS 902 A N D 960.—For 
purposes of applying sections 902 and 960 of the Internal Reve-
nue Code of 1986, the amendments made by this section shall 
apply to— 
,., 
(A) earnings and profits of the foreign corporation for 
taxable years beginning after December 31, 1986, and 
.,;. 
(B) foreign taxes paid or accrued by the foreign corpora-
tion with respect to such earnings and profits. 
Subtitle G—Tax Treatment of Possessions 
PART I—TREATMENT OF GUAM, AMERICAN SAMOA, AND 
THE NORTHERN MARIANA ISLANDS 
SEC. 1271. AUTHORITY OF GUAM, AMERICAN SAMOA, AND THE NORTHERN 
MARIANA ISLANDS TO ENACT REVENUE LAWS. 
(a) IN GENERAL.—Except as provided in subsection (b), nothing in 
the laws of the United States shall prevent Guam, American Samoa, 
or the Northern Mariana Islands from enacting tax laws (which 
shall apply in lieu of the mirror system) with respect to income— 
(1) from sources within, or effectively connected with the 
conduct of a trade or business within, any such possession, or 
(2) received or accrued by any resident of such possession. 
100 STAT. 2592 
PUBLIC LAW 99-514—OCT. 22, 1986 
(b) AGREEMENTS TO ALLEVIATE CERTAIN PROBLEMS RELATING TO 
TAX ADMINISTRATION.—Subsection (a) shall apply to Guam, Amer-
ican Samoa, or the Northern Mariana Islands only if (and so long as) 
an implementing agreement is in effect between the United States 
and such possession with respect to— 
(1) the elimination of double taxation involving taxation by 
< 
such possession and taxation by the United States, 
(2) the establishment of rules under which the evasion or 
, 
avoidance of United States income tax shall not be permitted or 
facilitated by such possession, 
(3) the exchange of information between such possession and 
the United States for purposes of tax administration, and 
(4) the resolution of other problems arising in connection with 
the administration of the tax laws of such possession or the 
United States. 
Any such implementing agreement shall be executed on behalf of 
the United States by the Secretary of the Treasury after consulta-
tion with the Secretary of the Interior. 
(c) REVENUES NOT TO DECREASE.—The total amount of the revenue 
received by any possession referred to in subsection (a) pursuant to 
its tax laws during the implementation year and each of the 4 fiscal 
years thereafter shall not be less than the revenue (adjusted for 
inflation) which was received by such possession pursuant to tax 
laws for its last fiscal year before the implementation year. 
(d) NONDISCRIMINATORY TREATMENT REQUIRED.—Nothing in any 
tax law of a possession referred to in subsection (a) may discriminate 
against any United States person or any resident (corporate or 
otherwise) of any other possession. 
(e) ENFORCEMENT.— 
(1) IN GENERAL.—If the Secretary of the Treasury (after con-
sultation with the Secretary of the Interior) determines that 
any possession has failed to comply with subsection (c) or (d), the 
Secretary of the Treasury shall so notify the Governor of such 
^ 
possession in writing. If such possession does not comply with 
subsection (c) or (d) (as the case may be) within 90 days of such 
notification, the Secretary of the Treasury shall notify the 
Congress of such noncompliance. Unless the Congress by law 
*
* 
provides otherwise, the mirror system of taxation shall be 
reinstated in such possession and shall be in full force and effect 
for taxable years beginning after such notification to the 
Congress. 
(2) SPECIAL RULE FOR REVENUE REQUIREMENTS.—If the failure 
to comply with subsection (c) is for good cause and does not 
jeopardize the fiscal integrity of the possession, the Secretary 
may waive the requirements of subsection (c) for such period as 
he determines appropriate. 
,..« 
(f) DEFINITIONS AND SPECIAL RULES.— 
' 
'" ^ 
(1) IMPLEMENTATION YEAR.—For purposes of this section, the 
^ 
term "implementation year" means the 1st fiscal year of the 
possession in which the tax laws authorized by subsection (a) 
r 
take effect. 
(2) MIRROR SYSTEM.—For purposes of this section, the mirror 
• i 
system of taxation consists of the provisions of law (in effect on 
the day before the date of the enactment of this Act) which 
make the provisions of the income tax laws of the United States 
r 
(as in effect from time to time) in effect in a possession of the 
United States. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2593 
(3) SPECIAL RULE FOR NORTHERN MARIANA ISLANDS.—Notwith-
standing the provisions of the last clause of section 601(a) of 
Public Law 94-241, the Commonwealth of the Northern Mari-
ana Islands may elect to continue its mirror system of taxation 
without regard to whether Guam enacts tax laws under the 
authority provided in subsection (a). 
SKC. 1272. KXCLISION OF POSSESSION SOURCE INCOME FROM THE 
C.ROSS INCOME OF CERTAIN INDIVIDUALS. 
(a) IN GENERAL.—Section 931 (relating to income from sources 
within possessions of the United States) is amended to read as 
follows: 
"SEC. 931. INCOME FROM SOURCES WITHIN GUAM. AMERICAN SAMOA. OR 
THE NORTHERN MARIANA ISLANDS. 
"(a) GENERAL RULE.—In the case of an individual who is a bona 
fide resident of a specified possession during the entire taxable year, 
gross income shall not include— 
"(1) income derived from sources within any specified posses-
sion, and 
"(2) income effectively connected with the conduct of a trade 
or business by such individual within any specified possession. 
"(b) DEDUCTIONS, ETC. ALLOCABLE TO EXCLUDED AMOUNTS N O T 
ALLOWABLE.—An individual shall not be allowed— 
"(1) as a deduction from gross income any deductions (other 
than the deduction under section 151, relating to personal 
exemptions), or 
"(2) any credit, 
properly allocable or chargeable against amounts excluded from 
gross income under this section. 
"(c) SPECIFIED POSSESSION.—For purposes of this section, the term 
'specified 
possession' means Guam, American Samoa, and the 
Northern Mariana Islands. 
"(d) SPECIAL RULES.—For purposes of this section— 
"(1) EMPLOYEES OF THE UNITED STATES.—Amounts paid for 
services performed as an employee of the United States (or any 
agency thereoO shall be treated as not described in paragraph 
(1) or (2) of subsection (a). 
"(2) DETERMINATION OF SOURCE, ETC.—The determination as to 
whether income is described in paragraph (1) or (2) of subsection 
(a) shall be made under regulations prescribed by the Secretary. 
"(8) DETERMINATION OF RESIDENCY.—For purposes of this sec-
tion and section 876, the determination of whether an individ-
ual is a bona fide resident of Guam, American Samoa, or the 
Northern Mariana Islands shall be made under regulations 
prescribed by the Secretary." 
(b) EXEMPTION FROM WITHHOLDING TAX; TAX IMPOSED BY SEC-
TION 1.—Section 876 (relating to alien residents of Puerto Rico) is 
amended to read as follows: 
•SEC. 876. ALIEN RESIDENTS OF PUERTO RICO. GUAM. AMERICAN SAMOA. 
OR THE NORTHERN MARIANA ISLANDS. 
"(a) GENERAL RULE.—This subpart shall not apply to any alien 
individual who is a bona fide resident of Puerto Rico, Guam, Amer-
ican Samoa, or the Northern Mariana Islands during the entire 
taxable year and such alien shall be subject to the tax imposed by 
section 1. 
100 STAT. 2594 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(b) C R O S S R E F E R E N C E S . — 
> 
• 
• 
"For exclusion from gross income of income derived from sources 
witiiin— 
"(1) Guam, American Samoa, and the Northern Mariana Islands, 
see section 931, and 
"(2) Puerto Rico, see section 933." i-'• ;^ 
,' •' 
1i • s J Jr" 
(c) EXEMPTION FROM WAGE WITHHOLDING FOR CERTAIN SERVICES 
PERFORMED IN POSSESSIONS.—Paragraph (8) of section 3401(a) (defin-
ing wages) is amended by adding at the end thereof the following 
new subparagraph: 
"(D) for services for the United States (or any agency 
thereof) performed by a citizen of the United States within 
j?.i, 
a possession of the United States to the extent the United 
States (or such agency) withholds taxes on such remunera-
tion pursuant to an agreement with such possession; or". 
(d) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) Section 932 (relating to citizens of possessions of the 
United States) is hereby repealed. 
(2) Section 935 (relating to coordination of United States and 
Guam individual income taxes) is hereby repealed. 
(3) Paragraphs (1) and (2) of section 933 are each amended by 
inserting ", or any credit," before "properly". 
(4) Subparagraph (C) of section 32(c)(1) is amended to read as 
follows: 
"(C) INDIVIDUAL WHO CLAIMS BENEFITS OF SECTION 911 NOT 
ELIGIBLE INDIVIDUAL.—The term 'eligible individual' does 
not include an individual who, for the taxable year, claims 
' --, j^ 
the benefits of section 911 (relating to citizens or residents 
of the United States living abroad)." 
(5) Clause (vii) of section 48(a)(2)(B) is amended by striking out 
"932,". 
(6) Paragraph (6) of section 63(c) (relating to certain individ-
uals, etc., not eligible for standard deduction), as amended by 
title I of this Act, is amended by striking out subparagraph (C) 
and by redesignating subparagraphs (D) and (E) as subpara-
graphs (C) and (D), respectively. 
(7) Section 153 is amended by striking out paragraph (4) and 
by redesignating paragraph (5) as paragraph (4). 
(8) Paragraph (8) of section 1402(a) is amended by striking out 
"and section 931 (relating to income from sources within posses-
sions of the United States)" and by inserting "and" after "of the 
employer),". 
(9) Paragraph (9) of section 1402(a) is amended to read as 
follows: 
"(9) the exclusion from gross income provided by section 931 
shall not apply;". 
(10) Clause (iii) of section 60910t))(l)(B) is amended by striking 
out "possessions of the United States" and inserting in lieu 
thereof "Guam, American Samoa, or the Northern Mariana 
Islands". 
(11) Subsection (b) of section 7655 is amended by redesignating 
paragraphs (1) and (2) as paragraphs (2) and (3), respectively, 
and by inserting before paragraph (2), as so redesignated, the 
following new paragraph: 
"(1) Section 931, relating to income tax on residents of Guam, 
American Samoa, or the Northern Mariana Islands;". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2595 
(12) The table of sections for subpart D of part III of sub-
chapter N of chapter 1 is amended by striking out the items 
relating to sections 932 and 935 and by striking out the item 
relating to section 931 and inserting in lieu thereof the follow-
ing: 
"Sec. 931. Income from sources within Guam, American Samoa, or the 
Northern Mariana Islands." 
(13) The table of sections for subpart A of part II of sub-
chapter N of chapter 1 is amended by striking out the item 
relating to section 876 and inserting in lieu thereof the follow-
' ing: 
"Sec. 876. Alien residents of Puerto Rico, Guam, American Samoa, or the 
Northern Mariana Islands." 
SEC. 1273. TREATMENT OF CORPORATIONS ORGANIZED IN GUAM, AMER-
ICAN SAMOA, OR THE NORTHERN MARIANA ISLANDS. 
(a) TREATMENT UNDER SUBPART F.—Subsection (c) of section 957 
(relating to controlled foreign corporations; United States persons), 
as amended by section 1224, is amended by adding "and" at the end 
of paragraph (1) and by striking out paragraphs (2) and (3) and 
inserting in lieu thereof the following new paragraph: 
"(2) with respect to a corporation organized under the laws of 
Guam, American Samoa, or the Northern Mariana Islands— 
"(A) 80 percent or more of the gross income of which for 
the 3-year period ending at the close of the taxable year (or 
for such part of such period as such corporation or any 
15'C,: ' predecessor has been in existence) was derived from sources 
v; • 
within such a possession or was effectively connected with 
the conduct of a trade or business in such a possession, and 
"(B) 50 percent or more of the gross income of which for 
such period (or part) was derived from the conduct of an 
active trade or business within such a possession, 
such term does not include an individual who is a bona fide 
J'' resident of Guam, American Samoa, or the Northern Mariana 
Islands. 
For purposes of subparagraphs (A) and (B) of paragraph (2), the 
determination as to whether income was derived from sources 
within a possession, was effectively connected with the conduct of a 
trade or business within a possession, or derived from the active 
conduct of a trade or business within a possession shall be made 
under regulations prescribed by the Secretary." 
(b) EXEMPTION FROM WITHHOLDING.— 
(1) IN GENERAL.—Subsection (b) of section 881 (relating to 
exception for certain Guam and Virgin Islands corporations) is 
amended by striking out paragraphs (1) and (2) and inserting in 
: lieu thereof the following: 
"(1) IN GENERAL.—For purposes of this section and section 
^i 884, a corporation created or organized in Guam, American 
Samoa, the Northern Mariana Islands, or the Virgin Islands or 
under the law of any such possession shall not be treated as a 
foreign corporation for any taxable year i
f
— 
.,. 
"(A) at all times during such taxable year less than 25 
percent in value of the stock of such corporation is bene-
ficially owned (directly or indirectly) by foreign persons, 
"(B) at least 65 percent of the gross income of such 
corporation is shown to the satisfaction of the Secretary to 
100 STAT. 2596 
PUBLIC LAW 99-514—OCT. 22, 1986 
^ - 
be effectively connected with the conduct of a trade or 
'• 
business in such a possession or the United States for the 
3-year period ending with the close of the taxable year of 
such corporation (or for such part of such period as the 
corporation or any predecessor has been in existence), and 
A'A •.. 
"(C!) no substantial part of the income of such corporation 
is used (directly or indirectly) to satisfy obligations to per-
^, j^ 
sons who are not bona fide residents of such a possession or 
'^'*''^ 
the United States." 
*
J 
(2) TECHNICAL AMENDMENTS.— 
(A) Subsection (b) of section 881 is amended by redesignat-
ing paragraph (3) as paragraph (2) and by striking out 
paragraph (4). 
(B) Subsection (c) of section 1442 is amended to read as 
follows: 
"(c) EXCEPTION FOR CERTAIN POSSESSIONS CORPORATIONS.—For pur-
poses of this section, the term 'foreign corporation' does not include 
a corporation created or organized in Guam, American Samoa, the 
Northern Mariana Islands, or the Virgin Islands or under the law of 
any such possession if the requirements of subparagraphs (A), (B), 
and (C) of section 881(b)(1) are met with respect to such corporation." 
PART II—TREATMENT OF THE VIRGIN ISLANDS 
) 
SEC. 1274. COORDIN.ATION OF IMTED STATES AND VIR(,IN ISLANDS 
INCOME TAXES. 
(a) IN GENERAL.—Subpart D of part III of subchapter N of chapter 
1 is amended by inserting after section 931 the following new 
section: 
"SEC. 932. COORDIN.ATION OF UNITED ST.ATES .AND VIRGIN ISLANDS 
INCO.ME T.4XES. 
"(a) TREATMENT OF UNITED STATES RESIDENTS.— 
•
; 
"(1) APPLICATION OF SUBSECTION.—This subsection shall apply 
to an individual for the taxable year if^ 
"(A) such individual— 
"(i) is a citizen or resident of the United States (other 
H 
than a bona fide resident of the Virgin Islands at the 
•-,-, .. 
close of the taxable year), and 
&
b
j
_ .-. < 
"(ii) has income derived from sources within the 
Virgin Islands, or effectively connected with the con-
duct of a trade or business within such possession, for 
the taxable year, or 
? 
"(B) such individual files a joint return for the taxable 
e
- 
year with an individual described in subparagraph (A). 
"(2) FILING REQUIREMENT.—Each individual to whom this 
n- subsection applies for the taxable year shall file his income tax 
J' 
return for the taxable year with both the United States and the 
1 
Virgin Islands. 
i' 
"(3) EXTENT OF INCOME TAX LIABILITY.—In the case of an 
individual to whom this subsection applies in a taxable year for 
5 
purposes of so much of this title (other than this section and 
-
^ section 7654) as relates to the taxes imposed by this chapter, the 
United States shall be treated as including the Virgin Islands. 
"(b) PORTION OF UNITED STATES TAX LIABILITY PAYABLE TO THE 
VIRGIN ISLANDS.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2597 
"(1) I N GENERAL.—Each individual to whom subsection (a) 
applies for the taxable year shall pay the applicable percentage 
of the taxes imposed by this chapter for such taxable year 
(determined without regard to paragraph (3)) to the Virgin 
Islands. 
"(2) APPLICABLE PERCENTAGE.— 
"(A) I N GENERAL.—For purposes of paragraph (1), the 
term 'applicable percentage' means the percentage which 
" 
Virgin Islands adjusted gross income bears to adjusted gross 
.7 
income. 
"(B) VIRGIN ISLANDS ADJUSTED GROSS INCOME.—For pur-
poses of subparagraph (A), the term 
'Virgin 
Islands 
adjusted 
gross 
income' 
means 
adjusted 
gross 
income 
' ' 
determined by taking into account only income derived 
" 
from sources within the Virgin Islands and deductions 
properly apportioned or allocable thereto. 
"(3) AMOUNTS PAID ALLOWED AS CREDIT.—There shall be al-
lowed as a credit against the tax imposed by this chapter for the 
taxable year an amount equal to the taxes required to be paid to 
the Virgin Islands under paragraph (1) which are so paid. 
"(c) TREATMENT OF VIRGIN ISLANDS RESIDENTS.— 
"(1) APPLICATION OF SUBSECTION.—This subsection shall apply 
to an individual for the taxable year if— 
"(A) such individual is a bona fide resident of the Virgin 
Islands at the close of the taxable year, or 
"(B) such individual files a joint return for the taxable 
year with an individual described in subparagraph (A). 
"(2) FILING REQUIREMENT.—Each individual to whom this 
subsection applies for the taxable year shall file his income tax 
return for the taxable year with the Virgin Islands. 
"(3) EXTENT OF INCOME TAX LIABILITY.—In the case of an 
individual to whom this subsection applies in a taxable year for 
purposes of so much of this title (other than this section and 
section 7654) as relates to the taxes imposed by this chapter, the 
Virgin Islands shall be treated as including the United States. 
"(4) RESIDENTS OF THE VIRGIN ISLANDS.—In the case of an 
individual who is a bona fide resident of the Virgin Islands at 
the close of the taxable year and who, on his return of income 
tax to the Virgin Islands, reports income from all sources and 
identifies the source of each item shown on such return, for 
purposes of calculating income tax liability to the United States 
gross income shall not include any amount included in gross 
income on such return. 
"(d) SPECIAL RULE FOR JOINT RETURNS.—In the case of a joint 
return, this section shall be applied on the basis of the residence of 
the spouse who has the greater adjusted gross income (determined 
without regard to community property laws) for the taxable year. 
"(e) SECTION N O T T O APPLY TO TAX IMPOSED IN VIRGIN ISLANDS.— 
This section shall not apply for purposes of determining income tax 
liability incurred to the Virgin Islands." 
(b) AUTHORITY T O IMPOSE NONDISCRIMINATORY 
LOCAL 
INCOME 
TAXES.—Nothing in any provision of Federal law shall prevent the 
Virgin Islands from imposing on any person nondiscriminatory local 
income taxes. Any taxes so imposed shall be treated in the same 
manner as State and local income taxes under section 164 of the 
Internal Revenue Code of 1954 and shall not be treated as taxes to 
which section 901 of such Code applies. 
100 STAT. 2598 
PUBLIC LAW 99-514—OCT. 22, 1986 
(c) REGULATIONS ON APPLICATION OF MIRROR SYSTEM.—The Sec-
retary of the Treasury or his delegate shall prescribe such regula-
tions as may be necessary or appropriate for applying this title for 
purposes of determining tax liability incurred to the Virgin Islands. 
(d) CLERICAL AMENDMENT.—The table of sections for such subpart 
D is amended by inserting after the item relating to section 931 the 
following new item: 
"Sec. 932. Coordination of United States and Virgin Islands income taxes." 
SEC. 127.5. VIRGIN ISLANDS CORPORATIONS ALLOWED POSSESSION TAX 
CREDIT. 
(a) POSSESSION TAX CREDIT ALLOWED.— 
(1) IN GENERAL.—Paragraph (1) of section 936(d) (defining 
possession) is amended by striking out ", but does not include 
the Virgin Islands of the United States" and inserting in lieu 
thereof "and the Virgin Islands". 
(2) CONFORMING AMENDMENTS.— 
(A) Section 934 is amended by striking out subsections (e) 
I 
and (f). 
(B) Subsection (e) of section 246 is amended by striking 
out "or 934(e)(3)". 
(b) 
CLARIFICATION OF TREATMENT OF VIRGIN ISLANDS INHAB-
ITANTS.—Subparagraph (B) of section 7651(5) (relating to the Virgin 
Islands) is amended to read as follows: 
"(B) For purposes of this title, section 28(a) of the Revised 
Organic Act of the Virgin Islands shall be effective as if 
such section 28(a) had been enacted before the enactment of 
this title and such section 28(a) shall have no effect on the 
amount of income tax liability required to be paid by any 
person to the United States." 
(c) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) Section 934 is amended by striking out subsections (b), (c), 
and (d). 
(2)(A) Subsection (a) of section 934 is amended by striking out 
"or (c) or in section 934A". 
(B) Section 934, as amended by paragraph (1), is amended by 
inserting after subsection (a) the following new subsection: 
"(b) REDUCTIONS PERMITTED WITH RESPECT TO CERTAIN INCOME.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), 
subsection (a) shall not apply with respect to so much of the tax 
liability referred to in subsection (a) as is attributable to income 
derived from sources within the Virgin Islands or income effec-
tively connected with the conduct of a trade or business within 
the Virgin Islands. 
"(2) EXCEPTION FOR LIABILITY PAID BY CITIZENS OR RESIDENTS OF 
THE UNITED STATES.—Paragraph (1) shall not apply to any liabil-
ity payable to the Virgin Islands under section 932(b). 
"(3) SPECIAL RULE FOR NON-UNITED STATES INCOME OF CERTAIN 
FOREIGN CORPORATIONS.— 
"(A) IN GENERAL.—In the case of a qualified foreign 
corporation, subsection (a) shall not apply with respect to so 
much of the tax liability referred to in subsection (a) as is 
attributable to income which is derived from sources out-
side the United States and which is not effectively con-
,ij e 
nected with the conduct of a trade or business within the 
United States. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2599 
"(B) QUAUriED FOREIGN CORPORATION.—FOF purpOSeS of 
subparagraph (A), the term 'qualified foreign corporation' 
means any foreign corporation if less than 10 percent of— 
"(i) the total voting power of the stock of such cor-
poration, and 
h^ f 
"(ii) the total value of the stock of such corporation, 
^ 
is owned or treated as owned (within the meaning of section 
958) by 1 or more United States persons. 
~
i
«
: 
"(4) DETERMINATION OF INCOME SOURCE, ETC.—The determina-
nt tion as to whether income is derived from sources within the 
; 
Virgin Islands or the United States or is effectively connected 
with the conduct of a trade or business within the Virgin 
: Islands or the United States shall be made under regulations 
prescribed by the Secretary." 
(3) Section 934A (relating to income tax rates on Virgin 
Islands source income) is hereby repealed. 
(4) Subparagraph (B) of section 28(dX3) is amended to read as 
, 
follows: 
"(B) SPECIAL UMITATION FOR CORPORATIONS TO WHICH SEC-
TION 936 APPUES.—No credit shall be allowed under this 
section with respect to any clinical testing conducted by a 
corporation to which an election under section 936 applies." 
n. 
(5) Clause (vii) of section 48(aX2XB) is amended by striking out 
"or which is entitled to the benefits of section 9340t>)" and by 
striking out ", 933, or 934(c)" and inserting in lieu thereof "or 
933". 
(6) Clause (i) of section 338(hX6XB) is amended by striking out 
"a corporation described in section 934(b),". 
(7) Subparagraph (B) of section 864(d)(5) is amended to read as 
follows: 
"(B) SPECIAL RULES FOR POSSESSIONS.—An amount treated 
d 
as interest under paragraph (1) shall not be treated as 
ac 
income described in subparagraph (A) or (B) of section 
936(aXl) unless such amount is from sources within a 
, J 
possession of the United States (determined after the ap-
plication of paragraph (1))." 
(8) The table of sections for subpart D of part III of subchapter 
N of chapter 1 is amended by striking out the item relating to 
section 934A. 
PART 
III—COVER 
OVER 
OF 
INCOME 
TAXES 
SEC. 1276. COVER OVER OF INCOME TAXES. 
(a) IN GENERAL.—Section 7654 (relating to coordination of United 
States and Guam individual income taxes) is amended to read as 
follows: 
"SEC. 7654. COORDINATION OF UNITED STATES AND CERTAIN POSSES-
SION INDIVIDUAL INCOME TAXES. 
"(a) GENERAL RULE.—The net collection of taxes imposed by chap-
ter 1 for each taxable year with respect to an individual to which 
section 931 or 932(c) applies shall be covered into the Treasury of the 
specified possession of which such individual is a bona fide resident. 
"OD) DEFINITION AND SPECIAL RULE.—For purposes of this section— 
"(1) NET COLLECTIONS.—In determining net collections for a 
taxable year, an appropriate adjustment shall be made for 
100 STAT. 2600 
PUBLIC LAW 99-514—OCT. 22, 1986 
credits allowed against the tax liability and refunds made of 
income taxes for the taxable year. 
"(2) SPECIFIED POSSESSION.—The term 'specified possession' 
-^ means Guam, American Samoa, the Northern Mariana Islands, 
and the Virgin Islands. 
"(c) TRANSFERS.—The transfers of funds between the United 
States and any specified possession required by this section shall be 
made not less frequently than annually. 
"(d) FEDERAL PERSONNEL.—In addition to the amount determined 
under subsection (a), the United States shall pay to each specified 
possession at such times and in such manner as determined by the 
Secretary— 
"(1) the amount of the taxes deducted and withheld by the 
United States under chapter 24 with respect to compensation 
J paid to members of the Armed Forces who are stationed in such 
possession but who have no income tax liability to such posses-
g sion with respect to such compensation by reason of the Sol-
diers' and Sailors' Civil Relief Act (50 App. U.S.C. 501 et seq.), 
and 
e 
"(2) the amount of the taxes deducted and withheld under 
« chapter 24 with respect to amounts paid for services performed 
as an employee of the United States (or any agency thereof) in a 
specified possession with respect to an individual unless section 
931 or 932(c) applies. 
•'(e) REGULATIONS.—The Secretary shall prescribe such regula-
cions as may be necessary to carry out the provisions of this section 
and sections 931 and 932, including regulations prohibiting the 
rebate of taxes covered over which are allocable to United States 
source income and prescribing the information which the individ-
uals to whom such sections may apply shall furnish to the Sec-
retary." 
(b) CLERICAL AMENDMENT.—The table of sections for subchapter D 
of chapter 78 is amended by striking out the item relating to section 
7654 and inserting in lieu thereof the following: 
"Sec. 7654. Coordination of United States and certain possession individual 
income taxes." 
' 
PART IV—EFFECTIVE DATE 
SEC. 1277. EFFECTIVE DATE. 
(a) IN GENERAL.—Except as otherwise provided in this section, the 
amendments made by this subtitle shall apply to taxable years 
beginning after December 31, 1986. 
(b) SPECIAL RULE FOR GUAM, AMERICAN SAMOA, AND THE NORTH-
ERN 
MARIANA ISLANDS.—The amendments made by this subtitle 
shall apply with respect to Guam, American Samoa, or the North-
ern Mariana Islands (and to residents thereof and corporations 
created or organized therein) only if (and so long as) an implement-
ing agreement under section 1271 is in effect between the United 
States and such possession. 
(c) SPECIAL RULES FOR THE VIRGIN ISLANDS.— 
(1) IN GENERAL.—The amendments made by section 1275(c) 
* shall apply with respect to the Virgin Islands (and residents 
thereof and corporations created or organized therein) only if 
* (and so long as) an implementing agreement is in effect between 
i 
the United States and the Virgin Islands with respect to the 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2601 
establishment of rules under which the evasion or avoidance of 
United States income tax shall not be permitted or facilitated 
by such possession. Any such implementing agreement shall be 
executed on behalf of the United States by the Secretary of the 
Treasury, after consultation with the Secretary of the Interior. 
(2) SECTION 1275(b).— 
(A) IN GENERAL.—The amendment made by section 
1275(b) shall apply with respect to— 
(i) any taxable year beginning after December 31, 
us 
1986, and 
: ' -' 
(ii) any pre-1987 open year. 
(B) SPECIAL RULES.—In the case of any pre-1987 open 
year— 
(i) the amendment made by section 1275(b) shall not 
apply to income from sources in the Virgin Islands or 
income effectively connected with the conduct of a 
trade or business in the Virgin Islands, and 
,,^<y .' 
(ii) the taxpayer shall be allowed a credit— 
•':•;.. - 
(I) against any additional tax imposed by subtitle 
.or 
A of the Internal Revenue Code of 1954 (by reason 
of the amendment made by section 1275(b)) on 
••" '• 
income not described in clause (i), 
(II) for any tax paid to the Virgin Islands before 
- o; fvjj 
the date of the enactment of this Act and attrib-
utable to such income. 
' 
For purposes of clause (ii)(II), any tax paid before Janu-
ary 1, 1987, pursuant to a process in effect before 
August 16, 1986, shall be treated as paid before the date 
of the enactment of this Act. 
(C) PRE-1987 OPEN YEAR.—For purposes of this paragraph, 
the term "pre-1987 open year" means any taxable year 
beginning before January 1, 1987, if on the date of the 
i 
enactment of this Act the assessment of a deficiency of 
income tax for such taxable year is not barred by any law 
or rule of law. 
(D) EXCEPTION.—In the case of any pre-1987 open year, 
the amendment made by section 1275(b) shall not apply to 
any domestic corporation i
f
— 
(i) during the fiscal year which ended May 31, 1986, 
tjyjf 
such corporation was actively engaged directly or 
through a subsidiary in the conduct of a trade or 
business in the Virgin Islands and such trade or busi-
ness consists of business related to marine activities, 
and 
/ 
(ii) such corporation was incorporated on March 31, 
1 
1983, in Delaware. 
(E) EXCEPTION FOR CERTAIN TRANSACTIONS.— 
(i) IN GENERAL.—In the case of any pre-1987 open 
year, the amendment made by section 1275(b) shall not 
apply to any income derived from transactions de-
scribed in clause (ii) by 1 or more corporations which 
were formed in Delaware on or about March 6, 1981, 
and which have owned 1 or more office buildings in St. 
; 
Thomas, United States Virgin Islands, for at least 5 
years before the date of the enactment of this Act. 
(ii) DESCRIPTION OF TRANSACTIONS.—The transactions 
described in this clause are— 
100 STAT. 2602 
PUBLIC LAW 99-514—OCT. 22, 1986 
» , ~: 
, 
(I) the redemptions of limited partnership in-
h, 
r
- 
terests for cash and property described in an agree-
^, - ., 
ment (as amended) dated March 12, 1981, 
(II) the subsequent disposition of the properties 
., 
distributed in such redemptions, and 
(III) interest earned before January 1, 1987, on 
,v« < 
bank deposits of proceeds received from such 
redemptions to the extent such deposits are located 
'',.-- 
in the United States Virgin Islands. 
(iii) LIMITATION.—The aggregate reduction in tax by 
reason 
of 
this 
subparagraph 
shall 
not 
exceed 
$8,312,000. If the taxes which would be payable as the 
result of the application of the amendment made by 
{{,,• • 
'^ 
section 1275(b) to pre-1987 open years exceeds the 
io • ' 
limitation of the preceding sentence, such excess shall 
( 
be treated as attributable to income received in taxable 
years in reverse chronological order. 
(d) REPORT ON IMPLEMENTING AGREEMENTS.—If, during the 1-year 
period beginning on the date of the enactment of this Act, any 
implementing agreement described in subsection (b) or (c) is not 
executed, the Secretary of the Treasury or his delegate shall report 
to the Committee on Finance of the United States Senate, the 
Committee on Ways and Means, and the Committee on Interior and 
Insular Affairs of the House of Representatives with respect to— 
(1) the status of such negotiations, and 
(2) the reason why such agreement has not been executed. 
(e) TREATMENT OF CERTAIN UNITED STATES PERSONS.—Except as 
otherwise provided in regulations prescribed by the Secretary of the 
Treasury or his delegate, if a United States person becomes a 
resident of Guam, American Samoa, or the Northern Mariana 
Islands, the rules of section 877(c) of the Internal Revenue Code of 
1954 shall apply to such person during the 10-year period beginning 
when such person became such a resident. The preceding sentence 
shall apply to dispositions after December 31, 1985, in taxable years 
ending after such date. 
-^ 
TITLE XIII—TAX-EXEMPT BONDS 
Subtitle A—Amendments of Internal Revenue 
Code of 1954 
SEC. 1
3
0
1
. 
STATE 
AND 
LOCAL 
BONDS. 
(a) EXCLUSION FOR INTEREST ON BONDS WHICH MEET CERTAIN 
REQUIREMENTS.—Section 103 (relating to interest on certain govern-
mental obligations) is amended to read as follows: 
"SEC. 103. INTEREST ON STATE AND LOCAL BONDS. 
^ 
"(a) EXCLUSION.—Except as provided in subsection (b), gross 
income does not include interest on any State or local bond. 
"(b) EXCEPTIONS.—Subsection (a) shall not apply to— 
"(1) PRIVATE ACTIVITY BOND WHICH IS NOT A QUALIFIED BOND.— 
f
: 
Any private activity bond which is not a qualified bond (within 
J- 
the meaning of section 141). 
"(2) ARBITRAGE BOND.—Any arbitrage bond (within the mean-
ing of section 148). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2603 
"(3) BOND NOT IN REGISTERED FORM, ETC.—Any bond unless 
such bond meets the applicable requirements of section 149. 
"(c) DEFINITIONS.—For purposes of this section and part IV— 
"(1) STATE OR LOCAL BOND.—The term 'State or local bond' 
means an obligation of a State or political subdivision thereof 
"(2) STATE.—The term 'State' includes the District of Colum-
bia and any possession of the United States." 
(b) TAX EXEMPTION REQUIREMENTS FOR STATE AND LOCAL BONDS.— 
Part IV of subchapter B of chapter 1 (relating to determination of 
marital status) is amended to read as follows: 
"PART IV—TAX EXEMPTION REQUIREMENTS FOR STATE 
AND LOCAL BONDS 
•' t 
"Subpart A. Private activity bonds. 
"Subpart B. Requirements applicable to all State and local bonds. 
"Subpart C. Definitions and special rules. 
"Subpart A—Private Activity Bonds 
"Sec. 141. Private activity bond; qualified bond. 
"Sec. 142. Exempt facility bond. 
"Sec. 143. Mortgage revenue bonds: qualified mortgage and qualified 
sj:jijf> 
veterans' mortgage bond. 
"Sec. 144. Qualified small issue bond; qualified student loan bond; qualified 
., , 
redevelopment bond. 
* 
"Sec. 145. Qualified 501(cX3) bond. 
"Sec. 146. Volume cap. 
"Sec. 147. Other requirements applicable to certain private activity bonds. 
"SEC. 141. PRIVATE ACTIVITY BOND; QUALIFIED BOND. 
"(a) PRIVATE ACTIVITY BOND.—For purposes of this title, the term 
'private activity bond' means any bond issued as part of an issue— 
"(1) which meets— 
"(A) the private business use test of paragraph (1) of 
subsection (b), and 
"(B) the private security or payment test of paragraph (2) 
of subsection (b), or 
; i 
"(2) which meets the private loan financing test of subsection 
(c). 
"(b) PRIVATE BUSINESS TESTS.— 
"(1) PRIVATE BUSINESS USE TEST.—Except as otherwise pro-
vided in this subsection, an issue meets the test of this para-
graph if more than 10 percent of the proceeds of the issue are to 
be used for any private business use. 
"(2) PRIVATE SECURITY OR PAYMENT TEST.—Except as otherwise 
provided in this subsection, an issue meets the test of this 
paragraph if the payment of the principal of, or the interest on, 
more than 10 percent of the proceeds of such issue is (under the 
terms of such issue or any underlying arrangement) directly or 
indirectly— 
"(A) secured by any interest in— 
"(i) property used or to be used for a private business 
use, or 
' ''' 
"(ii) payments in respect of such property, or 
"(B) to be derived from payments (whether or not to the 
issuer) in respect of property, or borrowed money, used or to 
be used for a private business use. 
100 STAT. 2604 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(3) 5 PERCENT TEST FOR PRIVATE BUSINESS USE NOT RELATED O. 
DISPROPORTIONATE TO GOVERNMENT USE FINANCED BY THE 
ISSUE.— 
"(A) IN GENERAL.—An issue shall be treated as meeting 
the tests of paragraphs (1) and (2) if such tests would be met 
if such paragraphs were applied— 
"(i) by substituting '5 percent' for '10 percent' each 
J ^ ,. 
place it appears, and 
yAr 
-i 
"(ii) by taking into account only— 
"(I) the proceeds of the issue which are to be used 
for any private business use which is not related to 
V J , 
any government use of such proceeds, 
"(II) the disproportionate related business use 
proceeds of the issue, and 
"(III) payments, property, and borrowed money 
with respect to any use of proceeds described in 
subclause (I) or (II). 
"(B) DISPROPORTIONATE RELATED BUSINESS USE PROCEEDS.— 
For purposes of subparagraph (A), the disproportionate re-
lated business use proceeds of an issue is an amount equal 
to the aggregate of the excesses (determined under the 
following sentence) for each private business use of the 
; K1- 
proceeds of an issue which is related to a government use of 
such proceeds. The excess determined under this sentence 
^'^''- 
is the excess of— 
"(i) the proceeds of the issue which are to be used for 
the private business use, over 
t i l V
I 
"(ii) the proceeds of the issue which are to be used for 
the government use to which such private business use 
relates. 
"(4) LOWER LIMITATION FOR CERTAIN OUTPUT FACILITIES.—An 
issue 5 percent or more of the proceeds of which are to be used 
with respect to any output facility (other than a facility for the 
furnishing of water) shall be treated as meeting the tests of 
paragraphs (1) and (2) if the nonqualified amount with respect 
to such issue exceeds the excess of— 
n 
"(A) $15,000,000, over 
JJ.J > 
"(B) the aggregate nonqualified amounts with respect to 
all prior tax-exempt issues 5 percent or more of the pro-
ceeds of which are or will be used with respect to such 
facility (or any other facility which is part of the same 
project). 
There shall not be taken into account under subparagraph (B) 
any bond which is not outstanding at the time of the later issue 
or which is to be redeemed (other than in an advance refunding) 
from the net proceeds of the later issue. 
"(5) COORDINATION WITH VOLUME CAP WHERE NONQUALIFIED 
AMOUNT EXCEEDS $15,000,000.—If the nonqualified amount with 
respect to an issue— 
"(A) exceeds $15,000,000, but 
"(B) does not exceed the amount which would cause 
- a 
bond which is part of such issue to be treated as a private 
activity bond without regard to this paragraph, 
such bond shall nonetheless be treated as a private activity 
bond unless the issuer allocates a portion of its volume cap 
under section 146 to such issue in an amount equal to the excess 
of such nonqualified amount over $15,000,000. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2605 
"(6) PRIVATE BUSINESS USE DEFINED.— 
"(A) I N GENERAL.—For purposes of this subsection, the 
* 
term 
'private business use' means use (directly or in-
directly) in a trade or business carried on by any person 
other than a governmental unit. For purposes of the preced-
ing sentence, use as a member of the general public shall 
not be taken into account. 
"(B) CLARIFICATION OF TRADE OR BUSINESS.—For purposes 
of the 1st sentence of subparagraph (A), any activity carried 
on by a person other than a natural person shall be treated 
as a trade or business. 
"(7) GOVERNMENT USE.—The term 'government use' means 
any use other than a private business use. 
"(8) NONQUALIFIED AMOUNT.—For purposes of this subsection, 
the term 'nonqualified amount' means, with respect to an issue, 
?
^ 
the lesser of— 
"(A) the proceeds of such issue which are to be used for 
any private business use, or 
1^, 
"(B) the proceeds of such issue with respect to which 
there are payments (or property or borrowed money) de-
scribed in paragraph (2). 
"(9) EXCEPTION FOR QUALIFIED 501(C)(3) BONDS.—There shall 
not be taken into account under this subsection or subsection (c) 
the portion of the proceeds of an issue which (if issued as a 
separate issue) would be treated as a qualified 501(c)(3) bond if 
^' 
the issuer elects to treat such portion as a qualified 501(c)(3) 
bond. 
• "(c) PRIVATE LOAN FINANCING TEST.— 
"(1) IN GENERAL.—An issue meets the test of this subsection if 
' 
the amount of the proceeds of the issue which are to be used 
(directly or indirectly) to make or finance loans (other than 
loans described in paragraph (2)) to persons other than govern-
mental units exceeds the lesser of— 
* • - 
"(A) 5 percent of such proceeds, or 
"(B) $5,000,000. 
"(2) EXCEPTION FOR TAX ASSESSMENT, ETC., LOANS.—For pur-
i 
poses of paragraph (1), a loan is described in this paragraph if 
such loan— 
i 
"(A) enables the borrower to finance any governmental 
i 
tax or assessment of general application for a specific essen-
tial governmental function, or 
<M' T 
" ( B ) is a nonpurpose investment (within the meaning of 
section 148(f)(6)(A)). 
"(d) QUALIFIED BOND.—For purposes of this part, the term 'quali-
fied bond' means any private activity bond if— 
"(1) I N GENERAL.—Such bond is— 
"(A) an exempt facility bond, 
"(B) a qualified mortgage bond, 
y, r- .,, 
"(C) a qualified veterans' mortgage bond, 
"(D) a qualified small issue bond, 
^ 
"(E) a qualified student loan bond, 
"(F) a qualified redevelopment bond, or 
"(G) a qualified 501(c)(3) bond. 
"(2) VOLUME CAP.—Such bond is issued as part of an issue 
which meets the applicable requirements of section 146, and 
"(3) OTHER REQUIREMENTS.—Such bond meets the applicable 
requirements of each subsection of section 147. 
100 STAT. 2606 
PUBLIC LAW 99-514—OCT. 22, 1986 
"SEC. 142. EXEMPT FACILITY BOND. 
"(a) GENERAL RULE.—For purposes of this part, the term 'exempt 
facility bond' means any bond issued as part of an issue 95 percent 
or more of the net proceeds of which are to be used to provide— 
"(1) airports, 
"(2) docks and wharves, 
"(3) mass commuting facilities, 
"(4) facilities for the furnishing of water, 
-.,, 
"(5) sewage facilities, 
.„ -
"(6) solid waste disposal facilities, 
,,j, 
"(7) qualified residential rental projects, 
"(8) facilities for the local furnishing of electric energy or gas, 
"(9) local district heating or cooling facilities, or 
"(10) qualified hazardous waste facilities. 
"(b) SPECIAL EXEMPT FACILITY BOND RULES.—For purposes of 
subsection (a)— 
"(1) CERTAIN FACILITIES MUST BE GOVERNMENTALLY OWNED.— 
"(A) IN GENERAL.—A facility shall be treated as described 
-'Ko ; '-n in paragraph (1), (2), or (3) of subsection (a) only if all of the 
property to be financed by the net proceeds of the issue is to 
ilsti 
be owned by a governmental unit. 
i
O -i...... 
"(B) SAFE HARBOR FOR LEASES AND MANAGEMENT CON-
:: 
TRACTS.—For purposes of subparagraph (A), property leased 
by a governmental unit shall be treated as owned by such 
governmental unit i
f
— 
"(i) the lessee makes an irrevocable election (binding 
on the lessee and all successors in interest under the 
„
. 
lease) not to claim depreciation or an investment credit 
with respect to such property, 
,' 
"(ii) the lease term (as defined in 168(i)(3)) is not more 
than 80 percent of the reasonably expected economic 
life of the property (as determined under section 
147(b)), and 
.. 
- 
"(iii) the lessee has no option to purchase the prop-
r tU-^r-i 
^^ty other than at fair market value (as of the time 
such option is exercised). 
.,;, 
Rules similar to the rules of the preceding sentence shall 
apply to management contracts and similar types of operat-
ing agreements. 
"(2) LIMITATION ON OFFICE SPACE.—An office shall not be 
treated as described in a paragraph of subsection (a) unless— 
"(A) the office is located on the premises of a facility 
described in such a paragraph, and 
"(B) not more than a de minimis amount of the functions 
to be performed at such office is not directly related to the 
day-to-day operations at such facility. 
"(c) AIRPORTS, DOCKS AND WHARVES, AND MASS COMMUTING 
FACILITIES.—For purposes of subsection (a)— 
"(1) STORAGE AND TRAINING FACILITIES.—Storage or training 
facilities directly related to a facility described in paragraph (1), 
(2), or (3) of subsection (a) shall be treated as described in the 
paragraph in which such facility is described. 
"(2) EXCEPTION FOR CERTAIN PRIVATE FACILITIES.—Property 
shall not be treated as described in paragraph (1), (2), or (3) of 
subsection (a) if such property is described in any of the follow-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2607 
ing subparagraphs and is to be used for any private business use 
(as defined in section 141(bX6)). 
"(A) Any lodging facility. 
^ 
"(B) Any retail facility (including food and beverage 
facilities) in excess of a size necessary to serve passengers 
and employees at the exempt facility. 
"(C) Any retail facility (other than parking) for pas-
sengers or the general public located outside the exempt 
facility terminal. 
"(D) Any office building for individuals who are not 
employees of a governmental unit or of the operating 
authority for the exempt facility. 
"(E) Any industrial park or manufacturing facility. 
"(d) QUALIFIED RESIDENTIAL RENTAL PROJECT.—For purposes of 
this section— 
"(1) IN GENERAL.—The term 'qualified residential rental 
project' means any project for residential rental property if, at 
all times during the qualified project period, such project meets 
the requirements of subparagraph (A) or (B), whichever is 
elected by the issuer at the time of the issuance of the issue with 
respect to such project: 
;; 
"(A) 20-50 TEST.—The project meets the requirements of 
' ' * 
this subparagraph if 20 percent or more of the residential 
units in such project are occupied by individuals whose 
income is 50 percent or less of area median gross income. 
"(B) 40-60 TEST.—The project meets the requirements of 
this subparagraph if 40 percent or more of the residential 
units in such project are occupied by individuals whose 
income is 60 percent or less of area median gross income. 
For purposes of this paragraph, any property shall not be 
treated as failing to be residential rental property merely be-
cause part of the building in which such property is located is 
used for purposes other than residential rental purposes. 
"(2) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
subsection— 
, , 
"(A) QUAUFIED PROJECT PERIOD.—The term 'qualified 
project period' means the period beginning on the 1st day 
on which 10 percent of the residential units in the project 
are occupied and ending on the latest o
f
— 
"(i) the date which is 15 years after the date on which 
50 percent of the residential units in the project are 
occupied, 
.• 
"(ii) the 1st day on which no tax-exempt private 
activity bond issued with respect to the project is 
'y],i't 
outstanding, or 
"(iii) the date on which any assistance provided with 
respect to the project under section 8 of the United 
States Housing Act of 1937 terminates. 
"(B) 
INCOME 
OF 
INDIVIDUALS; AREA 
MEDIAN 
GROSS 
INCOME.—The income of individuals and area median gross 
t i 5 
income shall be determined by the Secretary in a manner 
consistent with determinations of lower income families 
ji ;i 
and area median gross income under section 8 of the United 
f
. 
States Housing Act of 1937 (or, if such program is termi-
nated, under such program £is in effect immediately before 
"Si 
such termination). Determinations under the preceding sen-
tence shall include adjustments for family size. 
100 STAT. 2608 
PUBLIC LAW 99-514—OCT. 22, 1986 
'•iUi a' "(3) CURRENT INCOME DETERMINATIONS.—For purposes of this 
subsection— 
"(A) I N GENERAL.—The determination of whether the 
income of a resident of a unit in a project exceeds the 
applicable income limit shall be made at least annually on 
the basis of the current income of the resident. 
>fic 
"(B) CONTINUING RESIDENT'S INCOME MAY INCREASE ABOVE 
:,;f^*- THE APPLICABLE LIMIT.—If the income of a resident of a unit 
in a project did not exceed the applicable income limit upon 
^5« 
commencement of such resident s occupancy of such unit 
t,-.,,^ 
(or as of any prior determination under subparagraph (A)), 
the income of such resident shall be treated as continuing 
to not exceed the applicable income limit. The preceding 
j,j „ 
sentence shall cease to apply to any resident whose income 
as of the most recent determination under subparagraph 
\^*-.r 
(A) exceeds 140 percent of the applicable income limit if 
jg^ . 
after such determination, but before the next determina-
,,. 
tion, any residential unit of comparable or smaller size in 
the same project is occupied by a new resident whose 
^ 
income exceeds the applicable income limit. 
"(4) SPECIAL RULE IN CASE OF DEEP RENT SKEWING.— 
%, „4^ 
"(A) I N GENERAL.—In the case of any project described in 
subparagraph (B), the 2d sentence of subparagraph (B) of 
' 
paragraph (3) shall be applied by substituting— 
^ , 
"(i)'170 percent'for'140 percent', and 
J 
"(ii) 'any low-income unit in the same project is 
occupied by a new resident whose income exceeds 40 
percent of area median gross income' for 'any residen-
tial unit of comparable or smaller size in the same 
project is occupied by a new resident whose income 
exceeds the applicable income limit'. 
"(B) DEEP RENT SKE^WED PROJECT.—A project is described 
in this subparagraph if the owner of the project elects to 
have this paragraph apply and, at all times during the 
"''' 
qualified project period, such project meets the require-
.„,. 
ments of clauses (i), (ii), and (iii): 
^'*',- * 
"(i) The project meets the requirements of this clause 
^ •, 
if 15 percent or more of the low-income units in the 
^y-*;ijl 
-. 
project are occupied by individuals whose income is 40 
percent or less of area median gross income. 
^
"
^ •''*' 
"(ii) The project meets the requirements of this 
-^' 
' . 
clause if the gross rent with respect to each low-income 
unit in the project does not exceed 30 percent of the 
' * 
applicable income limit which applies to individuals 
'•i • '.'" 
occupying the unit. 
"(iii) The project meets the requirements of this 
"''' 
clause if the gross rent with respect to each low-income 
->»•' ' 
unit in the project does not exceed Va of the average 
rent with respect to units of comparable size which are 
-»i^~ 
not occupied by individuals who meet the applicable 
''i^:\ 
income limit. 
"(C) DEFINITIONS APPLICABLE TO SUBPARAGRAPH (B).—For 
purposes of subparagraph (B)— 
"(i) LOW-INCOME UNIT.—The term 'low-income unit' 
means any unit which is required to be occupied by 
individuals who meet the applicable income limit, 
"(ii) GROSS RENT.—The term 'gross rent' includes— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2609 
"(I) any payment under section 8 of the United 
States Housing Act of 1937, and 
"(II) any utility allowance determined by the 
Secretary after taking into account such deter-
minations under such section 8. 
"(5) APPUCABLE INCOME UMIT.—For purposes of paragraphs 
(3) and (4), the term 'applicable income limit' means— 
"(A) the limitation under subparagraph (A) or (B) of 
paragraph (1) which applies to the project, or 
"(B) in the case of a unit to which paragraph (4XBXi) 
applies, the limitation which applies to such unit. 
"(6) SPECIAL RULE FOR CERTAIN HIGH COST HOUSING AREA.—In 
the case of a project located in a city having 5 boroughs and a 
population in excess of 5,000,000, subparagraph (B) of paragraph 
(1) shall be applied by substituting '25 percent' for '40 percent'. 
"(7) 
CERTIFICATION TO SECRETARY.—The operator 
of 
any 
project with respect to which an election was made under this 
subsection shall submit to the Secretary (at such time and in 
such manner as the Secretary shall prescribe) an annual certifi-
cation as to whether such project continues to meet the require-
ments of this subsection. Any failure to comply with the provi-
sions of the preceding sentence shall not affect the tax-exempt 
status of any bond but shall subject the operator to penalty, as 
provided in section 6652(j). 
"(e) FACIUTIES FOR THE FURNISHING OF WATER.—For purposes of 
subsection (aX4), the term 'facilities for the furnishing of water' 
means any facility for the furnishing of water if— 
"(1) the water is or will be made available to members of the 
general public (including electric utility, industrial, agricul-
tural, or commercial users), and 
"(2) either the facility is operated by a governmental unit or 
the rates for the furnishing or sale of the water have been 
established or approved by a State or political subdivision 
thereof, by an agency or instrumentality of the United States, 
or by a public service or public utility commission or other 
similar body of any State or political subdivision thereof. 
"(0 LOCAL FURNISHING OF ELECTRIC ENERGY OR GAS.—For pur-
poses of subsection (aX8), the local furnishing of electric energy or 
gas from a facility shall only include furnishing solely within the 
area consisting of— 
"(1) a city and 1 contiguous county, or 
"(2) 2 contiguous counties. 
"(g) LOCAL DISTRICT HEATING OR COOLING FACILITY.— 
"(1) IN GENERAL.—For purposes of subsection (aX9), the term 
'local district heating or cooling facility' means property used as 
an integral part of a local district heating or cooling system. 
"(2) LOCAL DISTRICT HEATING OR COOUNG SYSTEM.— 
"(A) IN GENERAL.—For purposes of paragraph (1), the 
term 'local district heating or cooling system' means any 
local system consisting of a pipeline or network (which may 
be connected to a heating or cooling source) providing hot 
water, chilled water, or steam to 2 or more users for— 
"(i) residential, commercial, or industrial heating or 
4
>
; 
cooling, or 
S'^i - 
"(ii) process steam. 
100 STAT. 2610 
PUBLIC LAW 99-514—OCT. 22, 1986 
f'-i !«(/ 
"(B) LOCAL SYSTEM.—For purposes of this paragraph, a 
local system includes facilities furnishing heating and cool-
ing to an area consisting of a city and 1 contiguous county. 
"(h) QUALIFIED HAZARDOUS WASTE FACILITIES.—For purposes of 
subsection (aXlO), the term 'qualified hazardous waste facility' 
means any facility for the disposal of hazardous waste by inciner-
ation or entombment but only i
f
— 
"(1) the facility is subject to final permit requirements under 
subtitle C of title II of the Solid Waste Disposal Act (as in effect 
on the date of the enactment of the Tax Reform Act of 1986), 
and 
"(2) the portion of such facility which is to be provided by the 
issue does not exceed the portion of the facility which is to be 
used by persons other than— 
"(A) the owner or operator of such facility, and 
' , 
"(B) any related person (within the meaning of section 
144(aX3)) to such owner or operator, 
"SEC. 1
4
3
. 
MORTGAGE REVENUE BONDS: 
QUALIFIED 
MORTGAGE BOND 
AND 
QUALIFIED 
VETERANS' 
MORTGAGE 
BOND. 
"(a) QUAUFIED MORTGAGE BOND.— 
"(1) QUAUFIED MORTGAGE BOND DEFINED.— 
*' 
-
"(A) IN GENERAL.—For purposes of this title, the term 
'qualified mortgage bond' means a bond which is issued as 
, 
part of a qualified mortgage issue. 
to « 
«^g) TERMINATION ON DECEMBER 31, 1988.—No bond issued 
•%siy after December 31, 1988, may be treated as a qualified 
mortgage bond. 
"(2) QUALIFIED MORTGAGE ISSUE DEFINED.— 
"(A) DEFINITION.—For purposes of this title, the term 
'qualified mortgage issue' means an issue by a State or 
'"'* 
political subdivision thereof of 1 or more bonds, but only 
if— 
"(i) all proceeds of such issue (exclusive of issuance 
costs and a reasonably required reserve) are to be used 
f 
to finance owner-occupied residences, 
"(ii) such issue meets the requirements of subsections 
(c), (d), (e), (f), (g), (h), and (i), and 
"(iii) no bond which is part of such issue meets the 
-a a .. 
private business tests of paragraphs (1) and (2) of sec-
tion 141(b). 
"(B) GOOD FAITH EFFORT TO COMPLY WITH MORTGAGE ELIGI-
BiUTY REQUIREMENTS.—An issue which fails to meet 1 or 
more of the requirements of subsections (c), (d), (e), (0, and 
f 
(i) shall be treated as meeting such requirements if— 
"(i) the issuer in good faith attempted to meet all 
., ? > 
such requirements before the mortgages were executed, 
"(ii) 95 percent or more of the proceeds devoted to 
r'T 
owner-financing was devoted to residences with respect 
/i :, 
to which (at the time the mortgages were executed) all 
such requirements were met, and 
"(iii) any failure to meet the requirements of such 
subsections is corrected within a reasonable period 
•jc > 
after such failure is first discovered. 
"(C) GOOD FAITH EFFORT TO COMPLY WITH OTHER REQUIRE-
MENTS.—An issue which fails to meet 1 or more of the 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2611 
^: 
requirements of subsections (g) and (h) shall be treated as 
meeting such requirements if— 
"(i) the issuer in good faith attempted to meet all 
such requirements, and 
"(ii) any failure to meet such requirements is due to 
inadvertent error after taking reasonable steps to 
comply with such requirements. 
"(b) 
QUALIFIED VETERANS' MORTGAGE BOND DEFINED.—For pur-
poses of this part, the term 'qualified veterans' mortgage bond' 
means any bond— 
"(1) which is issued as part of an issue 95 percent or more of 
the net proceeds of which are to be used to provide residences 
for veterans, 
;,- 
"(2) the payment of the principal and interest on which is 
f|- secured by the general obligation of a State, 
"(3) which is part of an issue which meets the requirements of 
|> subsections (c), (g), (i)(l), and (1), and 
"(4) which does not meet the private business tests of para-
graphs (1) and (2) of section 141(b). 
Rules similar to the rules of subparagraphs (B) and (C) of subsection 
(a)(2) shall apply to the requirements specified in paragraph (3) of 
this subsection. 
"(c) RESIDENCE REQUIREMENTS.— 
"(1) FOR A RESIDENCE.—A residence meets the requirements of 
this subsection only if— 
H« 
"(A) it is a single-family residence which can reasonably 
be expected to become the principal residence of the mort-
gagor within a reasonable time after the financing is pro-
Q. 
vided, and 
"(B) it is located within the jurisdiction of the authority 
issuing the bond. 
;;;; 
"(2) FOR AN ISSUE.—An issue meets the requirements of this 
subsection only if all of the residences for which owner-financ-
I ing is provided under the issue meet the requirements of para-
graph (1). 
"(d) 3-YEAR REQUIREMENT.— 
"(1) IN GENERAL.—An issue meets the requirements of this 
subsection only if 95 percent or more of the net proceeds of such 
issue are used to finance the residences of mortgagors who had 
no present ownership interest in their principal residences at 
'.. 
any time during the 3-year period ending on the date their 
mortgage is executed. 
jj^ 
"(2) EXCEPTIONS.—For purposes of paragraph (1), the proceeds 
tj 
of an issue which are used to provide— 
"(A) financing with respect to targeted area residences, 
K. - ^
^ 
and 
"(B) qualified home improvement loans and qualified 
rehabilitation loans, 
shall be treated as used as described in paragraph (1). 
"(3) MORTGAGOR'S INTEREST IN RESIDENCE BEING FINANCED.— 
For purposes of paragraph (1), a mortgagor's interest in the 
residence with respect to which the financing is being provided 
shall not be taken into account. 
"(e) PURCHASE PRICE REQUIREMENT.— 
"(1) IN GENERAL.—An issue meets the requirements of this 
ll 
subsection only if the acquisition cost of each residence the 
owner-financing of which is provided under the issue does not 
100 STAT. 2612 
PUBLIC LAW 99-514—OCT. 22, 1986 
r:f exceed 90 percent of the average area purchase price applicable 
to such residence. 
i' 
"(2) AVERAGE AREA PURCHASE PRICE.—For purposes of para-
graph (1), the term 'average area purchase price' means, with 
o 
respect to any residence, the average purchase price of single 
0 
family residences (in the statistical area in which the residence 
is located) which were purchased during the most recent 12-
-
» month period for which sufficient statistical information is 
available. The determination under the preceding sentence 
shall be made as of the date on which the commitment to 
provide the financing is made (or, if earlier, the date of the 
a 
purchase of the residence). 
"(3) SEPARATE APPUCATION TO NEW RESIDENCES AND OLD RESI-
l DENCES.—For purposes of this subsection, the determination of 
average area purchase price shall be made separately with 
"
t 
respect to— 
"(A) residences which have not been previously occupied, 
••y*.-:^ 
a n d 
"(B) residences which have been previously occupied. 
I
* 
"(4) SPECIAL RULE FOR 2 TO 4 FAMILY RESIDENCES.—For 
pur-
't poses of this subsection, to the extent provided in regulations, 
the determination of average area purchase price shall be made 
separately with respect to 1 family, 2 family, 3 family, and 4 
= family residences. 
"(5) SPECIAL RULE FOR TARGETED AREA RESIDENCES.—In 
the 
1 case of a targeted area residence, paragraph (1) shall be applied 
J by substituting '110 percent' for '90 percent'. 
J 
"(6) EXCEPTION FOR QUALIFIED HOME IMPROVEMENT LOANS.— 
Paragraph (1) shall not apply with respect to any qualified home 
' 
improvement loan. 
"(f) INCOME REQUIREMENTS.— 
"(1) IN GENERAL.—An issue meets the requirements of this 
subsection only if all owner-financing provided under the issue 
i is provided for mortgagors whose family income is 115 percent 
or less of the applicable median family income. 
"(2) DETERMINATION OF FAMILY INCOME.—For purposes of this 
e 
subsection, the family income of mortgagors, and area median 
gross income, shall be determined by the Secretary after taking 
' 
into account the regulations prescribed under section 8 of the 
^ United States Housing Act of 1937 (or, if such program is 
?
• terminated, under such program as in effect immediately before 
such termination). 
a
^ 
"(3) SPECIAL RULE FOR APPLYING PARAGRAPH (i) IN THE CASE 
OF TARGETED AREA RESIDENCES.—In the case of any financing 
provided under any issue for targeted area residences— 
"(A) V
b of the amount of such financing may be provided 
boH ; 
without regard to paragraph (1), and 
"(B) paragraph (1) shall be treated as satisfied with re-
spect to the remainder of the owner financing if the family 
income of the mortgagor is 140 percent or less of the 
'- 
applicable median family income. 
''>". 
"(4) APPLICABLE MEDIAN FAMILY INCOME.—For purposes of this 
subsection, the term 'applicable median family income' means, 
with respect to a residence, whichever of the following is the 
ei greater: 
'? 
"(A) the area median gross income for the area in which 
to. 
such residence is located, or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2613 
"(B) the statewide median gross income for the State in 
which such residence is located. 
"(g) REQUIREMENTS RELATED TO ARBITRAGE.— 
"(1) IN GENERAL.—An issue meets the requirements of this 
subsection only if such issue meets the requirements of para-
graphs (2) and (3) of this subsection. Such requirements shall be 
in addition to the requirements of section 148 (other than 
subsection (0 thereof). 
"(2) EFFECTIVE RATE OF MORTGAGE INTEREST CANNOT EXCEED 
BOND YIELD BY MORE THAN 1.125 PERCENTAGE POINTS.— 
"(A) IN GENERAL.—An issue shall be treated as meeting 
the requirements of this paragraph only if the excess of^ 
"(i) the effective rate of interest on the mortgages 
; 
provided under the issue, over 
"(ii) the yield on the issue, 
''. 
is not greater than 1.125 percentage points. 
"(B) EFFECTIVE RATE OF MORTGAGE INTEREST.— 
"(i) IN GENERAL.—In determining the effective rate of 
interest on any mortgage for purposes of this para-
graph, there shall be taken into account all fees, 
charges, and other amounts borne by the mortgagor 
which are attributable to the mortgage or to the bond 
issue. 
;. 
"(ii) SPECIFICATION OF SOME OF THE AMOUNTS TO BE 
TREATED AS BORNE BY THE MORTGAGOR.—For purpOSeS of 
" ' 
clause (i), the following items (among others) shall be 
treated as borne by the mortgagor: 
• ! 
"(I) all points or similar charges paid by the 
seller of the property, and 
"(II) the excess of the amounts received from any 
person other than the mortgagor by any person in 
connection with the acquisition of the mortgagor's 
interest in the property over the usual and reason-
able acquisition costs of a person acquiring like 
property where owner-financing is not provided 
through the use of qualified mortgage bonds or 
qualified veterans' mortgage bonds, 
"(iii) SPECIFICATION OF SOME OF THE AMOUNTS TO BE 
TREATED AS NOT BORNE B
Y THE MORTGAGOR.—For pur-
poses of clause (i), the following items shall not be 
taken into account: 
"(I) any expected rebate of arbitrage profits, and 
"(II) any application fee, survey fee, credit report 
fee, insurance charge, or similar amount to the 
extent such amount does not exceed amounts 
charged in such area in cases where owner-financ-
ing is not provided through the use of qualified 
mortgage bonds or qualified veterans' mortgage 
bonds. 
Subclause (II) shall not apply to origination fees, points, 
or similar amounts. 
"(iv) PREPAYMENT ASSUMPTIONS.—In determining the 
effective rate of interest— 
"(I) it shall be assumed that the mortgage 
prepayment rate will be the rate set forth in the 
most recent applicable mortgage maturity experi-
71-19A 
0 
- 
89 
- 
27 
: 
a.. 
3 
Part3 
100 STAT. 2614 
PUBLIC LAW 99-514—OCT. 22, 1986 
rr ktiiJ'i •^nj .-.'] ence table published by the Federal 
Housing 
Administration, and 
"(II) prepayments of principal shall be treated 
•\:-,. ' 
as received on the last day of the month in which 
• ,. , • 
the issuer reasonably expects to receive 
such 
prepayments. 
.f..fi; 
"(C) YIELD ON THE ISSUE.—For purposes of this subsection, 
the yield on an issue shall be determined on the basis of— 
"(i) the issue price (within the meaning of sections 
1273 and 1274), and 
., 
"(ii) an expected maturity for the bonds which is 
consistent 
with 
the assumptions 
required 
under 
subparagraph (B)(iv). 
"(3) ARBITRAGE AND INVESTMENT GAINS TO BE USED TO REDUCE 
COSTS OF OWNER-FINANCING.— 
"(A) IN GENERAL.—An issue shall be treated as meeting 
the requirements of this paragraph only if an amount equal 
1) yi*i-i f to the sum of— 
"(i) the excess of— 
, 1 
"(I) the amount earned on all nonpurpose invest-
/ 
. 
ments (other than investments attributable to an 
excess described in this clause), over 
"(II) the amount which would have been earned 
- r ; 
if such investments were invested at a rate equal 
• . 
to the yield on the issue, plus 
^ ' 
; 
"(ii) any income attributable to the excess described 
in clause (i), 
i'- 
^•' 
is paid or credited to the mortgagors as rapidly as may be 
practicable. 
• 
' ^ 
"(B) INVESTMENT GAINS AND LOSSES.—For purposes of 
subparagraph (A), in determining the amount earned on all 
nonpurpose investments, any gain or loss on the disposition 
of such investments shall be taken into account. 
"(C) REDUCTION WHERE ISSUER DOES NOT USE FULL 1.125 
' , . 
PERCENTAGE POINTS UNDER PARAGRAPH (2).— 
10 
"(i) IN GENERAL.—The amount required to be paid or 
credited to mortgagors under subparagraph (A) (deter-
:,r -^ 
mined under this paragraph without regard to this 
subparagraph) shall be reduced by the unused para-
^
>
,
' *,, , , ,, 
graph (2) amount. 
"(ii) UNUSED PARAGRAPH (2) AMOUNT.—For purposes 
,'t 
• 
of clause (i), the unused paragraph (2) amount is the 
*
• 
, • 
amount which (if it were treated as an interest pay-
-.(, 
ment made by mortgagors) would result in the excess 
referred to in paragraph (2)(A) being equal to 1.125 
percentage points. Such amount shall be fixed and 
determined as of the yield determination date. 
; ; 
"(D) ELECTION TO PAY UNITED STATES.—Subparagraph (A) 
shall be satisfied with respect to any issue if the issuer 
..r.: ..^ 
elects before issuing the bonds to pay over to the United 
States— 
V - 
"(i) not less frequently than once each 5 years after 
the date of issue, an amount equal to 90 percent of the 
aggregate amount which would be required to be paid 
or credited to mortgagors under subparagraph (A) (and 
not theretofore paid to the United States), and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2615 
"(ii) not later than 60 days after the redemption of 
the last bond, 100 percent of such aggregate amount 
not theretofore paid to the United States. 
"(E) SIMPLIFIED ACCOUNTING.—The Secretary shall permit 
any simplified system of accounting for purposes of this 
paragraph which the issuer establishes to the satisfaction of 
the Secretary will assure that the purposes of this para-
graph are carried out. 
"(F) NoNPURPOSE INVESTMENT.—For purposes of this 
'» 
paragraph, the term 'nonpurpose investment' has the 
meaning given such term by section 148(f)(6XA). 
"(h) PORTION OF LOANS REQUIRED TO BE PLACED IN TARGETED 
AREAS.— 
"(1) IN GENERAL.—An issue meets the requirements of this 
subsection only if at least 20 percent of the proceeds of the issue 
which are devoted to providing owner-financing is made avail-
able (with reasonable diligence) for owner-financing of targeted 
area residences for at least 1 year after the date on which 
owner-financing is first made available with respect to targeted 
area residences. 
"(2) LIMITATION.—Nothing in paragraph (1) shall be treated as 
requiring the making available of an amount which exceeds 40 
percent of the average annual aggregate principal amount of 
mortgages executed during the immediately preceding 3 
calendar years for single-family, owner-occupied residences 
located in targeted areas within the jurisdiction of the issuing 
authority, 
"(i) OTHER REQUIREMENTS.— 
"(1) MORTGAGES MUST BE NEW MORTGAGES.— 
"(A) IN GENERAL.—An issue meets the requirements of 
this subsection only if no part of the proceeds of such issue 
is used to acquire or replace existing mortgages. 
"(B) EXCEPTIONS.—Under regulations prescribed by the 
Secretary, the replacement of— 
, , 
"(i) construction period loans, 
' 
"(ii) bridge loans or similar temporary initial financ-
ing, and 
-i9.«v'. 
"(iii) in the case of a qualified rehabilitation, an 
existing mortgage, 
shall not be treated as the acquisition or replacement of an 
-8' 
» existing mortgage for purposes of subparagraph (A). 
"(2) CERTAIN REQUIREMENTS MUST BE MET WHERE MORTGAGE IS 
'' 
ASSUMED.—An issue meets the requirements of this subsection 
only if each mortgage with respect to which owner-financing 
has been provided under such issue may be assumed only if the 
requirements of subsections (c), (d), and (e), and the require-
ments of paragraph (1) or (3XB) of subsection (f) (whichever 
applies), are met with respect to such assumption, 
"(j) TARGETED AREA RESIDENCES.— 
"(1) IN GENERAL.—For purposes of this section, the term 
'targeted area residence' means a residence in an area which is 
either— 
"(A) a qualified census tract, or 
"(B) an area of chronic economic distress. 
"(2) QUAUFIED CENSUS TRACT.— 
"(A) IN GENERAL.—For purposes of paragraph (1), the 
term 'qualified census tract' means a census tract in which 
100 STAT. 2616 
PUBLIC LAW 99-514—OCT. 22, 1986 
70 percent or more of the families have income which is 80 
-, 
t 
percent or less of the statewide median family income. 
"(B) DATA USED.—The determination under subparagraph 
(A) shall be made on the basis of the most recent decennial 
census for which data are available. 
"". 
"(3) AREA OF CHRONIC ECONOMIC DISTRESS.— 
"(A) IN GENERAL.—For purposes of paragraph (1), the 
term 'area of chronic economic distress' means an area of 
-- ' 
chronic economic distress— 
-' 
"(i) designated by the State as meeting the standards 
established by the State for purposes of this subsection, 
'•'•*'' -'* " 
and 
"(ii) the designation of which has been approved by 
^
- 
the Secretary and the Secretary of Housing and Urban 
•^ 
Development. 
"(B) CRITERIA TO BE USED IN APPROVING STATE DESIGNA-
TIONS.—The criteria used by the Secretary and the Sec-
retary of Housing and Urban Development in evaluating 
any proposed designation of an area for purposes of this 
subsection shall be— 
"(i) the condition of the housing stock, including the 
age of the housing and the number of abandoned and 
substandard residential units, 
"(ii) the need of area residents for owner-financing 
'I; 
under this section, as indicated by low per capita 
*' 
income, a high percentage of families in poverty, a high 
number of welfare recipients, and high unemployment 
rates, 
"(iii) the potential for use of owner-financing under 
„
' ' 
this section to improve housing conditions in the area, 
' '• 
and 
"(iv) the existence of a housing assistance plan which 
' ' " • 
provides a displacement program and a public improve-
ments and services program, 
"(k) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) MORTGAGE.—The term 'mortgage' means any owner-
financing. 
,, 
.j, 
"(2) STATISTICAL AREA.— 
"(A) IN GENERAL.—The term 'statistical area' means— 
"(i) a metropolitan statistical area, and 
"(ii) any county (or the portion thereof) which is not 
within a metropolitan statistical area. 
"(B) METROPOLITAN STATISTICAL AREA.—The term 'metro-
.«.. 
politan statistical area' includes the area defined as such by 
the Secretary of Commerce. 
"(C) DESIGNATION WHERE ADEQUATE STATISTICAL INFORMA-
TION NOT AVAILABLE.—For purposes of this paragraph, if 
, . 
there is insufficient recent statistical information with re-
v
^
; 
spect to a county (or portion thereof) described in subpara-
graph (A)(ii), the Secretary may substitute for such county 
(or portion thereof) another area for which there is suffi-
cient recent statistical information. 
"(D) DESIGNATION WHERE NO COUNTY.—In the case of any 
j - 
!. 
portion of a State which is not within a county, subpara-
'f', jv- 
graphs (A)(ii) and (C) shall be applied by substituting for 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2617 
'county' an area designated by the Secretary which is the 
equivalent of a county. 
"(3) ACQUISITION COST.— 
"(A) IN GENERAL.—The term 'acquisition cost' means the 
cost of acquiring the residence as a completed residential 
unit. 
"(B) EXCEPTIONS.—The term 'acquisition cost' does not 
include— 
"(i) usual and reasonable settlement or financing 
costs, 
"(ii) the value of services performed by the mortgagor 
or members of his family in completing the residence, 
and 
"(iii) the cost of land which has been owned by the 
mortgagor for at least 2 years before the date on which 
construction of the residence begins. 
"(C) 
SPECIAL 
RULE 
FOR 
QUALIFIED 
REHABILITATION 
^^^ 
" LOANS.—In the case of a qualified rehabilitation loan, for 
purposes of subsection (e), the term 'acquisition cost' in-
^" 
eludes the cost of the rehabilitation. 
"(4) QUALIFIED HOME IMPROVEMENT LOAN.—The term 'quali-
fied home improvement loan' means the financing (in an 
' amount which does not exceed $15,000)— 
"(A) of alterations, repairs, and improvements on or in 
connection with an existing residence by the owner thereof, 
but 
"(B) only of such items as substantially protect or im-
prove the basic livability or energy efficiency of the prop-
erty. 
"(5) QUALIFIED REHABILITATION LOAN.— 
"(A) IN GENERAL.—The term 'qualified 
rehabilitation 
, ; 
loan' means any owner-financing provided in connection 
with— 
"(i) a qualified rehabilitation, or 
"(ii) the acquisition of a residence with respect to 
which there has been a qualified rehabilitation, 
but only if the mortgagor to whom such financing is pro- 
• 
vided is the first resident of the residence after the comple-
tion of the rehabilitation. 
^j^ 
"(B) 
QUALIFIED 
REHABILITATION.—For 
purposes 
of 
subparagraph (A), the term 'qualified rehabilitation' means 
r any rehabilitation of a building if— 
"(i) there is a period of at least 20 years between the 
date on which the building was first used and the date 
on which the physical work on such rehabilitation 
V
-
' : 
begins, 
.-,.,;. 
"(ii) in the rehabilitation process— 
"(I) 50 percent or more of the existing external 
*i 
walls of such building are retained in place as 
external walls, 
"(II) 75 percent or more of the existing external 
, , 
walls of such building are retained in place as 
internal or external walls, and 
"(III) 75 percent or more of the existing internal 
structural framework of such building is retained 
i 
. a 
in place, and 
100 STAT. 2618 
PUBLIC LAW 99-514—OCT. 22, 1986 
ii • 
"(iii) the expenditures for such rehabilitation are 25 
percent or more of the mortgagor's adjusted basis in 
the residence. 
- ' *• 
For purposes of clause (iii), the mortgagor's adjusted basis 
,t, 
shall be determined as of the completion of the rehabilita-
tion or, if later, the date on which the mortgagor acquires 
the residence. 
"(6) DETERMINATIONS ON ACTUARIAL BASIS.—All determina-
tions of yield, effective interest rates, and amounts required to 
be paid or credited to mortgagors or paid to the United States 
under subsection (g) shall be made on an actuarial basis taking 
into account the present value of money. 
"(7) SINGLE-FAMILY AND OWNER-OCCUPIED RESIDENCES INCLUDE 
CERTAIN RESIDENCES WITH 2 TO 4 UNITS.—Except for purposes of 
subsection (h)(2), the terms 'single-family' and 'owner-occupied', 
when used with respect to residences, include 2, 3, or 4 family 
residences— 
"(A) one unit of which is occupied by the owner of the 
i . 
units, and 
"(B) which were first occupied at least 5 years before the 
mortgage is executed. 
"(8) COOPERATIVE HOUSING CORPORATIONS.— 
"(A) IN GENERAL.—In the case of any cooperative housing 
corporation— 
;,,, 
"(i) each dwelling unit shall be treated as if it were 
actually owned by the person entitled to occupy such 
dwelling unit by reason of his ownership of stock in the 
, 
corporation, and 
"(ii) any indebtedness of the corporation allocable to 
the dwelling unit shall be treated as if it were indebted-
, 
ness of the shareholder entitled to occupy the dwelling 
. 
/ 
unit. 
' 
"(B) ADJUSTMENT TO TARGETED AREA REQUIREMENT.—In 
the case of any issue to provide financing to a cooperative 
housing corporation with respect to cooperative housing not 
located in a targeted area, to the extent provided in regula-
^ 
tions, such issue may be combined with 1 or more other 
^ 
issues for purposes of determining whether the require-
'' - ' 
ments of subsection (h) are met. 
.. 
"(C) COOPERATIVE HOUSING CORPORATION.—The term 'co-
•\ 
operative housing corporation' has the meaning given to 
'^ 
such term by section 216(bXl). 
"(9) TREATMENT OF UMITED EQUITY COOPERATIVE HOUSING.— 
"(A) 
TREATMENT AS RESIDENTIAL RENTAL PROPERTY.— 
Except as provided in subparagraph (B), for purposes of this 
part— 
"(i) any limited equity cooperative housing shall be 
treated as residential rental property and not as owner-
"' ' - 
occupied housing, and 
"(ii) bonds issued to provide such housing shall be 
subject to the same requirements and limitations as 
•• 
bonds the proceeds of which are to be used to provide 
qualified residential rental projects (as defined in sec-
tion 142(d)). 
• 
"(B) BONDS SUBJECT TO QUALIFIED MORTGAGE BOND TERMI-
^ ' "^ 
NATION DATE.—Subparagraph (A) shall not apply to any 
bond issued after the date specified in subsection (aXlXB). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2619 
"(C) LIMITED EQUITY COOPERATIVE HOUSING.—For purposes 
of this paragraph, the term 'limited equity cooperative 
housing' means any dwelUng unit which a person is entitled 
to occupy by reason of his ownership of stock in a qualified 
cooperative housing corporation. 
'(D) QUALIFIED COOPERATIVE HOUSING CORPORATION.—For 
purposes of this paragraph, the term 'qualified cooperative 
housing corporation' means any cooperative housing cor-
poration (as defined in section 216(b)(1)) if— 
f>^)i.^'^ 
"(i) the consideration paid for stock held by any 
n- 
stockholder entitled to occupy any house or apartment 
r 
in a building owned or leased by the corporation may 
t 
not exceed the sum of— 
"(I) the consideration paid for such stock by the 
•
f
, . 
first such stockholder, as adjusted by a cost-of-
living adjustment determined by the Secretary, 
"(II) payments made by any stockholder 
for 
.7 . 
improvements to such house or apartment, and 
"(III) payments (other than amounts taken into 
J 
account under subclause (I) or (ID) attributable to 
any stockholder to amortize the principal of the 
corporation's indebtedness arising from the ac-
if,-. ,, 
quisition or development of real property, includ-
•^^'^' - 
ing improvements thereof, 
"(ii) the value of the corporation's assets (reduced by 
^ 
any corporate liabilities), to the extent such value ex-
ceeds the combined transfer values of the outstanding 
*»eh' 
corporate stock, shall be used only for public benefit or 
' * ' 
charitable purposes, or directly to benefit the corpora-
tion itself, and shall not be used directly to benefit any 
stockholder, and 
J 
"(iii) at the time of issuance of the issue, such cor-
poration makes an election under this paragraph. 
"(E) EFFECT OF ELECTION.—If a cooperative housing cor-
t' 
poration makes an election under this paragraph, section 
*' 
216 shall not apply with respect to such corporation (or any 
successor thereof) during the qualified project period (as 
defined in section 142(d)(2)). 
"(F) 
CORPORATION MUST CONTINUE TO BE QUALIFIED CO-
j 
OPERATIVE.—Subparagraph (A)(i) shall not apply to limited 
**''' 
equity cooperative housing unless the cooperative housing 
corporation continues to be a qualified cooperative housing 
'^ 
corporation at all times during the qualified project period 
(as defined in section 142(d)(2)). 
"(G) ELECTION IRREVOCABLE.—Any election under this 
paragraph, once made, shall be irrevocable. 
"(1) ADDITIONAL REQUIREMENTS FOR QUALIFIED VETERANS' MORT-
GAGE BONDS.—An issue meets the requirements of this subsection 
only if it meets the requirements of paragraphs (1), (2), and (3). 
"(1) VETERANS TO WHOM FINANCING MAY BE PROVIDED.—An 
issue meets the requirements of this paragraph only if each 
mortgagor to whom financing is provided under the issue is a 
qualified veteran. 
"(2) REQUIREMENT THAT STATE PROGRAM BE IN EFFECT BEFORE 
JUNE 22, 1984.—An issue meets the requirements of this para-
> graph only if it is a general obligation of a State which issued 
^ qualified veterans' mortgage bonds before June 22, 1984. 
ll-
100 STAT. 2620 
PUBLIC LAW 99-514-OCT. 22, 1986 
"(3) VOLUME LIMITATION.— 
'- 
"(A) I N GENERAL.—An issue meets the requirements of 
this paragraph only if the aggregate amount of bonds issued 
* 
pursuant thereto (when added to the aggregate amount of 
quaHfied veterans' mortgage bonds previously issued by the 
State during the calendar year) does not exceed the State 
'? 
veterans limit for such calendar year. 
> 
"(B) STATE VETERANS LIMIT.—A State veterans limit for 
any calendar y^ar is the amount equal to— 
^ 
"(i) the aggregate amount of qualified veterans bonds 
'- ' 
issued by such State during the period beginning on 
' 
• 
January 1, 1979, and ending on June 22, 1984 (not 
including the amount of any qualified veterans bond 
issued by such State during the calendar year (or por-
tion thereof) in such period for which the amount of 
such bonds so issued was the lowest), divided by 
; 
"(ii) the number (not to exceed 5) of calendar years 
/ ' 
after 1979 and before 1985 during which the State 
; ' 
issued qualified veterans bonds (determined by only 
" ', 
taking into account bonds issued on or before June 22, 
::* 
1984). 
- i 
"(C) TREATMENT OF REFUNDING ISSUES.— 
"(i) IN GENERAL.—For purposes of subparagraph (A), 
the term 'qualified veterans' mortgage bond' shall not 
include any bond issued to refund another bond but 
only if the maturity date of the refunding bond is not 
later than the later of— 
"(I) the maturity date of the bond to be refunded, 
./, 
or 
"(II) the date 32 years after the date on which 
,„. 
the refunded bond was issued (or in the case of a 
series of refundings, the date on which the original 
bond was issued). 
p. 
The preceding sentence shall apply only to the extent 
J^ 
that the amount of the refunding bond does not exceed 
;,,' 
. . . . 
the outstanding amount of the refunded bond. 
"(ii) EXCEPTION FOR ADVANCE REFUNDING.—Claused) 
shall not apply to any bond issued to advance refund 
h 
another bond. 
"(4) QUALIFIED VETERAN.—For purposes of this subsection, the 
, term 'qualified veteran' means any veteran— 
h 
"(A) who served on active duty at some time before 
January 1, 1977, and 
"(B) who applied for the financing before the later of^ 
"(i) the date 30 years after the last date on which 
r i
« " 
-u 
such veteran left active service, or 
"(ii) January 31,1985. 
"(5) SPECIAL RULE FOR CERTAIN SHORT-TERM BONDS.—In the 
, case of any bond— 
"(A) which has a term of 1 year or less, 
"(B) which is authorized to be issued under O.R.S. 407.435 
(as in effect on the date of the enactment of this subsection), 
3: 
to provide financing for property taxes, and 
"(C) which is redeemed at the end of such term, 
t^ the amount taken into account under this subsection with 
respect to such bond shall be Vis of its principal amount. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2621 
•SEC. 144. QUALIFIED SMALL ISSUE BOND; QUALIFIED STUDENT LOAN 
BOND; QUALIFIED REDEVELOPMENT BOND. 
"(a) QUALIFIED SMALL ISSUE BOND.— 
"(1) IN GENERAL.—For purposes of this part, the term 'quali-
fied small issue bond' means any bond issued as part of an issue 
the aggregate authorized face amount of which is $1,000,000 or 
less and 95 percent or more of the net proceeds of which are to 
be used— 
"(A) for the acquisition, construction, reconstruction, or 
improvement of land or property of a character subject to 
the allowance for depreciation, or 
"(B) to redeem part or all of a prior issue which was 
issued for purposes described in subparagraph (A) or this 
subparagraph. 
"(2) CERTAIN PRIOR ISSUES TAKEN INTO ACCOUNT.—If— 
"(A) the proceeds of 2 or more issues of bonds (whether or 
not the issuer of each such issue is the same) are or will be 
used primarily with respect to facilities located in the same 
incorporated municipality or located in the same county 
: 
0)ut not in any incorporated municipality), 
"(B) the principal user of such facilities is or will be the 
same person or 2 or more related persons, and 
"(C) but for this paragraph, paragraph (1) (or the cor-
responding provision of prior law) would apply to each such 
issue, 
then, for purposes of paragraph (1), in determining the aggre-
gate face amount of any later issue there shall be taken into 
account the aggregate face amount of tax-exempt bonds issued 
under all prior such issues and outstanding at the time of such 
later issue (not including as outstanding any bond which is to be 
redeemed (other than in an advance refunding) from the net 
proceeds of the later issue). 
"(3) RELATED PERSONS.—For purposes of this subsection, a 
person is a related person to another person if^ 
"(A) the relationship between such persons would result 
in a disallowance of losses under section 267 or 707(b), or 
"(B) such persons are members of the same controlled 
group of corporations (as defined in section 1563(a), except 
that 'more than 50 percent' shall be substituted for 'at least 
80 percent' each place it appears therein). 
"(4) $10,000,000 LIMIT IN CERTAIN CASES.— 
"(A) IN GENERAL.—At the election of the issuer with 
respect to any issue, this subsection shall be applied— 
"(i) by substituting '$10,000,000' for '$1,000,000' in 
paragraph (1), and 
"(ii) in determining the aggregate face amount of 
such issue, by taking into account not only the amount 
described in paragraph (2), but also the aggregate 
amount of capital expenditures with respect to facili-
;u 
ties described in subparagraph (B) paid or incurred 
during the 6-year period beginning 3 years before the 
date of such issue and ending 3 years after such date 
(and financed otherwise than out of the proceeds of 
outstanding tax-exempt issues to which paragraph (1) 
(or the corresponding provision of prior law) applied), 
as if the aggregate amount of such capital expenditures 
Hi.. 
«
%
{ 
'to 
100 STAT. 2622 
PUBLIC LAW 99-514—OCT. 22, 1986 
ii^*CKi : . constituted the face amount of a prior outstanding 
issue described in paragraph (2). 
"(B) FACILITIES TAKEN INTO ACCOUNT.—For purposes of 
^i 
subparagraph (A)(ii), the facilities described in this subpara-
graph are facilities— 
"(i) located in the same incorporated municipality or 
located in the same county O^ut not in any incorporated 
municipality), and 
"(ii) the principal user of which is or will be the same 
person or 2 or more related persons. 
For purposes of clause (i), the determination of whether or 
not facilities are located in the same governmental unit 
shall be made as of the date of issue of the issue in question. 
"(C) CERTAIN CAPITAL EXPENDITURES NOT TAKEN INTO AC-
COUNT.—For purposes of subparagraph (A)(ii), any capital 
expenditure— 
"(i) to replace property destroyed or damaged by fire, 
storm, or other casualty, to the extent of the fair 
market value of the property replaced, 
^'***' 
"(ii) required by a change made after the date of issue 
. ^ 
of the issue in question in a Federal or State law or 
**'' 
local ordinance of general application or required by a 
change made after such date in rules and regulations of 
general application issued under such a law or 
ordinance, 
"(iii) required by circumstances which could not be 
*
^ 
reasonably foreseen on such date of issue or arising out 
' •' 
of a mistake of law or fact (but the aggregate amount of 
^ 
expenditures not taken into account under this clause 
"• 
with respect to any issue shall not exceed $1,000,000), 
^c« o 
or 
i*^ 
"(iv) described in clause (i) or (ii) of section 41(b)(2)(A) 
for which a deduction was allowed under section 174(a), 
R 
shall not be taken into account. 
"(D) LIMITATION ON LOSS OF TAX EXEMPTION.—In applying 
if 
subparagraph (A)(ii) with respect to capital expenditures 
' 
made after the date of any issue, no bond issued as a part of 
i>" 
such issue shall cease to be treated as a qualified small 
^; 
issue bond by reason of any such expenditure for any period 
before the date on which such expenditure is paid or 
incurred. 
"(E) CERTAIN REFINANCING ISSUES.—In the case of any 
«
• 
issue described in paragraph (1)(B), an election may be 
made under subparagraph (A) of this paragraph only if all 
fii 
of the prior issues being redeemed are issues to which 
paragraph (1) (or the corresponding provision of prior law) 
to 
applied. In applying subparagraph (A)(ii) with respect to 
such a refinancing issue, capital expenditures shall be 
taken into account only for purposes of determining 
whether the prior issues being redeemed qualified (and 
would have continued to qualify) under paragraph (1) (or 
the corresponding provision of prior law). 
"(F) 
AGGREGATE AMOUNT OF CAPITAL EXPENDITURES 
WHERE THERE IS URBAN DEVELOPMENT ACTION GRANT.—In 
i 
the case of any issue 95 percent or more of the net proceeds 
• 
of which are to be used to provide facilities with respect to 
J 
which an urban development action grant has been made 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2623 
» 
under section 119 of the Housing and Community Develop-
ment Act of 1974, capital expenditures of not to exceed 
$10,000,000 shall not be taken into account for purposes of 
applying subparagraph (A)(ii). 
"(5) ISSUES FOR RESIDENTIAL PURPOSES.—This subsection shall 
not apply to any bond issued as part of an issue 5 percent or 
more of the net proceeds of which are to be used directly or 
indirectly to provide residential real property for family units. 
"(6) LIMITATIONS ON TREATMENT OF BONDS AS PART OF THE 
SAME ISSUE.— 
"(A) IN GENERAL.—For purposes of this subsection, sepa-
rate lots of bonds which (but for this subparagraph) would 
be treated as part of the same issue shall be treated as 
separate issues unless the proceeds of such lots are to be 
used with respect to 2 or more facilities— 
"(i) which are located in more than 1 State, or 
"(ii) which have, or will have, as the same principal 
user the same person or related persons. 
"(B) FRANCHISES.—For purposes of subparagraph (A), a 
person (other than a governmental unit) shall be considered 
a principal user of a facility if such person (or a group of 
related persons which includes such person)— 
"(i) guarantees, arranges, participates in, or assists 
with the issuance (or pays any portion of the cost of 
' 
issuance) of any bond the proceeds of which are to be 
used to finance or refinance such facility, and 
"(ii) provides any property, or any franchise, trade-
mark, or trade name (within the meaning of section 
1253), which is to be used in connection with such 
facility. 
"(7) SUBSECTION NOT TO APPLY IF BONDS ISSUED WITH CERTAIN 
OTHER TAX-EXEMPT BONDS.—This subsection shall not apply to 
any bond issued as part of an issue (other than an issue to which 
paragraph (4) applies) if the interest on any other bond which is 
part of such issue is excluded from gross income under any 
provision of law other than this subsection. 
"(8) 
RESTRICTIONS ON FINANCING CERTAIN FACILITIES.—This 
subsection shall not apply to an issue if— 
"(A) more than 25 percent of the net proceeds of the issue 
are to be used to provide a facility the primary purpose of 
which is one of the following: retail food and beverage 
services, automobile sales or service, or the provision of 
recreation or entertainment; or 
"(B) any portion of the proceeds of the issue is to be used 
to provide the following: any private or commercial golf 
course, country club, massage parlor, tennis club, skating 
facility (including roller skating, skateboard, and ice skat-
ing), racquet sports facility (including any handball or 
racquetball court), hot tub facility, suntan facility, or race-
track. 
"(9) 
AGGREGATION OF 
ISSUES WITH 
RESPECT TO SINGLE 
PROJECT.—For purposes of this subsection, 2 or more issues part 
or all of the net proceeds of which are to be used with respect to 
a single building, an enclosed shopping mall, or a strip of offices, 
stores, or warehouses using substantial common facilities shall 
be treated as 1 issue (and any person who is a principal user 
100 STAT. 2624 
PUBLIC LAW 99-514—OCT. 22, 1986 
with respect to any of such issues shall be treated as a principal 
user with respect to the aggregated issue). 
"(10) AGGREGATE LIMIT PER TAXPAYER.— 
"(A) IN GENERAL.—This subsection shall not apply to any 
jt, 
issue if the aggregate authorized face amount of such issue 
./^ 
allocated to any test-period beneficiary (when increased by 
the outstanding tax-exempt facility-related bonds of such 
beneficiary) exceeds $40,000,000. 
"(B) OUTSTANDING TAX-EXEMPT FACILITY-RELATED BONDS.— 
"(i) IN GENERAL.—For purposes of applying subpara-
,r,a 
graph (A) with respect to any issue, the outstanding 
tax-exempt facility-related bonds of any person who is a 
test-period beneficiary with respect to such issue is the 
^. 
aggregate amount of tax-exempt bonds referred to in 
clause (ii)— 
"(I) which are allocated to such beneficiary, and 
•,, ^
^ 
' 
"(II) which are outstanding at the time of such 
"
* 
later issue (not including as outstanding any bond 
which is to be redeemed (other than in an advance 
refunding) from the net proceeds of the later issue). 
. ' -. 
"(ii) BONDS TAKEN INTO ACCOUNT.—For purposes of 
clause (i), the bonds referred to in this clause are— 
j , : 
, 
"(I) exempt facility bonds, qualified small issue 
i V r-'f, 
. 
bonds, and qualified redevelopment bonds, and 
.'^ / . ' 
"(II) industrial development bonds (as defined in 
section 103(b)(2), as in effect on the day before the 
,» ^ 
date of the enactment of the Tax Reform Act of 
^ 
1986) to which section 141(a) does not apply. 
"(C) ALLOCATION OF FACE AMOUNT OF ISSUE.— 
"(i) IN GENERAL.—Except as otherwise provided in 
,.. J 
.. 
regulations, the portion of the face amount of an issue 
allocated to any test-period beneficiary of a facility 
financed by the proceeds of such issue (other than an 
owner of such facility) is an amount which bears the 
same relationship to the entire face amount of such 
issue as the portion of such facility used by such bene-
ficiary bears to the entire facility. 
"(ii) OWNERS.—Except as otherwise provided in regu-
., 
lations, the portion of the face amount of an issue 
'" '-. . 
allocated to any test-period beneficiary who is an owner 
of a facility financed by the proceeds of such issue is an 
; ,' , ,, 
amount which bears the same relationship to the entire 
face amount of such issue as the portion of such facility 
owned by such beneficiary bears to the entire facility. 
' 
"(D) TEST-PERIOD BENEFICIARY.—For purposes of this para-
graph, except as provided in regulations, the term 'test-
period beneficiary' means any person who is an owner or a 
principal user of facilities being financed by the issue at 
,,, 
any time during the 3-year period beginning on the later 
^ 
of-
,, i .,. 
'^i^ ^^® ^^^^ such facilities were placed in service, or 
"(ii) the date of issue. 
"(E) TREATMENT OF RELATED PERSONS.—For purposes of 
this paragraph, all persons who are related (within the 
meaning of paragraph (3)) to each other shall be treated as 
1 person. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2625 
"(11) LIMITATION ON ACQUISITION OF DEPRECIABLE FARM PROP-
ERTY.— 
"(A) IN GENERAL.—This subsectionshall not apply to any 
issue if more than $250,000 of the net proceeds of such issue 
are to be used to provide depreciable farm property with 
respect to which the principal user is or will be the same 
person or 2 or more related persons. 
"(B) DEPRECIABLE FARM PROPERTY.—For purposes of this 
paragraph, the term 'depreciable farm property' means 
property of a character subject to the allowance for depre-
ciation which is to be used in a trade or business of farming. 
"(C) PRIOR ISSUES TAKEN INTO ACCOUNT.—In determining 
the amount of proceeds of an issue to be used as described 
in subparagraph (A), there shall be taken into account the 
aggregate amount of each prior issue to which paragraph 
(1) (or the corresponding provisions of prior law) applied 
which were or will be so used. 
"(12) TERMINATION DATES.— 
"(A) IN GENERAL.—This subsection shall not apply to— 
"(i) any bond (other than a borld described in clause 
(ii)) issued after December 31,1986, or 
"(ii) any bond issued to refund a bond issued on or 
before such date unless— 
"(I) the refunding bond has a maturity date not 
later than the maturity date of the refunded bond, 
"(II) the amount of the refunding bond does not 
exceed the outstanding amount of the refunded 
bond, 
"(III) the interest rate on the refunding bond is 
lower than the interest rate on the refunded bond, 
and 
"(IV) the net proceeds of the refunding bond are 
used to redeem the refunded bond not later than 90 
days after the date of the issuance of the refunding 
bond. 
i
^ 
"(B) BONDS ISSUED TO FINANCE MANUFACTURING FACILITIES 
AND FARM PROPERTY.—In the case of any bond issued as part 
of an issue 95 percent or more of the net proceeds of which 
are to be used to provide— 
"(i) any manufacturing facility, or 
"(ii) any land or property in accordance with section 
147(c)(2), 
subparagraph (A) shall be applied by substituting '1989' for 
'1986'. 
"(C) MANUFACTURING FACILITY.—For purposes of this 
paragraph, the term 'manufacturing facility' means any 
facility which is used in the manufacturing or production of 
tangible personal property (including the processing result-
ing in a change in the condition of such property). A rule 
similar to the rule of section 1420t>)(2) shall apply for pur-
poses of the preceding sentence. 
'Ot)) QUALIFIED STUDENT LOAN BOND.—For purposes of this part— 
"(1) IN GENERAL.—The term 'qualified student loan bond' 
means any bond issued as part of an issue the applicable 
percentage or more of the net proceeds of which are to be used 
directly or indirectly to make or finance student loans under— 
100 STAT. 2626 
PUBLIC LAW 99-514—OCT. 22, 1986 
.:X'''i U',- "(A) a program of general application to which the 
Higher Education Act of 1965 applies i
f
— 
%> 
"(i) limitations are imposed under the program on— 
»;. , 
"(I) the maximum amount of loans outstanding 
f 
, 
to any student, and 
-. ,,. ,i 
"(II) the maximum rate of interest payable on 
any loan, 
"(ii) the loans are directly or indirectly guaranteed 
. 
by the Federal Government, 
"(iii) the financing of loans under the program is not 
limited by Federal law to the proceeds of tax-exempt 
bonds, and 
•^ 
"(iv) special allowance payments under section 438 of 
^,i 
, 
the Higher Education Act of 1965— 
",...,., 
"(I) are authorized to be paid with respect to 
; J r 
loans made under the program, or 
• ' 
"(II) would be authorized to be made with respect 
to loans under the program if such loans were not 
» 
financed 
with the proceeds of tax-exempt bonds, or 
I 
"(B) a program of general application approved by the 
' 
State to which part B of title IV of the Higher Education 
. ^
^ 
Act of 1965 (relating to guaranteed student loans) does not 
* 
apply if no loan under such program exceeds the difference 
^ 
between the total cost of attendance and other forms of 
f
* 
student assistance (not including loans pursuant to section 
428B(a)(l) of such Act (relating to parent loans) or subpart I 
. 
; 
of part C of title VII of the Public Health Service Act 
^' 
(relating to student assistance)) for which the student bor-
rower may be eligible. A bond issued as part of an issue shall 
V *' 
be treated as a qualified student loan bond only if no bond 
'^''* 
which is part of such issue meets the private business tests 
of paragraphs (1) and (2) of section 141Cb). 
"(2) APPLICABLE PERCENTAGE.—For purposes of paragraph (1), 
the term 'applicable percentage' means— 
"(A) 90 percent in the case of the program described in 
paragraph (IXA), and 
"(B) 95 percent in the case of the program described in 
paragraph (IXB). 
"(3) STUDENT BORROWERS MUST BE RESIDENTS OF ISSUING STATE, 
ETC.—A student loan shall be treated as being made or financed 
under a program described in paragraph (1) with respect to an 
issue only if the student is— 
"(A) a resident of the State from which the volume cap 
under section 146 for such loan was derived, or 
"(B) enrolled at an educational institution located in such 
:rt3 
State. 
.* - 
"(4) DISCRIMINATION ON BASIS OF SCHOOL LOCATION NOT PER-
MITTED.—A program shall not be treated as described in para-
graph (1)(A) if such program discriminates on the basis of the 
location (in the United States) of the educational institution in 
which the student is enrolled. 
"(c) QUAUFIED REDEVELOPMENT BOND.—For purposes of this 
part— 
"(1) IN GENERAL.—The term 'qualified redevelopment bond' 
means any bond issued as part of an issue 95 percent or more of 
the net proceeds of which are to be used for 1 or more redevelop-
ment purposes in any designated blighted area. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2627 
"(2) ADDITIONAL REQUIREMENTS.—A bond shall not be treated 
as a qualified redevelopment bond unless— 
"(A) the issue described in paragraph (1) is issued pursu-
ant to— 
"(i) a State law which authorizes the issuance of such 
bonds for redevelopment purposes in blighted areas, 
and 
"(ii) a redevelopment plan which is adopted before 
such issuance by the governing body described in para-
graph (4XA) with respect to the designated blighted 
area, 
"(BXi) the payment of the principal and interest on such 
f
*
'
- 
issue is primarily secured by taxes of general applicability 
imposed by a general purpose governmental unit, or 
"(ii) any incresise in real property tax revenues (attrib-
utable to increases in assessed value) by reason of the 
carrying out of such purposes in such area is reserved 
, 
exclusively for debt service on such issue (and similar 
issues) to the extent such increase does not exceed such debt 
r 
service, 
d:u"r 
"(C) each interest in real property located in such area— 
"(i) which is acquired by a governmental unit with 
the proceeds of the issue, and 
"(ii) which is transferred to a person other than a 
governmental unit, 
is transferred for fair market value, 
... 
"(D) the financed area with respect to such issue meets 
the no additional charge requirements of paragraph (5), and 
"(E) the use of the proceeds of the issue meets the 
requirements of paragraph (6). 
"(3) REDEVELOPMENT PURPOSES.—For purposes of paragraph 
I 
(1)-
"(A) IN GENERAL.—The term 'redevelopment purposes' 
means, with respect to any designated blighted area— 
ii) 4
J
C
, 
"(i) the acquisition (by a governmental unit having 
the power to exercise eminent domain) of real property 
located in such area, 
"(ii) the clearing and preparation for redevelopment 
of land in such area which was acquired by such 
governmental unit, 
"(iii) the rehabilitation of real property located in 
jj 
such area which was acquired by such governmental 
,i 
unit, and 
"(iv) the relocation of occupants of such real prop-
s'; ,v.. ... -
•
- 
erty. 
^ 
"(B) NEW CONSTRUCTION NOT PERMITTED.—The term 're-
^. 
development purposes' does not include the construction 
(other than the rehabilitation) of any property or the 
enlargement of an existing building. 
"(4) DESIGNATED BUGHTED AREA.—For purposes of this subsec-
tion— 
"(A) IN GENERAL.—The term 'designated blighted area' 
means any blighted area designated by the governing body 
of a local general purpose governmental unit in the jurisdic-
tion of which such area is located. 
j;^ 
"(B) BUGHTED AREA.—The term 'blighted area' means 
any area which the governing body described in subpara-
100 STAT. 262§ 
PUBLid LAW 9^-514—OCT. 22, 1986 
J-' ; . ' 
graph (A) determines to be a blighted area on the basis of 
the substantial presence of factors such as excessive vacant 
,r '. 
land on which structures were previously located, aban-
doned or vacant buildings, substandard structures, vacan-
> cies, and delinquencies in payment of real property taxes. 
"(C) DESIGNATED AREAS MAY NOT EXCEED 20 PERCENT OF 
TOTAL ASSESSED VALUE OF REAL PROPERTY IN GOVERNMENT'S 
JURISDICTION.— 
"(i) IN GENERAL.—An area may be designated by a 
, 
..-- 
governmental unit as a blighted area only if the des-
ignation percentage with respect to such area, when 
added to the designation percentages of all other des-
ignated blighted areas within the jurisdiction of such 
governmental unit, does not exceed 20 percent. 
i''. 
' 
"(ii) DESIGNATION PERCENTAGE.—For purposes of this 
subparagraph, the term 
'designation 
percentage' 
means, with respect to any area, the percentage (deter-
mined at the time such area is designated) which the 
assessed value of real property located in such area is 
of the total assessed value of all real property located 
> d \,v within the jurisdiction of the governmental unit which 
designated such area, 
"(iii) EXCEPTION WHERE BONDS NOT OUTSTANDING.— 
f
" 
' The designation percentage of a previously designated 
blighted area shall not be taken into account under 
clause (i) if no qualified redevelopment bond (or similar 
bond) is or will be outstanding with respect to such 
area. 
.
>
v 
.-. 
"(D) MINIMUM DESIGNATED AREA.— 
"(i) IN GENERAL.—Except as provided in clause (ii), an 
1
^
*
^ 
.1 
area shall not be treated as a designated blighted area 
for purposes of this subsection unless such area is 
'• ^ 
contiguous and compact and its area equals or exceeds 
100 acres. 
"(ii) 10-ACRE MINIMUM IN CERTAIN CASES.—Clause (i) 
shall be applied by substituting *10 acres' for '100 acres' 
if not more than 25 percent of the financed area is to be 
q * 
provided (pursuant to the issue and all other such 
'' " - ', •' 
issues) to 1 person. For purposes of the preceding sen-
tence, all related persons (as defined in subsection 
(aX3)) shall be treated as 1 person. For purposes of this 
clause, an area provided to a developer on a short-term 
interim basis shall not be treated as provided to such 
H 
developer. 
"(5) No ADDITIONAL CHARGE REQUIREMENTS.—The financed 
area with respect to any issue meets the requirements of this 
paragraph if, while any bond which is part of such issue is 
outstanding— 
"(A) no owner or user of property located in the financed 
-m-i. 
area is subject to a charge or fee which similarly situated 
owners or users of comparable property located outside 
such area are not subject, and 
"(B) the assessment method or rate of real property taxes 
with respect to property located in the financed area does 
not differ from the assessment method or rate of real 
' ! 
property taxes with respect to comparable property located 
outside such area. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2629 
For purposes of the preceding sentence, the term 'comparable 
property' means property which is of the same type as the 
property to which it is being compared and which is located 
within the jurisdiction of the designating governmental unit. 
"(6) USE OF PROCEEDS REQUIREMENTS.—The use of the proceeds 
of an issue meets the requirements of this paragraph i
f
— 
"(A) not more than 25 percent of the net proceeds of such 
issue are to be used to provide (including the provision of 
-i. 
land for) facilities described in subsection (a)(8) or section 
147(e), and 
"(B) no portion of the proceeds of such issue is to be used 
to provide (including the provision of land for) any private 
or commercial golf course, country club, massage parlor, 
hot tub facility, suntan facility, racetrack or other facility 
used for gambling, or any store the principal business of 
which is the sale of alcoholic beverages for consumption off 
premises. 
"(7) FINANCED AREA.—For purposes of this subsection, the 
term 'financed area' means, with respect to any issue, the 
portion of the designated blighted area with respect to which 
the proceeds of such issue are to be used. 
"(8) RESTRICTION ON ACQUISITION OF LAND NOT TO APPLY.— 
Section 147(c) (other than paragraphs (1)(B) and (2) thereof) shall 
not apply to any qualified redevelopment bond. 
"SEC. 14.5. QUALIFIED .501(c)(3) BOND. 
"(a) IN GENERAL.—For purposes of this part, except as otherwise 
provided in this section, the term 'qualified 501(c)(3) bond' means 
any private activity bond issued as part of an issue i
f
— 
"(1) all property which is to be provided by the net proceeds of 
the issue is to be owned by a 501(c)(3) organization or a govern-
mental unit, and 
"(2) such bond would not be a private activity bond i
f
— 
"(A) 501(c)(3) organizations were treated as governmental 
units with respect to their activities which do not constitute 
unrelated trades or businesses, determined by applying 
section 513(a), and 
"(B) paragraphs (1) and (2) of section 141(b) were applied 
by substituting '5 percent' for '10 percent' each place it 
appears and by substituting 'net proceeds' for 'proceeds' 
each place it appears. 
"(b) $150,000,000 LIMITATION ON BONDS OTHER THAN HOSPITAL 
BONDS.— 
"(1) IN GENERAL.—A bond (other than a qualified hospital 
bond) shall not be treated as a qualified 501(c)(3) bond if the 
aggregate authorized face amount of the issue (of which such 
bond is a part) allocated to any 501(c)(3) organization which is a 
test-period beneficiary (when increased by the outstanding tax-
exempt nonhospital bonds of such organization) exceeds 
$150,000,000. 
"(2) OUTSTANDING TAX-EXEMPT NONHOSPITAL BONDS.— 
"(A) IN GENERAL.—For purposes of applying paragraph (1) 
with respect to any issue, the outstanding tax-exempt 
nonhospital bonds of any organization which is a test-period 
beneficiary with respect to such issue is the aggregate 
;,'i 
amount of tax-exempt bonds referred to in subparagraph 
(B)-
100 STAT. 2630 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(i) which are allocated to such organization, and 
:.-' • 
' 
"(ii) which are outstanding at the time of such later 
b", 
issue (not including as outstanding any bond which is 
J; . 
- 
to be redeemed (other than in an advance refunding) 
from the net proceeds of the later issue). 
"(B) 
BONDS TAKEN INTO ACCOUNT.—For purposes 
of 
subparagraph (A), the bonds referred to in this subpara-
graph are— 
"(i) any qualified 501(c)(3) bond other than a qualified 
hospital bond, and 
f - 
"(ii) any bond to which section 141(a) does not apply 
if— 
"(I) such bond would have been an industrial 
development bond (as defined in section 103(b), as 
in effect on the day before the date of the enact-
' 
• 
ment of the Tax Reform Act of 1986) if 501(c)(3) 
organizations were not exempt persons, and 
*:!.' 
"(II) such bond was not described in paragraph 
* 
. 
(4), (5), or (6) of such section 103(b) (as in effect on 
;: f
. 
' 
the date such bond was issued). 
"(C) ONLY NONHOSPITAL PORTION OF BONDS TAKEN INTO 
ACCOUNT.— 
• .... ' 
"(i) IN GENERAL.—A bond shall be taken into account 
under subparagraph (B)(ii) only to the extent that the 
proceeds of the issue of which such bond is a part are 
not used with respect to a hospital. 
'^BJvrfQfli 
"(ii) SPECIAL RULE.—If 90 percent or more of the net 
u« • 
proceeds of an issue are used with respect to a hospital, 
no bond which is part of such issue shall be taken into 
* 
tfi 
account under subparagraph (B)(ii). 
"(3) AGGREGATION RULE.—For purposes of this subsection, 2 or 
more organizations under common management or control shall 
be treated as 1 organization. 
"(4) ALLOCATION OF FACE AMOUNT OF ISSUE; TEST-PERIOD BENE-
FICIARY.—Rules similar to the rules of subparagraphs (C) and 
(D) of section 144(a)(10) shall apply for purposes of this sub-
section. 
• "(c) QUALIFIED HOSPITAL BOND.—For purposes of this section, the 
term 'qualified hospital bond' means any bond issued as part of an 
issue 95 percent or more of the net proceeds of which are to be used 
with respect to a hospital. 
"(d) ELECTION OUT.—This section shall not apply to an issue if— 
"(1) the issuer elects not to have this section apply to such 
issue, and 
"(2) such issue is an issue of exempt facility bonds, or quali-
fied redevelopment bonds, to which section 146 applies. 
"SEC. 146. VOLUME CAP. 
"(a) GENERAL RULE.—A private activity bond issued as part of an 
issue meets the requirements of this section if the aggregate face 
amount of the private activity bonds issued pursuant to such issue, 
when added to the aggregate face amount of tax-exempt private 
activity bonds previously issued by the issuing authority during the 
calendar year, does not exceed such authority's volume cap for such 
calendar year. 
"Ot)) VOLUME CAP FOR STATE AGENCIES.—For purposes of this 
section— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2631 
"(1) IN GENERAL.—The volume cap for any agency of the State 
authorized to issue tax-exempt private activity bonds for any 
calendar year shall be 50 percent of the State ceiling for such 
calendar year. 
"(2) SPECIAL RULE WHERE STATE HAS MORE THAN i AGENCY.—If 
more than 1 agency of the State is authorized to issue tax-
exempt private activity bonds, all such agencies shall be treated 
as a single agency. 
"(c) VOLUME CAP FOR OTHER ISSUERS.—For purposes of this sec-
tion— 
"(1) IN GENERAL.—The volume cap for any issuing authority 
(other than a State agency) for any calendar year shall be an 
amount which bears the same ratio to 50 percent of the State 
' 
ceiling for such calendar year as— 
'*^ 
"(A) the population of the jurisdiction of such issuing 
authority, bears to 
"^ 
"(B) the population of the entire State. 
•' 
"(2) OVERLAPPING JURISDICTIONS.—For purposes of paragraph 
, 
(IXA), if an area is within the jurisdiction of 2 or more govern-
^' 
mental units, such area shall be treated as only within the 
jurisdiction of the unit having jurisdiction over the smallest 
' 
geographical area unless such unit agrees to surrender all or 
part of such jurisdiction for such calendar year to the unit with 
overlapping jurisdiction which has the next smallest geographi-
cal area. 
"(d) STATE CEIUNG.—For purposes of this section— 
"(1) IN GENERAL.—The State ceiling applicable to any State 
for any calendar year shall be the greater of— 
"(A) an amount equal to $75 multiplied by the State 
population, or 
"(B) $250,000,000. 
Subparagraph (B) shall not apply to any possession of the 
United States. 
"(2) ADJUSTMENT AFTER 1987.—In the case of calendar years 
t. 
after 1987, paragraph (1) shall be applied by substituting— 
b^. .. 
"(A) '$50' for '$75', and 
"(B) '$150,000,000' for '$250,000,000'. 
"(3) SPECIAL RULE FOR STATES WITH CONSTITUTIONAL HOME 
RULE CITIES.—For purposes of this section— 
"(A) IN GENERAL.—The volume cap for any constitutional 
ffJi V 
home rule city for any calendar year shall be determined 
under paragraph (1) of subsection (c) by substituting '100 
: - 
percent' for '50 percent'. 
"(B) COORDINATION WITH OTHER ALLOCATIONS.—In the 
case of any State which contains 1 or more constitutional 
home rule cities, for purposes of applying subsections (b) 
and (c) with respect to issuing authorities in such State 
other than constitutional home rule cities, the State ceiling 
for any calendar year shall be reduced by the aggregate 
volume caps determined for such year for all constitutional 
.f.j.f 
home rule cities in such State. 
"(C) CONSTITUTIONAL HOME RULE CITY.—For purposes of 
this section, the term 'constitutional home rule city means, 
:;or'* 
with respect to any calendar year, any political subdivision 
of a State which, under a State constitution which was 
- . 
adopted in 1970 and effective on July 1,1971, had home rule 
powers on the 1st day of the calendar year. 
100 STAT. 2632 
PUBLIC LAW 99-514—OCT. 22, 1986 
-'- 
"(4) SPECIAL RULE FOR POSSESSIONS WITH POPULATIONS OF LESS 
THAN THE POPULATION OF THE LEAST POPULOUS STATE.— 
"(A) IN GENERAL.—If the population of any possession of 
the United States for any calendar year is less than the 
i* " i 
population of the least populous State (other than a posses-
sion) for such calendar year, the limitation under para-
graph (1)(A) shall not be less than the amount determined 
under subparagraph (B) for such calendar year. 
'•mi . X 
''(g) LIMITATION.—The limitation determined under this 
, 
4i 
subparagraph, with respect a possession, for any calendar 
' 
year is an amount equal to the product o
f
— 
"(i) the fraction— 
"(I) the numerator of which is the amount ap-
,. ,. 
.. 
, 
plicable under paragraph (1)(B) for such calendar 
'^' " '
*
•
* 
year, and 
"(II) the denominator of which is the State popu-
lation of the least populous State (other than a 
possession) for such calendar year, and 
" , 
"(ii) the population of such possession for such cal-
endar year. 
"(e) STATE MAY PROVIDE FOR DIFFERENT ALLOCATION.—For pur-
poses of this section— 
"(1) IN GENERAL.—Except as provided in paragraph (3), a 
State may, by law provide a different formula for allocating the 
State ceiling among the governmental units (or other authori-
. . 
ties) in such State having authority to issue tax-exempt private 
activity bonds. 
"(2) INTERIM AUTHORITY FOR GOVERNOR.— 
"(A) IN GENERAL.—Except as otherwise provided in para-
graph (3), the Governor of any State may proclaim a dif-
.„. 
, 
ferent formula for allocating the State ceiling among the 
governmental units (or other authorities) in such State 
:^'./.. 
having authority to issue private activity bonds. 
-t 
"(B) TERMINATION OF AUTHORITY.—The authority pro-
vided in subparagraph (A) shall not apply to bonds issued 
after the earlier of— 
yv, -' 
"(i) the last day of the 1st calendar year after 1986 
during which the legislature of the State met in regular 
session, or 
"(ii) the effective date of any State legislation with 
respect to the allocation of the State ceiling. 
"(3) STATE MAY NOT ALTER ALLOCATION TO CONSTITUTIONAL 
HOME RULE CITIES.—Except as Otherwise provided in a State 
, 
constitutional amendment (or law changing the home rule 
provision adopted in the manner provided by the State constitu-
tion), the authority provided in this subsection shall not apply 
to that portion of the State ceiling which is allocated to any 
constitutional home rule city in the State unless such city 
agrees to such different allocation. 
"if) ELECTIVE CARRYFORWARD OF UNUSED LIMITATION FOR SPECI-
FIED PURPOSE.— 
"(1) IN GENERAL.—If— 
"(A) an issuing authority's volume cap for any calendar 
year after 1985, exceeds 
•''*'» -'''•' 
"(B) the aggregate amount of tax-exempt private activity 
bonds issued during such calendar year by such authority. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2633 
such authority may elect to treat all (or any portion) of such 
excess as a carryforward for 1 or more carryforward purposes. 
"(2) ELECTION MUST IDENTIFY PURPOSE.—In any election under 
paragraph (1), the issuing authority shall— 
i 
"(A) identify the purpose for which the carryforward is 
elected, and 
"(B) specify the portion of the excess described in para-
graph (1) which is to be a carryforward for each such 
purpose. 
"(3) USE OF CARRYFORWARD.— 
t 
"(A) IN GENERAL.—If any issuing authority elects a 
carryforward under paragraph (1) with respect to any 
i 
carryforward purpose, any private activity bonds issued by 
such authority with respect to such purpose during the 3 
ii 
calendar years following the calendar year in which the 
carryforward arose shall not be taken into account under 
'
« 
subsection (a) to the extent the amount of such bonds does 
not exceed the amount of the carryforward elected for such 
purpose. 
"(B) 
ORDER 
IN 
WHICH 
CARRYFORWARD 
USED.— 
Canyforwards elected with respect to any purpose shall be 
T 
used in the order of the calendar years in which they arose. 
"(4) ELECTION.—Any election under this paragraph (and any 
identification or specification contained therein), once made, 
^ shall be irrevocable. 
"(5) CARRYFORWARD PURPOSE.—The term 'carryforward pur-
pose' means— 
"(A) the purpose of issuing bonds referred to in one of the 
clauses of section 141(dXlXA), 
"(B) the purpose of issuing qualified mortgage bonds or 
''" 
mortgage credit certificates, 
^ 
"(C) the purpose of issuing qualified student loan bonds, 
^ 
and 
"(D) the purpose of issuing qualified redevelopment 
bonds. 
"(g) EXCEPTION FOR CERTAIN BONDS.—Only for purposes of this 
section, the term 'private activity bond' shall not include— 
"(1) any qualified veterans' mortgage bond, 
^ 
"(2) any qualified 501(cX3) bond, and 
"(3) any exempt facility bond issued as part of an issue 
described in paragraph (1) or (2) of section 142(a) (relating to 
airports and docks and wharves). 
"(h) EXCEPTION FOR GOVERNMENT-OWNED SOUD WASTE DISPOSAL 
FACIUTIES.— 
"(1) IN GENERAL.—Only for purposes of this section, the term 
'private activity bond' shall not include any exempt facility 
f
y bond described in section 142(aX6) which is issued as part of an 
!,' issue if all of the property to be financed by the net proceeds of 
such issue is to be owned by a governmental unit. 
"(2) 
SAFE 
HARBOR FOR DETERMINATION OF GOVERNMENT 
OWNERSHIP.—In determining ownership for purposes of para-
graph (1), section 1420t>XlXB) shall apply, except that a lease 
term shall be treated eis satisfying clause (ii) thereof if it is not 
more than 20 years, 
"(i) TREATMENT OF REFUNDING ISSUES.—For purposes of the 
volume cap imposed by this section— 
100 STAT. 2634 
PUBLIC LAW 99-514—OCT. 22, 1986 
'• 
"(1) IN GENERAL.—The term 'private activity bond' shall not 
.f- include any bond which is issued to refund another bond to the 
".- extent that the amount of such bond does not exceed the 
outstanding amount of the refunded bond. 
r 
"(2) SPECIAL RULES FOR STUDENT LOAN BONDS.—In the case of 
any qualified student loan bond, paragraph (1) shall apply only 
.. if the maturity date of the refunding bond is not later than the 
f
f later of— 
"(A) the maturity date of the bond to be refunded, or 
"(B) the date 17 years after the date on which the re-
» '" funded bond was issued (or in the case of a series of 
V 
refundings, the date on which the original bond was issued). 
"(3) SPECIAL RULES FOR QUALIFIED MORTGAGE BONDS.—In the 
b case of any qualified mortgage bond, paragraph (1) shall apply 
s only if the maturity date of the refunding bond is not later than 
- the later of— 
; 
"(A) the maturity date of the bond to be refunded, or 
"(B) the date 32 years after the date on which the re-
funded bond was issued (or in the case of a series of 
refundings, the date on which the original bond was issued). 
cj 
"(4) EXCEPTION FOR ADVANCE REFUNDING.—This subsection 
", shall not apply to any bond issued to advance refund another 
bond. 
"(j) POPULATION.—For purposes of this section, determinations of 
the population of any State (or issuing authority) shall be made with 
respect to any calendar year on the basis of the most recent census 
estimate of the resident population of such State (or issuing author-
ity) released by the Bureau of Census before the beginning of such 
calendar year, 
"(k) FACILITY MUST BE LOCATED WITHIN STATE.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), no 
,
_
^ portion of the State ceiling applicable to any State for any 
'" calendar year may be used with respect to financing for a 
, facility located outside such State. 
"(2) EXCEPTION FOR CERTAIN FACILITIES WHERE STATE WILL GET 
PROPORTIONATE SHARE OF BENEFITS.—Paragraph (1) shall not 
^' apply to any exempt facility bond described in paragraph (4), (5), 
(6), or (10) of section 142(a) if the issuer establishes that the 
State's share of the use of the facility (or its output) will equal 
or exceed the State's share of the private activity bonds issued 
to finance the facility. 
"(1) ISSUER OF QUALIFIED SCHOLARSHIP FUNDING BONDS.—In the 
case of a qualified scholarship funding bond, such bond shall be 
treated for purposes of this section as issued by a State or local 
issuing authority (whichever is appropriate). 
"(m) TREATMENT OF AMOUNTS ALLOCATED TO PRIVATE ACTIVITY 
PORTION OF GOVERNMENT USE BONDS.— 
"(1) IN GENERAL.—The volume cap of an issuer shall be 
^
^ reduced by the amount allocated by the issuer to an issue under 
section 141(b)(5). 
T 
"(2) ADVANCE REFUNDINGS.—Except as otherwise provided by 
'i the Secretary, any advance refunding of any part of an issue to 
<» which an amount was allocated under section 141(b)(5) (or would 
3
* have been allocated if such section applied to such issue) shall 
be taken into account under this section to the extent of the 
&'• amount of the volume cap which was (or would have been) so 
allocated. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2635 
"(n) REDUCTION FOR MORTGAGE CREDIT CERTIFICATES, ETC.—The 
volume cap of any issuing authority for any calendar year shall be 
reduced by the sum o
f
— 
"(1) the amount of qualified mortgage bonds which such 
authority elects not to issue under section 25(cX2XAXii) during 
such year, plus 
"(2) the amount of any reduction in such ceiling under section 
25(0 applicable to such authority for such year. 
"SEC. 147. OTHER REQUIREMENTS APPLICABLE TO CERTAIN PRIVATE 
ACTIVITY BONDS. 
"(a) SUBSTANTIAL USER REQUIREMENT.— 
"(1) IN GENERAL.—Except as provided in subsection (h), a 
private activity bond shall not be a qualified bond for any period 
during which it is held by a person who is a substantial user of 
the facilities or by a related person of such a substantial user. 
"(2) RELATED PERSON.—For purposes of paragraph (1), the 
following shall be treated as related persons— 
"(A) 2 or more persons if the relationship between such 
persons would result in a disallowance of losses under 
section 267 or 707(b), 
"(B) 2 or more persons which are members of the same 
,^, 
controlled group of corporations (as defined in section 
4,., 
1563(a), except that 'more than 50 percent' shall be sub-
stituted for 'at least 80 percent' each place it appears 
therein), 
, 
"(C) a partnership and each of its partners (and their 
spouses and minor children), and 
"(D) an S corporation and each of its shareholders (and 
their spouses and minor children). 
"(b) MATURITY MAY NOT EXCEED 120 PERCENT OF ECONOMIC 
LIFE.— 
"(1) GENERAL RULE.—Except as provided in subsection (h), a 
private activity bond shall not be a qualified bond if it is issued 
as part of an issue and— 
"(A) the average maturity of the bonds issued as part of 
such issue, exceeds 
"(B) 120 percent of the average reasonably expected eco-
nomic life of the facilities being financed with the net 
proceeds of such issue. 
"(2) DETERMINATION OF AVERAGES.—For purposes of para-
graph (D— 
"(A) the average maturity of any issue shall be deter-
mined by taking into account the respective issue prices of 
the bonds issued as part of such issue, and 
"(B) the average reasonably expected economic life of the 
facilities being financed with any issue shall be determined 
by taking into account the respective cost of such facilities. 
"(3) SPECIAL RULES.— 
., 
"(A) DETERMINATION OF ECONOMIC LIFE.—For purposes of 
this subsection, the reasonably expected economic life of 
any facility shall be determined as of the later of^ 
"(i) the date on which the bonds are issued, or 
"(ii) the date on which the facility is placed in service 
(or expected to be placed in service). 
"(B) TREATMENT OF LAND.— 
100 STAT. 2636 
PUBLIC LAW 99-514—OCT. 22, 1986 
sj;"^ 
.. 
"(i) LAND NOT TAKEN INTO ACCOUNT.—Except as pro-
•4 iif. • 
vided in clause (ii), land shall not be taken into account 
under paragraph (1)(B). 
"(ii) ISSUES WHERE 25 PERCENT OR MORE OF PROCEEDS 
, 
• •,..' 
USED TO FINANCE LAND.—If 25 percent or more of the 
net proceeds of any issue is to be used to finance land, 
w •*""V_ such land shall be taken into account under paragraph 
(1)(B) and shall be treated as having an economic life of 
30 years. 
"(4) 
SPECIAL 
RULE 
FOR POOLED 
FINANCING 
OF 
501(C)(3) 
ORGANIZATION.— 
"(A) IN GENERAL.—At the election of the issuer, a quali-
fied 501(c)(3) bond shall be treated as meeting the require-
i 
ments of paragraph (1) if such bond meets the requirements 
•
* 
of subparagraph (B). 
•^- 
"(B) REQUIREMENTS.—A qualified 501(c)(3) bond meets the 
***' 
requirements of this subparagraph if— 
"(i) 95 percent or more of the net proceeds of the 
c'jir. 
issue of which such bond is a part are to be used to 
"
^ '^'" 
make or finance loans to 2 or more 501(cX3) organiza-
tions or governmental units for acquisition of property 
"'^-J 
to be used by such organizations, 
•'*'*'• 
"(ii) each loan described in clause (i) satisfies the 
''" 
requirements of paragraph (1) (determined by treating 
*••"•''"' 
each loan as a separate issue), 
. J 
"(iii) before such bond is issued, a demand survey was 
•.!**n 
conducted which shows a demand for financing greater 
than an amount equal to 120 percent of the lendable 
• 'lu. f', 
proceeds of such issue, and 
"(iv) 95 percent or more of the net proceeds of such 
' ' 
issue are to be loaned to 501(c)(3) organizations or 
governmental units within 1 year of issuance and, to 
,' 
the extent there are any unspent proceeds after such 
' *''"' 
1-year period, bonds issued as part of such issue are to 
be redeemed as soon as possible thereafter (and in no 
"'• 
event later than 18 months after issuance). 
A bond shall not meet the requirements of this subpara-
^ 
graph if the maturity date of any bond issued as part of 
' ' 
such issue is more than 30 years after the date on which the 
bond was issued (or, in the case of a refunding or series of 
refundings, the date on which the original bond was issued). 
"(5) SPECIAL RULE FOR CERTAIN FHA INSURED LOANS.—Para-
graph (1) shall not apply to any bond issued as part of an issue 
95 percent or more of the net proceeds of which are to be used to 
finance mortgage loans insured under FHA 242 or under a 
similar Federal Housing Administration program (as in effect 
on the date of the enactment of the Tax Reform Act of 1986) 
where the loan term approved by such Administration plus the 
maximum maturity of debentures which could be issued by such 
Administration in satisfaction of its obligations exceeds the 
term permitted under paragraph (1). 
"(c) LIMITATION ON U S E FOR LAND ACQUISITION.— 
"(1) IN GENERAL.—Except as provided in subsection (h), a 
private activity bond shall not be a qualified bond if— 
"(A) it is issued as part of an issue and 25 percent or more 
of the net proceeds of such issue are to be used (directly or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2637 
* r
* 
indirectly) for the acquisition of land (or an interest 
therein), or 
"(B) any portion of the proceeds of such issue is to be used 
(directly or indirectly) for the acquisition of land (or an 
vr 
interest therein) to be used for farming purposes. 
"(2) EXCEPTION FOR FIRST-TIME FARMERS.— 
"(A) IN GENERAL.—If the requirements of subparagraph 
} 
(B) are met with respect to any land, paragraph (1) shall not 
apply to such land, and subsection (d) shall not apply to 
property to be used thereon for farming purposes, but only 
to the extent of expenditures (financed with the proceeds of 
the issue) not in excess of $250,000. 
,, 
"(B) ACQUISITION BY FIRST-TIME FARMERS.—The require-
ments of this subparagraph are met with respect to any 
land i
f
— 
"(i) such land is to be used for farming purposes, and 
"(ii) such land is to be acquired by an individual who 
is a first-time farmer, who will be the principal user of 
such land, and who will materially and substantially 
participate on the farm of which such land is a part in 
the operation of such farm. 
"(C) FIRST-TIME FARMER.—For purposes of this para-
graph— 
"(i) IN GENERAL.—The term 'first-time farmer' means 
any individual if such individual— 
"(I) has not at any time had any direct or in-
direct ownership interest in substantial farmland 
in the operation of which such individual materi-
ihii-i 
ally participated, and 
"(II) has not received financing under this para-
1 
graph in an amount which, when added to the 
financing to be provided under this paragraph, 
exceeds $250,000. 
"(ii) AGGREGATION RULES.—Any ownership or mate-
rial participation, or financing received, by an individ-
j; 
ual's spouse or minor child shall be treated as owner-
ship and material participation, or financing received, 
aidt 
by the individual, 
"(iii) INSOLVENT FARMER.—For purposes of clause (i), 
;, 
farmland which was previously owned by the individ-
ual and was disposed of while such individual was 
insolvent shall be disregarded if section 108 applied to 
indebtedness with respect to such farmland. 
"(D) FARM.—For purposes of this paragraph, the term 
'farm' has the meaning given such term by section 
6420(cX2). 
"(E) SUBSTANTIAL FARMLAND.—For purposes of this para-
graph, the term 'substantial farmland' means any parcel of 
land unless— 
"(i) such parcel is smaller than 15 percent of the 
median size of a farm in the county in which such 
parcel is located, and 
"(ii) the fair market value of the land does not at any 
time while held by the individual exceed $125,000. 
"(F) USED EQUIPMENT UMITATION.—For purposes of this 
paragraph, in no event may the amount of financing pro-
100 STAT. 2638 
PUBLIC LAW 99-514—OCT. 22, 1986 
^iXi 
vided by reason of this paragraph to a first-time farmer for 
personal property— 
b-i 
"(i) of a character subject to the allowance for depre-
G-- 
ciation, 
"(ii) the original use of which does not begin with 
such farmer, and 
"i ' 4
> 
"(iii) which is to be used for farming purposes, 
exceed $62,500. A rule similar to the rule of subparagraph 
(C)(ii) shall apply for purposes of the preceding sentence. 
"(3) EXCEPTION FOR CERTAIN LAND ACQUIRED FOR ENVIRON-
MENTAL PURPOSES, ETC.—Any land acquired by a governmental 
unit (or issuing authority) in connection with an airport, mass 
commuting facility, dock, or wharf shall not be taken into 
account under paragraph (1) if— 
"(A) such land is acquired for noise abatement or wetland 
preservation, or for future use as an airport, mass commut-
ing facility, dock, or wharf, and 
"(B) there is not other significant use of such land. 
"(d) ACQUISITION OF EXISTING PROPERTY NOT PERMITTED.— 
"(1) IN GENERAL.—Except as provided in subsection (h), a 
private activity bond shall not be a qualified bond if issued as 
\ 
part of an issue and any portion of the net proceeds of such 
issue is to be used for the acquisition of any property (or an 
interest therein) unless the 1st use of such property is pursuant 
to such acquisition. 
"(2) EXCEPTION FOR CERTAIN REHABILITATIONS.—Paragraph (1) 
shall not apply with respect to any building (and the equipment 
therefor) i
f
— 
"(A) the rehabilitation expenditures with respect to such 
^•'*"' building, equal or exceed 
"(B) 15 percent of the portion of the cost of acquiring such 
building (and equipment) financed with the net proceeds of 
the issue. 
A rule similar to the rule of the preceding sentence shall apply 
in the case of structures other than a building except that 
subparagraph (B) shall be applied by substituting '100 percent' 
for '15 percent'. 
"(3) REHABILITATION EXPENDITURES.—For purposes of this 
subsection— 
"(A) IN GENERAL.—Except as provided in this paragraph, 
the term 'rehabilitation expenditures' means any amount 
c 
properly chargeable to capital account which is incurred by 
the person acquiring the building for property (or additions 
or improvements to property) in connection with the re-
habilitation of a building. In the case of an integrated 
operation contained in a building before its acquisition, 
•BZkt'. such term includes rehabilitating existing equipment in 
• ' • 
such building or replacing it with equipment having 
substantially the same function. For purposes of this 
subparagraph, any amount incurred by a successor to the 
person acquiring the building or by the seller under a sales 
contract with such person shall be treated as incurred by 
such person. 
"(B) CERTAIN EXPENDITURES NOT INCLUDED.—The term 
'rehabilitation expenditures' does not include any expendi-
< ^
^
? 
ture described in section 48(g)(2)(B). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2639 
i 
"(C) 
PERIOD DURING WHICH EXPENDITURES MUST BE IN-
CURRED.—The term 'rehabilitation expenditures' shall not 
include any amount which is incurred after the date 2 years 
after the later o
f
— 
"(i) the date on which the building was acquired, or 
"(ii) the date on which the bond was issued. 
"(4) SPECIAL RULE FOR CERTAIN PROJECTS.—In the case of a 
project involving 2 or more buildings, this subsection shall be 
applied on a project basis. 
"(e) No PORTION OF BONDS MAY BE ISSUED FOR SKYBOXES, AIR-
PLANES, GAMBLING ESTABLISHMENTS, ETC.—A private activity bond 
shall not be treated as a qualified bond if issued as part of an issue 
and any portion of the proceeds of such issue is to be used to provide 
any airplane, skybox or other private luxury box, health club facil-
ity, facility primarily used for gambling, or store the principal 
business of which is the sale of alcoholic beverages for consumption 
off premises. 
"(f) PUBLIC APPROVAL REQUIRED FOR PRIVATE ACTIVITY BONDS.— 
"(1) IN GENERAL.—A private activity bond shall not be a 
qualified bond unless such bond satisfies the requirements of 
paragraph (2). 
"(2) PUBLIC APPROVAL REQUIREMENT.— 
"(A) IN GENERAL.—A bond shall satisfy the requirements 
of this paragraph if such bond is issued as a part of an issue 
which has been approved by— 
fi - 
"(i) the governmental unit— 
"(I) which issued such bond, or 
'
1
= 
"(II) on behalf of which such bond was issued, 
and 
«i 
"(ii) each governmental unit having jurisdiction over 
"•€£ 
the area in which any facility, with respect to which 
financing is to be provided from the net proceeds of 
such issue, is located (except that if more than 1 
governmental unit within a State has jurisdiction over 
the entire area within such State in which such facility 
is located, only 1 such unit need approve such issue). 
"(B) APPROVAL BY A GOVERNMENTAL UNIT.—For purposes 
of subparagraph (A), an issue shall be treated as having 
been approved by any governmental unit if such issue is 
approved— 
"(i) by the applicable elected representative of such 
governmental unit after a public hearing following 
reasonable public notice, or 
"(ii) by voter referendum of such governmental unit. 
"(C) SPECIAL RULES FOR APPROVAL OF FACILITY.—If there 
has been public approval under subparagraph (A) of the 
plan for financing a facility, such approval shall constitute 
approval under subparagraph (A) for any issue— 
*
- 
"(i) which is issued pursuant to such plan within 3 
years after the date of the 1st issue pursuant to the 
approval, and 
"(ii) all or substantially all of the proceeds of which 
are to be used to finance such facility or to refund 
previous financing under such plan. 
"(D) REFUNDING BONDS.—NO approval under subpara-
graph (A) shall be necessary with respect to any bond which 
is issued to refund (other than to advance refund) a bond 
100 STAT. 2640 
PUBLIC LAW 99-514—OCT. 22, 1986 
,.; 
approved under subparagraph (A) (or treated as approved 
j n 
under subparagraph (O) unless the maturity date of such 
bond is later than the maturity date of the bond to be 
refunded. 
,
Q 
"(E) APPLICABLE ELECTED REPRESENTATIVE.—For purposes 
of this paragraph— 
; ti> 
"(i) IN GENERAL.—The term 'applicable elected rep-
e^; ; , ;' 
resentative' means with respect to any governmental 
unit— 
"(I) an elected legislative body of such unit, or 
"(II) the chief elected executive officer, the chief 
elected State legal officer of the executive branch, 
or any other elected official of such unit designated 
for purposes of this paragraph by such chief elected 
executive officer or by State law. 
u . 
"(ii) No APPLICABLE ELECTED REPRESENTATIVE.—If Ot>ut 
for this clause) a governmental unit has no applicable 
.
_ , 
elected representative, the applicable elected represent-
£ i 
ative for purposes of clause (i) shall be the applicable 
I : :, ! 
elected representative of the governmental unit— 
"(I) which is the next higher governmental unit 
with such a representative, and 
ail. 
"(II) from which the authority of the govern-
. ,. 
mental unit with no such representative is derived. 
"(3) SPECIAL RULE FOR APPROVAL OF AIRPORTS.—If— 
"(A) the proceeds of an issue are to be used to finance a 
facility or facilities located at an airport, and 
t?r 
"(B) the governmental unit issuing such bonds is the 
owner or operator of such airport, 
such governmental unit shall be deemed to be the only govern-
mental unit having jurisdiction over such airport for purposes 
of this subsection. 
"(g) RESTRICTION ON ISSUANCE COSTS FINANCED BY ISSUE.— 
"(1) IN GENERAL.—A private activity bond shall not be a 
qualified bond if the issuance costs financed by the issue (of 
which such bond is a part) exceed 2 percent of the aggregate 
face amount of the issue. 
"(2) SPECIAL RULE FOR SMALL MORTGAGE REVENUE BOND 
ISSUES.—In the case of an issue of qualified mortgage bonds or 
qualified veterans' mortgage bonds, paragraph (1) shall be ap-
plied by substituting '3.5 percent' for '2 percent' if the aggregate 
authorized face amount of the issue does not exceed $20,000,000. 
"(h) CERTAIN RULES NOT To APPLY TO MORTGAGE REVENUE BONDS, 
QUALIFIED STUDENT LOAN BONDS, AND QUALIFIED 501(c)(3) BONDS.— 
"(1) MORTGAGE REVENUE BONDS AND QUALIFIED STUDENT LOAN 
BONDS.—Subsections (a), (b), (c), and (d) shall not apply to any 
qualified mortgage bond, qualified veterans' mortgage bond, or 
qualified student loan bond. 
"(2) QUALIFIED 501(CX3) BONDS.—Subsections (a), (c), and (d) 
shall not apply to any qualified 501(cX3) bond and subsection (e) 
shall be applied as if it did not contain 'health club facility' with 
respect to such a bond. 
"Subpart B—Requirements Applicable to All State and Local 
Bonds 
^ fO "Sec. 148. Arbitrage. 
"Sec. 149. Bonds must be registered to be tax exempt; other requirements. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2641 
"SEC. 148. ARBITR.4GE. 
"(a) ARBITRAGE BOND DEFINED.—For purposes of section 103, the 
term 'arbitrage bond' means any bond issufed as part of an issue any 
portion of the proceeds of which are reasonably expected (at the 
time of issuance of the bond) to be used directly or indirectly— 
"(1) to acquire higher yielding investments, or 
"(2) to replace funds which were used directly or indirectly to 
acquire higher yielding investments. 
For purposes of this subsection, a bond shall be treated as an 
arbitrage bond if the issuer intentionally uses any portion of the 
proceeds of the issue of which such bond is a part in a manner 
described in paragraph (1) or (2). 
"(h) HIGHER YIELDING INVESTMENTS.—For purposes of this sec-
tion— 
"(1) IN GENERAL.—The term 'higher yielding investments' 
means any investment property which produces a yield over the 
term of the issue which is materially higher than the yield on 
the issue. 
"(2) INVESTMENT PROPERTY.—The term 'investment property' 
means— 
"(A) any security (within the meaning of section 165(g)(2) 
(A) or (B)), 
, 
"(B) any obligation, 
"(C) any annuity contract, or 
"(D) any investment-type property. 
Such term shall not include any tax-exempt bond. 
"(c) TEMPORARY PERIOD EXCEPTION.— 
"(1) IN GENERAL.—For purposes of subsection (a), a bond shall 
not be treated as an arbitrage bond solely by reason of the fact 
i: 
that the proceeds of the issue of which such bond is a part may 
be invested in higher yielding investments for a reasonable 
temporary period until such proceeds are needed for the pur-
pose for which such issue was issued. 
^ 
"(2) 
LIMITATION 
ON 
TEMPORARY 
PERIOD 
FOR 
POOLED 
FINANCINGS.— 
"(A) IN GENERAL.—The temporary period referred to in 
paragraph (1) shall not exceed 6 months with respect to the 
proceeds of an issue which are to be used to make or finance 
loans (other than nonpurpose investments) to 2 or more 
persons. 
"(B) SPECIAL RULE FOR CERTAIN STUDENT LOAN POOLS.—In 
the case of the proceeds of an issue to be used to make or 
idab 
finance 
loans 
under a program 
described in section 
144(b)(1)(A), subparagraph (A) shall be applied by substitut-
ing '18 months' for '6 months'. The preceding sentence shall 
not apply to any bond issued after December 31, 1988. 
"(C) SHORTER TEMPORARY PERIOD FOR LOAN REPAYMENTS, 
ETC.—Subparagraph (A) shall be applied by substituting '3 
months' for '6 months' with respect to the proceeds from 
; 
the sale or repayment of any loan which are to be used to 
" 
make or finance any loan. For purposes of the preceding 
sentence, a nonpurpose investment shall not be treated as a 
'•••' 
loan. 
100 STAT. 2642 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(D) EXCEPTION FOR MORTGAGE REVENUE BONDS.—This 
paragraph shall not apply to any qualified mortgage bond 
or qualified veterans' mortgage bond. 
"(d) 
SPECIAL RULES FOR REASONABLY REQUIRED RESERVE OR 
REPLACEMENT FUND.— 
"(1) IN GENERAL.—For purposes of subsection (a), a bond shall 
not be treated as an arbitrage bond solely by reason of the fact 
that an amount of the proceeds of the issue of which such bond 
is a part may be invested in higher yielding investments which 
are part of a reasonably required reserve or replacement fund. 
The amount referred to in the preceding sentence shall not 
exceed 10 percent of the proceeds of such issue unless the issuer 
establishes to the satisfaction of the Secretary that a higher 
amount is necessary. 
"(2) LIMITATION ON AMOUNT IN RESERVE OR REPLACEMENT 
FUND WHICH MAY B
E FINANCED B
Y ISSUE.—A bond issued as part 
of an issue shall be treated as an arbitrage bond if the amount 
of the proceeds from the sale of such issue which is part of any 
fund described in paragraph (1) exceeds 10 percent of the pro-
ceeds of the issue (or such higher amount which the issuer 
establishes is necessary to the satisfaction of the Secretary). 
"(3) 
LIMITATION ON INVESTMENT IN NONPURPOSE INVEST-
MENTS.— 
"(A) IN GENERAL.—A bond which is part of an issue which 
does not meet the requirements of subparagraph (B) shall 
be treated as an arbitrage bond. 
"(B) REQUIREMENTS.—An issue meets the requirements of 
this subparagraph only if— 
"(i) at no time during any bond year may the amount 
invested in nonpurpose investments with a yield mate-
rially higher than the yield on the issue exceed 150 
percent of the debt service on the issue for the bond 
year, and 
"(ii) the aggregate amount invested as provided in 
' ' 
clause (i) is promptly and appropriately reduced as the 
amount of outstanding bonds of the issue is reduced (or, 
' 
= 
in the case of a qualified mortgage bond or a qualified 
': 
veterans' mortgage bond, as the mortgages are repaid). 
•' ^ 
"(C) EXCEPTIONS FOR TEMPORARY PERIOD.—Subparagraph 
• • 
(B) shall not apply to— 
"(i) proceeds of the issue invested for an initial tem-
; 
porary period until such proceeds are needed for the 
governmental purpose of the issue, and 
"(ii) temporary investment periods related to debt 
service. 
"(D) DEBT SERVICE DEFINED.—For purposes of this para-
graph, the debt service on the issue for any bond year is the 
scheduled amount of interest and amortization of principal 
payable for such year with respect to such issue. For pur-
poses of the preceding sentence, there shall not be taken 
into account amounts scheduled with respect to any bond 
which has been redeemed before the beginning of the bond 
;.: i 
year. 
"(E) No DISPOSITION IN CASE OF LOSS.—This paragraph 
shall not require the sale or disposition of any investment if 
such sale or disposition would result in a loss which exceeds 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2643 
the amount which, but for such sale or disposition, would at 
the time of such sale or disposition— 
"(i) be paid to the United States, or, 
"(ii) in the case of a qualified mortgage bond or a 
qualified veterans' mortgage bond, be paid or credited 
T
. 
mortgagors under section 143(g)(3)(A). 
"(F) EXCEPTION FOR GOVERNMENTAL USE BONDS AND QUALI-
-mq 8 
FIED 501(CX3) BONDS.—This paragraph shall not apply to 
any bond which is not a private activity bond or which is a 
-^'- ' 
qualified 501(c)(3) bond. 
"(e) 
MINOR PORTION MAY BE INVESTED IN HIGHER YIELDING 
INVESTMENTS.—Notwithstanding subsections (a), (c), and (d), a bond 
issued as part of an issue shall not be treated as an arbitrage bond 
solely by reason of the fact that an amount of the proceeds of such 
issue (in addition to the amounts under subsections (c) and (d)) is 
invested in higher yielding investments if such amount does not 
exceed the lesser of— 
"(1)5 percent of the proceeds of the issue, or 
"(2) $100,000. 
"(f) REQUIRED REBATE TO THE UNITED STATES.— 
"(1) IN GENERAL.—A bond which is part of an issue shall be 
treated as an arbitrage bond if the requirements of paragraphs 
(2) and (3) are not met with respect to such issue. The preceding 
sentence shall not apply to any qualified mortgage bond or 
qualified veterans' mortgage bond. 
"(2) REBATE TO UNITED STATES.—An issue shall be treated as 
meeting the requirements of this paragraph only if an amount 
equal to the sum o
f
— 
ai . 
"(A) the excess o
f
— 
"(i) the amount earned on all nonpurpose invest-
ments (other than investments attributable to an 
excess described in this subparagraph), over 
"(ii) the amount which would have been earned if 
such nonpurpose investments were invested at a rate 
equal to the yield on the issue, plus 
"(B) any income attributable to the excess described in 
subparagraph (A), 
is paid to the United States by the issuer in accordance with the 
requirements of paragraph (3). 
:
^ 
"(3) DUE DATE OF PAYMENTS UNDER PARAGRAPH (2).—Except 
to the extent provided by the Secretary, the amount which is 
required to be paid to the United States by the issuer shall be 
'I 
paid in installments which are made at least once every 5 years. 
' 
Each installment shall be in an amount which ensures that 90 
percent of the amount described in paragraph (2) with respect to 
the issue at the time payment of such installment is required 
will have been paid to the United States. The last installment 
shall be made no later than 60 days after the day on which the 
last bond of the issue is redeemed and shall be in an amount 
sufficient to pay the remaining balance of the amount described 
in paragraph (2) with respect to such issue. 
;,. 
"(4) SPECIAL RULES FOR APPLYING PARAGRAPH (2).— 
J.j. 
"(A) IN GENERAL.—In determining the aggregate amount 
ix '. 
earned on nonpurpose investments for purposes of para-
graph (2)— 
•Tid l(ii 
100 STAT. 2644 
PUBLIC LAW 99-514—OCT. 22, 1986 
'- 
* ' 
"(i) any gain or loss on the disposition of a 
nonpurpose investment shall be taken into account, 
and 
"(ii) unless the issuer otherwise elects, any amount 
' ' 
' 
earned on a bona fide debt service fund shall not be 
taken into account if the gross earnings on such fund 
ij 
for the bond year is less than $100,000. 
"(B) TEMPORARY INVESTMENTS.—Under regulations pre-
scribed by the Secretary— 
"(i) IN GENERAL.—An issue shall, for purposes of this 
( 
~ 
subsection, be treated as meeting the requirements of 
.^ 
paragraph (2) if the gross proceeds of such issue are 
, ,. 
expended for the governmental purpose for which the 
li ' 
issue was issued by no later than the day which is 6 
* . 
months after the date of issuance of such issue. Gross 
,_. 
proceeds which are held in a bona fide debt service 
fund shall not be considered gross proceeds, for pur-
poses of this subparagraph only, 
"(ii) ADDITIONAL PERIOD FOR CERTAIN BONDS.-^ 
"(I) IN GENERAL.—In the case of an issue de-
scribed in subclause (II), clause (i) shall be applied 
by substituting '1 year' for '6 months' with respect 
to the portion of the proceeds of the issue which 
are not expended in accordance with clause (i) if 
- 
such portion does not exceed the lesser of 5 percent 
of the proceeds of the issue or $100,000. 
•^ 
* 
"(II) ISSUES TO WHICH SUBCLAUSE (D APPLIES.— 
* *
;
* 
An issue is described in this subclause if no bond 
which is part of such issue is a private activity 
bond (other than a qualified 501(c)(3) bond) or a tax 
or revenue anticipation bond. 
^)j 
"(iii) SAFE HARBOR FOR DETERMINING WHEN PROCEEDS 
OF 
TAX AND REVENUE 
ANTICIPATION 
BONDS ARE 
f. '/ ':} 
EXPENDED.— 
>i 
"(I) I N GENERAL.—For purposes of clause (i), in 
the case of an issue of tax or revenue anticipation 
f
^ - 
.; 
bonds, the net proceeds of such issue 
(including 
earnings thereon) shall be treated as expended for 
. . 
, 
. , 
the governmental purpose of the issue on the 1st 
day after the date of issuance that the cumulative 
cash flow deficit to be financed by such issue ex-
ceeds 90 percent of the aggregate face amount of 
such issue. 
"(II) CUMULATIVE CASH FLOW DEFICIT.—For pur-
poses of subclause (I), the term 'cumulative cash 
flow deficit' means, as of the date of computation, 
the excess of the expenses paid during the period 
described in subclause (III) which would ordinarily 
be paid out of or financed by anticipated tax or 
other revenues over the aggregate amount avail-
able (other than from the proceeds of the issue) 
' 
during such period for the payment of such ex-
penses. 
"(Ill) 
PERIOD 
INVOLVED.—For 
purposes 
of 
• " *' 
subclause (II), the period 
described 
in this 
-'*f--i 
subclause is the period beginning on the date of 
issuance of the issue and ending on the earliest of 
ilsS 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2645 
the maturity date of the issue, the date 6 months 
after such date of issuance, or the date of the 
computation of cumulative cash flow deficit. 
"(C) EXCEPTION FOR SMALL GOVERNMENTAL UNITS.—An 
issue shall, for purposes of this subsection, be treated as 
meeting the requirements of paragraphs (2) and (3) i
f
— 
"(i) the issue is issued by a governmental unit with 
general taxing powers, 
"(ii) no bond which is part of such issue is a private 
activity bond, 
"(iii) 95 percent or more of the net proceeds of such 
issue are to be used for local governmental activities of 
the issuer (or of a governmental unit the jurisdiction of 
which is entirely within the jurisdiction of the issuer), 
and 
"(iv) the aggregate face amount of all tax-exempt 
bonds (other than private activity bonds) issued by such 
' 
• 
unit (and all subordinate entities thereof) during the 
calendar year in which such issue is issued is not 
reasonably expected to exceed $5,000,000. 
Clause (iv) shall not take into account any bond which is 
not outstanding at the time of a later issue or which is 
redeemed (other than in an advance refunding) from the 
i^ ' 
net proceeds of the later issue. 
"(D) EXCEPTION FOR CERTAIN QUALIFIED STUDENT LOAN 
i 
BONDS.— 
"(i) IN GENERAL.—In determining the aggregate 
T
' 
amount earned on nonpurpose investments acquired 
with gross proceeds of an issue of bonds described in 
section 144(b)(1)(A), the amount earned from invest-
ment of net proceeds of such issue during the initial 
temporary period under subsection (c) shall not be 
taken into account to the extent that the amount so 
' . 
earned is used to pay the reasonable— 
"(I) administrative costs of such a program 
; . 
. ' 
attributable to such issue and the costs of carrying 
such issue, and 
, 
"(II) costs of issuing such issue, 
but only to the extent such costs were financed with 
proceeds of such issue and for which the issuer was not 
reimbursed. 
"(ii) ONLY ARBITRAGE ON AMOUNTS LOANED DURING 
TEMPORARY PERIOD TAKEN INTO ACCOUNT F
O
R ADMINIS-
TRATIVE COSTS, ETC.—The amount earned from invest-
ment of net proceeds of an issue during the initial 
temporary period under subsection (c) shall be taken 
into account under clause (i)(I) only to the extent attrib-
utable to proceeds which were used to make or finance 
(not later than the close of such period) student loans 
V i'i\^ • 
under a program described in section 144(b)(1)(A). 
"(iii) ELECTION.—This subparagraph shall not apply 
to any issue if the issuer elects not to have this 
subparagraph apply to such issue. 
* ^ ' 
"(iv) TERMINATION.—This subparagraph shall not 
apply to any bond issued after December 31, 1988. 
"(5) EXEMPTION FROM GROSS INCOME OF SUM REBATED.—Gross 
income shall not include the sum described in paragraph (2). 
71_194 0 - 89 - 28 : CL. 3 Part3 
100 STAT. 2646 
PUBLIC LAW 99-514—OCT. 22, 1986 
d Notwithstanding any other provision of this title, no deduction 
sfi shall be allowed for any amount paid to the United States under 
paragraph (2). 
"(6) DEFINITIONS.—For purposes of this subsection and subsec-
•
- tions (c) and (d)— 
"(A) NoNPURPOSE INVESTMENT.—The term 'nonpurpose 
investment' means any investment property which— 
"(i) is acquired with the gross proceeds of an issue, 
•'- 
'. 
and 
, 
"(ii) is not acquired in order to carry out the govern-
mental purpose of the issue. 
"(B) GROSS PROCEEDS.—Except as otherwise provided by 
the Secretary, the gross proceeds of an issue include— 
•
" -'*'" 
"(i) amounts received (including repayments of prin-
cipal) as a result of investing the original proceeds of 
the issue, and 
"(ii) amounts to be used to pay debt service on the 
; , 
issue. 
"(7) PENALTY IN UEU OF LOSS OF TAX EXEMPTION.—In the case 
of an issue which would (but for this paragraph) fail to meet the 
requirements of paragraph (2) or (3), the Secretary may treat 
. 
such issue as not failing to meet such requirements i
f
— 
"(A) no bond which is part of such issue is a private 
.;/, 
activity bond (other than a qualified 501(c)(3) bond), 
"(B) the failure to meet such requirements is due to 
reasonable cause and not to willful neglect, and 
"(C) the issuer pays to the United States a penalty in an 
amount equal to the sum of— 
"(i) 50 percent of the amount which was not paid in 
accordance with paragraphs (2) and (3), plus 
>t 
"(ii) interest (at the underpayment rate established 
o
& J-' ' 
under section 6621) on the portion of the amount which 
was not paid on the date required under paragraph (3) 
for the period beginning on such date. 
The Secretary may waive all or any portion of the penalty 
under this paragraph. 
"(g) STUDENT LOAN INCENTIVE PAYMENTS.—Except to the extent 
otherwise provided in regulations, payments made by the Secretary 
of Education pursuant to section 438 of the Higher Education Act of 
1965 are not to be taken into account, for purposes of subsection 
(aXD, in determining yields on student loan notes. 
"(h) DETERMINATIONS OF YIELD.—For purposes of this section, the 
yield on an issue shall be determined on the basis of the issue price 
(within the meaning of sections 1273 and 1274). 
"(i) REGULATIONS.—The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section. 
"SEC. 149. BONDS MUST BE REGISTERED TO BE TAX EXEMPT; OTHER 
REQUIREMENTS. 
"(a) BONDS MUST BE REGISTERED TO BE TAX EXEMPT.— 
5,, 
"(1) GENERAL RULE.—Nothing in section 103(a) or in any other 
provision of law shall be construed to provide an exemption 
from Federal income tax for interest on any registration-re-
quired bond unless such bond is in registered form. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2647 
"(2) REGISTRATION-REQUIRED BOND.—For purposes of para-
graph (1), the term 'registration-required bond' means any bond 
other than a bond which— 
"(A) is not of a type offered to the public, 
"(B) has a maturity (at issue) of not more than 1 year, or 
r 
"(C) is described in section 163(fK2XB). 
"(3) SPECIAL RULES.— 
: 
"(A) BOOK ENTRIES PERMITTED.—For purposes of para-
graph (1), a book entry bond shall be treated as in reg-
: r 
istered form if the right to the principal of, and stated 
interest on, such bond may be transferred only through a 
book entry consistent with regulations prescribed by the 
Secretary. 
"(B) NOMINEES.—The Secretary shall prescribe such regu-
lations as may be necessary to carry out the purpose of 
paragraph (1) where there is a nominee or chain of nomi-
nees. 
"(b) FEDERALLY GUARANTEED BOND IS NOT TAX EXEMPT.— 
"(1) IN GENERAL.—Section 103(a) shall not apply to any State 
or local bond if such bond is federally guaranteed. 
"(2) FEDERALLY GUARANTEED DEFINED.—For purposes of para-
graph (1), a bond is federally guaranteed if— 
"(A) the payment of principal or interest with respect to 
such bond is guaranteed (in whole or in part) by the United 
States (or any agency or instrumentality thereof), 
^^. ,^ 
"(B) such bond is issued as part of an issue and 5 percent 
or more of the proceeds of such issue is to be— 
"(i) used in making loans the payment of principal or 
interest with respect to which are to be guaranteed (in 
whole or in part) by the United States (or any agency or 
instrumentality thereof), or 
"(ii) invested (directly or indirectly) in federally in-
sured deposits or accounts, or 
"(C) the payment of principal or interest on such bond is 
otherwise indirectly guaranteed (in whole or in part) by the 
United States (or an agency or instrumentality thereof)-
"(3) EXCEPTIONS.— 
,. , 
"(A) CERTAIN INSURANCE PROGRAMS.—A bond shall not be 
treated as federally guaranteed by reason of— 
,j,^^ 
"(i) any guarantee by the Federal Housing Adminis-
tration, the Veterans' Administration, the Federal Na-
tional Mortgage Association, the Federal Home Loan 
Mortgage Corporation, or the Government National 
Mortgage Association, 
"(ii) any guarantee of student loans and any guaran-
tee by the Student Loan Marketing Association to fi-
nance student loans, or 
"(iii) any guarantee by the Bonneville Power Author-
ity pursuant to the Northwest Power Act (16 U.S.C. 
839d) as in effect on the date of the enactment of the 
Tax Reform Act of 1984 with respect to any bond issued 
before July 1,1989. 
"(B) DEBT SERVICE, ETC.—Paragraph (1) shall not apply 
to— 
"(i) proceeds of the issue invested for an initial tem-
porary period until such proceeds are needed for the 
purpose for which such issue was issued, 
100 STAT. 2648 
PUBLIC LAW 99-514—OCT. 22, 1986 
-,.- . 
"(ii) investments of a bona fide debt service fund, 
••'.s'.' 
,' 
"(iii) investments of a reserve which meet the 
requirements of section 148(d), 
"(iv) investments in bonds issued by the United 
10 /xn^ 
States Treasury, or 
"(v) other investments permitted under regulations. 
"(C) EXCEPTION FOR HOUSING PROGRAMS.— 
••. . 
"(i) IN GENERAL.—Except as provided in clause (ii), 
paragraph (1) shall not apply to— 
"(I) a private activity bond for a qualified resi-
-
^ - 
dential rental project or a housing program obliga-
• 
tion under section 11(b) of the United States 
Housing Act of 1937, 
»>i; ' 
"(II) a qualified mortgage bond, or 
-;' 
" 
"(III) a qualified veterans' mortgage bond. 
ii' 
' 
"(ii) EXCEPTION NOT TO APPLY WHERE BOND INVESTED 
IN FEDERALLY INSURED DEPOSITS OR ACCOUNTS.—Clause 
(i) shall not apply to any bond which is federally 
guaranteed within the meaning of paragraph (2)(B)(ii). 
"(D) LOANS TO, OR GUARANTEES BY, FINANCIAL INSTITU-
TIONS.—Except as provided in paragraph (2)(B)(ii), a bond 
which is issued as part of an issue shall not be treated as 
federally guaranteed merely by reason of the fact that the 
proceeds of such issue are used in making loans to a 
financial institution or there is a guarantee by a financial 
institution unless such guarantee constitutes a federally 
insured deposit or account. 
•' 
"(4) DEFINITIONS.—For purposes of this subsection— 
fv 
"(A) TREATMENT OF CERTAIN ENTITIES WITH AUTHORITY TO 
B
O
R
R
O
W F
R
O
M UNITED STATES.—To the extent provided in 
regulations prescribed by the Secretary, any entity with 
*-•> ^^ 
statutory authority to borrow from the United States shall 
be treated as an instrumentality of the United States. 
Except in the case of an exempt facility bond, a qualified 
» 
small issue bond, a qualified student loan bond, and a 
qualified redevelopment bond, nothing in the preceding 
sentence shall be construed as treating the District of 
*'-' > ' 
Columbia or any possession of the United States as an 
instrumentality of the United States. 
"' 
"(B) FEDERALLY INSURED DEPOSIT OR ACCOUNT.—The term 
'federally insured deposit or account' means any deposit or 
account in a financial institution to the extent such deposit 
or account is insured under Federal law by the Federal 
Deposit Insurance Corporation, the Federal Savings and 
'''^"'' 
Loan Insurance Corporation, the National Credit Union 
' ' 
' 
Administration, or any similar federally chartered corpora-
tion. 
"(c) TAX EXEMPTION MUST BE DERIVED FROM THIS TITLE.— 
"(1) GENERAL RULE.—Except as provided in paragraph (2), no 
^ 
interest on any bond shall be exempt from taxation under this 
'^ 
title unless such interest is exempt from tax^ under this title 
without regard to any provision of law which is not contained in 
this title and which is not contained in a revenue Act. 
"(2) CERTAIN PRIOR EXEMPTIONS.— 
"(A) PRIOR EXEMPTIONS CONTINUED.—For purposes of this 
'^'' 
title, notwithstanding any provision of this part, any bond 
the interest on which is exempt from taxation under this 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2649 
title by reason of any provision of law (other than a provi-
sion of this title) which is in effect on January 6, 1983, shall 
be treated as a bond described in section 103(a). 
"(B) ADDITIONAL REQUIREMENTS FOR BONDS ISSUED AFTER 
1983.—Subparagraph (A) shall not apply to a bond (not 
described in subparagraph (O) issued after 1983 if the 
appropriate requirements of this part (or the corresponding 
provisions of prior law) are not met with respect to such 
bond. 
"(C) DESCRIPTION OF BOND.—A bond is described in this 
subparagraph (and treated as described in subparagraph 
(A))if-
"(i) such bond is issued pursuant to the Northwest 
Power Act (16 U.S.C. 839d), as in effect on July 18,1984; 
"(ii) such bond is issued pursuant to section 
608(aX6XA) of Public Law 97-468, as in effect on the 
date of the enactment of the Tax Reform Act of 1986; or 
"(iii) such bond is issued before June 19, 1984 under 
section llOt)) of the United States Housing Act of 1937. 
'(d) ADVANCE REFUNDINGS.— 
"(1) IN GENERAL.—Nothing in section 103(a) or in any other 
provision of law shall be construed to provide an exemption 
from Federal income tax for interest on any bond issued as part 
of an issue described in paragraph (2), (3), or (4). 
"(2) CERTAIN PRIVATE ACTIVITY BONDS.—An issue is described 
in this paragraph if any bond (issued as part of such issue) is 
issued to advance refund a private activity bond (other than a 
qualified 501(cX3) bond). 
"(3) OTHER BONDS.— 
"(A) IN GENERAL.—An issue is described in this para-
* 
graph if any bond (issued as part of such issue), hereinafter 
in this paragraph referred to as the 'refunding bond', is 
issued to advance refund a bond unless— 
"(i) the refunding bond is only— 
'' 
"(I) the 1st advance refunding of the original 
bond if the original bond is issued after 1985, or 
"(II) the 1st or 2nd advance refunding of the 
original bond if the original bond was issued before 
1986, 
"(ii) in the case of refunded bonds issued before 1986, 
the refunded bond is redeemed not later than the 
earliest date on which such bond may be redeemed at 
par or at a premium of 3 percent or less, 
"(iii) in the case of refunded bonds issued after 1985, 
. . 
the refunded bond is redeemed not later than the 
u 
earliest date on which such bond may be redeemed, 
"(iv) the initial temporary period under section 148(c) 
ends— 
"(I) with respect to the proceeds of the refunding 
bond not later than 30 days after the date of issue 
^. 
of such bond, and 
"(II) with respect to the proceeds of the refunded 
bond on the date of issue of the refunding bond, 
and 
"(v) in the case of refunded bonds to which section 
148(e) did not apply, on and after the date of issue of 
the refunding bond, the amount of proceeds of the 
100 STAT. 2650 
PUBLIC LAW 99-514—OCT. 22, 1986 
. ' !' - 
refunded bond invested in higher yielding investments 
•^'' 
(as defined in section 148(b)) which are nonpurpose 
investments (as defined in section 148(0(6)(A)) does not 
'" 
' 
exceed— 
"(I) the amount so invested as part of a reason-
ably required reserve or replacement fund or 
during an allowable temporary period, and 
"(II) the amount which is equal to the lesser of 5 
percent of the proceeds of the issue of which the 
refunded bond is a part or $100,000 (to the extent 
such amount is allocable to the refunded bond). 
"(B) SPECIAL RULES FOR REDEMPTIONS.— 
^. ' 
"(i) ISSUER MUST REDEEM ONLY IF DEBT SERVICE SAV-
« " 
iNGS.—Clause (ii) and (iii) of subparagraph (A) shall 
' 
apply only if the issuer may realize present value debt 
service savings (determined without regard to adminis-
trative expenses) in connection with the issue of which 
the refunding bond is a part. 
"(ii) REDEMPTIONS NOT REQUIRED BEFORE 90TH DAY.— 
For purposes of clauses (ii) and (iii) of subparagraph (A), 
the earliest date referred to in such clauses shall not be 
* 
earlier than the 90th day after the date of issuance of 
the refunding bond. 
"(4) ABUSIVE TRANSACTIONS PROHIBITED.—An issue is described 
! 
in this paragraph if any bond (issued as part of such issue) is 
^ issued to advance refund another bond and a device is employed 
in connection with the issuance of such issue to obtain a mate-
rial financial advantage (based on arbitrage) apart from savings 
attributable to lower interest rates. 
"(5) ADVANCE REFUNDING.—For purposes of this part, a bond 
shall be treated as issued to advance refund another bond if it is 
issued more than 90 days before the redemption of the refunded 
bond. 
i 
"(6) 
SPECIAL RULES FOR PURPOSES OF PARAGRAPH O).—For 
- 
purposes of paragraph (3), bonds issued before the date of the 
enactment of this subsection shall be taken into account under 
subparagraph (A)(i) thereof except— 
"(A) a refunding which occurred before 1986 shall be 
treated as an advance refunding only if the refunding bond 
' 
was issued more than 180 days before the redemption of the 
i;, 
refunded bond, and 
"(B) a bond issued before 1986, shall be treated as ad-
vance refunded no more than once before March 15, 1986. 
"(7) REGULATIONS.—The Secretary shall prescribe such regu-
lations as may be necessary or appropriate to carry out the 
purposes of this subsection. 
"(e) INFORMATION REPORTING.— 
"(1) IN GENERAL.—Nothing in section 103(a) or any other 
provision of law shall be construed to provide an exemption 
from Federal income tax for interest on any bond unless such 
bond satisfies the requirements of paragraph (2). 
"(2) INFORMATION REPORTING REQUIREMENTS.—A bond satisfies 
the requirements of this paragraph if the issuer submits to the 
Secretary, not later than the 15th day of the 2d calendar month 
after the close of the calendar quarter in which the bond is 
issued (or such later time as the Secretary may prescribe with 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2651 
respect to any portion of the statement), a statement concerning 
the issue of which the bond is a part which contains— 
"(A) the name and address of the issuer, 
"(B) the date of issue, the amount of net proceeds of the 
issue, the stated interest rate, term, and face amount of 
each bond which is part of the issue, the amount of issuance 
costs of the issue, and the amount of reserves of the issue, 
•FiMi 
"(C) where required, the name of the applicable elected 
representative who approved the issue, or a description of 
the voter referendum by which the issue was approved, 
,
f 
"(D) the name, address, and employer identification 
number of— 
"(i) each initial principal user of any facility provided 
; 
with the proceeds of the issue, 
"(ii) the common parent of any affiliated group of 
corporations (within the meaning of section 1504(a)) of 
^, 
which such initial principal user is a member, and 
"(iii) if the issue is treated as a separate issue under 
•.,? 
section 144(a)(6)(A), any person treated as a principal 
user under section 144(a)(6)(B), 
"(E) a description of any property to be financed from the 
- . 
proceeds of the issue, 
"(F) a certification by a State official designated by State 
•. .' 
law (or, where there is no such official, the Governor) that 
the bond meets the requirements of section 146 (relating to 
g . 
cap on private activity bonds), if applicable, and 
"(G) such other information as the Secretary may 
require. 
Subparagraphs (C) and (D) shall not apply to any bond which is 
f 
not a private activity bond. The Secretary may provide that 
certain information specified in the 1st sentence need not be 
*' 
included in the statement with respect to an issue where the 
inclusion of such information is not necessary to carry out the 
purposes of this subsection. 
"(3) EXTENSION OF TIME.—The Secretary may grant an exten-
sion of time for the filing of any statement required under 
paragraph (2) if there is reasonable cause for the failure to file 
• 
such statement in a timely fashion. 
:,, 
"Subpart C—Definitions and Special Rules 
"Sec. 150. Definitions and special rules. 
"SEC. 150. DEFINITIONS AND SPECIAL RULES. 
"(a) GENERAL RULE.—For purposes of this part— 
J 
"(1) BOND.—The term 'bond' includes any obligation. 
g 
"(2) GOVERNMENTAL UNIT NOT TO INCLUDE FEDERAL GOVERN-
i 
MENT.—The term 'governmental unit' does not include the 
United States or any agency or instrumentality thereof. 
ei 
"(3) NET PROCEEDS.—The term 'net proceeds' means, with 
respect to any issue, the proceeds of such issue reduced by 
rr 
amounts in a reasonably required reserve or replacement fund. 
"(4) 501(c)(3) ORGANIZATION.—The term '501(c)(3) organization' 
means any organization described in section 501(c)(3) and 
exempt from tax under section 501(a). 
100 STAT. 2652 
PUBLIC LAW 99-514—OCT. 22, 1986 
•in 
"(5) OWNERSHIP OF PROPERTY.—Property shall be treated as 
owned by a governmental unit if it is owned on behalf of such 
unit. 
"(6) TAX-EXEMPT BOND.—The term 'tax-exempt' means, with 
respect to any bond (or issue), that the interest on such bond (or 
on the bonds issued as part of such issue) is excluded from gross 
income. 
''(b) CHANGE IN USE OF FACILITIES FINANCED WITH TAX-EXEMPT 
PRIVATE ACTIVITY BONDS.— 
"(1) MORTGAGE REVENUE BONDS.— 
"(A) IN GENERAL.—In the case of any residence with 
respect to which financing is provided from the proceeds of 
j„f; ^^ a qualified mortgage bond or qualified veterans' mortgage 
bond, if there is a continuous period of at least 1 year 
during which such residence is not the principal residence 
of at least 1 of the mortgagors who received such financing, 
then no deduction shall be allowed under this chapter for 
interest on such financing which accrues on or after the 
date such period began. 
••' 
"(B) EXCEPTION.—Subparagraph (A) shall not apply to the 
extent the Secretary determines that its application would 
'^' " 
result in undue hardship and that the failure to meet the 
requirements of subparagraph (A) resulted from cir-
cumstances beyond the mortgagor's control. 
"(2) QUALIFIED RESIDENTIAL RENTAL PROJECTS.—In the case of 
any project for residential rental property— 
"(A) with respect to which financing is provided from the 
v T 
, proceeds of any private activity bond which, when issued, 
purported to be a tax-exempt bond described paragraph (7) 
' L ' of section 142(a), and 
"(B) which does not meet the requirements of section 
142(d), 
no deduction shall be allowed under this chapter for interest on 
such financing which accrues during the period beginning on 
the 1st day of the taxable year in which such project fails to 
meet such requirements and ending on the date such project 
meets such requirements. 
,;, 
"(3) QUALIFIED 50i(cX3) BONDS.— 
' (A) IN GENERAL.—In the case of any facility with respect 
to which financing is provided from the proceeds of any 
private activity bond which, when issued, purported to be a 
tax-exempt qualified 501(c)(3) bond, if any portion of such 
facility— 
"(i) is used in a trade or business of any person other 
than a 501(c)(3) organization or a governmental unit, 
but 
"(ii) continues to be owned by a 501(c)(3) organization, 
then the owner of such portion shall be treated for purposes of 
this title as engaged in an unrelated trade or business (as 
-'* defined in section 513) with respect to such portion. The amount 
of gross income attributable to such portion for any period shall 
not be less than the fair rental value of such portion for such 
period. 
"(B) DENIAL OF DEDUCTION FOR INTEREST.—No deduction 
shall be allowed under this chapter for interest on financ-
D
r
u
> , 
ing described in subparagraph (A) which accrues during the 
period beginning on the date such facility is used as de-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2653 
scribed in subparagraph (AXi) and ending on the date such 
facility is not so used. 
"(4) CERTAIN EXEMPT FACILITY BONDS.— 
"(A) IN GENERAL.—In the case of any facility with respect 
to which financing is provided from the proceeds of any 
private activity bond to which this paragraph applies, if 
such facility is not used for a purpose for which a tax-
exempt bond could be issued on the date of such issue, no 
deduction shall be allowed under this chapter for interest 
on such financing which accrues during the period begin-
ning on the date such facility is not so used and ending on 
the date such facility is so used. 
"(B) BONDS TO WHICH PARAGRAPH APPLIES.—This para-
graph applies to any private activity bond which, when 
issued, purported to be a tax-exempt exempt facility bond 
'• * ' 
described in a paragraph (other than paragraph (7)) of 
,, 
section 142(a). 
•
* 
"(5) 
FACILITIES REQUIRED TO BE OWNED BY GOVERNMENTAL 
UNITS OR 501(C)(3) ORGANIZATIONS.—If— 
J 
"(A) financing is provided with respect to any facility 
" 
from the proceeds of any private activity bond which, when 
issued, purported to be a tax-exempt bond, 
'- 
"(B) such facility is required to be owned by a govern-
mental unit or a 501(c)(3) organization as a condition of 
such tax exemption, and 
"(C) such facility is not so owned, 
then no deduction shall be allowed under this chapter for 
interest on such financing which accrues during the period 
beginning on the date such facility is not so owned and ending 
on the date such facility is so owned. 
"(c) EXCEPTION AND SPECIAL RULES FOR PURPOSES OF SUBSECTION 
(b).—For purposes of subsection (b)— 
"(1) EXCEPTION.—Any use with respect to facilities financed 
with proceeds of an issue which are not required to be used for 
' 
the exempt purpose of such issue shall not be taken into 
account. 
"(2) TREATMENT OF AMOUNTS OTHER THAN INTEREST.—If the 
amounts payable for the use of a facility are not interest, 
n 
subsection (b) shall apply to such amounts as if they were 
interest but only to the extent such amounts for any period do 
not exceed the amount of interest accrued on the bond financing 
for such period. 
"(3) USE OF PORTION OF FACILITY.—In the case of any person 
which uses only a portion of the facility, only the interest 
accruing on the financing allocable to such portion shall be 
taken into account by such person. 
I 
"(4) CESSATION WITH RESPECT TO PORTION OF FACILITY.—In the 
case of any facility where part but not all of the facility is not 
, 
used for an exempt purpose, only the interest accruing on the 
financing allocable to such part shall be taken into account. 
"(5) REGULATIONS.—The Secretary shall prescribe such regu-
lations as may be necessary or appropriate to carry out the 
purposes of this subsection and subsection (b). 
"(d) QUALIFIED SCHOLARSHIP FUNDING BOND.—For purposes of this 
part and section 103— 
"(1) TREATMENT AS STATE OR LOCAL BOND.—A qualified schol-
arship funding bond shall be treated as a State or local bond. 
100 STAT. 2654 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(2) 
QUALIFIED SCHOLARSHIP FUNDING BOND DEFINED.—The 
term 'qualified scholarship funding bond' means a bond issued 
by a corporation which— 
"(A) is a corporation not for profit established and oper-
V 
ated exclusively for the purpose of acquiring student loan 
ij 
notes incurred under the Higher Education Act of 1965, and 
"(B) is organized at the request of the State or 1 or more 
political subdivisions thereof or is requested to exercise 
such power by 1 or more political subdivisions and required 
* 
by its corporate charter and bylaws, or required by State 
fv 
]g^^ ^
Q devote any income (after payment of expenses, debt 
service, and the creation of reserves for the same) to the 
purchase of additional student loan notes or to pay over any 
income to the United States. 
"(e) BONDS OF CERTAIN VOLUNTEER FIRE DEPARTMENTS.—For pur-
poses of this part and section 103— 
"(1) IN GENERAL.—A bond of a volunteer fire department shall 
be treated as a bond of a political subdivision of a State i
f
— 
"(A) such department is a qualified volunteer fire depart-
'" 
ment with respect to an area within the jurisdiction of such 
' 
' 
political subdivision, and 
"(B) such bond is issued as part of an issue 95 percent or 
more of the net proceeds of which are to be used for the 
acquisition, construction, reconstruction, or improvement 
of a firehouse or firetruck used or to be used by such 
department. 
"(2) QUALIFIED VOLUNTEER FIRE DEPARTMENT.—For purposes of 
this subsection, the term 'qualified volunteer fire department' 
means, with respect to a political subdivision of a State, any 
, organization— 
"(A) which is organized and operated to provide firefight-
, 
ing or emergency medical services for persons in an area 
(within the jurisdiction of such political subdivision) which 
is not provided with any other firefighting services, and 
"(B) which is required (by written agreement) by the 
,. ? 
political subdivision to furnish firefighting services in such 
area." 
(c) AMENDMENT TO ARBITRAGE REGULATIONS.—The provision in 
the Federal income tax regulations relating to the arbitrage require-
ments which permits a higher yield on acquired obligations if the 
issuer elects to waive the benefits of the temporary period provisions 
shall not apply to bonds issued after August 31,1986. 
(d) STATE AND LOCAL GOVERNMENT SERIES MODIFICATIONS.—Not-
withstanding any other provision of law or any regulations promul-
gated thereunder (including the provisions of 31 CFR part 344) the 
Secretary of the Treasury shall extend by January 1, 1987, the State 
and Local Government Series program to provide— 
(1) instruments allowing flexible investment of bond proceeds 
in a manner eliminating the earning of rebatable arbitrage, 
(2) demand deposits under such program by eliminating ad-
*
?
" vance notice and minimum maturity requirements related to 
the purchase of bonds, 
sj 
(3) operation of such program at no net cost to the Federal 
Government, and 
'' 
(4) deposits for a stated maturity under reasonable advance 
^' notice requirements. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2655 
(e) MANAGEMENT CONTRACTS.—The Secretary of the Treasury or 
his delegate shall modify the Secretary's advance ruling guidelines 
relating to when use of property pursuant to a management con-
tract is not considered a trade or business use by a private person 
for purposes of section 141(a) of the Internal Revenue Code of 1986 to 
provide that use pursuant to a management contract generally shall 
not be treated as trade or business use as long as— 
(1) the term of such contract (including renewal options) does 
not exceed 5 years, 
(2) the exempt owner has the option to cancel such contract at 
the end of any 3-year period, 
(3) the manager under the contract is not compensated (in 
whole or in part) on the basis of a share of net profits, and 
(4) at least 50 percent of the annual compensation of the 
manager under such contract is based on a periodic fixed fee. 
(f) AMENDMENTS RELATING TO MORTGAGE CREDIT CERTIFICATE 
PROGRAM.— 
(1) TRADE-IN RATE INCREASED TO 25 PERCENT.— 
(A) Subparagraph (A) of section 25(dX2) (relating to aggre-
gate limit of certificate credit rates) is amended by striking 
out "20 percent" and inserting in lieu thereof "25 percent". 
(B) Subparagraph (A) of section 25(0(2) (defining correc-
tion amount) is amended by striking out "0.20" and insert-
utn< 
ing in lieu thereof "0.25". 
(2) CONFORMING AMENDMENTS.— 
(A) Clause (ii) of section 25(bX2XA) (defining certificate 
indebtedness amount) is amended by striking out "section 
103A(1X6)" and inserting in lieu thereof "section 143(kX4)". 
;i, . 
(B) Clause (iii) of section 25(bX2XA) is amended by strik-
ing out "section 103A(1X7)" and inserting in lieu thereof 
"section 143(kX5)". 
(CXi) Subparagraphs (AXiii) and (B) of section 25(cX2) are 
each amended by striking out "section 103A" each place it 
appears and inserting in lieu thereof "section 143". 
(ii) Clause (ii) of section 25(cX2XA) is amended by striking 
out "section 103A" and inserting in lieu thereof "section 
103". 
(D) Clause (iii) of section 25(cX2XA) (defining qualified 
s 
mortgage credit certificate program) is amended by striking 
out all the subclauses thereof and inserting in lieu thereof 
the following: 
"(I) subsection (c) (relating to residence require-
ments), 
"(II) subsection (d) (relating to 3-year require-
;,>i. 
ment), 
"(III) subsection (e) (relating to purchsise price 
requirement), 
"(IV) subsection (0 (relating to income require-
ments), 
"(V) subsection (h) (relating to portion of loans 
I, 
required to be placed in targeted areas), and 
"(VI) paragraph (1) of subsection (i) (relating to 
if,: 
other requirements),". 
(E) The last sentence of subparagraph (A) of section 
25(cX2) is amended by striking out "section 103A(cX2)" and 
^ 
inserting in lieu thereof "section 143(aX2)". 
(F) Subparagraph (B) of section 25(cX2) is amended— 
100 STAT. 2656 
PUBLIC LAW 99-514—OCT. 22, 1986 
:'• f «
^
: - I (i) by striking out "subclauses (II) and (IV)" and 
inserting in lieu thereof "subclauses (II), (IV), and (V)", 
and 
(ii) by striking out clause (iii) and all that follows and 
inserting in lieu thereof the following: 
Si**; ? vi 
"(iii) paragraph (1) of section 143(d) shall be applied 
by substituting '100 percent' for '95 percent or more'. 
i^^i 
Clause (iii) shall not apply if the issuing authority submits a 
plan to the Secretary for administering the 95-percent 
3 s ; 
requirement of section 143(d)(1) and the Secretary is satis-
fied that such requirement will be met under such plan." 
(G) Subsection (d) of section 25 (relating to determination 
of certificate credit rate) is amended by striking out para-
graph (3). 
(H) Paragraph (2) of section 25(e) (relating to indebtedness 
not treated as certified where certain requirements in fact 
not met) is amended by striking out "subsection (d)(1), (e), 
(f), and (j) of section 103A" and inserting in lieu thereof 
"subsections (c)(1), (d), (e), (f), and (i) of section 143". 
(I) Paragraph (6) of section 25(e) is amended by striking 
out "section 1030b)(6)(C)(i)" and inserting in lieu thereof 
"section 144(a)(3)(A)". 
,i!.. 
(J) Subparagraph (A) of section 25(e)(8) is amended by 
striking out "section 103A(1)(7)(B)" and inserting in lieu 
thereof "section 143(k)(5)(B)". 
? 
(K) Subparagraph (B) of section 25(e)(8) is amended by 
striking out "section 103A(1)(6)" and inserting in lieu 
thereof "section 143(k)(4)". 
(L) Paragraph (9) of section 25(e) is amended by striking 
out "section 103A(c)(l)" and inserting in lieu thereof "sec-
tion 143(a)(1)". 
*:i 
(M) Paragraph (10) of section 25(e) is amended by striking 
>c 
out "section 103A" and inserting in lieu thereof "section 
143". 
(N) Paragraph (1) of section 25(f) is amended by strikmg 
1 
out "paragraph (4) of section 103A(g)" and inserting in lieu 
thereof "subsection (d) of section 146". 
(O) Paragraph (3) of section 25(f) is amended by striking 
out "section 103A(g)(5)(C)" and inserting in lieu thereof 
"section 146(d)(3)(C)". 
(g) PENALTY FOR FAILURE To FILE REPORT ON COMPLIANCE WITH 
QUALIFIED 
RESIDENTIAL RENTAL PROJECT RULES.—Section 6652 
(relating to failure to file certain information returns, registration 
statements, etc.), as amended by section 1501 of this Act, is amended 
by redesignating subsection (j) as subsection (k) and by inserting 
after subsection (i) the following new subsection: 
"(j) FAILURE To FILE CERTIFICATION WITH RESPECT TO CERTAIN 
RESIDENTIAL RENTAL PROJECTS.—In the case of each failure to pro-
vide a certification as required by section 142(d)(7) at the time 
prescribed therefor, unless it is shown that such failure is due to 
reasonable cause and not to willful neglect, there shall be paid, on 
notice and demand of the Secretary and in the same manner as tax, 
by the person failing to provide such certification, an amount equal 
to $100 for each such failure." 
(h) REPEAL OF REPORT ON MORTGAGE REVENUE BOND PROGRAM.— 
Paragraph (7) of section 611(d) of the Tax Reform Apt of 1984 is 
hereby repealed. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2657 
(i) AMENDMENT TO OUTPUT REGULATIONS.—The Secretary of the 
Treasury or his delegate shall amend the provision in the Federal 
income tax regulations relating to when use pursuant to certain 
output contracts is considered to satisfy the private business tests of 
paragraphs (1) and (2) of section 141(b) of the Internal Revenue Code 
of 1986 to eliminate the requirement of a 3 percent guaranteed 
minimum payment. 
(j) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) REPEAL OF SECTION 103A.—Section 103A is hereby repealed. 
(2) SECTION 143 REDESIGNATED AS SECTION 7703.— 
• :
> 
(A) I N GENERAL.—Chapter 79 (relating to definitions) is 
amended by adding at the end thereof the following new 
section: 
"SEC. 7703. DETERMINATION OF MARITAL STATUS. 
"(a) GENERAL RULE.—For purposes of part V of subchapter B of 
chapter 1 and those provisions of this title which refer to this 
subsection— 
"(1) the determination of whether an individual is married 
shall be made as of the close of his taxable year; except that if 
his spouse dies during his taxable year such determination shall 
be made as of the time of such death; and 
"(2) an individual legally separated from his spouse under a 
decree of divorce or of separate maintenance shall not be consid-
ered as married. 
"(b) CERTAIN MARRIED INDIVIDUALS LIVING APART.—For purposes 
of those provisions of this title which refer to this subsection, i
f
— 
"(1) an individual who is married (within the meaning of 
subsection (a)) and who files a separate return maintains as his 
home a household which constitutes for more than one-half of 
the taxable year the principal place of abode of a child (within 
the meaning of section 151(eX3)) with respect to whom such 
individual is entitled to a deduction for the taxable year under 
section 151 (or would be so entitled but for paragraph (2) or (4) of 
section 152(e)), 
"(2) such individual furnishes over one-half of the cost of 
maintaining such household during the taxable year, and 
"(3) during the last 6 months of the taxable year, such individ-
ual's spouse is not a member of such household, 
such individual shall not be considered as married." 
(B) CLERICAL AMENDMENT.—The table of sections for chap-
: 
ter 79 is amended by adding at the end thereof the follow-
ing new item: 
"Sec. 7703. Determination of marital status." 
(3) Paragraph (3) of section 163(0 (relating to denial of deduc-
tions for interest on certain obligations not in registered form) is 
amended by striking out "section 103(jX3)" and inserting in lieu 
thereof "section 149(aX3)". 
(4) Sections 269A(bX3)", 414(mX5), 414(nX6), and 4988(cX2) 
(defining related person) are each amended by striking out 
"section 103(bX6XC)" and inserting in lieu thereof "section 
144(aX3)". 
(5) Paragraph (1) of section 4701(b) (defining registration-
required obligation) is amended by striking out "section 103(j)" 
and inserting in lieu thereof "section 149(a)". 
100 STAT. 2658 
PUBLIC LAW 99-514—OCT. 22, 1986 
• • 
(6) Sections 4940(c)(5), 4942(D(2)(A), and 7871(a)(4) are each 
amended by striking out "(relating to interest on certain 
governmental obligations)" and inserting in lieu thereof "(relat-
ing to State and local bonds)". 
(7) Paragraph (2) of section 7871(c) (relating to no exemption 
for certain private activity bonds) is amended to read as follows: 
"(2) N o EXEMPTION FOR PRIVATE ACTIVITY BONDS.—Subsection 
(a) of section 103 shall not apply to any private activity bond (as 
defined in section 141(a)) issued by an Indian tribal government 
(or subdivision thereof)." 
(8) Sections 22(e)(2), 32(c) and (d), 86(c)(3), 152(a)(9), 153(5), 
194(b)(1), 1398(d)(2), 3402(f), and 6362(f)(5) are each amended by 
striking out "section 143" each place it appears and inserting in 
lieu thereof "section 7703". 
(9) Sections 105(d)(5)(C) and 879(c)(3) are each amended by 
striking out "section 143(a)" and inserting in lieu thereof "sec-
tion 7703(a)". 
(10) Section 2(c) is amended by striking out "section 143(b)" 
and inserting in lieu thereof "section 7703(b)". 
SEC. 1302. TREATMENT OF SECTION 501(c)(3) BONDS. 
> 
Nothing in the treatment of section 501(c)(3) bonds as private 
activity bonds under the amendments made by this title shall be 
construed as indicating how section 501(c)(3) bonds will be treated in 
future legislation, and any change in future legislation applicable to 
private activity bonds shall apply to section 501(c)(3) bonds only if 
expressly provided in such legislation. 
SEC. 1303. REPEAL OF PROVISIONS RELATING TO GENERAL STOCK 
OWNERSHIP CORPORATIONS. 
(a) IN GENERAL.—Subchapter U of chapter 1 (relating to general 
stock ownership corporation) is hereby repealed. 
(b) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) Paragraph (1) of section 172(b) (relating to net operating 
loss carrybacks and carryovers) is amended by striking out 
subparagraph (J) and by redesignating subparagraph (K) as 
subparagraph (J). 
(2) Paragraphs (2) and (4) of section 172(k) are each amended 
by striking out "subsection (b)(l)(K)" and inserting in lieu 
thereof "subsection (b)(l)(J)". 
(3) Subsection (a) of section 1016 (relating to adjustments to 
basis) is amended by striking out paragraph (22) and by re-
designating paragraphs (23) through (27) as paragraphs (22) 
through (26), respectively. 
(4) Subsection (r) of section 3402 (relating to extension of 
withholding to GSOC distribution) is hereby repealed. 
(5) Section 6039B (relating to return of general stock owner-
ship corporation) is hereby repealed, 
i 
(c) CLERICAL AMENDMENTS.— 
(1) The table of subchapters for chapter 1 is amended by 
striking out the item relating to subchapter U. 
(2) The table of sections for subpart A of part III of subchapter 
A of chapter 61 is amended by striking out the item relating to 
section 6039B. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2659 
Subtitle B—Effective Dates and Transitional 
Rules 
SEC. 1311. GENERAL EFFECTIVE DATES. 
(a) IN GENERAL.—Except as otherwise provided in this subtitle, 
the amendments made by section 1301 shall apply to bonds issued 
after August 15,1986. 
(b) SECTION 1301(f).— 
(1) INCREASE IN TRADE-IN RATE.—The amendments made by 
' 
paragraph (1) of section 1301(f) shall apply to nonissued bond 
amounts elected after August 15,1986. 
- 
(2) CERTIFICATES.—The amendments made by paragraph (2) of 
section 1301(f) shall apply to certificates issued after August 15, 
1986. 
(c) CHANGES IN USE, ETC., OF FACIUTIES FINANCED WITH PRIVATE 
ACTIVITY BONDS.—Subsection (b) of section 150 of the 1986 Code 
shall apply to changes in use (and ownership) after August 15, 1986, 
but only with respect to financing (including refinancings) provided 
after such date. 
(d) SECTION 1303.—The amendments made by section 1303 shall 
take effect on the date of the enactment of this Act. 
SEC. 1312. TRANSITIONAL 
RULES FOR CONSTRUCTION OR BINDING 
AGREEMENTS AND CERTAIN GOVERNMENT BONDS ISSUED 
AFTER AUGUST 15,1986. 
(a) EXCEPTION FOR CONSTRUCTION OR BINDING AGREEMENTS.— 
(1) IN GENERAL.—The amendments made by section 1301 shall 
not apply to bonds (other than a refunding bend) with respect to 
a facility— 
ju.; 
(AXi) the original use of which commences with the tax-
payer, and the construction, reconstruction, or rehabilita-
tion of which began before September 26, 1985, and was 
completed on or after such date, 
|j 
(ii) the original use of which begins with the taxpayer and 
with respect to which a binding contract to incur significant 
expenditures for construction, reconstruction, or rehabilita-
tion was entered into before September 26, 1985, and some 
J 
of such expenditures are incurred on or after such date, or 
] 
(iii) acquired on or after September 26, 1985, pursuant to 
V 
a binding contract entered into before such date, and 
j. 
(B) described in an inducement resolution or other com-
parable preliminary approval adopted by an issuing author-
ity (or by a voter referendum) before September 26, 1985. 
(2) SIGNIFICANT EXPENDITURES.—For purposes of paragraph 
dXA), the term "significant expenditures" means expenditures 
' greater than 10 percent of the reeisonably anticipated cost of the 
construction, reconstruction, or rehabilit-ation of the facility 
involved. 
(b) CERTAIN AMENDMENTS TO APPLY TO BONDS UNDER SUBSECTION 
(a) TRANSITIONAL RULE.— 
(1) IN GENERAL.—In the case of a bond issued after August 15, 
1986, and to which subsection (a) of this section applies, the 
requirements of the following provisions shall be treated as 
included in section 103 and section 103A (as appropriate) of the 
1954 Code: 
100 STAT. 2660 
PUBLIC LAW 99-514—OCT. 22, 1986 
fg^ft 
(A) The requirement that 95 percent or more of the net 
proceeds of an issue are to be used for a purpose described 
in section 103(b)(4) or (5) of such Code in order for section 
103(b)(4) or (5) of such Code to apply, including the applica-
tion of section 142(bX2) of the 1986 Code (relating to limita-
, 
tion on office space). 
'"^.^ , 
(B) The requirement that 95 percent or more of the net 
proceeds of an issue are to be used for a purpose described 
in section 1030t)X6XA) of the 1954 Code in order for section 
^^. ,: 
103(bX6XA) of such Code to apply. 
*. " 
(C) The requirements of section 143 of the 1986 Code 
(relating to qualified mortgage bonds and qualified veter-
ans' mortgage bonds) in order for section 103AOt)X2) of the 
1954 Code to apply. 
(D) The requirements of section 144(aXll) of the 1986 
Code (relating to limitation on acquisition of depreciable 
farm property) in ordei* for section 1030t)X6XA) of the 1954 
Code to apply. 
(E) The requirements of section 1470t)) of the 1986 Code 
(relating to maturity may not exceed 120 percent of eco-
! 
i 
nomic life). 
(F) The requirements of section 147(0 of the 1986 Code 
(relating to public approval required for private activity 
''[' 
bonds). 
(G) The requirements of section 147(g) of the 1986 CJode 
(relating to restriction on issuance costs financed by issue). 
(H) The requirements of section 148 of the 1986 Code 
(relating to arbitrage). 
(I) The requirements of section 149(e) of the 1986 Code 
(relating to information reporting). 
(J) The provisions of section 1500t)) of the 1986 Code 
(relating to changes in use). 
(2) CERTAIN REQUIREMENTS APPLY ONLY TO BONDS ISSUED AFTER 
DECEMBER 31, 1986.—In the case of subparagraphs (F) and (I) of 
paragraphs (1), paragraph (1) shall be applied by substituting 
"December 31, 1986" for "August 15,1986". 
(3) APPLICATION OF VOLUME CAP.—Except as provided in sec-
tion 1315, any bond to which this subsection applies shall be 
treated as a private activity bond for purposes of section 146 of 
the 1986 Code if such bond would have been taken into account 
under section 103(n) or 103A(g) of the 1954 Code (determined 
-'' without regard to any carryforward election) were such bond 
issued before August 16,1986. 
(4) APPLICATION OF PROVISIONS.—For purposes of applying the 
requirements referred to in any subparagraph of paragraph (1) 
or of subsection (aX3) or 0^X3) of section 1313 to any bond, such 
bond shall be treated as described in the subparagraph of 
section 141(dXl) of the 1986 Code to which the use of the 
proceeds of such bond most closely relates. 
(c) SPECIAL RULES FOR CERTAIN GOVERNMENT BONDS ISSUED AFTER 
AUGUST 15,1986.— 
(1) IN GENERAL.—In the case of any bond described in para-
graph (2)— 
(A) section 1311(a) and (c) and subsection Ot)) of this 
'* 
section shall be applied by substituting "August 31, 1986" 
for "August 15, 1986" each place it appears. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2661 
-*" 
(B) subsection (b)(1) shall be applied without regard to 
subparagraphs (F), (G), and (J), and 
' 
(C) such bond shall not be treated as a private activity 
bond for purposes of applying the requirements referred to 
'
^
*
* 
in subparagraphs (H) and (I) of subsection (b)(1). 
(2) BOND DESCRIBED.—A bond is described in this paragraph if 
such bond is not— 
(A) an industrial development bond, as defined in section 
103(b)(2) of the 1954 Code but determined— 
(i) by inserting "directly or indirectly" after "is" in 
the material preceding clause (i) of subparagraph (B) 
thereof, and 
(ii) without regard to subparagraph (B) of section 
-•• 
103(b)(3) of such Code, 
(B) a mortgage subsidy bond (as defined in section 
' 
103A(b)(l) of such Code, without regard to any exception 
from such definition), or 
'• ' 
(C) a private loan bond (as defined in section 103(o)(2)(A) 
of such Code, without regard to any exception from such 
definition other than section 103(o)(2)(C) of such Code). 
(d) ELECTION OUT.—This section shall not apply to any issue with 
respect to which the issuer elects not to have this section apply. 
SEC. 1313. TRANSITIONAL RULES RELATING TO REFUNDINGS. 
(a) CERTAIN CURRENT REFUNDINGS.— 
(1) IN GENERAL.—Except as provided in paragraph (3), the 
amendments made by section 1301 shall not apply to any bond 
the proceeds of which are used exclusively to refund (other than 
to advance refund) a qualified bond (or a bond which is part of a 
series of refundings of a qualified bond) if— 
(A) the amount of the refunding bond does not exceed the 
outstanding amount of the refunded bond, and 
(B)(i) the average maturity of the issue of which the 
• 
• 
refunding bond is a part does not exceed 120 percent of the 
average reasonably expected economic life of the facilities 
being financed with the proceeds of such issue (determined 
under section 147(b) of the 1986 Code), or 
'Hid' 
(ii) the refunding bond has a maturity date not later than 
the date which is 17 years after the date on which the 
qualified bond was issued. 
In the case of a qualified bond which was (when issued) a 
qualified mortgage bond or a qualified veterans' mortgage bond, 
subparagraph (B)(i) shall not apply and subparagraph (B)(ii) 
shall be applied by substituting "32 years" for "17 years". 
(2) QUALIFIED BOND.—For purposes of paragraph (1), the term 
"qualified bond" means any bond (other than a refunding 
bond)— 
(A) issued before August 16,1986, or 
(B) issued after August 15, 1986, if section 1312(a) applies 
-1-5 
to such bond. 
(3) CERTAIN AMENDMENTS TO APPLY.—The following provisions 
of the 1986 Code shall be treated as included in section 103 and 
section 103A (as appropriate) of the 1954 Code and shall apply to 
refunding bonds described in paragraph (1): 
(A) The requirements of section 147(f) (relating to public 
approval required for private activity bonds) but only if the 
100 STAT. 2662 
PUBLIC LAW 99-514—OCT. 22, 1986 
maturity date of the refunding bond is later than the 
maturity date of the refunded bond. 
(B) The requirements of section 147(g) (relating to restric-
• J 
tion on issuance costs financed by issue). 
(C) The requirements of section 148 (relating to ar-
bitrage). 
(D) The requirements of section 149(e) (relating to 
information reporting). 
(E) The provisions of section 150(b) of such Code (relating 
to changes in use). 
Subparagraphs (A) and (D) shall apply only if the refunding 
bond is issued after December 31,1986. 
(4) SPECIAL RULES FOR CERTAIN GOVERNMENT BONDS ISSUED 
AFTER AUGUST 15, 1986.—In the casc of any bond described in 
section 1312(c)(2)— 
(A) paragraph (2) of this subsection shall be applied by 
substituting "August 31,1986" for "August 15,1986", 
;. , 
(B) paragraph (3) shall be applied without regard to sub-
; j^. 
paragraphs (A), (B), and (E), and 
(C) such bond shall not be treated as a private activity 
bond for purposes of applying the requirements referred to 
in subparagraphs (C) and (D) of paragraph (3). 
(b) CERTAIN ADVANCE REFUNDINGS.— 
(1) IN GENERAL.—Except as provided in paragraph (3), the 
amendments made by section 1301 shall not apply to any bond 
the proceeds of which are used exclusively to advance refund a 
bond if— 
(A) the refunded bond is described in paragraph (2), and 
(B) the requirements of subsection (aXlXB) are met. 
(2) NON-IDB'S, ETC.—A bond is described in this paragraph if 
such bond is not described in subsection (bX2) or (oX2XA) of 
section 103 of the 1954 Code and was issued (or was issued to 
refund a bond issued) before August 16,1986. 
(3) CERTAIN AMENDMENTS TO APPLY.—The following provisions 
of the 1986 Code shall be treated as included in section 103 and 
section 103A (as appropriate) of the 1954 (Dode and shall apply to 
refunding bonds described in paragraph (1): 
(A) The requirements of section 147(f) (relating to public 
approval required for private activity bonds). 
(B) The requirements of section 147(g) (relating to restric-
tion on issuance costs financed by issue). 
(C) The requirements of section 148 (relating to ar-
bitrage), except that section 148(dX3) shall not apply to 
proceeds of such bonds to be used to discharge the refunded 
:, 
bonds. 
^ 
(D) The requirements of paragraphs (3) and (4) of section 
149(d) (relating to advance refundings). 
(E) The requirements of section 149(e) (relating to 
v
f
^ 5 
information reporting). 
(F) The provisions of section 150(b) of such Code (relating 
to changes in use). 
Subparagraphs (A) and (E) shall apply only if the refunding 
bond is issued after December 31, 1986. 
(4) SPECIAL RULE FOR CERTAIN GOVERNMENT BONDS ISSUED 
AFTER AUGUST 15, 1986.—In the case of any bond described in 
section 1312(cX2)— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2663 
"4 :r 
(A) paragraph (2) of this subsection shall be applied by 
substituting "September 1, 1986" for "August 16, 1986 , 
(B) paragraph (3) shall be applied without regard to sub-
paragraphs (A), (B), and (F), and 
(C) such bond shall not be treated as a private activity 
bond for purposes of applying the requirements referred to 
t' 
in subparagraphs (C) and (E). 
a 
(5) CERTAIN REFUNDING BONDS SUBJECT TO VOLUME CAP.—Any 
t 
refunding bond described in paragraph (1) the proceeds of which 
are used to refund a bond issued as part of an issue 5 percent or 
» 
more of the net proceeds of which are to be used to provide an 
5 
output facility (within the meaning of section 141(b)(4) of the 
< 
1986 Code) shall be treated as a private activity bond for 
purposes of section 146 of the 1986 Code (to the extent of the 
nongovernmental use of such issue, under rules similar to the 
rules of section 146(m)(2) of such Code). For purposes of the 
preceding sentence, use by a 501(c)(3) organization with respect 
to its activities which do not constitute unrelated trades or 
^ 
businesses (determined by applying section 513(a) of the 1986 
Code) shall not be taken into account. 
(c) TREATMENT OF CURRENT REFUNDINGS OF CERTAIN IDB'S AND 
501(c)(3) BONDS.— 
(1) $40,000,000 LIMIT FOR CERTAIN SMALL ISSUE BONDS.—Para-
graph (10) of section 144(a) of the 1986 Code shall not apply to 
any bond the proceeds of which are used exclusively to refund a 
tax-exempt bond to which such paragraph and the correspond-
'* ing provision of prior law do not apply i
f
— 
*' 
(A) the refunding bond has a maturity date not later than 
i 
the maturity date of the refunded bond, 
(B) the amount of the refunding bond does not exceed the 
outstanding amount of the refunded bond, 
«• 
(C) the interest rate on the refunding bond is lower than 
£ 
the interest rate on the refunded bond, and 
(D) the net proceeds of the refunding bond are used to 
redeem the refunded bond not later than 90 days after the 
date of the issuance of the refunding bond. 
t' 
(2) $150,000,000 LIMITATION FOR CERTAIN 501(C)(3) BONDS.— 
Subsection (b) of section 145 of the 1986 Code (relating to 
$150,000,000 limitation for nonhospital bonds) shall not apply to 
5 any bond the proceeds of which are used exclusively to refund a 
tax-exempt bond to which such subsection does not apply i
f
— 
? 
(A)(i) the average maturity of the issue of which the 
u. > 
refunding bond is a part does not exceed 120 percent of the 
average reasonably expected economic life of the facilities 
being financed with the proceeds of such issue (determined 
j*o i 
under section 147(b) of the 1986 Code), or 
(ii) the refunding bond has a maturity date not later than 
r / 
the later of the date which is 17 years after the date on 
*
- 
which the qualified bond (as defined in subsection (a)(2)) was 
issued, and 
(B) the requirements of subparagraphs (B) and (D) of 
c 
paragraph (1) are met with respect to the refunding bond. 
i 
Subsection (b) of section 145 of the 1986 Code shall not apply to 
the 1st advance refunding after March 14, 1986, of a bond issued 
before January 1, 1986. 
(3) APPLICATION TO LATER ISSUES.—Any bond to which section 
144(a)(10) or 145(b) of the 1986 Code does not apply by reason of 
100 STAT. 2664 
PUBLIC LAW 99-514—OCT. 22, 1986 
, i this section shall be taken into account in determining whether 
such section applies to any later issue. 
SEC. 1314. SPECIAL RULES WHICH OVERRIDE OTHER RULES IN THIS 
SUBTITLE. 
(a) ARBITRAGE RESTRICTION ON INVESTMENTS IN ANNUITIES.—In 
the case of a bond issued after September 25, 1985, section 103(c) of 
the 1954 Code shall be applied by treating the reference to securities 
in paragraph (2) thereof as including a reference to an annuity 
contract. 
Oa) TEMPORARY PERIOD FOR ADVANCE REFUNDINGS.—In the case of 
a t)ond issued after December 31,1985, to advance refund a bond, the 
initial temporary period under section 103(c) of the 1954 Code with 
respect to the proceeds of the refunding bond shall end not later 
than 30 days after the date of issue of the refunding bond. 
(c) DETERMINATION OF YIELD.—In the case of a bond issued after 
December 31, 1985, for purposes of section 103(c) of the 1954 Code, 
the yield on an issue shall be determined on the basis of the issue 
price (within the meaning of sections 1273 and 1274 of the 1986 
Code). 
(d) ARBITRAGE REBATE REQUIREMENT.— 
(1) IN GENERAL.—Except as otherwise provided in this subsec-
,- tion, in the case of a bond issued after December 31, 1985, 
, 
section 103 of the 1954 Code shall be treated as including the 
requirements of section 148(f) of the 1986 Code in order for 
;,/ section 103(a) of the 1954 Code to apply. 
(2) GOVERNMENT BONDS.—In the case of a bond described in 
f. section 1312(cX2) (and not described in paragraph (3) of this 
subsection), parcigraph (1) shall be applied by substituting 
s, 
"August 31,1986" for "December 31,1985". 
(3) CERTAIN POOLS.— 
(A) IN GENERAL.—In the case of a bond described in 
section 1312(cX2) and issued as part of an issue described in 
subparagraph (B), (C), (D), or (E), paragraph (1) shall be 
J, 
applied by substituting "3 p.m. E.D.T., July 17, 1986" for 
"December 31, 1985". Such a bond shall not be treated as a 
private activity bond for purposes of applying section 148(f) 
J 
ofthe 1986 Code. 
(B) 
LOANS TO UNRELATED GOVERNMENTAL UNITS.—An 
issue is described in this subparagraph if any portion of the 
proceeds of the issue is to be used to make or finance loans 
to any governmental unit other than any governmental 
unit which is subordinate to the issuer and the jurisdiction 
, 
of which is within— 
(i) the jurisdiction of the issuer, or 
(ii) the jurisdiction of the governmental unit on 
behalf of which such issuer issued the issue. 
(C) LESS THAN 75 PERCENT OF PROJECTS IDENTIFIED.—An 
issue is described in this subparagraph if less than 75 
percent of the proceeds of the issue is to be used to make or 
finance loans to initial borrowers to finance projects identi-
fied (with specificity) by the issuer, on or before the date of 
issuance of the issue, £is projects to be financed with the 
,f. 
proceeds of the issue. 
(D) LESS THAN 25 PERCENT OF FUNDS COMMITTED TO BE 
,„^ - BORROWED.—An issue is described in this subparagraph if, 
on or before the date of issuance of the issue, commitments 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2665 
have not been entered into by initial borrowers to borrow at 
least 25 percent of the proceeds of the issue. 
(E) CERTAIN LONG MATURITY ISSUES.—An issue is de-
scribed in this subparagraph i
f
— 
,-«r 
(i) the maturity date of any bond issued as part of 
such issue exceeds 30 years, and 
/{ 
(ii) any principal payment on any loan made or 
r? 
financed by the proceeds of the issue is to be used to 
Ii 
make or finance additional loans. 
(F) SPECIAL RULES.— 
.;> 
(i) EXCEPTION FROM SUBPARAGRAPHS (C) AND (D) 
I 
WHERE SIMILAR POOLS ISSUED B
Y ISSUER.—An issue shall 
f 1, 
not be treated as described in subparagraph (C) or (D) 
with respect to any issue to make or finance loans to 
governmental units i
f
— 
(I) the issuer, before 1986, issued 1 or more simi-
lar issues to make or finance loans to govern-
mental units, and 
••':'• 
(II) the aggregate face amount of such issues 
issued during 1986 does not exceed 250 percent of 
& 
the average of the annual aggregate face amounts 
of such similar issues issued during 1983, 1984, or 
-fe 
1985. 
(ii) DETERMINATION OF ISSUANCE.—For purposes of 
• J 
subparagraph (A), an issue shall not be treated as 
issued until— 
(I) the bonds issued as part of such issue are 
f- * 
IT'* 
offered to the public (pursuant to final offering 
materials), and 
J' 
(II) at least 25 percent of such bonds is sold to the 
•
^
-
* 
public. 
" 
For purposes of the preceding sentence, the sale of a 
bond to a securities firm, broker, or other person acting 
in the capacity of an underwriter or wholesaler shall 
not be treated as a sale to the public. 
(e) INFORMATION REPORTING.—In the case of a bond issued after 
December 31, 1986, nothing in section 103(a) of the 1986 Code or any 
other provision of law shall be construed to provide an exemption 
from Federal income tax for interest on any bond unless such bond 
satisfies the requirements of section 149(e) of the 1986 C!ode. A bond 
described in section 1312(c)(2) shall not be treated as a private 
activity bond for purposes of applying such requirements. 
(f) ABUSIVE TRANSACTION LIMITATION ON ADVANCE REFUNDINGS TO 
APPLY.—In the case of a bond issued after December 31, 1986, 
nothing in section 103(a) of the 1986 Code or any other provision of 
law shall be construed to provide an exemption from Federal income 
tax for interest on any bond if the issue of which such bond is a part 
is described in paragraph (4) of section 149(d) of the 1986 Code 
(relating to abusive transactions). 
(g) SECTION TO OVERRIDE OTHER RULES.—Except as otherwise 
expressly provided by reference to a provision to which a subsection 
of this section applies, nothing in any other section of this subtitle 
shall be construed as exempting any bond from the application of 
such provision. 
100 STAT. 2666 
PUBLIC LAW 99-514—OCT. 22, 1986 
SEC. 1315. TRANSITIONAL RULES RELATING TO VOLUME CAP. 
(a) IN GENERAL.—Except as otherwise provided in this section, 
section 146(f) of the 1986 Code shall not apply with respect to an 
issuing authority's volume cap under section 103(n) of the 1954 Code, 
and no canyforward under such section 103(n) shall be recognized 
for bonds issued after August 15,1986. 
O
t
)
) CERTAIN BONDS FOR CARRYFORWARD PROJECTS OUTSIDE OF 
VOLUME CAP.—Bonds issued pursuant to an election under section 
103(nX10) of the 1954 Code (relating to elective carryforward of 
unused limitation for specified project) made before November 1, 
1985, shall not be taken into account under section 146 of the 1986 
Code if the canyforward project is a facility to which the amend-
ments made by section 1301 do not apply by reason of section 1312(a) 
of this Act. 
(c) VOLUME CAP NOT To APPLY WITH RESPECT TO CERTAIN FACIU-
TIES AND PURPOSES.—Section 146 of the 1986 Code shall not apply to 
any bond issued with respect to any facility or purpose described in 
a paragraph of subsection (d) i
f
— 
(1) such bond would not have been taken into account under 
section 103(n) of the 1954 Code (determined without regard to 
,ij any carryforward election) were such bond issued before 
t 
August 16,1986, or 
(2) such bond would not have been taken into account under 
y, 
section 103(n) of the 1954 CJode (determined with regard to any 
carrjrforward election made before January 1, 1986) were such 
bond issued before August 16,1986. 
(d) FACILITIES AND PURPOSES DESCRIBED.— 
(1) A facility is described in this paragraph if the amendments 
made by section 201 of this Act (relating to depreciation) do not 
.. apply to such facility by reason of section 204(aX8) of this Act 
(or, in the case of a facility which is governmentally owned, 
J, would not apply to such facility were it owned by a nongovern-
mental person). 
(2) A facility or purpose is described in this paragraph if the 
facility or purpose is described in a paragraph of section 1317. 
(3) A facility is described in this paragraph if the facility— 
(A) serves Los Osos, California, and 
(B) would be described in paragraph (1) were it a solid 
waste disposal facility. 
The aggregate face amount of bonds to which this paragraph 
'' 
applies shall not exceed $35,000,000. 
' 
(4) A facility is described in this paragraph if it is a sewage 
disposal facility with respect to which— 
(A) on September 13, 1985, the State public facilities 
"-' 
authority took official action authorizing the issuance of 
bonds for such facility, and 
(B) on December 30, 1985, there was an executive order of 
" 
the State Governor granting allocation of the State ceiling 
under section 103(n) of the 1954 (Dode in the amount of 
$250,000,000 to the Industrial Development Board of the 
• 
Parish of East Baton Rouge, Louisiana. 
^ The aggregate face amount of bonds to which this paragraph 
applies shall not exceed $98,500,000. 
(5) A facility is described in this paragraph i
f
— 
(A) such facility is a solid waste disposal facility in 
Charleston, South Carolina, and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2667 
(B) a State political subdivision took formal action on 
April 1, 1980, to commit development funds for such 
facility. 
For purposes of determining whether a bond issued as part of an 
issue for a facility described in the preceding sentence is an 
exempt facility bond for purposes of part IV of subchapter B of 
chapter 1 of the 1986 Code, "90 percent" shall be substituted for 
"95 percent" in section 142(a) of the 1986 Code. 
The aggregate face amount of bonds to which this paragraph 
applies shall not exceed $75,000,000. 
(6) A facility is described in this paragraph if^ 
(A) such facility is a wastewater treatment facility for 
.»: 
which site preparation commenced before September 1985, 
' - • 
and 
(B) a parish council approved a service agreement with 
respect to such facility on December 4,1985. 
The aggregate face amount of bonds to which this paragraph 
applies shall not exceed $120,000,000. 
(e) TREATMENT OF REDEVELOPMENT BONDS.—Any bond to which 
section 1317(6) of this Act applies shall be treated for purposes of 
this section as described in subsection (cXD. 
SEC. 1316. PROVISIONS RELATING TO CERTAIN ESTABLISHED STATE 
PROGRAMS. 
: (a) CERTAIN LOANS TO VETERANS FOR THE PURCHASE OF LAND.— 
(1) IN GENERAL.—A bond described in paragraph (2) shall be 
, 
treated as described in section 141(dXl) of the 1986 Code, but 
subsections (a), (b), (c), and (d) of section 147 of such C!ode shall 
not apply to such bond. 
(2) BOND DESCRIBED.—A bond is described in this paragraph 
if— 
(A) such bond is a private activity bond solely by reason 
. ^.,.^ 
of section 141(c) of such Code, and 
(B) such bond is issued as part of an issue 95 percent or 
more of the net proceeds of which are to be used to carry 
^ 
out a program established under State law to provide loans 
I 
to veterans for the purchsise of land and which has been in 
effect in substantially the same form during the 30-year 
period ending on July 18,1984, but only if such proceeds are 
used to make loans or to fund similar obligations— 
'1 . 
(i) in the same manner in which, 
(ii) in the same (or lesser) amount or multiple of acres 
per participant, and 
(iii) for the same purposes for which, 
J 
such program was operated on March 15,1984. 
^ (b) RENEWABLE ENERGY PROPERTY.— 
(1) IN GENERAL.—A bond described in paragraph (2) shall be 
treated as described in section 141(dXl) of the 1986 Code. 
(2) BOND DESCRIBED.—A bond is described in this paragraph if 
paragraph (1) of section 1030t>) of the 1954 Code would not 
(without regard to the amendments made by this title) have 
applied to such bond by reason of section 243 of the Crude Oil 
Windfall Profit Tax Act of 1980 if— 
(A) such section 243 were applied by substituting "95 
percent or more of the net proceeds" for "substantially all 
of the proceeds" in subsection (aXD thereof, and 
100 STAT. 2668 
PUBLIC LAW 99-514—OCT. 22, 1986 
(B) subparagraph (E) of subsection (a)(1) thereof referred 
to section 149(b) of the 1986 Code. 
. , 
^^ 
(c) CERTAIN STATE PROGRAMS.— 
(1) IN GENERAL.—A bond described in paragraph (2) shall be 
treated as described in section 141(d)(1) of the 1986 Code. 
(2) BOND DESCRIBED.—A bond is described in this paragraph if 
such bond is issued as part of an issue 95 percent or more of the 
net proceeds of which are to be used to carry out a program 
established under sections 280A, 280B, and 280C of the Iowa 
Code, but only i
f
— 
(A) such program has been in effect in substantially the 
lol 
same form since July 1, 1983, and 
.i'-H^i i 
(B) such proceeds are to be used to make loans or fund 
similar obligations for the same purposes as permitted 
?1« 
under such program on July 1, 1986. 
(3) $100,000,000 LIMITATION.—The aggregate face amount of 
'I- outstanding bonds to which this subsection applies shall not 
exceed $100,000,000. 
(d) USE BY CERTAIN FEDERAL INSTRUMENTALITIES TREATED AS USE 
B
Y GOVERNMENTAL UNITS.—Use by an instrumentality of the United 
States shall be treated as use by a State or local governmental unit 
for purposes of section 103, and part IV of subchapter B of chapter 1, 
of the 1986 Code with respect to a program approved by Congress 
before August 3, 1972, but only i
f
— 
( D a portion of such program has been financed by bonds 
issued before such date, to which section 103(a) of the 1954 Code 
applied pursuant to a ruling issued by the Commissioner of the 
' 
Internal Revenue Service, and 
(2) construction of 1 or more facilities comprising a part of 
such program commenced before such date. 
(e) REFUNDING PERMITTED OF CERTAIN BONDS INVESTED IN FEDER-
A LLY INSURED DEPOSITS 
(1) IN GENERAL.—Section 149(b)(2)(B)(ii) of the 1986 Code shall 
not apply to any bond issued to refund a bond— 
(A) which, when issued, would have been treated as feder-
ally guaranteed by reason of being described in clause (ii) of 
section 103(h)(2)(B) of the 1954 Code if such section had 
,». 
* applied to such bond, and 
(B)(i) which was issued before April 15,1983, or 
(ii) to which such clause did not apply by reason of the 
except clause in section 631(c)(2) of the Tax Reform Act of 
1984. 
Section 147(c) of the 1986 Code shall not apply to any refunding 
bond permitted under the preceding sentence if section 
103(b)(16) of the 1954 Code did not apply to the refunded bond 
when issued. 
(2) REQUIREMENTS.—A refunding bond meets the require-
ments of this paragraph i
f
— 
(A) the refunding bond has a maturity date not later than 
the maturity date of the refunded bond, 
(B) the amount of the refunding bond does not exceed the 
outstanding amount of the refunded bond, 
(C) the weighted average interest rate on the refunding 
bond is lower than the weighted average interest rate on 
the refunded bond, and 
,. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2669 
K 
(D) the net proceeds of the refunding bond are used to 
redeem the refunded bond not later than 90 days after the 
date of the issuance of the refunding bond. 
(f) CERTAIN HYDROELECTRIC GENERATING PROPERTY.— 
(1) IN GENERAL.—A bond described in paragraph (2) shall be 
treated as described in section 141(dXl) of the 1986 Code. 
(2) DESCRIPTION.—A bond is described in this paragraph if 
such bond is issued as part of an issue 95 percent or more of the 
net proceeds of which are to be used to provide a facility 
described in section 1030t)X4XH) of the 1954 Code determined— 
^, E 
(A) by substituting "an application for a license" for "an 
application" in section 103(bX8XEXii) of the 1954 Code, and 
(B) by appl3dng the requirements of section 14203X2) of 
the 1986 Code. 
(g) TREATMENT OF BONDS SUBJECT TO TRANSITIONAL RULES UNDER 
TAX REFORM ACT OF 1984.— 
(1) Subsections (dX3) and (0 of section 148 of the 1986 Code 
shall not apply to any bond described in section 624(cX2) of the 
Tax Reform Act of 1984. 
(2XA) There shall not be taken into account under section 146 
of the 1986 Code any bond described in the paragraph (3) of 
section 631(a) of the Tax Reform Act of 1984 relating to excep-
tion for certain bonds for a convention center and resource 
recovery project. 
(B) If a bond issued as part of an issue substantially all of the 
proceeds of which are used to provide the convention center to 
which such paragraph (3) applies, such bond shall be treated as 
an exempt facility bond as defined in section 142(a) of the 1986 
Code. 
(C) If a bond which is issued as part of an issue substantially 
all of the proceeds of which are used to provide the resource 
recovery project to which paragraph (3) applies, such bond shall 
be treated as an exempt facility bond as defined in section 142(a) 
of the 1986 Code and section 1490)) of such Code shall not apply. 
(3) The amendments made by section 1301 shall not apply to 
bonds issued to finance any property described in section 
631(dX4) of the Tax Reform Act of 1984. 
(4) The amendments made by section 1301 shall not apply to— 
t 
(A) any bond issued to finance property described in 
section 631(dX5) of the Tax Reform Act of 1984, 
(B) any bond described in paragraph (2), (3), (4), (5), (6), or 
(7) of section 632(a), or section 6320)), of such Act, and 
(C) any bond to which section 632(gX2) of such Act applies. 
In the case of bonds to which this pairagraph applies, the 
requirements of sections 148 and 149(d) shall be treated as 
included in section 103 of the 1954 Ck>de and shall apply to such 
bonds. 
(5) The preceding provisions of this subsection shall not apply 
to any bond issued after December 31,1988. 
(6) The amendments made by section 1301 shall not apply to 
any bond issued to finance property described in section 
216a)X3) of the Tax Equity and Fiscal Responsibility Act of 1982. 
(7) In the case of a bond described in section 632(d) of the Tax 
Reform Act of 1984— 
(A) section 141 of the 1986 Code shall be applied without 
regard to subsection (aX2) and subsection Ot>)(5) and para-
graphs (1) and (2) of subsection (b) thereof shall be applied 
100 STAT. 2670 
PUBLIC LAW 99-514—OCT. 22, 1986 
OJ i:; 
by substituting "25 percent" for "10 percent" each place it 
^lii f xJt appears, and 
(B) section 149(b) of the 1986 Code shall not apply. 
(8)(A) The amendments made by section 1301 shall not apply 
"
f
* to any bond to which section 629(a)(1) of the Tax Reform Act of 
1984 applies, but such bond shall be treated as a private activity 
bond for purposes of section 146 of the 1986 Code. 
(B) Section 629 of the Tax Reform Act of 1984 is amended— 
(i) in subsection (c)(2), by striking out "$625,000,000" and 
inserting in lieu thereof "$911,000,000", 
(ii) in subsection (c)(3), by adding at the end thereof the 
following new subparagraphs: 
"(D) Improvements to existing generating facilities. 
"(E) Transmission lines. 
use 
"(F) Electric generating facilities.", and 
(iii) in subsection (a), by adding at the end thereof the 
' 
following new sentence: ' The preceding sentence shall be 
applied by inserting 'and a rural electric cooperative utility' 
after 'regulated public utility' but only if not more than 1 
•II 
percent of the load of the public power authority is sold to 
such rural electric cooperative utility." 
(h) CERTAIN POLLUTION BONDS.—Any bond which is treated as 
described in section 103(b)(4)(F) of the 1954 Code by reason of section 
13209 of the Consolidated Omnibus Budget Reconciliation Act of 
1985 shall be treated as an exempt facility bond for purposes of part 
IV of subchapter B of chapter 1 of the 1986 Code, and section 147(d) 
of the 1986 Code shall not apply to such bond. 
(i) TRANSITION RULE FOR AGGREGATE LIMIT PER TAXPAYER.—For 
purposes of section 144(a)(10) of the 1986 Code, tax increment bonds 
described in section 1869(c)(3) of this Act which are issued before 
August 16, 1986, shall not be taken into account under subpara-
graph (B)(ii) thereof. 
(j) EXTENSION OF ADVANCE REFUNDING EXCEPTION FOR QUALIFIED 
PUBLIC FACILITY.—Paragraph (4) of section 631(c) of the Tax Reform 
Act of 1984 is amended— 
(1) by striking out "or the Dade County, Florida, airport" in 
the last sentence, and 
(2) by adding at the end thereof the following new sentence: 
"In the case of refunding obligations not to exceed $40,000,000 
with respect to the Dade County, Florida, airport, the first 
sentence of this paragraph shall be applied by substituting 
'December 31, 1987' for 'December 31, 1984' and the amend-
ments made by section 1301 of the Tax Reform Act of 1986 shall 
not apply." 
(k) EXPANSION OF EXCEPTION FOR RIVER PLACE PROJECT.—Section 
1104 of the Mortgage Subsidy Bond Tax Act of 1980, as added by the 
Tax Reform Act of 1984, is amended— 
(1) by striking out "December 31, 1984," in subsection (p) and 
inserting in lieu thereof "December 31, 1984 (other than obliga-
tions described in subsection (r)(l)),", and 
(2) by striking out "$55,000,000," in subsection (r)(l)(B) and 
inserting in lieu thereof "$110,000,000 of which $55,000,000 
must be redeemed no later than November 1, 1987". 
(1) CERTAIN REFUNDINGS.—Section 628(g) of the Tax Reform Act of 
1984 (and the amendments made by section 1301 of this Act) shall 
not apply to any refunding obligation if the refunded issue was 
approved by a city building commission on April 29, 1982, and was 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2671 
issued on Maty 11, 1982, and the refunding obligations were issued 
before January 1, 1987. 
SEC. 1317. TRANSITIONAL RULES FOR SPECIFIC FACILITIES. 
(1) DOCKS AND WHARVES.—A bond issued as part of an issue 95 
percent or more of the net proceeds of which are to be used to 
provide any dock or wharf (within the meaning of section 
103(bX4XD) of the 1954 Code) shall be treated as an exempt 
facility bond (for a facility described in section 142(aX2) of the 
1986 Code) for purposes of part IV of subchapter B of chapter 1 
of the 1986 Code if such dock or wharf is described in any of the 
following subparagraphs: 
(A) A dock or wharf is described in this subparagraph i
f
— 
(i) the issue to finance such dock or wharf was ap-
proved by official city action on September 3, 1985, and 
by voters on November 5,1985, and 
.,g 
(ii) such dock or wharf is for a slack water harbor 
with respect to which a Corps of Engineers grant of 
approximately $2,000,000 has been made under section 
I, ^ 
107 of the Rivers and Harbors Act. 
The aggregate face amount of bonds to which this subpara-
,^-|l= 
graph applies shall not exceed $2,500,000. 
(B) A dock or wharf is described in this subparagraph i
f
— 
(i) inducement resolutions were adopted on May 23, 
1985, September 18, 1985, and September 24, 1985, for 
the issuance of the bonds to finance such dock or wharf, 
%Q ., 
(ii) a harbor dredging contract with respect thereto 
* ,, 
was entered into on August 2,1985, and 
(iii) a construction management and joint venture 
agreement with respect thereto was entered into on 
October 1, 1984. 
^ 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $625,000,000. 
(C) A facility is described in this subparagraph i
f
— 
(i) the legislature first authorized on June 29, 1981, 
" 
" 
the State agency issuing the bond to issue at least 
$30,000,000 of bonds, 
(ii) the developer of the facility was selected on April 
26,1985, and 
(iii) an inducement resolution for the issuance of such 
issue was adopted on October 9,1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $200,000,000. 
* " 
(D) A facility is described in this subparagraph if— 
(i) an inducement resolution was adopted on Octo-
ber 17,1985, for such issue, and 
[[""' 
(ii) the city council for the city in which the facility is 
to be located approved on July 30, 1985, an application 
* '" 
for an urban development action grant with respect to 
such facility. 
The aggregate face amount of bonds to which this subpara-
^ 
graph applies shall not exceed $36,500,000. A facility shall 
be treated as described in this subparagraph if it would be 
.
^ 
so described if "90 percent" were substituted for "95 per-
cent" in the material preceding subparagraph (A) of this 
paragraph. 
100 STAT. 2672 
PUBLIC LAW 99-514—OCT. 22, 1986 
(2) POLLUTION CONTROL FACILITIES.—A bond issued as part of 
an issue 95 percent or more of the net proceeds of which are to 
be used to provide air or water pollution control facilities 
(within the meaning of section 103(bX4XC) of the 1954 Code) 
shall be treated as an exempt facility bond for purposes of part 
IV of subchapter B of chapter 1 of the 1986 Code if such facility 
is described in any of the following subparagraphs: 
(A) A facility is described in this subparagraph i
f
— 
(i) inducement resolutions with respect to such facil-
ity were adopted on September 23,1974, and on April 5, 
1985, 
(ii) a bond resolution for such facility was adopted on 
September 6,1985, and 
< 
(iii) the issuance of the bonds to finance such facility 
^''" 
was delayed by action of the Securities and Exchange 
Commission (file number 70-7127). 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $120,000,000. 
(B) A facility is described in this subparagraph i
f
— 
(i) there was an inducement resolution for such facil-
•'J' 
ity on November 19, 1985, and 
(ii) design and engineering studies for such facility 
were completed in March of 1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $25,000,000. 
(C) A facility is described in this subparagraph i
f
— 
ii^'.'UM 
(i) a resolution was adopted by the county board of 
supervisors pertaining to an issuance of bonds with 
i:"'A 
respect to such facility on April 10, 1974, and 
* 
(ii) such facility was placed in service on June 12, 
1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $90,000,000. For purposes of 
this subparagraph, a pollution control facility includes a 
''^' 
sewage or solid waste disposal facility (within the meaning 
^^- 
of section 103(b)(4)(E) of the 1954 Code). 
(D) A facility is described in this subparagraph if— 
(i) the issuance of the bonds for such facility was 
approved by a State agency on August 22, 1979, and 
® ' ' 
(ii) the authority to issue such bonds was scheduled 
to expire (under terms of the State approval) on 
-^^ 
August 22,1989. 
The aggregate face aikiount of bonds to which this subpara-
graph applies shall not exceed $198,000,000. 
(E) A facility is described in this subparagraph i
f
— 
(i) such facility is 1 of 4 such facilities in 4 States with 
*
^ 
respect to which the Ball Corporation transmitted a 
' 
letter of intent to purchase such facilities on Febru-
'* 
ary 26, 1986, and 
(ii) inducement resolutions were issued on Decem-
' 
ber 30, 1985, January 15, 1986, January 22, 1986, and 
March 17, 1986 with respect to bond issuance in the 4 
respective States. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $6,000,000. 
(F) A facility is described in this subparagraph i
f
— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2673 
(i) inducement resolutions for bonds with respect to 
such facility were adopted on September 27, 1977, 
May 27, 1980, and October 8,1981, and 
(ii) such facility is located at a geothermal power 
complex owned and operated by a single investor-
owned utility. 
For purposes of this subparagraph and section 103 of the 
1986 Code, all hydrogen sulfide air and water pollution 
control equipment, together with functionally related and 
subordinate equipment and structures, located or to be 
located at such power complex shall be treated as a single 
pollution control facility. The aggregate face amount of 
bonds to which this subparagraph applies shall not exceed 
$600,000,000. 
(G) A facility is described in this subparagraph i
f
— 
(i) such facility is an air pollution control facility 
approved by a State bureau of pollution control on July 
10, 1986, and by a State board of economic development 
on July 17, 1986, and 
(ii) on August 15, 1986, the State bond attorney gave 
notice to the clerk to initiate validation proceedings 
with respect to such issue and on August 28, 1986, the 
validation decree was entered. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $900,000. 
(I) A facility is described in this subparagraph i
f
— 
(i) a private company met with a State air control 
board on November 14, 1985, to propose construction of 
a sulften unit, and 
(ii) the sulften unit is being constructed under a 
letter of intent to construct which was signed on 
April 8,1986. 
The aggregate face amount of bonds to which this subpara 
graph applies shall not exceed $11,000,000. 
(J) A facility is described in this subparagraph if it is part 
of a 250 megawatt coal-fired electric plant in northeastern 
Nevada on which the Sierra Pacific Power Company began 
construction in 1980. The aggregate face amount of bonds to 
which 
this 
subparagraph 
applies 
shall 
not 
exceed 
$200,000,000. 
(K) A facility is described in this subparagraph i
f
— 
(i) there was an inducement resolution adopted by a 
State industrial development authority on January 14, 
1976, and 
(ii) such facility is named in a resolution of such 
authority relating to carryforward of the State's 
unused 1985 private activity bond limit passed by such 
industrial development authority on December 18, 
1985. 
This subparagraph shall apply only to obligations issued at 
the request of the party pursuant to whose request the 
January 14, 1976, inducement was given. The aggregate 
face amount of bonds to which this subparagraph applies 
shall not exceed $75,000,000. 
(L) A facility is described in this subparagraph if a city 
council passed an ordinance (ordinance number 4626) agree-
ing to issue bonds for such project, December 16, 1985. The 
100 STAT. 2674 
PUBLIC LAW 99-514—OCT. 22, 1986 
c 1 i 5 
aggregate face amount of obligations to which this subpara-
,Tf • 
graph applies shall not exceed $45,000,000. 
(3) SPORTS FACILITIES.—A bond issued as part of an issue 95 
percent or more of the net proceeds of which are to be used to 
provide sports facilities (within the meaning of section 
103a))(4XB) of the 1954 Code) shall be treated as an exempt 
facility bond for purposes of part IV of subchapter B of chapter 
' 
1 of the 1986 Code if such facilities are described in any of the 
following subparagraphs: 
(A) A facility is described in this subparagraph if it is a 
domed stadium— 
(i) which was the subject of a city ordinance passed 
'' 
on September 23, 1985, 
(ii) for which a loan of approximately $4,000,000 for 
land acquisition was approved on October 28, 1985, by 
the State Controlling Board, and 
(iii) a stadium operating corporation with respect to 
which was incorporated on March 20, 1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $200,000,000. 
' ' 
(B) A facility is described in this subparagraph i
f
— 
(i) it is a stadium with respect to which a lease 
agreement for the ground on which the stadium is to be 
built was entered into between a county and the sta-
dium corporation for such stadium on July 3, 1984, 
r 
(ii) there was a resolution approved on November 14, 
1984, by an industrial development authority setting 
forth the terms under which the bonds to be issued to 
, ,,^f,.. . 
finance 
such stadium would be issued, and 
J
f
j
^
j ?' t 
(iii) there was an agreement for consultant and 
engineering services for such stadium entered into on 
^^^ 
September 28,1984. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $90,000,000. 
((I!) A facility is described in this subparagraph if^ 
(i) it is a stadium to be used by an American League 
f 
baseball team currently using a stadium in a city 
-^,. ^ 
having a population in excess of 2,500,000 and de-
scribed in section 146(dX3) of the 1986 Code, or by one 
or more professional sports teams currently using 
5 . 
stadiums in such city (or professional sports teams 
^. . 
which locate in such city following the relocation from 
such city of one or more professional sports teams 
J;.,}!» 'h 
currently using one or more of such stadiums), and 
s 
(ii) the obligations to be used to provide financing for 
such stadium are issued pursuant to an inducement 
; 
resolution adopted by a State agency on November 20, 
1985 (whether or not the beneficiary of such issue is the 
beneficiary (if any) specified in such resolution). 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $250,000,000. In the case of a 
! 
carryforward of volume cap for a stadium described in the 
first sentence of this subparagraph, such carryforward shall 
+' 
be permitted whether or not there is a change in the 
beneficiary of the project. 
(D) A facility is described in this subparagraph i
f
— 
'•£'1.?' 
• sff? 
11 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2675 
(i) such facility is a stadium or sports arena for 
Memphis, Tennessee, 
(ii) there was an inducement resolution adopted on 
November 12, 1985, for the issuance of bonds to expand 
or renovate an existing stadium and sports arena and/ 
or to construct a new arena, and 
(iii) the city council for such city adopted a resolution 
on April 19, 1983, to include funds in the capital budget 
of the city for such facility or facilities. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $35,000,000. 
(E) A facility is described in this subparagraph if such 
facility is a baseball stadium located in Bergen, Essex, 
Union, Middlesex, or Hudson County, New Jersey with 
respect to which governmental action occurred on Novem-
ber 7, 1985. The aggregate face amount of bonds to which 
this subparagraph applies shall not exceed $150,000,000. 
(F) A facility is described in this subparagraph i
f
— 
(i) it is a facility with respect to which— 
(I) an inducement resolution dated December 24, 
1985, was adopted by the county industrial develop-
ment authority, 
(II) a public hearing of the county industrial 
development authority was held on February 6, 
1986, regarding such facility, and 
(III) a contract was entered into by the county, 
dated February 19, 1986, for engineering services 
for a highway improvement in connection with 
such project, or 
* • - 
(ii) it is a domed football stadium adjacent to Cervan-
tes Convention Center in St. Louis, Missouri, with re-
spect to which a proposal to evaluate market demand, 
financial operations, and economic impact was dated 
May 9, 1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $175,000,000. 
(G) A project to provide a roof or dome for an existing 
sports facility is described in this subparagraph i
f
— 
(i) in December 1984 the county sports complex 
authority filed a carryforward election under section 
'iP-(i 
103(n) of the 1954 Code with respect to such project, 
(ii) in January 1985, the State authorized issuance of 
$30,000,000 in bonds in the next 3 years for such 
project, and 
(iii) an 11-member task force was appointed by the 
county executive in June 1985, to further study the 
feasibility of the project. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $30,000,000. 
vU 
(H) A sports facility renovation or expansion project is 
described in this subparagraph i
f
— 
•4C' 
(i) an amendment to the sports team's lease agree-
ment for such facility was entered into on May 23, 
- 
1985, and 
(ii) the 
lease agreement 
had 
previously 
been 
amended in January 1976, on July 6, 1984, on April 1, 
1985, and on May 7, 1985. 
't.-* 
J ATJ 
100 STAT. 2676 
PUBLIC LAW 99-514—OCT. 22, 1986 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $20,000,000. 
(I) A facility is described in this subparagraph i
f
— 
(i) an appraisal for such facility was completed on 
March 6,1985, 
(ii) an inducement resolution was adopted with re-
spect to such facility on June 7,1985, and 
(iii) a State bond commission granted preliminary 
approval for such project on September 3,1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $3,200,000. 
(J) A sports facility renovation or expansion project is 
described in this subparagraph if— 
(i) such facility is a domed stadium which commenced 
operations in 1965, 
(ii) such facility has been the subject of an ongoing 
construction, expansion, or renovation program of 
planned improvements, 
(iii) part 1 of such improvements began in 1982 with 
a preliminary renovation program financed by tax-
exempt bonds, 
(iv) part 2 of such program was previously scheduled 
for a bond election on February 25, 1986, pursuant to a 
Commissioners Court Order of October 29, 1985, and 
(v) the bond election for improvements to such facil-
ity was subsequently postponed on December 10, 1985, 
in order to provide for more comprehensive construc-
tion planning. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $60,000,000. 
(K) A facility is described in this subparagraph if— 
(i) the 1985 State legislature appropriated a maxi-
mum sum of $22,500,000 to the State urban develop-
ment corporation to be made available for such project, 
and 
(ii) a development and operation agreement was en-
tered into among such corporation, the city, the State 
budget director, and the county industrial development 
agency, as of March 1,1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $28,000,000. 
(L) A facility is described in this subparagraph i
f
— 
(i) it is to consist of 1 or 2 stadiums appropriate for 
football games and baseball games with related struc-
tures and facilities, 
(ii) governmental action was taken on August 7,1985, 
by the county commission, and on December 19, 1985, 
by the city council, concerning such facility, and 
(iii) such facility is located in a city having a National 
League baseball team. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $200,000,000. 
(M) A facility is described in this subparagraph if— 
(i) such facility consists of 1 or 2 stadium projects (1 
of which may be a stadium renovation or expansion 
project) with related structures and facilities, 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2677 
(ii) a special advisory commission commissioned a 
study by a national accounting firm with respect to a 
project for such facility, which study was released in 
September 1985, and recommended construction of 
either a new multipurpose or a new baseball-only sta-
dium, 
(iii) a nationally recognized design and architectural 
firm released a feasibility study with respect to such 
project in April 1985, and 
(iv) the metropolitan area in which the facility is 
located is presently the home of an American League 
baseball team. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $200,000,000. 
(N) A facility is described in this subparagraph i
f
— 
(i) it is to consist of 1 or 2 stadiums appropriate for 
football games and baseball games with related struc-
tures and facilities, 
(ii) the site for such facility was approved by the 
council of the city in which such facility is to be located 
on July 9, 1985, and 
(iii) the request for proposals process was authorized 
by the council of the city in which such facility is to be 
located on November 5, 1985, and such requests were 
distributed to potential developers on November 15, 
1985, with responses due by February 14, 1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $200,000,000. 
(O) A facility is described in this subparagraph if— 
(i) such facility is described in a feasibility study 
dated September 1985, and 
(ii) resolutions were adopted or other actions taken 
on February 21, 1985, July 18, 1985, August 8, 1985, 
October 17, 1985, and November 7, 1985, by the Board 
of Supervisors of the county in which such facility will 
be located with respect to such feasibility study, appro-
priations to obtain land for such facility, and approving 
the location of such facility in the county. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $20,000,000. 
(P) A facility is described in this subparagraph if such 
facility constructed on a site acquired with the sale of 
revenue bonds approved by a city council on December 9, 
1985, (Ordinances No. 669 and 670, series 1985). The aggre-
gate face amount of bonds to which this subparagraph 
applies shall not exceed $90,000,000. 
(Q) A facility is described in this subparagraph if— 
(i) resolutions were adopted approving a ground lease 
dated June 27, 1983, by a sports authority (created by a 
State legislature) with respect to the land on which the 
facility will be erected, 
(ii) such facility is described in a market study dated 
June 13, 1983, and 
(iii) such facility was the subject of an Act of the 
State legislature which was signed on July 1, 1983. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $81,000,000. 
71-19A 0 - 89 - 29 : 
CL. 3 Part3 
100 STAT. 2678 
PUBLIC LAW 99-514—OCT. 22, 1986 
(R) A facility is described in this subparagraph if such 
facility is a baseball stadium and adjacent parking facilities 
with respect to which a city made a carryforward election of 
$52,514,000 on February 25, 1985. The aggregate face 
amount of bonds to which this subparagraph applies shall 
not exceed $50,000,000. 
(S) A facility is described in this subparagraph i
f
— 
(i) such facility is to be used by both a National 
Hockey League team and a National 
Basketball 
Association team, 
(ii) such facility is to be constructed on a platform 
using air rights over land acquired by a State authority 
and identified as site B in a report dated May 30, 1984, 
prepared for a State urban development corporation, 
and 
(iii) such facility is eligible for real property tax (and 
power and energy) benefits pursuant to State legisla-
tion approved and effective as of July 7,1982. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $225,000,000. 
(T) A facility is described in this subparagraph i
f
— 
(i) a resolution authorizing the financing of the facil-
ity through an issuance of revenue bonds was adopted 
by the City Commission on August 5, 1986, and 
(ii) the metropolitan area in which the facility is to be 
located is currently the spring training home of an 
American league baseball team located during the 
regular season in a city described in subparagraph (C). 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $10,000,000. 
(U) A facility is described in this subparagraph if it is a 
football stadium located in Oakland, California, with re-
spect to which a design was completed by a nationally 
recognized architectural firm for a stadium seating approxi-
mately 72,000, to be located on property adjacent to an 
existing coliseum complex. The aggregate face amount of 
bonds to which this subparagraph applies shall not exceed 
$100,000,000. 
(V) A facility is described in this subparagraph if it is a 
sports arena (and related parking facility) for Grand 
Rapids, Michigan. The aggregate face amount of bonds to 
which 
this 
subparagraph 
applies 
shall 
not 
exceed 
$80,000,000. 
(W) A facility is described in this subparagraph if such 
facility is located adjacent to the Anacostia River in the 
District of Columbia. The aggregate face amount of bonds to 
which 
this 
subparagraph 
applies 
shall 
not 
exceed 
$225,000,000. 
(X) A facility is described in this subparagraph if it is a 
spectator sports facility for the City of San Antonio, Texas. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $125,000,000. 
(Y) A facility is described in this subparagraph if it will 
be part of, or adjacent to, an existing stadium which has 
been owned and operated by a State university and i
f
— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2679 
(i) the stadium was the subject of a feasibility report 
by a certified public accounting firm which is dated 
December 28,1984, and 
(ii) a report by an independent research organization 
was prepared in December 1985 demonstrating support 
among donors and season ticket holders for the addi-
tion of a dome to the stadium. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $50,000,000. 
(4) RESIDENTIAL RENTAL PROPERTY.—A bond issued as part of 
an issue 95 percent or more of the net proceeds of which are to 
be used to finance a residential rental project within the mean-
ing of section 1030t»X4) of the 1954 Code shall be treated as an 
exempt facility bond within the meaning of section 142(aX7) of 
the 1986 Code if the facility with respect to the bond is issued 
satisfies all low-income occupancy requirements applicable to 
such bonds before August 15, 1986. The bonds are issued pursu-
ant to— 
(A) a contract to purchase such property dated August 12, 
1985; and 
(B) the county housing authority approved the property 
and the financing thereof on September 24,1985, 
(C) there was an inducement resolution adopted on 
October 10, 1985, by the county industrial development 
authority. 
The aggregate face amount of bonds to which this paragraph 
applies shall not exceed $25,400,000. 
(5) AIRPORTS.—A bond issued as a part of an issue 95 percent 
or more of the net proceeds of which are to be used to provide an 
airport (within the meaning of section 1030t)X4)(D) of the 1954 
Code) shall be treated as an exempt facility bond (for facilities 
described in section 142(aXl) of the 1986 Code) for purposes of 
part IV of subchapter B of chapter 1 of the 1986 Code if the 
facility is described in any of the following subparagraphs: 
(A) A facility is described in this subparagraph if such 
facility is a hotel at an airport facility serving a city 
described in section 631(aX3) of the Tax Reform Act of 1984 
(relating to certain bonds for a convention center and re-
source recovery project). The aggregate face amount of 
bonds to which this subparagraph applies shall not exceed 
$40,000,000. 
(B) A facility is described in this subparagraph if such 
facility is the primary airport for a city described in para-
graph (3XC). The aggregate face amount of bonds to which 
this subparagraph applies shall not exceed $500,000,000. 
Section 148(dX2) of the 1986 Code shall not apply to any 
issue to which this subparagraph applies. A facility shall be 
described in this subparagraph if it would be so described if 
"90 percent" were substituted for "95 percent" in the mate-
rial preceding subparagraph (A). 
(C) A facility is described in this subparagraph if such 
facility is a hotel at Logan airport and such hotel is located 
on land leased from a State authority under a lease con-
templating development of such hotel dated May 1, 1983, or 
under an amendment, renewal, or extension of such a lease. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $40,000,000. 
100 STAT. 2680 
PUBLIC LAW 99-514—OCT. 22, 1986 
(D) A facility is described in this subparagraph if such 
facility is the airport for the County of Sacramento, Califor-
nia. The aggregate face amount of bonds to which this 
subparagraph applies shall not exceed $150,000,000. 
(6) REDEVELOPMENT PROJECTS.—A bond issued as part of an 
issue 95 percent or more of the net proceeds of which are to be 
used to finance redevelopment activities as part of a project 
within a specific designated area shall be treated as a qualified 
redevelopment bond for purposes of part IV of subchapter B of 
chapter 1 of the 1986 Code if such project is described in any of 
the following subparagraphs: 
(A) A project is described in this subparagraph if it was 
the subject of a city ordinance numbered 82-115 and 
adopted on December 2, 1982, or numbered 9590 and 
adopted on April 6, 1983. The aggregate face amount of 
bonds to which this subparagraph applies shall not exceed 
$9,000,000. 
(B) A project is described in this subparagraph if it is a 
redevelopment project for an area in a city described in 
P
aragraph (3)(C) which was designated as commercially 
lighted on November 14, 1975, by the city council and the 
redevelopment plan for which will be approved by the city 
council before January 31, 1987. The aggregate face amount 
of bonds to which this subparagraph applies shall not 
exceed $20,000,000. 
,, 
(C) A project is described in this subparagraph' if it is a 
redevelopment project for an area in a city described in 
P
aragraph (3)(C) which was designated as commercially 
lighted on March 28, 1979, by the city council and the 
redevelopment plan for which was approved by the city 
council on June 20, 1984. The aggregate face amount of 
bonds to which this subparagraph applies shall not exceed 
$100,000,000. 
(D) A project is described in this subparagraph if it is any 
one of three redevelopment projects in areas in a city 
described in paragraph (3)(C) designated as blighted by a 
city council before January 31, 1987 and with respect to 
which the redevelopment plan is approved by the city 
council before January 31, 1987. The aggregate facj^ amount 
of bonds to which this subparagraph applies ^nall not 
exceed $20,000,000. 
(E) A project is described in this subparagraph if such 
project is for public improvements (including street re-
construction and improvement of underground utilities) for 
Great Falls, Montana, with respect to which engineering 
estimates are due on October 1, 1986. The aggregate face 
amount of bonds to which this subparagraph applies shall 
not exceed $3,000,000. 
(F) A project is described in this subparagraph if-7-
(i) such project is located in an area designated as 
blighted by the governing body of the city on February 
15, 1983 (Resolution No. 4573), and 
(ii) such project is developed pursuant to a redevelop-
ment plan adopted by the governing body of the city on 
March 1, 1983 (Ordinance No. 15073). 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $5,000,000. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2681 
(G) A project is described in this subparagraph if— 
(i) such project is located in an area designated by the 
governing body of the city in 1983, 
(ii) such project is described in a letter dated Au-
gust 8, 1985, from the developer's legal counsel to the 
development agency of the city, and 
(iii) such project consists primarily of retail facilities 
to be built by the developer named in a resolution of 
the governing body of the city on August 30, 1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $75,000,000. 
(H) A project is described in this subparagraph if— 
(i) such project is a project for research and develop-
ment facilities to be used primarily to benefit a State 
university and related hospital, with respect to which 
an urban renewal district was created by the city coun-
cil effective October 11,1985, and 
(ii) such project was announced by the university and 
the city in March 1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $40,000,000. 
(I) A project is described in this subparagraph if such 
project is a downtown redevelopment project with respect 
to which— 
(i) an urban development action grant was made, but 
only if such grant was preliminarily approved on 
November 3, 1983, and received final approval before 
June 1,1984, and 
(ii) the issuer of bonds with respect to such facility 
adopted a resolution indicating the issuer's intent to 
adopt such redevelopment project on October 6, 1981, 
and the issuer adopted an ordinance adopting such 
redevelopment project on December 13,1983. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $10,000,000. 
(J) A project is described in this subparagraph if— 
(i) with respect to such project the city council 
adopted on December 16, 1985, an ordinance directing 
the urban renewal authority to study blight and 
produce an urban renewal plan, 
(ii) the blight survey was accepted and approved by 
the urban renewal authority on March 20, 1986, and 
(iii) the city planning board approved the urban re-
newal plan on May 7, 1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $60,000,000. 
(K) A project is described in this subparagraph i
f
—
^ 
(i) the city redevelopment agency approved resolu-
tions authorizing issuance of land acquisition and 
public improvements bonds with respect to such project 
on August 8,1978, 
(ii) such resolutions were later amended in June 
1979, and 
(iii) the State Supreme Court upheld a lower court 
decree validating the bonds on December 11, 1980. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $380,000,000. 
100 STAT. 2682 
PUBLIC LAW 99-514—OCT. 22, 1986 
(L) A project is described in this subparagraph if it is a 
» • • 
mixed use redevelopment project either— 
(i) in an area (known as the Near South Development 
Area) with respect to which the planning department 
of a city described in paragraph 3(C) promulgated a 
draft development plan dated March 1986, and which 
was the subject of public hearings held by a subcommit-
tee of the plan commission of such city on May 28,1986, 
and June 10, 1986, or 
(ii) in an area located within the boundaries of any 1 
or more census tracts which are directly adjacent to a 
river whose course runs through such city. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $75,000,000. 
(M) A project is described in this subparagraph if it is a 
redevelopment project for an area in a city described in 
paragraph 3(C) and such area— 
(i) was the subject of a report released in May 1986, 
prepared by the National Park Service, and 
(ii) was the subject of a report released January 1986, 
prepared by a task force appointed by the Mayor of 
such city. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $75,000,000. 
(N) A project is described in this subparagraph if it is a 
city-university redevelopment project approved by a city 
ordinance No. 152-0-84 and the development plan for 
which was adopted on January 28, 1985. The aggregate face 
amount of bonds to which this subparagraph applies shall 
not exceed $23,760,000. 
(O) A project is described in this subparagraph if— 
(i) an inducement resolution was passed on March 9, 
1984, for issuance of bonds with respect to such project, 
(ii) such resolution was extended by resolutions 
passed on August 14, 1984, April 2, 1985, August 13, 
1985, and July 8,1986, 
(iii) an urban development action grant was prelimi-
narily approved for part or all of such project on July 3, 
1986, and 
(iv) the project is located in a district designated as 
the Peabody-Gayoso District. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $140,000,000. 
(P) A project is described in this subparagraph if the 
project is a 1-block area of a central business district 
containing a YMCA building with respect to which— 
(i) the city council adopted a resolution expressing an 
intent to issue bonds for the project on September 27, 
1985, 
' ,, .. 
(ii) the city council approved project guidelines for 
the project on December 20,1985, and 
(iii) the city council by resolution (adopted on July 30, 
1986) directed completion of a development sigreement. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $26,000,000. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2683 
(Q) A project is described in this subparagraph if the 
project is a 2-block area of a central business district des-
ignated as blocks E and F with respect to which— 
(i) the city council adopted guidelines and criteria 
and authorized a request for development proposals on 
July 22, 1985, 
(ii) the city council adopted a resolution expressing 
an intent to issue bonds for the project on September 
27,1985, and 
(iii) the city issued requests for development propos-
als on March 28,1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $47,000,000. 
(R) A project is described in this subparagraph if the 
project is an urban renewal project covering approximately 
5.9 acres of land in the Shaw area of the northwest section 
of the District of Columbia and the 1st portion of such 
project was the subject of a District of Columbia public 
hearing on June 2, 1986. The aggregate face amount of 
bonds to which this subparagraph applies shall not exceed 
$10,000,000. 
(S) A project is described in this subparagraph if such 
project is a hotel, commercial, and residential project on the 
east bank of the Grand River in Grand Rapids, Michigan, 
with respect to which a developer was selected by the city 
in June 1985 and a planning agreement was executed in 
August 1985. The aggregate face amount of bonds to which 
this subparagraph applies shall not exceed $39,000,000. 
(T) A project is described in this subparagraph if such 
project is the Wurzburg Block Redevelopment Project in 
Grand Rapids, Michigan. The aggregate face amount of 
bonds to which this subparagraph applies shall not exceed 
$60,000,000. 
(U) A project is described in this subparagraph if such 
project is consistent with an urban renewal plan adopted or 
ordered prepared before August 28, 1986, by the city council 
of the most populous city in a state which entered the 
Union on February 14, 1859. The aggregate face amount of 
bonds to which this subparagraph applies shall not exceed 
$83,000,000. 
(V) A project is described in this subparagraph if such 
project is consistent with an urban renewal plan which was 
adopted (or ordered prepared) before August 13, 1985, by an 
appropriate jurisdiction of a state which entered the Union 
on February 14, 1859. The aggregate face amount of bonds 
to which this subparagraph applies shall not exceed 
$135,000,000 and the limitation on the period during which 
bonds under this section may be issued shall not apply to 
such bonds. 
(W) A project is described in this paragraph if such 
project— 
(i) is located on lands submerged under the waters of 
a Great Lake or on adjacent lands which formerly were 
submerged under the waters of such lake; 
(ii) project lands were improved with a stadium 
which was demolished prior to December 31, 1983, and 
100 STAT. 2684 
PUBLIC LAW 99-514—OCT. 22, 1986 
(iii) legislation for the project was included in a 
biennium budget for such the State in which it is to be 
located prior to December 31,1983. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $105,000,000. 
(X) Any designated area with respect to which a project is 
described in any subparagraph of this paragraph shall be 
taken into account in applying section 144(c)(4)(C) of the 
1986 Code in determining whether other areas (not so 
described) may be designated. 
(7) CONVENTION CENTERS.—A bond issued as part of an issue 
95 percent or more of the net proceeds of which are to be used to 
provide any convention or trade show facility (within the mean-
ing of section 1030t))(4XC) of the 1954 Code) shall be treated as an 
exempt facility bond for purposes of part IV of subchapter B of 
chapter 1 of the 1986 Code if such facility is described in any of 
the following subparagraphs: 
(A) A facility is described in this subparagraph i
f
— 
(i) a feasibility consultant and a design consultant 
were hired on April 3, 1985, with respect to such facil-
ity, and 
(ii) a draft feasibility report with respect to such 
facility was presented on November 3, 1985, to the 
Mayor of the city in which such facility is to be located. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $190,000,000. For purposes of 
this subparagraph, not more than $20,000,000 of bonds 
issued to advance refund existing convention facility bonds 
sold on May 12, 1978, shall be treated as bonds described in 
this subparagraph. 
(B) A facility is described in this subparagraph i
f
— 
(i) an application for a State loan for such facility was 
approved by the city council on March 4, 1985, and 
(ii) the city council of the city in which such facility is 
to be located approved on March 25, 1985, an applica-
tion for an urban development action grant. 
The aggregate face amount of bonds which this subpara-
graph applies shall not exceed $10,000,000. 
(C) A facility is described in this subparagraph i
f
— 
(i) on November 1, 1983, a convention development 
tax took effect and was dedicated to financing such 
facility, 
(ii) the State supreme court of the State in which the 
facility is to be located validated such tax on Febru-
ary 8,1985, and 
(iii) an agreement was entered into on November 14, 
1985, between the city and county in which such facil-
ity is to be located on the terms of the bonds to be 
issued with respect to such facility. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $66,000,000. 
(D) A facility is described in this subparagraph if such 
facility was initially approved in 1983 and is for San Jose, 
California. The aggregate face amount of bonds to which 
this subparagraph applies shall not exceed $100,000,000. 
(E) A facility is described in this subparagraph if— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2685 
(i) such facility is meeting rooms for a convention 
center, and 
(ii) resolutions and ordinances were adopted with 
respect to such meeting rooms on January 17, 1983, 
July 11, 1983, December 17, 1984, and September 23, 
1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $75,000,000. 
(F) A facility is described in this subparagraph if it is an 
international trade center which is part of the 125th Street 
redevelopment project in New York, New York. The aggre-
gate face amount of obligations to which this subparagraph 
applies shall not exceed $165,000,000. 
(G) A facility is described in this subparagraph i
f
— 
(i) such facility is located in a city which was the 
subject of a convention center market analysis or study 
dated March 1983, and prepared by a nationally recog-
nized accounting firm, 
(ii) such facility's location was approved by a task 
force created jointly, in December 1985, by the Gov-
ernor or the State within which such facility will be 
located and the mayor of the capital city of such State, 
and 
(iii) the size of such facility is not more than 200,000 
square feet. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $70,000,000. 
(H) A facility is described in this subparagraph if an 
analysis of operations and recommendations of utilization 
of such facility was prepared by a certified public account-
ing firm pursuant to an engagement authorized on March 
6, 1984, and presented on June 11, 1984, to officials of the 
city in which such facility is located. The aggregate face 
amount of bonds to which this subparagraph applies shall 
not exceed $75,000,000. 
(I) A facility is described in this subparagraph i
f
— 
(i) voters approved a bond issue to finance the ac-
quisition of the site for such facility on May 4, 1985, 
(ii) title of the property was transferred from the 
Illinois Center Gulf Railroad to the city on September 
30,1985, and 
(iii) a United States judge rendered a decision regard-
ing the fair market value of the site of such facility on 
December 30,1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $131,000,000. 
(J) A facility is described in this subparagraph if— 
(i) such facility is to be used for an annual civic 
festival, 
(ii) a referendum was held in the spring of 1985 in 
which voters permitted the city council to lease 130 
acres of dedicated parkland to such festival, and 
(iii) the city council passed an inducement resolution 
on June 19, 1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $5,000,000. 
(K) A facility is described in this subparagraph i
f
— 
100 STAT. 2686 
PUBLIC LAW 99-514—OCT. 22, 1986 
(i) voters approved a bond issued to finance a portion 
of the cost of such faciUty on December 1, 1984, and 
(ii) such faciUty was the subject of a market study 
and financial projections dated March 21, 1986, pre-
pared by a nationally recognized accounting firm. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $5,000,000. 
(L) A facility is described in this subparagraph i
f
— 
(i) on July 12, 1984, the city council passed a resolu-
tion increasing the local hotel and motel tax to 7 
percent to assist in paying for such facility, 
(ii) on October 25, 1984, the city council selected a 
consulting firm for such facility, and 
(iii) with respect to such facility, the city council 
appropriated funds for additional work on February 7, 
1985, October 3,1985, and June 26,1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $120,000,000. 
(M) A facility is described in this subparagraph i
f
— 
(i) a board of county commissioners, in an action 
dated January 21, 1986, supported an application for 
official approval of the facility, and 
(ii) the State economic development commission 
adopted a resolution dated February 25, 1986, deter-
mining the facility to be an eligible facility pursuant to 
State law and the rules adopted by the commission. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $7,500,000. 
(8) SPORTS OR CONVENTION FACILITIES.—A bond issued as a 
part of an issue 95 percent or more of the net proceeds of which 
are to be used to provide either a sports facility (within the 
meaning of section 10303)(4)(B) of the 1954 Code) or a convention 
facility (within the meaning of section 103(b)(4)(C) of the 1954 
Code) shall be treated as an exempt facility bond for purposes of 
part IV of subchapter B of chapter 1 of the 1986 Code if such 
facility is described in any of the following subparagraphs: 
(A) A combined convention and arena facility, or any part 
thereof (whether on the same or different sites), is described 
in this subparagraph i
f
— 
(i) bonds for the expansion, acquisition, or construc-
tion of such combined facility are payable from a tax 
and are issued under a plan initially approved by the 
voters of the taxing authority on April 25, 1978, and 
(ii) such bonds were authorized for expanding a 
convention center, for acquiring an arena site, and for 
building an arena or any of the foregoing pursuant to a 
resolution adopted by the governing body of the bond 
issuer on March 17, 1986, and superseded by a resolu-
tion adopted by such governing body on May 27, 1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $160,000,000. 
(B) A sports or convention facility is described in this 
subparagraph i
f
— 
(i) on March 4, 1986, county commissioners held 
public hearings on creation of a county convention 
facilities authority, and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2687 
(ii) on March 7,1986, the county commissioners voted 
to create a county convention facilities authority and to 
submit to county voters a ¥2 cent sales and use tax to 
finance such facility. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $150,000,000. 
(C) A sports or convention facility is described in this 
sulsparagraph if^ 
(i) a feasibility consultant and a design consultant 
were hired prior to October 1980 with respect to such 
facility, 
(ii) a feasibility report dated October 1980 with re-
spect to such facility was presented to a city or county 
in which such facility is to be located, and 
(iii) on September 7, 1982, a joint city/county resolu-
tion appointed a committee which was charged with 
the task of independently reviewing the studies and 
present need for the facility. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $60,000,000. 
(D) A sports or convention facility is described in this 
subparagraph if— 
(i) such facility is a multipurpose coliseum facility for 
which, before January 1, 1985, a city, an auditorium 
district created by the State legislature within which 
such facility will be located, and a limited partnership 
executed an enforceable contract, 
(ii) significant governmental action regarding such 
facility was taken before May 23,1983, and 
(iii) inducement resolutions were passed for issuance 
of bonds with respect to such facility on May 26, 1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $25,000,000. 
(9) PARKING FACILITIES.—A bond issued as part of an issue 95 
percent or more of the net proceeds of which are to be used to 
provide a parking facility (within the meaning of section 
103a)X4XD) of the 1954 Code) shall be treated as an exempt 
facility bond for purposes of part IV of subchapter B of chapter 
1 of the 1986 Code if such facility is described in any of the 
following subparagraphs: 
(A) A facility is described in this subparagraph i
f
— 
(i) there was an inducement resolution on March 9, 
1984, for the issuance of bonds with respect to such 
facility, and 
(ii) such resolution was extended by resolutions 
passed on August 14, 1984, April 2, 1985, August 13, 
1985, and July 8,1986. 
The aggregate face smiount of bonds to which this subpara-
graph applies shall not exceed $30,000,000. 
(B) A facility is described in this subparagraph if^ 
(i) such facility is for a university medical school, 
(ii) the last parcel of land necessary for such facility 
was purchased on February 4,1985, and 
(iii) the amount of bonds to be issued with respect to 
such facility was increased by the State legislature of 
the State in which the facility is to be located as part of 
its 1983-1984 general appropriations act. 
100 STAT. 2688 
PUBLIC LAW 99-514—OCT. 22, 1986 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $9,000,000. 
(C) A facility is described in this subparagraph i
f
— 
(i) the development agreement with respect to the 
project of which such facility is a part was entered into 
during May 1984, and 
(ii) an inducement resolution was passed on October 
9, 1985, for the issuance of bonds with respect to the 
facility. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $35,000,000. 
(D) A facility is described in this subparagraph if the city 
council approved a resolution of intent to issue tax-exempt 
bonds (Resolution 34083) for such facility on April 30, 1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $8,000,000. Solely for pur-
poses of this subparagraph, a heliport constructed as part of 
such facility shall be deemed to be functionally related and 
subordinate to such facility. 
(E) A facility is described in this subparagraph if— 
(i) resolutions were adopted by a public joint powers 
authority relating to such facility on March 5, 1985, 
May 1, 1985, October 2, 1985, December 4, 1985, and 
February 5,1986; and 
(ii) such facility is to be located at an exposition park 
which includes a coliseum and sports arena. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $150,000,000. 
(F) A facility is described in this subparagraph if^ 
(i) it is to be constructed as part of an overall develop-
ment that is the subject of a development agreement 
dated October 1, 1983, between a developer and an 
organization described in section 501(cX3) of the 1986 
Code, and 
(ii) an environmental notification form with respect 
to the overall development was filed with a State 
environmental agency on February 28,1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $60,000,000. 
(G) A facility is described in this subparagraph i
f
— 
(i) an inducement resolution was passed by the city 
redevelopment agency on December 3, 1984, and a 
resolution to carryforward the private activity bond 
limit was passed by such agency on December 21, 1984, 
with respect to such facility, and 
(ii) the owner participation agreement with respect to 
such facility was entered into on July 30,1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $18,000,000. 
(H) A facility is described in this subparagraph if— 
(i) an application (dated August 28, 1986) for financial 
assistance was submitted to the county industrial 
development agency with respect to such facility, and 
(ii) the inducement resolution for such facility was 
passed by the industrial development agency on 
September 10,1986. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2689 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $8,000,000. 
(I) A facility is described in this subparagraph if— 
(i) it is located in a city the parking needs of which 
were comprehensively described in a "Downtown Park-
ing Plan 
dated January 1983, and approved by the 
city's City Plan Commission on June 1,1983, and 
(ii) obligations with respect to the construction of 
which are issued on behalf of a State or local govern-
mental unit by a corporation empowered to issue the 
same which was created by the legislative body of a 
State by an Act introduced on May 21, 1985, and 
thereafter passed, which Act became effective without 
the governor's signature on June 26,1985. 
The aggregate face amount of bonds to which this subpara-
graph applies sh£dl not exceed $50,000,000. 
(J) A facility is described in this subparagraph if— 
(i) such" facility is located in a city which w£is the 
subject of a convention center market analysis or study 
dated March 1983 and prepared by a nationally recog-
nized accounting firm, 
(ii) such facility is intended for use by, among others, 
persons attending a convention center located within 
the same town or city, and 
(iii) such facility's location was approved by a task 
force created jointly, in December 1985, by the gov-
ernor of the State within which such facility will be 
located and the mayor of the capital city of such State. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $30,000,000. 
(K) A facility is described in this subparagraph if— 
(i) scale and components for the facility were deter-
mined by a city downtown plan adopted October 31, 
1984 (resolution number 3882), and 
(ii) the site area for the facility is approximately 
51,200 square feet. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $5,000,000. 
(L) A facility is described in this subparagraph if— 
(i) the property for such facility was offered for devel-
opment by a city renewal agency on March 19, 1986 
(resolution number 920), and 
(ii) the site area for the facility is approximately 
25,600 square feet. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $5,000,000. 
(M) A facility is described in this subparagraph if such 
facility was approved by official action of the city council on 
July 26, 1984 (resolution number 33718), and is for the 
Moyer "Theatre. The aggregate face amount of bonds to 
which 
this 
subparagraph 
applies 
shall 
not 
exceed 
$8,000,000. 
(N) A facility is described in this subparagraph if it is 
part of a renovation project involving the Outlet Company 
building in Providence, Rhode Island. The aggregate face 
amount of obligations to which this subparagraph applies 
shall not exceed $6,000,000. 
100 STAT. 2690 
PUBLIC LAW 99-514—OCT. 22, 1986 
(10) CERTAIN ADVANCE REFUNDINGS.— 
''•' 
(A) Section 149(d)(3) of the 1986 Code shall not apply to a 
bond issued by a State admitted to the Union on November 
16, 1907, for the advance refunding of not more than 
$186,000,000 State turnpike obligations. 
(B) A refunding of the Charleston, West Virginia Town 
(Denter Garage Bonds shall not be treated for purposes of 
part IV of subchapter A of chapter 1 of the 1986 Code as an 
advance refunding if it would not be so treated if "100" 
were substituted for "90" in section 149(d)(5) of such Code. 
(11) PRINCIPAL USER PROVISIONS.— 
(A) In the case of a bond issued as part of an issue the 
proceeds of which are to be used to provide a facility 
described in subparagraph (B) or (C), the determination of 
whether such bond is an exempt facility bond shall be made 
by substituting "90 percent" for "95 percent" and section 
142(a) ofthe 1986 Code. 
(B) A facility is described in this subparagraph i
f
— 
(i) it is a waste-to-energy project for which a contract 
for the sale of electricity was executed in September 
1984, and 
(ii) the design, construction, and operation contract 
for such project was signed in March 1985 and the 
order to begin construction was issued on March 31, 
1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $29,100,000. 
(C) A facility is described in this subparagraph if it is a 
solid waste disposal facility for Charleston, South Carolina, 
and a State political subdivision took formal action on April 
1, 1980, to commit development funds for such facility. 
(12) QuAUFiED SCHOLARSHIP FUNDING BONDS.—Subsections 
(dX3) and (f) of section 148 of the 1986 Code shall not apply to 
any bond or series of bonds the proceeds of which are used 
exclusively to refund qualified scholarship funding bonds (as 
defined in section 150 of the 1986 Code) issued before January 1, 
1986, if— 
(A) the amount of the refunding bonds does not exceed 
the aggregate face amount of the refunded bonds, 
(B) the maturity date of such refunding bond is not later 
than later o
f
— 
(i) the maturity date of the bond to be refunded, or 
(ii) the date which is 15 years after the date on which 
the refunded bond was issued (or, in the case of a series 
of refundings, the date on which the original bond was 
issued), 
(C) the bonds to be refunded were issued by the California 
Student Loan Finance Ck)rporation, and 
(D) the face amount of the refunding bonds does not 
exceed $175,000,000. 
(13) RESIDENTIAL RENTAL PROPERTY PROJECTS.—A bond issued 
as part of an issue 95 percent or more of the net proceeds of 
which are to be used to provide a project for residential rental 
property which satisfies the requirements of section 103(bX4XA) 
of the 1954 Code shall be treated as an exempt facility bond (for 
projects described in section 142(aX7) of the 1986 Code) for 
purposes of part IV of subchapter B of chapter 1 of the 1986 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2691 
Code if the project is described in any of the following subpara-
graphs: 
(A) A residential rental property project is described in 
this subparagraph if— 
(i) a public building development corporation was 
formed on June 6, 1984, with respect to such project, 
(ii) a partnership of which the corporation is a gen-
eral partner w£is formed on June 8,1984, and 
(iii) the partnership entered into a preliminary agree-
ment with the State public facilities authority effective 
as of May 4, 1984, with respect to the issuance of the 
bonds for such project. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $6,200,000. 
(B) A residential rental property project is described in 
this subparagraph i
f
— 
(i) the Board of Commissioners of the city housing 
authority officially selected such project's developer on 
December 19,1985, 
(ii) the Board of the City Redevelopment Commission 
agreed on February 13, 1986, to conduct a public hear-
ing with respect to the project on March 6,1986, 
(iii) an official action resolution for such project was 
adopted on March 6,1986, and 
(iv) an allocation of a portion of the State ceiling w£is 
made with respect to such project on July 29, 1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $10,000,000. 
(C) A residential rental property project is described in 
this subparagraph i
f
— 
(i) the issuance of $1,289,882 of bonds for such project 
was approved by a State agency on September 11, 1985, 
and 
(ii) the authority to issue such bonds was scheduled to 
expire (under the terms of the State approval) on 
September 9,1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $1,300,000. 
(D) A residential rental property project is described in 
this subparagraph if— 
(i) the issuance of $7,020,000 of bonds for such project 
was approved by a State agency on October 10, 1985, 
and 
(ii) the authority to issue such bonds was scheduled to 
expire (under the terms of the State approval) on Octo-
ber 9,1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $7,020,000. 
(E) A residential rental property project is described in 
this subparagraph if— 
(i) it is to be located in a city urban renewal project 
area which was established pursuant to an urban re-
newal plan adopted by the city council on May 17, 1960, 
(ii) the urban renewal plan was revised in 1972 to 
permit multifamily dwellings in areais of the urban 
renewal project designated as a central business dis-
trict, 
100 STAT. 2692 
PUBLIC LAW 99-514—OCT. 22, 1986 
(iii) an inducement resolution was adopted for such 
project on December 14, 1984, and 
(iv) the city council approved on November 6, 1985, 
an agreement which provides for conveyance to the city 
of fee title to such project site. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $60,000,000. 
(F) A residential rental property project is described in 
this subparagraph i
f
— 
(i) such project is to be located in a city urban 
renewal project area which was established pursuant to 
an urban renewal plan adopted by the city council on 
May 17,1960, 
(ii) the urban renewal plan was revised in 1972 to 
permit multifamily dwellings in areas of the urban 
renewal project designated as a central business dis-
trict, 
(iii) the amended urban renewal plan adopted by the 
city council on May 19, 1972, also provides for the 
. . 
conversion of any public area site in Block J of the 
urban renewal project area for the development of 
residential facilities, and 
(iv) acquisition of all of the parcels comprising the 
Block J project site was completed by the city on 
December 28,1984. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $60,000,000. 
(G) A residential rental property project is described in 
this subparagraph i
f
— 
(i) such project is to be located on a city-owned site 
which is to become available for residential develop-
ment upon the relocation of a bus maintenance facility, 
(ii) preliminary design studies for such project site 
were completed in December 1985, and 
(iii) such project is located in the same State as the 
projects described in subparagraphs (E) and (F). 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $100,000,000. 
(H) A residential rental property project is described in 
this subparagraph i
f
— 
(i) at least 20 percent of the residential units in such 
project are to be utilized to fulfill the requirements of a 
unilateral agreement date July 21,1983, relating to the 
provision of low- and moderate-income housing, 
(ii) the unilateral agreement was incorporated into 
ordinance numbers 83-49 and 83-50, adopted by the 
city council and approved by the mayor on August 24, 
1983, and 
(iii) an inducement resolution was adopted for such 
project on September 25,1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $8,000,000. 
(I) A residential rental property project is described in 
this subparagraph i
f
— 
(i) a letter of understanding was entered into on 
December 11, 1985, between the city and county hous-
ing and community development office and the project 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2693 
developer regarding the conveyance of land for such 
project, and 
(ii) such project is located in the same State as the 
projects described in subparagraphs (E), (F), (G), and 
(H). 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed an amount which, together 
with the amounts allowed under subparagraphs (E), (F), (G), 
and (H), does not exceed $250,000,000. 
(J) A residential rental property project is described in 
this subparagraph if it is a multifamily residential develop-
ment located in Arrowhead Springs, within the county of 
San Bernardino, California, and a portion of the site of 
which currently is owned by the Campus Crusade for 
Christ. The aggregate face amount of bonds to which this 
subparagraph applies shall not exceed $350,000,000. 
(K) A residential rental property project is described in 
this subparagraph i
f
— 
(i) it is a new residential development with approxi-
mately 309 dwelling units located in census tract No. 
3202, and 
(ii) there w£is an inducement ordinance for such 
project adopted by a city council on November 20, 1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $32,000,000. 
(L) A residential rental property project is described in 
this subparagraph if— 
(i) it is a new residential development with approxi-
mately 70 dwelling units located in census tract No. 
3901, and 
(ii) there was an inducement ordinance for such 
project adopted by a city council on August 14, 1984. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $4,000,000. 
(M) A residential rental property project is described in 
this subparagraph if— 
(i) it is a new residential development with approxi-
mately 98 dwelling units located in census tract No. 
4701, and 
(ii) there was an inducement ordinance for such 
project adopted by a city council on August 14, 1984. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $7,000,000. 
(N) A project or projects are described in this subpara-
graph if they are part of the Willow Road residential 
improvement plan in Menlo Park, California. The aggre-
gate face amount of obligations to which this subparagraph 
applies shall not exceed $9,000,000. 
(O) A residential rental property project is described in 
this subparagraph i
f
— 
(i) an inducement resolution for such project was 
approved on July 18,1985, by the city council, 
(ii) such project was approved by such council on 
August 11, 1986, and 
(iii) such project consists of approximately 22 du-
plexes to be used for housing qualified low and mod-
erate income tenants. 
100 STAT. 2694 
PUBLIC LAW 99-514—OCT. 22, 1986 
The aggregate face amount of bonds to which this subpara-
graph appUes shall not exceed $1,500,000. 
(P) A residential rental property project is described in 
this subparagraph i
f
— 
(i) an inducement resolution for such project was 
approved on April 22,1986, by the city council, 
(ii) such project was approved by such council on 
August 11,1986, and 
(iii) such project consists of a unit apartment complex 
(having approximately 60 units) to be used for housing 
qualified low and moderate income tenants. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $1,625,000. 
(Q) A residential rental property project is described in 
this subparagraph i
f
— 
(i) a State housing authority granted a notice of 
official action for the project on May 24, 1985, and 
(ii) a binding agreement was executed for such 
project with the State housing finance authority on 
May 14, 1986, and such agreement was accepted by the 
State housing authority on June 5,1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $7,800,000. 
(R) A residential rental property project is described in 
this subparagraph if such project is either of 2 projects 
(located in St. Louis, Missouri) which received commitments 
to provide construction and permanent financing through 
the issuance of bonds in principal amounts of up to $242,130 
and $654,045, on July 16, 1986. The aggregate face amount 
of bonds to which this subparagraph applies shall not 
exceed $1,000,000. 
(S) A residential rental property project is described in 
this subparagraph i
f
— 
(i) a local housing authority approved an inducement 
resolution for such project on January 28, 1985, and 
(ii) a suit relating to such project was dismissed 
without right of further appeal on April 4,1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $13,200,000. 
(T) A residential rental property project is described in 
this subparagraph i
f
— 
(i) such project is the renovation of a hotel for resi-
dents for senior citizens, 
(ii) an inducement resolution for such project was 
adopted on November 20, 1985, by the State Develop-
ment Finance Authority, and 
(iii) such project is to be located in the metropolitan 
area of the city described in paragraph (3XC). 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $9,500,000. 
(U) A residential rental property project is described in 
this subparagraph i
f
— 
(i) such project is the renovation of apartment hous-
ing, 
(ii) an inducement resolution for such project was 
adopted on December 20, 1985, by the State Housing 
Development Authority, and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2695 
(iii) such project is to be located in the metropolitan 
area of the city described in paragraph (3XC). 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $12,000,000. 
(V) A residential rental project is described in this 
sulaparagraph if it is a renovation and construction project 
for low-income housing in central Louisville, Kentucky, and 
local board approval for such project was granted April 22, 
1986. The aggregate face amount of bonds to which this 
subparagraph applies shall not exceed $500,000. 
(W) A residential rental project is described in this 
subparagraph i
f
— 
(i) such project is 1 of 6 residential rental projects 
having in the aggregate approximately 1,010 units, 
(ii) inducement resolutions for such projects were 
adopted by the county residential finance authority on 
November 21,1985, and 
* 
(iii) a public hearing of the county residential finance 
authority was held by such authority on December 19, 
1985, regarding such projects to be constructed by an 
in-commonwealth developer. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $62,000,000. 
(X) A residential rental project is described in this 
subparagraph i
f
— 
(i) an inducement resolution with respect to such 
project was adopted by the State housing development 
authority on January 25,1985, and 
(ii) the issuance of bonds for such project was the 
subject of a law suit filed on October 25,1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $64,000,000. In the case of 
bonds to which this subparagraph applies, the requirements 
of sections 148 and 149(d) of the 1986 Code shall not be 
treated as included in section 103 of the 1954 Code and shall 
apply to such bonds. 
(Y) A project or projects are described in this subpara-
graph if they are financed with bonds issued by the Tulare, 
California, County Housing Authority. The aggregate face 
amount of obligations to which this subparagraph applies 
shall not exceed $8,000,000. 
(Z) A residential rental project is described in this 
subparagraph if such project is a multifamily mixed-use 
housing project located in a city described in paragraph 
(3XC), the zoning for which was changed to residential-
business planned development on November 26, 1985, and 
with respect to which both the city on December 4, 1985, 
and the state housing finance agency on December 20, 1985, 
adopted 
inducement 
resolutions. The aggregate 
face 
amount of obligations to which this subparagraph applies 
shall not exceed $90,000,000. 
(14) QuAUFiED STUDENT LOANS.—The amendments made by 
section 1301 shall not apply to any qualified student loan bonds 
(as defined in section 144 of the 1986 Code) issued by the 
Volunteer State Student Assistance Corporation. The aggregate 
face amount of bonds to which this paragraph applies shall not 
exceed $90,000,000. In the case of bonds to which this paragraph 
100 STAT. 2696 
PUBLIC LAW 99-514—OCT. 22, 1986 
applies, the requirements of sections 148 and 149(d) of the 1986 
Code shall be treated as included in section 103 of the 1954 Code 
and shall apply to such bonds. 
(15) ANNUITY CONTRACTS.—The treatment of annuity con-
tracts as investment property under section 1480))(2) of the 1986 
Code shall not apply to any bond described in any of the 
following subparagraphs: 
(A) A bond is described in this subparagraph if such bond 
is issued by a city located in a noncontiguous State i
f
— 
(i) the authority to acquire such a contract was ap-
> 
proved on September 24, 1985, by city ordinance A085-
176, and 
(ii) formal bid requests for such contracts were 
mailed to insurance companies on September 6, 1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $57,000,000. 
(B) A bond is described in this subparagraph i
f
— 
(i) on or before May 12, 1985, the governing board of 
the city pension fund authorized an agreement with an 
underwriter for possible execution and delivery of tax-
exempt certificates of participation by a nonprofit cor-
poration, and 
(ii) the proceeds of the sale of such certificates are to 
J 
be used to purchase an annuity to fund the unfunded 
liability of the City of Berkeley, California's Safety 
Members Pension Fund. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $40,000,000. 
(C) A bond is described in this subparagraph if such bond 
is issued by the South Dakota Building Authority if on 
September 18, 1985, representatives of such authority and 
its underwriters met with bond counsel and approved 
financing the purchase of an annuity contract through the 
sale and leaseback of State properties. The aggregate face 
amount of bonds to which this subparagraph applies shall 
not exceed $175,000,000. 
(D) A bond is described in this subparagraph i
f
— 
(i) such bond is issued by Los Angeles County, and 
(ii) such county, before September 25, 1985, paid or 
incurred at least $50,000 of costs related to the issuance 
of such bonds. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $500,000,000. 
(16) SOLID WASTE DISPOSAL FACILITY.—The amendments made 
by section 1301 shall not apply to any solid waste disposal 
facility i
f
— 
(A) construction of such facility was approved by State 
law I.e. 36-9-31, 
(B) there was an inducement resolution on November 19, 
1984, for the bonds with respect to such facility, and 
(C) a carryforward election of unused 1984 volume cap 
was made for such project on February 25, 1985. 
The aggregate face amount of bonds to which this paragraph 
applies shall not exceed $120,000,000. In the case of bonds to 
which this paragraph applies, the requirements of sections 148, 
149(d), and 149(g) of the 1986 Code shall be treated as included 
in section 103 of the 1954 Code and shall apply to such bonds. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2697 
(17) REFUNDING OF BOND ANTICIPATION NOTES.—There shall 
not be taken into account under section 146 of the 1986 Code 
any refunding of bond anticipation notes— 
(A) issued in December of 1984 by the Rhode Island 
Housing and Mortgage Finance Corporation, 
(B) which mature in December of 1986, 
(C) which is not an advance refunding within the mean-
ing of section 149(d)(5) of the 1986 Code (determined by 
substituting "180 days" for "90 days" therein), and 
(D) the aggregate face amount of the refunding bonds 
does not exceed $25,500,000. 
(18) CERTAIN AIRPORTS.—The amendments made by section 
1301 shall not apply to a bond issued as part of an issue 95 
percent or more of the net proceeds of which are to be used to 
provide any airport (within the meaning of section 103(bX4XD) 
of the 1954 Code) if such airport is a mid-field airport terminal 
and accompanying facilities at a major air carrier airport which 
during April 1980 opened a new precision instrument approach 
runway 10R28L. The aggregate face amount of bonds to which 
this subparagraph applies shall not exceed $425,000,000. 
(19) MASS COMMUTING FACILITIES.—A bond issued as a part of 
an issue 95 percent or more of the net proceeds of which are to 
be used to provide a mass commuting facility (within the mean-
ing of section 1030t)X4XD) of the 1954 Code) shall be treated as an 
exempt facility bond (for facilities described in section 142(aX3) 
of the 1986 Code) for purposes of part IV of subchapter B of 
chapter 1 of the 1986 Code if such facility is described in 1 of the 
following subparagraphs: 
(A) A facility is described in this subparagraph i
f
— 
(i) such facility provides access to an international 
airport, 
(ii) a corporation was formed in connection with such 
project in September 1984, 
(iii) the Board of Directors of such corporation au-
thorized the hiring of various firms to conduct a fea-
sibility study with respect to such project in April 1985, 
and 
(iv) such feasibility study was completed in Novem-
ber 1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $150,000,000. 
(B) A facility is described in this subparagraph if— 
(i) enabling legislation with respect to such project 
was approved by the State legislature in 1979, 
(ii) a 1-percent local sales tax assessment to be dedi-
cated to the financing of such project was approved by 
the voters on August 13,1983, and 
(iii) a capital fund with respect to such project was 
established upon the issuance of $90,000,000 of notes on 
October 22,1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $200,000,000 and such bonds 
must be issued before January 1, 1996. 
(C) A facility is described in this subparagraph i
f
— 
(i) bonds issued therefor are issued by or on behalf of 
an authority organized in 1979 pursuant to enabling 
100 STAT. 2698 
PUBLIC LAW 99-514—OCT. 22, 1986 
t •', 
legislation originally enacted by the State legislature in 
•,. 
1973, and 
(ii) such facility is part of a system connector de-
scribed in a resolution adopted by the board of directors 
of the authority on March 27,1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $400,000,000. Notwithstand-
ing the last paragraph of this subsection, this subparagraph 
shall apply to bonds issued before January 1,1996. 
(D) A facility is described in this subparsigraph i
f
— 
(i) the facility is a light rail transitway project, 
, 
(ii) enabling legislation with respect to the issuing 
authority was approved by the State legislature in May 
1973, 
(iii) on October 28, 1985, a board issued a request for 
consultants to conduct a feasibility study on mass tran-
sit corridor analysis in connection with the facility, and 
(iv) on May 12, 1986, a board approved a further 
binding contract for expenditures of approximately 
$1,494,963, to be expended on a facility study. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $250,000,000. Notwithstand-
ing the last paragraph of this subsection, this subparagraph 
shall apply to bonds issued before January 1,1996. 
(20) PRIVATE COLLEGES.—Section 148(f) of the 1986 (Dode shall 
not apply to any bond which is issued as part of an issue if such 
bond— 
(A) is issued by a political subdivision pursuant to home 
rule and interlocal cooperation powers conferred by the 
constitution and laws of a State to provide funds to finance 
the costs of the purcheise and construction of educational 
facilities for private colleges and universities, and 
(B) was the subject of a resolution of official action by 
such political subdivision (Resolution No. 86-1039) adopted 
by the governing body of such political subdivision on 
March 18,1986. 
The aggregate face amount of bonds to which this paragraph 
applies shall not exceed $100,000,000. 
(21) POOLED FINANCING PROGRAMS.— 
(A) Section 147(b) of the 1986 Code shall not apply to any 
hospital pooled financing program with respect to which— 
(i) a formal presentation was made to a city hospital 
facilities authority on January 14,1986, and 
(ii) such authority passed a resolution approving the 
bond issue in principle on February 5,1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $95,000,000. 
(B) Subsection (c) and (0 of section 148 of the 1986 Code 
shall not apply to bonds for which closing occurred on 
July 16, 1986, and for which a State municipal league 
served as administrator for use in a State described in 
section 103A(gX5XC)l of the Internal Revenue Code of 1954. 
The aggregate face amount of obligations to which this 
subparagraph applies shall not exceed $585,000,000. 
(22) DOWNTOWN REDEVELOPMENT PROJECT.— 
(A) In the case of a bond described in subparagraph (B), 
section 141 of the 1986 C!ode shall be applied without regard 
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2699 
to subsection (a)(2), subsection (b)(3), and subsection (b)(5); 
and paragraphs (1) and (2) of subsection (b) shall be applied 
by substituting "25 percent" for "10 percent" each place it 
appears. 
(B) A bond is described in this subparagraph if such bond 
is issued as part of an issue 95 percent or more of the net 
proceeds of which are to be used to provide a project to 
acquire and redevelop a downtown area i
f
— 
(i) on August 15, 1985, a downtown redevelopment 
authority adopted a resolution to issue bonds for such 
project, 
(ii) before September 26, 1985, the city expended (or 
entered into binding contracts to expend) more than 
$10,000,000 in connection with such project, and 
(iii) the state supreme court issued a ruling regarding 
the proposed finance structure for such project on 
December 11,1985. 
The aggregate face amount of bonds to which this para-
graph applies shall not exceed $85,000,000 and such bonds 
must be issued before January 1,1992. 
(23) MASS COMMUTING AND PARKING FACIUTIES.—A bond 
issued as part of an issue 95 percent or more of the net proceeds 
of which are to be used to provide any mass commuting facility 
or parking facility (within the meaning of section 103(b)(4)(D) of 
the 1954 Code) shall be treated as an exempt facility bond for 
purposes of part IV of subchapter B of chapter 1 of the 1986 
Code if such facility is provided in connection with the re-
habilitation, renovation, or other improvement to an existing 
railroad station owned on the date of the enactment of this Act 
by the National Railroad Passenger Corporation in the North-
east Corridor and which was placed in partial service in 1934 
and was placed in the National Register of Historic Places in 
1978. The aggregate face amount of bonds to which this para-
graph applies shall not exceed $30,000,000. 
(24) TAX-EXEMPT STATUS OF BONDS OF CERTAIN EDUCATIONAL 
ORGANIZATIONS.— 
(A) IN GENERAL.—For purposes of section 103 and part IV 
of subchapter B of chapter 1 of the 1986 Code, a qualified 
educational organization shall be treated as a governmental 
unit, but only with respect to a trade or business carried on 
by such organization which is not an unrelated trade or 
business (determined by applying section 513(a) of such 
Code to such organization). 
(B) QUALIFIED EDUCATIONAL ORGANIZATION.—For purposes 
of subparagraph (A), the term "qualified 
educational 
organization" means a college or university— 
(i) which was reincorporated and renewed with 
perpetual existence as a corporation by specific act of 
the legislature of the State within which such college 
or university is located on March 19, 1913, or 
(ii) which— 
(I) was initially incorporated or created on Feb-
ruary 28, 1787, on April 29, 1854, or on May 14, 
1888, and 
(II) as an instrumentality of the State, serves as 
a "State-related" university by a specific act of the 
100 STAT. 2700 
PUBLIC LAW 99-514—OCT. 22, 1986 
legislature of the State within which such college 
or university is located. 
(25) TAX-EXEMPT STATUS OF BONDS OF CERTAIN PUBLIC UTILI-
TIES.— 
(A) IN GENERAL.—Except as provided in subparagraph (B), 
a bond shall be treated as a qualified bond for purposes of 
section 103 of the 1986 Code if such bond is issued after the 
date of the enactment of this Act with respect to a public 
utility facility if such facility is— 
(i) located at any non-federally owned dam (or on 
project waters or adjacent lands) located wholly or 
partially in 3 counties, 2 of which are contiguous to the 
third, where the rated capacity of the hydroelectric 
generating facilities at 5 of such dams on October 18, 
1979, was more than 650 megawatts each, 
(ii) located at a dam (or on the project waters or 
adjacent lands) at which hydroelectric generating 
facilities were financed with the proceeds of tax-exempt 
obligations before December 31,1968, 
(iii) owned and operated by a State, political subdivi-
sion of a State, or any agency or instrumentality of any 
of the foregoing, and 
(iv) located at a dam (or on project waters or adjacent 
lands) where the general public has access for rec-
reational purposes to such dam or to such project 
waters or adjacent lands. 
(B) SPECIAL RULES FOR SUBPARAGRAPH (A) .— 
(i) BONDS SUBJECT TO CAP.—Section 146 of the 1986 
Code shall apply to any bond described in subpara-
graph (A) which (without regard to subparagraph (A)) is 
a private activity bond. 
(ii) LIMITATION ON AMOUNT OF BONDS TO WHICH 
SUBPARAGRAPH 
(A) APPUES.—The aggregate 
face 
amount of bonds to which subparagraph (A) applies 
shall 
not 
exceed 
$750,000,0()0, 
not 
more 
than 
^^•' 
$350,000,000 of which may be issued before January 1, 
1992. 
(iii) 
LIMITATION ON PURPOSES.—Subparagraph 
(A) 
shall only apply to bonds issued as part of an issue 95 
percent or more of the net proceeds of which are used 
to provide 1 or more of the following: 
(I) A fish by-pass facility or fisheries enhance-
ment facility. 
(II) A recreational facility or other improvement 
which is required by Federal licensing terms and 
conditions or other Federal, State, or local law 
requirements. 
(III) A project of repair, maintenance, renewal, 
or replacement, and safety improvement. 
(IV) 
Any 
reconstruction, 
replacement, 
or 
improvement, including any safety improvement, 
which increases, or allows an increase in, the 
capacity, efficiency, or productivity of the existing 
generating equipment. 
(26) CONVENTION AND PARKING FACILITIES.—A bond shall not 
be treated as a private activity bond for purposes of section 103 
and part IV of subchapter B of chapter 1 of the 1986 Code i
f
— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2701 
(A) such bond is issued to provide a sports or convention 
facility described in section 103(b)(4) (B) or (C) of the 1954 
Code, 
(B) such bond is not described in section 103 (bX2) or 
(oX2)(A) of such Code, 
(C) legislation by a State legislature in connection with 
such facility was enacted on July 19, 1985, and was des-
ignated Chapter 375 of the Laws of 1985, and 
(D) legislation by a State legislature in connection with 
the appropriation of funds to a State public benefit corpora-
tion for loans in connection with the construction of such 
facility was enacted on April 17, 1985, and was designated 
Chapter 41 of the Laws of 1985. 
The aggregate face amount of bonds to which this subparagraph 
applies shall not exceed $35,000,000. 
(27) SMALL ISSUE TERMINATION.—Section 144(a)(12) of the 
1986 
Code shall not apply to any bond issued as part of an issue 95 
percent or more of the net proceeds of which are to be used to 
provide a facility described in any of the following subpara-
graphs: 
(A) A facility is described in this subparagraph if— 
(i) the facility is a hotel and office facility located in a 
State capital, 
(ii) the economic development corporation of the city 
' 
in which the facility is located adopted an initial 
inducement resolution on October 30,1985, and 
(iii) a feasibility consultant was retained on Febru-
ary 21,1986, with respect to such facility. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $10,000,000. 
(B) A facility is described in this subparagraph if such 
facility is financed by bonds issued by a State finance 
authority which was created in April 1985 by Act 1062 of 
the State General Assembly, and the Bond Guarantee Act 
(Act 505 of 1985) allowed such authority to pledge the 
interest from investment of the State's general fund as a 
guarantee for bonds issued by such authority. The aggre-
gate face amount of bonds to which this subparagraph 
applies shall not exceed $75,000,000. 
(C) A facility is described in this subparagraph if such 
facility is a downtown mall and parking project for Holland, 
Michigan, with respect to which an initial agreement was 
formulated with the city in May 1985 and a formal memo-
randum of understanding was executed on July 2,1986. The 
aggregate face amount of bonds to which this subparagraph 
applies shall not exceed $18,200,000. 
(D) A facility is described in this subparagraph if such 
facility is a downtown mall and parking ramp project for 
Traverse City, Michigan, with respect to which a final 
development agreement was signed in June 1986. The 
aggregate face amount of bonds to which this subparagraph 
applies shall not exceed $21,500,000. 
(E) A facility is described in this subparagraph if such 
facility is the rehabilitation of the Heritage Hotel in Mar-
quette, Michigan. The aggregate face amount of bonds to 
which 
this 
subparagraph 
applies 
shall 
not 
exceed 
$5,000,000. 
100 STAT. 2702 
PUBLIC LAW 99-514—OCT. 22, 1986 
« 
(F) A facility is described in this subparagraph if it is the 
Lakeland Center Hotel in Lakeland, Florida. The aggregate 
face amount of obligations to which this subparagraph 
applies shall not exceed $10,000,000. 
(G) A facility is described in this subparagraph if it is the 
Marble Arcade office building renovation project in Lake-
land, Florida. The aggregate face amount of obligations to 
which 
this 
subparagraph 
applies 
shall 
not 
exceed 
$5,900,000. 
(H) A facility is described in this subparagraph if it is a 
medical office building in Bradenton, Florida, with respect 
to which— 
(i) a memorandum of agreement was entered into on 
October 17,1985, and 
(ii) the city council held a public hearing and ap-
proved issuance of the bonds on November 14, 1985. 
The aggregate face amount of obligations to which this 
subparagraph applies shall not exceed $8,500,000. 
(I) A facility is described in this subparagraph if it con-
sists of the rehabilitation of the Andover Town Hall in 
Andover, Massachusetts. The provisions of section 149(b) of 
the 1986 Code (relating to federally guaranteed obligations) 
shall not apply to obligations to finance such project solely 
as a result of the occupation of a portion of such building by 
a United States Post Office. 
(J) A facility is described in this subparagraph if it i^ the 
Central Bank Building renovation project in Grand Rapids, 
Michigan. The aggregate face amount of obligations to 
*' which 
this 
subparagraph 
applies 
shall 
not 
exceed 
$1,000,000. 
(28) CERTAIN PRIVATE LOANS NOT TAKEN INTO ACCOUNT.—For 
purposes of determining whether any bond is a private activity 
bond, an amount of loans (but not in excess of $75,00^0,000) 
provided from the proceeds of 1 or more issues shall not be 
taken into account if such loans are provided in furtherance 
of— 
(A) a city Emergency Conservation Plan as set forth in an 
ordinance adopted by the city council of such city on: Feb-
ruary 17,1983, or 
(B) a resolution adopted by the city council of such city on 
March 10, 1983, committing such city to a goal of reducing 
the peak load of such city's electric generation and distribu-
tion system by 553 megawatts in 15 years. 
(29) 
CERTAIN 
PRIVATE 
BUSINESS 
USE 
NOT 
TAKEN 
INTO 
ACCOUNT.— 
(A) The nonqualified amount of the proceeds of an issue 
shall not be taken into account under section 141(b)(5) of 
the 1986 Code or in determining whether a bond described 
in subparagraph (B) (which is part of such issue) is a private 
activity bond for purposes of section 103 and part IV faf 
subchapter B of chapter 1 of the 1986 Code. 
(B) A bond is described in this subparagraph i
f
— 
(i) such bond is issued before January 1, 1993, by a 
State admitted to the Union on June 14, 1776, and 
(ii) such bond is issued pursuant to a resolution of the 
i^j? x: 
State Bond Commission adopted before September 26, 
1985. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2703 
(C) The nonqualified amount to which this paragraph 
applies shall not exceed $150,000,000. 
(D) For purposes of this paragraph, the term "non-
qualified amount" has the meaning given such term by 
section 141(b)(8) of the 1986 Code, except that such term 
shall include the amount of the net proceeds of an issue 
which is to be used (directly or indirectly) to make or 
finance loans (other than loans described in section 141(cX2) 
of the 1986 Code) to persons other than governmental units. 
(30) VOLUME CAP NOT TO APPLY TO CERTAIN FACILITIES.—For 
purposes of section 146 of the 1986 Code, any exempt facility 
bond for the following facility shall not be taken into account: 
The facility is a facility for the furnishing of water which was 
authorized under Public Law 90-537 of the United States i
f
— 
(A) construction of such facility began on May 6, 1973, 
and 
(B) forward funding will be provided for the remainder of 
the project pursuant to a negotiated agreement between 
State and local water users and the Secretary of the In-
terior signed April 15,1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $391,000,000. 
(31) CERTAIN HYDROELECTRIC GENERATING PROPERTY.—A bond 
shall be treated as described in paragraph (2) of section 1316(f) 
of this Act if— 
(A) such bond would be so described but for the substi-
tution specified in such paragraph, 
(B) on January 7, 1983, an application for a preliminary 
permit was filed for the project for which such bond is 
issued and received docket no. 6986, and 
(C) on September 20,1983, the Federal Energy Regulatory 
Commission issued an order granting the preliminary 
permit for the project. 
The aggregate face amount of bonds to which this paragraph 
applies shall not exceed $12,000,000. 
(32) VOLUME CAP.—The State ceiling applicable under section 
146 of the 1986 Code for calendar year 1987 for the State which 
ratified the United States Constitution on May 29, 1790, shall be 
$150,000,000 higher than the State ceiling otherwise applicable 
under such section for such year. 
(33) 
APPLICATION OF $150,000,000 LIMITATION FOR CERTAIN 
QUALIFIED 501(C)(3) BONDS.—Proceeds of an issue described in 
any of the following subparagraphs shall not be taken into 
account under section 145(b) of the 1986 Code. 
(A) Proceeds of an issue are described in this subpara-
graph if— 
(i) such proceeds are used to provide medical school 
facilities or medical research and clinical facilities for a 
university medical center, 
(ii) such proceeds are of^ 
(I) a $21,550,000 issue on August 1,1980, 
(II) a $84,400,000 issue on September 1, 1984, and 
(III) a $48,500,000 issue (Series 1985 A and 1985 
B), and 
(iii) the issuer of all such issues is the same. 
(B) Proceeds of an issue are described in this subpara-
graph if such proceeds are for use by Yale University and— 
100 STAT. 2704 
PUBLIC LAW 99-514—OCT. 22, 1986 
(i) the bonds are issued after August 8, 1986, and 
before August 7, 1988, by the State of Connecticut 
Health and Educational Facilities Authority, or 
(ii) the bonds are the 1st or 2nd refundings (including 
advance refundings) of the bonds described in clause (i) 
or of original bonds issued before August 7, 1986, by 
such Authority. 
(C) Proceeds of an issue are described in this subpara-
graph i
f
— 
(i) such issue is issued on behalf of a university 
established by Charter granted by King George II of 
England on October 31, 1754, to accomplish a refunding 
(including an advance refunding) of bonds issued to 
finance 1 or more projects, and 
(ii) the application or other request for the issuance 
of the issue to the appropriate State issuer was made by 
or on behalf of such university before February 26, 
1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $250,000,000. 
(D) Proceeds of an issue are described in this subpara-
graph if— 
(i) such proceeds are to be used for finance construc-
tion of a new student recreation center, 
(ii) a contract for the development phase of the 
project was signed by the university on May 21, 1986, 
with a private company for 5 percent of the costs of the 
project, and 
(iii) a committee of the university board of adminis-
trators approved the major program elements for the 
center on August 11, 1986. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $25,000,000. 
(E) Proceeds of an issue are described in this subpara-
graph if— 
(i) such proceeds are to be used in the construction of 
new life sciences facilities for a university for medical 
research and education, 
(ii) the president of the university authorized a fac-
ulty/administration planning committee for such facili-
ties on September 17,1982, 
(iii) the trustees of such university authorized site 
and architect selection on October 30, 1984, and 
(iv) the university negotiated a $2,600,000 contract 
with the architect on August 9,1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $47,500,000. 
(F) Proceeds of an issue are described in this subpara-
graph if such proceeds are to be used to renovate under-
graduate chemistry and engineering laboratories, and to 
rehabilitate other basic science facilities, for an institution 
of higher education in Philadelphia, Pennsylvania, char-
tered by legislative Acts of the Commonwealth of Penn-
sylvania, including an Act dated September 30, 1791. The 
aggregate face amount of bonds to which this subparagraph 
applies shall not exceed $6,500,000. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2705 
(G) Proceeds of an issue are described in this subpara-
graph if such proceeds are of bonds which are the first 
advance refunding of bonds issued during 1985 for the 
development of a computer network, and construction and 
renovation or rehabilitation of other facilities, for an 
institution of higher education described in subparagraph 
(H). The aggregate face amount of bonds to which this 
subparagraph applies shall not exceed $80,000,000. 
(H) Proceeds of an issue are described in this subpara-
graph if^ 
(i) the issue is issued on behalf of a university 
founded in 1789, and 
(ii) the request to issue bonds for items to be deter-
mined by the issuer was transmitted to Congress on 
November 7,1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $200,000,000. 
(I) Proceeds of an issue are described in this subpara-
graph if the issue is issued on behalf of a university estab-
lished on August 6, 1872, for a project approved by the 
trustees thereof on November 11, 1985. The aggregate face 
amount of bonds to which this subparagraph applies shall 
not exceed $100,000,000. 
(J) Proceeds of an issue are described in this subpara-
graph i
f
— 
(i) the issue is issued on behalf of a university for 
which the founding grant was signed on November 11, 
1885, and 
(ii) such bond is issued for the purpose of providing a 
Near West Campus Redevelopment Project and a 
Student Housing Project. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $105,000,000. 
(J) Proceeds of an issue are described in this subpara-
graph i
f
— 
(i) they are the proceeds of advance refunding obliga-
tions issued on behalf of a university established on 
April 21,1831, and 
(ii) the application or other request for the issuance 
of such obligations was made to the appropriate State 
issuer before July 12,1986. 
The aggregate face amount of obligations to which this 
subparagraph applies shall not exceed $175,000,000. 
(K) Proceeds of an issue are described in this subpara-
graph i
f
— 
(i) the issue is for the purpose of financing or re-
financing 
costs associated with university facilities 
including 900 units of housing for students, faculty, and 
staff in up to two buildings and an office building 
containing up to 2,000 square feet of space, and 
(ii) a bond act authorizing the issuance of such bonds 
for such project was adopted on July 8, 1986, and such 
act under Federal law was required to be transmitted 
to Congress. 
The aggregate face amount of obligations to which this 
subparagraph applies shall not exceed $150,000,000. 
100 STAT. 2706 
PUBLIC LAW 99-514—OCT. 22, 1986 
(L) Proceeds of an issue are described in this subpara-
graph if such issue is for Cornell University in an aggregate 
face amount of not more than $150,000,000. 
(M) Proceeds of an issue are described in this subpara-
graph if^ 
(i) such issue would not (if issued before August 16, 
1986) be an industrial development bond (as defined in 
section 103a)X2) of the 1954 Code), and 
(ii) such bonds were approved by city voters on Janu-
ary 19,1985, for an art museum and 2 theaters. 
The aggregate face amount of obligations to which this 
subparagraph applies shall not exceed $2,300,000. 
(N) Proceeds of an issue are described in this subpara-
graph if^ 
(i) such issue is issued by a State dormitory authority 
on behalf of one or more universities described in 
section 501(cX3) of the 1986 Code or a foundling hos-
pital, and 
(ii) the application by the university for the issuance 
of such bond was made before October 27,1985. 
The aggregate face amount of bonds to which this para-
graph applies shall not exceed $150,000,000. In the case of 
bonds to which this paragraph applies, the requirements of 
sections 148 and 149(d) of the 1986 Code shall be treated as 
included in section 103 of the 1954 Code and shall apply to 
such bonds. 
(O) Any bond to which section 1450t)) of the 1986 (Dode 
does not apply by reason of this section shall be taken into 
account in determining whether such section applies to any 
later issue. 
(34) ARBITRAGE REBATE.—Section 148(f) of the 1986 Code shall 
not apply to any period before October 1, 1990, with respect to 
any bond the proceeds of which are to be used to provide a high-
speed rail system for the State of Ohio. The aggregate face 
amount of bonds to which this paragraph applies shall not 
exceed $2,000,000,000. 
(35) EXTENSION OF CARRYFORWARD PERIOD.— 
(A) In the case of a carrjrforward under section 103(nX10) 
of the 1954 Code of $170,000,000 of bond limit for calendar 
year 1984 for a project described in subparagraph (B), 
clause (i) of section 103(nX10XC) of the 1954 Code shall be 
applied by substituting "6 calendar years" for "3 calendar 
years", and such carryforward may be used by any author-
ity designated by the State in which the facility is located. 
(B) A project is described in this subparagraph if— 
(i) such project is a facility for local furnishing of 
^ 
electricity described in section 645 of the Tax Reform 
Act of 1984, and 
(ii) construction of such facility commenced within 
the 3-year period following the calendar year in which 
the carryforward arose. 
(36) POWER PURCHASE BONDS.—A bond issued to finance pur-
chase of power from a power facility at a dam being renovated 
pursuant to P.L. 98-381 shall not be treated as a private activity 
bond if it would not be such under section 141(b) (1) and (2) of 
the 1986 C!ode if 25 percent were substituted for 10 percent and 
the provisions of section 141(b) (3), (4), and (5) of the 1986 Code 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2707 
did not apply. The aggregate face amount of bonds to which this 
paragraph appUes shall not exceed $80,000,000. 
(37) QUALIFIED MORTGAGE BONDS.—A bond issued as part of 
either of 2 issues no later than September 8, 1986, shall be 
treated as a qualified mortgage bond within the meaning of 
section 141(d)(1)(B) of the 1986 Code if it satisfies the require-
ments of section 103A of the 1954 Code and if the issues are 
issued by the two most populous cities in the Tar Heel State. 
The aggregate face amount of bonds to which this paragraph 
applies shall not exceed $4,000,000. 
(38) EXEMPT FACILITY BONDS.—A bond shall be treated as an 
exempt facility bond within the meaning of section 142(a) of the 
1986 Code if it is issued to fund residential, office, retail, light 
industrial, recreational and parking development known as 
Tobacco Row. Such bond shall be subject to section 146 and 
sections 148 and 149 of the 1986 Code. The aggregate face 
amount of bonds to which this paragraph applies shall not 
exceed $100,000,000. 
(39) CERTAIN WASTEWATER TREATMENT FACIUTY.—A bond shall 
not be subject to the provisions of section 146 of the 1986 Code if 
it is issued to acquire and complete a wastewater treatment 
facility— 
(A) which was organized by an inter-local agreement 
dated October 17,1978, 
(B) for which $78,143,557 has been spent as of July 31, 
1986, and 
(C) for which the first construction contract was let on 
February 27,1981. 
The aggregate face amount of bonds to which this paragraph 
applies shall not exceed $100,000,000. 
(40) REFUNDING OF CERTAIN TAXABLE DEBT.—A bond issued to 
refinance taxable debt shall not be treated as a qualified 
501(c)(3) bond within the meaning of section 141(d)(1)(G) of the 
1986 Code if an authorizing resolution as adopted by the issuer 
on August 14, 1986, for St. Mary's Hospital. The aggregate face 
amount of bonds to which this paragraph applies shall not 
exceed $22,314,000. 
(41) 
TIME TO MATURITY FOR CERTAIN OBLIGATIONS.—The 
requirement of section 147(b) of the 1986 Code shall apply to 
current refunding bonds issued with respect to two power facili-
ties on which construction has been suspended by measuring 
the economic life of the facilities from the date of the refunding 
bonds if the facilities have not been placed in service as of the 
date of issuance of the refunding bonds. The aggregate face 
amount of bonds to which this paragraph applies shall not 
exceed $2,000,000,000. 
(42) RESIDENTIAL RENTAL PROPERTY.—A bond issued to finance 
a residential rental project within the meaning of 1030t>)(4) of 
the 1954 Code shall be treated as an exempt facility bond within 
the meaning of section 142(a)(7) of the 1986 Code if the county 
housing finance authority adopted an inducement resolution 
with respect to the project on May 8, 1985, and the project is 
located in Polk County, Florida. The aggregate face amount of 
bonds to which this paragraph applies shall not exceed 
$4,100,000. 
100 STAT. 2708 
PUBLIC LAW 99-514—OCT. 22, 1986 
(43) EXTENSION OF ADVANCE REFUNDING FOR CERTAIN FACIU-
TiES.—Paragraph (4) of section 631(c) of the Tax Reform Act of 
1984 is amended— 
(A) by striking out the second sentence thereof, 
(B) by adding at the end thereof the following new sen-
tence: "In the case of refunding obligations not exceeding 
$100,000,000 issued by the Alabama State Docks Depart-
ment, the first sentence of this paragraph shall be applied 
by substituting 'December 31, 1987' for 'December 31, 
1984'." 
(44) POOL BONDS.—The following amounts of pool bonds are 
exempt from the arbitrage rebate requirement of section 148(f) 
ofthe 1986 Code: 
Maximum Bond 
Pool 
Amount 
Tennessee Utility Districts Pool 
$80,000,000 
New Mexico Hospitals Bond Pool 
$35,000,000 
Pennsylvania Local Government Investment Trust Pool 
$375,000,000 
Indiana Bond Bank Pool 
$240,000,000 
Hernando County, Florida Bond Pool 
$300,000,000 
Utah Municipal Finance Cooperative Pool 
$262,000,000 
North Carolina League of Municipalities Pool 
$200,000,000 
Kentucky Municipal League Bond Pool 
$170,000,000 
Kentucky Association of Counties Bond Pool 
$100,000,000 
Homewood Municipal Bond Pool 
$50,000,000 
Colorado Association of School Boards Pool 
$300,000,000 
Tennessee Municipal League Pooled Bonds 
$75,000,000 
Georgia Municipal Association Pool 
$130,000,000 
(45) 
CERTAIN 
CARRYFORWARD 
ELECTIONS.—Notwithstanding 
any other provision of this title— 
(A) In the case of a metropolitan service district created 
pursuant to State revised statutes, chapter 268, up to 
$100,000,000 unused 1985 bond authority may be carried 
forward to any year until 1989 (regardless of the date on 
which such carryforward election is made). 
(B) If-
(i) official action was taken by an industrial develop-
ment board on September 16, 1985, with respect to the 
issuance of not more than $98,500,000, of waste water 
treatment revenue bonds, and 
(ii) an executive order of the governor granted a 
carryforward of State bond authority for such project 
on December 30,1985, 
such carryforward election shall be valid for any year 
through 1988. The aggregate face amount of obligations to 
which 
this 
subparagraph 
applies 
shall 
not exceed 
$98,500,000. 
(46) TREATMENT OF CERTAIN OBLIGATIONS TO FINANCE HYDRO-
ELECTRIC GENERATING FACILITY.—If— 
(A) obligations are issued in an amount not exceeding 
$5,000,000 to finance the construction of a hydroelectric 
generating facility located on the North Fork of Cache 
Creek in Lake County, California, which was the subject of 
a preliminary resolution of the issuer of the obligations on 
June 29, 1982, or are issued to refund any of such obliga-
tions, 
(B) substantially all of the electrical power generated by 
such facility is to be sold to a nongovernmental person 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2709 
pursuant to a long-term power sales agreement in accord 
ance with the Public Utility Regulatory Policies Act of 
1978, and 
(C) the initially issued obligations are issued on or before 
December 31, 1986, and any of such refunding obligations 
are issued on or before December 31,1996, 
then the person referred to in subparagraph (B) shall not be 
treated as a principal user of such facilities by reason of such 
sales for purposes of subparagraphs (D) and (E) of section 
103(b)(6) ofthe 1954 Code. 
(47) TREATMENT OF CERTAIN OBUGATIONS TO FINANCE STEAM 
AND ELECTRIC COGENERATION FACILITY.—IF— 
(A) obligations are issued on or before December 31, 1986, 
in an amount not exceeding $4,400,000 to finance a facility 
for the generation and transmission of steam and electricity 
having a maximum electrical capacity of approximately 5.3 
megawatts and located within the City of San Jose, Califor-
nia, or are issued to refund any of such obligations, 
(B) substantially all of the electrical power generated by 
such facility that is not sold to an institution of higher 
education created by statute of the State of California is to 
be sold to a nongovernmental person pursuant to a long-
term power sales agreement in accordance with the Public 
Utility Regulatory Policies Act of 1978, and 
(C) the initially issued obligations are issued on or before 
December 31, 1986, and any of such refunding obligations 
are issued on or before December 31,1996, 
then the nongovernmental person referred to in subparagraph 
(B) shall not be treated as a principal user of such facilities by 
reason of such sales for purposes of subparagraphs (D) and (E) of 
section 1030t)X6) of the Internal Revenue (Dode of 1954. 
(48) TREATMENT OF CERTAIN OBUGATIONS.—A bond which is 
not an industrial development bond under section 103(bX2) of 
the Internal Revenue CJode of 1954 shall not be treated as a 
private activity bond for purposes of part IV of subchapter B of 
chapter 1 of the 1986 Code if 95 percent or more of the net 
proceeds of the issue of which such bond is a part are used to 
provide facilities described in either of the following subpara-
graphs: 
(A) A facility is described in this subparagraph if it is a 
governmentally-owned and operated State fair and expo-
sition center with respect to which— 
(i) the 1985 session of the State legislature authorized 
revenue bonds to be issued in a maximum amount of 
$10,000,000, and 
(ii) a market feasibility study dated June 30, 1986, 
relating to a major capital improvemental program at 
the facility W£is prepared for the advisory board of the 
State fair and exposition center by a certified public 
accounting firm. 
The aggregate face amount of obligations to which this 
subparagraph applies shall not exceed $10,000,000. 
(B) A facility is described in this subparagraph if it is a 
convention, trade, or spectator facility which is to be lo-
cated in the State with respect to which subparagraph (O) 
applies and with respect to which feasibility and prelimi-
nary design consultants were hired on May 1, 1985 and 
71-19A 0 - 89 - 30 : (X. 3 Part3 
100 STAT. 2710 
PUBLIC LAW 99-514—OCT. 22, 1986 
October 31, 1985. The aggregate face amount of obligations 
to which this subparagraph applies shall not exceed 
$175,000,000. 
(49) 
TRANSITION RULE FOR REFUNDING CERTAIN HOUSING 
BONDS.—Sections 146 and 149(d) of the 1986 Code shall not apply 
to the refunding of any bond issued under section 11(b) of the 
Housing Act of 1937 before December 31, 1983, if— 
(A) the bond has an original term to maturity of at least 
40 years, 
(B) the maturity date of the refunding bonds does not 
exceed the maturity date of the refunded bonds, 
(C) the amount of the refunding bonds does not exceed the 
outstanding amount of the refunded bonds, 
(D) the interest rate on the refunding bonds is lower than 
the interest rate of the refunded bonds, and 
(E) the refunded bond is required to be redeemed not 
later than the earliest date on which such bond could be 
redeemed at par. 
(50) TRANSITION BONDS SUBJECT TO CERTAIN RULES.—In the 
case of any bond to which any provision of this subsection 
applies— 
(A) MINIMUM TAX TREATMENT.—Any bond which, without 
regard to this section, would be a private activity bond (as 
defined in section 141(a) of the 1986 Code) shall be so 
treated for purposes of section 55 of such Code unless such 
bond would not be described in section 103 (bX2) or (o)(2) of 
the 1954 Code were such bond issued before August 16, 
1986. 
(B) CERTAIN RESTRICTIONS APPLY.—Except as otherwise 
expressly provided, sections 103 and 103A of the 1954 Code 
shall be applied as if the requirements of section 148 and 
subsections (d) and (g) of section 149 of the 1986 Code were 
included in each such section. 
(51) CERTAIN ADDITIONAL PROJECTS.—Section 141(a) of the 1986 
Code shall be applied by substituting "25" for "10" each place it 
appears and by not applying sections 141(a)(3) and 141(cXl)(B) to 
bonds substantially all of the proceeds are used for— 
(A) A project is described in this subparagraph if it 
consists of a capital improvements program for a metropoli-
tan sewer district, with respect to which a proposition was 
submitted to voters on August 7, 1984. The aggregate face 
amount of obligations to which this subparagraph applies 
shall not exceed $60,000,000. 
(B) Facilities described in this subparagraph if it consists 
of additions, 
extensions, and improvements 
to the 
wastewater system for Lakeland, Florida. The aggregate 
face amount of obligations to which this subparagraph 
applies shall not exceed $20,000,000. 
(C) A project is described in this subparagraph if it is the 
Central Valley Water Reclamation Project in Utah. The 
aggregate face amount of obligations to which this subpara-
graph applies shall not exceed $100,000,000. 
(D) A project is described in this subparagraph if it is a 
project to construct approximately 26 miles of toll express-
ways, with respect to which any appeal to validation was 
filed July 11, 1986. The aggregate face amount of obliga-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2711 
tions to which this subparagraph applies shall not exceed 
$450,000,000. 
(52) TERMINATION.—This section shall not apply to any bond 
issued after December 31,1990. 
SEC. 1318. DEFINITIONS, ETC., RELATING TO EFFECTIVE DATES AND 
TRANSITIONAL RULES. 
For purposes of this subtitle— 
(1) 1954 CODE.—The term "1954 Code" means the Internal 
Revenue Code of 1954 as in effect on the day before the date of 
the enactment of this Act. 
(2) 1986 CODE.—The term "1986 Code" means the Internal 
Revenue Code of 1986 as amended by this Act. 
(3) BOND.—The term "bond" includes any obligation. 
(4) ADVANCE REFUND.—A bond shall be treated as issued to 
advance refund another bond if it is issued more than 90 days 
before the redemption of the refunded bond. 
(5) NET PROCEEDS.—The term "net proceeds" has the meaning 
given such term by section 150(a) of the 1986 Code. 
(6) CONTINUED APPLICATION OF THE 1954 CODE.—Nothing in 
this subtitle shall be construed to exempt any bond from any 
provision of the 1954 Code by reason of a delay in (or exemption 
from) the application of any amendment made by subtitle A. 
(7) TREATMENT AS EXEMPT FACILITY.—Any bond which is 
treated as an exempt facility bond by section 1316 or 1317 shall 
not fail to be so treated by reason of subsection (b) of section 142 
ofthe 1986 Code. 
TITLE XIV—TRUSTS AND ESTATES; UN-
EARNED INCOME OF CERTAIN MINOR 
CHILDREN; GIFT AND ESTATE TAXES; 
GENERATION-SKIPPING TRANSFER TAX 
Subtitle A—Income Taxation of Trusts and 
Estates 
SEC. 1401. GRANTOR TREATED AS HOLDING ANY POWER OR INTEREST OF 
GRANTOR'S SPOUSE. 
(a) IN GENERAL.—Section 672 (relating to definitions and rules) is 
amended by adding at the end thereof the following new subsection: 
"(e) GRANTOR TREATED AS HOLDING ANY POWER OR INTEREST OF 
GRANTOR'S SPOUSE.—For purposes of this subpart, if a grantor's 
spouse is living with the grantor at the time of the creation of any 
power or interest held by such spouse, the grantor shall be treated 
as holding such power or interest." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply with respect to transfers in trust made after March 1, 1986. 
SEC. 1402. LIMITATIONS TO REVERSIONARY INTEREST RULE EXCEP-
TIONS. 
(a) IN GENERAL.—Section 673 (relating to reversionary interest) is 
amended to read as follows: 
100 STAT. 2712 
PUBLIC LAW 99-514—OCT. 22, 1986 
"SEC. 673. REVERSIONARY INTERESTS. 
-* 
^,,. 
. 
"(a) GENERAL RULE.—The grantor shall be treated £is the owner of 
any portion of a trust in which he has a reversionary interest in 
either the corpus or the income therefrom, if, as of the inception of 
that portion of the trust, the value of such interest exceeds 5 percent 
of the value of such portion. 
"(b) REVERSIONARY INTEREST TAKING EFFECT AT DEATH OF MINOR 
LINEAL DESCENDANT BENEFICIARY.—In the case of any beneficiary 
who— 
"(1) is a lineal descendant of the grantor, and 
"(2) holds all of the present interests in any portion of a trust, 
the grantor shall not be treated under subsection (a) as the owner of 
such portion solely by reason of a reversionary interest in such 
portion which takes effect upon the death of such beneficiary before 
such beneficiary attains age 21." 
0?) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 674(b) (relating to exceptions for 
certain powers) is amended— 
(A) by striking out "the expiration of a period" and 
inserting in lieu thereof "the occurrence of an event", 
(B) by striking out "the expiration of the period" and 
inserting in lieu thereof "the occurrence of the event", and 
(C) by striking out "EXPIRATION OF 10-YEAR PERIOD" in the 
heading thereof and inserting in lieu thereof "OCCURRENCE 
OF EVENT". 
(2) Subsection (b) of section 676 (relating to power to revoke) is 
amended— 
(A) by striking out "the expiration of a period" and 
inserting in lieu thereof "the occurrence of an event", 
(B) by striking out "the expiration of such period" and 
inserting in lieu thereof "the occurrence of such event", 
and 
(C) by striking out "EXPIRATION OF 10-YEAR PERIOD" in 
the heading thereof and inserting in lieu thereof "OCCUR-
RENCE OF EVENT". 
(3) Subsection (a) of section 677 (relating to income for benefit 
of grantor) is amended— 
(A) by striking out "the expiration of a period" and 
inserting in lieu thereof "the occurrence of an event", and 
(B) by striking out "the expiration of the period" and 
inserting in lieu thereof "the occurrence of the event". 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply with respect to 
transfers in trust made after March 1,1986. 
(2) TRANSFERS PURSUANT TO PROPERTY SETTLEMENT AGREE-
MENT.—The amendments made by this section shall not apply 
to any transfer in trust made after March 1, 1986, pursuant to a 
binding property settlement agreement entered into on or 
before March 1, 1986, which required the taxpayer to establish a 
grantor trust and for the transfer of a specified sum of money or 
property to the trust by the taxpayer. This paragraph shall 
apply only to the extent of the amount required to be trans-
ferred under the agreement described in the preceding sen-
tence. 
.•.*.'•,..«*..« i„.,<, ,-...: ... 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2713 
SEC. 1403. TAXABLE YEAR OF TRUSTS TO BE CALENDAR YEAR. 
(a) IN GENERAL.—Subpart A of part I of subchapter J of chapter 1 
(relating to general rules for taxation of estates and trusts) is 
amended by adding at the end thereof the following new section: 
"SEC. 645. TAXABLE YEAR OF TRUSTS. 
"(a) IN GENERAL.—For purposes of this subtitle, the taxable year 
of any trust shall be the calendar year. 
"(b) EXCEPTION FOR TRUSTS EXEMPT FROM TAX AND CHARITABLE 
TRUSTS.—Subsection (a) shall not apply to a trust exempt from 
taxation under section 501(a) or to a trust described in section 
4947(a)(1)." 
(b) CLERICAL AMENDMENT.—The table of sections of subpart A of 
part I of subchapter J of chapter 1 is amended by adding at the end 
thereof the following new item: 
"Sec. 645, Taxable year of trusts." 
(c) EFFECTIVE DATE; TRANSITION RULE.— 
(1) EFFECTIVE DATE.—The amendments made by this section 
shall apply to taxable years beginning after December 31, 1986. 
(2) TRANSITION RULE.—With respect to any trust beneficiary 
who is required to include in gross income amounts under 
sections 652(a) or 662(a) of the Internal Revenue Code of 1986 in 
the 1st taxable year of the beneficiary beginning after Decem-
ber 31, 1986, by reason of any short taxable year of the trust 
required by the amendments made by this section, such income 
shall be ratably included in the income of the trust beneficiary 
over the 4-taxable year period beginning with such taxable year. 
SEC. 1404. TRUSTS AND CERTAIN ESTATES TO MAKE ESTIMATED PAY-
MENTS OF INCOME TAXES. 
(a) IN GENERAL.—Subsection (k) of section 6654 (relating to failure 
by individual to pay estimated income tax) is amended to read as 
follows: 
"(k) TRUSTS AND CERTAIN ESTATES.—This section shall apply to— 
"(1) any trust, and 
"(2) any estate with respect to any taxable year ending 2 or 
more years after the date of the death of the decedent's death." 
(b) CERTAIN PAYMENTS OF ESTIMATED TAX BY A TRUST.—Section 
643 is amended by adding at the end thereof the following new 
subsection: 
"(g) CERTAIN PAYMENTS OF ESTIMATED TAX TREATED AS PAID BY 
BENEFICIARY.— 
"(1) IN GENERAL.—In the case of a trust— 
"(A) the trustee may elect to treat any portion of a 
payment of estimated tax made by such trust for any 
taxable year of the trust as a payment made by a bene-
ficiary of such trust, 
"(B) any amount so treated shall be treated as paid or 
credited to the beneficiary on the last day of such taxable 
year, and 
"(C) for purposes of subtitle F, the amount so treated— 
"(i) shall not be treated as a payment of estimated 
tax made by the trust, but 
"(ii) shall be treated as a payment of estimated tax 
made by such beneficiary on January 15 following the 
taxable year. 
100 STAT. 2714 
PUBLIC LAW 99-514—OCT. 22, 1986 
The preceding sentence shall apply only to the extent the 
payments of estimated tax made by the trust for the taxable 
year exceed the tax imposed by this chapter shown on its return 
for the taxable year. 
"(2) TIME FOR MAKING ELECTION.—An election under para-
graph (1) may be made— 
"(A) only on the trust's return of the tax imposed by this 
chapter for the taxable year, and 
"(B) only if such return is filed on or before the 65th day 
after the close of the taxable year." 
(c) CONFORMING AMENDMENTS.— 
(1) Section 6152 (relating to installment payments) is re-
pealed. 
(2) Section 6215(b) (relating to cross references) is amended by 
striking out paragraph (7) and redesignating paragraph (8) as 
paragraph (7). 
(3) Paragraph (2) of section 6601 (relating to last date pre-
scribed for payment) is amended— 
(A) by striking out "6152(a), 6156(a), or 6158(a)" and 
inserting in lieu thereof "6156(a) or 6158(a)", and 
(B) by striking out "6152(b), 6156(b), or 6158(a)" in 
subparagraph (A) and inserting in lieu thereof "615603) or 
6158(a)". 
(4) The table of sections for subchapter A of chapter 62 is 
amended by striking out the item relating to section 6152. 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
Subtitle B—Unearned Income of Certain 
Minor Children 
SEC. 1411. UNEARNED INCOME OF CERTAIN MINOR CHILDREN. 
(a) GENERAL RULE.—Section 1, as amended by section 101, is 
amended by inserting after subsection (h) the following new subsec-
tion: 
"(i) CERTAIN UNEARNED INCOME OF MINOR CHILDREN TAXED AS IF 
PARENT'S INCOME.— 
"(1) IN GENERAL.—In the case of any child to whom this 
subsection applies, the tax imposed by this section shall be 
equal to the greater o
f
— 
"(A) the tax imposed by this section without regard to 
this subsection, or 
"(B) the sum of— 
"(i) the tax which would be imposed by this section if 
the taxable income of such child for the taxable year 
were reduced by the net unearned income of such child, 
plus 
"(ii) such child's share of the allocable parental tax. 
"(2) CHILD TO WHOM SUBSECTION APPLIES.—This subsection 
shall apply to any child for any taxable year i
f
— 
"(A) such child has not attained age 14 before the close of 
the taxable year, and 
"(B) either parent of such child is alive at the close of the 
taxable year. 
_. 
. - _ 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2715 
"(3) ALLOCABLE PARENTAL TAX.—For purposes of this subsec-
tion— 
"(A) IN GENERAL.—The term 'allocable parental tax' 
means the excess o
f
— 
"(i) the tax which would be imposed by this section 
on the parent's taxable income if such income included 
the net unearned income of all children of the parent to 
whom this subsection applies, over 
"(ii) the tax imposed by this section on the parent 
without regard to this subsection. 
For purposes of clause (i), net unearned income of all 
children of the parent shall not be taken into account in 
computing any deduction or credit of the parent. 
"(B) CHILD'S SHARE.—A child's share of any allocable 
parental tax of a parent shall be equal to an amount which 
bears the same ratio to the total allocable parental tax as 
the child's net unearned income bears to the aggregate net 
unearned income of all children of such parent to whom 
this subsection applies. 
"(4) NET UNEARNED INCOME.—For purposes of this subsec-
tion— 
"(A) IN GENERAL.—The term 'net unearned income' 
means the excess o
f
— 
"(i) the portion of the gross income for the taxable 
year which is not earned income (as defined in section 
911(d)(2)), over 
"(ii) the sum o
f
— 
"(I) the amount in effect for the taxable year 
under section 63(c)(5)(A) (relating to limitation on 
standard deduction in the case of certain depend-
ents), plus 
"(II) the greater of the amount described in 
subclause (I) or, if the child itemizes his deduction 
for the taxable year, the amount of the deductions 
allowed by this chapter for the taxable year which 
are directly connected with the production of the 
portion of gross income referred to in clause (i). 
"(B) LIMITATION BASED ON TAXABLE INCOME.—The amount 
of the net unearned income for any taxable year shall not 
exceed the individual's taxable income for such taxable 
year. 
"(5) SPECIAL RULES FOR DETERMINING PARENT TO WHOM SUBSEC-
TION APPLIES.—For purposes of this subsection, the parent whose 
taxable income shall be taken into account shall be— 
"(A) in the case of parents who are not married (within 
the meaning of section 7703), the custodial parent of the 
child, and 
^ 
"(B) in the case of married individuals filing separately, 
the individual with the greater taxable income. 
"(6) PROVIDING OF PARENT'S TIN.—The parent of any child to 
whom this subsection applies for any taxable year shall provide 
the TIN of such parent to such child and such child shall 
include such TIN on the child's return of tax imposed by this 
section for such taxable year." 
(b) DISCLOSURE OF INFORMATION.—Subparagraph (A) of section 
6103(e)(1) (relating to disclosure to persons having material interest) 
is amended by striking out "or" at the end of clause (ii), by inserting 
100 STAT. 2716 
PUBLIC LAW 99-514—OCT. 22, 1986 
"or" at the end of clause (iii), and by adding at the end thereof the 
following new clause: 
"(iv) the child of that individual (or such child's legal 
representative) to the extent necessary to comply with 
the provisions of section 10);"-
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31, 1986. 
Subtitle C—Gift and Estate Taxes 
SEC. 1421. INFORMATION NECESSARY FOR VALID SPECIAL USE VALU-
ATION ELECTION. 
(a) IN GENERAL.—In the case of any decedent dying before Janu-
ary 1,1986, if the executor— 
(1) made an election under section 2032A of the Internal 
Revenue Code of 1954 on the return of tax imposed by section 
2001 of such Code within the time prescribed for filing such 
return (including extensions thereof), and 
(2) provided substantially all the information with respect to 
such election required on such return of tax, 
such election shall be a valid election for purposes of section 2032A 
of such Code. 
(b) EXECUTOR MUST PROVIDE INFORMATION.—An election described 
in subsection (a) shall not be valid if the Secretary of the Treasury 
or his delegate after the date of the enactment of this Act requests 
information from the executor with respect to such election and the 
executor does not provide such information within 90 days of receipt 
of such request. 
(c) EFFECTIVE DATE.—The provisions of this section shall not apply 
to the estate of any decedent if before the date of the enactment of 
this Act the statute of limitations has expired with respect to— 
(1) the return of tax imposed by section 2001 of the Internal 
Revenue Code of 1954, and 
(2) the period during which a claim for credit or refund may 
be timely filed. 
(d) SPECIAL RULE FOR CERTAIN ESTATE.—Notwithstanding subsec-
tion (a)(2), the provisions of this section shall apply to the estate of 
an individual who died on January 30, 1984, and with respect to 
which— 
(1) a Federal estate tax return was filed on October 30, 1984, 
electing current use valuation, and 
(2) the agreement required under section 2032A was filed on 
November 9, 1984. 
SEC. 1422. GIFT AND ESTATE TAX DEDUCTIONS FOR CERTAIN CONSERVA-
TION EASEMENT DONATIONS. 
(a) ESTATE TAX.—Section 2055 (relating to transfers for public, 
charitable, and religious uses) is amended— 
(1) by redesignating subsection (f) as subsection (g), and 
(2) by inserting after subsection (e) the following new subsec-
tion: 
"(f) SPECIAL RULE FOR IRREVOCABLE TRANSFERS OF EASEMENTS IN 
REAL PROPERTY.—A deduction shall be allowed under subsection (a) 
in respect of any transfer of a qualified real property interest (as 
defined in section 170(h)(2)(C)) which meets the requirements of 
section 170(h) (without regard to paragraph (4)(A) thereof)." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2717 
(b) GIFT TAX.—Section 2522 (relating to charitable and similar 
gifts) is amended by redesignating subsection (d) as subsection (e) 
and by inserting after subsection (c) the following new subsection: 
"(d) SPECIAL RULE FOR IRREVOCABLE TRANSFERS OF EASEMENTS IN 
REAL PROPERTY.—A deduction shall be allowed under subsection (a) 
in respect of any transfer of a qualified real property interest (as 
defined in section 170(h)(2)(C)) which meets the requirements of 
section 170(h) (without regard to paragraph (4)(A) thereof)." 
(c) CONFORMING AMENDMENT.—Subparagraph (F)(ii) of section 
2106(a)(2) is amended by striking out "section 2055(f)" and inserting 
in lieu thereof "section 2055(g)". 
(d) SPECIAL DONATIONS.—If the Secretary of the Interior acquires 
by donation after December 31, 1986, a conservation easement 
(within the meaning of section 2(h) of S. 720, 99th Congress, 1st 
Session, as in effect on August 16, 1986), such donation shall qualify 
for treatment under section 2055(f) or 2522(d) of the Internal Reve-
nue Code of 1954, as added by this section. 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
apply to transfers and contributions made after December 31, 1986. 
SEC. 1423. CONVEYANCE OF CERTAIN REAL AND PERSONAL PROPERTY 
OF DECEDENT TO CHARITABLE FOUNDATION TREATED AS 
CHARITABLE CONTRIBUTION. 
Notwithstanding any other law or any rule of law (including res 
judicata, laches, or lapse of time), in the case of any real property or 
personal property located in Bangkok, Thailand, which— 
(1) was owned by James H.W. Thompson at the time of his 
death, and 
(2) has been transferred to the Jim Thompson Foundation 
(also known as the J.H.W. Thompson Foundation), a charitable 
foundation established in Thailand for the purpose of operating 
a museum consisting of such real and personal property, 
such property shall be treated, for purposes of section 2055 of the 
Internal Revenue Code of 1954 (relating to deductions for transfers 
for public, charitable, and religious uses), as having been transferred 
as a bequest or a devise directly from the estate of James H.W. 
Thompson to the Jim Thompson Foundation and the value of such 
property included in the gross estate shall be deducted from the 
gross estate of James H.W. Thompson for purposes of the tax 
imposed by section 2001 of such Code. 
Subtitle D—Generation-Skipping Transfers 
SEC. 1431. NEW TAX ON GENERATION-SKIPPING TRANSFERS. 
(a) GENERAL RULE.—Chapter 13 (relating to tax on certain genera-
tion-skipping transfers) is amended to read as follows: 
"CHAPTER 13—TAX ON GENERATION-SKIPPING 
TRANSFERS 
"Subchapter A. Tax imposed. 
"Subchapter B. Generation-skipping transfers. 
"Subchapter C. Taxable amount. 
"Subchapter D. GST exemption. 
"Subchapter E. Applicable rate; inclusion ratio. 
"Subchapter F. Other definitions and special rules. 
"Subchapter G. Administration. 
100 STAT. 2718 
PUBLIC LAW 99-514—OCT. 22, 1986 
"Subchapter A—Tax Imposed 
"Sec. 2601. Tax imposed. 
"Sec. 2602. Amount of tax. 
"Sec. 2603. Liability for tax. 
"Sec. 2604. Credit for certain State taxes. 
"SEC. 2601. TAX IMPOSED. 
"A tax is hereby imposed on every generation-skipping transfer 
(within the meaning of subchapter B). 
"SEC. 2602. AMOUNT OF TAX. 
"The amount of the tax imposed by section 2601 is— 
"(1) the taxable amount (determined under subchapter C), 
multiplied by 
"(2) the applicable rate (determined under subchapter E). 
"SEC. 2603. LIABILITY FOR TAX. 
"(a) PERSONAL LIABILITY.— 
"(1) TAXABLE DISTRIBUTIONS.—In the case of a taxable dis-
tribution, the tax imposed by section 2601 shall be paid by the 
transferee. 
"(2) TAXABLE TERMINATION.—In the case of a taxable termi-
nation or a direct skip from a trust, the tax shall be paid by the 
trustee. 
"(3) DIRECT SKIP.—In the case of a direct skip (other than a 
direct skip from a trust), the tax shall be paid by the transferor. 
"0)) SOURCE OF TAX.—Unless otherwise directed pursuant to the 
governing instrument by specific reference to the tax imposed by 
this chapter, the tax imposed by this chapter on a generation-
skipping transfer shall be charged to the property constituting such 
transfer. 
"(c) CROSS REFERENCE.— 
"For provisions making estate and gift tax provisions with respect to 
transferee liability, liens, and related matters applicable to the tax 
imposed by section 2601, see section 2661. 
"SEC. 2604. CREDIT FOR CERTAIN STATE TAXES. 
"(a) GENERAL RULE.—If a generation-skipping transfer (other than 
a direct skip) occurs at the same time as and as a result of the death 
of an individual, a credit against the tax imposed by section 2601 
shall be allowed in an amount equal to the generation-skipping 
transfer tax actually paid to any State in respect to any property 
included in the generation-skipping transfer. 
"(b) LIMITATION.—The aggregate amount allowed as a credit 
under this section with respect to any transfer shall not exceed 5 
percent of the amount of the tax imposed by section 2601 on such 
transfer. 
"Subchapter B—Generation-Skipping Transfers 
"Sec. 2611. Generation-skipping transfer defined. 
"Sec. 2612. Taxable termination; taxable distribution; direct skip. 
"Sec. 2613. Skip person and non-skip person defined. 
"SEC. 2611. GENERATION-SKIPPING TRANSFER DEFINED. 
"(a) IN GENERAL.—For purposes of this chapter, the term 'genera-
tion-skipping transfers' mean— 
"(1) a taxable distribution. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2719 
"(2) a taxable termination, and 
"(3) a direct skip. 
"(b) CERTAIN TRANSFERS EXCLUDED.—The term 'generation-skip-
ping transfer' does not include— 
"(1) any transfer (other than a direct skip) from a trust, to the 
extent such transfer is subject to a tax imposed by chapter 11 or 
12 with respect to a person in the 1st generation below that of 
the grantor, and 
"(2) any transfer which, if made inter vivos by an individual, 
would not be treated as a taxable gift by reason of section 
2503(e) (relating to exclusion of certain transfers for educational 
or medical expenses), and 
"(3) any transfer to the extent— 
"(A) the property transferred was subject to a prior tax 
imposed under this chapter, 
"(B) the transferee in the prior transfer was assigned to 
the same generation as (or a lower generation than) the 
generation assignment of the transferee in this transfer, 
and 
"(C) such transfers do not have the effect of avoiding tax 
under this chapter with respect to any transfer. 
"SEC. 2612. TAXABLE TERMINATION; TAXABLE DISTRIBUTION; DIRECT 
SKIP. 
"(a) TAXABLE TERMINATION.— 
"(1) GENERAL RULE.—For purposes of this chapter, the term 
'taxable termination' means the termination (by death, lapse of 
time, release of power, or otherwise) of an interest in property 
held in a trust unless— 
"(A) immediately after such termination, a non-skip 
person has an interest in such property, or 
"(B) at no time after such termination may a distribution 
(including distributions on termination) be made from such 
trust to a skip person. 
"(2) CERTAIN PARTIAL TERMINATIONS TREATED AS TAXABLE.—If, 
upon the termination of an interest in property held in a trust, 
a specified portion of the trust assets are distributed to skip 
persons who are lineal descendants of the holder of such in-
terest (or to 1 or more trusts for the exclusive benefit of such 
persons), such termination shall constitute a taxable termi-
nation with respect to such portion of the trust property. 
"(b) TAXABLE DISTRIBUTION.—For purposes of this chapter, the 
term 'taxable distribution' means any distribution from a trust to a 
skip person (other than a taxable termination or a direct skip). 
"(c) DIRECT SKIP.—For purposes of this chapter— 
"(1) IN GENERAL.—The term 'direct skip' means a transfer 
subject to a tax imposed by chapter 11 or 12 of an interest in 
property to a skip person. 
"(2) SPECIAL RULE FOR TRANSFERS TO GRANDCHILDREN.—For 
purposes of determining whether any transfer is a direct skip, 
if— 
"(A) an individual is a grandchild of the transferor (or the 
transferor's spouse or former spouse), and 
"(B) as of the time of the transfer, the parent of such 
individual who is a lineal descendant of the transferor (or 
the transferor's spouse or former spouse) is dead. 
100 STAT. 2720 
PUBLIC LAW 99-514—OCT. 22, 1986 
such individual shall be treated as if such individual were a 
child of the transferor and all of that grandchild's children shall 
be treated as if they were grandchildren of the transferor. In 
the case of lineal descendants below a grandchild, the preceding 
sentence may be reapplied. 
"SEC. 2613. SKIP PERSON AND NONSKIP PERSON DEFINED. 
"(a) SKIP PERSON.—For purposes of this chapter, the term 'skip 
person' means— 
"(1) a person assigned to a generation which is 2 or more 
generations below the generation assignment of the transferor, 
or 
"(2) a trust— 
"(A) if all interests in such trust are held by skip persons, 
or 
"(B) if— 
"(i) there is no person holding an interest in such 
trust, and 
"(ii) at no time after such transfer may a distribution 
(including distributions on termination) be made from 
such trust to a nonskip person. 
"(b) NON-SKIP PERSON.—For purposes of this chapter, the term 
'non-skip person' means any person who is not a skip person. 
"Subchapter C—Taxable Amount 
"Sec. 2621. Taxable amount in case of taxable distribution. 
"Sec. 2622. Taxable amount in case of taxable termination. 
"Sec. 2623. Taxable amount in case of direct skip. 
"Sec. 2624. Valuation. 
"SEC. 2621. TAXABLE AMOUNT IN CASE OF TAXABLE DISTRIBUTION. 
"(a) IN GENERAL.—For purposes of this chapter, the taxable 
amount in the case of any taxable distribution shall be— 
"(1) the value of the property received by the transferee, 
reduced by 
"(2) any expense incurred by the transferee in connection 
with the determination, collection, or refund of the tax imposed 
by this chapter with respect to such distribution. 
"(b) PAYMENT OF GST TAX TREATED AS TAXABLE DISTRIBUTION.— 
For purposes of this chapter, if any of the tax imposed by this 
chapter with respect to any taxable distribution is paid out of the 
trust, an amount equal to the portion so paid shall be treated as a 
taxable distribution. 
"SEC. 2622. TAXABLE AMOUNT IN CASE OF TAXABLE TERMINATION. 
"(a) IN GENERAL.—For purposes of this chapter, the taxable 
amount in the case of a taxable termination shall be— 
"(1) the value of all property with respect to which the 
taxable termination has occurred, reduced by 
"(2) any deduction allowed under subsection (b). 
"(b) DEDUCTION FOR CERTAIN EXPENSES.—For purposes of subsec-
tion (a), there shall be allowed a deduction similar to the deduction 
allowed by section 2053 (relating to expenses, indebtedness, and 
taxes) for amounts attributable to the property with respect to 
which the taxable termination has occurred. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2721 
"SEC. 2623. TAXABLE AMOUNT IN CASE OF DIRECT SKIP. 
"For purposes of this chapter, the taxable amount in the case of a 
direct skip shall be the value of the property received by the 
transferee. 
"SEC. 2624. VALUATION. 
"(a) GENERAL RULE.—Except as otherwise provided in this chap-
ter, property shall be valued as of the time of the generation-
skipping transfer. 
"(b) ALTERNATE VALUATION AND SPECIAL USE VALUATION ELEC-
TIONS APPLY TO CERTAIN DIRECT SKIPS.—In the case of any direct 
skip of property which is included in the transferor's gross estate, 
the value of such property for purposes of this chapter shall be the 
same as its value for purposes of chapter 11 (determined with regard 
to sections 2032 and 2032A). 
"(c) ALTERNATE VALUATION ELECTION PERMITTED IN THE CASE OF 
TAXABLE TERMINATIONS OCCURRING AT DEATH.—If 1 or more taxable 
terminations with respect to the same trust occur at the same time 
as and as a result of the death of an individual, an election may be 
made to value all of the property included in such terminations in 
accordance with section 2032. 
"(d) REDUCTION FOR CONSIDERATION PROVIDED BY TRANSFEREE.— 
For purposes of this chapter, the value of the property transferred 
shall be reduced by the amount of any consideration provided by the 
transferee. 
"Subchapter D—GST Exemption 
"Sec. 2631. GST exemption. 
"Sec. 2632. Special rules for allocation of GST exemption. 
"SEC. 2631. GST EXEMPTION. 
"(a) GENERAL RULE.—For purposes of determining the inclusion 
ratio, every individual shall be allowed a GST exemption of 
$1,000,000 which may be allocated by such individual (or his execu-
tor) to any property with respect to which such individual is the 
transferor. 
"Ot)) ALLOCATIONS IRREVOCABLE.—Any allocation under subsection 
(a), once made, shall be irrevocable. 
"SEC. 2632. SPECIAL RULES FOR ALLOCATION OF GST EXEMPTION. 
"(a) TIME AND MANNER OF ALLOCATION.— 
"(1) TIME.—Any allocation by an individual of his GST exemp-
tion under section 2631(a) may be made at any time on or before 
the date prescribed for filing the estate tax return for such 
individual's estate (determined with regard to extensions), 
regardless of whether such a return is required to be filed. 
"(2) MANNER.—The Secretary shall prescribe by forms or 
regulations the manner in which any allocation referred to in 
paragraph (1) is to be made. 
"Ob) DEEMED ALLOCATION TO CERTAIN LIFETIME DIRECT SKIPS.— 
"(1) IN GENERAL.—If any individual makes a direct skip 
during his lifetime, any unused portion of such individual's GST 
exemption shall be allocated to the property transferred to the 
extent necessary to make the inclusion ratio for such property 
zero. If the amount of the direct skip exceeds such unused 
100 STAT. 2722 
PUBLIC LAW 99-514—OCT. 22, 1986 
portion, the entire unused portion shall be allocated to the 
property transferred. 
"(2) UNUSED PORTION.—For purposes of paragraph (1), the 
unused portion of an individual's GST exemption is that portion 
of such exemption which has not previously been allocated by 
such individual (or treated as allocated under paragraph (1)) 
with respect to a prior direct skip. 
"(3) SUBSECTION NOT TO APPLY IN CERTAIN CASES.—An individ-
ual may elect to have this subsection not apply to a transfer. 
"(c) ALLOCATION OF UNUSED GST EXEMPTION.— 
"(1) IN GENERAL.—Any portion of an individual's GST exemp-
tion which has not been allocated within the time prescribed by 
subsection (a) shall be deemed to be allocated as follows— 
"(A) first, to property which is the subject of a direct skip 
occurring at such individual's death, and 
"(B) second, to trusts with respect to which such individ-
ual is the transferor and from which a taxable distribution 
or a taxable termination might occur at or after such 
individual's death. 
"(2) ALLOCATION WITHIN CATEGORIES.— 
"(A) IN GENERAL.—The allocation under paragraph (1) 
shall be made among the properties described in subpara-
graph (A) thereof and the trusts described in subparagraph 
(B) thereof, as the case may be, in proportion to the respec-
tive amounts (at the time of allocation) of the nonexempt 
portions of such properties or trusts. 
"(B) NONEXEMPT PORTION.—For purposes of subparagraph 
(A), the term 'nonexempt portion means the value (at the 
time of allocation) of the property or trust, multiplied by 
the inclusion ratio with respect to such property or trust. 
"Subchapter E—Applicable Rate; Inclusion Ratio 
"Sec. 2641. Applicable rate. 
"Sec. 2642. Inclusion ratio. 
"SEC. 2641. APPLICABLE RATE. 
"(a) GENERAL RULE.—For purposes of this chapter, the term 'ap-
plicable rate' means, with respect to any generation-skipping trans-
fer, the product o
f
— 
"(1) the maximum Federal estate tax rate, and 
"(2) the inclusion ratio with respect to the transfer. 
"(b) MAXIMUM FEDERAL ESTATE TAX RATE.—For purposes of 
subsection (a), the term 'maximum Federal estate tax rate' means 
the maximum rate imposed by section 2001 on the estates of de-
cedents dying at the time of the taxable distribution, taxable termi-
nation, or direct skip, as the case may be. 
"SEC. 2642. INCLUSION RATIO. 
"(a) INCLUSION RATIO DEFINED.—For purposes of this chapter— 
"(1) IN GENERAL.—Except as otherwise provided in this 
section, the inclusion ratio with respect to any property trans-
ferred in a generation-skipping transfer shall be the excess (if 
any) of 1 over— 
"(A) except as provided in subparagraph (B), the ap-
plicable fraction determined for the trust from which such 
transfer is made, or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2723 
"(B) in the case of a direct skip, the applicable fraction 
determined for such skip. 
"(2) APPLICABLE FRACTION.—For purposes of paragraph (1), the 
applicable fraction is a fraction— 
"(A) the numerator of which is the amount of the GST 
exemption allocated to the trust (or in the case of a direct 
skip, allocated to the property transferred in such skip), and 
"(B) the denominator of which is— 
"(i) the value of the property transferred to the trust 
(or involved in the direct skip), reduced by 
"(ii) the sum of— 
"(I) any Federal estate tax or State death tax 
actually recovered from the trust attributable to 
such property, and 
"(II) any charitable deduction allowed under sec-
tion 2055 or 2522 with respect to such property. 
Except as provided in paragraphs (3) and (4) of subsection (b), the 
value determined under subparagraph (B)(i) shall be of the property 
as of the time of the transfer to the trust (or the direct skip). 
"
O
t
>
) VALUATION RULES, ETC.— 
"(1) GIFTS FOR WHICH GIFT TAX RETURN FILED OR DEEMED 
ALLOCATION MADE.—If the allocation of the GST exemption to 
any property is made on a timely filed gift tax return required 
by section 6019 or is deemed to be made under section 
2632(b)(1)— 
"(A) the value of such property for purposes of subsection 
(a) shall be its value for purposes of chapter 12, and 
"(B) such allocation shall be effective on and after the 
date of such transfer. 
"(2) TRANSFERS AND ALLOCATIONS AT OR AFTER DEATH.— 
"(A) TRANSFERS AT DEATH.—If property is transferred £is a 
result of the death of the transferor, the value of such 
property for purposes of subsection (a) shall be its value for 
purposes of chapter 11. 
"(B) ALLOCATIONS AT OR AFTER DEATH OF TRANSFEROR.— 
Any allocation at or after the death of the transferor shall 
be effective on and after the date of the death of the 
transferor. 
"(3) INTER VIVOS ALLOCATIONS NOT MADE ON TIMELY FILED GIFT 
T
A
X RETURN.—If any allocation of the GST exemption to any 
property is made during the life of the transferor but is not 
made on a timely filed gift tax return required by section 6019 
and is not deemed to be made under section 2632(bXl)— 
"(A) the value of such property for purposes of subsection 
(a) shall be determined as of the time such allocation is filed 
with the Secretary, and 
"(B) such allocation shall be effective on and after the 
date on which such allocation is filed with the Secretary. 
"(4) QTIP TRUSTS.—If the value of property is included in the 
estate of a spouse by virtue of section 2044, and if such spouse is 
treated as the transferor of such property under section 2652(a), 
the value of such property for purposes of subsection (a) shall be 
its value for purposes of chapter 11 in the estate of such spouse. 
"(c) TREATMENT OF CERTAIN NONTAXABLE GIFTS.— 
"(1) DIRECT SKIPS.—In the case of any direct skip which is a 
nontaxable gift, the inclusion ratio shall be zero. 
"(2) TREATMENT OF NONTAXABLE GIFTS MADE TO TRUSTS.— 
100 STAT. 2724 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), any nontaxable gift which is not a direct skip and which 
is made to a trust shall not be taken into account under 
subsection (a)(2)(B). 
"(B) DETERMINATION OF 1ST TRANSFER TO TRUST.—In the 
case of any nontaxable gift referred to in subparagraph (A) 
which is the 1st transfer to the trust, the inclusion ratio for 
such trust shall be zero. 
"(3) NONTAXABLE GIFT.—For purposes of this section, the term 
'nontaxable gift' means any transfer of property to the extent 
such transfer is not treated as a taxable gift by reason o
f
— 
"(A) section 2503(b) (taking into account the application 
of section 2513), or 
"(B) section 2503(e). 
"(d) SPECIAL RULES WHERE MORE THAN 1 TRANSFER MADE TO 
TRUST.— 
"(1) IN GENERAL.—If a transfer of property (other than a 
nontaxable gift) is made to a trust in existence before such 
transfer, the applicable fraction for such trust shall be recom-
puted as of the time of such transfer in the manner provided in 
paragraph (2). 
"(2) APPUCABLE FRACTION.—In the case of any such transfer, 
the recomputed applicable fraction is a fraction— 
^ 
"(A) the numerator of which is the sum o
f
— 
"(i) the amount of the GST exemption allocated to 
property involved in such transfer, plus 
"(ii) the nontax portion of such trust immediately 
before such transfer, and 
"(B) the denominator of which is the sum of— 
"(i) the value of the property involved in such trans-
fer, reduced by any charitable deduction allowed under 
section 2055 or 2522 with respect to such property, and 
"(ii) the value of all of the property in the trust 
(immediately before such transfer). 
"(3) NONTAX PORTION.—For purposes of paragraph (2), the 
term 'nontax portion' means the product o
f
— 
"(A) the value of all of the property in the trust, and 
"(B) the applicable fraction in effect for such trust. 
"(4) SIMILAR RECOMPUTATION IN CASE OF CERTAIN LATE ALLOCA-
TIONS.—If^ 
"(A) any allocation of the GST exemption to property 
transferred to a trust is not made on a timely filed gift tax 
return required by section 6019, and 
"(B) there was a previous allocation with respect to prop-
erty transferred to such trust, 
the applicable fraction for such trust shall be recomputed as of 
the time of such allocation under rules similar to the rules of 
paragraph (2). 
"Subchapter F—Other Definitions and Special Rules 
"Sec. 2651. Generation assignment. 
"Sec. 2652. Other definitions. 
"Sec. 2653. Taxation of multiple skips. 
"Sec. 2654. Special rules. 
; 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2725 
"SEC. 2651. GENERATION ASSIGNMENT. 
"(a) IN GENERAL.—For purposes of this chapter, the generation to 
which any person (other than the transferor) belongs shall be deter-
mined in accordance with the rules set forth in this section. 
"(b) LINEAL DESCENDANTS.— 
"(1) IN GENERAL.—An individual who is a lineal descendant of 
a grandparent of the transferor shall be assigned to that genera-
tion which results from comparing the number of generations 
between the grandparent and such individual with the number 
of generations between the grandparent and the transferor. 
"(2) ON SPOUSE'S SIDE.—An individual who is a lineal descend-
ant of a grandparent of a spouse of the transferor (other than 
such spouse) shall be assigned to that generation which results 
from comparing the number of generations between such grand-
parent and such individual with the number of generations 
between such grandparent and such spouse. 
"(3) TREATMENT OF LEGAL ADOPTIONS, ETC.—For purposes of 
this subsection— 
"(A) LEGAL ADOPTIONS.—A relationship by legal adoption 
shall be treated as a relationship by blood. 
"(B) RELATIONSHIPS BY HALF-BLOOD.—A relationship by 
the half-blood shall be treated as a relationship of the 
whole-blood. 
"(c) MARITAL RELATIONSHIP.— 
"(1) MARRIAGE TO TRANSFEROR.—An individual who has been 
married at any time to the transferor shall be assigned to the 
transferor's generation. 
"(2) MARRIAGE TO OTHER LINEAL DESCENDANTS.—An individual 
who has been married at any time to an individual described in 
subsection (b) shall be assigned to the generation of the individ-
ual so described. 
"(d) PERSONS WHO ARE NOT LINEAL DESCENDANTS.—An individual 
who is not assigned to a generation by reason of the foregoing 
provisions of this section shall be assigned to a generation on the 
basis of the date of such individual's birth with— 
"(1) an individual born not more than 12 y2 years after the 
date of the birth of the transferor assigned to the transferor's 
generation, 
"(2) an individual born more than 12V2 years but not more 
than 37 V
a years after the date of the birth of the transferor 
assigned to the first generation younger than the transferor, 
and 
"(3) similar rules for a new generation every 25 years. 
"(e) OTHER SPECIAL RULES.— 
"(1) INDIVIDUALS ASSIGNED TO MORE THAN i GENERATION.— 
Except as provided in regulations, an individual who, but for 
this subsection, would be assigned to more than 1 generation 
shall be assigned to the youngest such generation. 
"(2) INTERESTS THROUGH ENTITIES.—Except as provided in 
paragraph (3), if an estate, trust, partnership, corporation, or 
other entity has an interest in property, each individual having 
a beneficial interest in such entity shall be treated as having an 
interest in such property and shall be assigned to a generation 
under the foregoing provisions of this subsection. 
"(3) TREATMENT OF CERTAIN CHARITABLE ORGANIZATIONS.—Any 
organization described in section 511(aX2) and any charitable 
100 STAT. 2726 
PUBLIC LAW 99-514—OCT. 22, 1986 
trust described in section 511(bX2) shall be assigned to the 
transferor's generation. 
"SEC. 2652. OTHER DEFINITIONS. 
"(a) TRANSFEROR.—For purposes of this chapter— 
"(1) IN GENERAL.—Except as provided in this subsection or 
section 2653(a), the term 'transferor' means— 
"(A) in the case of a transfer of a kind subject to the tax 
imposed by chapter 11, the decedent, and 
"(B) in the case of a transfer of a kind subject to the tax 
imposed by chapter 12, the donor. 
"(2) GiFT-spuTTiNG B
Y MARRIED COUPLES.—If, Under section 
2513, one-half of a gift is treated as made by an individual and 
one-half of such gift is treated as made by the spouse of such 
individual, such gift shall be so treated for purposes of this 
chapter. 
"(3) SPECIAL ELECTION FOR QUAUFIED TERMINABLE INTEREST 
PROPERTY.—In the case of— 
"(A) any property with respect to which a deduction is 
allowed to the decedent under section 2056 by reason of 
subsection (b)(7) thereof, and 
"(B) any property with respect to which a deduction to 
the donor spouse is allowed under section 2523 by reason of 
subsection (f) thereof, 
the estate of the decedent or the donor spouse, as the case may 
be, may elect to treat such property for purposes of this chapter 
as if the election to be treated as qualified terminable interest 
property had not been made. 
"(h) TRUST AND TRUSTEE.— 
"(1) TRUST.—The term 'trust' includes any arrangement 
(other than an estate) which, although not a trust, has substan-
tially the same effect as a trust. 
"(2) TRUSTEE.—In the case of an arrangement which is not a 
trust but which is treated as a trust under this subsection, the 
term 'trustee' shall mean the person in actual or constructive 
possession of the property subject to such arrangement. 
"(3) EXAMPLES.—Arrangements to which this subsection ap-
plies include arrangements involving life estates and remain-
ders, estates for years, and insurance and annuity contracts. 
"(c) INTEREST.— 
"(1) IN GENERAL.—A person has an interest in property held 
in trust if (at the time the determination is made) such person— 
"(A) has a right (other than a future right) to receive 
income or corpus from the trust, 
"(B) is a permissible current recipient of income or corpus 
from the trust and is not described in section 2055(a), or 
"(C) is described in section 2055(a) and the trust is— 
"(i) a charitable remainder annuity trust, 
"(ii) a charitable remainder unitrust within the 
meaning of section 664, or 
"(iii) a pooled income fund within the meaning of 
section 642(cX5). 
"(2) CERTAIN NOMINAL INTERESTS DISREGARDED.—For purposes 
of paragraph (1), an interest which is used primarily to postpone 
or avoid the tax imposed by this chapter shall be disregarded. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2727 
"SEC. 2653. TAXATION OF MULTIPLE SKIPS. 
"(a) GENERAL RULE.—For purposes of this chapter, i
f
— 
"(1) there is a generation-skipping transfer of any property, 
and 
"(2) immediately after such transfer such property is held in 
trust, 
for purposes of applying this chapter (other than section 2651) to 
subsequent transfers from the portion of such trust attributable to 
such property, the trust will be treated as if the transferor of such 
property were assigned to the first generation above the highest 
generation of any person who has an interest in such trust imme-
diately after the transfer. 
"(b) TRUST RETAINS INCLUSION RATIO.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), the 
provisions of subsection (a) shall not affect the inclusion ratio 
determined with respect to any trust. Under regulations pre-
scribed by the Secretary, notwithstanding the preceding sen-
tence, proper adjustment shall be made to the inclusion ratio 
with respect to such trust to take into account any tax under 
this chapter borne by such trust which is imposed by this 
chapter on the transfer described in subsection (a). 
"(2) SPECIAL RULE FOR POUR-OVER TRUST.— 
"(A) IN GENERAL.—If the generation-skipping transfer 
referred to in subsection (a) involves the transfer of prop-
erty from 1 trust to another trust (hereinafter in this 
paragraph referred to as the 'pour-over trust'), the inclusion 
ratio for the pour-over trust shall be determined by treating 
the nontax portion of such distribution as if it were a part 
of a GST exemption allocated to such trust. 
"(B) NONTAX PORTION.—For purposes of subparagraph 
(A), the nontax portion of any distribution is the amount of 
such distribution multiplied by the applicable fraction 
which applies to such distribution. 
"SEC. 2654. SPECIAL RULES. 
"(a) BASIS ADJUSTMENT.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), if 
property is transferred in a generation-skipping transfer, the 
basis of such property shall be increased (but not above the fair 
market value of such property) by an amount equal to that 
portion of the tax imposed by section 2601 (computed without 
regard to section 2604) with respect to the transfer which is 
attributable to the excess of the fair market value of such 
property over its adjusted basis immediately before the transfer. 
"(2) CERTAIN TRANSFERS AT DEATH.—If property is transferred 
in a taxable termination which occurs at the same time as and 
as a result of the death of an individual, the basis of such 
property shall be adjusted in a manner similar to the manner 
provided under section 1014(a); except that, if the inclusion ratio 
with respect to such property is less than 1, any increase in 
basis shall be limited by multiplying such increase by the 
inclusion ratio. 
"(b) SEPARATE SHARES TREATED AS SEPARATE TRUSTS.—Substan-
tially separate and independent shares of different beneficiaries in a 
trust shall be treated as separate trusts. 
"(c) DISCLAIMERS.— 
100 STAT. 2728 
PUBLIC LAW 99-514—OCT. 22, 1986 
"For provisions relating to the effect of a qualified disclaimer for pur-
poses of this chapter, see section 2518. 
"(d) LIMITATION ON PERSONAL LIABILITY OF TRUSTEE.—A trustee 
shall not be personally liable for any increase in the tax imposed by 
section 2601 which is attributable to the fact that— 
"(1) section 2642(c) (relating to exemption of certain non-
taxable gifts) does not apply to a transfer to the trust which was 
made during the life of the transferor and for which a gift tax 
return was not filed, or 
"(2) the inclusion ratio with respect to the trust is greater 
than the amount of such ratio as computed on the basis of the 
return on which was made (or was deemed made) an allocation 
of the GST exemption to property transferred to such trust. 
The preceding sentence shall not apply if the trustee has knowledge 
of facts sufficient reasonably to conclude that a gift tax return was 
required to be filed or that the inclusion ratio was erroneous. 
"Subchapter G—Administration 
"Sec. 2661. Administration. 
"Sec. 2662. Return requirements. 
"Sec. 2663. Regulations. 
"SEC. 2661. ADMINISTRATION. 
"Insofar as applicable and not inconsistent with the provisions of 
this chapter— 
"(1) except as provided in paragraph (2), all provisions of 
subtitle F (including penalties) applicable to the gift tax, to 
chapter 12, or to section 2501, are hereby made applicable in 
respect of the generation-skipping transfer tax, this chapter, or 
section 2601, as the case may be, and 
"(2) in the case of a generation-skipping transfer occurring at 
the same time as and as a result of the death of an individual, 
all provisions of subtitle F (including penalties) applicable to the 
estate tax, to chapter 11, or to section 2001 are hereby made 
applicable in respect of the generation-skipping transfer tax, 
this chapter, or section 2601 (as the case may be). 
"SEC. 2662. RETURN REQUIREMENTS. 
"(a) IN GENERAL.—The Secretary shall prescribe by regulations 
the person who is required to make the return with respect to the 
tax imposed by this chapter and the time by which any such return 
must be filed. To the extent practicable, such regulations shall 
provide that— 
"(1) the person who is required to make such return shall be 
the person liable under section 2603(a) for payment of such tax, 
and 
"(2) the return shall be filed— 
"(A) in the case of a direct skip (other than from a trust), 
on or before the date on which an estate or gift tax return is 
required to be filed with respect to the transfer, and 
"(B) in all other cases, on or before the 15th day of the 4th 
month after the close of the taxable year of the person 
required to make such return in which such transfer 
occurs. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2729 
"(b) INFORMATION RETURNS.—The Secretary may by regulations 
require a return to be filed containing such information as he 
determines to be necessary for purposes of this chapter. 
"SEC. 2663. REGULATIONS. 
"The Secretary shall prescribe such regulations as may be nec-
essary or appropriate to carry out the purposes of this chapter, 
including— 
"(1) such regulations as may be necessary to coordinate the 
provisions of this chapter with the recapture tax imposed under 
section 2032A(c), and 
"(2) regulations (consistent with the principles of chapters 11 
and 12) providing for the application of this chapter in the case 
of transferors who are nonresidents not citizens of the United 
States." 
(b) CLERICAL AMENDMENT.—The table of chapters for subtitle B is 
amended by striking out the item relating to chapter 13 and insert-
ing in lieu thereof the following: 
"CHAPTER 13. Tax on generation-skipping transfers." 
SEC. 1432. RELATED AMENDMENTS. 
(a) INCOME TAX DEDUCTION FOR GENERATION-SKIPPING TRANSFER 
TAX.— 
(1) IN GENERAL.—Subsection (a) of section 164 (relating to 
deduction for certain taxes), as amended by section 134, is 
amended by inserting after paragraph (4) the following new 
paragraph: 
"(5) the GST tax imposed on income distributions." 
(2) DEFINITIONS.—Subsection (b) of section 164, as so amended, 
is amended by adding at the end thereof the following new 
paragraph: 
"(4) SPECIAL RULES FOR GST TAX.— 
"(A) IN GENERAL.—The GST tax imposed on income dis-
tributions is— 
"(i) the tax imposed by section 2601, and 
"(ii) any State tax described in section 2604, 
but only to the extent such tax is imposed on a transfer 
which is included in the gross income of the distributee and 
to which section 666 does not apply. 
"(B) SPECIAL RULE FOR TAX PAID BEFORE DUE DATE.—Any 
tax referred to in subparagraph (A) imposed with respect to 
a transfer occurring during the taxable year of the distribu-
tee (or, in the case of a taxable termination, the trust) 
which is paid not later than the time prescribed by law 
(including extensions) for filing the return with respect to 
such transfer shall be treated as having been paid on the 
last day of the taxable year in which the transfer was 
made." 
(3) DEDUCTION FOR TAX IN CASE OF TAXABLE TERMINATIONS.— 
Paragraph (3) of section 691(c) (relating to deduction for estate 
tax) is amended to read as follows: 
"(3) SPECIAL RULE FOR GENERATION-SKIPPING TRANSFERS.—In 
the case of any tax imposed by chapter 13 on a taxable termi-
nation or a direct skip occurring as a result of the death of the 
transferor, there shall be allowed a deduction (under principles 
similar to the principles of this subsection) for the portion of 
such tax attributable to items of gross income of the trust which 
100 STAT. 2730 
PUBLIC LAW 99-514—OCT. 22, 1986 
were not properly includible in the gross income of the trust for 
periods before the date of such termination." 
(b) DISTRIBUTIONS IN REDEMPTION OF STOCK TO PAY GENERATION-
SKIPPING TRANSFER TAXES.—Subsection (d) of section 303 is amended 
to read as follows: 
"(d) SPECIAL RULES FOR GENERATION-SKIPPING TRANSFERS.—Where 
stock in a corporation is the subject of a generation-skipping trans-
fer (within the meaning of section 2611(a)) occurring at the same 
time as and as a result of the death of an individual— 
"(1) the stock shall be deemed to be included in the gross 
estate of such individual; 
"(2) taxes of the kind referred to in subsection (aXD which are 
imposed because of the generation-skipping transfer shall be 
treated as imposed because of such individual's death (and for 
this purpose the tax imposed by section 2601 shall be treated as 
an estate tax); 
"(3) the period of distribution shall be measured from the date 
of the generation-skipping transfer; and 
"(4) the relationship of stock to the decedent's estate shall be 
measured with reference solely to the amount of the generation-
skipping transfer." 
(C) AVAILABIUTY OF ALTERNATE VALUATION ELECTION.— 
(1) IN GENERAL.—Paragraph (2) of section 2032(c) (relating to 
election must decrease gross estate and estate tax) is amended 
to read as follows: 
"(2) the sum of the tax imposed by this chapter and the tax 
imposed by chapter 13 with respect to property includible in the 
decedent's gross estate (reduced by credits allowable against 
such taxes)." 
(2) CONFORMING AMENDMENT.—Subsection (g) of section 2013 
is hereby repealed. 
(d) GENERATION-SKIPPING TAX TREATED AS TAXABLE GIFT.— 
(1) IN GENERAL.—Subchapter B of chapter 12 is amended by 
inserting after section 2514 the following new section: 
"SEC. 2515. TREATMENT OF GENERATION-SKIPPING TRANSFER TAX. 
"In the case of any taxable gift which is a direct skip (within the 
meaning of chapter 13), the amount of such gift shall be increased by 
the amount of any tax imposed on the transferor under chapter 13 
with respect to such gift." 
(2) CLERICAL AMENDMENT.—The table of sections for sub-
chapter B of chapter 12 is amended by inserting after the item 
relating to section 2514 the following new item: 
"Sec. 2515. Treatment of generation-skipping transfer tax." 
(e) EXTENSION OF TIME FOR PAYMENT OF TAX ON CERTAIN DIRECT 
SKIPS.—Section 6166 is amended by redesignating subsections (i) and 
(j) as subsections (j) and (k), respectively, and by inserting after 
subsection (h) the following new subsection: 
"(i) SPECIAL RULE FOR CERTAIN DIRECT SKIPS.—To the extent that 
an interest in a closely held business is the subject of a direct skip 
(within the meaning of section 2612(c)) occurring at the same time as 
and as a result of the decedent's death, then for purposes of this 
section any tax imposed by section 2601 on the transfer of such 
interest shall be treated as if it were additional tax imposed by 
section 2001." 
. i ^ ^ 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2731 
SEC. 1433. EFFECTIVE DATES. 
(a) GENERAL RULE.—Except as provided in subsection (b), the 
amendments made by this part shall apply to any generation-
skipping transfer (within the meaning of section 2611 of the Internal 
Revenue Code of 1986) made after the date of the enactment of this 
Act. 
(h) SPECIAL RULES.— 
(1) TREATMENT OF CERTAIN INTER VIVOS TRANSFERS MADE AFTER 
SEPTEMBER 25, 1985.—For purposes of subsection (a) (and chapter 
13 of the Internal Revenue Code of 1986 as amended by this 
part), any inter vivos transfer after September 25, 1985, and on 
or before the date of the enactment of this Act shall be treated 
as if it were made on the 1st day after the date of enactment of 
this Act. 
(2) EXCEPTIONS.—The amendments made by this part shall 
not apply to— 
(A) any generation-skipping transfer under a trust which 
was irrevocable on September 25, 1985, but only to the 
extent that such transfer is not made out of corpus added to 
the trust after September 25,1985, 
(B) any generation-skipping transfer under a will exe-
cuted before the date of the enactment of this Act if the 
decedent dies before January 1,1987, and 
(C) any generation-skipping transfer— 
(i) under a trust to the extent such trust consists of 
property included in the gross estate of a decedent 
(other than property transferred by the decedent 
during his life after the date of the enactment of this 
Act), or reinvestments thereof, or 
(ii) which is a direct skip which occurs by reason of 
the death of any decedent; 
but only if such decedent was, on the date of the enactment 
of this Act, under a mental disability to change the disposi-
tion of his property and did not regain his competence to 
dispose of such property before the date of his death. 
(3) TREATMENT OF CERTAIN TRANSFERS TO GRANDCHILDREN.— 
For purposes of chapter 13 of the Internal Revenue Code of 
1986, the term "direct skip" shall not include any transfer 
before January 1, 1990, from a transferor to a grandchild of the 
transferor to the extent that the aggregate transfers from such 
transferor to such grandchild do not exceed $2,000,000. 
(c) REPEAL OF EXISTING TAX ON GENERATION-SKIPPING TRANS-
FERS.— 
(1) IN GENERAL.—In the case of any tax imposed by chapter 13 
of the Internal Revenue Code of 1954 (as in effect on the day 
before the date of the enactment of this Act), such tax (including 
interest, additions to tax, and additional amounts) shall not be 
assessed and if assessed, the assessment shall be abated, and if 
collected, shall be credited or refunded (with interest) as an 
overpayment. 
(2) WAIVER OF STATUTE OF LIMITATIONS.—If on the date of the 
enactment of this Act (or at any time within 1 year after such 
date of enactment) refund or credit of any overpayment of tax 
resulting from the application of paragraph (1) is barred by any 
law or rule of law, refund or credit of such overpayment shall, 
nevertheless, be made or allowed if claim therefore is filed 
100 STAT. 2732 
PUBLIC LAW 99-514—OCT. 22, 1986 
before the date 1 year after the date of the enactment of this 
Act. 
(d) ELECTION FOR CERTAIN TRANSFERS BENEFITING GRANDCHILD.— 
(1) IN GENERAL.—For purposes of chapter 13 of the Internal 
Revenue Code of 1986 (as amended by this Act) and subsection 
(b) of this section, any transfer in trust for the benefit of a 
grandchild of a transferor shall be treated as a direct skip i
f
— 
(A) the transfer occurs before the date of enactment of 
this Act, 
(B) the transfer would be a direct skip except for the fact 
that the trust instrument provides that, if the grandchild 
dies before vesting of the interest transferred, the interest 
is transferred to the grandchild's heir (rather than the 
grandchild's estate), and 
(C) an election under this subsection applies to such 
transfer. 
Any transfer treated as a direct skip by reason of the preceding 
sentence shall be subject to Federal estate tax on the grand-
child's death in the same manner as if the contingent gift over 
had been to the grandchild's estate. 
(2) ELECTION.—An election under paragraph (1) shall be made 
at such time and in such manner as the Secretary of the 
Treasury or his delegate may prescribe. 
TITLE XV—COMPLIANCE AND TAX 
ADMINISTRATION 
Subtitle A—Revision of Certain Penalties, Etc. 
SEC. 1501. PENALTY FOR FAILURE TO FILE INFORMATION RETURNS OR 
STATEMENTS. 
(a) GENERAL RULE.—Subchapter B of chapter 68 (relating to 
assessable penalties) is amended by adding at the end thereof the 
following new part: 
"PART II—FAILURE TO FILE CERTAIN INFORMATION 
RETURNS OR STATEMENTS 
"Sec. 6721. Failure to file certain information returns. 
"Sec. 6722. Failure to furnish certain payee statements. 
"Sec. 6723. Failure to include correct information. 
"Sec. 6724. Waiver; definitions and special rules. 
"SEC. 6721. FAILURE TO FILE CERTAIN INFORMATION RETURNS. 
"(a) GENERAL RULE.—In the case of each failure to file an informa-
tion return with the Secretary on the date prescribed therefor 
(determined with regard to any extension of time for filing), the 
person failing to so file such return shall pay $50 for each such 
failure, but the total amount imposed on such person for all such 
failures during any calendar year shall not exceed $100,000. 
"(b) PENALTY IN CASE OF INTENTIONAL DISREGARD.—If 1 or more 
failures to which subsection (a) applies are due to intentional dis-
regard of the filing requirement, then, with respect to each such 
failure— 
"(1) the penalty imposed under subsection (a) shall be $100, or, 
if greater— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2733 
"(A) in the case of a return other than a return required 
under section 6045(a), 6041A(b), 6050H, 6050J, 6050K, or 
6050L, 10 percent of the aggregate amount of the items 
required to be reported, or 
"(B) in the case of a return required to be filed by section 
6045(a), 6050K, or 6050L, 5 percent of the aggregate amount 
of the items required to be reported, and 
"(2) in the case of any penalty determined under paragraph 
( D -
"(A) the $100,000 limitation under subsection (a) shall not 
apply, and 
"(B) such penalty shall not be taken into account in 
applying the $100,000 limitation to penalties not deter-
mined under paragraph (1). 
"SEC. 6722. FAILURE TO FURNISH CERTAIN PAYEE STATEMENTS. 
"(a) GENERAL RULE.—In the case of each failure to furnish a payee 
statement on the date prescribed therefor to the person to whom 
such statement is required to be furnished, the person failing to so 
furnish such statement shall pay $50 for each such failure, but the 
total amount imposed on such person for all such failures during 
any calendar year shall not exceed $100,000. 
"(b) FAILURE TO NOTIFY PARTNERSHIP OF EXCHANGE OF PARTNER-
SHIP INTEREST.—In the case of any person who fails to furnish the 
notice required by section 6050K(c)(l) on the date prescribed there-
for, such person shall pay a penalty of $50 for each such failure. 
"SEC. 6723. FAILURE TO INCLUDE CORRECT INFORMATION. 
"(a) GENERAL RULE.—If^ 
"(1) any person files an information return or furnishes a 
payee statement, and 
"(2) such person does not include all of the information 
required to be shown on such return or statement or includes 
incorrect information, 
such person shall pay $5 for each return or statement with respect 
to which such failure occurs, but the total amount imposed on such 
person for all such failures during any calendar year shall not 
exceed $20,000. 
"Ot)) PENALTY IN CASE OF INTENTIONAL DISREGARD.—If 1 or more 
failures to which subsection (a) applies are due to intentional dis-
regard of the correct information reporting requirement, then, with 
respect to each such failure— 
"(1) the penalty imposed under subsection (a) shall be $100, or, 
if greater— 
"(A) in the case of a return other than a return required 
under section 6045(a), 6041A(b), 6050H, 6050J, 6050K, or 
6050L, 10 percent of the aggregate amount of the items 
required to be reported correctly, or 
"(B) in the case of a return required to be filed by section 
6045(a), 6050K, or 6050L, 5 percent of the aggregate amount 
of the items required to be reported correctly, and 
"(2) in the case of any penalty determined under paragraph 
( D -
"(A) the $20,000 limitation under subsection (a) shall not 
apply, and 
100 STAT. 2734 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(B) such penalty shall not be taken into account in 
applying the $20,000 limitation to penalties not determined 
under paragraph (1). 
"(c) COORDINATION WITH SECTION 6676.—No penalty shall be 
imposed under subsection (a) or (b) with respect to any return or 
statement if a penalty is imposed under section 6676 (relating to 
failure to supply identifying number) with respect to such return or 
statement. 
"SEC. 6724. WAIVER; DEFINITIONS AND SPECIAL RULES. 
"(a) REASONABLE CAUSE WAIVER.—No penalty shall be imposed 
under this part with respect to any failure if it is shown that such 
failure is due to reasonable cause and not to willful neglect. 
"(b) PAYMENT OF PENALTY.—Any penalty imposed by this part 
shall be paid on notice and demand by the Secretary and in the 
same manner as tax. 
"(c) SPECIAL RULES FOR FAILURE To FILE INTEREST AND DIVIDEND 
RETURNS OR STATEMENTS.— 
"(1) HIGHER STANDARDS FOR WAIVER.—In the case of any 
interest or dividend return or statement— 
"(A) subsection (a) shall not apply, but 
"(B) no penalty shall be imposed under this part if it is 
shown that the person otherwise liable for such penalty 
exercised due diligence in attempting to satisfy the require-
ment with respect to such return or statement. 
"(2) LIMITATIONS NOT TO APPLY.—In the case of any interest or 
dividend return or statement— 
"(A) the $100,000 limitations of sections 6721(a) and 
6722(a) and the $20,000 limitation of section 6723(a) shall 
not apply (and any penalty imposed on any failure involv-
ing such a return or statement shall not be taken into 
account in applying such limitations to other penalties), 
and 
"(B) penalties imposed with respect to such returns or 
statements shall not be taken into account for purposes of 
applying such limitations with respect to other returns or 
statements. 
"(3) SELF ASSESSMENT.—Any penalty imposed under this part 
on any person with respect to an interest or dividend return or 
statement— 
"(A) shall be assessed and collected in the same manner 
as an excise tax imposed by subtitle D, and 
"(B) shall be due and payable on April 1 of the calendar 
year following the calendar year for which such return or 
statement is required. 
"(4) DEFICIENCY PROCEDURES NOT TO APPLY.—Subchapter B of 
chapter 63 (relating to deficiency procedures for income, estate, 
gift, and certain excise taxes) shall not apply in respect of the 
assessment or collection of any penalty imposed under this part 
with respect to an interest or dividend return or statement. 
"(5) INTEREST OR DIVIDEND RETURN OR STATEMENT.—For pur-
poses of this subsection, the term "interest or dividend return or 
statement' means— 
"(A) any return required by section 6042(a)(1), 6044(a)(1), 
or 6049(a), and 
"^B) any statement required under section 6042(c), 
6044(e), or 6049(c). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2735 
"(d) DEFINITIONS.—For purposes of this part— 
"(1) INFORMATION RETURN.—The term 'information return' 
means— 
"(A) any statement of the amount of payments to another 
person required by— 
"(i) section 6041 (a) or (b) (relating to certain informa-
tion at source), 
rl%u3 
"(ii) section 6042(aXl) (relating to payments of 
dividends), 
1 ; 
"(iii) section 6044(a)(1) (relating to payments of 
patronage dividends), 
oi 1
4 
"(iv) section 6049(a) (relating to payments of interest), 
"(v) section 6050A(a) (relating to reporting require-
'iSi 
ments of certain fishing boat operators), 
"(vi) section 6050N(a) (relating to payments of royal-
' ;? 
ties), or 
"(vii) section 6051(d) (relating to information returns 
with respect to income tax withheld), and 
"(B) any return required by— 
"(i) section 4997(a) (relating to information with re-
spect to windfall profit tax on crude oil), 
"(ii) section 6041A (a) or (b) (relating to returns of 
direct sellers), 
^ 
"(iii) section 6045 (a) or (d) (relating to returns of 
brokers), 
3*' 
"(iv) section 6050H(a) (relating to mortgage interest 
received in trade or business from individuals), 
"(v) section 60501(a) (relating to cash received in 
trade or business), 
"(vi) section 6050J(a) (relating to foreclosures and 
abandonments of security), 
"(vii) section 6050K(a) (relating to exchanges of cer-
tain partnership interests), 
"(viii) section 6050L(a) (relating to returns relating to 
?'' 
certain dispositions of donated property), 
"(ix) section 6052(a) (relating to reporting payment of 
wages in the form of group-term life insurance), or 
"(x) section 6053(cXl) (relating to reporting with 
respect to certain tips). 
"(2) PAYEE STATEMENT.—The term 'payee statement' means 
any statement required to be furnished under— 
"(A) section 4997(a) (relating to records and information; 
regulations), 
"(B) section 6031(b), 6034A, or 6037(b) (relating to state-
ments furnished by certain pass-thru entities), 
"(C) section 6039(a) (relating to information required in 
connection with certain options), 
"(D) section 6041(d) (relating to information at source), 
"(E) section 6041A(e) (relating to returns regarding pay-
ments of remuneration for services and direct sales), 
"(F) section 6042(c) (relating to returns regarding pay-
ments of dividends and corporate earnings and profits), 
"(G) section 6044(e) (relating to returns regarding pay-
ments of patronage dividends), 
"(H) section 6045 (b) or (d) (relating to returns of brokers), 
"(I) section 6049(c) (relating to returns regarding pay-
ments of interest). 
100 STAT. 2736 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(J) section 6050A(b) (relating to reporting requirements 
of certain fishing boat operators), 
"(K) section 6050C (relating to information regarding 
windfall profit tax on domestic crude oil), 
"(L) section 6050H(d) (relating to returns relating to 
mortgage interest received in trade or business from 
individuals), 
"(M) section 60501(e) (relating to returns relating to cash 
received in trade or business), 
"(N) section 6050J(e) (relating to returns relating to fore-
closures and abandonments of security), 
"(O) section 6050K03) (relating to returns relating to 
exchanges of certain partnership interests), 
"(P) section 6050L(c) (relating to returns relating to cer-
tain dispositions of donated property), 
"(Q) section 6050N(b) (relating to returns regarding pay-
ments of royalties), 
"(R) section 6051 (relating to receipts for employees), 
"(S) section 6052(b) (relating to returns regarding pay-
ment of wages in the form of group-term life insurance), or 
"(T) section 6053 (b) or (c) (relating to reports of tips)." 
(b) INCREASE IN MAXIMUM PENALTY FOR FAILURE To 
SUPPLY 
IDENTIFYING NUMBERS.—Subsection (a) of section 6676 (relating to 
failure to supply identifying numbers) is amended by striking out 
"$50,000" and inserting in lieu thereof "$100,000". 
(c) CLARIFICATION OF PENALTY FOR FAILURE To FURNISH PAYEE 
STATEMENTS.— 
(1) Subsection (d) of section 6041 is amended to read as follows: 
"(d) STATEMENTS TO BE FURNISHED TO PERSONS WITH RESPECT TO 
WHOM INFORMATION IS REQUIRED.—Every person required to make a 
return under subsection (a) shall furnish to each person with respect 
to whom such a return is required a written statement showing— 
"(1) the name and address of the person required to make 
such return, and 
"(2) the aggregate amount of payments to the person required 
to be shown on the return. 
The written statement required under the preceding sentence shall 
be furnished to the person on or before January 31 of the year 
following the calendar year for which the return under subsection 
(a) was required to be made. To the extent provided in regulations 
prescribed by the Secretary, this subsection shall also apply to 
persons required to make returns under subsection (b)." 
(2) Subsection (c) of section 6042 is amended to read as follows: 
"(c) STATEMENTS TO BE FURNISHED TO PERSONS WITH RESPECT TO 
WHOM INFORMATION IS REQUIRED.—Every person required to make a 
return under subsection (a) shall furnish to each person whose name 
is required to be set forth in such return a written statement 
showing— 
(1) the name and address of the person required to make 
such return, and 
"(2) the aggregate amount of payments to the person required 
to be shown on the return. 
The written statement required under the preceding sentence shall 
be furnished (either in person or in a statement mailing by first-
class mail which includes adequate notice that the statement is 
enclosed) to the person on or before January 31 of the year following 
the calendar year for which the return under subsection (a) was 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2737 
required to be made and shall be in such form as the Secretary may 
prescribe by regulations." 
(3) Subsection (e) of section 6044 is amended to read as follows: 
"(e) STATEMENTS TO BE FURNISHED TO PERSONS WITH RESPECT TO 
WHOM INFORMATION IS REQUIRED.—Every cooperative required to 
make a return under subsection (a) shall furnish to each person 
whose name is required to be set forth in such return a written 
statement showing— 
"(1) the name and address of the cooperative required to make 
such return, and 
"(2) the aggregate amount of payments to the person required 
to be shown on the return. 
The written statement required under the preceding sentence shall 
be furnished (either in person or in a statement mailing by first-
class mail which includes adequate notice that the statement is 
enclosed) to the person on or before January 31 of the year following 
the calendar year for which the return under subsection (a) was 
required to be made and shall be in such form as the Secretary may 
prescribe by regulations." 
(4) Subsection (b) of section 6045 is amended to read as follows: 
"(b) STATEMENTS TO BE FURNISHED TO CUSTOMERS.—Every person 
required to make a return under subsection (a) shall furnish to each 
customer whose name is required to be set forth in such return a 
written statement showing— 
"(1) the name and address of the person required to make 
such return, and 
"(2) the information required to be shown on such return with 
respect to such customer. 
The written statement required under the preceding sentence shall 
be furnished to the customer on or before January 31 of the year 
following the calendar year for which the return under subsection 
(a) was required to be made." 
(5) Subsection (c) of section 6049 is amended to read as follows: 
"(c) STATEMENTS TO BE FURNISHED TO PERSONS WITH RESPECT TO 
WHOM INFORMATION IS REQUIRED.— 
"(1) IN GENERAL.—Every person required to make a return 
under subsection (a) shall furnish to each person whose name is 
required to be set forth in such return a written statement 
showing— 
"(A) the name and address of the person required to make 
such return, and 
Ih 
"(B) the aggregate amount of payments to, or the aggre-
gate amount includible in the gross income of, the person 
required to be shown on the return. 
"(2) TIME AND FORM OF STATEMENT.—The written statement 
under paragraph (1)— 
"(A) shall be furnished (either in person or in a statement 
mailing by first-class mail which includes adequate notice 
that the statement is enclosed) to the person on or before 
January 31 of the year following the calendar year for 
which the return under subsection (a) was required to be 
made, and 
"(B) shall be in such form £is the Secretary may prescribe 
by regulations." 
(6) Subsection Ot)) of section 6050A is amended to read as 
follows: 
100 STAT. 2738 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(b) WRITTEN STATEMENT.—Every person required to make a 
return under subsection (a) shall furnish to each person whose name 
is required to be set forth in such return a written statement 
showing the information relating to such person required to be 
contained in such return. The written statement required under the 
preceding sentence shall be furnished to the person on or before 
January 31 of the year following the calendar year for which the 
return under subsection (a) was required to be made." 
(7) Subsection (b) of section 6050B is amended to read as 
follows: 
"(b) STATEMENTS TO BE FURNISHED TO INDIVIDUALS WITH RESPECT 
To WHOM INFORMATION IS REQUIRED.—Every person required to 
make a return under subsection (a) shall furnish to each individual 
whose name is required to be set forth in such return a written 
statement showing— 
"(1) the name and address of the person required to make 
such return, and 
"(2) the aggregate amount of payments to the individual 
required to be shown on such return. 
The written statement required under the preceding sentence shall 
be furnished to the individual on or before January 31 of the year 
following the calendar year for which the return under subsection 
(a) was required to be made." 
(8) Subsection (b) of section 6050E is amended to read as 
follows: 
"(b) STATEMENTS TO BE FURNISHED TO INDIVIDUALS WITH RESPECT 
To WHOM INFORMATION Is REQUIRED.—Every person required to 
make a return under subsection (a) shall furnish to each individual 
whose name is required to be set forth in such return a written 
statement showing— 
"(1) the name of the State or political subdivision thereof, and 
"(2) the information required to be shown on the return with 
respect to refunds, credits, and offsets to the individual. 
The written statement required under the preceding sentence shall 
be furnished to the individual during January of the calendar year 
following the calendar year for which the return under subsection 
(a) was required to be made. No statement shall be required under 
this subsection with respect to any individual if it is determined (in 
the manner provided by regulations) that such individual did not 
claim itemized deductions under chapter 1 for the taxable year 
giving rise to the refund, credit, or offset." 
(9) Subsection (b) of section 6050F is amended to read as 
follows: 
"(b) STATEMENTS TO BE FURNISHED TO PERSONS WITH RESPECT TO 
WHOM INFORMATION IS REQUIRED.—Every person required to make a 
return under subsection (a) shall furnish to each individual whose 
name is required to be set forth in such return a written statement 
showing— 
"(1) the name of the agency making the payments, and 
"(2) the aggregate amount of payments, of repayments, and of 
reductions, with respect to the individual required to be shown 
on such return. 
The written statement required under the preceding sentence shall 
be furnished to the individual on or before January 31 of the year 
following the calendar year for which the return under subsection 
(a) was required to be made." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2739 
(10) Subsection (h) of section 6050G is amended to read as 
follows: 
"(h) STATEMENTS TO BE FURNISHED TO PERSONS WITH RESPECT TO 
WHOM INFORMATION IS REQUIRED.—The Railroad Retirement Board 
shall furnish to each individual whose name is required to be set 
forth in the return under subsection (a) a written statement show-
ing— 
"(1) the aggregate amount of payments to such individual, 
and of employee contributions with respect thereto, required to 
be shown on the return, and 
"(2) such other information as the Secretary may require. 
The written statement required under the preceding sentence shall 
be furnished to the individual on or before January 31 of the year 
following the calendar year for which the return under subsection 
(a) was required to be made." 
(11) Subsection (d) of section 6050H is amended to read as 
follows: 
"(d) STATEMENTS TO BE FURNISHED TO INDIVIDUALS WITH RESPECT 
To WHOM INFORMATION Is REQUIRED.—Every person required to 
make a return under subsection (a) shall furnish to each individual 
whose name is required to be set forth in such return a written 
statement showing— 
"(1) the name and address of the person required to make 
such return, and 
"(2) the aggregate amount of interest described in subsection 
(aX2) received by the person required to make such return from 
the individual to whom the statement is required to be 
furnished. 
The written statement required under the preceding sentence shall 
be furnished on or before January 31 of the year following the 
calendar year for which the return under subsection (a) was 
required to be made." 
(12) Subsection (e) of section 60501 is amended to read as 
follows: 
"(e) STATEMENTS TO BE FURNISHED TO PERSONS WITH RESPECT TO 
WHOM INFORMATION IS REQUIRED.—Every person required to make a 
return under subsection (a) shall furnish to each person whose name 
is required to be set forth in such return a written statement 
showing— 
"(1) the name and address of the person required to make 
such return, and 
"(2) the aggregate amount of cash described in subsection (a) 
received by the person required to make such return. 
The written statement required under the preceding sentence shall 
be furnished to the person on or before January 31 of the year 
following the calendar year for which the return under subsection 
(a) was required to be made." 
(13) Subsection (h) of section 6050K is amended to read as 
follows: 
"(b) STATEMENTS TO BE FURNISHED TO TRANSFEROR AND TRANS-
FEREE.—Every partnership required to make a return under subsec-
tion (a) shall furnish to each person whose name is required to be set 
forth in such return a written statement showing— 
"(1) the name and address of the partnership required to 
make such return, and 
"(2) the information required to be shown on the return with 
respect to such person. 
100 STAT. 2740 
PUBLIC LAW 99-514—OCT. 22, 1986 
The written statement required under the preceding sentence shall 
be furnished to the person on or before January 31 of the year 
following the calendar year for which the return under subsection 
(a) was required to be made." 
(14) Subsection (h) of section 6052 is amended to read as 
follows: 
"(b) STATEMENTS TO BE FURNISHED TO EMPLOYEES WITH RESPECT 
To WHOM INFORMATION Is REQUIRED.—Every employer required to 
make a return under subsection (a) shall furnish to each employee 
whose name is required to be set forth in such return a written 
statement showing the cost of the group-term life insurance shown 
on such return. The written statement required under the preceding 
sentence shall be furnished to the employee on or before January 31 
of the year following the calendar year for which the return under 
subsection (a) was required to be made." 
(15) Subsection (a) of section 6034A is amended— 
(A) by striking out "making the return required to be 
^ 
filed" 
and inserting in lieu thereof "required to file a 
return", 
(B) by striking out "was filed" and inserting in lieu 
thereof "was required to be filed", and 
(C) by striking out "shown on such return" and inserting 
in lieu thereof "required to be shown on such return". 
(16) Subsection (b) of section 6031 (relating to return of part-
nership income) is amended— 
(A) by striking out "was filed" and inserting in lieu 
' 
thereof "was required to be filed", and 
(B) by striking out "shown on such return" and inserting 
in lieu thereof "required to be shown on such return". 
(d) CONFORMING AMENDMENTS.— 
(1)(A) Section 6652 is amended— 
(i) by striking out subsection (a) and by redesignating 
I i 
subsections (b) through (k) as subsections (a) through (j), 
respectively, and 
' 
(ii) by striking out "OTHER RETURNS" in the heading of 
subsection (a) (as so redesignated) and inserting in lieu 
thereof "RETURNS WITH RESPECT TO CERTAIN PAYMENTS 
AGGREGATING LESS THAN $10". 
(B) Subsection (g) of section 219 is amended by striking out 
"section 6652(h)" and inserting in lieu thereof "section 6652(g)". 
(C) Sections 6033(e), 6034(c), and 6043(c) are each amended by 
striking out "section 6652(d)" and inserting in lieu thereof 
"section 6652(c)". 
(D) Sections 6047(e)(1) and 6058(f) are each amended by strik-
ing out "section 6652(f)" and inserting in lieu thereof "section 
6652(e)". 
(E) Paragraph (1) of section 6050C(d) is amended by striking 
out "section 6652(b)" and inserting in lieu thereof "section 
6722". 
(F) Subsection (g) of section 6057 is amended by striking out 
"section 6652(e)" and inserting in lieu thereof "section 6652(d)". 
(2) Section 6678 is hereby repealed. 
(3) Subchapter B of chapter 68 is amended by inserting after 
the subchapter heading the following: 
i 
"Part I. General provisions. 
"Part II. Failure to file certain information returns or statements. 
l 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2741 
a 
"PART I—GENERAL PROVISIONS". 
(4) The table of sections for subchapter B of chapter 68 (as jn 
effect before the amendment made by paragraph (3)) is amended 
by striking out the item relating to section 6678. 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
apply to returns the due date for which (determined without regard 
to extensions) is after December 31, 1986, except that the amend-
ments made by subsections (c)(2), (c)(3), and (c)(5) shall apply to 
returns the due for which (determined without regard to extensions) 
is after the date of the enactment of this Act. 
SEC. 1502. INCREASE IN PENALTY FOR FAILURE TO PAY TAX. 
(a) GENERAL RULE.—Section 6651 (relating to failure to file tax 
return or to pay tax) is amended by redesignating subsection (d) as 
subsection (e) and by inserting after subsection (c) the following new 
subsection: 
"(d) INCREASE IN PENALTY FOR FAILURE TO PAY TAX IN CERTAIN 
CASES.— 
"(1) IN GENERAL.—In the case of each month (or fraction 
. 
thereof) beginning after the day described in paragraph (2) of 
this subsection, paragraphs (2) and (3) of subsection (a) shall be 
applied by substituting '1 percent' for '0.5 percent' each place it 
appears. 
"(2) DESCRIPTION.—For purposes of paragraph (1), the day 
described in this paragraph is the earlier of^ 
"(A) the day 10 days after the date on which notice is 
given under section 6331(d), or 
"(B) the day on which notice and demand for immediate 
payment is given under the last sentence of section 
6331(a)." 
(b) REPEAL OF CERTAIN REDUCTION IN FAILURE TO PAY PENALTY.— 
Paragraph (1) of section 6651(c) is amended to read as follows: 
"(1) ADDITIONS UNDER MORE THAN ONE PARAGRAPH.—With 
respect to any return, the amount of the addition under para-
graph (1) of subsection (a) shall be reduced by the amount of the 
addition under paragraph (2) of subsection (a) for any month (or 
fraction thereof to which an addition to tax applies under both 
paragraphs (1) and (2). In any case described in the last sentence 
of subsection (a), the amount of the addition under paragraph 
(1) of subsection (a) shall not be reduced under the preceding 
sentence below the amount provided in such last sentence. 
(c) EFFECTIVE DATES.— 
(1) SUBSECTION (a).—The amendments made by subsection (a) 
shall apply— 
(A) to failures to pay which begin after December 31, 
1986, and 
(B) to failures to pay which begin on or before December 
31,1986, if after December 31,1986— 
' 
(i) notice (or renotice) under section 6331(d) of the 
Internal Revenue Code of 1954 is given with respect to 
such failure, or 
(ii) notice and demand for immediate payment of the 
underpayment is made under the last sentence of sec-
tion 6331(a) of such Code. 
! In the case of a failure to pay described in subparagraph (B), 
paragraph (2) of section 6651(d) of such Code (as added by 
71-194 0 - 89 - 31 : QL. 3 Part3 
100 STAT. 2742 
PUBLIC LAW 99-514—OCT. 22, 1986 
subsection (a)) shall be applied by taking into account the first 
notice (or renotice) after December 31, 1986. 
(2) SUBSECTION (b).—The amendment made by subsection (b) 
.ft shall apply to amounts assessed after December 31, 1986, with 
respect to failures to pay which begin before, on, or after such 
date. 
SEC. 1503. AMENDMENTS TO PENALTY FOR NEGLIGENCE AND FRAUD. 
(a) GENERAL RULE.—Section 6653 (relating to failure to pay tax) is 
amended by striking out subsections (a) and (b) and inserting in lieu 
thereof the following: 
"(a) NEGLIGENCE.— 
"(1) IN GENERAL.—If any part of any underpayment (as de-
fined in subsection (c)) is due to negligence or disregard of rules 
V or regulations, there shall be added to the tax an amount equal 
to the sum o
f
— 
"(A) 5 percent of the underpayment, and 
"(B) an amount equal to 50 percent of the interest pay-
able under section 6601 with respect to the portion of such 
. - 
underpayment which is attributable to negligence for the 
period beginning on the last date prescribed by law for 
payment of such underpayment 
(determined 
without 
. ^ regard to any extension) and ending on the date of the 
assessment of the tax (or, if earlier, the date of the payment 
^-' 
of the tax). 
"(2) UNDERPAYMENT TAKEN INTO ACCOUNT REDUCED BY POR-
ai TiON ATTRIBUTABLE T
O FRAUD.—There shall not be taken into 
account under this subsection any portion of an underpayment 
K attributable to fraud with respect to which a penalty is imposed 
fi under subsection 0)). 
"(3) NEGLIGENCE.—For purposes of this subsection, the term 
" 'negligence' includes any failure to make a reasonable attempt 
i to comply with the provisions of this title, and the term 'dis-
regard' includes any careless, reckless, or intentional disregard. 
"(b) FRAUD.— 
"(1) IN GENERAL.—If any part of any underpayment (as de-
^^ fined in subsection (c)) of tax required to be shown on a return is 
• due to fraud, there shall be added to the tax an amount equal to 
*
: the sum of— 
' 
"(A) 75 percent of the portion of the underpayment which 
* 
is attributable to fraud, and 
,t' 
«'(g) g
^
j
^ amount equal to 50 percent of the interest pay-
^ , 
able under section 6601 with respect to such portion for the 
S; o ; period beginning on the last day prescribed by law for 
payment of such underpayment 
(determined 
without 
^ 
regard to any extension) and ending on the date of the 
assessment of the tax or, if earlier, the date of the payment 
of the tax. 
"(2) DETERMINATION OF PORTION ATTRIBUTABLE TO FRAUD.—If 
• the Secretary establishes that any portion of an underpayment 
' 
is attributable to fraud, the entire underpayment shall be 
treated as attributable to fraud, except with respect to any 
. portion of the underpayment which the taxpayer establishes is 
not attributable to fraud. 
"(3) SPECIAL RULE FOR JOINT RETURNS.—In the case of a joint 
J return, this subsection shall not apply with respect to a spouse 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2743 
unless some part of the underpayment is due to the fraud of 
such spouse." 
(b) SPECIAL RULE FOR INTEREST OR DIVIDEND PAYMENTS EXTENDED 
T
O OTHER AMOUNTS SHOWN ON INFORMATION RETURNS.—Subsection 
(g) of section 6653 (relating to special rule in the case of interest or 
dividend payments) is amended to read as follows: 
"(g) 
SPECIAL 
RULE 
FOR AMOUNTS 
SHOWN 
ON INFORMATION 
RETURNS.—If— 
"(1) any amount is shown on— 
"(A) an information 
return (as defined in section 
• • 
6724(d)(1)), or 
"(B) a return filed under section 6031, section 6037, sec-
tion 6012(a) by an estate or trust, section 6050B, or section 
* • 
6050E,and 
"(2) the payee (or other person with respect to whom the 
return is made) fails to properly show such amount on his 
return, 
any portion of an underpayment attributable to such failure shall be 
treated, for purposes of subsection (a), as due to negligence in the 
absence of clear and convincing evidence to the contrary." 
(c) CONFORMING AMENDMENTS.— 
(1) Subsection (d) of section 6222 is amended by striking out 
"intentional or negligent". 
(2) Subsection (d) of section 6653 is amended by striking out 
"same underpayment" and inserting in lieu thereof "portion of 
the underpayment which is attributable to fraud". 
(3) Subsection (f) of section 6653 is amended by striking out 
"or intentional disregard of rules and regulations (but without 
intent to defraud)". 
(d) CHANGE IN SECTION HEADING.— 
(1) The heading for section 6653 (relating to failure to pay tax) 
is amended to read as follows: 
"SEC. 6653. ADDITIONS TO TAX FOR NEGLIGENCE AND FRAUD." 
(2) The item relating to section 6653 in the table of sections 
for subpart A of chapter 68 is amended to read as follows: 
"Sec. 6653. Additions to tax for negligence and fraud." 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
apply to returns the due date for which (determined without regard 
to extensions) is after December 31,1986. 
SEC. 1504. INCREASE IN PENALTY FOR SUBSTANTIAL UNDERSTATEMENT 
OF LIABILITY. 
(a) IN GENERAL.—Subsection (a) of section 6661 (relating to 
substantial understatement of liability) is amended by striking out 
"10 percent" and inserting in lieu thereof "20 percent". 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to returns the due date for which (determined without regard 
to extensions) is after December 31,1986. 
100 STAT. 2744 
PUBLIC LAW 99-514—OCT. 22, 1986 
Subtitle B—Interest Provisions 
SEC. 1511. DIFFERENTIAL INTEREST RATE. 
(a) GENERAL RULE.—Section 6621 (relating to determination of 
rate of interest) is amended by striking out subsections (a), (b), and 
(c) and inserting in lieu thereof the following: 
"(a) GENERAL RULE.— 
"(1) OVERPAYMENT RATE.—The overpayment rate established 
under this section shall be the sum of— 
"(A) the short-term Federal rate determined under 
.,,, 
subsection (b), plus 
"(B) 2 percentage points. 
"(2) UNDERPAYMENT RATE.—The underpayment rate estab-
lished under this section shall be the sum o
f
— 
"(A) the short-term Federal rate determined under 
subsection (b), plus 
"(B) 3 percentage points. 
"(b) SHORT-TERM FEDERAL RATE.—For purposes of this section— 
"(1) GENERAL RULE.—The Secretary shall determine the short-
term Federal rate for the first month in each calendar quarter. 
"(2) PERIOD DURING WHICH RATE APPUES.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the Federal short-term rate determined under para-
graph (1) for any month shall apply during the first cal-
endar quarter beginning after such month. 
"(B) SPECIAL RULE FOR INDIVIDUAL ESTIMATED TAX.—In 
*
• 
determining the addition to tax under section 6654 for 
^ 
failure to pay estimated tax for any taxable year, the 
Federal short-term rate which applies during the 3rd 
month following such taxable year shall also apply during 
*
* 
the first 15 days of the 4th month following such taxable 
year. 
"(3) FEDERAL SHORT-TERM RATE.—The Federal short-term rate 
for any month shall be the Federal short-term rate determined 
« during such month by the Secretary in accordance with section 
1274(d). Any such rate shall be rounded to the nearest full 
percent (or, if a multiple of V
2 of 1 percent, such rate shall be 
increased to the next highest full percent)." 
(b) COORDINATION BY REGULATION.—The Secretary of the Treasury 
or his delegate may issue regulations to coordinate section 6621 of 
the Internal Revenue Code of 1954 (as amended by this section) with 
section 6601(f) of such Code. Such regulations shall not apply to any 
period after the date 3 years after the date of the enactment of this 
Act. 
(c) TECHNICAL AMENDMENTS.— 
(1) Section 6621 is amended— 
(A) by redesignating subsection (d) as subsection (c), and 
.:-, 
(B) by striking out "the adjusted rate established under 
subsection (b)" in subsection (c)(1) (as so redesignated) and 
inserting in lieu thereof "the underpayment rate estab-
lished under this section", and 
(C) by striking out "annual" in subsection (c)(1) (as so 
redesignated). 
(2) Subparagraph (G) of section 47(d)(3) is amended by striking 
out "determined under section 6621" and inserting in lieu 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2745 
thereof "determined at the underpayment rate established 
under section 6621". 
(3) The last sentence of section 48(d)(6)(C)(ii) (defining at risk 
percentage) is amended by striking out "the rate" and inserting 
in lieu thereof "the underpayment rate". 
(4) Subparagraph (B) of section 167(q)(2) is amended by strik-
ing out "at the rate determined under section 6621" and insert-
ing in lieu thereof "at the underpayment rate established under 
section 6621". 
(5) Subparagraph (B) of section 644(a)(2) is amended by strik-
ing out "the annual rate established under section 6621" and 
inserting in lieu thereof "the underpayment rate established 
under section 6621". 
(6) Subparagraph (A) of section 852(e)(3) is amended by strik-
ing out "the annual rate established under section 6621" and 
inserting in lieu thereof "the underpayment rate established 
under section 6621". 
(7) Paragraph (2) of section 4497(c) is amended by striking out 
"at rates determined under section 6621" and inserting in lieu 
thereof "at the underpayment rate established under section 
6621". 
(8) Subsection (e) of section 6214 is amended by striking out 
"section 6621(d)(4)" and inserting in lieu thereof "section 
6621(c)(4)". 
(9) Paragraph (1) of section 6332(c) is amended by striking out 
"an annual rate established under section 6621" and inserting 
in lieu thereof "the underpayment rate established under 
section 6621". 
(10) Subsection (c) of section 6343 is amended by striking out 
"an annual rate established under section 6621" and inserting 
in lieu thereof "the overpayment rate established under section 
6621". 
(11) Subsection (a) of section 6601 is amended by striking out 
"an annual rate established under section 6621" and inserting 
in lieu thereof "the underpayment rate established under sec-
tion 6621". 
(12) Section 6602 is amended by striking out "an annual rate 
established under section 6621" and inserting in lieu thereof 
"the underpayment rate established under section 6621". 
(13) Subsection (a) of section 6611 is amended by striking out 
"an annual rate established under section 6621" and inserting 
in lieu thereof "the overpayment rate established under section 
6621". 
(14) Paragraph (1) of section 6654(a) is amended by striking 
out "the applicable annual rate established under section 6621" 
and inserting in lieu thereof "the underpayment rate estab-
lished under section 6621". 
(15) Paragraph (1) of section 6655(a) is amended by striking 
out "the rate established under section 6621" and inserting in 
lieu thereof "the underpayment rate established under section 
6621". 
(16) Subsection (g) of section 7426 is amended by striking out 
"an annual rate established under section 6621" and inserting 
in lieu thereof "the overpayment rate established under section 
6621". 
(17) Section 1961(c)(1) of title 28, United States Code, is 
amended by striking out "a rate established under section 6621" 
100 STAT. 2746 
PUBLIC LAW 99-514—OCT. 22, 1986 
" 
and inserting in lieu thereof "the underpayment rate or over-
payment rate (whichever is appropriate) established under 
I 
section 6621". 
3 
(18) Section 2411 of title 28, United States Code, is amended 
by striking out "an annual rate established under section 6621" 
and inserting in lieu thereof "the overpayment rate established 
under section 6621". 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
apply for purposes of determining interest for periods after Decem-
ber 31,1986. 
SEC. 1512. INTEREST ON ACCUMULATED EARNINGS TAX TO ACCRUE 
BEGINNING ON DATE RETURN IS DUE. 
(a) IN GENERAL.—Subsection (b) of section 6601 (relating to last 
date prescribed for payment) is amended by redesignating para-
graph (4) £is paragraph (5) and by inserting after paragraph (3) the 
following new paragraph: 
"(4) ACCUMULATED EARNINGS TAX.—In the case of the tax 
imposed by section 531 for any taxable year, the last date 
prescribed for payment shall be deemed to be the due date 
(without regard to extensions) for the return of tax imposed by 
subtitle A for such taxable year." 
(b) EFFECTIVE DATE.—The amendments made by this section shall 
apply to returns the due date for which (determined without regard 
to extensions) is after December 31,1985. 
Subtitle C—Information Reporting Provisions 
SEC. 1521. REQUIREMENT OF REPORTING FOR REAL ESTATE TRANS-
ACTIONS. 
(a) GENERAL RULE.—Section 6045 (relating to returns of brokers) is 
amended by adding at the end thereof the following new subsection: 
"(e) 
RETURN REQUIRED IN THE CASE OF REAL ESTATE TRANS-
ACTIONS.— 
"(1) IN GENERAL.—In the case of a real estate transaction, the 
s: 
real estate broker shall file a return under subsection (a) and a 
lo 
statement under subsection (b) with respect to such transaction. 
"(2) REAL ESTATE BROKER.—For purposes of this subsection, 
the term 'real estate broker' means any of the following persons 
involved in a real estate transaction in the following order: 
: 
"(A) the person (including any attorney or title company) 
responsible for closing the transaction, 
; 
' (B) the mortgage lender, 
. . . 
"(C) the seller's broker, 
K = 
r. ;, • 
"(D) the buyer's broker, or 
"(E) such other person designated in regulations pre-
T: 
scribed by the Secretary. 
{• Any person treated as a real estate broker under the preceding 
f 
sentence shall be treated as a broker for purposes of subsection 
(c)(1)." 
O
t
)
) BACKUP WITHHOLDING REQUIREMENTS.—Paragraph (5) of sec-
tion 3406(h) (relating to other definitions and special rules) is 
amended by adding at the end thereof the following new sub-
paragraph: 
e» 
"(D) R E A L ESTATE BROKER N O T TREATED AS A BROKER.— 
f 
Except as provided by regulations, such term shall not 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2747 
include any real estate broker (as defined in section 
6045(e)(2))". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to real estate transactions closing after December 31, 1986. 
SEC. 1522. INFORMATION REPORTING ON PERSONS RECEIVING CON-
TRACTS FROM CERTAIN FEDERAL AGENCIES. 
(a) IN GENERAL.—Subpart B of part III of subchapter A of chapter 
61 (relating to information concerning transactions with other per-
sons) is amended by adding at the end thereof the following new 
section: 
"SEC. 6050M. RETURNS RELATING TO PERSONS RECEIVING CONTRACTS 
FROM FEDERAL EXECUTIVE AGENCIES. 
"(a) REQUIREMENT OF REPORTING.—The head of every Federal 
executive agency which enters into any contract shall make a 
return (at such time and in such form as the Secretary may by 
regulations prescribe) setting forth— 
"(1) the name, address, and TIN of each person with which 
ii 
such agency entered into a contract during the calendar year, 
J 
and 
"(2) such other information as the Secretary may require. 
"(b) FEDERAL EXECUTIVE AGENCY.—For purposes of this section, 
the term 'Federal executive agency* means— 
"(1) any Executive agency (as defined in section 105 of title 5, 
United States Code) other than the General Accounting Office, 
"(2) any military department (as defined in section 102 of such 
title), and 
"(3) the United States Postal Service and the Postal Rate 
Commission. 
"(c) AUTHORITY TO EXTEND REPORTING TO LICENSES AND SUB-
CONTRACTS.—To the extent provided in regulations, this section also 
shall apply to— 
"(1) licenses granted by Federal executive agencies, and 
"(2) subcontracts under contracts to which subsection (a) 
^
* 
applies. 
"(d) AUTHORITY TO PRESCRIBE MINIMUM AMOUNTS.—This section 
shall not apply to contracts or licenses in any class which are below 
a minimum amount or value which may be prescribed by the 
Secretary by regulations for such class." 
(b) CLERICAL AMENDMENT.—The table of sections for such subpart 
B is amended by adding at the end thereof the following new item: 
^j 
"Sec. 6050M. Returns relating to persons receiving contracts from Federal 
'^*"'' * 
executive agencies." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to contracts (and subcontracts) entered into, and licenses 
granted, before, on, or after January 1,1987. 
SEC. 1523. RETURNS REGARDING PAYMENTS OF ROYALTIES. 
(a) IN GENERAL.—Subpart B of part III of subchapter A of chapter 
61 (relating to information concerning transactions with other per-
sons) is amended by adding at the end thereof the following new 
section: 
"SEC. 6050N. RETURNS REGARDING PAYMENTS OF ROYALTIES. 
"(a) REQUIREMENT OF REPORTING.—Every person— 
100 STAT. 2748 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(1) who makes payments of royalties (or similar amounts) 
aggregating $10 or more to any other person during any cal-
i 
endar year, or 
i 
"(2) who receives payments of royalties (or similar amounts) 
as a nominee and who makes payments aggregating $10 or more 
during any calendar year to any other person with respect to 
the royalties (or similar amounts) so received, 
shall make a return according to the forms or regulations prescribed 
by the Secretary, setting forth the aggregate amount of such pay-
ments and the name and address of the person to whom paid. 
"(b) STATEMENTS T O B E FURNISHED TO PERSONS W I T H RESPECT To 
W H O M INFORMATION Is FURNISHED.—Every person required to make 
a return under subsection (a) shall furnish to each person whose 
name is required to be set forth in such return a written statement 
showing— 
"(1) the name and address of the person required to make 
such return, and 
"(2) the aggregate amount of payments to the person required 
to be shown on such return. 
The written statement required under the preceding sentence shall 
be furnished (either in person or in a statement mailing by first-
class mail which includes adequate notice that the statement is 
enclosed) to the person on or before January 31 of the year following 
the calendar year for which the return under subsection (a) was 
made and shall be in such form as the Secretary may prescribe by 
regulations. 
"(c) EXCEPTION FOR PAYMENTS TO CERTAIN PERSONS.—Except to 
the extent otherwise provided in regulations, this section shall not 
apply to any amount paid to a person described in subparagraph (A), 
(B), (C), (D), (E), or (F) of section 6049(b)(4)." 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (3) of section 34060t)) (relating to backup 
withholding) is amended— 
(A) by striking out "or" at the end of subparagraph (C), 
(B) by striking out the period at the end of subparagraph 
,; 
(D) and inserting in lieu thereof ", or", and 
vt • * 
(C) by adding at the end thereof the following new 
nil 
subparagraph: 
"(E) section 6050N (relating to payments of royalties)." 
ti. 
(2) Subsection (a) of section 6041 (relating to information at 
r 
source) is amended by striking out "or 6049(a)" and inserting in 
lieu thereof "6049(a), or 6050N(a)". 
(3) Section 6676 (relating to failure to supply 
identifying 
numbers) is amended— 
(A) by striking out "or 6049" in subsection (a)(3) and 
inserting in lieu thereof "6049, or 6050N", 
(B) by striking out "or 6049" in subsection (b)(1)(A) and 
inserting in lieu thereof "6049, or 6050N", and 
, 
, 
(C) by striking out "AND DIVIDEND" in the heading for 
''"*"'"' 
subsection (b) and inserting in lieu thereof ", DIVIDENDS, 
AND ROYALTIES". 
(c) CLERICAL AMENDMENT.—The table of sections of subpart B of 
part III of subchapter A of chapter 61 is amended by adding at the 
end thereof the following new item: 
"Sec. 6050N. Returns regarding payments of royalties." 
(
.
< 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2749 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
apply with respect to payments made after December 31, 1986. 
SEC. 1524. TINS REQUIRED FOR DEPENDENTS CLAIMED ON TAX RETURNS. 
(a) GENERAL RULE.—Section 6109 (relating to identifying numbers) 
is amended by adding at the end thereof the following new 
subsection: 
"(e) FURNISHING NUMBER FOR CERTAIN DEPENDENTS.—If— 
"(1) any taxpayer claims an exemption under section 151 for 
any dependent on a return for any taxable year, and 
"(2) such dependent has attained the age of 5 years before the 
close of such taxable year, 
such taxpayer shall include on such return the identifying number 
(for purposes of this title) of such dependent." 
03) PENALTY FOR FAILURE TO SUPPLY TIN.—Section 6676 (relating 
to failure to supply identifying numbers) is amended by adding at 
the end thereof the following new subsection: 
"(e) PENALTY FOR FAILURE TO SUPPLY TIN OF DEPENDENT.— 
* 
"(1) IN GENERAL.—If any person required under section 
6109(e) to include the TIN of any dependent on his return fails 
0 
to include such number on such return (or includes an incorrect 
1 
number), such person shall, unless it is shown that such failure 
is due to reasonable cause and not willful neglect, pay a penalty 
i- 
of $5 for each such failure. 
"(2) SUBSECTION (a) NOT TO APPLY.—Subsection (a) shall not 
apply to any failure described in paragraph (1) of this 
subsection." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to returns the due date for which (determined without regard 
to extensions) is after December 31,1987. 
SEC. 1525. TAX-EXEMPT INTEREST REQUIRED TO BE SHOWN ON RETURN. 
(a) IN GENERAL.—Section 6012 (relating to persons required to 
make returns of income) is amended by redesignating subsection (d) 
as subsection (e) by inserting after subsection (c) the following new 
subsection: 
"(d) TAX-EXEMPT INTEREST REQUIRED TO BE SHOWN ON RETURN.— 
Every person required to file a return under this section for the 
taxable year shall include on such return the amount of interest 
received or accrued during the taxable year which is exempt from 
the tax imposed by chapter 1." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1986. 
Subtitle D—Provisions Relating to Tax 
Shelters 
SEC. 1531. MODIFICATION OF TAX SHELTER RATIO TEST FOR REGISTRA-
TION OF TAX SHELTERS. 
(a) IN GENERAL.—Subparagraph (A) of section 6111(c)(2) (defining 
tax shelter ratio) is amended by striking out "200 percent" and 
inserting in lieu thereof "350 percent". 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to any tax shelter (within the meaning of section 6111 of the 
100 STAT. 2750 
PUBLIC LAW 99-514—OCT. 22, 1986 
Internal Revenue Code of 1986 as amended by this section) interests 
in which are first offered for sale after December 31,1986. 
SEC. 1532. INCREASED PENALTY FOR FAILURE TO REGISTER TAX 
SHELTERS. 
(a) IN GENERAL.—Paragraph (2) of section 6707(a) (relating to 
penalty for failure to register tax shelters) is amended to read £is 
follows: 
"(2) AMOUNT OF PENALTY.—The penalty imposed under para-
graph (1) with respect to any tax shelter shall be an amount 
"
^
^ equal to the greater o
f
— 
"(A) 1 percent of the aggregate amount invested in such 
tax shelter, or 
"(B) $500." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to failures with respect to tax shelters interests in which are 
first offered for sale after the date of the enactment of this Act. 
SEC. 1533. PENALTY FOR FAILURE TO INCLUDE TAX SHELTER IDENTI-
FICATION NUMBER ON RETURN INCREASED TO $250. 
(a) IN GENERAL.—Paragraph (2) of section 67070t>) (relating to 
penalty for failure to furnish tax shelter identification number) is 
amended by striking out "$50" and inserting in lieu thereof "$250". 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to returns filed after the date of the enactment of this Act. 
SEC. 1534. INCREASED PENALTY FOR FAILURE TO MAINTAIN LISTS OF 
INVESTORS IN POTENTIALLY ABUSIVE TAX SHELTERS. 
(a) IN GENERAL.—Subsection (a) of section 6708 (relating to failure 
to maintain lists of investors in potentially abusive tax shelters) is 
amended by striking out "$50,000" and inserting in lieu thereof 
"$100,000". 
Ot)) EFFECTIVE DATE.—The amendments made by this section shall 
apply to failures occurring or continuing after the date of the 
enactment of this Act. 
SEC. 1535. CLARIFICATION OF TREATMENT OF SHAM OR FRAUDULENT 
TRANSACTIONS UNDER SECTION 6621(c). 
(a) CLARIFICATION OF TREATMENT OF SHAM OR FRAUDULENT TRANS-
ACTIONS.—Subparagraph (A) of section 6621(c)(3) (as so redesignated) 
is amended by striking out "and" at the end of clause (iii), by 
striking out the period at the end of clause (iv) and inserting in lieu 
thereof ", and", and by adding at the end thereof the following new 
clause: 
"(v) any sham or fraudulent transaction." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to interest accruing after December 31, 1984; except that 
such amendment shall not apply in the case of any underpayment 
with respect to which there wgis a final court decision before the 
date of the enactment of this Act. 
^tii 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2751 
fc Subtitle E—Estimated Tax Provisions 
SEC. 1541. CURRENT YEAR LIABILITY TEST INCREASED FROM 80 TO 90 
PERCENT FOR ESTIMATED TAX PAYMENTS BY INDIVIDUALS. 
(a) IN GENERAL.—Clause (i) of section 6654(dXl)(B) (defining 
required annual payment) is amended by striking out "80 percent" 
each place it appears and inserting in lieu thereof "90 percent". 
(b) TECHNICAL AMENDMENTS.— 
(1) The table contained in clause (ii) of section 6654(d)(2)(C) 
(defining applicable percentage) is amended— 
(A) by striking out "20" and inserting in lieu thereof 
"22.5", 
(B) by striking out "40" and inserting in lieu thereof "45", 
(C) by striking out "60" and inserting in lieu thereof 
.1 
"67.5", and 
(D) by striking out "80" and inserting in lieu thereof 
"90". 
(2) Subparagraph (C) of section 6654(i)(l) (relating to special 
rules for farmers and fishermen) is amended by striking out "80 
percent" and inserting in lieu thereof "90 percent". 
(3) The table contained in subparagraph (B) of section 
6654(j)(3) (relating to special rules for nonresident aliens) is 
amended— 
(A) by striking out "40" and inserting in lieu thereof 
"45", 
(B) by striking out "60" and inserting in lieu thereof 
"67.5", and 
(C) by striking out "80" and inserting in lieu thereof "90". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1986. 
SEC. 1542. CERTAIN TAX-EXEMPT ORGANIZATIONS SUBJECT TO COR-
PORATE ESTIMATED TAX RULES. 
(a) GENERAL RULE.—Section 6154 (relating to installment pay-
ments of estimated income tax by corporations) is amended by 
adding at the end thereof the following new subsection: 
"(h) CERTAIN TAX-EXEMPT ORGANIZATIONS.—For purposes of this 
section and section 6655— 
"(1) any organization subject to the tax imposed by section 
511, and any private foundation subject to the tax imposed by 
section 4940, shall be treated as a corporation subject to tax 
under section 11, 
"(2) any tax imposed by section 511 or 4940 shall be treated as 
a tax imposed by section 11, and 
"(3) any reference to taxable income shall be treated as 
including a reference to unrelated business taxable income or 
net investment income (as the case may be)." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1986. 
SEC. 1543. WAIVER OF ESTIMATED PENALTIES FOR 1986 UNDERPAY-
MENTS ATTRIBUTABLE TO THIS ACT. 
No addition to tax shall be made under section 6654 or 6655 of the 
Internal Revenue Code of 1986 (relating to failure to pay estimated 
tax) for any period before April 16, 1987 (March 16, 1987, in the case 
of a taxpayer subject to section 6655 of such Code), with respect to 
100 STAT. 2752 
PUBLIC LAW 99-514—OCT. 22, 1986 
any underpayment, to the extent such underpayment was created or 
increased by any provision of this Act. 
Subtitle F—Provisions Regarding Judicial 
; 
, 
Proceedings 
SEC. 1551. LIMITATIONS ON AWARDING OF COURT COSTS AND CERTAIN 
FEES MODIFIED. 
(a) MAXIMUM DOLLAR LIMITATION REMOVED.—Subsection (b) of 
section 7430 (relating to awarding of court costs and certain fees) is 
amended by striking out paragraph (1) and redesignating para-
graphs (2), (3), and (4) as paragraphs (1), (2), and (3), respectively. 
(b) AWARDING OF COURT COSTS AND CERTAIN FEES DENIED IF 
PREVAILING PARTY PROTRACTS PROCEEDINGS.—Section 7430(b) (relat-
ing to limitations to awarding of court costs and certain fees) is 
amended by adding at the end thereof the following new paragraph: 
"(4) 
COSTS DENIED 
WHERE 
PARTY 
PREVAILING 
PROTRACTS 
PROCEEDINGS.—No award for reasonable litigation costs may be 
made under subsection (a) with respect to any portion of the 
civil proceeding during which the prevailing party has 
unreasonably protracted such proceeding." 
(c) ADDITIONAL LIMITATIONS ON FEES OF EXPERT WITNESSES AND 
ATTORNEYS.—Subparagraph (A) of section 7430(c)(1) (defining reason-
able litigation costs) is amended to read as follows: 
"(A) IN GENERAL.—The term 'reasonable litigation costs' 
includes— 
"(i) reasonable court costs, and 
"(ii) based upon prevailing market rates for the kind 
or quality of services furnished— 
^^^' 
"(I) the reasonable expenses of expert witnesses 
in connection with the civil proceeding, except that 
no expert witness shall be compensated at a rate in 
excess of the highest rate of compensation for 
expert witnesses paid by the United States, 
"(II) the reasonable cost of any study, analysis, 
engineering report, test, or project which is found 
u- 
by the court to be necessary for the preparation of 
the party's case, and 
i 
. 
"(Ill) reasonable fees paid or incurred for the 
services of attorneys in connection with the civil 
, 'c,^:. '^ . 
proceeding, except that such fees shall not be in 
excess of $75 per hour unless the court determines 
i t ' 
that an increase in the cost of living or a special 
^ 
factor, such as the limited availability of qualified 
attorneys for such proceeding, justifies a higher 
rate." 
(d) DEFINITION OF PREVAILING PARTY.—Subparagraph (A) of sec-
tion 7430(c)(2) (defining prevailing party) is amended— 
(1) by striking out "was unreasonable" in clause (i) and 
inserting in lieu thereof "was not substantially justified", and 
(2) by striking out "and" at the end of clause (i), by striking 
out the period at the end of clause (ii) and inserting in lieu 
thereof ", and", and by adding at the end thereof the following 
new clause: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2753 
"(iii) meets the requirements of section 504(b)(1)(B) of 
title 5, United States Code (as in effect on the date of 
the enactment of the Tax Reform Act of 1986 and 
applied by taking into account the commencement of 
the proceeding described in subsection (a) in lieu of the 
initiation of the adjudication referred to in such 
section)." 
(e) 
POSITION 
OF 
UNITED 
STATES 
INCLUDES 
ADMINISTRATIVE 
ACTION.—Section 7430(c) (relating to definitions) is amended by 
adding at the end thereof the following new paragraph: 
"(4) POSITION OF UNITED STATES.—The term 'position of the 
United States' includes— 
"(A) the position taken by the United States in the civil 
proceeding, and 
"(B) any administrative action or inaction by the District 
Counsel of the Internal Revenue Service (and all subse-
quent administrative action or inaction) upon which such 
proceeding is based." 
(0 TECHNICAL AMENDMENT.—Subsection (a) of section 7430 is 
amended by inserting "(payable in the case of the Tax Court in the 
same manner as such an award by a district court)" after "a 
judgment". 
(g) PROVISIONS MADE PERMANENT.—Section 7430 is amended by 
striking out subsection (f). 
(h) EFFECTIVE DATES.— 
(1) GENERAL RULE.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to amounts paid 
after September 30, 1986, in civil actions or proceedings, com-
menced after December 31,1985. 
(2) SUBSECTION (f).—The amendment made by subsection (f) 
shall take effect as if included in the amendments made by 
section 292 of the Tax Equity and Fiscal Responsibility Act of 
1982. 
(3) APPLICABILITY OF AMENDMENTS TO CERTAIN PRIOR CASES.— 
The amendments made by this section shall apply to any case 
commenced after December 31, 1985, and finally disposed of 
before the date of the enactment of this Act, except that in any 
such case, the 30-day period referred to in section 2412(d)(1)(B) of 
title 28, United States Code, or Rule 231 of the Tax Court, as the 
case may be, shall be deemed to commence on the date of the 
enactment of this Act. 
SEC. 1552. FAILURE TO PURSUE ADMINISTRATIVE REMEDIES. 
(a) GENERAL RULE.—Section 6673 (relating to damages assessable 
for instituting proceedings before the Tax Court primarily for delay, 
etc.) is amended by striking out "or that the taxpayer's position in 
such proceedings is frivolous or groundless" and inserting in lieu 
thereof ", that the taxpayer's position in such proceeding is frivolous 
or groundless, or that the taxpayer unreasonably failed to pursue 
available administrative remedies". 
O
t
>
) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to proceedings commenced after the date of the enact-
ment of this Act. 
(c) REPORT.—The Secretary of the Treasury or his delegate and the 
Tax Court shall each prepare a report for 1987 and for each 2-
calendar year period thereafter on the inventory of cases in the Tax 
Court and the measures to close cases more efficiently. Such reports 
100 STAT. 2754 
PUBLIC LAW 99-514—OCT. 22, 1986 
shall be submitted to the Committee on Ways and Means of the 
House of Representatives and the Committee on Finance of the 
Senate. 
SEC. 1553. TAX COURT PRACTICE FEE. 
(a) IN GENERAL.—Part III of Subchapter C of chapter 76 (relating 
to miscellaneous provisions) is amended by adding at the end thereof 
the following new section: 
"SEC. 7475. PRACTICE FEE. 
"(a) IN GENERAL.—The Tax Court is authorized to impose a peri-
odic registration fee on practitioners admitted to practice before 
such Court. The frequency and amount of such fee shall be deter-
mined by the Tax Court, except that such amount may not exceed 
$30 per year. 
"(b) USE OF FEES.—The fees described in subsection (a) shall be 
available to the Tax Court to employ independent counsel to pursue 
disciplinary matters." 
O
t
)
) CONFORMING AMENDMENTS.— 
(1) The second sentence of section 7472 (relating to expendi-
tures) is amended by striking out "All" and inserting in lieu 
thereof "Except as provided in section 7475, all". 
(2) Section 7473 (relating to disposition of fees) is amended by 
striking out "All" and inserting in lieu thereof "Except as 
provided in section 7475, all". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
take effect on January 1,1987. 
SEC. 1554. CLARIFICATION OF JURISDICTION OVER ADDITION TO TAX 
FOR FAILURE TO PAY AMOUNT OF TAX SHOWN ON RETURN. 
(a) IN GENERAL.—Subsection (a) of section 6214 (relating to deter-
minations by Tax Court) is amended by striking out "addition to the 
tax" and inserting in lieu thereof "any addition to the tax". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to any action or proceeding in the Tax Court with 
respect to which a decision has not become final (as determined 
under section 7481 of the Internal Revenue Code of 1954) before the 
date of the enactment of this Act. 
SEC. 1555. AUTHORITY TO REQUIRE ATTENDANCE OF UNITED STATES 
MARSHALS AT TAX COURT SESSIONS. 
(a) IN GENERAL.—Subsection (e) of section 7456 (relating to 
incidental powers) is amended by adding at the end thereof the 
following new sentence: "The United States marshal for any district 
in which the Tax Court is sitting shall, when requested by the chief 
judge of the Tax Court, attend any session of the Tax Court in such 
district." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
take effect on the date of the enactment of this Act. 
SEC. 1556. CHANGES IN CERTAIN PROVISIONS RELATING TO SPECIAL 
TRIAL JUDGES. 
(a) IN GENERAL.—Part I of subchapter C of chapter 76 (relating to 
judicial proceedings) is amended by inserting after section 7443 the 
following new section: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2755 
"SEC. 7443A, SPECIAL TRIAL JUDGES. 
"(a) APPOINTMENT.—The chief judge may, from time to time, 
appoint special trial judges who shall proceed under such rules and 
regulations as may be promulgated by the Tax Court. 
"(b) PROCEEDINGS WHICH MAY BE ASSIGNED TO SPECIAL TRIAL 
JUDGES.—The chief judge may assign— 
"(1) any declaratory judgment proceeding, 
"(2) any proceeding under section 7463, 
"(3) any proceeding where neither the amount of the defi-
ciency placed in dispute (within the meaning of section 7463) 
nor the amount of any claimed overpayment exceeds $10,000, 
and 
"(4) any other proceeding which the chief judge may 
designate, 
to be heard by the special trial judges of the court. 
"(c) AUTHORITY TO MAKE COURT DECISION.—The court may 
authorize a special trial judge to make the decision of the court with 
respect to any proceeding described in paragraph (1), (2), or (3) of 
subsection (b), subject to such conditions and review as the court 
may provide. 
"(d) SALARY.—Each special trial judge shall receive salary— 
"(1) at a rate equal to 90 percent of the rate for judges of the 
Tax Court, and 
"(2) in the same installments as such judges. 
"(e) EXPENSES FOR TRAVEL AND SUBSISTENCE.—Subsection (d) of 
section 7443 shall apply to special trial judges subject to such rules 
and regulations as may be promulgated by the Tax Court." 
(b) TECHNICAL AMENDMENTS.— 
(1) Section 7456 (relating to administration of oaths and 
procurement of testimony) is amended by striking out subsec-
tions (c) and (d) and by redesignating subsection (e) as subsection 
(0. 
(2) Subsection (c) of section 7471 is amended by striking out 
"section 7456(c)" and inserting in lieu thereof "subsections (d) 
and (e) of section 7443A". 
(3) The table of sections for part I of subchapter C of chapter 
76 is amended by inserting after the item relating to section 
7443 the following new item: 
"Sec. 7443A. Special trial judges." 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall take effect on the date 
of the enactment of this Act. 
(2) SALARY.—Subsection (d) of section 7443A of the Internal 
Revenue Code of 1954 (as added by this section) shall take effect 
on the 1st day of the 1st month beginning after the date of the 
enactment of this Act. 
(3) 
NEW APPOINTMENTS NOT REQUIRED.—Nothing 
in 
the 
amendments made by this section shall be construed to require 
the reappointment of any individual serving as a special trial 
judge of the Tax Court on the day before the date of the 
enactment of this Act. 
100 STAT. 2756 
PUBLIC LAW 99-514—OCT. 22, 1986 
SEC. 1557. EFFECT ON RETIRED PAY BY ELECTION TO PRACTICE LAW. 
ETC., AFTER RETIREMENT. 
(a) 
CHANGE IN A G E AND SERVICE REQUIREMENTS FOR RETIRE-
MENT.—Paragraph (2) of section 7447(b) (relating to retirement) is 
amended to read as follows: 
"(2) Any judge who meets the age and service requirements 
set forth in the following table may retire: 
And the years 
of service as 
"The judge has 
a judge are 
attained age: 
at least: 
65 
15 
66 
14 
67 
13 
68 
12 
69 
11 
70 
10." 
(b) EFFECT ON RETIRED PAY OF PRACTICING LAW, ETC., AFTER 
RETIREMENT.—Subsection (f) of section 7447 (relating to individuals 
receiving retired pay to be available for recall) is amended to read as 
follows: 
"(f) RETIRED PAY AFFECTED IN CERTAIN CASES.—In the case of 
an 
individual for whom an election to receive retired pay under subsec-
tion (d) is in effect— 
"(1) 1-YEAR FORFEITURE FOR FAILURE TO PERFORM JUDICIAL 
DUTIES.—If such individual during any calendar year fails to 
perform judicial duties required of him by subsection (c), such 
individual shall forfeit all rights to retired pay under subsection 
(d) for the 1-year period which begins on the 1st day on which he 
so fails to perform such duties. 
"(2) PERMANENT FORFEITURE OF RETIRED PAY WHERE CERTAIN 
NON-GOVERNMENT SERVICES PERFORMED.—If such individual per-
forms (or supervises or directs the performance of) legal or 
accounting services in the field of Federal taxation for his 
client, his employer, or any of his employer's clients, such 
individual shall forfeit all rights to retired pay under subsection 
(d) for all periods beginning on or after the 1st day on which he 
engages in any such activity. The preceding sentence shall not 
apply to any civil office or employment under the Government 
of the United States. 
"(3) 
SUSPENSION 
OF RETIRED PAY DURING 
PERIOD OF COM-
PENSATED GOVERNMENT SERVICE.—If such individual 
accepts 
compensation for civil office or employment under the Govern-
ment of the United States (other than the performance of 
judicial duties pursuant to subsection (c)), such individual shall 
forfeit all rights to retired pay under subsection (d) for the 
period for which such compensation is received. 
"(4) FORFEITURES OF RETIRED PAY UNDER PARAGRAPHS (i) AND 
(2) NOT TO APPLY WHERE INDIVIDUAL ELECTS TO FREEZE AMOUNT 
OF RETIRED PAY.— 
"(A) I N GENERAL.—If any individual makes an election 
under this paragraph— 
"(i) paragraphs (1) and (2) (and subsection (c)) shall 
not apply to such individual beginning on the date such 
election takes effect, and 
"(ii) the retired pay under subsection (d) payable to 
such individual for periods beginning on or after the 
date such election takes effect shall be equal to the 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2757 
retired pay to which such individual would be entitled 
^ 
without regard to this clause at the time of such 
election. 
"(B) ELECTION.—An election under this paragraph— 
"(i) may be made by an individual only if such 
individual meets the age and service requirements for 
retirement under paragraph (2) of subsection (b), 
"(ii) may be made only during the period during 
which the individual may make an election to receive 
retired pay or while the individual is receiving retired 
pav, and 
(iii) shall be made in the same manner as the 
election to receive retired pay. 
Such an election, once it takes effect, shall be irrevocable. 
"(C) WHEN ELECTION TAKES EFFECT.—Any election under 
this paragraph shall take effect on the 1st day of the 1st 
month following the month in which the election is made." 
(c) HIGH 3 YEARS OF SALARY MUST BE DURING PERIOD WHEN 
ELECTION TO RECEIVE RETIRED PAY IS NOT IN EFFECT.—Subsection 
(m) of section 7448 (relating to computation of annuities) is amended 
by adding at the end thereof the following new sentence: "In deter-
mining the period of 3 consecutive years referred to in the preceding 
sentence, there may not be taken into account any period for which 
an election under section 7447(fX4) is in effect." 
(d) CLERICAL AMENDMENTS.— 
(1) Subsection (a) of section 7447 (relating to definitions) is 
amended by striking out paragraph (2) and by redesignating 
paragraphs (3) and (5) as paragraphs (2) and (3), respectively. 
(2) Subsection (e) of section 7447 is amended by striking out 
"Civil Service Commission" each place it appears and inserting 
in lieu thereof "Office of Personnel Management". 
(3) Subparagraph (C) of section 7447(g)(2) (relating to coordina-
tion with civil service retirement) is amended by striking out 
"Civil Service Commission" and inserting in lieu thereof "Office 
of Personnel Management". 
(e) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
take effect on the date of the enactment of this Act. 
(2) FORFEITURE OF RETIRED PAY.—The amendments made by 
this section shall not apply to any individual who, before the 
date of the enactment of this Act, forfeited his rights to retired 
pay under section 7447(d) of the Internal Revenue Code of 1954 
by reason of the 1st sentence of section 7447(f) of such Code (as 
in effect on the day before such date). 
SEC. 1558. AUTHORIZATION 
FOR APPEALS 
FROM 
INTERLOCUTORY 
ORDERS OF THE TAX COURT. 
(a) IN GENERAL.—Subsection (a) of section 7482 (relating to courts 
of review) is amended by adding at the end thereof the following 
new paragraph: 
"(2) INTERLOCUTORY ORDERS.— 
"(A) IN GENERAL.—When any judge of the Tax Court 
includes in an interlocutory order a statement that a 
controlling question of law is involved with respect to which 
there is a substantial ground for difference of opinion and 
that an immediate appeal from that order may materially 
advance the ultimate termination of the litigation, the 
100 STAT. 2758 
PUBLIC LAW 99-514—OCT. 22, 1986 
: 'uJitr United States Court of Appeals may, in its discretion, 
,' > 
permit an appeal to be taken from such order, if application 
is made to it within 10 days after the entry of such order. 
Neither the application for nor the granting of an appeal 
. 
under this paragraph shall stay proceedings in the Tax 
Court, unless a stay is ordered by a judge of the Tax Court 
or by the United States Court of Appeals which has jurisdic-
tion of the appeal or a judge of that court. 
"(B) ORDER TREATED AS TAX COURT DECISION.—For 
pur-
:>©- 
poses of subsections (b) and (c), an order described in this 
paragraph shall be treated as a decision of the Tax Court. 
"(C) VENUE FOR REVIEW OF SUBSEQUENT PROCEEDINGS.—If 
a United States Court of Appeals permits an appeal to be 
taken from an order described in subparagraph (A), except 
as provided in subsection (b)(2), any subsequent review of 
the decision of the Tax Court in the proceeding shall be 
made by such Court of Appeals." 
(b) CLERICAL AMENDMENTS.—The text of subsection (a) of section 
7482 (as in effect before the amendment made by subsection (a)) is 
moved below the subsection heading and 2 ems to the right (so that 
the left margin of such text is aligned with the left margin of the 
paragraph (2) added by subsection (a)) and amended by inserting 
before such text "(1) IN GENERAL.—". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to any order of the Tax Court entered after the date of the 
enactment of this Act. 
SEC. 1559. CHANGES RELATING TO ANNUITIES FOR SURVIVING SPOUSES 
AND DEPENDENT CHILDREN OF TAX COURT JUDGES. 
(a) INCREASES IN SALARY DEDUCTIONS, AND AUTHORIZATIONS OF 
APPROPRIATIONS, FOR TAX COURT JUDGES SURVIVORS ANNUITY 
FUND.— 
(1) INCREASES IN SALARY DEDUCTIONS.— 
(A) Subsection (c) of section 7448 (relating to salary deduc-
tions) is amended by striking out "3 percent" and inserting 
in lieu thereof "3.5 percent". 
r. i 
(B) Subsection (d) of section 7448 (relating to deposits in 
survivors annuity fund) is amended by striking out "3 
,
^
-
? 
percent" the second place it appears and inserting in lieu 
thereof "3.5 percent". 
(2) AUTHORIZATION OF APPROPRIATIONS.— 
(A) IN GENERAL.—Subsection (c) of section 7448 is 
amended— 
(i) by striking out "(c) SALARY DEDUCTIONS.—There" 
and inserting in lieu thereof the following: 
"(c) SURVIVORS ANNUITY FUND.— 
"(1) SALARY DEDUCTIONS.—There", 
(ii) by moving the text of such subsection 2 ems to the 
right, and 
(iii) by adding at the end thereof the following new 
paragraph: 
,.j^ I 
"(2) APPROPRIATIONS WHERE UNFUNDED LIABILITY.— 
"(A) IN GENERAL.—Not later than the close of each fiscal 
year, there shall be deposited in the Treasury of the United 
States to the credit of the survivors annuity fund, in accord-
ance with such procedures as may be prescribed by the 
Comptroller General of the United States, amounts re-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2759 
quired to reduce to zero the unfunded liability (if any) of 
such fund. Subject to appropriation Acts, such deposits 
shall be taken from sums available for such fiscal year for 
the payment of amounts described in subsection (a)(4), and 
shall immediately become an integrated part of such fund. 
"(B) EXCEPTION.—The amount required by subparagraph 
(A) to be deposited in any fiscal year shall not exceed an 
amount equal to 11 percent of the aggregate amounts de-
scribed in subsection (a)(4) paid during such fiscal year. 
' 
"(C) UNFUNDED 
LIABIUTY DEFINED.—For purposes of 
subparagraph (A), the term 'unfunded liability' means the 
amount estimated by the Secretary to be equal to the excess 
(as of the close of the fiscal year involved) o
f
— 
. u. 
"(i) the present value of all benefits payable from the 
survivors annuity fund (determined on an annual basis 
in accordance with section 9503 of title 31, United 
. States Code), over 
-' 
,, 
"(ii) the sum o
f
— 
"(I) the present values of future deductions 
under subsection (c) and future deposits under 
subsection (d), plus 
"(II) the balance in such fund as of the close of 
such fiscal year. 
'•: 
"(D) AMOUNTS NOT CREDITED TO INDIVIDUAL ACCOUNTS.— 
Amounts appropriated pursuant to this paragraph shall not 
i' V'- be credited to the account of any individual for purposes of 
subsection, (g)." 
'. 
'. 
*'- 
(B) CONFORMING AMENDMENT.—Subsection (h) of section 
7448 is amended by striking out "subsection (c)" and insert-
ing in lieu thereof "subsection (c)(1)". 
O
t
)
) INCREASES IN ANNUITIES PAYABLE FROM SURVIVORS ANNUITY 
FUND.— 
(1) ANNUITIES FOR SURVIVING SPOUSES.— 
(A) INCREASE IN ANNUITY.—Subsection (m) of section 7448 
f 
(relating to computation of annuities) is amended— 
(i) by striking out "IVi percent" and inserting in lieu 
thereof "1.5 percent", and 
(ii) by striking out "but such annuity shall not" and 
; 
. 
'i all that follows down through the end thereof and 
inserting in lieu thereof "except that such annuity 
• shall not exceed an amount equal to 50 percent of such 
average annual salary, nor be less than an amount 
> 
equal to 25 percent of such average annual salary, and 
shall be further reduced in accordance with subsection 
(d) (if applicable)." 
(B) ANNUITY TO TERMINATE ON REMARRIAGE ONLY IF 
SPOUSE NOT 55.—The second sentence of section 7448(h) is 
amended by striking out "or remarriage" and inserting in 
a 
lieu thereof "or such surviving spouse's remarriage before 
attaining age 55". 
(2) ANNUITIES FOR SURVIVING DEPENDENT CHILDREN.— 
(A) ANNUITY WHERE SURVIVING SPOUSE.—Paragraph (2) of 
section 7448(h) (relating to entitlement to annuity) is 
amended by striking out all that follows "equal to" and 
I 
inserting in lieu thereof the following: 
"the lesser o
f
— 
100 STAT. 2760 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(A) 10 percent of the average annual salary of such 
judge (determined in accordance with subsection (m)), or 
"(B) 20 percent of such average annual salary, divided by 
the number of such children; or". 
(B) ANNUITY WHERE NO SURVIVING SPOUSE.—Paragraph 
(3) of section 7448(h) is amended by striking out all that 
follows 
"equal to" and inserting in lieu 
thereof the 
following: 
i 
; 
-
"the lesser of— 
' 
"(A) 20 percent of the average annual salary of such 
judge (determined in accordance with subsection (m)), or 
' , 
"(B) 40 percent of such average annual salary, divided by 
the number of such children." 
(c) AUTHORITY T O ELECT TERMINATION OF PARTICIPATION IN SURVI-
VOR ANNUITY PROGRAM.— 
(1) IN GENERAL.—Subsection (g) of section 7448 is amended by 
inserting "or if any judge ceases to be married after making the 
election under subsection (b) and revokes (in a writing filed as 
provided in subsection (b)) such election" after "1939". 
(2) CONFORMING AMENDMENT.—The subsection heading for 
such subsection (g) is amended by striking out " O F SERVICE". 
(d) EFFECTIVE DATE.— 
(1) SALARY DEDUCTIONS.— 
(A) The amendment made by subsection (a)(1)(A) shall 
t <
r 
\ apply to amounts paid after November 1, 1986. 
Jt 
(B) The amendment made by subsection (a)(1)(B) shall 
apply to service after November 1, 1986. 
*. 
(2) APPROPRIATIONS.—The amendments made by subsection 
? (a)(2) shall apply to fiscal years beginning after 1986. 
(3) COMPUTATION OF ANNUITIES.—The amendments made by 
subsection (b) shall apply to annuities the starting date of which 
is after November 1, 1986. 
(4) OPPORTUNITY TO REVOKE SURVIVOR ANNUITY ELECTION.— 
(A) IN GENERAL.—Any individual who before November 1, 
1986, made an election under subsection (b) of section 7448 
of the Internal Revenue Code of 1954 may revoke such 
election. Such a revocation shall constitute a complete with-
drawal from the survivor annuity program provided for in 
such section and shall be filed as provided for elections 
I 
under such subsection. 
•' 
(B) 
EFFECT 
OF REVOCATION.—Any 
revocation 
under 
is- 
subparagraph (A) shall have the same effect as if there 
were a termination to which section 7448(g) of such Code 
applies on the date such revocation is filed. 
(C) 
PERIOD 
REVOCATION 
PERMITTED.—Any 
revocation 
under subparagraph (A) may be made only during the 180-
day period beginning on the date of the enactment of this 
Act. 
• , 
(5) OPPORTUNITY TO ELECT SURVIVOR ANNUITY WHERE PRIOR 
REVOCATION.—Any individual who under paragraph (4) revoked 
an election under subsection (b) of section 7448 of such Code 
* may thereafter make such an election only if such individual 
deposits to the credit of the survivors annuity fund 
under 
subsection (c) of such section the entire amount paid to such 
individual under paragraph (4), together with interest computed 
as provided in subsection (d) of such section. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2761 
Subtitle G—Tax Administration Provisions 
SEC. 1561. SUSPENSION OF STATUTE OF LIMITATIONS IF THIRD-PARTY 
RECORDS NOT PRODUCED WITHIN 6 MONTHS AFTER SERV-
ICE OF SUMMONS. 
(a) IN GENERAL.—Subsection (e) of section 7609 (relating to special 
procedures for third-party summonses) is amended to read as 
follows: 
"(e) SUSPENSION OF STATUTE OF LIMITATIONS.— 
"(1) SUBSECTION (b) ACTION.—If any person takes any action 
as provided in subsection (b) and such person is the person with 
respect to whose liability the summons is issued (or is the agent, 
nominee, or other person acting under the direction or control 
of such person), then the running of any period of limitations 
under section 6501 (relating to the assessment and collection of 
tax) or under section 6531 (relating to criminal prosecutions) 
e 
with respect to such person shall be suspended for the period 
during which a proceeding, and appeals therein, with respect to 
the enforcement of such summons is pending. 
"(2) SUSPENSION AFTER 6 MONTHS OF SERVICE OF SUMMONS.—In 
the absence of the resolution of the third-party recordkeeper's 
c 
response to the summons described in subsection (c), the run-
ning of any period of limitations under section 6501 or under 
section 6531 with respect to any person with respect to whose 
liability the summons is issued other (other than a person 
a 
taking action as provided in subsection (b)) shall be suspended 
I 
for the period— 
"(A) beginning on the date which is 6 months after the 
service of such summons, and 
"(B) ending with the final resolution of such response." 
(b) NOTICE OF SUSPENSION IN THE CASE OF A JOHN DOE SUMMONS.— 
Section 7609(i) (relating to duty of third-party recordkeeper) is 
amended by adding at the end thereof the following new paragraph: 
"(4) NOTICE OF SUSPENSION OF STATUTE OF LIMITATIONS IN THE 
CASE OF A JOHN D
O
E SUMMONS.—In the case of a summons 
described in subsection (f) with respect to which any period of 
limitations has been suspended under subsection (e)(2), the 
third-party recordkeeper shall provide notice of such suspension 
to any person described in subsection (f)." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
take effect on the date of the enactment of this Act. 
SEC. 1562. AUTHORITY TO RESCIND NOTICE OF DEFICIENCY WITH 
T A X P A Y E R S CONSENT. 
(a) IN GENERAL.—Section 6212 (relating to notice of deficiency) is 
amended by adding at the end thereof the following new subsection: 
"(d) AUTHORITY TO RESCIND NOTICE OF DEFICIENCY WITH TAX-
PAYER'S CONSENT.—The Secretary may, with the consent of the 
taxpayer, rescind any notice of deficiency mailed to the taxpayer. 
Any notice so rescinded shall not be treated as a notice of deficiency 
for purposes of subsection (c)(1) (relating to further deficiency letters 
restricted), section 6213(a) (relating to restrictions applicable to 
deficiencies; petition to Tax Court), and section 6512(a) (relating to 
limitations in case of petition to Tax Court), and the taxpayer shall 
have no right to file a petition with the Tax Court based on such 
notice." 
100 STAT. 2762 
PUBLIC LAW 99-514—OCT. 22, 1986 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to notices of deficiency issued on or after January 1, 1986. 
SEC. 1563. AUTHORITY TO ABATE INTEREST DUE TO ERRORS OR DELAYS 
BY THE INTERNAL REVENUE SERVICE. 
(a) IN GENERAL.—Section 6404 (relating to abatements) is 
amended by adding at the end thereof the following new subsection: 
"(e) 
ASSESSMENTS OF INTEREST ATTRIBUTABLE TO ERRORS AND 
DELAYS BY INTERNAL REVENUE SERVICE.— 
"(1) IN GENERAL.—In the case of any assessment of interest 
on— 
"(A) any deficiency attributable in whole or in part to any 
error or delay by an officer or employee of the Internal 
Revenue Service (acting in his official capacity) in perform-
ing a ministerial act, or 
• 
"(B) any payment of any tax described in section 6212(a) 
to the extent that any delay in such payment is attributable 
to such an officer or employee being dilatory in performing 
a ministerial act, 
the Secretary may abate the assessment of all or any part of 
such interest for any period. For purposes of the preceding 
sentence, an error or delay shall be taken into account only if 
no significant aspect of such error or delay can be attributed to 
the taxpayer involved, and after the Internal Revenue Service 
has contacted the taxpayer in writing with respect to such 
deficiency or payment. 
•K^ 
"(2) INTEREST ABATED WITH RESPECT TO ERRONEOUS REFUND 
CHECK.—The Secretary shall abate the assessment of all interest 
r' on any erroneous refund under section 6602 until the date 
demand for repayment is made, unless— 
"(A) the taxpayer (or a related party) has in any way 
caused such erroneous refund, or 
"(B) such erroneous refund exceeds $50,000." 
' 
(b) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to interest accruing with respect to deficiencies or 
payments for taxable years beginning after December 31, 1978. 
(2) STATUTE OF LIMITATIONS.—If refund or credit of any 
amount resulting from the application of the amendment made 
by subsection (a) is prevented at any time before the close of the 
date which is 1 year after the date of the enactment of this Act 
by the operation of any law or rule of law (including res 
,,, judicata), refund or credit of such amount (to the extent attrib-
utable to the application of the amendment made by subsection 
(a)) may, nevertheless, be made or allowed if claim therefore is 
filed before the close of such 1-year period. 
SEC. 1564. SUSPENSION 
OF 
COMPOUNDING 
WHERE 
INTEREST 
ON 
DEFICIENCY SUSPENDED. 
(a) IN GENERAL.—Subsection (c) of section 6601 (relating to suspen-
sion of interest in certain income, estate, gift, and certain excise 
taxes cases) is amended by inserting before the period at the end 
thereof "and interest shall not be imposed during such period on 
any interest with respect to such deficiency for any prior period". 
(b) EFFECTIVE DATE.— 
(1) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to interest accruing after December 31, 1982. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2763) 
^ 
(2) STATUTE OF LIMITATIONS.—If refund or credit of any 
amount resulting from the application of the amendment made 
by subsection (a) is prevented at any time before the close of the 
date which is 1 year after the date of the enactment of ,this Act 
by the operation of any law or rule of law (including res 
judicata), refund or credit of such amount (to the extent attrib-
utable to the application of the amendment made by subsection 
(a)) may, nevertheless, be made or allowed if claim therefore is 
filed before the close of such 1-year period. 
SEC. 1565. CERTAIN 
SERVICECONNECTED 
DISABILITY 
PAYMENTS 
EXEMPT FROM LEVY. 
(a) EXEMPTION FROM LEVY.—Subsection (a) of section 6334 (relat-
ing to the enumeration of property exempt from levy) is amended by 
adding at the end thereof the following new paragraph: 
"(10) CERTAIN SERVICE-CONNECTED DISABILITY PAYMENTS.—Any 
amount payable to an individual as a service-connected (within 
the meaning of section 101(16) of title 38, United States Code) 
disability benefit under— 
"(A) subchapter II, IV, or VI of chapter 11 of such title 38, 
"(B) subchapter I, II, or III of chapter 19 of such title 
38, or 
"(C) chapter 21, 31, 32, 34, 35, 37, or 39 of such title 38." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to amounts payable after December 31,1986. 
SEC. 1566. INCREASE IN VALUE OF PERSONAL PROPERTY SUBJECT TO 
CERTAIN LISTING AND NOTICE PROCEDURES. 
(a) IN GENERAL.—Section 7325 (relating to personal property 
valued at $2,500 or less) is amended by striking out "$2,500" each 
place it appears (including the section heading) and inserting in lieu 
thereof "$100,000". 
(b) INCREASE IN AMOUNT OF BOND BY CLAIMANT.—Paragraph (3) of 
section 7325 is amended by striking out "$250" and inserting in lieu 
thereof "$2,500". 
(c) TECHNICAL AMENDMENT.—Paragraph (4) of section 7103(b) is 
amended by striking out "$1,000" and inserting in lieu thereof 
"$100,000". 
(d) CLERICAL AMENDMENT.—The item relating to section 7325 in 
the table of sections for part II of subchapter C of chapter 75 is 
amended by striking out "$2,500" and inserting in lieu thereof 
"$100,000". 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
take effect on the date of the enactment of this Act. 
SEC. 1567. CERTAIN RECORDKEEPING REQUIREMENTS. 
(a) IN GENERAL.—For purposes of sections 132 and 274 of the 
Internal Revenue Code of 1954, use of an automobile by a special 
agent of the Internal Revenue Service shall be treated in the same 
manner as use of an automobile by an officer of any other law 
enforcement agency. 
(b) EFFECTIVE DATE.—The provisions of this section shall take 
effect on January 1, 1985. 
100 STAT. 2764 
PUBLIC LAW 99-514—OCT. 22, 1986 
SEC. 1568. DISCLOSURE OF RETURNS AND RETURN INFORMATION TO 
CERTAIN CITIES. 
(a) IN GENERAL.—Subsection (b) of section 6103 (relating to defini-
tions for confidentiality and disclosure of returns and return 
information) is amended— 
(1) by striking out paragraph (5) and inserting in lieu thereof 
the following: 
; i 
"(5) STATE.—The term 'State' means— 
"(A) any of the 50 States, the District of Columbia, the 
. 
Commonwealth of Puerto Rico, the Virgin Islands, the 
"*^^ 
Canal Zone, Guam, American Samoa, the Commonwealth 
of the Northern Mariana Islands, the Republic of the Mar-
shall Islands, the Federated States of Micronesia, and the 
Republic of Palau, and 
"(B) for purposes of subsections (a)(2), (b)(4), (d)(1), (hX4), 
V r * 
and (p) any municipality— 
"(i) with a population in excess of 2,000,000 (as deter-
mined under the most recent decennial United States 
census data available), 
.. f: . 
"(ii) which imposes a tax on income or wages, and 
'."> 
"(iii) with which the Secretary (in his sole discretion) 
has entered into an agreement regarding disclosure.", 
and 
r 
(2) by adding at the end thereof the following new paragraph: 
"(10) CHIEF EXECUTIVE OFFICER.—The term 'chief executive 
officer' means, with respect to any municipality, any elected 
official and the chief official (even if not elected) of such 
municipality." 
(b) EFFECTIVE DATE.—The amendments made by this section shall 
take effect on the date of the enactment of this Act. 
SEC. 1569. TREATMENT OF CERTAIN FORFEITURES. 
(a) IN GENERAL.—Subsection (i) of section 6323 is amended by 
adding at the end thereof the following new paragraph: 
"(3) FORFEITURES.—For purposes of this subchapter, a forfeit-
ure under local law of property seized by a law enforcement 
agency of a State, county, or other local governmental subdivi-
sion shall relate back to the time of seizure, except that this 
paragraph shall not apply to the extent that under local law the 
holder of an intervening claim or interest would have priority 
over the interest of the State, county, or other local govern-
mental subdivision in the property." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
take effect on the date of the enactment of this Act. 
SEC. 1570. PROCEDURE AT TAX SALE OF SEIZED PROPERTY WHERE NO 
PERSON OFFERS MINIMUM PRICE. 
(a) IN GENERAL.—Paragraph (1) of section 6335(e) (relating to 
manner and conditions of sale of seized property) is amended to read 
as follows: 
> 
,^ , 
"(1) I N GENERAL.— 
"(A) 
DETERMINATIONS RELATING TO MINIMUM PRICE.— 
-^ 
Before the sale of property seized by levy, the Secretary 
' ^"' 
shall determine— 
"(i) a minimum price for which such property shall 
be sold (taking into account the expense of making the 
levy and conducting the sale), and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2765 
"(ii) whether, on the basis of criteria prescribed by 
the Secretary, the purchase of such property by the 
United States at such minimum price would be in the 
best interest of the United States. 
"(B) 
SALE TO HIGHEST BIDDER AT OR ABOVE MINIMUM 
PRICE.—If, at the sale, one or more persons offer to purchase 
such property for not less than the amount of the minimum 
price, the property shall be declared sold to the highest 
bidder. 
"(C) PROPERTY DEEMED SOLD TO UNITED STATES AT MINI-
MUM 
PRICE IN CERTAIN CASES.—If no person offers the 
-. : s 
amount of the minimum price for such property at the sale 
^.-. 
and the Secretary has determined that the purchase of such 
property by the United States would be in the best interest 
of the United States, the property shall be declared to be 
sold to the United States at such minimum price. 
"(D) RELEASE TO OWNER IN OTHER CASES.—If, at the sale, 
- 
the property is not declared sold under subparagraph (B) or 
(C), the property shall be released to the owner thereof and 
J, I J 
the expense of the levy and sale shall be added to the 
amount of tax for the collection of which the levy was 
made. Any property released under this subparagraph shall 
5; 
remain subject to any lien imposed by subchapter C." 
O
t
>
) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to— 
(1) property seized after the date of the enactment of this Act, 
and 
J 
(2) property seized on or before such date which is held by the 
I 
United States on such date. 
SEC. 1571. MODIFICATION OF TIPS ALLOCATION METHOD. 
Effective for any payroll period beginning after December 31, 
1986, an establishment may utilize the optional method of tips 
allocation described in the last sentence of section 31.6053-3(fKlXiv) 
of the Internal Revenue Regulations only if such establishment 
employs less than the equivalent of 25 full-time employees during 
such payroll period. 
SEC. 1572. TREATMENT OF FORFEITURES OF LAND SALES CONTRACTS 
FOR PURPOSES OF DISCHARGE OF LIENS. 
(a) AMENDMENT OF SECTION 7425(c).—Subsection (c) of section 7425 
(relating to special rules for discharge of liens) is amended by adding 
at the end thereof the following new paragraph: 
"(4) FORFEITURES OF LAND SALES CONTRACTS.—For purposes of 
subsection (b), a sale of property includes any forfeiture of a 
land sales contract." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall 
apply to forfeitures after the 30th day after the date of the enact-
ment of this Act. 
Subtitle H—Miscellaneous Provisions 
SEC. 1581. WITHHOLDING 
ALLOWANCES 
TO 
REFLECT 
NEW 
RATE 
SCHEDULES. 
(a) IN GENERAL.—The Secretary of the Treasury or his delegate 
shall modify the withholding schedules and withholding exemption 
100 STAT. 2766 
PUBLIC LAW 99-514—OCT. 22, 1986 
certificates under section 3402 of the Internal Revenue Code of 1954 
to better approximate actual tax liability under the amendments 
made by this Act. 
(b) CERTAIN DECREASES IN WITHHOLDING NOT PERMITTED.—Subsec-
tion (i) of section 3402 is amended by striking out "or decreases". 
(c) EMPLOYER'S RESPONSIBILITY.—If an employee has not filed a 
revised withholding allowance certificate before October 1, 1987, the 
employer shall withhold income taxes from the employee's wages— 
(1) as if the employee claimed 1 withholding allowance, if the 
employee checked the "single" box on the employee's previous 
withholding allowance certificate, or 
(2) as if the employee claimed 2 withholding allowances, if the 
employee checked the "married" box on the employee's pre-
vious withholding allowance certificate. 
SEC. 1582. REPORT ON RETURN-FREE SYSTEM. 
(a) REPORT.—The Secretary of the Treasury or his delegate shall 
prepare a report on a return-free system for the Federal income tax 
of individuals. Such report shall include— 
(1) the identification of classes of individuals who would be 
permitted to use a return-free system, 
(2) how such a system would be phased in, 
(3) what additional resources the Internal Revenue Service 
~) would need to carry out such a system, and 
(4) the types of changes to the Internal Revenue Code of 1954 
which would inhibit or enhance the use of such a system. 
(b) DUE DATE.—The report under subsection (a) shall be submit-
ted, not later than 6 months after the date of the enactment of this 
Act, to the Committee on Ways and Means of the House of Rep-
resentatives and the Committee on Finance of the Senate. 
TITLE XVI—EXEMPT AND NONPROFIT 
ORGANIZATIONS 
SEC. 1601. CERTAIN DISTRIBUTIONS OF LOW COST ARTICLES AND EX-
CHANGES AND RENTALS OF MEMBER LISTS BY CERTAIN 
ORGANIZATIONS NOT TO BE TREATED AS UNRELATED TRADE 
OR BUSINESS. 
(a) IN GENERAL.—Section 513 (defining unrelated trade or busi-
ness) is amended by adding at the end thereof the following new 
subsection: 
"(h) 
CERTAIN DISTRIBUTIONS OF LOW COST ARTICLES WITHOUT 
OBLIGATION TO PURCHASE AND EXCHANGES AND RENTALS OF MEMBER 
LISTS.— 
"(1) IN GENERAL.—In the case of an organization which is 
described in section 501 and contributions to which are deduct-
ible under paragraph (2) or (3) of section 170(c), the term 'unre-
lated trade or business' does not include— 
"(A) activities relating to the distribution of low cost 
articles if the distribution of such articles is incidental to 
the solicitation of charitable contributions, or 
af^AII 
"(B) g^jjy trade or business which consists o
f
— 
"(i) exchanging with another such organization 
names and addresses of donors to (or members of) such 
organization, or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2767 
"(ii) renting such names and addresses to another 
such organization. 
"(2) Low C
O
S
T ARTICLE DEFINED.—For purposes of this 
subsection— 
"(A) IN GENERAL.—The term 'low cost article' means any 
article which has a cost not in excess of $5 to the organiza-
tion which distributes such item (or on whose behalf such 
item is distributed). 
"(B) AGGREGATION RULE.—If more than 1 item is distrib-
uted by or on behalf of an organization to a single distribu-
tee in any calendar year, the aggregate of the items so 
distributed in such calendar year to such distributee shall 
' •' 
be treated as 1 article for purposes of subparagraph (A). 
"(C) INDEXATION OF $5 AMOUNT.—In the case of any tax-
able year beginning in a calendar year after 1987, the $5 
amount in subparagraph (A) shall be increased by an 
t: 0 
amount equal to— 
"(i) $5, multiplied by 
"(ii) the cost-of-living adjustment determined under 
section 1(f)(3) for the calendar year in which the tax-
able year begins. 
"(3) DISTRIBUTION WHICH IS INCIDENTAL TO THE SOLICITATION OF 
CHARITABLE CONTRIBUTIONS 
DESCRIBED.—For 
purpOSeS o f 
t h i s 
subsection, any distribution of low cost articles by an organiza-
tion shall be treated as a distribution incidental to the solicita-
tion of charitable contributions only if— 
"(A) such distribution is not made at the request of the 
distributee, 
"(B) such distribution is made without the express con-
sent of the distributee, and 
"(C) the articles so distributed are accompanied by— 
"(i) a request for a charitable contribution (as defined 
imm 
in section 170(c)) by the distributee to such organiza-
tion, and 
' 
"(ii) a statement that the distributee may retain the 
low cost article regardless of whether such distributee 
makes a charitable contribution to such organization." 
Ot)) EFFECTIVE DATE.—The amendment made by this section shall 
apply to distributions of low cost articles and exchanges and rentals 
of member lists after the date of the enactment of this Act. 
SEC. 1602. EDUCATIONAL ACTIVITIES AT CONVENTION AND TRADE 
SHOWS. 
(a) CERTAIN EDUCATIONAL ACTIVITIES TREATED AS CONVENTION AND 
TRADE SHOW ACTIVITIES.—Section 513(dX3XB) (defining to qualified 
convention and trade show activity) is amended by inserting after 
"industry in general" the following: "or to educate persons in 
attendance regarding new developments or products and services 
related to the exempt activities of the organization". 
Ot)) QUAUFYING ORGANIZATIONS.—Section 513(dX3)(C) (defining 
qualifying organization) is amended— 
(1) by striking out "501(c) (5) or (6)" and inserting in lieu 
thereof "501(c) (3), (4), (5), or (6)", and 
(2) by inserting before the period at the end thereof the 
following: "or which educates persons in attendance regarding 
new developments or products and services related to the 
exempt activities of the organization". 
100 STAT. 2768 
PUBLIC LAW 99-514—OCT. 22, 1986 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to activities in taxable years beginning after the date of the 
enactment of this Act. 
SEC. 1603. TAX EXEMPTION FOR CERTAIN TITLE-HOLDING COMPANIES. 
(a) IN GENERAL.—Section 501(c) (relating to the list of exempt 
organizations) is amended by adding at the end thereof the following 
new paragraph: 
"(25)(A) Any corporation or trust which— 
"(i) has no more than 35 shareholders or beneficiaries, 
"(ii) has only 1 class of stock or beneficial interest, and 
"(iii) is organized for the exclusive purposes of— 
"(I) acquiring real property and holding title to, and 
collecting income from, such property, and 
c 
"(II) remitting the entire amount of income from 
fic yi 
such property (less expenses) to 1 or more organizations 
described in subparagraph (C) which are shareholders 
of such corporation or beneficiaries of such trust. 
"(B) A corporation or trust shall be described in subparagraph 
(A) without regard to whether the corporation or trust is orga-
nized by 1 or more organizations described in subparagraph (C). 
"(C) An organization is described in this subparagraph if such 
organization is— 
"(i) a qualified pension, profit sharing, or stock bonus 
plan that meets the requirements of section 401(a), 
"(ii) a governmental plan (within the meaning of section 
9f!r 
414(d)), 
"(iii) the United States, any State or political subdivision 
fk5 
thereof, or any agency or instrumentality of any of the 
foregoing, 
"(iv) any organization described in paragraph (3), or 
"(v) any organization described in this paragraph. 
"(D) A corporation or trust described in this paragraph must 
permit its shareholders or beneficiaries— 
"(i) to dismiss the corporation's or trust's investment 
adviser, following reasonable notice, upon a vote of the 
shareholders or beneficiaries holding a majority of interest 
in the corporation or trust, and 
i' 
"(ii) to terminate their interest in the corporation or trust 
by either, or both, of the following alternatives, as deter-
„^^, 
mined by the corporation or trust: 
'*" 
"(I) by selling or exchanging their stock in the cor-
poration or interest in the trust (subject to any Federal 
f ^ 
or State securities law) to any organization described in 
subparagraph (C) so long as the sale or exchange does 
not increase the number of shareholders or bene-
ficiaries in such corporation or trust above 35, or 
. -,. 
-. 
"(II) by having their stock or interest redeemed by 
the corporation or trust after the shareholder or bene-
r*' '!> 
ficiary has provided 90 days notice to such corporation 
or trust." 
(b) CLERICAL AMENDMENT.—Subparagraph (C) of section 514(c)(9) 
(relating to real property acquired by a qualified organization) is 
amended— 
(1) by striking out "or" at the end of clause (i), 
(2) by striking out the period following clause (ii) and insert-
ing in lieu thereof "; or", and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2769 
(3) by adding at the end thereof the following new clause: 
"(iii) an organization described in section 501(c)(25)." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31, 1986. 
SEC. 1604. EXCEPTION TO MEMBERSHIP ORGANIZATION DEDUCTION 
RULES. 
(a) IN GENERAL.—Subsection 0?) of section 277 (relating to deduc-
tions incurred by certain membership organizations in transactions 
with members) is amended— 
(1) by striking out "or" at the end of paragraph (2), 
(2) by striking out the period at the end of paragraph (3) and 
inserting in lieu thereof ", or", and 
(3) by adding at the end thereof the following new paragraph: 
"(4) which is engaged primarily in the gathering and distribu-
tion of news to its members for publication." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act. 
SEC. 1605. TAX-EXEMPT STATUS FOR AN ORGANIZATION INTRODUCING 
INTO PUBLIC USE TECHNOLOGY DEVELOPED BY QUALIFIED 
ORGANIZATIONS. 
(a) IN GENERAL.—For purposes of the Internal Revenue Code of 
1986, an organization shall be treated as an organization orga-
nized and operated exclusively for charitable purposes if such 
organization— 
(1) is organized and operated exclusively— 
(A) to provide for (directly or by arranging for and super-
vising the performance by independent contractors)— 
(i) reviewing technology disclosures from qualified 
organizations, 
(ii) obtaining protection for such technology through 
tfii 
if 
patents, copyrights, or other means, and 
(iii) licensing, sale, or other exploitation of such 
technology, 
(B) to distribute the income therefrom, to such qualified 
organizations after paying expenses and other amounts 
as agreed with the originating qualified organizations, 
and 
(C) to 
make 
research 
grants 
to 
such 
qualified 
organizations, 
(2) regularly provides the services and research grants de-
scribed in paragraph (1) exclusively to 1 or more qualified 
organizations, except that research grants may be made to such 
qualified organizations through an organization which is con-
trolled by 1 or more organizations each of which— 
(A) is an organization described in section 501(c)(3) of the 
Internal Revenue Code of 1986 or the income of which is 
excluded from taxation under section 115 of such Code, and 
(B) may be a recipient of the services or research grants 
described in paragraph (1), 
(3) derives at least 80 percent of its gross revenues from 
providing services to qualified organizations located in the same 
State as the State in which such organization has its principal 
office, and 
(4) was incorporated on July 20, 1981. 
100 STAT. 2770 
PUBLIC LAW 99-514—OCT. 22, 1986 
(b) QUALIFIED ORGANIZATIONS.—For purposes of this section, the 
term "qualified organization" has the same meaning given to such 
term by subparagraphs (A) and (B) of section 41(e)(6) (as redesig 
nated by section 231(dX2)) of the Internal Revenue Code of 1986. 
(c) TREATMENT OF INVESTMENT IN A TECHNOLOGY TRANSFER SERV-
ICE ORGANIZATION.— 
(1) IN GENERAL.—A qualified investment made by a private 
foundation in an organization described in subparagraph (C) 
shall be treated as an investment described in section 4944(c) of 
the Internal Revenue Code of 1986 and shall not result in 
imposition of taxes under section 4941, 4943, 4944, 4945, or 
507(c) of such Code. 
(2) DEFINITIONS.—For purposes of this subsection— 
(A) QUAUFIED INVESTMENT.—The term "qualified invest-
ment" means a transfer by a private foundation of— 
(i) all of the patents, copyrights, know-how, and other 
technology or rights thereto of the private foundation, 
and 
(ii) investment assets, net receivables, and cash not 
exceeding $35,000,000, 
to such organization in exchange for debt. 
(B) PRIVATE FOUNDATION.—The term "private founda-
tion" means— 
' 
(i) a nonprofit corporation which was incorporated 
before 1913 which is described in sections 501(cX3) and 
509(a) of such Code, and which is exempt from taxation 
under section 501(a) of such Code, and 
(ii) the principal purposes of which are to support 
research by and to provide technology transfer services 
to organizations described in section 170(b)(lXA) of such 
Code— 
(I) which are exempt from taxation under section 
:•; 
501(a) of such Code, or 
(II) the income of which is excluded from tax-
' > 
ation under section 115 of such Code. 
(C) TECHNOLOGY TRANSFER ORGANIZATION.—The term 
"technology transfer organization" means a corporation 
established after the date of the enactment of this Act— 
(i) which is organized and operated to advance the 
public welfare through the provision of technology 
. • -.. i 
transfer services to research organizations, 
(ii) no part of the net earnings of which inures to the 
benefit of, or is distributable to, any private share-
., "' ' 
holder, individual, or entity, other than a private 
foundation or research organization, 
t 
(iii) which does not participate in, or intervene in 
(including the publishing or distributing of statements) 
? 
any political campaign on behalf of any candidate for 
public office, 
'. - 
(iv) no substantial part of the activities of which is 
. !-,• 
carrying on propaganda, or otherwise attempting, to 
influence legislation, and 
'^ 
-
* 
(v) upon liquidation or dissolution of which all of its 
net assets can be distributed 
only to 
research 
organizations. 
(d) EFFECTIVE DATE.—This section shall take effect on the date of 
the enactment of this Act. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2771 
SEC. 1606. DEFINITION OF GOVERNMENT OFFICIAL. 
(a) IN GENERAL.—Paragraph (5) of section 4946(c) of the Internal 
Revenue Code of 1986 (relating to government official) is amended 
by striking out "$15,000" and inserting in lieu thereof "$20,000". 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to compensation received after December 31,1985. 
SEC. 1607. TRANSITION RULE FOR ACQUISITION INDEBTEDNESS WITH RE-
SPECT TO CERTAIN LAND. 
For purposes of applying section 514(c) of the Internal Revenue 
Code of 1986, with respect to a disposition during calendar year 1986 
or calendar year 1987 of land acquired during calendar year 1984, 
the term "acquisition indebtedness" does not include indebtedness 
incurred in connection with bonds issued after January 1, 1984, and 
before July 19, 1984, on behalf of an organization which is a commu-
nity college and which is described in section 511(a)(2)(B) of such 
Code. 
SEC. 1608. TREATMENT OF CERTAIN AMOUNTS PAID TO OR FOR THE 
BENEFIT OF CERTAIN INSTITUTIONS OF HIGHER EDUCATION. 
(a) IN GENERAL.—Amounts paid by a taxpayer to or for the benefit 
of an institution of higher education described in paragraph (1) or (2) 
of subsection (b) (other than amounts separately paid for tickets) 
which would otherwise qualify as a charitable contribution within 
the meaning of section 170 of the Internal Revenue Code of 1986 
shall not be disqualified because such taxpayer receives the right to 
seating or the right to purchase seating in an athletic stadium of 
such institution. 
flt)) DESCRIBED INSTITUTIONS.— 
(1) An institution is described in this paragraph, if— 
(A) such institution was mandated by a State constitution 
:^^; ''* 
in 1876, 
m :' 
(g) such institution was established by a State legislature 
in March 1881, and is located in a State capital pursuant to 
a statewide election in September 1981, 
(C) the campus of such institution formally opened on 
September 15,1883, and 
(D) such institution is operated under the authority of a 9-
member board of regents appointed by the governor. 
(2) An institution is described in this paragraph if such 
institution has an athletic stadium— 
(A) the plans for renovation of which were approved by a 
board of supervisors in December 1984, and reaffirmed by 
such board in December 1985 and January 1986, and 
(B) the plans for renovation of which were approved by a 
State board of ethics for public employees in February 1986. 
(c) EFFECTIVE DATE.—The provisions of this section shall apply to 
amounts paid in taxable years beginning on or after January 1, 
1984. 
100 STAT. 2772 
PUBLIC LAW 99-514—OCT. 22, 1986 
TITLE XVII—MISCELLANEOUS 
PROVISIONS 
SEC. 1701. EXTENSION AND MODIFICATION OF TARGETED JOBS CREDIT. 
(a) 3-YEAR EXTENSION.—Paragraph (3) of section 51(c) (relating to 
termination) is amended by striking out "December 31, 1985" and 
inserting in lieu thereof "December 31,1988". 
(b) CREDIT FOR FIRST-YEAR WAGES ONLY.— 
(1) IN GENERAL.—Section 51(a) (relating to determination of 
amount of credit) is amended to read as follows: 
"(a) DETERMINATION OF AMOUNT.—For purposes of section 38, the 
amount of the targeted jobs credit determined under this section for 
the taxable year shall be equal to 40 percent of the qualified first-
year wages for such year." 
(2) CONFORMING AMENDMENTS.— 
(A) Subsection (b) of section 51 (defining qualified wages) 
is amended— 
(i) by striking out paragraph (3) and by redesignating 
paragraph (4) as paragraph (3), and 
(ii) by striking out ", and the amount of the 
qualified second-year wages," in paragraph (3) (as so 
redesignated). 
(B) Subparagraph (B) of section 51(d)(12) (relating to quali-
fied summer youth employee) is amended— 
(i) by striking out "50 percent" in clause (i) thereof 
and inserting in lieu thereof "40 percent", 
(ii) by striking out clause (ii) and redesignating 
clauses (iii) and (iv) as clauses (ii) and (iii), respectively, 
(iii) by striking out "subsection (b)(4)" and inserting 
in lieu thereof "subsection (b)(3)" in clause (iii) (as so 
redesignated). 
(c) ELIGIBLE INDIVIDUALS—PERIOD OF EMPLOYMENT.—Subsection (i) 
of section 51 (relating to certain individuals ineligible) is amended 
by adding at the end thereof the following new paragraph: 
"(3) 
INDIVIDUALS 
NOT 
MEETING 
MINIMUM 
EMPLOYMENT 
PERIOD.—No wages shall be taken into account under subsection 
(a) with respect to any individual unless such individual 
either— 
"(A) is employed by the employer at least 90 days (14 days 
y 
in the case of an individual described in subsection (d)(12)), 
or 
. ., 
"(B) has completed at least 120 hours (20 hours in the 
case of an individual described in subsection (d)(12)) of 
services performed for the employer." 
(d) EXTENSION OF AUTHORIZATION.—Paragraph (2) of section 261(f) 
of the Economic Recovery Tax Act of 1981 is amended by striking 
out "fiscal years 1983, 1984, and 1985" and inserting in lieu thereof 
"fiscal years 1983,1984,1985,1986,1987, and 1988". 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
apply with respect to individuals who begin work for the employer 
after December 31,1985. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2773 
SEC. 1702. CERTAIN DIESEL FUEL TAXES MAY BE IMPOSED ON SALES TO 
RETAILERS. 
(a) IN GENERAL.—Section 4041 (relating to imposition of tax on 
special fuels) is amended by adding at the end thereof the following 
new subsection: 
"(n) TAX ON DIESEL FUEL FOR HIGHWAY VEHICLE USE MAY BE 
IMPOSED ON SALE TO RETAILER.—Under regulations prescribed by the 
Secretary— 
"(1) IN GENERAL.—Upon the written consent of the seller, the 
tax imposed by subsection (a)(1)— 
"(A) shall apply to the sale of diesel fuel to a qualified 
retailer (and such sale shall be treated as described in 
subsection (a)(1)(A)), and 
"(B) shall not apply to the sale of diesel fuel by such 
retailer or the use of diesel fuel described in subsection 
(a)(1)(B) if tax was imposed on such fuel under subpara-
graph (A) of this paragraph. 
"(2) 
LIABILITY FOR VIOLATION OF CERTIFICATION.—Notwith-
standing paragraph (1), a qualified retailer shall be liable for 
the tax on liquid described in paragraph (3)(C)(ii) if such liquid is 
used as fuel in a diesel-powered highway vehicle. 
"(3) DEFINITIONS.—For purposes of this subsection— 
"(A) QUALIFIED RETAILER.—The term 'qualified retailer' 
means any retailer— 
"(i) who elects (under such terms and conditions as 
may be prescribed by the Secretary) to have paragraph 
(1) apply to all sales of diesel fuel to such retailer by 
any person, and 
'- -
^ 
"(ii) who agrees to provide a written notice to such 
person that paragraph (1) applies to all sales of diesel 
fuel by such person to such retailer. 
Such election and notice shall be effective for such period or 
• 
periods as may be prescribed by the Secretary. 
"(B) RETAILER.—The term 'retailer' means any person 
who sells diesel fuel for use as a fuel in a diesel-powered 
highway vehicle. Such term does not include any person 
who sells diesel fuel primarily for resale. 
"(C) DIESEL FUEL.— 
"(i) IN GENERAL.—The term 'diesel fuel' means any 
liquid on which tax would be imposed by subsection 
(a)(1) if sold to a person, and for a use, described in 
subsection (a)(1)(A). 
"(ii) EXCEPTION.—A liquid shall not be treated as 
diesel fuel for purposes of this subsection if the retailer 
certifies in writing to the seller of such liquid that such 
liquid will not be sold for use as a fuel in a diesel-
powered highway vehicle. 
"(4) FAILURE TO NOTIFY SELLER.— 
"(A) IN GENERAL.—If a qualified retailer fails to provide 
the notice described in paragraph (3)(A)(ii) to any seller of 
diesel fuel to such retailer— 
"(i) paragraph (1) shall not apply to sales of diesel 
fuel by such seller to such retailer during the period for 
which such failure continues, and 
"(ii) any diesel fuel sold by such seller to such retailer 
during such period shall be treated as sold by such 
71-19A 0 - 89 - 32 : QL. 3 Part3 
100 STAT. 2774 
PUBLIC LAW 99-514—OCT. 22, 1986 
•i -
^ • 
!
* 
retailer (in a sale described in subsection (a)(1)(A)) on 
the date such fuel was sold to such retailer. 
"(B) PENALTY.—For penalty for failing to notify seller, see 
^
4
J , -, 
section 6652(j). 
. fx •: 
• 
.;jc 
"(5) EXEMPTIONS NOT TO APPLY.— 
"(A) IN GENERAL.—No exemption from the tax imposed 
by subsection (a)(1) shall apply to a sale to which paragraph 
(1) or (4)(A) of this subsection applies. 
., ,t 
- 
"(B) CROSS REFERENCE.— 
"For provisions allowing a credit or refund for certain sales and uses of 
fuel, see sections 6416 and 6427." 
(b) PENALTY.—Section 6652 (relating to failure to file certain 
information returns, registration statements, etc.), as amended by 
section 1501(d), is amended by redesignating subsection (j) as subsec-
tion (k) and by inserting after subsection (i) the following new 
subsection: 
"(j) FAILURE TO GIVE WRITTEN NOTICE TO CERTAIN SELLERS OF 
DIESEL FUEL.— 
,.. 
"(1) IN GENERAL.—If any qualified retailer fails to provide the 
notice described in section 4041(n)(3)(A)(ii) to any seller of diesel 
fuel to such retailer, unless it is shown that such failure is due 
to reasonable cause and not to willful neglect, there shall be 
' ;j 
paid, on notice and demand of the Secretary and in the same 
manner as tax, by such retailer with respect to each sale of 
diesel fuel to such retailer by such seller to which section 
4041(n)(4) applies an amount equal to 5 percent of the tax 
imposed by section 4041(a)(1) on such sale by reason of para-
graphs (3) and (4)(A) of section 4041(n). 
,(,; 
"(2) DEFINITIONS.—For purposes of paragraph (1), the terms 
• , 
'qualified retailer' and 'diesel fuel' have the respective mean-
ings given such terms by section 404 l(n)." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to sales after the first calendar quarter beginning more than 
60 days after the date of the enactment of this Act. 
SEC. 
1
7
0
3
. 
GASOLINE 
TAX 
GENERALLY 
COLLECTED 
AT 
TERMINAL 
LEVEL. 
(a) IN GENERAL.—Subpart A of part III of subchapter A of chapter 
32 (relating to manufacturers excise taxes) is amended to read as 
follows: 
i 
• 
"Subpart A—Gasoline 
"Sec. 4081. Imposition of tax. 
' • 
-;H 
"Sec. 4082. Definitions. 
^«j 
"Sec. 4083. Cross references. 
• . 
• 
"SEC. 4081. IMPOSITION OF TAX. 
"(a) TAX IMPOSED.— 
"(1) IN GENERAL.—There is hereby imposed a tax of 9 cents a 
gallon on the earlier o
f
— 
- ^. 
"(A) the removal, or 
- 
* 
"(B) the sale, 
, ; 
of gasoline by the refiner or importer thereof or the terminal 
',,' 
operator. 
"(2) BULK TRANSFER TO TERMINAL OPERATOR.—For purposes of 
paragraph (1), the bulk transfer of gasoline to a terminal opera-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2775 
tor by a refiner or importer shall not be considered a removal or 
sale of gasoline by such refiner or importer. 
"(b) TREATMENT OF REMOVAL OR SUBSEQUENT SALE BY BLENDER OR 
COMPOUNDER.— 
"(1) IN GENERAL.—There is hereby imposed a tax of 9 cents a 
gallon on gasoline removed or sold by the blender or 
compounder thereof. 
"(2) CREDIT FOR TAX PREVIOUSLY PAID.—If— 
aw?,,.,. 
u^^^ ^g^^ jg imposed on the removal or sale of gasoline by 
reason of paragraph (1), and 
"(B) the blender or compounder establishes the amount of 
the tax paid with respect to such gasoline by reason of 
subsection (a), 
the amount of the tax so paid shall be allowed as a credit 
against the tax imposed by reason of paragraph (1). 
"(c) GASOLINE MIXED WITH ALCOHOL AT REFINERY, ETC.— 
"(1) IN GENERAL.—Under regulations prescribed by the Sec-
retary, subsection (a) shall be applied by substituting '3 cents' 
; 
for '9 cents' in the case of the removal or sale of any gasoline for 
use in producing gasohol at the time of such removal or sale. 
For purposes of this paragraph, the term 'gasohol' means any 
mixture of gasoline if at least 10 percent of such mixture is 
alcohol. 
"(2) LATER SEPARATION OF GASOLINE FROM GASOHOL.—If any 
person separates the gasoline from a mixture of gasoline and 
alcohol on which tax was imposed under subsection (a) at a rate 
equivalent to 3 cents a gallon by reason of this subsection (or 
with respect to which a credit or payment was allowed or made 
by reason of section 6427(f)(1)), such person shall be treated as 
the refiner of such gasoline. The amount of tax imposed on any 
sale of such gasoline by such person shall be 5% cents a gallon. 
"(3) ALCOHOL DEFINED.—For purposes of this subsection, the 
term 'alcohol' includes methanol and ethanol but does not 
include alcohol produced from petroleum, natural gas, or coal 
(including peat). Such term does not include alcohol with a proof 
of less than 190 (determined without regard to any added 
denaturants). 
"(4) TERMINATION.—Paragraph (1) shall not apply to any 
removal or sale after December 31, 1992. 
"(d) TERMINATION.—On and after October 1, 1988, the taxes im-
posed by this section shall not apply. 
"SEC. 4082. DEFINITIONS. 
"(a) GASOLINE.—For purposes of this subpart, the term 'gasoline' 
includes, to the extent prescribed in regulations— 
"(1) gasoline blend stocks, and 
"(2) products commonly used as additives in gasoline. 
For purposes of paragraph (1), the term 'gasoline blend stocks' 
means any petroleum product component of gasoline. 
"03) CERTAIN USES DEFINED AS REMOVAL.—If a refiner, importer, 
terminal operator, blender, or compounder uses (other than in the 
production of gasoline or special fuels referred to in section 4041) 
gasoline refined, imported, blended, or compounded by him, such 
use shall for the purposes of this chapter be considered a removal. 
100 STAT. 2776 
PUBLIC LAW 99-514—OCT. 22, 1986 
"SEC. 4083. CROSS REFERENCES. 
"(1) For provisions to relieve farmers from excise tax in the case of gas-
oline used on the farm for farming purposes, see section 6420. 
H'. 
•i(2) For provisions to relieve purchasers of gasoline from excise tax in 
the case of gasoline used for certain nonhighway purposes, used by local 
, 
transit systems, or sold for certain exempt purposes, see section 6421. 
i, 
"(3) For provisions to relieve purchasers of gasoline from excise tax in 
the case of gasoline not used for taxable purposes, see section 6427." 
(b) BOND REQUIREMENTS.— 
(1) IN GENERAL.—Section 4101 is amended to read as follows: 
"SEC. 4101. REGISTRATION AND BOND. 
"(a) REGISTRATION.—Every person subject to tax under section 
4081 shall, before incurring any liability for tax under such section, 
register with the Secretary. 
"Ot)) BOND.—Under regulations prescribed by the Secretary, every 
person who registers under subsection (a) may be required to give a 
bond in such sum as the Secretary determines." 
(2) CLERICAL AMENDMENT.—The table of sections for subpart C 
of part III of subchapter A of chapter 32 is amended by striking 
out the item relating to section 4101 and inserting in lieu 
thereof the following new item: 
"Sec. 4101. Registration and bond." 
(c) GASOLINE SOLD FOR CERTAIN EXEMPT PURPOSES.— 
(1) IN GENERAL.—Section 6421 (relating to gasoline used for 
certain nonhighway purposes or by local transit systems) is 
amended— 
(A) by redesignating subsections (c), (d), (e), (f), (g), and (h) 
as subsections (d), (e), (f), (g), (h), and (i), respectively, and 
(B) by inserting after subsection 0)), the following new 
sulDsection: 
*' "(c) EXEMPT PURPOSES.—If gasoline is sold to any person for any 
purpose described in paragraph (2), (3), (4), or (5) of section 4221(a), 
the Secretary shall pay (without interest) to such person an amount 
equal to the product of the number of gallons of gasoline so sold 
multiplied by the rate at which tax was imposed on such gasoline by 
section 4081." 
(2) CONFORMING AMENDMENTS.— 
(A) Paragraph (1) of section 6421(d) (relating to time for 
y* 
filing claims; period covered), as redesignated by paragraph 
(1) of this subsection, is amended by striking out "and not 
• i ;>: 
more than one claim may be filed under subsection (b)" and 
inserting in lieu thereof "not more than one claim may be 
filed under subsection Qy), and not more than one claim may 
be filed under subsection (c)". 
. 
(B) Section 6421(f) (relating to exempt sales; other pay-
ments or refunds available), as redesignated by paragraph 
(1) of this subsection, is amended by striking out paragraph 
(1) 
and 
redesignating 
paragraphs 
(2) 
and 
(3) 
as 
paragraphs (1) and (2), respectively. 
(C) Subsection (a) of section 4221 (relating to certain tax-
free sales) is amended— 
(i) by inserting "or 4081" after "section 4121" in the 
first sentence, and 
(ii) by striking out "4071, or 4081" in the last sen-
.. , 
tence and inserting in lieu thereof "or 4071". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2777 
(D) The heading for section 6421 is amended to read as 
follows: 
"SEC. 6421. GASOLINE USED FOR CERTAIN NONHIGHWAY PURPOSES, 
USED BY LOCAL TRANSIT SYSTEMS, OR SOLD FOR CERTAIN 
EXEMPT PURPOSES." 
(E) The table of contents for subchapter B of chapter 65 is 
amended by striking out the item relating to section 6421 
and inserting in lieu thereof the following new item: 
"Sec. 6421. Gasoline used for certain nonhighway purposes, used by local 
transit systems, or sold for certain exempt purposes." 
(d) TIME FOR FILING GASOHOL CREDIT.— 
(1) IN GENERAL.—Section 6427(h) (relating to time for filing 
claims; period covered) is amended by adding at the end thereof 
the following new paragraph: 
; 
"(3) SPECIAL RULE FOR GASOHOL CREDIT.— 
"(A) IN GENERAL.—A claim may be filed under subsection 
(f) by any person with respect to gasoline used to produce 
gasohol (as defined in section 4081(c)(1)) for any period— 
"(i) for which $200 or more is payable under such 
subsection (f), and 
"(ii) which is not less than 1 week. 
"(B) PAYMENT OF CLAIM.—Notwithstanding subsection 
(0(1), if the Secretary has not paid pursuant to a claim filed 
under this section within 20 days of the date of the filing of 
such claim, the claim shall be paid with interest from such 
date determined by using the overpayment rate and 
method under section 6621." 
(B) CONFORMING AMENDMENTS.— 
(i) Paragraph (1) of section 6427(h) is amended by 
striking out "(f)". 
(ii) Paragraph (2)(A) of section 6427(h) is amended— 
(I) by inserting "or" at the end of subclause (i), 
(II) by striking out "or" at the end of subclause 
(ii), and 
i0i -;.; 
(Ill) by striking out clause (iii) and "(or clauses)". 
(iii) Paragraph (2)(B) of section 6427(f) is amended by 
striking out "or clause (iii)". 
(iv) Paragraph (2) of section 6427(j) is amended by 
striking out "subsection (h)(2)" and inserting in lieu 
thereof' 'subsection (h)(2) or (h)(3)". 
(e) CREDIT FOR GASOLINE BLEND STOCKS OR ADDITIVES NOT USED 
FOR PRODUCING GASOLINE.— 
(1) IN GENERAL.—Section 6427 (relating to fuels not used for 
,: taxable purposes) is amended— 
(A) by redesignating subsections (h), (i), (j), (k), (1), (m), and 
* 
(n) as subsections (i), (j), (k), (1), (m), (n), and (o), respectively, 
and 
(B) by inserting after subsection (g) the following new 
subsection: 
"(h) GASOLINE BLEND STOCKS OR ADDITIVES NOT USED FOR PRODUC-
ING GASOLINE.—Except as provided in subsection (k), if any gasoline 
blend stock or additive (within the meaning of section 4082(b)) is not 
used by any person to produce gasoline and such person establishes 
that the ultimate use of such gasoline blend stock or additive is not 
to produce gasoline, the Secretary shall pay (without interest) to 
100 STAT. 2778 
PUBLIC LAW 99-514—OCT. 22, 1986 
such person an amount equal to the aggregate amount of the tax 
imposed on such person with respect to such gasoline blend stock or 
additive." 
(2) CONFORMING AMENDMENTS.— 
(A) Subsections (a), (b)(1), (c), (d), (eXD, (0(1), and (gXD of 
section 6427 are each amended by striking out "subsection 
(j)" and inserting in lieu thereof "subsection (k)". 
' 
(B) Subsection (iXD of section 6427 (as redesignated by 
subsection (dXlXA)) is amended by striking out "or (g)" and 
inserting in lieu thereof "(g), or (h)". 
(C) Subsections (iX2XAXi) and (n) of section 6427 (as so 
redesignated) are amended by striking out "and (g)" each 
place it appears and inserting in lieu thereof "(g), and (h)". 
j 
(D) The heading of subsection (n) of section 6427 {as so 
redesignated) is amended by striking out "AND (g)" and 
inserting in lieu thereof "(g), AND (h)". 
(E) Subsection (iX2) of section 6427 (as so redesignated) is 
• 
amended by striking out "subsection (hX2)" and inserting in 
lieu thereof "(i)(2)". 
(F) Section 34(a)(3) is amended by striking out "section 
6427(j)" and inserting in lieu thereof "section 6427(k)". 
(G) Sections 7210, 7603, 7604(b), 7604(cX2), 7605(a), 
7609(cXl), and 7610(c) are amended by striking out "section 
•'-''- 
6427(iX2)" and inserting in lieu thereof "section 64270'X2)". 
if) FLOOR STOCK TAXES.— 
(1) IN GENERAL.—On gasoline subject to tax under section 
: 
4081 of the Internal Revenue Code of 1986 which, on January 1, 
1988, is held by a dealer for sale, and with respect to which no 
tax has been imposed under such section, there is hereby im-
posed a floor stocks tax at the rate of 9 cents a gallon. 
'" 
(2) OVERPAYMENT OF FLOOR STOCKS TAXES.—Section 6416 of 
such Code shall apply in respect of the floor stocks taxes 
imposed by this section, so as to entitle, subject to all provisions 
of such section, any person paying such floor stocks taxes to a 
* credit or refund thereof for any reasons specified in such 
section. 
(3) DUE DATE OF TAXES.—The taxes imposed by this subsection 
shall be paid before February 16,1988. 
(4) TRANSFER OF FLOOR STOCKS TAXES TO HIGHWAY TRUST 
^ FUND.—For purposes of determining the amount transferred to 
the Highway Trust Fund for any period, the taxes imposed by 
this subsection shall be treated as if they were imposed by 
- section 4081 of the Internal Revenue Code of 1986. 
(5) DEFINITIONS AND SPECIAL RULE.—For purposes of this 
subsection— 
(A) DEALER.—The term "dealer" includes a wholesaler, 
M . jobber, distributor, or retailer. 
f-v 
(B) HELD BY A DEALER.—Gasoline shall be considered as 
"held by a dealer" if title thereto has passed to such dealer 
wa? 
(whether or not delivery to him has been made) and if for 
purposes of consumption title to such gasoline or possession 
thereof has not at any time been transferred to any person 
'? 
other than a dealer. 
(C) GASOUNE.—The term "gasoline" has the same mean-
ing given to such term by section 4082(a) of the Internal 
Revenue Code of 1986. 
(g) STUDY OF EVASION OF GASOLINE TAX.— 
- 
^ 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2779 
(1) IN GENERAL.—The Secretary of the Treasury or his dele-
gate shall conduct a study of the incidence of the evasion of the 
gasoline tax. 
(2) REPORT.—The report of the study under paragraph (1) shall 
be submitted, not later than December 31, 1986, to the Commit-
tee on Ways and Means of the House of Representatives and the 
Committee on Finance of the Senate. 
(h) EFFECTIVE DATE.—The amendments made by this section shall 
apply to gasoline removed (as defined in section 4082 of the Internal 
Revenue Code of 1986, as amended by this section) after December 
31,1987. 
SEC. 1704. EXEMPTION FROM SOCIAL SECURITY COVERAGE FOR CER-
TAIN CLERGY. 
(a) CONDITIONS FOR RECEIVING EXEMPTION.— 
(1) IN GENERAL.—Section 1402(e)(1) (relating to exemption 
from tax on self-employment income of certain ministers, mem-
bers of religious orders, and Christian Science practitioners) is 
^ amended by inserting "and, in the case of an individual de-
scribed in subparagraph (A), that he has informed the ordain-
ing, commissioning, or licensing body of the church or order 
' 
that he is opposed to such insurance" after "Act)". 
« 
(2) VERIFICATION 
OF APPLICATION.—Section 
1402(e), 
as 
amended by paragraph (1) of this subsection, is further 
amended— 
(A) by striking out "Any individual" in paragraph (1) and 
inserting in lieu thereof "Subject to paragraph (2), any 
individual", 
(B) by redesignating paragraphs (2) and (3) as paragraphs 
(3) and (4), respectively, and 
(C) by inserting after paragraph (1) the following new 
^ 
paragraph: 
"(2) VERIFICATION OF APPLICATION.—The Secretary may ap-
^ prove an application for an exemption filed pursuant to para-
graph (1) only if the Secretary has verified that the individual 
applying for the exemption is aware of the grounds on which 
f 
the individual may receive an exemption pursuant to this 
: 
subsection and that the individual seeks exemption on such 
grounds. The Secretary (or the Secretary of Health and Human 
Services under an agreement with the Secretary) shall make 
^ such verification by such means as prescribed in regulations." 
(3) EFFECTIVE DATE.—The amendments made by paragraphs 
(1) and (2) shall apply to applications filed after December 31, 
1986. 
03) REVOCATION OF EXEMPTION.— 
(1) IN GENERAL.—Notwithstanding section 1402(e)(3) of the 
Internal Revenue Code of 1986, as redesignated by subsection 
(aX2)(B) of this section, any exemption which has been received 
under section 1402(e)(1) of such Code by a duly ordained, 
commissioned, or licensed minister of a church, a member of a 
religious order, or a Christian Science practitioner, and which is 
effective for the taxable year in which this Act is enacted, may 
be revoked by filing an application therefor (in such form and 
manner, and with such official, as may be prescribed in regula-
tions made under chapter 2 of subtitle A of such Code), if such 
application is filed— 
100 STAT. 2780 
PUBLIC LAW 99-514—OCT. 22, 1986 
(A) before the applicant becomes entitled to benefits 
under section 202(a) or 223 of the Social Security Act (with-
out regard to section 202(j)(l) or 223(b) of such Act), and 
(B) no later than the due date of the Federal income tax 
return (including any extension thereof) for the applicant's 
. first taxable year beginning after the date of the enactment 
of this Act. 
Any such revocation shall be effective (for purposes of chapter 2 
of subtitle A of the Internal Revenue Code of 1986 and title II of 
' the Social Security Act), as specified in the application, either 
with respect to the applicant's first taxable year ending on or 
. after the date of the enactment of this Act or with respect to the 
applicant's first taxable year beginning after such date, and for 
all succeeding taxable years; and the applicant for any such 
revocation may not thereafter again file application for an 
• exemption under such section 1402(e)(1). If the application is 
filed on or after the due date of the Federal income tax return 
3 for the applicant's first taxable year ending on or after the date 
of the enactment of this Act and is effective with respect to that 
taxable year, it shall include or be accompanied by payment in 
f full of an amount equal to the total of the taxes that would have 
been imposed by section 1401 of the Internal Revenue Code of 
1986 with respect to all of the applicant's income derived in that 
taxable year which would have constituted net earnings from 
self-employment for purposes of chapter 2 of subtitle A of such 
i - Code (notwithstanding paragraph (4) or (5) of section 1402(c) of 
: such Code) but for the exemption under section 1402(e)(1) of 
such Code. 
(2) EFFECTIVE DATE.—Paragraph (1) of this subsection shall 
apply with respect to service performed (to the extent specified 
in such paragraph) in taxable years ending on or after the date 
of the enactment of this Act and with respect to monthly 
< insurance benefits payable under title II of the Social Security 
Act on the basis of the wages and self-employment income of 
any individual for months in or after the calendar year in which 
such individual's application for revocation (as described in such 
paragraph) is effective (and lump-sum death payments payable 
under such title on the basis of such wages and self-employment 
income in the case of deaths occurring in or after such calendar 
year). 
SEC. 1705. APPLICABILITY OF UNEMPLOYMENT COMPENSATION TAX TO 
CERTAIN SERVICES PERFORMED FOR CERTAIN INDIAN 
TRIBAL GOVERNMENTS. 
(a) IN GENERAL.—For purposes of the Federal Unemployment Tax 
Act, service performed in the employ of a qualified Indian tribal 
government shall not be treated as employment (within the mean-
ing of section 3306 of such Act) if it is service— 
(1) which is performed— 
(A) before, on, or after the date of the enactment of this 
Act, but before January 1, 1988, and 
(B) during a period in which the Indian tribal government 
is not covered by a State unemployment compensation 
program, and 
•'. 
(2) with respect to which the tax imposed under the Federal 
Unemployment Tax Act has not been paid. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2781 
(b) DEFINITION.—For purposes of this section, the term "qualified 
Indian tribal government" means an Indian tribal government the 
service for which is not covered by a State unemployment compensa-
tion program on June 11, 1986 
SEC. 1706. TREATMENT OF CERTAIN TECHNICAL PERSONNEL. 
(a) IN GENERAL.—Section 530 of the Revenue Act of 1978 is 
amended by adding at the end thereof the following new subsection: 
"(d) EXCEPTION.—This section shall not apply in the case of an 
individual who, pursuant to an arrangement between the taxpayer 
and another person, provides services for such other person as an 
engineer, designer, drafter, computer programmer, systems analyst, 
or other similarly skilled worker engaged in a similar line of work." 
Oa) EFFECTIVE DATE.—The amendment made by this section shall 
apply to remuneration paid and services rendered after December 
31,1986. 
SEC. 1707. EXCLUSION FOR CERTAIN FOSTER CARE PAYMENTS. 
(a) IN GENERAL.—Section 131 (relating to certain foster care pay-
ments) is amended to read as follows: 
"SEC. 
1
3
1
. 
CERTAIN 
FOSTER 
CARE 
PAYMENTS. 
"(a) GENERAL RULE.—Gross income shall not include amounts 
received by a foster care provider during the taxable year as quali-
fied foster care payments. 
"(h) QUALIFIED FOSTER CARE PAYMENT DEFINED.—For purposes of 
this section— 
"(1) IN GENERAL.—The term 'qualified foster care payment' 
means any amount— 
"(A) which is paid by a State or political subdivision 
thereof or by a placement agency which is described in 
section 501(c)(3) and exempt from tax under section 501(a), 
and 
"(B) which is— 
"(i) paid to the foster care provider for caring for a 
qualified foster individual in the foster care provider's 
home, or 
"(ii) a difficulty of care payment. 
"(2) QUALIFIED FOSTER INDIVIDUAL.—The term 'qualified foster 
individual' means any individual who is living in a foster family 
home in which such individual was placed by— 
"(A) an agency of a State or political subdivision thereof, 
or 
"(B) in the case of an individual who has not attained age 
19, an organization which is licensed by a State (or political 
subdivision thereof) as a placement agency and which is 
described in section 501(c)(3) and exempt from tax under 
section 501(a). 
"(3) LIMITATION BASED ON NUMBER OF INDIVIDUALS OVER THE 
AGE OF 18.—In the case of any foster home in which there is a 
qualified foster care individual who has attained age 19, foster 
care payments (other than difficulty of care payments) for any 
period to which such payments relate shall not be excludable 
from gross income under subsection (a) to the extent such 
payments are made for more than 5 such qualified foster 
individuals." 
100 STAT. 2782 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(c) DIFFICULTY OF CARE PAYMENTS.—For purposes of this 
section— 
"(1) DIFFICULTY OF CARE PAYMENTS.—The term 'difficulty of 
care payments' means payments to individuals which are not 
described in subsection (b)(lXB)(i), and which— 
"(A) are compensation for providing the additional care of 
a qualified foster individual which is— 
' 
"(i) required by reason of a physical, mental, or 
' > 
emotional handicap of such individual with respect to 
which the State has determined that there is a need for 
additional compensation, and 
"(ii) provided in the home of the foster care provider, 
and 
"(B) are designated by the payor as compensation 
)- 
described in subparagraph (A). 
"(2) LIMITATION BASED ON NUMBER OF INDIVIDUALS.—In the 
case of any foster home, difficulty of care payments for any 
period to which such payments relate shall not be excludable 
from gross income under subsection (a) to the extent such 
payments are made for more than— 
"(A) 10 qualified foster individuals who have not attained 
age 19, and 
" 
"(B) 5 qualified foster individuals not described in 
subparagraph (A)." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply to taxable years beginning after December 31,1985. 
SEC. 1708. EXTENSION OF RULES FOR SPOUSES OF INDIVIDUALS MISSING 
INACTION. 
(a) EXTENSION OF PROVISIONS.— 
(1) DEFINITION OF SURVIVING SPOUSE.—Subparagraph (B) of 
section 2(a)(3) (relating to special rule where deceased spouse 
was in missing status) is amended to read as follows: 
"(B) except in the case of the combat zone designated for 
g 
purposes of the Vietnam conflict, the date which is 2 years 
after the date designated under section 112 as the date of 
termination of combatant activities in that zone." 
(2) INCOME TAXES OF MEMBERS OF ARMED FORCES ON DEATH.— 
The last sentence of section 692(b) (relating to individuals in 
missing status) is amended to read as follows: "Except in the 
case of the combat zone designated for purposes of the Vietnam 
conflict, the preceding sentence shall not cause subsection (aXD 
to apply for any taxable year beginning more than 2 years after 
the date designated under section 112 as the date of termination 
of combatant activities in a combat zone." 
(3) JOINT RETURNS.—The last sentence of section 6013(f)(1) 
(relating to joint returns where an individual is in missing 
status) is amended by striking out "no such election may be 
made for any taxable year beginning after December 31, 1982" 
and inserting in lieu thereof "such election may be made for 
any taxable year while an individual is in missing status". 
(4) POSTPONEMENT OF TIME FOR PERFORMING CERTAIN ACTS.— 
The last sentence of section 75080?) (relating to application to 
spouse) is amended to read as follows: "Except in the case of the 
combat zone designated for purposes of the Vietnam conflict, 
the preceding sentence shall not cause this section to apply for 
any spouse for any taxable year beginning more than 2 years 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2783 
after the date designated under section 112 as the date of 
termination of combatant activities in a combat zone." 
(b) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31, 1982. 
SEC. 1709. AMENDMENT TO THE REINDEER INDUSTRY ACT OF 1937. 
(a) TAX EXEMPTION FOR REINDEER-RELATED INCOME.—Before the 
period at the end of the first sentence of section 8 of the Act of 
September 1, 1937 (50 Stat. 900, chapter 897), insert the following: 
": Provided, That during the period of the trust, income derived 
directly from the sale of reindeer and reindeer products as provided 
in this Act shall be exempt from Federal income taxation". 
Ot)) EFFECTIVE DATE.—The amendment made by this section shall 
take effect as if originally included in the provision of the Act of 
September 1,1937, to which such amendment relates. 
SEC. 1710. QUALITY CONTROL STUDIES. 
Section 12301 of the Consolidated Omnibus Reconciliation Act of 
1985 is amended— 
(1) by striking out "of the enactment of this Act" in subsection 
(a)(3) and inserting in lieu thereof "the Secretary and the 
National Academy of Sciences enter into the contract required 
under paragraph (2)"; 
(2) by striking out "18 months after the date of the enactment 
of this Act" in subsection (c)(1) and inserting in lieu thereof "6 
months after the date on which the results of both studies 
required under subsection (a)(3) have been reported". 
SEC. 1711. ADOPTION 
ASSISTANCE 
AGREEMENTS 
UNDER 
ADOPTION 
ASSISTANCE PROGRAM: PAYMENT OF NONRECURRING EX-
PENSES RELATED TO ADOPTIONS OF CHILDREN WITH SPE-
CIAL NEEDS. 
(a) IN GENERAL.—Section 473(a) of the Social Security Act is 
amended— 
(1) by redesignating paragraphs (2), (3), and (4) as paragraphs 
(3), (4), and (5), respectively, and 
(2) by striking out all of paragraph (1) through "adopt a child 
who—" and inserting in lieu thereof the following: 
"(1)(A) Each State having a plan approved under this part shall 
enter into adoption assistance agreements (as defined in section 
475(3)) with the adoptive parents of children with special needs. 
"(B) Under any adoption assistance agreement entered into by a 
State with parents who adopt a child with special needs, the State— 
"(i) shall make payments of nonrecurring adoption expenses 
' 
incurred by or on behalf of such parents in connection with the 
adoption of such child, directly through the State agency or 
through another public or nonprofit private agency, in amounts 
determined under paragraph (3), and 
"(ii) in any case where the child meets the requirements of 
paragraph (2), may make adoption assistance payments to such 
parents, directly through the State agency or through another 
public or nonprofit private agency, in amounts so determined. 
"(2) For purposes of paragraph (l)(B)(ii), a child meets the require-
ments of this paragraph if such child— 
(b) 
DEFINITION 
AND PAYMENT 
OF NONRECURRING 
ADOPTION 
EXPENSES.—Section 473(a) of the Social Security Act, as amended by 
100 STAT. 2784 
PUBLIC LAW 99-514—OCT. 22, 1986 
subsection (a) of this section, is further amended by adding at the 
end thereof the following new paragraph: 
"(6)(A) For purposes of paragraph (l)(B)(i), the term 'nonrecurring 
adoption expenses' means reasonable and necessary adoption fees, 
court costs, attorney fees, and other expenses which are directly 
related to the legal adoption of a child with special needs and which 
are not incurred in violation of State or Federal law. 
"(B) A State's payment of nonrecurring adoption expenses under 
an adoption assistance agreement shall be treated as an expenditure 
made for the proper and efficient administration of the State plan 
for purposes of section 474(a)(3)(B)." 
(c) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) The first sentence of section 470 of the Social Security Act 
is amended by striking out "foster care" and all that follows 
down through "title XVI)" and inserting in lieu thereof the 
following: "foster care and transitional independent living pro-
grams for children who otherwise would be eligible for assist-
ance under the State's plan approved under part A and adop-
tion assistance for children with special needs". 
(2) Paragraphs (1) and (11) of section 471(a) of such Act are 
each amended by striking out "adoption assistance payments" 
and inserting in lieu thereof "adoption assistance". 
(3) Section 473(a)(3) of such Act, as redesignated by subsection 
(a)(1) of this section, is amended— 
(A) by striking out "adoption assistance payments" in the 
first sentence and inserting in lieu thereof "payments to be 
made in any case under clauses (i) and (ii) of paragraph 
(1)(B)", and 
(B) by inserting after "the adoption assistance payment" 
the first place it appears in the second sentence the foUow-
'
"
* 
ing: "made under clause (ii) of paragraph (1)(B)". 
(4) Section 473(a)(5) of such Act, as so redesignated, is 
amended by striking out ", pursuant to an interlocutory decree, 
shall be eligible for adoption assistance payments under this 
subsection," and inserting in lieu thereof "in accordance with 
applicable State and local law shall be eligible for such pay-
ments,". 
(5) Section 473(b)(1)(A) of such Act is amended by striking out 
"subsection (a)(1)" and inserting in lieu thereof "subsection 
<a)(2)". 
(6) Section 475(3) of such Act is amended by striking out 
clause (A) and inserting in lieu thereof the following: "(A) 
specifies the nature and amount of any payments, services, and 
assistance to be provided under such agreement, and". 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
apply only with respect to expenditures made after December 31, 
1986. 
TITLE XVUl—TECHNICAL CORRECTIONS 
SEC. 1800. COORDINATION WITH OTHER TITLES. 
For purposes of applying the amendments made by any title of 
this Act other than this title, the provisions of this title shall be 
treated as having been enacted immediately before the provisions of 
such other titles. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2785 
Subtitle A—Amendments Related to the Tax 
Reform Act of 1984 
CHAPTER 1—AMENDMENTS RELATED TO TITLE I OF THE 
ACT 
SEC. 1801. AMENDMENTS RELATED TO DEFERRAL OF CERTAIN TAX 
REDUCTIONS. 
(a) AMENDMENTS RELATED TO SECTION 12 OF THE ACT.— 
(1) ELECTION OUT OF TRANSITIONAL RULES.—Paragraph (1) of 
section 12(c) of the Tax Reform Act of 1984 (relating to finance 
lease provisions) is amended by adding at the end thereof the 
following new sentence: 
"The preceding sentence shall not apply to any property with 
respect to which an election is made under this sentence at such 
', 
time after the date of the enactment of the Tax Reform Act of 
1986 as the Secretary of the Treasury or his delegate may 
prescribe." 
(2) TREATMENT OF CERTAIN FARM FINANCE LEASES.— 
(A) IN GENERAL.—If— 
(i) any partnership or grantor trust is the lessor 
under a specified agreement, 
(ii) such partnership or grantor trust met the require-
ments of section 168(f)(8XCXi) of the Internal Revenue 
Code of 1954 (relating to special rules for finance lesises) 
when the agreement was entered into, and 
(iii) a person other than a C corporation became a 
partner in such partnership (or a beneficiary in such 
trust) before September 26,1985, 
then, for purposes of applying the revenue laws of the 
United States in respect to such agreement, the portion of 
the property allocable to partners (or beneficiaries) not 
described in clause (iii) shall be treated as if it were subject 
to a separate agreement and the portion of such property 
allocable to the partner or beneficiary described in clause 
J 
(iii) shall be treated £is if it were subject to a separate 
agreement. 
(B) SPECIFIED AGREEMENT.—For purposes of subparagraph 
^ 
(A), the term "specified agreement" means an agreement to 
which subparagraph (B) of section 209(d) of the Tax Equity 
and Fiscal Responsibility Act of 1982 applies which is— 
(i) an agreement dated as of December 20, 1982, as 
amended and restated as of February 1,1983, involving 
approximately $8,734,000 of property at December 31, 
1983, 
(ii) an agreement dated as of December 15, 1983, as 
i>v,. ^ *' I 
amended and restated as of January 3, 1984, involving 
approximately $13,199,000 of property at December 31, 
1984, or 
(iii) an agreement dated as of October 25, 1984, as 
amended and restated as of December 1, 1984, involv-
ing approximately $966,000 of property at December 31, 
1984. 
Qy) AMENDMENT RELATED TO SECTION 26 OF THE ACT.—Paragraph 
(2) of section 42510)) (relating to rate of tax on communications 
100 STAT. 2786 
PUBLIC LAW 99-514—OCT. 22, 1986 
services) is amended by inserting "1985," after "1984," in the table 
contained in such section. 
(c) AMENDMENTS RELATED TO SECTION 27 OF THE ACT.— 
(1) Subsection (e) of section 5061 (relating to payment by 
fl electronic fund transfer of alcohol taxes) is amended by adding 
at the end thereof the following new paragraph: 
"(3) CONTROLLED GROUPS.— 
y,# 
.. * 
"(A) IN GENERAL.—In the case of a controlled group of 
corporations, all corporations which are component mem-
bers of such group shall be treated as 1 taxpayer. For 
purposes of the preceding sentence, the term 'controlled 
group of corporations' has the meaning given to such term 
_^; 
by subsection (a) of section 1563, except that 'more than 50 
Hi 
percent' shall be substituted for 'at least 80 percent' each 
place it appears in such subsection. 
"(B) 
CONTROLLED 
GROUPS 
WHICH 
INCLUDE 
NONINCORPORATED PERSONS.—Under regulations prescribed 
by the Secretary, principles similar to the principles of 
subparagraph (A) shall apply to a group of persons under 
common control where 1 or more of such persons is not a 
corporation." 
,^.,.. 
(2) Paragraph (3) of section 5703(b) (relating to payment by 
electronic fund transfer of tobacco taxes) is amended by adding 
at the end thereof the following: "Rules similar to the rules of 
section 5061(e)(3) shall apply to the $5,000,000 amount specified 
in the preceding sentence." 
(3) Paragraph (7) of section 27(b) of the Tax Reform Act of 
1984 (relating to floor stocks tax on distilled spirits) is amended 
by adding at the end thereof the following new subparagraph: 
"(F) TREATMENT OF DISTILLED SPIRITS IN FOREIGN TRADE 
^a^ J.. 
ZONES.—Notwithstanding the Act of June 18, 1934 (48 Stat. 
998, 19 U.S.C. 81a) or any other provision of law, distilled 
spirits which are located in a foreign trade zone on Octo-
ber 1, 1985, shall be subject to the tax imposed by para-
graph (1) and shall be treated for purposes of this subsection 
as held on such date for sale i
f
— 
'''j.^^\'..^. 
"(i) internal revenue taxes have been determined, or 
customs duties liquidated, with respect to such distilled 
j! 
,, 
spirits before such date pursuant to a request made 
under the first proviso of section 3(a) of such Act, or 
• 
"(ii) such distilled spirits are held on such date under 
the supervision of customs pursuant to the second pro-
viso of such section 3(a). 
Under regulations prescribed by the Secretary, provisions 
similar to sections 5062 and 5064 of such Code shall apply to 
distilled spirits with respect to which tax is imposed by 
paragraph (1) by reason of this subparagraph." 
SEC. 1802. AMENDMENTS RELATED TO TAX-EXEMPT ENTITY LEASING 
PROVISIONS. 
(a) AMENDMENTS RELATING TO SECTION 31 OF THE ACT.—r 
(1) TREATMENT OF USE IN UNRELATED TRADE OR BUSINESS.— 
^.. 
Subparagraph (D) of section 168(jX3) (relating tol exception 
where property used in unrelated trade or business) \s amended 
by adding at the end thereof the following new sentence: "For 
j 
purposes of subparagraph (B)(iii), any portion of a property so 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2787 
used shall not be treated as leased to a tax-exempt entity in a 
disqualified lease." 
(2) TREATMENT OF CERTAIN PREVIOUSLY TAX-EXEMPT ORGANIZA-
TIONS.— 
(A) Clause (i) of section 168(jX4XE) (relating to treat-
ment of certain previously tax-exempt organizations) is 
amended— 
(i) by striking out "any property of which such 
organization is the lessee" and inserting in lieu thereof 
"any propertv (other than property held by such 
organization)', and 
(ii) by striking out "first leased to" and inserting in 
lieu thereof "first used by". 
(B) Subclause (I) of section 168(j)(4)(E)(ii) is amended bv 
striking out "of which such organization is the lessee'. 
(C) Subclause (II) of section 168(j)(4)(E)(ii) is amended by 
striking out "is placed in service under the lease" and 
inserting in lieu thereof "is first used by the organization". 
(D) Subparagraph (E) of section 168(j)(4) is amended by 
adding at the end thereof the following new clause: 
"(iv) FIRST USED.—For purposes of this subparagraph, 
property shall be treated as first used by the organiza-
tion— 
"(I) when the property is first placed in service 
under a lease to such organization, or 
"(II) in the case of property leased to (or held by) 
.
i 
. 
a partnership (or other pass-thru entity) in which 
the organization is a member, the later of when 
such property is first used by such partnership or 
pass-thru entity or when such organization is first 
V
5 w ^ 
a member of such partnership or pass-thru entity." 
(E)(i) Paragraph (9) of section 168(j) is amended by re-
designating subparagraph (E) as subparagraph (F) and by 
inserting after 
subparagraph 
(D) the following 
new 
subparagraph: 
"(E) TREATMENT OF CERTAIN TAXABLE ENTITIES.— 
"(i) IN GENERAL.—For purposes of this paragraph, 
except as otherwise provided in this subparagraph, any 
tax-exempt controlled entity shall be treated as a tax-
exempt entity. 
"(ii) ELECTION.—If a tax-exempt controlled entity 
makes an election under this clause— 
"(I) such entity shall not be treated as a tax-
exempt entity for purposes of this paragraph, and 
"(II) any gain recognized by a tax-exempt entity 
on any disposition of an interest in such entity (and 
any dividend or interest received or accrued by a 
tax-exempt entity from such tax-exempt controlled 
entity) shall be treated as unrelated business tax-
able income for purposes of section 511. 
Any such election shall be irrevocable and shall bind 
5 
all tax-exempt entities holding interests in such tax-
exempt controlled entity. For purposes of subclause (II), 
there shall only be taken into account dividends which 
are properly allocable to income of the tax-exempt 
controlled entity which was not subject to tax under 
this chapter. 
100 STAT. 2788 
PUBLIC LAW 99-514—OCT. 22, 1986 
^5 ". *
^ 
"(iii) TAX-EXEMPT CONTROLLED ENTITY.—The term 
'tax-exempt controlled entity' means any corporation 
' (which is not a tax-exempt entity determined without 
regard to this subparagraph and paragraph (4)(E)) if 50 
n 
percent or more (by value) of the stock in such corpora-
^
* -' 
tion is held (directly or through the application of 
section 318 determined without regard to the 50-per-
cent limitation contained in subsection (a)(2)(C) thereof) 
by 1 or more tax-exempt entities." 
• ;«i ^ 
(ii)(I) Except as otherwise provided in this clause, the 
amendment made by clause (i) shall apply to property 
iii 1 
placed in service after September 27, 1985; except that such 
amendment shall not apply to any property acquired pursu-
ant to a binding written contract in effect on such date (and 
at all times thereafter). 
(II) If an election under this subclause is made with 
respect to any property, the amendment made by clause (i) 
shall apply to such property whether or not placed in 
service on or before September 27,1985. 
(F) Clause (i)(I) of section 31(g)(16)(C) of the Tax Reform 
Act of 1984 (defining exempt arbitrage profits) is amended 
by striking out "section 168(j)(4)(E)(i)(I) and inserting in 
lieu thereof "section 168(j)(4)(E)(i)". 
i 
»
*
" 
(G) Clause (i) of section 168(j)(4)(E) is amended by striking 
out "preceding sentence" and inserting in lieu thereof 
f
^ 
"preceding sentence and subparagraph (D)(ii)". 
(3) REPEAL OF OVERLAPPING SECRETARIAL AUTHORITY.—Clause 
(iv) of section 168(j)(5)(C) (relating to property not subject to 
rapid obsolescence may be excluded) is hereby repealed. 
(4) PARTNERSHIP RULES.— 
(A) Paragraph (8) of section 168(j) (relating to tax-exempt 
use of property leased to partnerships, etc., determined at 
partner level) is amended by striking out "and paragraphs 
(4) and (5) of section 48(a)" in the matter preceding subpara-
graph (A). 
(B) Paragraph (9) of section 168(j) (relating to treatment of 
property owned by partnerships, etc.) is amended— 
(i) by striking out "and paragraphs (4) and (5) of 
section 48(a)" in subparagraph (A), and 
(ii) by striking out "loss deduction" in subparagraph 
r ;.' 
(B)(i) and inserting in lieu thereof "loss, deduction". 
(C) Paragraph (5) of section 48(a) (relating to property 
used by governmental units or foreign persons or entities) is 
amended by redesignating subparagraph (D) as subpara-
graph (E) and by inserting after subparagraph (C) the fol-
lowing new subparagraph: 
"(D) SPECIAL RULES FOR PARTNERSHIPS, ETC.—For purposes 
of this paragraph and paragraph (4), rules similar to the 
rules of paragraphs (8) and (9) of section 168(j) shall apply." 
(5) TREATMENT OF CERTAIN AIRCRAFT LEASED TO FOREIGN 
PERSONS.— 
(A) Subsection (a) of section 47 (relating to certain disposi-
tions, etc., of section 38 property) is amended by adding at 
the end thereof the following new paragraph: 
"(9) AIRCRAFT LEASED TO FOREIGN PERSONS OR ENTITIES.— 
t, A
r 
"(A) IN GENERAL.—Any aircraft which was new section 38 
property for the taxable year in which it was placed in 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2789 
service and which is used by any foreign person or entity 
(as defined in section 168(j)(4)(C)) under a qualified lease (as 
defined in paragraph (7XC)) entered into before January 1, 
1990, shall not be treated as ceasing to be section 38 prop-
erty by reason of such use until such aircraft has been so 
used for a period or periods exceeding 3 years in total. 
"(B) RECAPTURE PERIOD EXTENDED.—For purposes of para-
graphs (1) and (5)(B) of this subsection, any period during 
which there was use described in subparagraph (A) of an 
aircraft shall be disregarded." 
(B) Clause (iii) of section 48(aX5)(B) is hereby repealed. 
(6) TREATMENT OF CERTAIN PARTNERSHIPS HAVING SECTION 593 
ORGANIZATION AS MEMBER.—Paragraph (4) of section 46(e) is 
amended by adding at the end thereof the following new 
subparagraph: 
"(D) SPECIAL RULES FOR PARTNERSHIPS, ETC.—For purposes 
of paragraph (1)(A), rules similar to the rules of paragraphs 
(8) and (9) of section 168(j) shall apply." 
(7) TREATMENT OF CERTAIN PROPERTY HELD BY PARTNERSHIPS.— 
(A) Paragraph (9) of section 168(j) (relating to treatment 
of property owned by partnerships, etc.) is amended by 
redesignating subparagraphs (D), (E), and (F) as subpara-
graphs (E), (F), and (G), respectively, and by inserting after 
subparagraph (C) the following new subparagraph: 
"(D) DETERMINATION OF WHETHER PROPERTY USED IN UN-
RELATED TRADE OR BUSINESS.—For purposes of this subsec-
tion, in the case of any property which is owned by a 
partnership which has both a tax-exempt entity and a 
person who is not a tax-exempt entity as partners, the 
determination of whether such property is used in an unre-
lated trade or business of such an entity shall be made 
without regard to section 514." 
(B) Subparagraph (E) of section 168(j)(9) (as redesignated 
by subparagraph (A)) is amended by striking out "and (C)" 
and inserting in lieu thereof "(C), and (D)". 
(8) EXCEPTION FOR QUAUFIED REHABILITATED BUILDINGS LEASED 
TO SECTION 593 ORGANIZATIONS.—Paragraph (4) of section 46(e) 
(relating to special rules where section 593 organization is 
lessee) is amended by adding at the end thereof the following 
new subparagraph: 
"(E) EXCEPTION FOR QUALIFIED REHABILITATED BUILDINGS 
LEASED T
O SECTION 593 ORGANIZATIONS.—Subparagraph (A) 
shall not apply to qualified investment attributable to 
qualified rehabilitation expenditures for any portion of a 
building if such portion of the building would not be tax-
exempt use property (as defined in section 168(j)) if the 
section 593 organization were a tax-exempt entity (as de-
fined in section 168(j)(4))." 
(9) CLERICAL AMENDMENTS.— 
(A) Paragraph (4) of section 48(a) is amended— 
(i) by striking out "514(c)" and inserting in lieu 
thereof "514(b)", and 
(ii) by striking out "5140))" and inserting in lieu 
thereof "514(a)". 
(B) Subclause (I) of section 48(g)(2)(BXvi) is amended by 
striking out "section 168(jX3)" and inserting in lieu thereof 
"section 168(j)". 
100 STAT. 2790 
PUBLIC LAW 99-514—OCT. 22, 1986 
3 
(C) Subparagraph (A) of section 7701(e)(4) is amended by 
' 
adding at the end thereof the following new sentence: 
^ 
"For purposes of this paragraph, the term 'related entity' 
has the same meaning as when used in section 168(j)." 
(10) EFFECTIVE DATE PROVISIONS.— 
(A) Subparagraph (B) of section 31(g)(3) of the Tax Reform 
Act of 1984 is amended by striking out "The amendments 
made by this section" and inserting in lieu thereof "Para-
graph (9) of section 168(j) of the Internal Revenue Code of 
1954 (as added by this section)". 
•>3s 
(g) Effective with respect to property placed in service by 
the taxpayer after July 18, 1984, clause (ii) of section 
31(g)(15)(D) of the Tax Reform Act of 1984 (relating to 
^ certain aircraft) is amended to read as follows: 
"(ii) such aircraft is originally placed in service by 
such foreign person or entity (or its successor in in-
terest under the contract) after May 23, 1983, and 
before January 1,1986." 
(C) Paragraph (4) of section 31(g) of the Tax Reform Act of 
1984 is amended by adding at the end thereof the following 
new subparagraph: 
"(C) SPECIAL RULE FOR CREDIT UNIONS.—In the case of any 
property leased to a credit union pursuant to a written 
,^ 
binding contract with an expiration date of December 31, 
1984, 
which was entered into by such organization on 
August 23,1984— 
2 
"(i) such credit union shall not be treated as an 
r 
agency or instrumentality of the United States; and 
"(ii) clause (ii) of subparagraph (A) shall be applied 
,,. . 
by substituting 'January 1, 1987' for 'January 1, 1985'." 
(D)(i) Clause (ii) of section 31(g)(20)(B) of the Tax Reform 
Act of 1984 (defining substantial improvement) is amended 
by striking out subclauses (I) and (II) and inserting in lieu 
thereof the following: 
f77'5 
"(I) by substituting 'property' for 'building' each 
place it appears therein, 
"(II) by substituting '20 percent' for '25 percent' 
^a« • - 
in clause (ii) thereof, and 
"(III) without regard to clause (iii) thereof." 
(ii) The amendment made by clause (i) shall not apply to 
any property if— 
(I) on or before March 28, 1985, the taxpayer (or a 
predecessor in interest under the contract) or the tax-
exempt entity entered into a written binding contract 
j'-^ 
to acquire, construct, or rehabilitate the property, or 
[ 
iHi* 
(II) the taxpayer or the tax-exempt entity began the 
construction, reconstruction, or rehabilitation of the 
property on or before March 28, 1985. 
(E) Paragraph (4) of section 31(g) of the Tax Reform Act of 
J3; 
• 
1984 is amended by adding at the end thereof the following 
new subparagraphs: 
i. 
' 
r 
"(D) SPECIAL RULE FOR GREENVILLE AUDITORIUM BOARD.— 
For purposes of this paragraph, significant official govern-
' 
mental action taken by the Greenville County Auditorium 
> • ? . Board of Greenville, South Carolina, before May 23, 1983, 
shall be treated as significant official governmental action 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2791 
with respect to the coliseum facility subject to a binding 
contract to lease which was in effect on January 1, 1985. 
"(E) TREATMENT OF CERTAIN HISTORIC STRUCTURES.—If— 
"(i) on June 16, 1982, the legislative body of the local 
governmental unit adopted a bond ordinance to provide 
funds to renovate elevators in a deteriorating building 
owned by the local governmental unit and listed in the 
National Register, and 
"(ii) the chief executive officer of the local govern-
mental unit, in connection with the renovation of such 
- - 
building, made an application on June 1, 1983, to a 
State agency for a Federal historic preservation grant 
'-' 
and made an application on June 17, 1983, to the 
Economic Development Administration of the United 
States Department of Commerce for a grant, 
the requirements of clauses (i) and (ii) of subparagraph (A) 
shall be treated as met." 
(F) Subparagraph (H) of section 31(g)(17) of the Tax 
Reform Act of 1984 is amended by adding at the end thereof 
the following new sentence: "In the case of Clemson Univer-
sity, the preceding sentence applies only to the Continuing 
Education Center and the component housing project." 
j , . ^ 
(G) Subparagraph (L) of section 31(g)(17) of the Tax 
Reform Act of 1984 is amended by adding at the end thereof 
the following: 
"Property is described in this subparagraph if such prop-
erty was leased to a tax-exempt entity pursuant to a lease 
recorded in the Registry of Deeds of Essex County, New 
Jersey, on May 7, 1984, and a deed of such property was 
recorded in the Registry of Deeds of Essex County, New 
Jersey, on May 7,1985." 
(b) AMENDMENTS RELATED TO SECTION 32 OF THE ACT.— 
(1) Subsection (f) of section 168 (relating to special rules) is 
amended— 
(A) by redesignating the paragraph (13) relating to motor 
vehicle operating leases as paragraph (14), and 
(B) by redesignating paragraph (14) as paragraph (15). 
(2) Subsection (c) of section 32 of the Tax Reform Act of 1984 is 
amended by striking out "section 168(f)(13)" and inserting in 
lieu thereof "section 168(0(14)". 
SEC. 1803. AMENDMENTS RELATED TO TREATMENT OF BONDS AND 
OTHER DEBT INSTRUMENTS. 
(a) AMENDMENTS RELATED TO SECTION 41 OF THE ACT.— 
(1) TREATMENT OP SHORT-TERM NONGOVERNMENT OBLIGA-
TIONS.— 
(A) Subsection (a) of section 1271 (relating to treatment of 
' 
amounts received on retirement or sale or exchange of debt 
^ 
instruments) is amended by adding at the end thereof the 
following new paragraph: 
"(4) CERTAIN SHORT-TERM NONGOVERNMENT OBLIGATIONS.— 
j 
"(A) IN GENERAL.—On the sale or exchange of any short-
term nongovernment obligation, any gain realized which 
does not exceed an amount equal to the ratable share of the 
original issue discount shall be treated as ordinary income. 
100 STAT. 2792 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(B) SHORT-TERM NONGOVERNMENT OBLIGATION.—For pur-
poses of this paragraph, the term 'short-term nongovern-
ment obligation' means any obligation which— 
"(i) has a fixed maturity date not more than 1 year 
from the date of the issue, and 
"(ii) is not a short-term Government obligation (as 
defined in paragraph (3)(B) without regard to the last 
sentence thereof. 
- 
- • 
"(C) RATABLE SHARE.—For purposes of this paragraph, 
except as provided in subparagraph (D), the ratable share of 
the original issue discount is an amount which bears the 
same ratio to such discount as— 
"(i) the number of days which the taxpayer held the 
; . f 
obligation, bears to 
"(ii) the number of days after the date of original 
< J 
issue and up to (and including) the date of its maturity. 
"(D) 
ELECTION OF ACCRUAL ON BASIS OF CONSTANT IN-
TEREST RATE.—At the election of the taxpayer with respect 
to any obligation, the ratable share of the original issue 
discount is the portion of the original issue discount accru-
ing while the taxpayer held the obligation determined 
(under regulations prescribed by the Secretary) on the basis 
of-
"(i) the yield to maturity based on the issue price of 
the obligation, and 
"(ii) compounding daily. 
Any election under this subparagraph, once made with 
respect to any obligation, shall be irrevocable." 
(B) Paragraph (3) of section 1283(d) is amended by strik-
ing out "section 1271(a)(3)" and inserting in lieu thereof 
"paragraphs (3) and (4) of section 1271(a)". 
(2) ELECTION OF ACCRUAL ON BASIS OF CONSTANT INTEREST RATE 
FOR SHORT-TERM GOVERNMENT OBLIGATIONS.— 
(A) IN GENERAL.—Paragraph (3) of section 1271(a) (relat-
ing to certain short-term Government obligations) is 
r>.' . 
amended by adding at the end thereof the following new 
subparagraph: 
"(E) ELECTION OF ACCRUAL ON BASIS OF CONSTANT INTEREST 
RATE.—At the election of the taxpayer with respect to any 
obligation, the ratable share of the acquisition discount is 
the portion of the acquisition discount accruing while the 
taxpayer held the obligation determined (under regulations 
Q i/ - 
prescribed by the Secretary) on the basis of— 
"(i) the taxpayer's yield to maturity based on the 
taxpayer's cost of acquiring the obligation, and 
. . . 
"(ii) compounding daily. 
An election under this subparagraph, once made with re-
spect to any obligation, shall be irrevocable." 
(B) TECHNICAL AMENDMENT.—Subparagraph (D) of section 
.^ 
1271(a)(3) is amended by striking out "this paragraph" and 
inserting in lieu thereof "this paragraph, except as pro-
vided in subparagraph (E)". 
(3) DEFINITION OF SHORT-TERM GOVERNMENT OBLIGATION.— 
Subparagraph (B) of section 1271(a)(3) (defining short-term 
Government obligation) is amended to read as follows: 
"(B) SHORT-TERM GOVERNMENT OBLIGATION.—For purposes 
' 
of this paragraph, the term 'short-term Government obliga-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2793 
tion' means any obligation of the United States or any of its 
possessions, or of a State or any political subdivision 
thereof, or of the District of Columbia, which has a fixed 
maturity date not more than 1 year from the date of issue. 
Such term does not include any tax-exempt obligation." 
(4) DEDUCTION OF ORIGINAL ISSUE DISCOUNT ON SHORT-TERM 
OBLIGATIONS.—Paragraph (2) of section 163(e) (relating to origi-
nal issue discount) is amended by adding at the end thereof the 
following new subparagraph: 
"(C) SHORT-TERM OBUGATIONS.—In the case of an obligor 
of 
a 
short-term 
obligation 
(as 
defined 
in 
section 
1283(aXl)(A)) who uses the cash receipts and disbursements 
method of accounting, the original issue discount (and any 
other interest payable) on such obligation shall be deduct-
ible only when paid." 
(5) TREATMENT OF CERTAIN TRANSFERS OF MARKET DISCOUNT 
BONDS.—Paragraph (1) of section 1276(d) (relating to special 
rules) is amended by striking out "and" at the end of subpara-
graph (A) and by inserting after subparagraph (B) the following 
new subparagraph: 
"(C) paragraph (3) of section 12450t)) shall be applied as if 
it did not contain a reference to section 351, and". 
(6) TREATMENT OF BONDS ACQUIRED AT ORIGINAL ISSUE FOR 
PURPOSES OF MARKET DISCOUNT RULES.—Paragraph (1) of section 
1278(a) (defining market discount bond) is amended by adding at 
the end thereof the following new subparagraph: 
"(C) TREATMENT OF BONDS ACQUIRED AT ORIGINAL ISSUE.— 
"(i) IN GENERAL.—Except as otherwise provided in 
this subparagraph or in regulations, the term 'market 
discount bond' shall not include any bond acquired by 
the taxpayer at its original issue. 
"(ii) TREATMENT OF BONDS ACQUIRED FOR LESS THAN 
ISSUE PRICE.—Clause (i) shall not apply to any bond i
f
— 
"(I) the basis of the taxpayer in such bond is 
determined under section 1012, and 
"(II) such basis is less them the issue price of such 
bond determined under subpart A of this part. 
"(iii) 
BONDS 
ACQUIRED 
IN 
CERTAIN 
REORGANIZA-
TIONS.—Clause (i) shall not apply to any bond issued 
pursuant to a plan of reorganization (within the mean-
ing of section 368(aXl)) in exchange for another bond 
having market discount. Solely for purposes of section 
1276, the preceding sentence shall not apply if such 
other bond was issued on or before July 18, 1984 (the 
date of the enactment of section 1276) and if the bond 
issued pursuant to such plan of reorganization has the 
same term and the same interest rate as such other 
bond had. 
"(iv) TREATMENT OF CERTAIN TRANSFERRED BASIS PROP-
ERTY.—For purposes of clause (i), if the adjusted basis of 
any bond in the hands of the taxpayer is determined by 
reference to the adjusted basis of such bond in the 
hands of a person who acquired such bond at its origi-
nal issue, such bond shall be treated as acquired by the 
taxpayer at its original issue." 
(7) TREATMENT OF CERTAIN STRIPPED BONDS OR STRIPPED COU-
PONS.—Paragraph (1) of section 12810b) (relating to short-term 
100 STAT. 2794 
PUBLIC LAW 99-514—OCT. 22, 1986 
obligations to which section applies) is amended by striking out 
r "or" at the end of subparagraph (D), by striking out the period 
'; at the end of subparagraph (E) and inserting in lieu thereof 
f' ", or", and by adding at the end thereof the following new 
subparagraph: 
'*' 
"(F) is a stripped bond or stripped coupon held by the 
person who stripped the bond or coupon (or by any other 
person whose basis is determined by reference to the basis 
in the hands of such person)." 
(8) ACCRUAL OF INTEREST PAYMENTS ON CERTAIN SHORT-TERM 
OBUGATIONS.— 
(A) Effective with respect to obligations acquired after 
^,. 
September 27, 1985, subsection (a) of section 1281 (relating 
to current inclusion in income of discount on certain short-
term obligations) is amended to read as follows: 
"(a) GENERAL RULE.—In the case of any short-term obligation to 
which this section applies, for purposes of this title— 
"(1) there shall be included in the gross income of the holder 
an amount equal to the sum of the daily portions of the acquisi-
*
t tion discount for each day during the taxable year on which 
such holder held such obligation, and 
4 
"(2) any interest payable on the obligation (other than in-
H terest taken into account in determining the amount of the 
acquisition discount) shall be included in gross income as it 
accrues." 
(B) Subsection (a) of section 1282 (relating to deferral of 
interest deduction allocable to accrued discount) is amended 
to read as follows: 
"(a) GENERAL RULE.—Except as otherwise provided in this section, 
the net direct interest expense with respect to any short-term 
obligation shall be allowed as a deduction for the taxable year only 
to the extent such expense exceeds the sum o
f
— 
"(1) the daily portions of the acquisition discount for each day 
during the taxable year on which the taxpayer held such obliga-
tion, and 
"(2) the amount of any interest payable on the obligation 
(other than interest taken into account in determining the 
amount of the acquisition discount) which accrues during the 
taxable year while the taxpayer held such obligation (and is not 
included in the gross income of the taxpayer for such taxable 
year by reason of the taxpayer's method of accounting)." 
(9) TREATMENT OF TRANSFERS OF LAND BETWEEN RELATED PAR-
TIES.—In the case of any sale or exchange before July 1, 1985, to 
which section 483(f) of the Internal Revenue Code of 1954 (as in 
effect on the day before the date of the enactment of Public Law 
99-121) applies, such section shall be treated as providing that 
the discount rate to be used for purposes of section 483(c)(1) of 
such Code shall be 6 percent, compounded semiannually. 
(10) 
CLARIFICATION OF TREATMENT OF DEBT INSTRUMENTS 
ISSUED F
O
R PUBUCLY T
R
A
D
E
D PROPERTY.—Subparagraph (B) of 
section 12730t))(3) (relating to debt instruments issued for prop-
erty where there is public trading) is amended to read as 
follows: 
"(BXi) is issued for stock or securities which are traded on 
an established securities market, or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2795 
"(ii) to the extent provided in regulations, is issued for 
property (other than stock or securities) of a kind regularly 
traded on an established market,". 
(11) BOND PREMIUMS AMORTIZED AT CONSTANT RATE, ETC.— 
(A) IN GENERAL.—Paragraph (3) of section 171(b) (relating 
to amortizable bond premiums) is amended to read as fol-
lows: 
"(3) METHOD OF DETERMINATION.— 
"(A) IN GENERAL.—Except as provided in regulations pre-
scribed by the Secretary, the determinations required 
under paragraphs (1) and (2) shall be made on the basis of 
the taxpayer's yield to maturity determined by— 
"(i) using the taxpayer's basis (for purposes of deter-
mining loss on sale or exchange) of the obligation, and 
"(ii) compounding at the close of each accrual period 
(as defined in section 1272(a)(5)). 
"(B) SPECIAL RULE WHERE EARLIER CALL DATE IS USED.— 
For purposes of subparagraph (A), if the amount payable on 
an earlier call date is used under paragraph (l)(B)(ii) in 
determining the amortizable bond premium attributable to 
the period before the earlier call date, such bond shall be 
treated as maturing on such date for the amount so payable 
and then reissued on such date for the amount so payable." 
(B) AMORTIZABLE BOND PREMIUM RULES TO APPLY TO 
OBUGATIONS ISSUED BY INDIVIDUALS, ETC.—Subsection (d) of 
section 171 (defining bond) is amended by striking out 
"issued by any corporation and bearing interest (including 
any like obligation issued by a government or political 
subdivision thereof),". 
(C) EFFECTIVE DATE.— 
(i) The amendments made by this paragraph shall 
apply to obligations issued after September 27, 1985. 
(ii) In the case of a taxpayer with respect to whom an 
election is in effect on the date of the enactment of this 
Act under section 171(c) of the Internal Revenue Code 
of 1954, such election shall apply to obligations issued 
after September 27, 1985, only if the taxpayer chooses 
(at such time and in such manner as may be prescribed 
by the Secretary of the Treasury or his delegate) to 
have such election apply with 
respect to such 
obligations. 
(12) CLARIFICATION OF AMOUNT OF AMORTIZABLE BOND PRE-
IIUM.— 
(A) IN GENERAL.—Subsection (b) of section 171 (defining 
amortizable bond premium) is amended by adding at the 
end thereof the following new paragraph: 
"(4) TREATMENT OF CERTAIN BONDS ACQUIRED IN EXCHANGE FOR 
THER PROPERTY.— 
"(A) I N GENERAL.—If— 
"(i) a bond is acquired by any person in exchange for 
other property, and 
f 
"(ii) the basis of such bond is determined (in whole or 
in part) by reference to the basis of such other 
property, 
for purposes of applying this subsection to such bond while 
held by such person, the basis of such bond shall not exceed 
its fair market value immediately after the exchange. A 
100 STAT. 2796 
PUBLIC LAW 99-514—OCT. 22, 1986 
similar rule shall apply in the case of such bond while held 
by any other person whose basis is determined (in whole or 
in part) by reference to the basis in the hands of the person 
referred to in clause (i). 
"(B) SPECIAL RULE WHERE BOND EXCHANGED IN REORGA-
NIZATION.—Subparagraph (A) shall not apply to an ex-
change by the taxpayer of a bond for another bond if such 
exchange is a part of a reorganization (as defined in section 
.« 
368). If any portion of the basis of the taxpayer in a bond 
transferred in such an exchange is not taken into account 
in determining bond premium by reason of this paragraph, 
such portion shall not be taken into account in determining 
the amount of bond premium on any bond received in the 
exchange." 
(B) EFFECTIVE DATE.—The amendment made by subpara-
graph (A) shall apply to exchanges after May 6, 1986. 
(13) 
SPECIAL 
RULE 
FOR BONDS WITH 
PARTIAL 
PRINCIPAL 
PAYMENTS.— 
(A) TREATMENT OF ACCRUED MARKET DISCOUNT.— 
(i) Subsection (a) of section 1276 (relating to disposi-
tion gain representing accrued market discount treated 
as ordinary income) is amended by redesignating para-
graph (3) as paragraph (4) and by inserting after para-
T 
graph (2) the following new paragraph: 
"(3) TREATMENT OF PARTIAL PRINCIPAL PAYMENTS.— 
"(A) IN GENERAL.—Any partial principal payment on a 
market discount bond shall be included in gross income as 
ordinary income to the extent such payment does not 
exceed the accrued market discount on such bond. 
"(B) ADJUSTMENT.—If subparagraph (A) applies to any 
partial principal payment on any market discount bond, for 
purposes of applying this section to any disposition of (or 
subsequent partial principal payment on) such bond, the 
amount of accrued market discount shall be reduced by the 
amount of such partial principal payment included in gross 
income under subparagraph (A)." 
(ii) Paragraph (4) of section 1276(a) (as redesignated 
by subparagraph (A)) is amended by striking out 
"under paragraph (1)" and inserting in lieu thereof 
"under paragraph (1) or (3)". 
(iii) Subsection (b) of section 1276 is amended by 
adding at the end thereof the following new paragraph: 
"SPECIAL RULE WHERE PARTIAL PRINCIPAL PAYMENTS. In 
the 
case of a bond the principal of which may be paid in 2 or more 
payments, the amount of accrued market discount shall be 
determined under regulations prescribed by the Secretary" 
(B) 
COORDINATION WITH TAX TREATMENT OF STRIPPED 
BONDS.— 
(i) Paragraph (1) of section 1286(b) (relating to tax 
1 ;t 
treatment of person stripping bond) is amended to read 
as follows: 
"(1) such person shall include in gross income an amount 
equal to the sum of— 
"(A) the interest accrued on such bond while held by such 
person and before the time such coupon or bond was dis-
posed of (to the extent such interest has not theretofore 
been included in such person's gross income), and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2797 
"(B) the accrued market discount on such bond deter-
mined as of the time such coupon or bond was disposed of 
(to the extent such discount has not theretofore been in-
cluded in such person's gross income),". 
(ii) Paragraph (2) of section 1286(b) is amended by 
striking out "the amount of the accrued interest de-
scribed in paragraph (1)" and inserting in lieu thereof 
"the amount included in gross income under paragraph 
(1)". 
(C) EFFECTIVE DATE.—The amendments made by this 
paragraph shall apply to obligations acquired after the date 
of the enactment of this Act. 
(14) CLERICAL AMENDMENTS.— 
(A) Subparagraph (A) of section 1274(cX4) is amended by 
striking out "FOR LESS THAN $1,000,000" in the subpara-
i 
graph heading and inserting in lieu thereof "FOR $1,000,000 
O
R LESS". 
(B) Paragraph (1) of section 483(d) is amended by striking 
out "any debt instrument to which section 1272 applies" 
and inserting in lieu thereof "any debt instrument for 
which an issue price is determined under section 1273(b) 
(other than paragraph (4) thereof) or section 1274". 
(C) Clause (iii) of section 6049(bX5XB) is amended by 
striking out "section 1232(bXl)" and inserting in lieu 
thereof "section 1273(a)". 
(b) AMENDMENTS RELATED TO SECTION 44 OF THE ACT.— 
(1) CLARIFICATION OF TRANSITIONAL RULE FOR PURPOSES OF 
IMPUTED INTEREST RULES.—Paragraph (4) of section 44(b) of the 
Tax Reform Act of 1984 (relating to special rules for sales before 
July 1, 1985), as added by section 2 of Public Law 98-612, is 
amended— 
(A) by striking out "before July 1, 1985" in subparagraph 
(A) and inserting in lieu thereof "^ter December 31, 1984, 
and before July 1,1985", 
(B) by striking out "BEFORE JULY i, 1985" in the para-
graph heading and inserting in lieu thereof "AFTER DECEM-
•'i 
BER 31, 1984, AND BEFORE JULY 1, 1985", and 
(C) by adding at the end thereof the following new 
subparagraph: 
"(G) CLARIFICATION OF APPUCATION OF THIS PARAGRAPH, 
ETC.—This paragraph and parsigraphs (5), (6), and (7) shall 
apply only in the case of sales or exchanges to which section 
1274 or 483 of the Internal Revenue Code of 1954 (as 
amended by section 41) applies." 
(2) CLARIFICATION OF INTEREST ACCRUAL, ETC.—Subparagraph 
(A) of section 44(bX3) of the Tax Reform Act of 1984 is amended 
by striking out "and before January 1, 1985," each place it 
appears. 
(3) EXCEPTION FOR BINDING CONTRACTS.—Subparagraph (B) of 
section 44(bX3) of the Tax Reform Act of 1984 is amended to 
read £is follows: 
"(B) EXCEPTION FOR BINDING CONTRACTS.— 
"(i) Subparagraph (AXiXD shall not apply to any sale 
or exchange pursuant to a written contract which was 
^ 
binding on March 1, 1984, and at all times thereafter 
before the sale or exchange. 
100 STAT. 2798 
PUBLIC LAW 99-514—OCT. 22, 1986 
, vf ' - 
"(ii) Subparagraph (A)(i)(II) shall not apply to any 
%. 
sale or exchange pursuant to a written contract which 
ft'. 
was binding on June 8, 1984, and at all times thereafter 
before the sale or exchange." 
(4) CLERICAL AMENDMENT.—Clause (ii) of section 44(b)(6)(B) of 
the Tax Reform Act of 1984 (as added by section 2 of Public Law 
98-612) is amended by striking out "greater than" and inserting 
, in lieu thereof "not greater than". 
(5) CLARIFICATION OF EFFECTIVE DATE FOR REPEAL OF CAPITAL 
,, ASSET REQUIREMENT.—Subsection (g) of section 44 of the Tax 
Reform Act of 1984 is amended by striking out "before Decem-
ber 31, 1984" and inserting in lieu thereof "on or before Decem-
ber 31, 1984". 
SEC. 1804. AMENDMENTS RELATED TO CORPORATE PROVISIONS. 
(a) AMENDMENT RELATED TO SECTION 51 OF THE ACT.—Subsection 
(a) of section 246A (relating to dividends received deduction reduced 
where portfolio stock is debt financed) is amended— 
(1) by striking out "or 245" and inserting in lieu thereof "or 
245(a)", and 
(2) by adding at the end thereof the following new sentence: 
"The preceding sentence shall be applied before any determina-
tion of a ratio under paragraph (1) or (2) of section 245(a)." 
(b) AMENDMENTS RELATED TO SECTION 53 AND SECTION 54 OF THE 
ACT.— 
(1) AMENDMENTS TO SECTION 246.— 
(A) Subparagraph (A) of section 246(c)(1) (relating to 
o 
exclusion of certain dividends) is amended to read as 
;,. 
follows: 
^1 
"(A) Which is held by the taxpayer for 45 days or less, 
or". 
j-i. 
(B) Paragraph (4) of section 246(c) (relating to holding 
^ 
period reduced for periods where risk of loss diminished) is 
amended by striking out "determined under paragraph (3)" 
and inserting in lieu thereof "determined for purposes of 
,:^ 
this subsection". 
(C) The amendments made by this paragraph shall apply 
^, 
to stock acquired after March 1,1986. 
(2) EFFECTIVE DATE FOR RELATED PERSON PROVISIONS.—Para-
graph (3) of section 53(e) of the TEIX Reform Act of 1984 (relating 
to effective date for related person provisions) is amended to 
read as follows: 
^r "(3) RELATED PERSON PROVISIONS.— 
"(A) IN GENERAL.—Except as otherwise provided in 
,. 
subparagraph (B), the amendment made by subsection (c) 
^ 
shall take effect on July 18,1984. 
f
; 
(B) SPECIAL RULE FOR PURPOSES OF SECTION 265(2).—The 
amendment made by subsection (c) insofar as it relates to 
, 
section 265(2) of the Internal Revenue Code of 1954 shall 
^^ 
apply to— 
"(i) term loans made after July 18, 1984, and 
"(ii) demand loans outstanding after July 18, 1984 
sise Y 
(other than any loan outstanding on July 18, 1984, and 
gj 
' 
repaid before September 18, 1984). 
J 
"(C) TREATMENT OF RENEGOTIATIONS, ETC.—For purposes 
of this paragraph, any loan renegotiated, extended, or re-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2799 
vised after July 18, 1984, shall be treated as a loan made 
after such date. 
"(D) DEFINITION OF TERM AND DEMAND LOANS.—For pur-
poses of this paragraph, the terms 'demand loan' and 'term 
loan' have the respective meanings given such terms by 
paragraphs (5) and (6) of section 7872(f) of the Internal 
Revenue Code of 1954, except that the second sentence of 
such paragraph (5) shall not apply." 
(3) SPECIAL RULE FOR CERTAIN DISTRIBUTIONS BEFORE JANUARY 
1, 1988.—Paragraph (3) of section 54 of the Tax Reform Act of 
1984 (relating to exceptions for distributions before January 1, 
1985, to 80-percent corporate shareholders) is amended by 
adding at the end thereof the following new subparagraph: 
"(D) 
SPECIAL RULE FOR CERTAIN DISTRIBUTIONS BEFORE 
JANUARY 1, 1988.— 
"(i) IN GENERAL.—In the case of a transaction to 
which this subparagraph applies, subparagraph (A) 
shall be applied by substituting '1988' for '1985' and the 
amendments made by subtitle D of title VI shall not 
;; 
apply. 
"(ii) TRANSACTION TO WHICH SUBPARAGAPH APPLIES.— 
This subparagraph apples to a transaction in which a 
Delaware corporation which was incorporated on May 
31, 1927, and which was acquired by the transferee on 
December 9, 1968, transfers to the transferee stock in a 
corporation— 
"(I) with respect to which such Delaware cor-
poration is a 100-percent corporate shareholder, 
and 
"(II) which is a Tennessee corporation which was 
incorporated on October 5, 1981, and which is a 
successor to an Indiana corporation which was 
incorporated on June 28, 1946, and acquired by the 
transferee on December 9,1968." 
(c) AMENDMENTS RELATED TO SECTION 55 OF THE ACT.— 
(1) Clause (ii) of section 852(b)(4)(B) (relating to losses attrib-
utable to exempt-interest dividend) is amended by striking out 
"for less than 31 days" and inserting in lieu thereof "for 6 
months or less". 
(2) Subparagraph (C) of section 8520aX4) (relating to deter-
mination of holding periods) is amended to read as follows: 
"(C) DETERMINATION OF HOLDING PERIODS.—For purposes 
of this paragraph, the rules of paragraphs (3) and (4) of 
IS I 
section 246(c) shall apply in determining the period for 
which the taxpayer has held any share of stock; except that 
r
^ ' 
'6 months' shall be substituted for each number of days 
specified in subparagraph (B) of section 246(c)(3)." 
•*'- (3) Subparagraph (D) of section 8520t))(4) (relating to losses 
incurred under a periodic liquidation plan) is amended by strik-
ing out "subparagraph (A)" and inserting in lieu thereof "sub-
paragraphs (A) and (B)". 
(4) Paragraph (4) of section 852(b) is amended by adding at the 
end thereof the following new subparagraph: 
"(E) AUTHORITY TO SHORTEN REQUIRED HOLDING PERIOD.— 
In the case of a regulated investment company which regu-
larly distributes at least 90 percent of its net tax-exempt 
interest, the Secretary may by regulations prescribe that 
100 STAT. 2800 
PUBLIC LAW 99-514—OCT. 22, 1986 
5
*
t f 
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) The paragraph heading for paragraph (4) of section 852(b) 
is amended by striking out "LESS THAN 31 DAYS" and inserting in 
lieu thereof "6 MONTHS OR LESS". 
(6) The amendments made by this subsection shall apply to 
stock with respect to which the taxpayer's holding period begins 
after March 28,1985. 
(d) AMENDMENT RELATED TO SECTION 58 OF THE ACT.— 
(1) IN GENERAL.—Paragraph (1) of section 562(b) (relating to 
distributions in liquidation) is amended by adding at the end 
thereof the following new sentence: "Except to the extent pro-
vided in regulations, the preceding sentence shall not apply in 
the case of any mere holding or investment company which is 
not a regulated investment company." 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
shall apply to distributions after September 27,1985. 
(e) AMENDMENTS RELATED TO SECTION 60 OF THE ACT.— 
(1) TREATMENT OF CERTAIN REDEMPTION AND LIQUIDATION 
RIGHTS.—Subparagraph (C) of section 1504(a)(4) (relating to cer-
tain preferred stock not treated as stock) is amended to read as 
follows: 
"(C) has redemption and liquidation rights which do not 
exceed the issue price of such stock (except for a reasonable 
redemption or liquidation premium), and". 
(2) TREATMENT OF CERTAIN CORPORATIONS AFFILIATED ON JUNE 
22, 1984.—Paragraph (2) of section 60(b) of the Tax Reform Act 
of 1984 (relating to special rule for corporations affiliated on 
June 22, 1984) is amended by adding at the end thereof the 
following new sentence: "The preceding sentence shall cease to 
apply as of the first day after June 22, 1984, on which such 
corporation does not qualify as a member of such group under 
section 1504(a) of the Internal Revenue Code of 1954 (as in effect 
on the day before the date of the enactment of this Act)." 
(3) TREATMENT OF CERTAIN SELL-DOWNS AFTER JUNE 22,1984.— 
Paragraph (3) of section 600)) of the Tax Reform Act of 1984 
(relating to special rule not to apply to certain sell-downs after 
June 22,1984) is amended to read as follows: 
"(3) SPECIAL RULE NOT TO APPLY TO CERTAIN SELL-DOWNS AFTER 
JUNE 22, 1984.—If— 
/ 
"(A) the requirements of paragraph (2) are satisfied with 
respect to a corporation, 
"(B) more than a de minimis amount of the stock of such 
corporation— 
it 
"(i) is sold or exchanged (including in a redemption), 
or 
Jill 
"(ii) is issued, 
after June 22, 1984 (other than in the ordinary course of 
- ' 
business), and 
"(C) the requirements of the amendment made by subsec-
tion (a) are not satisfied after such sale, exchange, or issu-
ance, 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2801 
then the amendment made by subsection (a) shall apply for 
purposes of determining whether such corporation continues to 
be a member of the group. The preceding sentence shall not 
apply to any transaction if such transaction does not reduce the 
percentage of the fair market value of the stock of the corpora-
tion referred to in the preceding sentence held by members of 
the group determined without regard to this paragraph." 
(4) TREATMENT OF CERTAIN CORPORATIONS AFFIUATED ON JUNE 
22, 1984, ETC.—Subsection (b) of section 60 of the Tax Reform 
Act of 1984 is amended by striking out paragraph (5) and 
inserting in lieu thereof the following new paragraphs: 
"(5) NATIVE CORPORATIONS.— 
"(A) In the case of a Native Corporation established 
under the Alaska Native Claims Settlement Act (43 U.S.C. 
1601 et seq.), or a corporation all of whose stock is owned 
directly by such a corporation, during any taxable year 
(beginning after the effective date of these amendments and 
; 
before 1992), or any part thereof, in which the Native 
Corporation is subject to the provisions of section 7(h)(1) of 
such Act (43 U.S.C. 1606(h)(1))— 
"(i) the amendment made by subsection (a) shall not 
apply, and 
' 
"(ii) the requirements for affiliation under section 
1504(a) of the Internal Revenue Code of 1986 before the 
amendment made by subsection (a) shall be applied 
solely according to the provisions expressly contained 
therein, without regard to escrow arrangements, 
redemption rights, or similar provisions. 
hx- 
"(B) Except as provided in subparagraph (C), during the 
period described in subparagraph (A), no provision of the 
:
^ 
Internal Revenue Code of 1986 (including sections 269 and 
482) or principle of law shall apply to deny the benefit or 
use of losses incurred or credits earned by a corporation 
described in subparagraph (A) to the affiliated group of 
which the Native Corporation is the common parent. 
"(C) Losses incurred or credits earned by a corporation 
described in subparagraph (A) shall be subject to the gen-
•£,. 
eral consolidated return regulations, including the provi-
sions relating to separate return limitation years, and to 
sections 382 and 383 of the Internal Revenue Code of 1986. 
• 
"(D) Losses incurred and credits earned by a corporation 
J 
which is affiliated with a corporation described in subpara-
graph (A) shall be treated as having been incurred or 
earned in a separate return limitation year, unless the 
corporation incurring the losses or earning the credits satis-
fies the affiliation requirements of section 1504(a) without 
application of subparagraph (A). 
"(6) 
TREATMENT OF CERTAIN CORPORATIONS AFFIUATED ON 
JUNE 22, 1984.—In the case of an affiliated group which— 
"(A) has as its common parent a Minnesota corporation 
incorporated on April 23,1940, and 
*
* ""'- 
"(B) has a member which is a New York corporation 
incorporated on November 13,1969, 
' 
for purposes of determining whether such New York corpora-
, 
tion continues to be a member of such group, paragraph (2) shall 
- 
be applied by substituting for 'January 1, 1988,' the earlier of 
100 STAT. 2802 
PUBLIC LAW 99-514—OCT. 22, 1986 
January 1, 1994, or the date on which the voting power of the 
preferred stock in such New York corporation terminates. 
"(7) ELECTION TO HAVE AMENDMENTS APPLY FOR YEARS BEGIN-
NING AFTER 1983.—If the common parent of any group makes an 
election under this paragraph, notwithstanding any other provi-
sion of this subsection, the amendments made by subsection (a) 
shall apply to such group for taxable years beginning after 
December 31, 1983. Any such election, once made, shall be 
irrevocable. 
"(8) TREATMENT OF CERTAIN AFFIUATED GROUPS.—If— 
"(A) a corporation (hereinafter in this paragraph referred 
to as the parent') was incorporated in 1968 and filed 
consolidated returns as the parent of an affiliated group for 
each of its taxable years ending after 1969 and before 1985, 
"(B) another corporation (hereinafter in this paragraph 
referred to as the 'subsidiary') became a member of the 
parent's affiliated group in 1978 by reason of a recapitaliza-
tion pursuant to which the parent increased its voting 
^^j 
interest in the subsidiary from not less than 56 percent to 
not less than 85 percent, and 
,.p 
"(C) such subsidiary is engaged (or was on September 27, 
1985, engaged) in manufacturing and distributing a broad 
„l 
line of business systems and related supplies for binding, 
laminating, shredding, graphics, and providing secure 
identification, 
then, for purposes of determining whether such subsidiary cor-
poration is a member of the parent's affiliated group under 
section 1504(a) of the Internal Revenue Code of 1954 (as 
amended by subsection (a)), paragraph (2)(B) of such section 
1504(a) shall be applied by substituting '55 percent' for '80 
percent'. 
"(9) TREATMENT OF CERTAIN CORPORATIONS AFFIUATED DURING 
1971.— In the case of a group of corporations which filed a 
consolidated Federal income tax return for the taxable year 
beginning during 1971 and which— 
"(A) included as a common parent on December 31, 1971, 
» o.< 
a Delaware corporation incorporated on August 26, 1969, 
and 
"(B) included as a member thereof a Delaware corpora-
tion incorporated on November 8,1971, 
for taxable years beginning after December 31,1970, and ending 
before January 1,1988, the requirements for affiliation for each 
member of such group under section 1504(a) of the Internal 
Revenue Code of 1954 Ot)efore the amendment made by subsec-
tion (a)) shall be limited solely to the provisions expressly 
contained therein and by reference to stock issued under State 
5 
law as common or preferred stock. During the period described 
in the preceding sentence, no provision of the Internal Revenue 
Code of 1986 (including sections 269 and 482) or principle of law, 
except the general consolidated return regulations (including 
the provisions relating to separate return limitation years) and 
sections 382 and 383 of such Code, shall apply to deny the 
K?; =
. benefit or use of losses incurred or credits earned by members of 
such group." 
(5) TREATMENT OF CERTAIN SELL-DOWNS.—Paragraph (4) 
of 
i 
section 600t)) of the Tax Reform Act of 1984 (relating to excep-
j 
, tion for certain sell-downs) is amended by adding at the end 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2803 
thereof the following new sentence: "For purposes of the preced-
ing sentence, if there is a letter of intent between a corporation 
and a securities underwriter entered into on or before June 22, 
1984, and the subsequent issuance or sale is effected pursuant to 
a registration statement filed with the Securities and Exchange 
Commission, such stock shall be treated as issued or sold pursu-
ant to a registration statement filed with the Securities and 
Exchange Commission on or before June 22,1984." 
(6) AMENDMENT OF SECTION 332.— 
!, 
(A) IN GENERAL.—Paragraph (1) of section 332(b) (relating 
to liquidations to which section applies) is amended to read 
- 
as follows: 
'; 
"(1) the corporation receiving such property was, on the date 
^
- 
of the adoption of the plan of liquidation, and has continued to 
be at all times until the receipt of the property, the owner of 
stock (in such other corporation) meeting the requirements of 
section 1504(a)(2); and either". 
5 
(B) EFFECTIVE DATE.— 
(i) IN GENERAL.—Except as provided in clause (iii), the 
amendment made by subparagraph (A) shall apply 
with respect to plans of complete liquidation adopted 
after March 28,1985. 
(ii) CERTAIN DISTRIBUTIONS MADE AFTER DECEMBER 31, 
1984.—Except as provided in clause (iii), the amend-
ment made by subparagraph (A) shall also apply with 
' 
respect to plans of complete liquidations adopted on or 
before March 28, 1985, pursuant to which any distribu-
tion is made in a taxable year beginning after Decem-
'"'•' '• 
her 31, 1984 (December 31, 1983, in the case of an 
affiliated group to which an election under section 
60(b)(7) of the Tax Reform Act of 1984 applies), but only 
-
^ 
if the liquidating corporation and any corporation 
which receives a distribution in complete liquidation of 
p 
such corporation are members of an affiliated group of 
' 
corporations filing a consolidated return for the taxable 
year which includes the date of the distribution. 
"
? 
(iii) TRANSITIONAL RULE FOR AFFILIATED GROUPS.—The 
amendment made by subparagraph (A) shall not apply 
with respect to plans of complete liquidation if the 
liquidating corporation is a member of an affiliated 
group of corporations under section 600b) (2), (5), (6), or 
y 
(8) of the Tax Reform Act of 1984, for all taxable years 
which include the date of any distribution pursuant to 
.1 
such plan. 
(7) AMENDMENT OP SECTION 337.— 
(A) IN GENERAL.—Subparagraph (B) of section 337(c)(3) 
m 1
1 
(defining distributee corporation) is amended to read as 
follows: 
i M ' 
"(B) DISTRIBUTEE CORPORATION.—For purposes of subpara-
graph (A), the term 'distributee corporation' means any 
4 
corporation which receives a distribution to which section 
i: 
332 applies in a complete liquidation of the selling corpora-
tion. Such term also includes any other corporation which 
»: 
receives a distribution to which section 332 applies in a 
complete liquidation of a corporation which is a distributee 
corporation under the preceding sentence or prior applica-
tion of this sentence." 
100 STAT. 2804 
PUBLIC LAW 99-514—OCT. 22, 1986 
- « 
(B) EFFECTIVE DATE.—The amendment made by subpara-
graph (A) shall apply in the case of plans of complete 
liquidation pursuant to which any distribution is made in a 
taxable year beginning after December 31, 1984 (December 
31, 1983, in the case of an affiliated group to which an 
election under section 6003X7) of the Tax Reform Act of 1984 
applies). 
{.S) AMENDMENT OF SECTION 338.— 
(A) IN GENERAL.—Paragraph (3) of section 338(d) (defining 
qualified stock purchase) is amended to read as follows: 
"(3) QuAUFiED S
T
O
C
K PURCHASE.—The term 'qualified stock 
purchase' means any transaction or series of transactions in 
which stock (meeting the requirements of section 1504(aX2)) of 1 
corporation is acquired by another corporation by purchase 
during the 12-month acquisition period." 
(B) EFFECTIVE DATE.—The amendment made by subpara-
graph (A) shall apply in cases where the 12-month acquisi-
tion period (as defined in section 338(hXl) of the Internal 
Revenue Code of 1954) begins after December 31, 1985. 
J 
(9) TREATMENT OF CERTAIN CORPORATION ORGANIZED ON FEB-
RUARY 22, 1983.—In the case of a Rhode Island corporation 
which was org£inized on February 22, 1983, and which on Feb-
ruary 25,1983— 
(A) purchased the stock of another corporation, 
(B) filed an election under section 338(g) of the Internal 
Revenue C!ode of 1986 with respect to such purchase, and 
(C) merged into the acquired corporation, 
such purchase of stock shall be considered as made by the 
acquiring corporation, such election shall be valid, and the 
acquiring corporation shall be considered a purchasing corpora-
tion for purposes of section 338 of such Code without regard to 
the duration of the existence of the acquiring corporation. 
(10) TREATMENT OF FORMER DISC'S.—Paragraph (7) of section 
1504(b) (defining includible corporation) is eimended to read as 
follows: 
"(7) A DISC (as defined in section 992(aXl)), or any other 
corporation which has accumulated DISC income which is de-
rived after December 31,1984." 
(f) AMENDMENTS RELATED TO SECTION 61 OF THE ACT.— 
(1) TREATMENT OF DISTRIBUTIONS OF APPRECIATED PROPERTY.— 
(A) Subsection O
b
) of section 312 (relating to effect on 
earnings and profits) is amended to read as follows: 
"(b) DISTRIBUTIONS OF APPRECIATED PROPERTY.—On the distribu-
tion by a corporation, with respect to its stock, of any property 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 (aX3) 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." 
(B) Subsection (c) of section 312 is amended by inserting 
"and" at the end of paragraph (1), by striking out ", and" at 
the end of paragraph (2) and inserting in lieu thereof a 
period, and by striking out paragraph (3). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2805 
(C) The subsection heading for subsection (c) of section 
312 is amended by striking out ", ETC.". 
(D) Subsection (n) of section 312 is amended by striking 
out paragraph (4) and by redesignating paragraphs (5), (6), 
(7), (8), and (9) as paragraphs (4), (5), (6), (7), and (8), respec-
tively. 
(E) Paragraph (8) of section 312(n) (as redesignated by 
subparagraph (D)) is amended by striking out "subsection 
(k)(4)" and all that follows and inserting in lieu thereof the 
following: 
"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." 
(F) Any reference in subsection (e) of section 61 of the Tax 
Reform Act of 1984 to a paragraph of section 312(n) of the 
Internal Revenue Code of 1954 shall be treated as a ref-
erence to such paragraph as in effect before its redesigna-
tion by subparagraph (D). 
(2) CLERICAL AMENDMENTS.— 
(A) Subsection (a) of section 1275 is amended— 
(i) by redesignating the paragraph added by section 
61 of the Tax Reform Act of 1984 as paragraph (5), and 
(ii) by striking out "TO CORPORATIONS" in the heading 
of such paragraph and inserting in lieu thereof "BY 
CORPORATIONS". 
(B) Paragraph (3) of section 301(f) is amended by striking 
out "this section" and inserting in lieu thereof "this subsec-
tion". 
(3) EFFECTIVE DATE FOR TREATMENT OF REDEMPTIONS.—Para-
graph (7) of section 312(n) of the Internal Revenue Code of 1954 
(as redesignated by paragraph (1)(D) of this subsection), and the 
amendments made by section 61(a)(2) of the Tax Reform Act of 
1984, shall apply to distributions in taxable years beginning 
after September 30,1984. 
(g) AMENDMENTS RELATED TO SECTION 63 OF THE ACT.— 
(1) IN GENERAL.—Section 361 (relating to nonrecognition of 
gain or loss to corporations) is amended to read as follows: 
"SEC. 
3
6
1
. 
NONRECOGNITION OF 
GAIN 
OR 
LOSS 
TO 
TRANSFEROR 
COR-
PORATION; 
OTHER 
TREATMENT 
OF 
TRANSFEROR 
CORPORA-
TION; 
ETC. 
"(a) GENERAL RULE.—No gain or loss shall be recognized to a 
transferor corporation which is a party to a reorganization on any 
exchange of property pursuant to the plan of reorganization. 
"Ob) OTHER TREATMENT OF TRANSFEROR CORPORATION.—In the case 
of a transferor corporation which is a party to a reorganization— 
"(1) sections 336 and 337 shall not apply with respect to any 
liquidation of such corporation pursuant to the plan of reorga-
nization, 
"(2) the basis of the property (other than stock and securities 
described in paragraph (3)) received by the corporation pursuant 
to such plan of reorganization shall be the same as it would be 
in the hands of the transferor of such property, adjusted by the 
amount of gain or loss recognized to such transferor on such 
transfer, and 
100 STAT. 2806 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(3) no gain or loss shall be recognized by such corporation on 
any disposition (pursuant to the plan of reorganization) of stock 
or securities which were received pursuant to such plan and 
which are in another corporation which is a party to such 
reorganization. 
For purposes of paragraph (3), if the transferor corporation is 
merged, consolidated, or liquidated pursuant to the plan of reorga-
nization, or if a transaction meets the requirements of section 
368(aXlXC) pursuant to a waiver granted by the Secretary under 
section 368(a)(2)(G)(ii), any distribution of such stock or securities by 
the transferor corporation to its creditors in connection with such 
transaction 
shall be treated as pursuant to such plan of 
reorganization. 
"(c) TREATMENT OF DISTRIBUTIONS OF APPRECIATED PROPERTY.— 
Notwithstanding any other provision of this subtitle, gain shall be 
recognized on the distribution of property (other than property 
permitted by section 354, 355, or 356 to be received without the 
recognition of gain) pursuant to a plan of reorganization in the same 
manner as if such property had been sold to the distributee at its 
fair market value." 
(2) 
CLARIFICATION OF TRANSFERS TO CREDITORS.—Section 
368(a)(2)(G)(i) (relating to distribution requirement) is amended 
by adding at the end thereof the following new sentence: "For 
purposes of the preceding sentence, if the acquired corporation 
is liquidated pursuant to the plan of reorganization, any dis-
tribution to its creditors in connection with such liquidation 
shall be treated as pursuant to the plan of reorganization." 
(3) CONFORMING AMENDMENT.—The table of sections for sub-
part C of part III of subchapter C of chapter 1 is amended by 
striking out the item relating to section 361 and inserting in 
lieu thereof the following: 
"Sec. 361. Nonrecognition of gain or loss to transferor corporation; other 
treatment of transferor corporation; etc." 
(4) EFFECTIVE DATE.—The amendments made by this subsec-
tion shall apply to plans of reorganizations adopted after the 
date of the enactment of this Act. 
(h) AMENDMENTS RELATED TO SECTION 64 OF THE ACT.— 
(1) Subsection (c) of section 368 (defining control) is amended 
to read as follows: 
"(c) CONTROL DEFINED.—For purposes of part I (other than section 
304), part II, this part, and part V, the term 'control' means the 
ownership of stock possessing at least 80 percent of the total com-
bined voting power of all classes of stock entitled to vote and at least 
80 percent of the total number of shares of all other classes of stock 
of the corporation." 
(2) Paragraph (2) of section 368(a) is amended by adding at the 
end thereof the following new subparagraph: 
"(H) SPECIAL RULE FOR DETERMINING WHETHER CERTAIN 
*
* 
TRANSACTIONS ARE QUALIFIED UNDER PARAGRAPH (1)(D).—In 
the case of any transaction with respect to which the 
': 
requirements of subparagraphs (A) and (B) of section 
.
^ 
354(b)(1) are met, for purposes of determining whether such 
transaction qualifies under subparagraph (D) of paragraph 
% 
(1), the term 'control' has the meaning given to such term 
by section 304(c)." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2807 
(3) Section 368(a)(2) is amended by inserting "(other than for 
purposes of subparagraph (C))" in subparagraph (A) after 
"subchapter", 
(i) AMENDMENTS RELATED TO SECTION 65 OF THE ACT.— 
(1) IN GENERAL.—Subsection (a) of section 341 (relating to 
collapsible corporations) is amended by striking out "held for 
more than 6 months". 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
shall apply with respect to sales, exchanges, and distributions 
after September 27,1985. 
(j) AMENDMENTS RELATED TO SECTION 67 OF THE ACT.— 
(1) EXEMPTION FOR SMALL BUSINESS CORPORATIONS, ETC.— 
Subsection 03) of section 280G (defining excess parachute pay-
ment) is amended by adding at the end thereof the following 
new paragraph: 
"(5) EXEMPTION FOR SMALL BUSINESS CORPORATIONS, ETC.— 
"(A) IN GENERAL.—Notwithstanding paragraph (2), the 
term 'parachute payment' does not include— 
"(i) any payment to a disqualified individual with 
respect to a corporation which (immediately before the 
I 
change described in paragraph (2)(A)(i)) was a small 
business corporation (as defined in section 1361(b)), and 
"(ii) any payment to a disqualified individual with 
respect to a corporation (other than a corporation de-
scribed in clause (i)) i
f
— 
"(I) immediately before the change described in 
paragraph (2)(A)(i), no stock in such corporation 
was readily tradeable on an established securities 
•' •' 
market or otherwise, and 
"(II) the shareholder approval requirements of 
subparagraph (B) are met with respect to such 
payment. 
The Secretary may, by regulations, prescribe that the 
r 
requirements of subclause (I) of clause (ii) are not met 
where a substantial portion of the assets of any entity 
consists (directly or indirectly) of stock in such corpora-
tion and interests in such other entity are readily 
• 
tradeable on an established securities market, or other-
wise. 
"(B) SHAREHOLDER APPROVAL REQUIREMENTS.—The share-
holder approval requirements of this subparagraph are met 
with respect to any payment i
f
— 
"(i) such payment was approved by a vote of the 
,, 
persons who owned, immediately before the change 
] 
described in paragraph (2)(A)(i), more than 75 percent 
( 
of the voting power of all outstanding stock of the 
corporation, and 
i» 
"(ii) there was adequate disclosure to shareholders of 
all material facts concerning all payments which (but 
^ 
for this paragraph) would be parachute payments with 
respect to a disqualified individual." 
(2) TREATMENT OF REASONABLE COMPENSATION.—Paragraph (4) 
of section 280G(b) (relating to excess parachute payments re-
duced to extent taxpayer establishes reasonable compensation) 
is amended to read as follows: 
100 STAT. 2808 
PUBLIC LAW 99-514—OCT. 22, 1986 
I 
"(4) TREATMENT OF AMOUNTS WHICH TAXPAYER ESTABLISHES AS 
1 REASONABLE COMPENSATION.—In the case of any payment de-
scribed in paragraph (2)(A)— 
"(A) the amount treated as a parachute payment shall 
..^ 
not include the portion of such payment which the taxpayer 
1, 
establishes by clear and convincing evidence is reasonable 
compensation for personal services to be rendered on or 
after the date of the change described in paragraph (2XAXi), 
and 
"(B) the amount treated as an excess parachute payment 
shall be reduced by the portion of such payment which the 
taxpayer establishes by clear and convincing evidence is 
reasonable compensation for personal services actually ren-
^ 
dered before the date of the change described in paragraph 
* 
(2XA)(i). 
For purposes of subparagraph (B), reasonable compensation for 
services actually rendered before the date of the change de-
"
^ scribed in paragraph (2XAXi) shall be first offset against the 
base amount." 
(3) 
EXEMPTION FOR PAYMENT UNDER QUAUFIED 
PLANS.— 
Subsection (b) of section 280G (defining excess parachute pay-
' ment) is amended by adding at the end thereof the following 
new paragraph: 
"(6) EXEMPTION FOR PAYMENTS UNDER QUALIFIED PLANS.—Not-
- withstanding paragraph (2), the term 'parachute pajmient' shall 
not include any payment to or from— 
"(A) a plan described in section 401(a) which includes a 
trust exempt from tax under section 501(a), 
"(B) an annuity plan described in section 403(a), or 
"(C) a simplified employee pension (as defined in section 
408(k))." 
(4) TREATMENT OF AFFIUATED GROUPS.—Subsection (d) of sec-
tion 280G is amended by adding at the end thereof the following 
new paragraph: 
"(5) TREATMENT OF AFFILIATED GROUPS.—Except as otherwise 
provided in regulations, all members of the same affiliated 
group (as defined in section 1504, determined without regard to 
section 15040))) shall be treated as 1 corporation for purposes of 
this section. Any person who is an officer or any member of 
such group shall be treated as an officer of such 1 corporation." 
(5) LIMITATION ON NUMBER OF INDIVIDUALS TREATED AS HIGHLY 
'I COMPENSATED.—Subsection (c) of section 280G (defining disquali-
' fied individual) is amended by adding at the end thereof the 
following new sentence: "For purposes of paragraph (2), the 
*
^ term 'highly-compensated individual' only includes an individ-
ual who is (or would be if the individual were an employee) a 
member of the group consisting of the highest paid 1 percent of 
•
•
* the employees of the corporation or, if less, the highest paid 250 
employees of the corporation." 
(6) EXCLUDED AMOUNTS NOT TAKEN INTO ACCOUNT IN DETER-
MINING WHETHER THRESHOLD AMOUNT IS MET.—Subparagraph 
E (A) of section 280G(bX2) (defining parachute payment) is 
amended by adding at the end thereof the following new sen-
tence: 
"For purposes of clause (ii), payments not treated as para-
chute payments under paragraph (4XA), (5), or (6) shall not 
be taken into account." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2809 
(7) LIMITATION ON TREATMENT OF PAYMENT PURSUANT TO SECU-
RITIES L
A
W VIOLATION AS PARACHUTE PAYMENT.—Subparagraph 
(B) of section 280G(bX2) (defining parachute payments) is 
amended to read as follows: 
"(B) AGREEMENTS.—The term 'parachute payment' shall 
also include any payment in the nature of compensation to 
(or for the benefit of) a disqualified individual if such 
payment is made pursuant to an agreement which violates 
any generally enforced securities laws or regulations. In 
any proceeding involving the issue of whether any payment 
made to a disqualified individual is a parachute payment on 
account of a violation of any generally enforced securities 
laws or regulations, the burden of proof with respect to 
establishing the occurrence of a violation of such a law or 
regulation shall be upon the Secretary." 
(8) CLERICAL AMENDMENT.—Paragraph (2) of section 280G(d) 
(defining base period) is amended by striking out "was an 
employee of the corporation" and inserting in lieu thereof 
"performed personal services for the corporation". 
(k) AMENDMENTS RELATING TO SECTION 68 OF THE ACT.— 
(1) No 
DISC PREFERENCE REDUCTION FOR S CORPORATIONS.— 
Effective with respect to taxable years beginning after Decem-
ber 31, 1982, paragraph (4) of section 291(a) (as in effect on the 
day before the date of the enactment of the Tax Reform Act of 
1984) is amended by striking out "a corporation" and inserting 
in lieu thereof "a C corporation". 
(2) CLARIFICATION OF EFFECTIVE DATES.— 
(A) Paragraph (2) of section 68(e) of the Tax Reform Act of 
1984 (relating to section 1250 gain) is amended by striking 
out "of the Internal Revenue Code of 1954" and inserting in 
lieu thereof "of the Internal Revenue Code of 1954, and the 
amendment made by subsection (c)(2) of this section,". 
(B) Paragraph (3) of section 68(e) of the Tax Reform Act of 
1984 (relating to pollution control facilities) is amended by 
striking out "of such Code" and inserting in lieu thereof "of 
-
^ g, 
such Code, and so much of the amendment made by subsec-
tion (cXD of this section as relates to pollution control 
facilities,". 
(3) CLERICAL AMENDMENTS.— 
(A) The subsection heading of section 291(a) is amended 
by striking out "20-PERCENT". 
(B) Paragraph (2) of section 68(c) of the Tax Reform Act of 
1984 is amended by striking out "section 57(h)" and insert-
ing in lieu thereof "section 57(b)". 
(C) Subparagraph (B) of section 570t)Xl) is amended to 
read £is follows: 
"(B) IRON ORE AND COAL.—In the case of any item of tax 
preference of a corporation described in paragraph (8) of 
subsection (a) Ot>ut only to the extent such item is allocable 
to a deduction for depletion for iron ore and coal, including 
lignite), only 71.6 percent of the amount of such item of tax 
preference (determined without regard to this subsection) 
shall be taken into account as an item of tax preference." 
(D) Paragraph (2) of section 570t)) is amended by striking 
out "85 percent" and inserting in lieu thereof "80 percent". 
100 STAT. 2810 
PUBLIC LAW 99-514—OCT. 22, 1986 
SEC. 1805. AMENDMENTS RELATED TO PARTNERSHIP PROVISIONS. 
(a) AMENDMENTS RELATED TO SECTION 72 OF THE ACT.— 
(1) CLARIFICATION THAT CHANGE NEED NOT OCCUR DURING TAX-
ABLE YEAR OF PAYMENT.— 
(A) Clause (i) of section 706(d)(2)(A) is amended by striking 
out "each such item" and inserting in lieu thereof "such 
item". 
(B) Subparagraph (B) of section 706(d)(2) is amended by 
striking out "which are described in paragraph (1) and". 
(2) CLERICAL AMENDMENT.—Clause (i) of section 706(d)(2)(C) 
(relating to items attributable to periods not within taxable 
year) is amended by striking out "the first day of such taxable 
year" and inserting in lieu thereof "the first day of the taxable 
year". 
(b) AMENDMENT RELATED TO SECTION 73 OF THE ACT.—Clause (iii) 
of section 707(a)(2)(B) (relating to treatment of certain property 
transfers) is amended by striking out "sale of property" and insert-
ing in lieu thereof "sale or exchange of property". 
(c) AMENDMENTS RELATED TO SECTION 75 OF THE ACT.— 
(1) LIMITATION ON AMOUNT OF GAIN.—Section 386 (relating to 
transfers of partnership and trust interests by a corporation) is 
amended by redesignating subsection (d) as subsection (e) and by 
inserting after subsection (c) the following new subsection: 
"(d) LIMITATION ON AMOUNT OF GAIN RECOGNIZED IN CASE OF NON-
LIQUIDATING DISTRIBUTIONS.—In the case of any distribution by a 
corporation to which section 311 applies, the amount of any gain 
recognized by reason of subsection (a) shall not exceed the amount of 
the gain which would have been recognized if the partnership 
interest had been sold. The Secretary may by regulations provide 
that the amount of such gain shall be computed without regard to 
any loss attributable to property contributed to the partnership for 
the principal purpose of recognizing such loss on the distribution." 
(2) CLARIFICATION OF SECTION 761(e).—Subsection (e) of sec-
tion 761 (relating to distributions treated as exchanges) is 
amended— 
(A) by striking out "For purposes of" and inserting in lieu 
thereof "Except as otherwise provided in regulations, for 
purposes of", 
(B) by striking out "any distribution (not otherwise 
treated as an exchange)" and inserting in lieu thereof "any 
^ ' 
distribution of an interest in a partnership (not otherwise 
. 
^ 
treated as an exchange)", and 
7 ,';' 
(C) by striking out "DISTRIBUTIONS" in the subsection 
*
-
* 
heading and inserting in lieu thereof "DISTRIBUTIONS OF 
PARTNERSHIP INTERESTS". 
(d) AMENDMENT RELATED TO SECTION 77 OF THE ACT.—Subpara-
graph (A) of section 1031(a)(3) (relating to requirement that property 
be identified) is amended by striking out "before the day" and 
inserting in lieu thereof "on or before the day". 
SEC. 1806. AMENDMENTS RELATED TO TRUST PROVISIONS. 
(a) AMENDMENT RELATED TO SECTION 81 OF THE ACT.—Subpara-
graph (B) of section 643(e)(3), as redesignated by subsection (c) 
(relating to election to recognize gain), is amended to read as follows: 
"(B) ELECTION.—Any election under this paragraph shall 
apply to all distributions made by the estate or trust during 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2811 
a taxable year and shall be made on the return of such 
estate or trust for such taxable year." 
(b) TREATMENT OF MULTIPLE TRUSTS.—Subsection O
t
)
) of section 82 
of the Tax Reform Act of 1984 (relating to treatment of multiple 
trusts) is amended by inserting before the period at the end thereof 
the following: "; except that, in the case of a trust which was 
irrevocable on March 1, 1984, such amendment shall so apply only 
to that portion of the trust which is attributable to contributions to 
corpus after March 1,1984". 
(c) CLERICAL AMENDMENTS.—Section 643 (relating to definitions 
applicable to subparts A, B, C, and D) is amended— 
(1) by redesignating the subsection added by section 81 of the 
Tax Reform Act of 1984 as subsection (e), and 
(2) by redesignating the subsection added by section 82 of such 
Act as subsection (f). 
SEC. 1807. AMENDMENTS RELATED TO ACCOUNTING CHANGES. 
(a) AMENDMENTS RELATED TO SECTION 91 OF THE ACT.— 
(1) CLARIFICATION OF CASH BASIS EXCEPTION TO TAX SHELTER 
RULE.— 
(A) Subparagraph (A) of section 461(i)(2) is amended by 
striking out "within 90 days after the close of the taxable 
year" and inserting in lieu thereof "before the close of the 
90th day after the close of the taxable year". 
(B) The heading for paragraph (2) of section 461(i) is 
amended by striking out "WITHIN 90 DAYS" and inserting in 
lieu thereof "ON OR BEFORE THE 90TH DAY". 
(2) CLARIFICATION OF COORDINATION WITH SECTION 464.— 
Subparagraph (A) of section 461(i)(4) (relating to special rules for 
farming) is amended to read as follows: 
n 
(A) any tax shelter described in paragraph (3XC) shall be 
treated as a farming syndicate for purposes of section 464; 
except that this subparagraph shall not apply for purposes 
of determining the income of an individual meeting the 
requirements of section 464(c)(2),". 
(3) TREATMENT OF MINING AND SOUD WASTE RECLAMATION AND 
CLOSING COSTS.— 
(A) 
RESERVE INCREASED BY AMOUNT DEDUCTED.—Para-
S8f 
graph (2) of section 468(a) (relating to establishment of 
reserves for reclamation and closing costs) is amended by 
adding at the end thereof the following new subparagraph: 
"(D) RESERVE INCREASED BY AMOUNT DEDUCTED.—A re-
serve shall be increased each taxable year by the amount 
allowable as a deduction under paragraph (1) for such 
taxable year which is allocable to such reserve." 
(B) EFFECTIVE DATE.—Subsection (g) of section 91 of the 
Tax Reform Act of 1984 (relating to effective dates) is 
amended by adding at the end thereof the following new 
paragraph: 
"(4) EFFECTIVE DATE FOR TREATMENT OF MINING AND SOUD 
WASTE RECLAMATION AND CLOSING COSTS.—Except as otherwise 
provided in subsection (h), the amendments made by subsection 
O
t
)
) shall take effect on the date of the enactment of this Act 
with respect to taxable years ending after such date." 
(C) CLERICAL AMENDMENT.—Paragraph (1) of section 
468(a) is amended by striking out 
this subsection" and 
inserting in lieu thereof "this section". 
100 STAT. 2812 
PUBLIC LAW 99-514-OCT. 22, 1986 
11: 
(4) TREATMENT OF DECOMMISSIONING OF NUCLEAR POWER-
PLANT.— 
(A) TIME WHEN PAYMENTS DEEMED MADE.— 
(i) IN GENERAL.—Section 468A is amended by adding 
at the end thereof the following new subsection: 
"(g) TIME WHEN PAYMENTS DEEMED MADE.—For purposes of this 
section, a taxpayer shall be deemed to have made a payment to the 
Fund on the last day of a taxable year if such payment is made on 
account of such taxable year and is made within V-k months after 
the close of such taxable year." 
(ii) TRANSITIONAL RULE.—To the extent provided in 
"" 
regulations prescribed by the Secretary of the Treasury 
.
o
r 
his delegate, subsection (g) of section 468 
A of the 
'"'*'* ' 
' 
Internal Revenue Code of 1954 (as added by clause (i)) 
shall be applied with respect to any payment on ac-
. count of a taxable year beginning before January 1, 
1987, Eis if it did not contain the requirement that the 
,, , „^, 
payment be made within V-h months after the close of 
the taxable year. Such regulations may provide that, to 
the extent such payment to the Fund is made more 
than 2 ¥2 months after the close of the taxable year, any 
adjustment to the tax attributable to such payment 
shall not affect the amount of interest payable with 
respect to periods before the payment is made. Such 
regulations may provide appropriate adjustments to 
the deduction allowed under such section 468A for any 
., i : 
such taxable year to take into account the fact that the 
; '
^ I.-;. 
payment to the Fund is made more than V-k months 
after the close of the taxable year. 
(B) TREATMENT OF AMOUNTS DISTRIBUTED.—Subparagraph 
(A) of section 468A(c)(l) (relating to inclusion of amount 
distributed) is amended by striking out "subsection 
(e)(2)(B)" and inserting in lieu thereof "subsection (e)(4)(B)". 
(C) CLARIFICATION OF TAXATION OF FUND.—Paragraph (2) 
mik 
: of section 468A(e) (relating to taxation of Fund) is amended 
to read as follows: 
. j ; 
"(2) TAXATION OF FUND.— 
"(A) IN GENERAL.—There is hereby imposed on the gross 
income of the Fund for any taxable year a tax at a rate 
equal to the highest rate of tax specified in section 11(b), 
except that— 
f 
"(i) there shall not be included in the gross income of 
u 
i 
the Fund any payment to the Fund with respect to 
which a deduction is allowable under subsection (a), 
and 
"(ii) there shall be allowed as a deduction to the Fund 
any amount paid by the Fund which is described in 
paragraph (4XB) (other than an amount paid to the 
taxpayer) and which would be deductible under this 
chapter for purposes of determining the taxable income 
of a corporation. 
"(B) TAX IN LIEU OF OTHER TAXATION.—The tax imposed 
by subparagraph (A) shall be in lieu of any other taxation 
-'' 
under this subtitle of the income from assets in the Fund. 
»fii 
"(C) FUND TREATED AS CORPORATION.—For purposes of 
subtitle F— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2813 
"(i) the Fund shall be treated as if it were a corpora-
tion, and 
"(ii) any tax imposed by this pareigraph shall be 
treated as a tax imposed by section 11." 
(D) LIMITATION ON INVESTMENTS.—Paragraph (4) of sec-
tion 468A(e) is amended by striking out "and" at the end of 
= : 
subparagraph (A), by striking out the period at the end of 
subparagraph (B) and inserting in lieu thereof ", and", and 
i 
by 
adding 
at 
the 
end 
thereof 
the 
following 
new 
subparagraph: 
"(C) to the extent that a portion of the Fund is not 
currently needed for purposes described in subparagraph 
(A) or (B), making investments described in section 
501(c)(21)(B)(ii)." 
(E) CLERICAL AMENDMENTS.— 
(i) Subsection (a) of section 468A is amended by strik-
ing out "this subsection" and inserting in lieu thereof 
"this section". 
(ii) Subsection (d) of section 468A is amended by 
striking out "this subsection" in the material preceding 
paragraph (1) and inserting in lieu thereof "this 
J, 
section". 
* 
(iii) The subsection heading for subsection (e) of sec-
tion 468A is amended by striking out "TRUST FUND" 
and inserting in lieu thereof "RESERVE FUND". 
(iv) Paragraph (1) of section 468A(e) is amended— 
(I) by striking out "this subsection" and inserting 
in lieu thereof "this section", and 
(II) by striking out "Trust Fund" and inserting in 
lieu thereof "Reserve Fund". 
(v) Paragraph (6) of section 468A(e) is amended— 
(I) by striking out "this subsection" each place it 
appears and inserting in lieu thereof "this sec-
tion", and 
(II) by striking out "this subparagraph" and 
inserting in lieu thereof "this paragraph". 
(vi) Subsection (f) of section 468A is amended by 
striking out "The term" and inserting in lieu thereof 
"For purposes of this section, the term". 
f-" 
(vii) Section 88 is amended by striking out "of rate-
* • 
making purposes" and inserting in lieu thereof "for 
ratemaking purposes". 
(F) EFFECTIVE DATE.—Subsection (g) of section 91 of the 
Tax Reform Act of 1984 is amended by adding at the end 
thereof the following new paragraph: 
"(5) 
RULES 
FOR 
NUCLEAR 
DECOMMISSIONING 
COSTS.—The 
amendments made by subsections (c) and (f) shall take effect on 
the date of the enactment of this Act with respect to taxable 
years ending after such date." 
(5) EFFECTIVE DATE FOR NET OPERATING LOSS PROVISIONS.— 
Subsection (g) of section 91 of the Tax Reform Act of 1984 is 
amended by adding at the end thereof the following new 
paragraph: 
"(6) 
MODIFICATION 
OF NET 
OPERATING 
LOSS 
CARRYBACK 
PERIOD.—The amendments made by subsection (d) shall apply to 
losses for taxable years beginning after December 31, 1983." 
100 STAT. 2814 
PUBLIC LAW 99-514—OCT. 22, 1986 
(6) CLARIFICATION OF ELECTION FOR EARLIER EFFECTIVE DATE.— 
Subparagraph (A) of section 91(g)(2) of the Tax Reform Act of 
ft 
1984 (relating to taxpayer may elect earlier application) is 
amended— 
(A) by striking out "incurred before" and inserting in lieu 
•: 
thereof "incurred on or before", 
(B) by striking out "incurred on or after" and inserting in 
': 
lieu thereof "incurred after", and 
•
V
' -, 
(C) by adding at the end thereof the following new 
sentence: 
-:•' ' 
"The Secretary of the Treasury or his delegate may by 
regulations provide that (in lieu of an election under the 
preceding sentence) a taxpayer may (subject to such condi-
tions as such regulations may provide) elect to have subsec-
tion (h) of section 461 of such Code apply to the taxpayer's 
entire taxable year in which occurs July 19,1984." 
'« 
(7) SPECIAL RULES FOR DESIGNATED SETTLEMENT FUNDS.— 
(A) IN GENERAL.—Subpart C of part II of subchapter E of 
chapter 1 (relating to taxable year for which deduction 
taken) is amended by adding at the end thereof the follow-
ing new section: 
"SEC. 468B. SPECIAL RULES FOR DESIGNATED SETTLEMENT FUNDS. 
"(a) IN GENERAL.—For purposes of section 461(h), economic 
performance shall be deemed to occur as qualified payments are 
made by the taxpayer to a designated settlement fund. 
: "(b) TAXATION OF DESIGNATED SETTLEMENT FUND.— 
"(1) IN GENERAL.—There is imposed on the gross income of 
ii 
any designated settlement fund for any taxable year a tax at a 
rate equal to the maximum rate in effect for such taxable year 
under section 1(e). 
"(2) CERTAIN EXPENSES ALLOWED.—For purposes of paragraph 
(1), gross income for any taxable year shall be reduced by the 
amount of any administrative costs (including State and local 
•. 
taxes) and other incidental expenses of the designated set-
tlement fund (including legal, accounting, and actuarial 
-^; 
expenses)— 
l©&i»j 
"(A) which are incurred in connection with the operation 
of the fund, and 
"(B) which would be deductible under this chapter for 
H:v 
purposes of determining the taxable income of the 
corporation, 
a- 
no other deduction shall be allowed to the fund. 
!;• 
"(3) TRANSFERS TO THE FUND.—In the case of any qualified 
payment made to the fund— 
"(A) the amount of such payment shall not be treated as 
iit 
income of the designated settlement fund. 
If 
"(B) the basis of the fund in any property which con-
stitutes a qualified payment shall be equal to the fair 
market value of such property at the time of payment, and 
"(C) the fund shall be treated as the owner of the prop-
,
? 
erty in the fund (and any earnings thereon). 
"(4) TAX IN UEU OF OTHER TAXATION.—The tax imposed by 
-
^ 
paragraph (1) shall be in lieu of any other taxation under thL 
subtitle of income from assets in the designated settlement 
fund. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2815 
"(5) COORDINATION WITH SUBTITLE F.—For purposes of sub-
title F— 
"(A) a designated settlement fund shall be treated as a 
corporation, and 
"(B) any tax imposed by this subsection shall be treated 
as a tax imposed by section 11. 
"(c) 
DEDUCTIONS NOT ALLOWED FOR TRANSFER OF INSURANCE 
AMOUNTS.—No deduction shall be allowable for any qualified pay-
ment by the taxpayer of any amounts received from the settlement 
of any insurance claim to the extent such amounts are excluded 
from the gross income of the taxpayer. 
"(d) DEFINITIONS.—For purposes of this section— 
"(1) QUAUFIED PAYMENT.—The term 'qualified 
payment' 
means any money or property which is transferred to any 
designated settlement fund pursuant to a court order, other 
than— 
"(A) any amount which may be transferred from the fund 
to the taxpayer, or 
"(B) the transfer of any stock or indebtedness of the 
taxpayer (or any related person). 
"(2) DESIGNATED SETTLEMENT FUND.—The term 'designated 
settlement fund' means any fund— 
"(A) which is established pursuant to a court order, 
"(B) with respect to which no amounts may be trans-
ferred other than in the form of qualified payments, 
,o/ 
"(C) which is administered by persons a majority of whom 
are independent of the taxpayer, 
"(D) which is established for the principal purpose of 
resolving and satisfying present and future claims against 
the taxpayer (or any related person or formerly related 
person) arising out of personal injury, death, or property 
damage, 
"(E) under the terms of which the taxpayer may not hold 
any beneficial interest in the income or corpus of the fund, 
and 
"(F) with respect to which an election is made under this 
section by the taxpayer. 
An election under this section shall be made at such time and in 
such manner as the Secretary shall by regulation prescribe. 
Such an election, once made, may be revoked only with the 
consent of the Secretary. 
"(3) RELATED PERSON.—The term 'related person' means a 
person related to the taxpayer within the meaning of section 
267(b). 
"(e) NoNAPPLICABILITY OF SECTION.—This section shall not apply 
with respect to any liability of the taxpayer arising under any 
workers' compensation Act or any contested liability of the taxpayer 
within the meaning of section 461(f). 
"(f) OTHER FUNDS.—Except as provided in regulations, any pay-
ment in respect of a liability described in subsection (dX2XD) (and 
not described in subsection (e)) to a trust fund or escrow fund which 
is not a designated settlement fund shall not be treated as constitut-
ing economic performance." 
(B) CLERICAL AMENDMENT.—The table of sections for sub-
part C of part II of subchapter E of chapter 1 is amended by 
adding after the item relating to section 468A the following 
new item: 
100 STAT. 2816 
PUBLIC LAW 99-514—OCT. 22, 1986 
"Sec. 468B. Special rules for designated settlement funds." 
(C) SPECIAL RULE FOR TAXPAYER IN BANKRUPTCY REORGA-
NIZATION.—In the case of any settlement fund which is 
established for claimants against a corporation which filed 
a petition for reorganization under chapter 11 of title 11, 
United States Code, on August 26, 1982, and which filed 
^•i 
v^rith a United States district court a first amended and 
restated plan of reorganization before March 1, 1986— 
(i) any portion of such fund which meets the require-
^ ^ 
-- 
ments of subparagraphs (A), (C), (D), and (F) of section 
468B(d)(2) of the Internal Revenue Code of 1954 (as 
.,^^,, 
added by this paragraph) shall be treated as a des-
,^^.V'. 
ignated settlement fund for purposes of section 468B of 
. V 
such Code, 
(ii) such corporation (or any successor thereof) shall 
y-^il. 
be liable for the tax imposed by section 468B of such 
Code on such portion of the fund (and the fund shall 
f.(;- .; . 
not be liable for such tax), such tax shall be deductible 
by the corporation, and the rate of tax under section 
l
« -
u • . 
468B of such Code for any taxable year shall be equal to 
15 percent, and 
(iii) any transaction by any portion of the fund not 
-.u:> ' 
described in clause (i) shall be treated as a transaction 
made by the corporation. 
umih^' 
(D) CLARIFICATION OF LAW WITH RESPECT TO CERTAIN 
FUNDS.— 
'^ • 
(i) IN GENERAL.—Nothing in any provision of law 
shall be construed as providing that an escrow account, 
settlement fund, or similar fund is not subject to cur-
,; .. 
j.gj^^ income tax. If contributions to such an account or 
fund are not deductible, then the account or fund shall 
be taxed as a grantor trust. 
(ii) EFFECTIVE DATE.—The provisions of clause (i) shall 
, s... i- 
apply to accounts or funds established after August 16, 
•* 
1986. 
(8) TRANSITIONAL RULE FOR CERTAIN AMOUNTS.—For purposes 
of section 461(h) of the Internal Revenue Code of 1954, economic 
performance shall be treated as occurring on the date of a 
payment to an insurance company if— 
5 
(A) such payment was made before November 23, 1985, 
for indemnification Eigainst a tort liability relating to per-
sonal injury or death caused by inhalation or ingestion of 
dust from asbestos-containing insulation products, 
(B) such insurance company is unrelated to taxpayer, 
(C) such payment is not refundable, and 
(D) the taxpayer is not engaged in the mining of asbestos 
;r' 
nor is any member of any affiliated group which includes 
the taxpayer so engaged, 
(b) AMENDMENTS RELATED TO SECTION 92 OF THE ACT.— 
(1) TREATMENT OF SERVICES.—Subsection (g) of section 467 
(relating to comparable rules for services) is amended by adding 
at the end thereof the following new sentence: "The preceding 
sentence shall not apply to any amount to which section 404 or 
^*i 404A (or any other provision specified in regulations) applies." 
(2) CLERICAL AMENDMENTS.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2817 
(A) Subparagraph (A) of section 467(b)(4) is amended by 
striking out "statutory recover period" and inserting in lieu 
thereof "statutory recovery period". 
(B) Paragraph (4) of section 467(c) is amended by striking 
out "subsection Ot))(3)(A)" and inserting in lieu thereof 
"subsection (b)(4)(A)". 
(C) The last sentence of section 467(d)(2) is amended by 
striking out "section 1274(c)(2)(C)" and inserting in lieu 
thereof "section 1274(c)(4)(C)". 
(D) Paragraph (5) of section 467(e) is amended by striking 
out "section 168((1)(4)(D)" and inserting in lieu thereof "sec-
tion 168(e)(4)(D)". 
(c) TRANSITION RULE.—A taxpayer shall be allowed to use the cash 
receipts and disbursements method of accounting for taxable years 
ending after January 1,1982, if such taxpayer— 
(1) is a partnership which was founded in 1936, 
(2) has over 1,000 professional employees, 
(3) used a long-term contract method of accounting for a 
substantial part of its income from the performance of architec-
tural and engineering services, and 
(4) is headquartered in Chicago, Illinois. 
SEC. 1808. AMENDMENTS RELATED TO TAX STRADDLE PROVISIONS. 
(a) TREATMENT OF SUBCHAPTER S CORPORATIONS.— 
(1) Section 102 of the Tax Reform Act of 1984 (relating to 
section 1256 extended to certain options) is amended by adding 
at the end thereof the following new subsection: 
"0") COORDINATION OF ELECTION UNDER SUBSECTION (d)(3) WITH 
ELECTIONS UNDER SUBSECTIONS (g) AND (h).—The Secretary of the 
Tresisury or his delegate shall prescribe such regulations as may be 
necessary to coordinate the election provided by subsection (dX3) 
with the elections provided by subsections (g) and (h)." 
(2) Paragraph (3) of section 102(d) of the Tax Reform Act of 
1984 (relating to subchapter S election) is amended by striking 
out "(as so defined)" and inserting in lieu thereof "(as so 
defined) or such other day as may be permitted under 
regulations". 
(b) TREATMENT OF AMOUNTS RECEIVED FOR LOANING SECURITIES.— 
Subparagraph (B) of section 263(g)(2) (defining interest and carrying 
charges) is amended by striking out "and" at the end of clause (ii), 
by striking out the period at the end of clause (iii) and inserting in 
lieu thereof ", and", and by inserting after clause (iii) the following 
new clause: 
"(iv) any amount which is a payment with respect to 
' 
a security loan (within the meaning of section 512(aX5)) 
includible in gross income with respect to such prop-
erty for the taxable year." 
(c) TREATMENT OF OPTION STRADDLES.—Subparagraph (A) of sec-
tion 1092(dX3) (relating to special rules for stocks) is amended by 
adding at the end thereof the following new sentence: "The preced-
ing sentence shall not apply to any interest in stock." 
(d) SECTION 108.—Section 108 of the Tax Reform Act of 1984 is 
amended— 
(1) by striking out "if such position is part of a transaction 
entered into for profit" and inserting in lieu thereof "if such 
loss is incurred in a trade or business, or if such loss is incurred 
100 STAT. 2818 
PUBLIC LAW 99-514—OCT. 22, 1986 
in a transaction entered into for profit though not connected 
with a trade or business", 
(2) by striking out subsection (b) and inserting in lieu thereof 
the following: 
"(b) Loss INCURRED IN A TRADE OR BUSINESS.—For purposes of 
subsection (a), any loss incurred by a commodities dealer in the 
trading of commodities shall be treated as a loss incurred in a trade 
or business.", 
(3) by striking out the heading for subsection (c) and inserting 
in lieu thereof the following: 
"(c) NET LOSS ALLOWED.—", 
(4) by striking out subsection (f) and inserting in lieu thereof 
the following: 
"(f) COMMODITIES DEALER.—For purposes of this section, the term 
'commodities dealer' means any taxpayer who— 
"(1) at any time before January 1, 1982, was an individual 
described in section 1402(i)(2)(B) of the Internal Revenue Code of 
1954 (as added by this subtitle), or 
"(2) was a member of the family (within the meaning of 
section 704(e)(3) of such Code) of an individual described in 
paragraph (1) to the extent such member engaged in commod-
ities trading through an organization the members of which 
consisted solely of— 
"(A) 1 or more individuals described in paragraph (1), and 
"(B) 1 or more members of the families (as so defined) of 
- 
such individuals.", and 
(4) by striking out subsection (h) and inserting in lieu thereof 
the following: 
"(h) SYNDICATES.—For purposes of this section, any loss incurred 
by a person (other than a commodities dealer) with respect to an 
interest in a syndicate (within the meaning of section 1256(eX3XB) of 
the Internal Revenue Code of 1954) shall not be considered to be a 
loss incurred in a trade or business." 
SEC. 1809. AMENDMENTS RELATED TO DEPRECIATION PROVISIONS. 
(a) AMENDMENTS RELATED TO SECTION 111 OF THE ACT.— 
(1) 15-YEAR STRAIGHT LINE ELECTION FOR LOW-INCOME HOUS-
ING.—The table contained in subparagraph (A) of section 
1680t))(3) (relating to election of different recovery percentage) is 
amended— 
(A) by striking out "and low-income housing" in the last 
' 
item, and 
^, 
(B) by adding at the end thereof the following new item: 
, 
"Low-income housing 
15, 35, or 45 years." 
(2) USE OF CONVENTIONS.— 
(A) 
MID-MONTH CONVENTION FOR I9-YEAR REAL PROP-
ERTY.— 
(i) Paragraph (2) of section 1680?) (relating to 19-year 
real property) is amended— 
(I) by striking out the last sentence of subpara-
.; -'• 
graph (A), and 
(II) by amending subparagraph (B) to read as 
K 
,- 
follows: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2819 
"(B) MID-MONTH CONVENTION FOR 19-YEAR REAL PROP-
ERTY.—In the case of 19-year real property, the amount of 
the deduction determined under any provision of this sec-
tion (or for purposes of section 57(a)(12)(B) or 312(k)) for any 
taxable year shall be determined on the basis of the number 
of months (using a mid-month convention) in which the 
property is in service." 
• 
(ii) Subparagraph (B) of section 168(fK2) (relating to 
recovery property used predominantly outside the 
t"lavo 
United States) is amended to read as follows: 
"(B) REAL PROPERTY.—Except as provided in subpara-
graph (C), in the case of 19-year real property or low-income 
housing which, during the taxable year, is predominantly 
used outside the United States, the recovery deduction for 
the taxable year shall be, in lieu of the amount determined 
under subsection 03), the amount determined by applying to 
the unadjusted basis of such property the applicable 
percentage determined under tables prescribed by the Sec-
retary. For purposes of the preceding sentence, in prescrib-
ing such tables, the Secretary shall— 
"(i) assign to the property described in this subpara-
graph a 35-year recovery period, and 
s 
"(ii) assign percentages determined in accordance 
with the use of the method of depreciation described in 
section 167(jXlXB), switching to the method described 
in section 1670t)Xl) at a time to maximize the deduction 
?' 
allowable under subsection (a)." 
(B) MONTHLY CONVENTION FOR LOW-INCOME HOUSING.— 
Subparagraph (B) of section 1680t)X4) (relating to low-income 
housing) is amended to read as follows: 
"(B) MONTHLY CONVENTION.—In the case of low-income 
housing, the amount of the deduction determined under 
any provision of this section (or for purposes of section 
K 
57(aX12XB) or 312(k)) for any taxable year shall be deter-
mined on the basis of the number of months (treating all 
property placed in service or disposed of during any month 
as placed in service or disposed of on the first day of such 
month) in which the property is in service." 
^c 
(C) C O N F O R M I N G AMENDMENTS.— 
vii 
(i) Effective on and after the date of the enactment of 
this Act, clause (ii) of section 168(jX2XB) (relating to 
conventions) is amended to read as follows: 
• * 
"(ii) CROSS REFERENCE.— 
(V 
"For other applicable conventions, see paragraphs (2)(B) and (4)(B) of 
subsection (b)." 
(ii) Subparagraph (A) of section 312(kX3) is amended 
by striking out ", and rules similar to the rules under 
the next to the last sentence of section 1680t)X2XA) and 
section 168a)X2XB) shall apply". 
(3) MINIMUM TAX TREATMENT.—Subparagraph (B) of section 
57(a)(12) (relating to 19-year real property and low-income hous-
ing) is amended by striking out so much of such subparagraph 
as precedes clause (i) thereof and inserting in lieu thereof the 
following: 
"(B) 19-YEAR REAL PROPERTY AND LOW-INCOME HOUSING.— 
With respect to each recovery property which is 19-year 
100 STAT. 2820 
PUBLIC LAW 99-514—OCT. 22, 1986 
- 
real property or low-income housing, the amount (if any) by 
which the deduction allowed under section 168(a) (or, in the 
C£ise of property described in section 167(k), under section 
167) for the taxable year exceeds the deduction which would 
have been allowable for the taxable year had the property 
been depreciated using a straight-line method (without 
regard to salvage value) over a recovery period of—". 
(4) 
TREATMENT OF PROPERTY FINANCED WITH TAX-EXEMPT 
BONDS.— 
(A) Clause (ii) of section 168(fX12)(B) (relating to recovery 
'' 
method) is amended to read as follows: 
"(ii) 19-YEAR REAL PROPERTY.—In the case of 19-year 
real property, the amount of the deduction allowed 
shall be determined by using the straight-line method 
(without regard to salvage value) and a recovery period 
of 19 years. 
(B) Subparagraph (C) of section 168(f)(12) (relating to 
exception for projects for residential rental property) is 
amended to read as follows: 
"(C) EXCEPTION FOR LOW- AND MODERATE-INCOME HOUS-
,, 5
-
> ING.—Subparagraph (A) shall not apply to— 
"(i) any low-income housing, and 
"(ii) any other recovery property which is placed in 
service in connection with projects for residential 
rental property financed by the proceeds of obligations 
described in section 103(bX4XA)." 
(C) Any property described in paragraph (3) of section 
631(d) of the Tax Reform Act of 1984 shall be treated as 
• :: 
property described in clause (ii) of section 168(f)(12)(C) of the 
Internal Revenue Code of 1954 as amended by subpara-
graph (B). 
(5) COORDINATION WITH IMPUTED INTEREST CHANGES.—In the 
case of any property placed in service before May 9, 1985 (or 
treated as placed in service before such date by section 105(bX3) 
of Public Law 99-121)— 
(A) any reference in any amendment made by this subsec-
tion to 19-year real property shall be treated as a reference 
to 18-year real property, and 
(B) section 168(f)(12XBXii) of the Internal Revenue Code of 
1954 (as amended by paragraph (4XA)) shall be applied by 
substituting "18 years for "19 years". 
OD) TREATMENT OF TRANSFEREE IN CERTAIN TRANSACTIONS.— 
(1) IN GENERAL.—Subparagraph (A) of section 168(fK10) (relat-
ing to transferee bound by transferor's period and method in 
certain cases) is amended to read as follows: 
"(A) IN GENERAL.—In the case of recovery property trans-
ferred in a transaction described in subparagraph (B), for 
. . 
purposes of computing the deduction allowable under 
subsection (a) with respect to so much of the basis in the 
hands of the transferee as does not exceed the adjusted 
basis in the hands of the transferor— 
"(i) if the transaction is described in subparagraph 
(B)(i), the transferee shall be treated in the same 
manner as the transferor, or 
_ ;
p
, 
"(ii) if the transaction is described in clause (ii) or (iii) 
•
i
-
f '.*yjj "• of subparagraph (B) and the transferor made an elec-
tion with respect to such property under subsection 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2821 
(bX3) or (f)(2)(C), the transferee shall be treated as 
having made the same election (or its equivalent)." 
(2) TREATMENT OF TERMINATIONS OF PARTNERSHIPS.—Subpara-
graph (B) of section 168(f)(10) is amended by adding at the end 
thereof the following new sentence: 
"Clause (i) shall not apply in the case of the termination of 
a partnership under section 708(b)(1)(B)." 
(3) EFFECTIVE DATE.—The amendments made by this subsec-
tion shall apply to property placed in service by the transferee 
after December 31, 1985, in taxable years ending after such 
date. 
(c) AMENDMENT RELATED TO SECTION 112 OF THE ACT.—Paragraph 
(2) of section 453(i) (defining recapture income) is amended by 
striking out "section 1245 or 1250' and inserting in lieu thereof 
"section 1245 or 1250 (or so much of section 751 as relates to section 
1245 or 1250)". 
(d) AMENDMENTS RELATED TO SECTION 113 OF THE ACT.— 
(1) TREATMENT OF FILMS, VIDEO TAPES, AND SOUND RECORD-
INGS.—Except with respect to property placed in service by the 
taxpayer on or before March 28, 1985, subsection (c) of section 
167 (relating to limitations on use of certain methods and rates) 
is amended by adding at the end thereof the following new 
sentence: 
"Paragraphs (2), (3), and (4) of subsection (h) shall not apply to any 
motion picture film, video tape, or sound recording." 
(2) CLERICAL AMENDMENT.—Subsection (q) of section 48 is 
amended by redesignating the paragraph relating to special 
rule for qualified films as paragraph (7). 
(e) AMENDMENTS RELATED TO SECTION 114 OF THE ACT.— 
(1) Paragraph (1) of section 48(b) (defining new section 38 
property) is amended by adding at the end thereof the following 
new sentence: "Such term includes any section 38 property the 
reconstruction of which is completed by the taxpayer, but only 
with respect to that portion of the basis which is properly 
attributable to such reconstruction." 
(2) Paragraph (2) of section 480t)) (relating to special rule for 
sale-leasebacks) is amended— 
(A) by striking out "paragraph (1)" and inserting in lieu 
thereof "the first sentence of paragraph (1)", 
(B) by striking out "used under the lease" and inserting 
in lieu thereof "used under the leaseback (or lease) referred 
to in subparagraph (B)", 
(C) by adding at the end thereof the following new sen-
tence: "The preceding sentence shall not apply to any 
property if the lessee and lessor of such property make an 
election under this sentence. Such an election, once made, 
may be revoked only with the consent of the Secretary.", 
and 
(D) by striking out "3 months o f in subparagraph (B) and 
inserting in lieu thereof "3 months after". 
SEC. 1810. AMENDMENTS RELATED TO FOREIGN PROVISIONS. 
(a) AMENDMENTS RELATED TO SECTION 121 OF THE ACT.— 
(1) TREATMENT OF CERTAIN DOMESTIC CORPORATIONS.— 
(A) IN GENERAL.—Subsection (g) of section 904 (relating to 
source rules in the case of United States-owned foreign 
corporations) is amended by redesignating paragraph (9) as 
100 STAT. 2822 
PUBLIC LAW 99-514—OCT. 22, 1986 
6 
paragraph (10), and by inserting after paragraph (8) the 
following new paragraph: 
"(9) 
TREATMENT OF CERTAIN DOMESTIC CORPORATIONS.—For 
purposes of this subsection— 
"(A) in the case of interest treated as not from sources 
within the United States under section 861(a)(1)(B), the 
corporation paying such interest shall be treated as a 
United States-owned foreign corporation, and 
"(B) in the case of any dividend treated as not from 
sources within the United States under section 861(a)(2)(A), 
the corporation paying such dividend shall be treated as a 
United States-owned foreign corporation." 
(B) EFFECTIVE DATE.—The amendment made by subpara-
graph (A) shall take effect on March 28, 1985. In the case of 
any taxable year ending after such date of any corporation 
treated as a United States-owned foreign corporation by 
reason of the amendment made by subparagraph (A)— 
(i) only income received or accrued by such corpora-
tion after such date shall be taken into account under 
section 904(g) of the Internal Revenue Code of 1954; 
except that 
(ii) paragraph (5) of such section 904(g) shall be ap-
plied by taking into account all income received or 
accrued by such corporation during such taxable year. 
(2) TREATMENT OF CERTAIN FOREIGN CORPORATIONS ENGAGED IN 
TRADE OR BUSINESSES WITHIN THE UNITED STATES.—Subparagraph 
(E) of section 121(b)(2) of the Tax Reform Act of 1984 (relating to 
special rules for applicable CFC) is amended by adding at the 
end thereof the following new clause: 
"(iii) TREATMENT OF CERTAIN FOREIGN CORPORATIONS 
ENGAGED IN BUSINESS IN UNITED STATES.—For purpOSeS 
of clause (ii), a foreign corporation shall be treated as a 
United States person with respect to any interest pay-
ment made by such corporation if^ 
"(I) at least 50 percent of the gross income from 
', .'txi- 
all sources of such corporation for the 3-year period 
ending with the close of its last taxable year ending 
.', 1 .5 
on or before March 31, 1984, was effectively con-
nected with the conduct of a trade or business 
^,; ,r.:,. 
within the United States, and 
I •. 
; , 
"(II) at least 50 percent of the gross income from 
all sources of such corporation for the 3-year period 
ending with the close of its taxable year preceding 
the payment of such interest was effectively con-
nected with the conduct of a trade or business 
within the United States." 
(3) TREATMENT OF CERTAIN SHORT-TERM BORROWING.—Clause 
(ii) of section 121(b)(2XD) of the Tax Reform Act of 1984 (defining 
applicable CFC) is amended by striking out "or the holding of 
short-term obligations" and all that follows and inserting in lieu 
thereof "(or short-term borrowing from nonaffiliated persons) 
and lending the proceeds of such obligations (or such borrowing) 
to affiliates." 
(4) COORDINATION WITH TREATY OBLIGATIONS.—Section 904(g) 
of the Internal Revenue Code of 1954 shall apply notwithstand-
ing any treaty obligation of the United States to the contrary 
(whether entered into on, before, or after the date of the enact-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2823 
ment of this Act) unless (in the case of a treaty entered into 
after the date of the enactment of this Act) such treaty by 
specific reference to such section 904(g) clearly expresses the 
intent to override the provisions of such section. 
(5) TRANSITIONAL RULE RELATED TO SECTION I25(bx5) OF THE 
ACT.—For purposes of section 1250t)X5) of the Tax Reform Act of 
1984 (relating to separate application of section 904 in case of 
income covered by transitional rules), any carryover under 
section 904(c) of the Internal Revenue Code of 1954 allowed to a 
taxpayer which was incorporated on August 31, 1962, attrib-
utable to taxes paid or accrued in taxable years beginning in 
1981, 1982, 1983, or 1984, with respect to amounts included in 
gross income under section 951 of such Code in respect of a 
controlled foreign corporation which was incorporated on 
May 27, 1977, shall be treated as taxes paid or accrued on 
income separately treated under such section 1250t)X5). 
(b) AMENDMENTS RELATED TO SECTION 122 OF THE ACT.— 
(1) TREATMENT OF SUBPART F AND FOREIGN PERSONAL HOLDING 
COMPANY INCLUSIONS.—Subparagraph (C) of section 904(dX3) 
(relating to exception where designated corporation has small 
amount of separate limitation interest) is amended by adding at 
the end thereof the following new sentence: 
"The preceding sentence shall not apply to any amount 
includible in gross income under section 551 or 951." 
(2) TREATMENT OF INTEREST AND DIVIDENDS FROM MEMBERS OF 
SAME AFFIUATED GROUP.—Paragraph (3) of section 904(d) (relat-
ing to certain amounts attributable to United States-owned 
foreign corporations, etc., treated as interest) is amended by 
striking out subparagraph (J), by redesignating subparagraph (I) 
as subparagraph (J), and by inserting after subparagraph (H) 
the following new subparagraph: 
"(I) 
INTEREST AND DIVIDENDS FROM MEMBERS OF SAME 
AFFIUATED GROUP.—For purposes of this paragraph, divi-
dends and interest received or accrued by the designated 
payor corporation from another member of the same affili-
ated group (determined under section 1504 without regard 
to subsection (bX3) thereof) shall be treated as separate 
limitation interest if (and only if) such amounts are attrib-
utable (directly or indirectly) to separate limitation interest 
of any other member of such group." 
(3) TREATMENT OF INTEREST FROM DESIGNATED PAYOR CORPORA-
TION.—Paragraph (2) of section 904(d) is amended by inserting 
at the end thereof the following: "For purposes of this subsec-
tion, interest (after the operation of section 904(dX3)) received 
from a designated payor corporation described in section 
904(dX3XEXiii) by a taxpayer which owns directly or indirectly 
less than 10 percent of the voting stock of such designated payor 
corporation shall be treated as interest described in subpara-
graph (A) to the extent such interest would have been so treated 
had such taxpayer received it from other than a designated 
payor corporation." 
(4) DEFINITION OF DESIGNATED PAYOR CORPORATION.— 
(A) IN GENERAL.—Subparagraph (E) of section 904(d)(3) 
(defining designated payor corporation) is amended by strik-
ing out "and' at the end of clause (ii), by striking out the 
period at the end of clause (iii) and inserting in lieu thereof 
', and", and by adding at the end thereof the following: 
100 STAT. 2824 
PUBLIC LAW 99-514—OCT. 22, 1986 
,^j 
. , > 
"(iv) any other corporation formed or availed of for 
purposes of avoiding the provisions of this paragraph. 
For purposes of this paragraph, the rules of paragraph (9) of 
subsection (g) shall apply." 
(B) EFFECTIVE DATES.— 
(i) The amendment made by subparagraph (A) 
insofar as it adds the last sentence to subparagraph (E) 
of section 905(d)(3) shall take effect on March 28, 1985. 
In the case of any taxable year ending after such date 
of any corporation treated as a designated payor cor-
poration by reason of the amendment made by 
subparagraph (A)— 
(I) only income received or accrued by such cor-
poration after such date shall be taken into 
,,^^ .. 
account under section 904(dX3) of the Internal 
Revenue Code of 1954; except that 
(II) subparagraph (C) of such section 904(d)(3) 
, ^, , 
shall be applied by taking into account all income 
received or accrued by such corporation during 
such taxable year. 
.. 
. 
(ii) The amendment made by subparagraph (A) 
insofar as it adds clause (iv) to subparagraph (E) of 
section 904(d)(3) shall take effect on December 31, 1985. 
For purposes of such amendment, the rule of the 
second sentence of clause (i) shall be applied by taking 
into account December 31, 1985, in lieu of March 28, 
1985. 
(c) AMENDMENTS RELATED TO SECTION 123 OF THE ACT.— 
(1) Subparagraph (A) of section 956(b)(3) (relating to certain 
trade or service receivables acquired from related United States 
persons) is amended by striking out "paragraph (2)" and insert-
ing in lieu thereof "paragraph (2) (other than subparagraph (H) 
thereof)". 
(2) Subsection (d) of section 864 (relating to treatment of 
related person factoring income) is amended by redesignating 
paragraph (7) as paragraph (8) and by inserting after paragraph 
(6) the following new paragraph: 
"(7) EXCEPTION FOR CERTAIN RELATED PERSONS DOING BUSINESS 
IN SAME FOREIGN COUNTRY.—Paragraph (1) shall not apply to 
any trade or service receivable acquired by any person from a 
related person if— 
"(A) the person acquiring such receivable and such re-
lated person are created or organized under the laws of the 
same foreign country and such related person has a 
substantial part of its assets used in its trade or business 
located in such same foreign country, and 
"(B) such related person would not have derived any 
foreign base company income (as defined in section 954(a), 
determined without regard to section 954(b)(3XA)), or any 
^ ^ 
income effectively connected with the conduct of a trade or 
"
*
* 
business within the United States, from such receivable if it 
had been collected by such related person." 
(3) Clause (i) of section 864(d)(5)(A) (relating to certain provi-
sions not to apply) is amended by inserting before the period at 
the end thereof the following: "and subparagraph (J) of section 
904(d)(3) (relating to interest from members of same affiliated 
group)". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2825 
(d) AMENDMENTS RELATED TO SECTION 127 OF THE ACT.— 
(1) DEFINITION OF PORTFOLIO INTEREST.— 
(A) Paragraph (2) of section 871(h) (defining portfolio 
interest) is amended by striking out "which is described in" 
in the matter preceding subparagraph (A) and inserting in 
Heu thereof "which would be subject to tax under subsec-
tion (a) but for this subsection and which is described in". 
(B) Paragraph (2) of section 881(c) (defining portfolio 
interest) is amended by striking out "which is described in" 
in the matter preceding subparagraph (A) and inserting in 
lieu thereof "which would be subject to tax under subsec-
tion (a) but for this subsection and which is described in". 
(2) ATTRIBUTION OF SHAREHOLDER STOCK TO CORPORATION.— 
Subparagraph (C) of section 871(h)(3) (relating to portfolio 
' 
interest not to include interest received by 10-percent share-
holders) is amended by striking out "and" at the end of clause 
(i), by redesignating clause (ii) as clause (iii), and by inserting 
after clause (i) the following new clause: 
"(ii) section 318(aX3XC) shall be applied— 
"(I) without regard to the 50-percent limitation 
therein; and 
"(II) in any case where such section would not 
apply but for subclause (I), by considering a cor-
poration as owning the stock (other than stock in 
such corporation) which is owned by or for any 
shareholder of such corporation in that proportion 
which the value of the stock which such share-
holder owns in such corporation bears to the value 
of all stock in such corporation, and". 
(3) CLERICAL AMENDMENTS.— 
(A) Paragraph (1) of section 871(a) is amended by striking 
out "provided in subsection (i)" in the matter preceding 
subparagraph (A), and inserting in lieu thereof "provided in 
subsection (h)". 
(B) Clause (ii) of section 871(hX2)(B) is amended by strik-
ing out "has received" and inserting in lieu thereof 
"receives". 
(C) Clause (ii) of section 881(c)(2XB) is amended by strik-
ing out "has received" and inserting in lieu thereof 
"receives". 
(D) Paragraph (9) of section 1441(c) is amended by striking 
out "871(hX2)" and inserting in lieu thereof "section 
871(h)". 
(E) Subsection (a) of section 1442 is amended— 
(i) by striking out "sections 871(hX2)" and inserting 
in lieu thereof "sections 871(h)", 
(ii) by striking out "sections 881(cX2)" and inserting 
in lieu thereof "sections 881(c)", and 
(iii) by striking out "section 1449(c)(9)" and inserting 
in lieu thereof "section 1441(cX9)". 
(e) AMENDMENTS RELATED TO SECTION 128 OF THE ACT.— 
(1) DEDUCTION FOR ORIGINAL ISSUE DISCOUNT.— 
(A) Subparagraph (A) of section 163(eX3) (relating to spe-
cial rule for original issue discount on obligation held by 
related foreign person) is amended by adding at the end 
thereof the following new sentence: "The preceding sen-
tence shall not apply to the extent that the original issue 
100 STAT. 2826 
PUBLIC LAW 99-514—OCT. 22, 1986 
discount is effectively connected with the conduct by such 
foreign related person of a trade or business within the 
United States unless such original issue discount is exempt 
from taxation (or is subject to a reduced rate of tax) pursu-
ant to a treaty obligation of the United States." 
(B) Subsection (e) of section 163 is amended by redesignat-
ing the paragraph relating to cross references as paragraph 
(5). 
(2) TAXATION OF ORIGINAL ISSUE DISCOUNT.— 
(A) Subparagraph (C) of section 871(a)(1) (relating to 
income not connected with United States business) is 
amended to read as follows: 
"(C) in the case of— 
"(i) a sale or exchange of an original issue discount 
obligation, the amount of the original issue discount 
accruing while such obligation was held by the non-
resident alien individual (to the extent such discount 
was not theretofore taken into account under clause 
(ii)), and 
fj ' iif 
"(ii) a payment on an original issue discount obliga-
tion, an amount equal to the original issue discount 
accruing while such obligation was held by the non-
resident alien individual (except that such original 
issue discount shall be taken into account under this 
clause only to the extent such discount was not thereto-
fore taken into account under this clause and only to 
the extent that the tax thereon does not exceed the 
payment less the tax imposed by subparagraph (A) 
thereon), and". 
(B) Paragraph (3) of section 881(a) (relating to tax on 
income of foreign corporations not connected with United 
States business) is amended to read as follows: 
O
f i 
"(3) in the case o
f
— 
"(A) a sale or exchange of an original issue discount 
obligation, the amount of the original issue discount accru-
ing while such obligation was held by the foreign corpora-
tion (to the extent such discount was not theretofore taken 
into account under subparagraph (B)), and 
"(B) a payment on an original issue discount obligation, 
an amount equal to the original issue discount accruing 
while such obligation was held by the foreign corporation 
(except that such original issue discount shall be taken into 
account under this subparagraph only to the extent such 
discount was not theretofore taken into account under this 
^fii 
subparagraph and only to the extent that the tax thereon 
does not exceed the payment less the tax imposed by para-
graph (1) thereon), and", 
(f) AMENDMENTS RELATED TO SECTION 129 OF THE ACT.— 
(1) TREATMENT OF ELECTIONS UNDER SECTION 897(i).— 
(A) Paragraph (1) of section 897(i) (relating to election by 
foreign corporation to be treated as domestic corporation) is 
amended by striking out "and section 6039C" and inserting 
"^•' 
in lieu thereof ", section 1445, and section 6039C". 
(B) Paragraph (4) of section 897(i) is amended by striking 
out "this section and section 6039C" and inserting in lieu 
thereof "this section, section 1445, and section 6039C". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2827 
(2) EXEMPTION FOR INTERESTS IN CERTAIN CORPORATIONS.— 
Paragraph (3) of section 1445(b) (relating to nonpublicly traded 
domestic corporation furnishing affidavit that it is not a United 
States real property holding corporation) is amended to read as 
follows: 
"(3) NONPUBUCLY TRADED DOMESTIC CORPORATION FURNISHES 
AFFIDAVIT THAT INTERESTS IN CORPORATION NOT UNITED STATES 
REAL PROPERTY INTERESTS.—Except as provided in paragraph (7), 
this paragraph applies in the case of a disposition of any 
interest in any domestic corporation if the domestic corporation 
furnishes to the transferee an affidavit by the domestic corpora-
tion stating, under penalty of perjury, that— 
"(A) the domestic corporation is not and has not been a 
United States real property holding corporation (as defined 
in section 897(cX2)) during the applicable period specified in 
section 897(cXlXA)(ii), or 
"(B) as of the date of the disposition, interests in such 
corporation are not United States real property interests by 
reason of section 897(cXlXB)." 
^3) NOTICE OF FALSE AFFIDAVIT.— 
(A) Clause (i) of section 1445(dXlXB) (relating to notice of 
false affidavit; foreign corporations) is amended to read as 
follows: 
"(i) any transferor's agent— 
"(I) such agent has actual knowledge that such 
affidavit is false, or 
"(II) in the case of an affidavit described in 
subsection (bX2) furnished by a corporation, such 
corporation is a foreign corporation, or". 
(B) Paragraph (1) of section 1445(d) is amended by strik-
ing out "described in paragraph (2XA)" and inserting in lieu 
thereof "described in paragraph (2)". 
(4) TREATMENT OF CERTAIN DOMESTIC PARTNERSHIPS, TRUSTS, 
AND ESTATES.— 
(A) IN GENERAL.—Paragraph (1) of section 1445(e) (relat-
ing to certain domestic partnerships, trusts, and estates) is 
amended to read as follows: 
"(1) CERTAIN DOMESTIC PARTNERSHIPS, TRUSTS, AND ESTATES.— 
In the case of any disposition of a United States real property 
interest as defined in section 897(c) (other than a disposition 
described in paragraph (4) or (5)) by a domestic partnership, 
domestic trust, or domestic estate, such partnership, the trustee 
of such trust, or the executor of such estate (as the case may be) 
shall be required to deduct and withhold under subsection (a) a 
tax equal to 28 percent of the gain realized to the extent such 
gain— 
"(A) is allocable to a foreign person who is a partner or 
beneficiary of such partnership, trust, or estate, or 
"(B) is allocable to a portion of the trust treated as owned 
by a foreign person under subpart E of part I of subchapter 
i 
J. 
(B) EFFECTIVE DATE.—The amendment made by subpara-
graph (A) shall apply to dispositions after the day 30 days 
after the date of the enactment of this Act. 
(5) DISTRIBUTIONS BY DOMESTIC CORPORATIONS TO FOREIGN 
SHAREHOLDER.—Paragraph (3) of section 1445(e) (relating to dis-
tributions by certain domestic corporations to foreign share-
100 STAT. 2828 
PUBLIC LAW 99-514-OCT. 22, 1986 
holders) is amended by adding at the end thereof the following 
new sentence: "The preceding sentence shall not apply if, as of 
the date of the distribution, interests in such corporation are 
not United States real property interests by reason of section 
897(c)(1)(B)." 
(6) CERTAIN TAXABLE DISTRIBUTIONS.—Paragraph (4) of section 
1445(e) (relating to taxable distributions by domestic or foreign 
partnerships, trusts, or estates) is amended by striking out 
"section 897(g)" and inserting in lieu thereof "section 897". 
(7) PAYMENT OF TAX.—Subsection (d) of section 6039C (relating 
to special rule for United States interests and Virgin Islands 
interests) is amended by striking out "subject to tax under 
section 897(a)" and inserting in lieu thereof "subject to tax 
under section 897(a) (and any person required to withhold tax 
under section 1445)". 
(8) PAYMENTS THROUGH i OR MORE ENTITIES.—Paragraph (6) of 
section 1445(e) (relating to regulations) is amended by inserting 
before the period at the end thereof the following: "and regula-
tions for the application of this subsection in the case of pay-
ments through 1 or more entities", 
(9) CONFORMING AMENDMENTS TO SECTION 6652(g).— 
(A) Paragraph (1) of section 6652(g) (relating to returns, 
etc., required under section 6039C) is amended to read as 
follows: 
"(1) IN GENERAL.—In the case of each failure to make a return 
required by section 6039C which contains the information re-
quired by such section on the date prescribed therefor (deter-
mined with regard to any extension of time for filing), unless it 
is shown that such failure is due to reasonable cause and not to 
willful neglect, the amount determined under paragraph (2) 
shall be paid (upon notice and demand by the Secretary and in 
the same manner as tax) by the person failing to make such 
return." 
(B) Paragraph (3) of section 6652(g) is amended to read as 
follows: 
"(3) LIMITATION.—The amount determined under paragraph 
(2) with respect to any person for failing to meet the require-
ments of section 6039C for any calendar year shall not exceed 
the lesser o
f
— 
"(A) $25,000, or 
"(B) 5 percent of the aggregate of the fair market value of 
the United States real property interests owned by such 
person at any time during such year. 
For purposes of the preceding sentence, fair market value shall 
be determined as of the end of the calendar year (or, in the case 
of any property disposed of during the calendar year, as of the 
date of such disposition)." 
(C) The subsection heading for subsection (g) of section 
6652 is amended by striking out ", ETC.,". 
(g) AMENDMENTS RELATED TO SECTION 131 OF THE ACT.— 
(1) Subsection (f) of section 367 (relating to transitional rule) is 
hereby repealed. 
(2) Paragraph (1) of section 7482(b) (relating to venue) is 
amended by striking out "section 7428, 7476, or 7477" and 
inserting in lieu thereof "section 7428 or 7476". 
(3) Paragraph (8) of section 6501(c) (relating to failure to notify 
the Secretary under section 6038B) is amended— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2829 
(A) by striking out "subsection (a) or (d)" and inserting in 
lieu thereof "subsection (a), (d), or (e)", and 
(B) by striking out "exchange" each place it appears and 
inserting in lieu thereof "exchange or distribution". 
(4XA) Subsection (aXD of section 367 (relating to foreign cor-
porations) is amended by striking out "355,". 
(B) Subsection (e) of section 367 (relating to treatment of 
liquidations under section 336) is amended— 
(i) by striking out "described in section 336" and inserting 
in lieu thereof "described in section 336 or 355 (or so much 
of section 356 as relates to section 355)", and 
(ii) by striking out "LIQUIDATIONS UNDER SECTION 366" in 
the subsection heading and inserting in lieu thereof "DIS-
TRIBUTIONS DESCRIBED IN SECTION 336 OR 355". 
(h) AMENDMENTS RELATED TO SECTION 132 OF THE ACT.— 
(1) Subsection (c) of section 552 (relating to certain dividends 
and interest not taken into account) is amended by adding at 
the end thereof the following new sentence: 
"For purposes of the preceding sentence, the term 'related person' 
has the meaning given such term by section 954(dX3) (determined by 
substituting 'foreign personal holding company' for 'controlled for-
eign corporation' each place it appears)." 
(2) Paragraph (1) of section 551(f) (relating to stock held 
through foreign entity) is amended by striking out "United 
States shareholder" and inserting in lieu thereof "United States 
shareholder or an estate or trust which is a foreign estate or 
trust". 
(i) AMENDMENTS RELATED TO SECTION 133 OF THE ACT.— 
(1) Subparagraph (B) of section 1248(iXl) (relating to treat-
ment of certain indirect transfers) is amended by striking out 
"in redemption of his stock" and inserting in lieu thereof "in 
redemption or liquidation (whichever is appropriate)". 
(2) Clause (iii) of section 133(dX3XB) of the Tax Reform Act of 
1984 (relating to amendments related to section 1248) is 
amended by striking out "180 days after the date of the enact-
ment of this Act" and inserting in lieu thereof "the date which 
is 1 year after the date of the enactment of the Tax Reform Act 
of 1985". 
(j) AMENDMENTS RELATED TO SECTION 136 OF THE ACT.— 
(1) COLLECTION OF TAX.—Subsection (b) of section 269B (relat-
ing to stapled entities) is amended by inserting before the period 
at the end thereof the following: "and regulations providing 
that any tax imposed on the foreign corporation referred to in 
subsection (aXD may, if not paid by such corporation, be col-
lected from the domestic corporation referred to in such subsec-
tion or the shareholders of such foreign corporation". 
(2) EXCEPTION WHERE CORPORATIONS OWNED BY FOREIGN PER-
SONS.—Section 269B is amended by adding at the end thereof 
the following new subsection: 
"(e) SUBSECTION (aXD NOT TO APPLY IN CERTAIN CASES.— 
"(1) IN GENERAL.—Subsection (aXD shall not apply if it is 
established to the satisfaction of the Secretary that the domestic 
corporation and the foreign corporation referred to in such 
subsection are foreign owned. 
"(2) FOREIGN OWNED.—For purposes of paragraph (1), a cor-
poration is foreign owned if less than 50 percent of^ 
100 STAT. 2830 
PUBLIC LAW 99-514—OCT. 22, 1986 
ai mfii 
"(A) the total combined voting power of all classes of 
stock of such corporation entitled to vote, and 
bf 
"(B) the total value of the stock of the corporation, 
is held directly (or indirectly through applying paragraphs (2) 
f' and (3) of section 958(a) and paragraph (4) of section 318(a)) by 
United States persons (as defined in section 7701(aX30))." 
(k) AMENDMENT RELATED TO SECTION 137 OF THE ACT.—Subsection 
(e) of section 954 (defining foreign base company services income) is 
amended to read as follows: 
"(e) FOREIGN BASE COMPANY SERVICES INCOME.— 
"(1) IN GENERAL.—For purposes of subsection (aX3), the term 
'foreign base company services income' means income (whether 
in the form of compensation, commissions, fees, or otherwise) 
derived in connection with the performance of technical, mana-
gerial, engineering, architectural, scientific, skilled, industrial, 
commercial, or like services which— 
"(A) are performed for or on behalf of any related person 
(within the meaning of subsection (dX3)), and 
"(B) are performed outside the country under the laws of 
. 
which the controlled foreign corporation is created or 
organized. 
"(2) EXCEPTION.—Parg^aph (1) shall not apply to income 
derived in connection with the performance of services which 
are directly related to— 
"(A) the sale or exchange by the controlled foreign cor-
poration of property manufactured, produced, grown, or 
extracted by it and which are performed before the time of 
the sale or exchange, or 
"(B) an offer or effort to sell or exchange such property. 
"(3) TREATMENT OF CERTAIN INSURANCE CONTRACTS.—For pur-
poses of parsigraph (1), in the case of any services performed 
with respect to any policy of insurance or reinsurance with 
respect to which the primary insured is a related person (within 
the meaning of section 864(dX4))— 
"(A) such primary insured shall be treated as a related 
person for purposes of paragraph (IXA) (whether or not the 
requirements of subsection (dX3) are met), 
"(B) such services shall be treated as performed in the 
country within which the insured hazards, risks, losses, or 
liabilities occur, and 
"(C) except as otherwise provided in regulations by the 
Secretary, rules similar to the rules of section 953(b) shall 
be applied in determining the income from such services." 
(1) AMENDMENTS RELATED TO SECTION 138 OF THE ACT.— 
(1) Clause (i) of section 7701(bX4XE) (relating to limitation of 
teachers and trednees) is amended by adding at the end thereof 
the following new sentence: "In the case of an individual all of 
whose compensation is described in section 872(bX3), the preced-
ing sentence shall be applied by substituting '4 calendar years' 
for *2 calendar years'." 
(2) Subparagraph (A) of section 7701(bXl) is amended— 
(A) by striking out "the requirements of clause (i) or (ii)" 
and inserting in lieu thereof the requirements of clause (i), 
7. 
u. (ii), or (iii)", and 
(B) bv adding at the end thereof the following new clause: 
-toj fi , 
(iii) FIRST YEAR ELECTION.—Such individual makes 
the election provided in paragraph (4)." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2831 
(3) Subparagraph (A) of section 7701(b)(2) is amended by 
adding at the end thereof the following new clause: 
"(iv) RESIDENCY STARTING DATE FOR INDIVIDUALS 
MAKING FIRST Y
E
A
R ELECTION.—In the case of an 
individual who makes the election provided by para-
graph (4) with respect to any calendar year, the resi-
dency starting date shall be the 1st day during such 
calendar year on which the individual is treated as a 
resident of the United States under that paragraph." 
(4) Subsection (b) of section 7701 is amended by redesignating 
paragraphs (4), (5), (6), (7), (8), (9), and (10) as paragraphs (5), (6), 
[1), (8), (9), (10), and (11), respectively, and by inserting after 
paragraph (3) the following new paragraph: 
"(4) FIRST-YEAR ELECTION.— 
"(A) An alien individual shall be deemed to meet the 
requirements of this subparagraph if such individual— 
"(i) is not a resident of the United States under 
clause (i) or (ii) of paragraph (1)(A) with respect to a 
calendar year (hereinafter referred to as the 'election 
year'), 
"(ii) was not a resident of the United States under 
paragraph (1)(A) with respect to the calendar year 
immediately preceding the election year, 
"(iii) is a resident of the United States under clause 
(ii) of paragraph (1)(A) with respect to the calendar year 
immediately following the election year, and 
"(iv) is both— 
"(I) present in the United States for a period of 
at least 31 consecutive days in the election year, 
and 
"(II) present in the United States during the 
period beginning with the first day of such 31-day 
period and ending with the last day of the election 
year (hereinafter referred to as the 'testing period') 
for a number of days equal to or exceeding 75 
percent of the number of days in the testing period 
(provided that an individual shall be treated for 
purposes of this subclause as present in the United 
States for a number of days during the testing 
period not exceeding 5 days in the aggregate, not-
withstanding his absence from the United States 
r; 
on such days). 
"(B) An alien individual who meets the requirements of 
subparagraph (A) shall, if he so elects, be treated as a 
resident of the United States with respect to the election 
year. 
"(C) An alien individual who makes the election provided 
by subparagraph (B) shall be treated as a resident of the 
United States for the portion of the election year which 
begins on the 1st day of the earliest testing period during 
such year with respect to which the individual meets the 
requirements of clause (iv) of subparagraph (A). 
' (D) The rules of subparagraph (D)(i) of paragraph (3) 
shall apply for purposes of determining an individual's 
presence in the United States under this paragraph. 
"(E) An election under subparagraph (B) shall be made on 
the individual's tax return for the election year, provided 
100 STAT. 2832 
PUBLIC LAW 99-514—OCT. 22, 1986 
id 
that such election may not be made before the individual 
has met the substantial presence test of paragraph (3) with 
s« 
respect to the calendar year immediately following the 
election year. 
"(F) An election once made under subparagraph (B) re-
mains in effect for the election year, unless revoked with 
the consent of the Secretary." 
(5)(A) Section 7701(b)(4)(A) (defining exempt individual) is 
amended by striking "or" at the end of clause (ii), by striking 
the period at the end of clause (iii) and inserting ", or" and by 
adding after clause (iii) the following new clause: 
.... 
"(jy) a professional athlete who is temporarily in the 
United States to compete in a charitable sports event de-
scribed in section 274(k)(2)." 
*
*
^ 
(B) The amendments made by this paragraph shall apply to 
periods after the date of the enactment of this Act. 
SEC. 1811. AMENDMENTS RELATED TO REPORTING, PENALTY, AND 
OTHER PROVISIONS. 
(a) AMENDMENTS RELATED TO SECTION 145 OF THE ACT.— 
(1) Section 6050H (relating to returns relating to mortgage 
interest received in trade or business from individuals) is 
amended by adding at the end thereof the following new 
subsection: 
"(g) SPECIAL RULES FOR COOPERATIVE HOUSING CORPORATIONS.— 
For purposes of subsection (a), an amount received by a cooperative 
housing corporation from a tenant-stockholder shall be deemed to be 
interest received on a mortgage in the course of a trade or business 
engaged in by such corporation, to the extent of the tenant-stock-
holder's proportionate share of interest described in section 
216(a)(2). Terms used in the preceding sentence shall have the same 
meanings as when used in section 216." 
(2) Paragraph (2) of section 145(d) of the Tax Reform Act of 
1984 is amended l3y striking out "section 6652" and inserting in 
lieu thereof "section 6676". 
(b) AMENDMENTS RELATED TO SECTION 149 OF THE ACT.— 
(1) RETURN OF PARTNERSHIP INCOME.— 
(A) IN GENERAL.—Section 6031 (relating to return of part-
nership income) is amended— 
fc3,'i <
? 
(i) by inserting "or who holds an interest in such 
partnership as a nominee for another person" in 
subsection (b) after "who is a partner", and 
(ii) by adding at the end thereof, the following new 
subsection: 
"(c) NOMINEE REPORTING.—Any person who holds an interest in a 
partnership as a nominee for another person— 
"(1) shall furnish to the partnership, in the manner pre-
scribed by the Secretary, the name and address of such other 
person, and any other information for such taxable year as the 
Secretary may by form and regulation prescribe, and 
"(2) shall furnish in the manner prescribed by the Secretary 
such other person the information provided by such partnership 
under subsection (b)." 
(B) EFFECTIVE DATE.—The amendments made by this 
subsection shall apply to partnership taxable years begin-
ning after the date of the enactment of this Act, 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2833 
(2) RETURNS RELATING TO CERTAIN PARTNERSHIP INTERESTS.— 
Paragraph (2) of section 6050K(c) (relating to requirement that 
transferor notify partnership) is amended by striking out "this 
subsection" and inserting in lieu thereof "this section". 
(c) AMENDMENTS RELATED TO SECTION 150 OF THE ACT.— 
(1) Paragraph (3) of section 6678(a) (relating to failure to 
furnish certain statements) is amended by striking out "or" at 
the end of subparagraph (E), by adding "or" at the end of 
subparagraph (F), and by inserting after subparagraph (F) the 
following new subparagraph: 
"(G) section 6045(d) (relating to statements required in 
the case of certain substitute payments),". 
(2) Clause (ii) of section 6652(a)(3)(A) (relating to penalty in the 
case of intentional disregard) is amended by inserting "(other 
than by subsection (d) of such section)" after "section 6045". 
(d) AMENDMENT RELATED TO SECTION 155 OF THE ACT.—Section 
6660 (relating to addition of tax in the case of valuation understate-
ment for purposes of estate or gift taxes) is amended by adding at 
the end thereof the following new subsection: 
"(f) UNDERPAYMENT DEFINED.—For purposes of this section, the 
term 'underpayment' has the meaning given to such term by section 
6653(c)(1)." 
(e) AMENDMENT RELATED TO SECTION 157 OF THE ACT.—Paragraph 
(3) of section 7502(e) is amended by striking out "the tax' and 
inserting in lieu thereof "any tax". 
SEC. 1812. AMENDMENTS RELATED TO MISCELLANEOUS PROVISIONS. 
(a) AMENDMENTS RELATED TO SECTION 171 OF THE ACT.— 
(1) Subsection (a) of section 111 (relating to recovery of tax 
benefit items) is amended by striking out "did not reduce 
income subject to tax" and inserting in lieu thereof "did not 
reduce the amount of tax imposed by this chapter". 
(2) Subsection (c) of section 111 (relating to treatment of 
carryovers) is amended by striking out "reducing income subject 
to tax or reducing tax imposed by this chapter, as the case may 
be" and inserting in lieu thereof "reducing tax imposed by this 
chapter". 
(3) Paragraph (12) of section 381(c) (relating to recovery of bad 
debts, prior taxes, or delinquency amounts) is amended to read 
v as follows: 
"(12) RECOVERY OF TAX BENEFIT ITEMS.—If the acquiring cor-
poration is entitled to the recovery of any amounts previously 
deducted by (or allowable as credits to) the distributor or trans-
feror corporation, the acquiring corporation shall succeed to the 
treatment under section 111 which would apply to such 
amounts in the hands of the distributor or transferor 
corporation." 
(4) Paragraph (2) of section 1351(d) is amended by striking out 
"relating to recovery of bad debts, etc." and inserting in lieu 
thereof "relating to recovery of tax benefit items". 
(5) Paragraph (3) of section 1398(g) is amended to read as 
follows: 
"(3) RECOVERY OF TAX BENEFIT ITEMS.—Any amount to which 
section 111 (relating to recovery of tax benefit items) applies." 
(b) AMENDMENTS RELATED TO SECTION 172 OF THE ACT.— 
(1) COORDINATION OF SECTION 7872 WITH TAXES ON PRIVATE 
FOUNDATIONS.—Subparagraph (B) of section 4941(dX2) (defining 
100 STAT. 2834 
PUBLIC LAW 99-514—OCT. 22, 1986 
self-dealing) is amended by striking out "without interest or 
other charge" and inserting in lieu thereof "without interest or 
other charge (determined without regard to section 7872)", 
(2) COORDINATION WITH WITHHOLDING.—Paragraph (9) of sec-
tion 7872(f) (relating to no withholding) is amended to read as 
r follows: 
"(9) No WITHHOLDING.—No amount shall be withheld under 
chapter 24 with respect to— 
"(A) any amount treated as transferred or retransferred 
under subsection (a), and 
i7 
"(B) any amount treated as received under subsection 
(b)." 
(3) DEFINITION OF DEMAND LOAN.—Paragraph (5) of section 
7872(f) (defining demand loan) is amended to read as follows: 
"(5) DEMAND LOAN.—The term 'demand loan' means any loan 
which is payable in full at any time on the demand of the 
lender. Such term also includes (for purposes other than deter-
mining the applicable Federal rate under paragraph (2)) any 
loan if the benefits of the interest arrangements of such loan 
are not transferable and are conditioned on the future perform-
ance of substantial services by an individual. To the extent 
provided in regulations, such term also includes any loan with 
an indefinite maturity." 
(4) CLARIFICATION OF APPUCABLE FEDERAL RATE.—Subpara-
graph (B) of section 7872(fK2) (defining applicable Federal rate) 
is amended by inserting ", compounded semiannually" imme-
diately before the period at the end thereof. 
(5) CERTAIN ISRAEL BONDS NOT SUBJECT TO RULES RELATING TO 
BELOW-MARKET LOANS.—Section 7872 of the Internal Revenue 
Code of 1954 (relating to treatment of loans with below-market 
interest rates) shall not apply to £uiy obligation issued by Israel 
if— 
(A) the obligation is payable in United States dollars, and 
(B) the obligation bears interest at an annual rate of not 
less than 4 percent. 
(c) AMENDMENTS RELATED TO SECTION 174 OF THE ACT.— 
(1) TREATMENT OF FOREIGN PERSONS.—Subsection (a) of section 
267 is amended by adding at the end thereof the following new 
paragraph: 
"(3) PAYMENTS TO FOREIGN PERSONS.—The Secretary shall by 
^ regulations apply the matching principle of paragraph (2) in 
cases in which the person to whom the payment is to be made is 
not a United States person." 
(2) TREATMENT OF CERTAIN SALES OF INVENTORY EXPANDED.— 
Subparagraph (B) of section 267(fK3) (relating to loss deferral 
rules not to apply in certain C£ises) is amended by inserting "(or 
persons described in subsection (bXlO))" after "same controlled 
group". 
(3) TREATMENT OF CERTAIN RELATED PARTNERSHIPS.— 
(A) Effective with respect to sales or exchanges after 
'ife 
September 27, 1985, paragraphs (IXA) and (2XA) of section 
707(b) (relating to certain sales or exchanges of property 
^p ' 
with respect to controlled partnerships) are each amended 
by striking out "a partner' and inserting in lieu thereof "a 
person". 
(B) Paragraph (1) of section 707(b) is amended by adding 
at the end thereof the following new sentence: "For pur-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2835 
poses of section 267(a)(2), partnerships described in subpara-
graph (B) of this paragraph shall be treated as persons 
specified in section 2670t))." 
(C) Subsection (e) of section 267 is amended by adding at 
the end thereof the following new paragraph: 
"(6) CROSS REFERENCE.— 
"For additional rules relating: to partnerships, see section 707(b)." 
(4) CLERICAL AMENDMENTS.— 
(A) Paragraph (12) of section 2670t>) (defining related per-
sons) is amended by striking out "same persons owns" and 
inserting in lieu thereof "same persons own". 
(B) Subparagraph (B) of section 178(b)(2) (defining related 
persons) is amended by inserting before the period "and 
subsection (f)(1)(A) of such section shall not apply". 
(C) Clause (ii) of section 936(h)(3)(D) (defining related 
person) is amended to read as follows: 
"(ii) SPECIAL RULE.—For purposes of clause (i), section 
267(b) and section 707(bXl) shall be applied by 
substituting '10 percent' for '50 percent'." 
(5) EXCEPTION FOR CERTAIN INDEBTEDNESS.—Clause (i) of sec-
tion 174(c)(3XA) of the Tax Reform Act of 1984 shall be applied 
by substituting "December 31, 1983" for "September 29, 1983" 
in the case of indebtedness which matures on January 1, 1999, 
the payments on which from January 1989 through November 
1993 equal U/L plus $77,600, the payments on which from 
December 1993 to maturity equal U/L plus $50,100, and which 
accrued interest at 13.75 percent through December 31, 1989. 
(d) AMENDMENTS RELATED TO SECTION 177 OF THE ACT.— 
(1) CLARIFICATION OF TREATMENT OF DIVIDENDS PAID BY FED-
ERAL HOME LOAN BANKS.— 
(A) Subparagraph (B) of section 246(aX2) (relating to cer-
tain dividends of Federal home loan banks) is amended— 
(i) by striking out "For purposes of subparagraph (A), 
in" and inserting in lieu thereof "In", and 
(ii) by striking out subclause (II) of clause (i) and 
inserting in lieu thereof the following: 
"(II) which were not previously treated as 
distributed 
under 
subparagraph 
(A) or 
this 
subparagraph, bears to". 
(B) Paragraph (2) of section 246(a) (relating to subsection 
not to apply to certain dividends of Federal Home Loan 
Banks) is amended by redesignating subparagraph (C) as 
subparagraph (D) and by inserting after subparagraph (B) 
the following new subparagraph: 
"(C) COORDINATION WITH SECTION 243.—To the extent that 
. 
paragraph (1) does not apply to any dividend by reason of 
subparagraph (A) or (B) of this paragraph, the requirement 
contained in section 243(a) that the corporation paying the 
dividend be subject to taxation under this chapter shall not 
apply." 
(C) Subparagraph (D) of section 246(aX2) (as redesignated 
by subparagraph (B)) is amended by adding at the end 
thereof the following new clause: 
"(iv) EARNINGS AND PROFITS.—The earnings and prof-
its of any FHLB for any taxable year shall be treated £is 
equal to the sum of— 
100 STAT. 2836 
PUBLIC LAW 99-514—OCT. 22, 1986 
£":«-->' 
"(I) any dividends received by the FHLB from 
rjr,.: '. ' --. ' 
the FHLMC during such taxable year, and 
"(11) the total earnings and profits (determined 
^c ,.;' 
without regard to dividends described in subclause 
(I)) of the FHLB as reported in its annual financial 
statement prepared in accordance with section 20 
of the Federal Home Loan Bank Act (12 U.S.C. 
1440)." 
(2) CLARIFICATION OF EFFECTIVE DATE.—Paragraph (4) of sec-
tion 177(d) of the Tax Reform Act of 1984 (relating to effective 
dates) is amended to read as follows: 
"(4) CLARIFICATION OF EARNINGS AND PROFITS OF FEDERAL 
HOME LOAN MORTGAGE CORPORATION.— 
"(A) TREATMENT OF DISTRIBUTION OF PREFERRED STOCK, 
r- ir 
ETC.—For purposes of the Internal Revenue Code of 1954, 
the distribution of preferred stock by the Federal Home 
u 
Loan Mortgage Corporation during December of 1984, and 
^ . 
the other distributions of such stock by Federal Home Loan 
Banks during January of 1985, shall be treated as if they 
were distributions of money equal to the fair market value 
of the stock on the date of the distribution by the Federal 
Home Loan Banks (and such stock shall be treated as if it 
were purchased with the money treated as so distributed). 
No deduction shall be allowed under section 243 of the 
Internal Revenue Code of 1954 with respect to any dividend 
paid by the Federal Home Loan Mortgage Corporation out 
of earnings and profits accumulated before January 1, 1985. 
"(B) SECTION 246(a) NOT TO APPLY TO DISTRIBUTIONS OUT 
' 
OF EARNINGS AND PROFITS ACCUMULATED DURING 1985.— 
Subsection (a) of section 246 of the Internal Revenue Code 
of 1954 shall not apply to any dividend paid by the Federal 
Home Loan Mortgage Corporation during 1985 out of earn-
ings and profits accumulated after December 31, 1984." 
(e) AMENDMENTS RELATED TO SECTION 179 OF THE ACT.— 
(1) CLARIFICATION OF DEFINITION OF PASSENGER AUTOMOBILE.— 
(A) SECTION 280F.—Clause (ii) of section 280F(d)(5)(A) 
- ,i« 
(defining passenger automobile) is amended by striking out 
"gross vehicle weight" and inserting in lieu thereof "un-
i 
loaded gross vehicle weight". 
(B) GAS GUZZLER TAX.— 
(i) Clause (ii) of section 406403)(1)(A) (defining pas-
senger automobile) is amended by striking out "gross 
vehicle weight" and inserting in lieu thereof "unloaded 
' 
gross vehicle weight". 
(ii) Paragraph (5) of section 4064(b) (defining manu-
facturer) is amended to read as follows: 
"(5) MANUFACTURER.— 
"(A) IN GENERAL.—The term 'manufacturer' includes a 
producer or importer. 
• 
"(B) EXCEPTION FOR CERTAIN SMALL MANUFACTURERS.—A 
person shall not be treated £is the manufacturer of any 
automobile i
f
— 
r 
"(i) such person would (but for this subparagraph) be 
so treated solely by reason of lengthening an existing 
automobile, and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2837 
"(ii) such person is a small manufacturer (as defined 
in subsection (d)(4)) for the model year in which such 
lengthening occurs." 
(iii) The amendments made by clauses (i) and (ii) shall 
take effect as if included in the amendments made by 
section 201 of Public Law 95-618; except that the 
amendment made by clause (i) shall not apply to any 
station wagon i
f
— 
(I) such station wagon is originally equipped with 
more than 6 seat belts, 
(II) such station wagon was manufactured before 
November 1,1985, and 
(III) such station wagon is of the 1985 or 1986 
model year. 
(C) TRUCKS AND VANS.—Subparagraph (A) of section 
280F(d)(5) is amended by adding at the end thereof the 
following new sentence: 
"In the case of a truck or van, clause (ii) shall be applied by 
substituting 'gross vehicle weight' for 'unloaded gross ve-
hicle weight'." 
(2) DEDUCTIONS OF EMPLOYEE FOR USE OF LISTED PROPERTY.— 
Subparagraph (A) of section 280F(d)(3) (relating to deductions of 
employee) is amended by striking out "recovery deduction 
allowable to the employee" and inserting in lieu thereof "recov-
ery deduction allowable to the employee (or the amount of any 
deduction allowable to the employee for rentals or other pay-
ments under a lease of listed property)". 
(3) TREATMENT OF CERTAIN COMPUTERS.—Subparagraph (B) of 
section 280F(d)(4) (relating to exception for certain computers) is 
amended by striking out "at a regular business establishment" 
and inserting in lieu thereof "at a regular business establish-
ment and owned or leased by the person operating such 
establishment". 
(4) EXCEPTION FOR PROPERTY USED IN BUSINESS OF TRANSPORT-
ING PERSONS OR PROPERTY.—Paragraph (4) of section 280F(d) 
(defining listed property) is amended by adding at the end 
thereof the following new subparagraph: 
"(C) 
EXCEPTION FOR PROPERTY USED IN BUSINESS OF 
TRANSPORTING PERSONS O
R PROPERTY.—Except to the extent 
provided in regulations, clause (ii) of subparagraph (A) shall 
not apply to any property substantially all of the use of 
which is in a trade or business of providing to unrelated 
persons services consisting of the transportation of persons 
or property for compensation or hire." 
(5) CLERICAL AMENDMENT.—Paragraph (2) of section 280F(d) 
(relating to subsequent depreciation deductions reduced for 
deductions allocable to personal use) is amended by striking out 
"is not use described in" and inserting in lieu thereof "is use 
described in". 
CHAPTER 2—AMENDMENTS RELATED TO TITLE II OF THE 
ACT 
SEC. 1821. AMENDMENTS RELATED TO SECTION 211 OF THE ACT. 
(a) CERTAIN AMOUNTS NOT LESS THAN SURRENDER VALUE OF CON-
TRACT.—Subsection (c) of section 807 (relating to rules for certain 
100 STAT. 2838 
PUBLIC LAW 99-514—OCT. 22, 1986 
reserves) is amended by adding at the end thereof the following new 
sentence: "In no case shall the amount determined under paragraph 
(3) for any contract be less than the net surrender value of such 
contract." 
(b) CLARIFICATION OF DEFINITION OF EXCESS INTEREST.—Subpara-
graph (B) of section 808(dXl) (defining excess interest) is amended to 
read as follows: 
"(B) in excess of interest determined at the prevailing 
State assumed rate for such contract." 
(c) COORDINATION OF 1984 FRESH-START ADJUSTMENT WITH CER-
TAIN ACCELERATIONS OF POUCYHOLDER DIVIDENDS DEDUCTIONS.—Sec-
tion 808 (relating to policyholder dividends deduction) is amended by 
adding at the end thereof the following new subsection: 
"(f) COORDINATION OF 1984 FRESH-START ADJUSTMENT WITH ACCEL-
ERATION OF POUCYHOLDER DIVIDENDS DEDUCTION THROUGH CHANGE 
IN BUSINESS PRACTICE.— 
"(1) IN GENERAL.—The amount determined under paragraph 
(1) of subsection (c) for the year of change shall (before any 
reduction under paragraph (2) of subsection (c)) be reduced by so 
much of the accelerated policyholder dividends deduction for 
such year as does not exceed the 1984 fresh-start adjustment for 
policyholder dividends (to the extent such adjustment was not 
previously taken into account under this subsection). 
"(2) YEAR OF CHANGE.—For purposes of this subsection, the 
term 'year of change' means the taxable year in which the 
change in business practices which results in the accelerated 
policyholder dividends deduction takes effect. 
"(3) 
ACCELERATED POUCYHOLDER DIVIDENDS DEDUCTION DE-
FINED.—For purposes of this subsection, the term 'accelerated 
policyholder dividends deduction' means the amount which (but 
for this subsection) would be determined for the taxable year 
under paragraph (1) of subsection (c) but which would have been 
determined (under such paragraph) for a later taxable year 
under the business practices of the taxpayer £is in effect at the 
close of the preceding taxable year, 
"(4) 
1984 
FRESH-START ADJUSTMENT FOR POUCYHOLDER DIVI-
DENDS.—For purposes of this subsection, the term '1984 fresh-
start adjustment for policyholder dividends' means the amounts 
held as of December 31, 1983, by the taxpayer as reserves for 
dividends to policyholders under section 811(b) (as in effect on 
the day before the date of the enactment of the Tax Reform Act 
of 1984) other than for dividends which accrued before January 
1, 1984. Such amounts shall be properly reduced to reflect the 
amount of previously nondeductible policyholder dividends (as 
determined under section 809(f) as in effect on the day before 
the date of the enactment of the Tax Reform Act of 1984). 
"(5) SEPARATE APPUCATION WITH RESPECT TO LINES OF BUSI-
NESS.—This subsection shall be applied separately with respect 
to each line of business of the taxpayer. 
"(6) SUBSECTION NOT TO APPLY TO MERE CHANGE IN DIVIDEND 
AMOUNT.—This subsection shall not apply to a mere change in 
the amount of policyholder dividends. 
"(7) SUBSECTION NOT TO APPLY TO POUCIES ISSUED AFTER DECEM-
BER 31, 1983.— 
"(A) IN GENERAL.—This subsection shall not apply to any 
policyholder dividend paid or accrued with respect to a 
policy issued after December 31, 1983. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2839 
"(B) EXCHANGES OF SUBSTANTIALLY SIMILAR POLICIES.—For 
purposes of subparagraph (A), any policy issued after 
December 31, 1983, in exchange for a substantially similar 
policy issued on or before such date shall be treated as 
issued before January 1, 1984. A similar rule shall apply in 
the case of a series of exchanges. 
"(8) SUBSECTION TO APPLY TO POLICIES PROVIDED UNDER EM-
PLOYEE BENEFIT PLANS.—This subsection shall not apply to any 
policyholder dividend paid or accrued with respect to a group 
policy issued in connection with a plan to provide welfare 
benefits to employees (within the meaning of section 419(e)(2))." 
(d) CLARIFICATION OF EQUITY BASE.—Paragraph (2) of section 
809(b) (defining equity base) is amended by adding at the end thereof 
the following new sentence: "No item shall be taken into account 
more than once in determining equity base." 
(e) DEFINITION OF 50 LARGEST STOCK COMPANIES.— 
(1) IN GENERAL.—Subparagraph (C) of section 809(d)(4) (defin-
ing 50 largest stock companies) is amended by striking out the 
last sentence and inserting in lieu thereof the following: 
"the Secretary— 
"(i) shall, for purposes of determining the base period 
stock earnings rate, exclude from the group determined 
under the preceding sentence any company which had 
a negative equity base at any time during 1981,1982, or 
1983, 
"(ii) shall exclude from such group for any calendar 
year any company which has a negative equity base, 
and 
"(iii) may by regulations exclude any other company 
which otherwise would have been included in such 
group if the inclusion of the excluded company or 
companies would, by reason of the small equity base of 
such company, seriously distort the stock earnings rate. 
The aggregate number of companies excluded by the Sec-
retary under clause (iii) shall not exceed the excess of 2 over 
the number of companies excluded under clause (ii)." 
(2) ONLY DOMESTIC COMPANIES TAKEN INTO ACCOUNT.—Section 
809 is amended— 
(A) by striking out "largest stock life insurance compa-
nies" in subsection (d)(4)(C) and inserting in lieu thereof 
"largest domestic stock life insurance companies", and 
(B) by striking out "mutual life insurance companies" in 
subsection (e)(1) and inserting in lieu thereof "domestic 
mutual life insurance companies". 
(f) CLARIFICATION OF STATEMENT GAIN OR LOSS FROM OPER-
ATIONS.—Paragraph (1) of section 809(g) (defining statement gain or 
loss from operations) is amended by striking out so much of such 
paragraph as precedes subparagraph (B) and inserting in lieu 
thereof the following: 
"(1) STATEMENT GAIN OR LOSS FROM OPERATIONS.—The term 
'statement gain or loss from operations' means the net gain or 
loss from operations required to be set forth in the annual 
statement, determined without regard to Federal income taxes, 
and— 
"(A) determined by substituting for the amount shown for 
policyholder dividends the amount of deduction for policy-
100 STAT. 2840 
PUBLIC LAW 99-514—OCT. 22, 1986 
holder dividends determined under section 808 (without 
regard to section 808(c)(2)),". 
(g) DIFFERENTIAL EARNINGS RATE WHICH MAY BE USED FOR PUR-
POSES OF ESTIMATED TAX PAYMENTS.—Subsection (c) of section 809 
(defining differential earnings rate) is amended by adding at the end 
thereof the following new paragraph: 
"(3) COORDINATION WITH ESTIMATED TAX PAYMENTS.—For pur-
poses of applying section 6655 with respect to any installment of 
estimated tax, the amount of tax shall be determined by using 
the lesser o
f
— 
"(A) the differential earnings rate of the second tax year 
preceding the taxable year for which the installment is 
made, or 
"(B) the differential earnings rate for the taxable year for 
which the installment is made." 
(h) RECOMPUTATION OF DIFFERENTIAL EARNINGS AMOUNT NOT 
TAKEN INTO ACCOUNT FOR PURPOSES OF ESTIMATED TAX.—Subsection 
(f) of section 809 (relating to recomputation in subsequent year) is 
amended by adding at the end thereof the following new paragraph: 
"(5) SUBSECTION NOT TO APPLY FOR PURPOSES OF ESTIMATED 
TAX.—Section 6655 shall be applied to any taxable year without 
regard to any adjustments under this subsection for such year." 
(i) AMENDMENTS RELATED TO PRORATION FORMULAS.— 
(1) Paragraph (2) of section 812(b) is amended— 
(A) by striking out "the prevailing State assumed rate" in 
subparagraph (A) and inserting in lieu thereof "the prevail-
ing State assumed rate or, where such rate is not used, 
another appropriate rate", 
(B) by striking out "and" at the end of subparagraph (B), 
(C) by striking out the period at the end of subparagraph 
(C) and inserting in lieu thereof ", and", and 
(D) by adding at the end thereof the following new 
subparagraph: 
"(D) interest on amounts left on deposit with the com-
pany." 
(2) Subparagraph (B) of section 8120t>)(3) (relating to gross 
investment income's proportionate share of policyholder divi-
dends) is amended— 
(A) by striking out "(including tax-exempt interest)" in 
clause (ii), and 
(B) by adding at the end thereof the following new sen-
tence: 
"For purposes of subparagraph (BXii), life insurance gross 
income shall be determined by including tax-exempt in-
terest and by applying section 807(a)(2XB) as if it did not 
contain clause (i) thereof." 
(3) Subsection (c) of section 812 (defining net investment 
income) is amended to read as follows: 
"(c) NET INVESTMENT INCOME.—For purposes of this section, the 
term 'net investment income' means— 
"(1) except as provided in paragraph (2), 90 percent of gross 
investment income; or 
"(2) in the case of gross investment income attributable to 
assets held in segregated asset accounts under variable con-
tracts, 95 percent of gross investment income." 
(4) Section 812 is amended by adding at the end thereof the 
following new subsection: 
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2841 
"(g) TREATMENT OF INTEREST PARTIALLY TAX-EXEMPT UNDER SEC-
TION 133.—For purposes of this section and subsections (a) and 0)) of 
section 807, the terms 'gross investment income' and 'tax-exempt 
interest' shall not include any interest received with respect to a 
securities acquisition loan (as defined in section 133(b)). Such in-
terest shall not be included in life insurance gross income for 
purposes of subsection (bX3)." 
(j) TREATMENT OF FOREIGN LIFE INSURANCE (COMPANIES.—Para-
graph (1) of section 813(a) (relating to adjustment where surplus held 
in United States is less than specified minimum) is amended by 
adding at the end thereof the following new sentence: "The preced-
ing sentence shall be applied before computing the amount of the 
special life insurance company deduction and the small life insur-
ance company deduction, and any increase under the preceding 
sentence shall be treated as gross investment income." 
(k) TREATMENT OF CERTAIN DISTRIBUTIONS TO SHAREHOLDERS FROM 
PRE-1984 POUCYHOLDERS SURPLUS ACCOUNT.— 
(1) Subsection (f) of section 815 (relating to other rules ap-
plicable to policyholders surplus account continued) is amended 
by striking out "sections 6501(cX6)" and inserting in lieu thereof 
"sections 8190)), 6501(cX6)". 
(2) Subsection (a) of section 815 is amended by adding at the 
end thereof the following new sentence: 
"For purposes of the preceding sentence, the term 'indirect distribu-
tion' shall not include any bona fide loan with arms-length terms 
and conditions." 
(3) In the case of any loan made before March 1, 1986 (other 
than a loan which is renegotiated, extended, renewed, or revised 
after February 28, 1986), which does not meet the requirements 
of the last sentence of section 815(a) of the Internal Revenue 
Code of 1954 (as added by paragraph (2)), the amount of the 
indirect distribution for purposes of such section 815(a) shall be 
the foregone interest on the loan (determined by using the 
lowest rate which would have met the arms-length require-
ments of such sentence for such a loan). 
(1) TREATMENT OF DEFICIENCY RESERVES.—Section 816 (defining life 
insurance company) is amended by adding at the end thereof the 
following new subsection: 
"(h) TREATMENT OF DEFICIENCY RESERVES.—For purposes of this 
section and section 813(aX4XB), the terms 'life insurance reserves' 
and 'total reserves' shall not include deficiency reserves." 
(m) TREATMENT OF CERTAIN NONDIVERSIFIED CONTRACTS.— 
(1) Subsection (h) of section 817 (relating to treatment of 
certain nondiversified contracts) is amended by striking out 
paragraphs (3) and (4) and inserting in lieu thereof the follow-
ing: 
'(3) SPECIAL RULE FOR INVESTMENTS IN UNITED STATES OBLIGA-
TIONS.—To the extent that any segregated asset account with 
respect to a variable life insurance contract is invested in 
securities issued by the United States Treasury, the invest-
ments made by such account shall be treated as adequately 
diversified for purposes of paragraph (1). 
"(4) LOOK-THROUGH IN CERTAIN CASES.—For purposes of this 
subsection, if all of the beneficial interests in a regulated invest-
ment company or in a trust are held by 1 or more— 
"(A) insurance companies (or affiliated companies) in 
their general account or in segregated asset accounts, or 
100 STAT. 2842 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(B) fund managers (or affiliated companies) in connec-
tion with the creation or management of the regulated 
investment company or trust, 
the diversification requirements of paragraph (1) shall be ap-
plied by taking into account the assets held by such regulated 
investment company or trust. 
"(5) INDEPENDENT INVESTMENT ADVISORS PERMITTED.—Nothing 
in this subsection shall be construed as prohibiting the use of 
independent investment advisors." 
(2) Paragraph (1) of section 817(h) is amended by striking out 
the last sentence. 
(n) TREATMENT OF CERTAIN DEFERRED COMPENSATION PLANS.— 
Subparagraph (A) of section 818(a)(6) (defining pension plan con-
tract) is amended to read as follows: 
"(A) a governmental plan (within the meaning of section 
414(d)) or an eligible State deferred compensation plan 
(within the meaning of section 457(b)), or". 
(o) DIVIDENDS WITHIN AFFILIATED GROUP.—Subsection (e) of sec-
tion 818 (relating to special rule for consolidated returns) is 
amended to read as follows: 
"(e) SPECIAL RULES FOR CONSOLIDATED RETURNS.— 
"(1) ITEMS OF COMPANIES OTHER THAN LIFE INSURANCE COMPA-
NIES.—If an election under section 1504(c)(2) is in effect with 
respect to an affiliated group for the taxable year, all items of 
the members of such group which are not life insurance compa-
nies shall not be taken into account in determining the amount 
of the tentative LICTI of members of such group which are life 
insurance companies. 
"(2) DIVIDENDS WITHIN GROUP.—In the case of a life insurance 
company filing or required to file a consolidated return under 
section 1501 with respect to any affiliated group for any taxable 
year, any determination under this part with respect to any 
dividend paid by one member of such group to another member 
of such group shall be made as if such 
group was not filing a consolidated return." 
(p) TREATMENT OF DIVIDENDS FROM SUBSIDIARIES, ETC.—Paragraph 
(4) of section 805(a) (relating to dividends received by company) is 
amended by redesignating subparagraph (D) as subparagraph (E) 
and by striking out subparagraph (C) and inserting in lieu thereof 
the following new subparagraphs: 
"(C) 100 PERCENT DIVIDEND.—For purposes of subpara-
graph (A)— 
"(i) IN GENERAL.—Except as provided in clause (ii), 
the term '100 percent dividend' means any dividend if 
the percentage used for purposes of determining the 
deduction allowable under section 243, 244, or 245(b) is 
100 percent. 
"(ii) TREATMENT OF DIVIDENDS FROM NONINSURANCE 
COMPANIES.—The term '100 percent dividend' does not 
include any distribution by a corporation which is not 
an insurance company to the extent such distribution 
is out of tax-exempt interest or out of dividends which 
are not 100 percent dividends (determined with the 
application of this clause as if it applies to distributions 
by all corporations including insurance companies). 
"(D) SPECIAL RULES FOR CERTAIN DIVIDENDS FROM INSUR-
ANCE COMPANIES.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2843 
"(i) IN GENERAL.—In the case of any 100 percent 
dividend paid to any life insurance company out of the 
earnings and profits for any taxable year beginning 
after December 31, 1983, of another life insurance com-
pany i
f
— 
"(I) the paying company's share determined 
under section 812 for such taxable year, exceeds 
"(II) the receiving company's share determined 
under section 812 for its taxable year in which the 
dividend is received or accrued, 
the deduction allowed under section 243, 244, or 2450t)) 
(as the case may be) shall be reduced as provided in 
clause (ii). 
"(ii) AMOUNT OF REDUCTION.—The reduction under 
this clause for a dividend is an amount equal to— 
"(I) the portion of such dividend attributable to 
prorated amounts, multiplied by 
"(II) the percentage obtained by subtracting the 
share described in subclause (II) of clause (i) from 
the share described in subclause (I) of such clause, 
"(iii) PRORATED AMOUNTS.—For purposes of this 
subparagraph, the term 'prorated amounts' means tax-
exempt interest and dividends other than 100 percent 
dividends. 
"(iv) PORTION OF DIVIDEND ATTRIBUTABLE TO PRORATED 
AMOUNTS.—For purposes of this subparagraph, in 
determining the portion of any dividend attributable to 
prorated amounts— 
"(I) any dividend by the paying corporation shall 
be treated as paid first out of earnings and profits 
for taxable years beginning after December 31, 
1983, attributable to prorated amounts (to the 
extent thereof), and 
"(II) by determining the portion of earnings and 
profits so attributable without any reduction for 
the tax imposed by this chapter. 
"(v) 
SUBPARAGRAPH TO APPLY TO DIVIDENDS FROM 
OTHER INSURANCE COMPANIES.—Rules similar to the 
rules of this subsection shall apply in the case of 100 
percent dividends paid by an insurance company which 
is not a life insurance company." 
(q) SPECIAL RULE FOR APPLICATION OF HIGH SURPLUS MUTUAL 
RULES.—In the case of any mutual life insurance company— 
(1) which was incorporated on February 23,1888, and 
(2) which acquired a stock subsidiary during 1982, 
the amount of such company's excess equity base for purposes of 
section 809(i) of such Code shall, notwithstanding the last sentence 
of section 809(i)(2)(D), equal $175,000,000. 
(r) CLERICAL AMENDMENT.—Paragraph (3) of section 809(f) is 
amended by striking out "subsection (c)(2)" and inserting in lieu 
thereof "subsection (c)(1)(B)". 
(s) AMENDMENTS RELATED TO SECTION 807.—Subparagraph (C) of 
section 807(d)(5) is amended by adding at the end thereof the follow-
ing: "When the Secretary by regulation changes the table applicable 
to a type of contract, the new table shall be treated (for purposes of 
subparagraph (B) and for purposes of determining the issue dates of 
contracts for which it shall be used) as if it were a new prevailing 
100 STAT. 2844 
PUBLIC LAW 99-514—OCT. 22, 1986 
commissioner's standard table adopted by the twenty-sixth State as 
of a date (no earlier than the date the regulation is issued) specified 
by the Secretary." 
(t) AMENDMENT RELATED TO SECTION 817.— 
(1) Subsection (d) of section 817 is amended by adding at the 
end thereof the following new sentence: "Paragraph (3) shall be 
applied without regard to whether there is a guarantee, and 
obligations under such guarantee which exceed obligations 
under the contract without regard to such guarantee shall be 
accounted for as part of the company's general account." 
(2) The amendment made by paragraph (1) shall apply— 
(A) to contracts issued after December 31, 1986, and 
(B) to contracts issued before January 1, 1987, if such 
contract was treated as a variable contract on the tax-
payer's return. 
SEC. 1822. AMENDMENTS RELATED TO SECTION 216 OF THE ACT. 
(a) CLARIFICATION OF APPUCATION OF 10-YEAR SPREAD.—Subpara-
graph (C) of section 216(b)(3) of the Tax Reform Act of 1984 (relating 
to 10-year spread inapplicable where no 10-year spread under prior 
law) is amended by striking out "was required to have been taken 
into account" and inserting in lieu thereof "would have been re-
quired to be taken into account". 
(b) TREATMENT OF CERTAIN ELECTIONS UNDER SECTION 818(C).— 
Subparagraph (B) of section 216(b)(4) of the Tax Reform Act of 1984 
(relating to the elections under section 818(c) after September 27, 
1983, not taken into account) is amended by striking out "Subpara-
graph (A)" and inserting in lieu thereof "Paragraph (3) and subpara-
graph (A) of this paragraph". 
(c) ELECTION NOT TO HAVE RESERVES RECOMPUTED.— 
(1) Clause (ii) of section 216(c)(2)(A) of the Tax Reform Act of 
1984 (relating to election with respect to contracts issued after 
1983 and before 1989) is amended by striking out "$3,000,000" 
and inserting in lieu thereof "$3,000,000 (determined with 
regard to this paragraph)". 
(2) Subparagraph (A) of section 216(c)(2) of the Tax Reform 
Act of 1984 is amended by striking out "be equal to" and all 
that follows down through the period at the end thereof and 
inserting in lieu thereof the following: "be equal to the greater 
of the statutory reserve for such contract (adjusted as provided 
in subparagraph (B)) or the net surrender value of such contract 
(as deHned in section 807(e)(1) of the Internal Revenue Code of 
1954)." 
(3) Subparagraph (B) of section 216(cX2) of the Tax Reform Act 
of 1984 is amended— 
(A) by striking out "statutory reserves" and inserting in 
lieu thereof "opening and closing statutory reserves", and 
(B) by striking out "under section 805(c)(1) of such Code" 
and inserting in lieu thereof "under the principles of sec-
tion 805(c)(1) of such Code". 
(d) SPECIAL RULE WHERE REINSURER NOT USING CALENDAR YEAR 
AS TAXABLE YEAR.—Subparagraph (A) of section 216(b)(3) of the Tax 
Reform Act of 1984 is amended by adding at the end thereof the 
following: "For purposes of this subparagraph, if the reinsurer's 
taxable year is not a calendar year, the first day of the reinsurer's 
first taxable year beginning after December 31, 1983, shall be 
substituted for 'January 1, 1984' each place it appears." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2845 
(e) CLARIFICATION OF EFFECT OF FRESH START ON EARNINGS AND 
PROFITS.—Paragraph (1) of section 21603) of the Tax Reform Act of 
1984 is amended by adding at the end thereof the following new 
sentences: "The preceding sentence shall apply for purposes of 
computing the earnings and profits of any insurance company for its 
1st taxable year beginning in 1984. The preceding sentence shall be 
applied by substituting '1985' for '1984' in the case of an insurance 
company which is a member of a controlled group (as defined in 
section 806(dX3)), the common parent of which is 
"(A) a company having its principal place of business in 
Alabama and incorporated in Delaware on November 29, 1979, 
or 
"(B) a company having its principal place of business in 
Houston, Texas, and incorporated in Delaware on June 9,1947." 
(f) TREATMENT OF SECTION 818(C) ELECTIONS MADE BY CERTAIN 
ACQUIRED COMPANIES.—Parcigraph (4) of section 2160t>) of the Tax 
Reform Act of 1984 is amended by adding at the end thereof the 
following new subparagraph: 
"(C) SECTION 818(C) ELECTIONS MADE BY CERTAIN ACQUIRED 
COMPANIES.— 
"(i) IN GENERAL.—If the case of any corporation— 
"(I) which made an election under such section 
818(c) before September 28,1983, and 
"(II) which was acquired in a qualified stock 
purchase (as defined in section 338(c) of the In-
ternal Revenue Code of 1954) before December 31, 
1983, 
the fact that such corporation is treated as a new corpora-
tion under section 338 of such Code shall not result in the 
election described in clause (i) not applying to such new 
corporation. 
"(ii) TIME FOR MAKING SECTION 818(C) OR 338 ELEC-
TION.—In the case of any corporation described in 
clause (i), the time for making an election under section 
818(c) of such Code (with respect to the first taxable 
year of the corporation beginning in 1983 and ending 
after September 28, 1983), or making an election under 
section 338 of such Code with respect to the qualified 
stock purchase described in clause (iXID, shall not 
expire before the close of the 60th day after the date of 
the enactment of the Tax Reform Act of 1986. 
"(iii) STATUTE OF LIMITATIONS.—In the case of any 
such election under section 818(c) or 338 of such Code 
which would not have been timely made but for clause 
(ii), the period for assessing any deficiency attributable 
to such election (or for filing claim for credit or refund 
of any overpayment attributable to such election) shall 
not expire before the date 2 years after the date of the 
enactment of this Act. 
SEC. 1823. AMENDMENT RELATED TO SECTION 217 OF THE ACT. 
Subsection (n) of section 217 of the Tajf Reform Act of 1984 
(relating to special rule for companies using net level reserve 
method for noncancellable accident and health insurance contracts) 
is amended to read as follows: 
"(n) SPECIAL RULE FOR COMPANIES USING NET LEVEL RESERVE 
METHOD FOR NONCANCELLABLE ACCIDENT AND HEALTH INSURANCE 
100 STAT. 2846 
PUBLIC LAW 99-514—OCT. 22, 1986 
CONTRACTS.—A company shall be treated as meeting the require-
ments of section 807(d)(3)(AXiii) of the Internal Revenue Code of 
1954, as amended by this Act, with respect to any directly-written 
noncancellable accident and health insurance contract (whether 
under existing or new plans of insurance) for any taxable year if— 
"(1) such company— 
"(A) was using the net level reserve method to compute at 
least 99 percent of its statutory reserves on such contracts 
as of December 31,1982, and 
"(B) received more than half its total direct premiums in 
1982 from directly-written noncancellable accident and 
health insurance, 
"(2) after December 31, 1983, and through such taxable year, 
such company has continuously used the net level reserve 
method for computing at least 99 percent of its tax and statu-
tory reserves on such contracts, and 
"(3) for any such contract for which the company does not use 
the net level reserve method, such company uses the same 
^^ method for computing tax reserves as such company uses for 
computing its statutory reserves." 
SEC. 1824. AMENDMENT RELATED TO SECTION 218 OF THE ACT. 
Section 218 of the Tax Reform Act of 1984 is hereby repealed. 
SEC. 1825. AMENDMENTS RELATED TO SECTION 221 OF THE ACT. 
(a) COMPUTATIONAL RULES.— 
(1) Paragraph (1) of section 7702(e) (relating to computational 
rules) is amended— 
(A) by striking out "shall be no earlier than" in subpara-
graph (B) and inserting in lieu thereof "shall be deemed to 
be no earlier than", 
(B) by striking out "and" at the end of subparagraph (B), 
(C) by redesignating subparagraph (C) as subparagraph 
(D) and inserting after subparagraph (B) the following new 
subparagraph: 
"(C) the death benefits shall be deemed to be provided 
until the maturity date determined by taking into account 
subparagraph (B), and", and 
(D) by striking out "the maturity date described in 
subparagraph (B)" in subparagraph (D) (as so redesignated) 
and inserting in lieu thereof "the maturity date determined 
by taking into account subparagraph (B)". 
(2) Subparagraph (C) of section 7702(b)(2) is amended by strik-
ing out "subparagraphs (A) and (C)" and inserting in lieu 
thereof "subparagraphs (A) and (D)". 
(3) Section 7702(eXl) is amended by inserting "(other than 
subsection (d))" after "section". 
(4) Section 7702(eX2) is amended— 
(A) by striking out "and" at the end of subparagraph (A), 
(B) by striking out the period at the end of subparagraph 
(B), and inserting in lieu thereof a comma and "and', and 
(C) by adding at the end thereof the following new 
subparagraph: 
"(C) for purposes of the cash value accumulation test, the 
death benefit increases may be taken into account if the 
contract— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2847 
"(i) has an initial death benefit of $5,000 or less and a 
maximum death benefit of $25,000 or less, 
"(ii) provides for a fixed predetermined annual in-
crease not to exceed 10 percent of the initial death 
benefit or 8 percent of the death benefit at the end of 
the preceding year, and 
"(iii) was purchased to cover payment of burial ex-
penses or in connection with prearranged funeral 
expenses. 
For purposes of subparagraph (C), the initial death benefit of a 
contract shall be determined by treating all contracts issued to 
the same contract owner as 1 contract." 
(b) CLARIFICATION OF SECTION 7702(f)(7).— 
(1) Paragraph (7) of section 7702(f) (relating to adjustments) is 
amended to read as follows: 
"(7) ADJUSTMENTS.— 
"(A) IN GENERAL.—If there is a change in the benefits 
under (or in other terms of) the contract which was not 
reflected in any previous determination or adjustment 
made under this section, there shall be proper adjustments 
in future determinations made under this section. 
"(B) RULE FOR CERTAIN CHANGES DURING FIRST 15 YEARS.— 
If— 
"(i) a change described in subparagraph (A) reduces 
benefits under the contract, 
"(ii) the change occurs during the 15-year period 
beginning on the issue date of the contract, and 
"(iii) a cash distribution is made to the policyholder 
as a result of such change, 
section 72 (other than subsection (eX5) thereof) shall apply 
to such cash distribution to the extent it does not exceed the 
recapture ceiling determined under subparagraph (C) or (D) 
(whichever applies). 
"(C) RECAPTURE CEILING WHERE CHANGE OCCURS DURING 
FIRST 5 YEARS.—If the change referred to in subparagraph 
(B)(ii) occurs during the 5-year period beginning on the 
issue date of the contract, the recapture ceiling is— 
"(i) in the case of a contract to which subsection (a)(1) 
applies, the excess o
f
— 
"(I) the cash surrender value of the contract, 
immediately before the reduction, over 
"(II) the net single premium (determined under 
:. i 
subsection (b)), immediately after the reduction, or 
"(ii) in the case of a contract to which subsection 
(a)(2) applies, the greater o
f
— 
'(I) the excess of the aggregate premiums paid 
under the contract, immediately before the reduc-
tion, over the guideline premium limitation for the 
contract (determined under subsection (c)(2), taking 
into account the adjustment described in subpara-
graph (A)), or 
"(II) the excess of the cash surrender value of the 
contract, immediately before the reduction, over 
the cash value corridor of subsection (d) (deter-
mined immediately after the reduction). 
"(D) RECAPTURE CEIUNG WHERE CHANGE OCCURS AFTER 
5TH Y
E
A
R AND BEFORE 16TH YEAR.—If the change referred to 
100 STAT. 2848 
PUBLIC LAW 99-514—OCT. 22, 1986 
i i ;. 
in subparagraph (B) occurs after the 5-year period referred 
to under subparagraph (C), the recapture ceiling is the 
;; 
excess of the cash surrender value of the contract, imme-
diately before the reduction, over the cash value corridor of 
subsection (d) (determined immediately after the reduction 
and whether or not subsection (d) applies to the contract). 
"(E) 
TREATMENT OF CERTAIN DISTRIBUTIONS MADE IN 
ANTICIPATION OF BENEFIT REDUCTIONS.—Under regulations 
prescribed by the Secretary, subparagraph (B) shall apply 
also to any distribution made in anticipation of a reduction 
in benefits under the contract. For purposes of the preced-
ing sentence, appropriate adjustments shall be made in the 
provisions of subparagraphs (C) and (D); and any distribu-
tion which reduces the cash surrender value of a contract 
and which is made within 2 years before a reduction in 
benefits under the contract shall be treated as made in 
anticipation of such reduction." 
(2) Subparagraph (A) of section 7702(0(1) (defining premiums 
paid) is amended by striking out "less any other amounts 
received" and inserting in lieu thereof "less any excess pre-
miums with respect to which there is a distribution described in 
subparagraph (B) or (E) of paragraph (7) and any other amounts 
received'. 
(c) CLARIFICATION OF TREATMENT OF CONTRACTS WHICH DO NOT 
MEET TEST.—Clause (ii) of section 7702(gXlXB) (defining income on 
the contract) is amended to read as follows: 
"(ii) the premiums paid (as defined in subsection 
(fXD) under the contract during the taxable year." 
(d) TREATMENT OF FLEXIBLE PREMIUM CONTRACTS ISSUED DURING 
1984 WHICH MEET NEW REQUIREMENTS.—Subsection (b) of section 
221 of the Tax Reform Act of 1984 (relating to 1-year extension of 
flexible premium contract provisions) is amended by adding at the 
end thereof the following new pareigraph: 
"(3) TRANSITIONAL RULE.—Any flexible premium contract 
issued during 1984 which meets the requirements of section 
7702 of the Internal Revenue Code of 1954 (as added by this 
section) shall be treated as meeting the requirements of section 
101(f) of such Code." 
(e) TREATMENT OF CERTAIN CJONTRACTS ISSUED BEFORE OCTOBER 1, 
1984.—Clause (i) of section 221(dX2XC) of the Tax Reform Act of 1984 
(relating to certain contracts issued before October 1, 1984) is 
amended— 
(1) by striking out "in clause (i) thereof in the material 
preceding subclause (I), and 
(2) by striking out "any mortality charges" in subclause (I) 
and inserting in lieu thereof "any mortality charges and any 
initial excess interest guarantees". 
SEC. 1826. AMENDMENTS RELATED TO SECTION 222 OF THE ACT. 
(a) EXCEPTION FOR ANNUITY C!ONTRACTS WHICH ARE PART OF 
QUALIFIED PLANS.—Subsection (s) of section 72 (relating to required 
distributions where holder dies before entire interest is distributed) 
is amended by adding at the end thereof the following new para-
graph: 
"(5) EXCEPTION FOR ANNUITY CONTRACTS WHICH ARE PART OF 
QUAUFiED PLANS.—This subsection shall not apply to any annu-
ity contract— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2849 
"(A) which is provided— 
"(i) under a plan described in section 401(a) which 
includes a trust exempt from tax under section 501, or 
"(ii) under a plan described in section 403(a), 
"(B) which is described in section 403(b), or 
"(C) which is an individual retirement annuity or pro-
vided under an individual retirement account or annuity." 
(b) SPECIAL RULES WHERE HOLDER IS NOT INDIVIDUAL, ETC.— 
(1) Subsection (s) of section 72 (relating to required distribu-
tions where holder dies before entire interest is distributed) is 
amended by adding at the end thereof the following new para-
graphs: 
"(6) SPECIAL RULE WHERE HOLDER IS CORPORATION OR OTHER 
NON-INDIVIDUAL.— 
"(A) IN GENERAL.—For purposes of this subsection, if the 
holder of the contract is not an individual, the primary 
annuitant shall be treated as the holder of the contract. 
"(B) PRIMARY ANNUITANT.—For purposes of subpara-
graph (A), the term 'primary annuitant' means the individ-
ual, the events in the life of whom are of primary impor-
tance in affecting the timing or amount of the payout under 
the contract. 
"(7) TREATMENT OF CHANGES IN PRIMARY ANNUITANT WHERE 
HOLDER OF CONTRACT IS NOT AN INDIVIDUAL.—For pUrpOSCS of 
this subsection, in the case of a holder of an annuity contract 
which is not an individual, if there is a change in a primary 
annuity (as defined in paragraph (6)(B)), such change shall be 
treated as the death of the holder." 
(2) Paragraph (1) of section 72(s) is amended by striking out 
"the holder of such contract" each place it appears and insert-
ing in lieu thereof "any holder of such contract'. 
(3) Paragraph (4) of section 72(e) (relating to amounts not 
received as annuities) is amended by adding at the end thereof 
the following new subparagraph: 
"(C) 
TREATMENT OF TRANSFERS 
WITHOUT ADEQUATE 
CONSIDERATION.— 
"(i) IN GENERAL.—If an individual who holds an 
annuity contract transfers it without full and adequate 
consideration, such individual shall be treated as 
receiving an amount equal to the excess o
f
— 
"(I) the cash surrender value of such contract at 
the time of transfer, over 
"(II) the investment in such contract at such 
time, 
under the contract as an amount not received as an 
annuity. 
"(ii) 
EXCEPTION FOR CERTAIN TRANSFERS BETWEEN 
SPOUSES O
R FORMER SPOUSES.—Clause (i) shall not apply 
to any transfer to which section 1041(a) (relating to 
transfers of property between spouses or incident to 
divorce) applies. 
"(iii) ADJUSTMENT TO INVESTMENT IN CONTRACT OF 
TRANSFEREE.—If Under clause (i) an amount is included 
in the gross income of the transferor of an annuity 
contract, the investment in the contract of the trans-
feree in such contract shall be increased by the amount 
so included." 
100 STAT. 2850 
PUBLIC LAW 99-514—OCT. 22, 1986 
(4) The amendments made by this subsection shall apply to 
contracts issued after the date which is 6 months after the date 
of the enactment of this Act in taxable years ending after such 
date. 
(c) CLARIFICATION OF EXCEPTION FOR DISTRIBUTION AFTER DEATH.— 
Effective with respect to distributions made after the date 6 months 
after the date of the enactment of this Act, subparagraph (B) of 
section 72(q)(2) (relating to 5-percent penalty for premature distribu-
tions from annuity contracts) is amended to read as follows: 
"(B) made on or after the death of the holder (or, where 
the holder is not an individual, the death of the primary 
annuitant (as defined in subsection (s)(6XB))),". 
(d) EXCEPTION FOR ANNUITIES WHICH ARE QUAUFIED FUNDING 
ASSETS.—Paragraph (2) of section 72(q) (relating to 5-percent penalty 
for premature distributions from annuity contracts) is amended by 
striking out "or" at the end of subparagraph (E), by striking out the 
period at the end of subparagraph (F) and inserting in lieu 
thereof ", or", and by adding at the end thereof the following new 
subparagraph: 
"(G) under a qualified funding asset (within the meaning 
" 
of section 130(d), but without regard to whether there is a 
qualified assignment)." 
SEC. 1827. AMENDMENTS RELATED TO SECTION 223 OF THE ACT. 
(a) DETERMINATION OF COSTS IN THE CASE OF DISCRIMINATORY 
PLANS.— 
(1) IN GENERAL.—Subparagraph (B) of section 79(d)(1) (relating 
to nondiscrimination requirements) is amended to read as 
follows: 
"(B) the cost of group-term life insurance on the life of 
any key employee shall be the greater o
f
— 
"(i) such cost determined without regard to subsec-
tion (c), or 
"(ii) such cost determined with regard to subsection 
(0." 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
shall apply to taxable years ending after the date of the enact-
ment of this Act. 
(b) CLARIFICATION OF EFFECTIVE DATE.— 
(1) Subparagraph (A) of section 223(d)(2) of the Tax Reform 
Act of 1984 (relating to treatment of former employees in case of 
existing group-term insurance plans) is amended by striking out 
the material following clause (ii) and inserting in lieu thereof 
the following: 
"but only with respect to an individual who attained age 55 
on or before January 1, 1984, and was employed by such 
employer (or a predecessor employer) at any time during 
1983. Such amendments also shall not apply to any em-
ployee who retired from employment on or before January 
1, 1984, and who, when he retired, was covered by the plan 
(or a predecessor plan)." 
(2) Subparagraph (C) of section 223(dX2) of the Tax Reform 
Act of 1984 is amended by striking out "after December 31, 
1986," and by striking out shall not be taken into account" and 
inserting in lieu thereof "may, at the employer's election, be 
disregarded". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2851 
(3) COMPARABLE SUCCESSOR PLANS.—Paragraph (2) of section 
223(d) of the Tax Reform Act of 1984 is amended by adding at 
the end thereof the following new subparagraph: 
"(D) COMPARABLE SUCCESSOR PLANS.—For purposes of 
subparagraph (A), a plan shall not fail to be treated as a 
comparable successor to a plan described in subparagraph 
(A)(i) with respect to any employee whose benefits do not 
increase under the successor plan." 
(c) DEFINITION OF KEY EMPLOYEE.—Paragraph (6) of section 79(d) 
(defining key employee) is amended— 
(1) by striking out all that follows "section 416(i)" and insert-
ing in lieu thereof a period, and 
(2) by adding at the end thereof the following new sentence: 
"Such term also includes any retired employee if such employee 
when he retired or separated from service was a key employee." 
(d) SEPARATE TREATMENT OF FORMER EMPLOYEES.—Subsection (d) 
of section 79 (relating to nondiscrimination requirements) is 
amended by adding at the end thereof the following new paragraph: 
"(8) TREATMENT OF FORMER EMPLOYEES.—To the extent pro-
vided in regulations, this subsection shall be applied separately 
with respect to former employees." 
(e) COORDINATION WITH SECTION 83.—Paragraph (5) of section 83(e) 
is amended by striking out "the cost of. 
SEC. 1828. AMENDMENT RELATED TO SECTION 224 OF THE ACT. 
Paragraph (1) of section 1035(b) (defining endowment contract) is 
amended by striking out "subject to tax under subchapter L". 
SEC. 1829. WAIVER OF INTEREST ON CERTAIN UNDERPAYMENTS OF TAX. 
No interest shall be payable for any period before July 19, 1984, 
on any underpayment of a tax imposed by the Internal Revenue 
Code of 1954, to the extent such underpayment was created or 
increased by any provision of subtitle A of title II of the Tax Reform 
Act of 1984 (relating to taxation of life insurance companies). 
SEC. 1830. SCOPE OF SECTION 255 OF THE TAX EQUITY AND FISCAL 
RESPONSIBILITY ACT OF 1982. 
In the case of any taxable year beginning before January 1, 1982, 
in applying the provisions of section 255(c)(2) of the Tax Equity and 
Fiscal Responsibility Act of 1982, the Internal Revenue Service shall 
give full and complete effect to the terms of any modified coinsur-
ance contract. The terms to be given effect within the meaning of 
this provision shall include, but are not limited to, the effective date 
and investment income rate as stated in such contract. 
CHAPTER 3—AMENDMENTS RELATED TO TITLE III OF THE 
ACT 
SEC. 1831. AMENDMENT RELATED TO SECTION 301 OF THE ACT. 
Clause (iv) of section 170(b)(1)(C) (defining capital gain property) is 
amended by striking out "this subparagraph" and inserting in lieu 
thereof "this paragraph". 
SEC. 1832. AMENDMENT RELATED TO SECTION 303 OF THE ACT. 
Paragraph (2) of section 4940(e) (relating to requirements) is 
amended by striking out subparagraph (B) and the material follow-
ing such subparagraph and inserting in lieu thereof the following: 
100 STAT. 2852 
PUBLIC LAW 99-514—OCT. 22, 1986 
.«<. . 
"(B) such private foundation was not liable for tax under 
section 4942 with respect to any year in the base period." 
SEC. 1833. AMENDMENT RELATED TO SECTION 305 OF THE ACT. 
Section 6214(c) is amended by striking out "section 4962(b)" and 
inserting in lieu thereof "section 4963(b)". 
SEC. 1834. AMENDMENT RELATED TO SECTION 311 OF THE ACT. 
Subparagraph (A) of section 311(a)(3) of the Tax Reform Act of 
1984 is amended by striking out "a State law" and inserting in lieu 
thereof "a State law (originally enacted on April 22,1977)". 
CHAPTER 4—AMENDMENTS RELATED TO TITLE IV OF THE 
ACT 
SEC. 1841. AMENDMENT RELATED TO SECTION 411 OF THE ACT. 
Section 6654 (relating to failure by individual to pay estimated 
income tax) is amended by redesignating subsections (j)> (k), and (1) 
as subsections (k), (1), and (m), respectively, and by inserting after 
subsection (i) the following new subsection: 
"(j) SPECIAL RULES FOR NONRESIDENT ALIENS.—In the case of a 
nonresident alien described in section 6072(c): 
"(1) PAYABLE IN 3 INSTALLMENTS.—There shall be 3 required 
installments for the taxable year. 
"(2) TIME FOR PAYMENT OF INSTALLMENTS.—The due dates for 
required installments under this subsection shall be determined 
under the following table: 
"In the case of the following 
required installments: 
The due date is: 
1st 
June 15 
2nd 
September 15 
3rd 
January 15 of 
' 
the following 
taxable year. 
"(3) AMOUNT OF REQUIRED INSTALLMENTS.— 
"(A) FIRST REQUIRED INSTALLMENT.—In the case of the 
first required installment, subsection (d) shall be applied by 
substituting '50 percent' for '25 percent' in subsection 
(d)(1)(A). 
"(B) DETERMINATION OF APPUCABLE PERCENTAGE.—The 
applicable percentage for purposes of subsection (d)(2) shall 
be determined under the following table: 
"In the case of the following 
The applicable 
required installments: 
percentage is: 
1st 
45 
»5.t .' 
2nd 
67.5 
3rd 
90." 
SEC. 1842. AMENDMENTS RELATED TO SECTION 421 OF THE ACT. 
(a) COORDINATION WiTH SECTION 1041.—Section 267 (relating to 
losses, expenses, and interest with respect to transactions between 
related taxpayers) is amended by adding at the end thereof the 
following new subsection: 
"(g) COORDINATION WITH SECTION 1041.—Subsection (a)(1) shall not 
apply to any transfer described in section 1041(a) (relating to trans-
fers of property between spouses or incident to divorce)." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2853 
(b) TREATMENT OF TRANSFERS IN TRUST WHERE LIABIUTY EXCEEDS 
BASIS.—Section 1041 (relating to transfers of property between 
spouses or incident to divorce) is amended by adding at the end 
thereof the following new subsection: 
"(e) TRANSFERS IN TRUST WHERE LIABIUTY EXCEEDS BASIS.— 
Subsection (a) shall not apply to the transfer of property in trust to 
the extent that— 
"(1) the sum of the amount of the liabilities assumed, plus the 
amount of the liabilities to which the property is subject, 
exceeds 
"(2) the total of the adjusted basis of the property transferred. 
Proper adjustment shall be made under subsection (b) in the basis of 
the transferee in such property to take into account gain recognized 
by reason of the preceding sentence." 
(c) TREATMENT OF CERTAIN TRANSFERS IN TRUST.—Subsection (g) of 
section 453B (relating to transfers between spouses, or incident to 
divorce) is amended by striking out "section 1041" and inserting in 
lieu thereof "section 1041 (other than a transfer in trust)". 
(d) CLERICAL AMENDMENT.—Paragraph (17) of section 7701(a) 
(defining husband and wife as including former husband and wife) is 
amended by striking out "and 682" and inserting in lieu thereof 
", 682, and 2516". 
SEC. 1843. AMENDMENTS RELATED TO SECTION 422 OF THE ACT. 
(a) CROSS REFERENCE.—Section 71 (relating to alimony and sepa-
rate maintenance payments) is amended by adding at the end 
thereof the following new subsection: 
"(g) CROSS REFERENCES.— 
"(1) For deduction of alimony or separate maintenance payments, see 
section 215. 
"(2) For taxable status of income of an estate or trust in the case of 
divorce, etc., see section 682." 
(b) INSTRUMENT NOT REQUIRED TO SPECIFY ABSENCE OF LIABIUTY 
To MAKE PAYMENTS AFTER DEATH.—Subparagraph (D) of section 
710t))(l) (defining alimony or separate maintenance payments) is 
amended by striking out (and the divorce or separation instrument 
states that there is no such liability)". 
(c) RECOMPUTATION WHERE EXCESS FRONT-LOADING OF ALIMONY 
PAYMENTS.— 
(1) IN GENERAL.—Subsection (f) of section 71 is amended to 
read as follows: 
"(f) RECOMPUTATION WHERE EXCESS FRONT-LOADING OF AUMONY 
PAYMENTS— 
"(1) IN GENERAL.—If there are excess alimony payments— 
"(A) the payor spouse shall include the amount of such 
excess payments in gross income for the payor spouse's 
taxable year beginning in the 3rd post-separation year, and 
"(B) the payee spouse shall be allowed a deduction in 
computing adjusted gross income for the amount of such 
excess payments for the payee's taxable year beginning in 
the 3rd post-separation year. 
"(2) EXCESS AUMONY PAYMENTS.—For purposes of this subsec-
tion, the term 'excess alimony payments' mean the sum of— 
"(A) the excess payments for the 1st post-separation year, 
and 
"(B) the excess payments for the 2nd post-separation 
year. 
100 STAT. 2854 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(3) EXCESS PAYMENTS FOR IST POST-SEPARATION YEAR.—For 
purposes of this subsection, the amount of the excess payments 
for the 1st post-separation year is the excess (if any) of— 
"(A) the amount of the alimony or separate maintenance 
payments paid by the payor spouse during the 1st post-
separation year, over 
. 
o ' 
"(B) the sum of— 
"(i) the average of— 
"(I) the alimony or separate maintenance pay-
ments paid by the payor spouse during the 2nd 
post-separation year, reduced by the excess pay-
ments for the 2nd post-separation year, and 
"(II) the alimony or separate maintenance pay-
ments paid by the payor spouse during the 3rd 
post-separation year, plus 
"(ii) $15,000. 
"(4) EXCESS PAYMENTS FOR 2ND POST-SEPARATION YEAR.—For 
purposes of this subsection, the amount of the excess payments 
for the 2nd post-separation year is the excess (if any) of^ 
"(A) the amount of the alimony or separate maintenance 
payments paid by the payor spouse during the 2nd post-
separation year, over 
"(B) the sum of— 
"(i) the amount of the alimony or separate mainte-
nance payments paid by the payor spouse during the 
3rd post-separation year, plus 
"(ii) $15,000. 
"(5) EXCEPTIONS.— 
' 
"(A) 
WHERE PAYMENT CEASES BY REASON OF DEATH OR 
REMARRIAGE.—Paragraph (1) shall not apply i
f
— 
"(i) either spouse dies before the close of the 3rd post-
separation year, or the payee spouse remarries before 
the close of the 3rd post-separation year, and 
"(ii) the alimony or separate maintenance payments 
cease by reason of such death or remarriage. 
"(B) SUPPORT PAYMENTS.—For purposes of this subsection, 
the term 'alimony or separate maintenance payment' shall 
not include any payment received under a decree described 
in subsection (b)(2)(C). 
"(C) 
FLUCTUATING PAYMENTS NOT WITHIN CONTROL OF 
P
A
Y
O
R SPOUSE.—For purposes of this subsection, the term 
'alimony or separate maintenance payment' shall not in-
clude any payment to the extent it is made pursuant to a 
continuing liability (over a period of not less than 3 years) 
to pay a fixed portion or portions of the income from a 
business or property or from compensation for employment 
or self-employment. 
"(6) POST-SEPARATION YEARS.—For purposes of this subsection, 
the term '1st post-separation years' means the 1st calendar year 
in which the payor spouse paid to the payee spouse alimony or 
separate maintenance payments to which this section applies. 
The 2nd and 3rd post-separation years shall be the 1st and 2nd 
succeeding calendar years, respectively." 
(2) EFFECTIVE DATES.— 
"(A) IN GENERAL.—The amendment made by paragraph 
(1) shall apply with respect to divorce or separation in-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2855 
struments (as defined in section 71(b)(2)) of the Internal 
Revenue Code of 1986 executed after December 31, 1986. 
"(B) 
MODIFICATIONS OF INSTRUMENTS EXECUTED BEFORE 
JANUARY 1, 1987.—The amendments made by paragraph (1) 
shall also apply to any divorce or separation instrument (as 
so defined) executed before January 1,1987, but modified on 
or after such date if the modification expressly provides 
that the amendments made by paragraph (1) shall apply to 
such modification. 
(3) TRANSITIONAL RULE.—In the case of any instrument to 
which the amendment made by paragraph (1) does not apply, 
paragraph (2) of section 71(f) of the Internal Revenue C!ode of 
1954 (as in effect on the day before the date of the enactment of 
this Act) shall apply only with respect to the first 3 post-
separation years, 
(d) CLERICAL AMENDMENT.—Subparsigraph (B) of section 71(cX2) 
(relating to treatment of certain reductions related to contingency 
involving child) is amended by striking out "specified in paragraph 
(1)" and inserting in lieu thereof "specified in subparagraph (A)". 
SEC. 1844. AMENDMENTS RELATED TO SECTION 431 OF THE ACT. 
(a) 
DEFINITION 
OF RELATED PERSON.—Clause (v) of section 
46(cX8XD) is amended by striking out "clause (i)" and inserting in 
lieu thereof "this subparagraph". 
(b) CLARIFICATION OF RECAPTURE.— 
(1) Paragraph (1) of section 47(d) (relating to increases in 
nonqualified nonrecourse financing) is amended— 
(A) by striking out "reducing the qualified investment" 
and inserting in lieu thereof "reducing the credit base (as 
defined in section 48(cX8XC))", and 
(B) by adding at the end thereof the following new sen-
tence: 'For purposes of determining the amount of credit 
subject to the early disposition or cessation rules of subsec-
tion (a), the net increase in the amount of the nonqualified 
nonrecourse financing with respect to the property shall be 
treated as reducing the property's credit base (and cor-
respondingly reducing the qualified investment in the prop-
erty) in the year in which the property was first placed in 
service." 
(2) Subparagraph (F) of section 47(dX3) is hereby repealed. 
(3) Subparagraph (A) of section 46(cX9) (relating to subsequent 
decreases in nonqualified nonrecourse financing with respect to 
property) is amended by striking out "additional qualified 
investment in" and inserting in lieu thereof "an increase in the 
credit base for". 
(4) Clause (i) of section 47(dX3XE) is amended by inserting 
before the semicolon at the end thereof the following: "reduced 
by the sum of the credit recapture amounts with respect to such 
property for all preceding taxable years". 
(5) Clause (i) of section 46(cX9XC) is amended by striking out 
"any increase in a taxpayer's qualified investment" and all that 
follows down through the period at the end thereof and insert-
ing in lieu thereof the following: "any increase in a taxpayer's 
credit base for any property by reason of this paragraph shall be 
taken into account as if it were property placed in service by the 
taxpayer in the taxable year in which the property referred to 
in subparagraph (A) was first placed in service.' 
100 STAT. 2856 
PUBLIC LAW 99-514—OCT. 22, 1986 
SEC. 1845. AMENDMENT RELATED TO SECTION 452 OF THE ACT. 
Section 456 of the Tax Reform Act of 1984 is amended by adding 
at the end thereof the following new subsection: 
"(d) SECTION 452.—The amendment made by section 452 shall 
apply to products manufactured or produced after October 31,1984." 
SEC. 1846. AMENDMENTS RELATED TO SECTION 473 OF THE ACT. 
Subsection (d) of section 39 (relating to transitional rules) is 
amended— 
(1) by striking out "or 44G" in paragraph (1)(A) and inserting 
in lieu thereof "or 44G (as in effect before the enactment of the 
Tax Reform Act of 1984)", and 
(2) by striking out "as so defined in section 25(b)" in para-
graph (2)(B) and inserting in lieu thereof "as defined in section 
26(b)". 
SEC. 1847. AMENDMENTS RELATED TO SECTION 474 OF THE ACT. 
(a) MINIMUM TAX AMENDMENTS.— 
(1) Subparagraph (A) of section 55(c)(3) (relating to carryover 
and carryback of certain credits) is amended by striking out "of 
such limitation" and inserting in lieu thereof "of such credit 
allowable". 
(2) Effective with respect to taxable years beginning after 
December 31, 1982, clause (i) of section 55(c)(2)(E) (relating to 
special rule for applying section 904(c)) is amended to read as 
follows: 
"(i) the limitation of section 904(a) shall be deemed to 
be the amount of foreign tax credit allowable under 
section 27(a) in computing the regular tax for the 
taxable year increased by the amount of the limitation 
determined under subparagraph (C), and". 
O
t
)
) CLERICAL AMENDMENTS.— 
(1) The clause heading for clause (iii) of section 3O0b)(2)(D) is 
amended by striking out "NEW JOBS OR WIN CREDIT" and insert-
ing in lieu thereof "TARGETED JOBS CREDIT". 
(2) Paragraph (1) of section 86(f) is amended by striking out 
"section 37(c)(3)(A)" and inserting in lieu thereof "section 
22(cX3)(A)". 
(3) Subparagraph (C) of section 151(e)(5) is amended bv strik-
ing out section 37(e)" and inserting in lieu thereof 
section 
22(e)". 
(4) Clause (i) of section 415(c)(3)(C) is amended by striking out 
"section 37(e)(3)" and inserting in lieu thereof "section 22(eX3)". 
(5) Paragraph (9) of section 422A(c) is amended by striking out 
"section 37(e)(3)" and inserting in lieu thereof "section 22(eX3)". 
(6) Paragraph (5) of section 48(1) is amended— 
(A) by striking out "section 44C(c)" and inserting in lieu 
thereof "section 23(c)", and 
(B) by striking out "section 44C(c)(4XAXviii)" and insert-
ing in lieu thereof "section 23(cX4XA)(viii)". 
(7) Subparagraph (E) of section 108(bX2) is amended by strik-
ing out "section 33" and inserting in lieu thereof "section 27". 
(8) Subsection (b) of section 280C is amended— 
(A) by striking out "section 29" each place it appears and 
inserting in lieu thereof "section 28", and 
(B) by striking out "section 29(b)" and inserting in lieu 
thereof "section 280i))". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2857 
(9) Section 6699 is amended— 
(A) by striking out "section 44G" each place it appears in 
subsections (a) and (cX2XB) and inserting in lieu thereof 
"section 41", and 
(B) by striking out "section 44Gr(cXlXB)" in subsection 
(aX4) and inserting in lieu thereof "section 41(cXlXB)". 
(10) Subsection (a) of section 6411 is amended by striking out 
"or unused business credit" in the second sentence thereof and 
inserting in lieu thereof "unused research credit, or unused 
business credit", 
(11) Subparagraph (A) of section 460t)X2) is amended by strik-
ing out "48(lX3XAXvii)" in the table contained in such subpara-
graph and inserting in lieu thereof "48(lX3XAXviii)". 
(12) Paragraph (1) of section 1630)) of the Tax Reform Act of 
1984 is amended by inserting "(as amended by sections 211, 314, 
and 474 of this Act)" after "Section 6501". 
(13) Section 6501 is amended by redesignating subsection (n) 
as subsection (o) and by inserting after subsection (m) the 
following new subsection: 
"(n) DEFICIENCIES ATTRIBUTABLE TO ELECTION OF CERTAIN CRED-
ITS.—The period for assessing a deficiency attributable to any elec-
tion under section 40(f) or 510') (or any revocation thereof) shall not 
expire before the date 1 year after the date on which the Secretary 
is notified of such election (or revocation)." 
(14) Subsection (k) of section 6501 is amended by striking out 
"an investment credit carryback, or a work incentive program 
carryback, or a new employee credit carryback" and inserting 
in lieu thereof "or a credit carryback (as defined in section 
6511(dX4XC))". 
(15) Subsection (h) of section 6511 (relating to limitations on 
credit or refund) is amended— 
(A) by striking out "section 6501(qXlXB)" in paragraph (1) 
and inserting in lieu thereof "section 6501(mXlXB)", and 
(B) by striking out "section 6501(qX2XB)" in paragraph (2) 
and inserting in lieu thereof "section 6501(mX2XB)". 
(16) Paragraph (1) of section 665(d) is amended by striking out 
"subpart A of part IV" and inserting in lieu thereof "part IV" 
SEC. 1848. AMENDMENTS RELATED TO SECTION 491 OF THE ACT. 
(a) Paragraph (9) of section 46(f) (relating to special rule for 
additional credit) is hereby repealed. 
(b) Subparagraph (A) of section 401(cX2) (defining earned income) 
is amended by striking out "sections 404 and 405(c)' and inserting in 
lieu thereof "section 404". 
(c) Subparagraph (D) of section 404(aX8) is amended by striking 
out "the deductions allowed by this section and section 405(c)" and 
inserting in lieu thereof "the deduction allowed by this section". 
(d) The second sentence of section 2039(e) is amended by striking 
out "or a bond described in paragraph (3)". 
(eXD Section 6704 is amended— 
(A) by striking out "section 6047(e)" each place it appears in 
subsection (a) and inserting in lieu thereof "section 6047(d)", 
and 
(B) by striking out "section 6047(e)" in the section heading 
and inserting in lieu thereof "section 6047(d)". 
(2) Subsection (e) of section 6047 is amended by adding at the end 
thereof the following new paragraph: 
100 STAT. 2858 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(3) For provisions relating to penalty for failure to comply with the 
provisions of subsection (d), see section 6704." 
(3) The table of sections for subchapter B of chapter 68 is amended 
by striking out "section 6047(e)" in the item relating to section 6704 
and inserting in lieu thereof "section 6047(d)". 
(f) Subsection (b) of section 4973 (defining excess contributions) is 
amended— 
(1) by striking out ", individual retirement annuities, or 
bonds" in the material preceding paragraph (1) and inserting in 
lieu thereof "or individual retirement annuities", 
(2) by striking out subparagraph (A) of paragraph (1) and 
inserting in lieu thereof the following: 
"(A) the amount contributed for the taxable year to the 
accounts or for the annuities (other than a rollover con-
tribution described in section 402(aX5), 402(aX7), 403(aX4), 
403(bX8), or 408(d)(3)), over", and 
(3) by striking out "or bonds" in paragraph (2XC) thereof. 
CHAPTER 5—AMENDMENTS RELATED TO TITLE V OF THE 
ACT 
SEC. 1851. AMENDMENTS RELATED TO WELFARE BENEFIT PLAN PROVI-
SIONS. 
(a) AMENDMENTS RELATED TO SECTION 511 OF THE ACT.— 
(1) TREATMENT OF PLANS FOR INDEPENDENT CONTRACTORS.— 
Paragraph (1) of section 419(g) (relating to extension to plans for 
independent contractors) is amended by striking out "such a 
plan" and inserting in lieu thereof "such a relationship". 
(2) AMENDMENTS TO SECTION 4i9A(d).— 
(A) COORDINATION WITH SECTION 415.—Paragraph (2) of 
section 419A(d) (relating to coordination with section 415) is 
amended by adding at the end thereof the following new 
sentence: "Subparagraph (B) of section 415(cXl) shall not 
apply to any amount treated as an annual addition under 
the preceding sentence." 
(B) SEPARATE ACCOUNT REQUIREMENTS APPLY ONLY WHERE 
THERE IS PRE-FUNDING.—Paragraph (1) of section 419A(d) is 
amended by adding at the end thereof the following new 
sentence: 
"The requirements of this paragraph shall apply to the first 
taxable year for which a reserve is taken into account under 
subsection (cX2) and to all subsequent taxable years." 
(3) CLARIFICATION OF SECTION 4i9A(e).— 
(A) Subsection (e) of section 419A is amended to read as 
follows: 
"(e) SPECIAL LIMITATIONS ON RESERVES FOR MEDICAL BENEFITS OR 
LIFE INSURANCE BENEFITS PROVIDED TO RETIRED EMPLOYEES.— 
"(1) RESERVE MUST BE NONDISCRIMINATORY.—No reserve may 
be taken into account under subsection (c)(2) for post-retirement 
medical benefits or life insurance benefits to be provided to 
covered employees unless the plan meets the requirements of 
section 505(b) with respect to such benefits (whether or not such 
requirements apply to such plan). The preceding sentence shall 
not apply to any plan maintained pursuant to an agreement 
between employee representatives and 1 or more employers if 
the Secretary finds that such agreement is a collective bargain-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2859 
ing agreement and that post-retirement medical benefits or life 
insurance benefits were the subject of good faith bargaining 
between such employee representatives and such employer or 
employers. 
"(2) LIMITATION ON AMOUNT OF LIFE INSURANCE BENEFITS.— 
Life insurance benefits shall not be taken into account under 
subsection (c)(2) to the extent the aggregate amount of such 
benefits to be provided with respect to the employee exceeds 
$50,000." 
(B) Subsection (e) of section 419A of the Internal Revenue 
Code of 1954 (as amended by subparagraph (A)) shall not 
apply to any group-term life insurance to the extent that 
the amendments made by section 223(a) of the Tax Reform 
Act of 1984 do not apply to such insurance by reason of 
paragraph (2) of section 223(d) of such Act. 
(4) TREATMENT OF COLLECTIVELY BARGAINED PLANS.—Para-
graph (5) of section 419A(f) (relating to higher limit in case of 
collectively bargained plans) is amended by striking out "wel-
fare benefit fund established under" and inserting in lieu 
thereof "welfare benefit fund maintained pursuant to". 
(5) 
CLARIFICATION 
OF ACTUARIAL CERTIFICATION 
REQUIRE-
MENT.—Subparagraph (A) of section 419A(c)(5) (relating to spe-
cial limitation where no actuarial certification) is amended by 
striking out "under paragraph (1)" and inserting in lieu thereof 
"under this subsection". 
(6) AGGREGATION RULES.— 
(A) Paragraph (1) of section 419A(h) (relating to aggrega-
tion rules) is amended to read as follows: 
"(1) AGGREGATION OF FUNDS.— 
"(A) MANDATORY AGGREGATION.—For purposes of subsec-
tions (c)(4), (d)(2), and (e)(2), all welfare benefit funds of an 
employer shall be treated as 1 fund. 
"(B) PERMISSIVE AGGREGATION FOR PURPOSES NOT SPECI-
FIED IN SUBPARAGRAPH (A).—For purposes of this section 
(other than the provisions specified in subparagraph (A)), at 
the election of the employer, 2 or more welfare benefit 
funds of such employer may (to the extent not inconsistent 
with the purposes of this subpart and section 512) be 
treated as 1 fund." 
(B) Subsection (b) of section 419A is amended by striking 
out "this subpart" and inserting in lieu thereof "this sub-
part and section 512". 
(7) CLARIFICATION OF ADJUSTMENTS FOR EXISTING RESERVES.— 
Paragraph (7) of section 419A(f) (relating to adjustments for 
existing excess reserves) is amended by striking out subpara-
graph (C) and inserting in lieu thereof the following new sub-
paragraphs: 
"(C) EXISTING EXCESS RESERVE.—For purposes of comput-
ing the increase under subparagraph (A) for any taxable 
year, the term 'existing excess reserve' means the excess (if 
any) of^ 
"(i) the amount of assets set aside at the close of the 
first taxable year ending after July 18, 1984, for pur-
poses described in subsection (a), over 
"(ii) the account limit determined under this section 
(without regard to this paragraph) for the taxable year 
for which such increase is being computed. 
100 STAT. 2860 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(D) FUNDS TO WHICH PARAGRAPH APPLIES.—This para-
graph shall apply only to a welfare benefit fund which, as of 
July 18, 1984, had assets set aside for purposes described in 
subsection (a)." 
(8)(A) CLARIFICATION OF FUND.—Subsection (e) of section 419 
(defining welfare benefit funds) is amended by adding at the end 
thereof the following new paragraph: 
"(4) TREATMENT OF AMOUNTS HELD PURSUANT TO CERTAIN 
INSURANCE CONTRACTS.— 
"(A) IN GENERAL.—Notwithstanding paragraph (3)(C), the 
term 'fund' shall not include amounts held by an insurance 
company pursuant to an insurance contract if— 
"(i) such contract is a life insurance contract de-
scribed in section 264(a)(1), or 
"(ii) such contract is a qualified nonguaranteed con-
tract. 
"(B) QUALIFIED NONGUARANTEED CONTRACT.— 
"(i) IN GENERAL.—For purposes of this paragraph, the 
term 'qualified nonguaranteed contract' means any 
insurance contract (including a reasonable premium 
stabilization reserve held thereunder) i
f
— 
"(I) there is no guarantee of a renewal of such 
contract, and 
"(II) other than insurance protection, the only 
payments to which the employer or employees are 
entitled are experience rated refunds or policy divi-
^S '
"
S
c
J
-
^ 
dends which are not guaranteed and which are 
determined by factors other than the amount of 
welfare benefits paid to (or on behalf of) the 
employees of the employer or their beneficiaries. 
"(ii) LIMITATION.—In the case of any qualified 
nonguaranteed contract, subparagraph (A) shall not 
apply unless the amount of any experience rated 
refund or policy dividend payable to an employer with 
respect to a policy year is treated by the employer as 
received or accrued in the taxable year in which the 
policy year ends." 
(B) EFFECTIVE DATE OF REGULATIONS.—Except in the case of a 
reserve for post-retirement medical or life insurance benefits 
and any other arrangement between an insurance company and 
an employer under which the employer has a contractual right 
to a refund or dividend based solely on the experience of such 
employer, any account held for an employer by any person and 
defined as a fund in regulations issued pursuant to section 
419(e)(3)(C) of the Internal Revenue Code of 1954 shall be consid-
ered a "fund" no earlier than 6 months following the date such 
regulations are published in final form. 
(9) CLARIFICATION OF TAXES PAID BY EMPLOYER ON INCOME OF 
CERTAIN WELFARE BENEFIT FUNDS.—Subsection (g) of section 
419A (relating to employer taxed on income of welfare benefit 
funds in certain cases) is amended by adding at the end thereof 
the following new paragraph: 
"(3) COORDINATION WITH SECTION 419.—If any amount is in-
cluded in the gross income of an employer for any taxable year 
under paragraph (1) with respect to any welfare benefit fund— 
(A) the amount of the tax imposed by this chapter which 
is attributable to the amount so included shall be treated as 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2861 
a contribution paid to such welfare benefit fund on the last 
day of such taxable year, and 
(B) the tax so attributable shall be treated as imposed on 
the fund for purposes of section 419(c)(4)(A)." 
(10) AMENDMENTS TO TAX ON UNRELATED BUSINESS INCOME.— 
(A) Clause (i) of section 512(a)(3)(E) is amended by striking 
out "determined under section 419A(c)" and inserting in 
lieu thereof "determined under section 419A (without 
regard to subsection (f)(6) thereof)". 
(B) Subparagraph (E) of section 512(a)(3) is amended by 
striking out clause (ii) and by redesignating clauses (iii) and 
(iv) as clauses (ii) and (iii), respectively. 
(C) Clause (ii) of section 512(a)(3)(E) (as redesignated by 
subparagraph (B)) is amended— 
(i) by striking out "a existing reserve" in subclause (I) 
and inserting in lieu thereof "an existing reserve", and 
(ii) by striking out subclause (II) and inserting in lieu 
thereof the following: 
"(II) For purposes of subclause (II), the term 
'reserve for post-retirement medical or life insur-
ance benefits' means the greater of the amount of 
assets set aside for purposes of post-retirement 
medical or life insurance benefits to be provided to 
covered employees as of the close of the last plan 
year ending before the date of the enactment of the 
Tax Reform Act of 1984 or on July 18, 1984,". 
(D) Clause (iii) of section 512(a)(3)(E) (as redesignated by 
subparagraph (B)) is amended by striking out "paragraph 
shall not" and inserting in lieu thereof "subparagraph shall 
not". 
(11) AMENDMENTS RELATED TO TAX ON CERTAIN FUNDED WEL-
FARE BENEFIT PLANS.—Subsection (b) of section 4976 (defining 
disqualified benefit) is amended to read as follows: 
'
O
t
>
) DISQUALIFIED BENEFIT.—For purposes of subsection (a)— 
"(1) IN GENERAL.—The term 'disqualified benefit' means— 
"(A) any post-retirement medical benefit or life insurance 
benefit provided with respect to a key employee if a sepa-
rate account is required to be established for such employee 
under section 419A(d) and such payment is not from such 
account, 
"(B) any post-retirement medical benefit or life insurance 
benefit provided with respect to an individual in whose 
favor discrimination is prohibited unless the plan meets the 
requirements of section 505(b) with respect to such benefit 
(whether or not such requirements apply to such plan), and 
"(C) any portion of a welfare benefit fund reverting to the 
benefit of the employer. 
"(2) 
EXCEPTION FOR COLLECTIVE BARGAININJG PLANS.—Para-
graph (1)(B) shall not apply to any plan maintained pursuant to 
an agreement between employee representatives and 1 or more 
employers if the Secretary finds that such agreement is a 
collective bargaining agreement and that the benefits referred 
to in paragraph (1)(B) were the subject of good faith bargaining 
between such employee representatives and such employer or 
employers. 
"(3) 
EXCEPTION FOR NONDEDUCTIBLE CONTRIBUTIONS.—Para-
graph (1)(C) shall not apply to any amount attributable to a 
100 STAT. 2862 
PUBLIC LAW 99-514—OCT. 22, 1986 
contribution to the fund which is not allowable as a deduction 
under section 419 for the taxable year or any prior taxable year 
(and such contribution shall not be included in any carryover 
under section 419(d)). 
"(4) EXCEPTION FOR CERTAIN AMOUNTS CHARGED AGAINST EXIST-
ING RESERVE.—Subparagraphs (A) and (B) of paragraph (1) shall 
not apply to post-retirement benefits charged against an exist-
ing reserve for post-retirement medical or life insurance bene-
fits (as defined in section 512(a)(3)(E)) or charged against the 
income on such reserve." 
(12) CLARIFICATION OF EFFECTIVE DATE.—Subsection (e) of sec-
tion 511 of the Tax Reform Act of 1984 is amended by adding at 
the end thereof the following new paragraphs: 
"(6) AMENDMENTS RELATED TO TAX ON UNRELATED BUSINESS 
INCOME.—The amendments made by subsection (b) shall apply 
with respect to taxable years ending after December 31, 1985. 
For purposes of section 15 of the Internal Revenue Code of 1954, 
such amendments shall be treated as a change in the rate of a 
tax imposed by chapter 1 of such Code. 
"(7) AMENDMENTS RELATED TO EXCISE TAXES ON CERTAIN WEL-
FARE BENEFIT PLANS.—The amendments made by subsection (c) 
shall apply to benefits provided after December 31,1985." 
(13) Section 419A(f)(5) is amended to read as follows: 
"(5) SPECIAL RULE FOR COLLECTIVE BARGAINED AND EMPLOYEE 
PAY-ALL PLANS.—No accounts limits shall apply in the case of 
any qualified asset account under a separate welfare benefit 
fund— 
"(A) under a collective bargaining agreement, or 
"(B) an employee pay-all plan under section 501(c)(9) if— 
"(i) such plan has at least 50 employees (determined 
without regard to subsection (hXD), and 
"(ii) no employee is entitled to a refund with respect 
to amounts in the fund, other than a refund based on 
the experience of the entire fund." 
(14) CLERICAL AMENDMENT.—Paragraph (2) of section 511(e) of 
the Tax Reform Act of 1984 is amended by striking out "and 
section 514". 
O
t
)
) AMENDMENTS RELATED TO SECTION 512 OF THE ACT.— 
(1) TRANSITIONAL RULE FOR CERTAIN TAXPAYERS WITH FULLY 
VESTED VACATION PAY PLANS.— 
(A) IN GENERAL.—In the case of any taxpayer— 
(i) who maintained a fully vested vacation pay plan 
where payments are expected to be paid (or are in fact 
paid) within 1 year after the accrual of the vacation 
pay, and 
(ii) who makes an election under section 463 of the 
Internal Revenue Code of 1954 for such taxpayer's 1st 
taxable year ending after the date of the enactment of 
the Tax Reform Act of 1984, 
in lieu of establishing a suspense account under such sec-
tion 463, such election shall be treated as a change in the 
taxpayer's method of accounting and the adjustments re-
quired as a result of such change shall be taken into 
account under section 481 of such CJode. 
(B) EXTENSION OF TIME FOR MAKING ELECTION.—In 
the 
case of any taxpayer who meets the requirements of 
subpareigraph (AXi), the time for making an election under 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2863 
section 463 of such Code for such taxpayer's 1st taxable 
year ending after the date of the enactment of the Tax 
Reform Act of 1984 shall not expire before the date 6 
months after the date of the enactment of this Act. 
(2) CLERICAL AMENDMENTS.— 
(A) Clause (ii) of section 40403)(2)(B) (relating to exceptions 
for certain benefits) is amended by striking out "to any 
benefit" and inserting in lieu thereof "any benefit". 
(B) Subsection (b) of section 404 is amended— 
(i) by striking out "UNFUNDED" in the subsection 
heading and inserting in lieu thereof "CERTAIN", and 
(ii) by striking out "UNFUNDED" in the heading of 
paragraph (2) and inserting in lieu thereof "CERTAIN". 
(C)(i) Section 404(a) is amended by striking out "section 
162 (relating to trade or business expenses) or section 212 
(relating to expenses for the production of income); but, if 
they satisfy the conditions of either of such sections," and 
inserting in lieu thereof "this chapter; but, if they would 
otherwise be deductible,". 
(ii) Subsection (d) of section 404 is amended by striking 
out "under section 162 or 212" each place it appears and 
inserting in lieu thereof "under this chapter", 
(iii) Subsection (a) of section 404A is amended— 
(I) by striking out "under section 162, 212, or 404" 
and inserting in lieu thereof "under this chapter", and 
(II) by striking out "they satisfy the conditions of 
section 162" and inserting in lieu thereof "they would 
otherwise be deductible". 
(iv) Subsection (a) of section 419 is amended— 
(I) by striking out "under section 162 or 212" and 
inserting in lieu thereof "under this subchapter", and 
(II) by striking out "they satisfy the requirements of 
either of such sections" and inserting in lieu thereof 
"they would otherwise be deductible". 
(c) AMENDMENTS RELATED TO SECTION 513 OF THE ACT.— 
(1) Paragraph (1) of section 505(a) (relating to certain require-
ments must be met in case of organizations described in para-
graph (9) or (20) of section 501(c)) is amended by striking out "of 
an employer". 
(2) Paragraph (1) of section 505(b) (relating to nondiscrimina-
tion requirements) is amended by striking out "as provided in 
paragraph (2)" and inserting in lieu thereof "as otherwise pro-
vided in this subsection". 
(3) Subparagraph (B) of section 5050t))(l) is amended by strik-
ing out "highly compensated employees" and inserting in lieu 
thereof "highly compensated individuals". 
(4) Paragraph (2) of section 505(a) (relating to exception for 
collective bargaining agreements) is amended to read as follows* 
"(2) EXCEPTION FOR COLLECTIVE BARGAINING AGREEMENTS.— 
Paragraph (1) shall not apply to any organization which is part 
of a plan maintained pursuant to an agreement between em-
ployee representatives and 1 or more employers if the Secretary 
finds that such agreement is a collective bargaining agreement 
and that such plan was the subject of good faith bargaining 
between such employee representatives and such employer or 
employers." 
100 STAT. 2864 
PUBLIC LAW 99-514—OCT. 22, 1986 
SEC. 1852. AMENDMENTS RELATED TO PENSION PLAN PROVISIONS. 
(a) AMENDMENTS RELATED TO SECTION 521 OF THE ACT.— 
(1) CLARIFICATION THAT DISTRIBUTION FROM INDIVIDUAL RETIRE-
MENT ACCOUNTS OR ANNUITIES MUST BEGIN AT 70 V2.— 
(A) Paragraph (6) of section 408(a) (defining individual 
retirement account) is amended by striking out "(relating to 
required distributions)" and inserting in lieu thereof "(with-
out regard to subparagraph (C)(ii) thereof) and the inciden-
tal death benefit j-equirements of section 401(a)". 
(B) Paragraph (3) of section 408(b) (defining individual 
retirement annuity) is amended by striking out "(relating 
to required distributions)" and inserting in lieu thereof 
"(without regard to subparagraph (C)(ii) thereof) and the 
incidental death benefit requirements of section 401(a)". 
(2) EXEMPTION OF PRE-1985 ACCUMULATIONS FROM PENALTY ON 
PREMATURE DISTRIBUTIONS.— 
(A) Subparagraph (A) of section 72(m)(5) (relating to pen-
alties applicable to certain amounts received by 5-percent 
owners) is amended to read as follows: 
"(A) This subparagraph shall apply— 
"(i) to amounts which— 
"(I) are received from a qualified trust described 
in section 401(a) or under a plan described in sec-
tion 403(a), and 
"(II) are received by a 5-percent owner before 
such owner attains the age of 59 ¥2 years, for any 
reason other than such owner becoming disabled 
(within the meaning of paragraph (7) of this sec-
tion), and 
"(ii) to amounts which are received from a qualified 
trust described in section 401(a) or under a plan de-
scribed in section 403(a) at any time by a 5-percent 
owner, or by the successor of such owner, but only to 
the extent that such amounts are determined (under 
regulations prescribed by the Secretary) to exceed the 
benefits provided for such individual under the plan 
formula. 
Clause (i) shall not apply to any amount received by an 
individual in his capacity as a policyholder of an annuity, 
endowment, or life insurance contract which is in the 
nature of a dividend or similar distribution and clause (i) 
shall not apply to amounts attributable to benefits accrued 
before January 1,1985." 
(B) Subparagraph (C) of section 72(mX5) is amended to 
read as follows: 
"(C) For purposes of this paragraph, the term '5-percent 
owner' means any individual who, at any time during the 5 
plan years preceding the plan year ending in the taxable 
year in which the amount is received, is a 5-percent owner 
(as defined in section 416(iXlXB))." 
(C) Paragraph (5) of section 72(m) is amended by striking 
out "owNER-EMPLOYEEs" in the paragraph heading and 
inserting in lieu thereof "5-PERCENT OWNERS". 
(3) EXTENSION OF DISTRIBUTION REQUIREMENTS TO SECTION 
4030t)) ANNUITIES.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2865 
(A) Subsection (b) of section 403 (relating to taxability of 
beneficiary under annuity purchased by section 501(c)(3) 
organization or public school) is amended by adding at the 
end thereof the following new paragraph: 
"(10) DISTRIBUTION REQUIREMENTS.—Under regulations pre-
scribed by the Secretary, this subsection shall not apply to any 
annuity contract (or to any custodial account described in para-
graph (7) or retirement income account described in paragraph 
(9)) unless requirements similar to the requirements of section 
401(a)(9) are met (and requirements similar to the incidental 
death benefit requirements of section 401(a) are met) with 
respect to such annuity contract (or custodial account or retire-
ment income account)." 
(B) Paragraph (7) of section 4030?) is amended by striking 
out subparagraph (D). 
(C) The amendments made by this paragraph shall apply 
to benefits accruing after December 31, 1986, in taxable 
years ending after such date. 
(4) CLARIFICATION OF REQUIRED BEGINNING DATE.— 
(A) Subparagraph (C) of section 401(a)(9) (defining re-
quired beginning date) is amended by striking out the last 
sentence and inserting in lieu thereof the following: 
"Clause (ii) shall not apply in the case of an employee who 
is a 5-percent owner (as defined in section 416(i)(l)(B)) ^t 
any time during the 5-plan-year period ending in the cal-
endar year in which the employee attains age lOVz. If the 
employee becomes a 5-percent owner during any subse-
quent plan year, the required beginning date shall be April 
1 of the calendar year following the calendar year in which 
such subsequent plan year ends." 
(B) Subsection (d) of section 409 (relating to employer 
securities must stay in the plan) is amended by adding at 
the end thereof the following new sentence: 
"This subsection shall not apply to any distribution required under 
section 401(a)(9)." 
(5) REQUIRED DISTRIBUTIONS NOT ELIGIBLE FOR ROLLOVER TREAT-
MENT.— 
(A) Paragraph (5) of section 402(a) (relating to rollover 
amounts) is amended by adding at the end thereof the 
following new subparagraph: 
"(G) REQUIRED DISTRIBUTIONS NOT ELIGIBLE FOR ROLLOVER 
TREATMENT.—Subparagraph (A) shall not apply to any dis-
tribution to the extent such distribution is required under 
section 401(a)(9)." 
(B)(i) Subparagraph (B) of section 403(a)(4) is amended by 
striking out "through (F)" and inserting in lieu thereof 
"through (G)". 
(ii) Paragraph (8) of section 4030t>) is amended by adding 
at the end thereof the following new subparagraph: 
"(D) REQUIRED DISTRIBUTIONS NOT ELIGIBLE FOR ROLLOVER 
TREATMENT.—Subparagraph (A) shall not apply to any dis-
tribution to the extent such distribution is required under 
paragraph (10)." 
(C) Paragraph (3) of section 408(d) (relating to rollover 
contributions) is amended by adding at the end thereof the 
following new subparagraph: 
100 STAT. 2866 
PUBLIC LAW 99-514—OCT. 22, 1986 
' 
"(E) DENIAL OF ROLLOVER TREATMENT FOR REQUIRED DIS-
TRIBUTIONS.—This subparagraph shall not apply to any 
amount to the extent such amount is required to be distrib-
uted under subsection (aX6) or (bX3)." 
(6) TREATMENT OF DISTRIBUTIONS REQUIRED UNDER INCIDENTAL 
DEATH BENEFIT RULES.—Paragraph (9) of section 401(a) (relating 
to required distributions) is amended by adding at the end 
thereof the following new subparagraph: 
"(G) TREATMENT OF INCIDENTAL DEATH BENEFIT DISTRIBU-
TIONS.—For purposes of this title, any distribution required 
under the incidental death benefit requirements of this 
subsection shall be treated as a distribution required under 
this paragraph." 
j 
(7) CLERICAL AMENDMENTS.— 
(A) Paragraph (1) of section 408(c) is amended by striking 
out "paragraphs (1) through (7)" and inserting in lieu 
thereof "paragraphs (1) through (6)". 
(B) Subsection (a) of section 4974 (relating to excise tax on 
certain accumulations in individual retirement accounts or 
annuities) is amended by striking out "section 408(a) (6) or 
(7), or 408fl3) (3) or (4)" and inserting in lieu thereof "section 
408(aX6) or 408a)X3)". 
(C) Subsection (b) of section 4974 is amended by striking 
out "section 408(a) (6) or (7) or 408(b) (3) or (4)" and inserting 
in lieu thereof "section 408(aX6) or 4080i)X3)". 
(b) AMENDMENTS RELATED TO SECTION 522 OF THE ACT.— 
(1) Clause (v) of section 402(aX5XE) (defining partial distribu-
tion) is amended by striking out "of any portion of" and insert-
ing in lieu thereof "of all or any portion of". 
(2) Clause (i) of section 402(aX5XD) (relating to special rules for 
partial distributions) is amended by adding at the end thereof 
the following new sentence: 
"For purposes of subclause (I), the balance to the credit 
of the employee shall not include any accumulated 
deductible employee contributions (within the meaning 
of section 72(oX5))." 
(3XA) Section 402 is amended by adding at the end thereof the 
following new subsection: 
"(g) TREATMENT OF SELF-EMPLOYED INDIVIDUALS.—For purposes of 
this section, except as otherwise provided in subparagraph (A) of 
subsection (eX4), the term 'employee' includes a self-employed 
individual (as defined in section 401(cXlXB)) and the employer of 
such individual shall be the person treated as his employer under 
section 401(cX4)." 
(B) Paragraph (4) of section 402(e) is amended by striking out 
subparagraph (F). 
(4) Paragraph (7) of section 402(a) (relating to rollover where 
spouse received distributions after death of employee) is 
amended by striking out "the spouse were the employee" and 
inserting in lieu thereof "the spouse were the employee; except 
that a trust or plan described in subclause (III) or (IV) of 
paragraph (5XEXiv) shall not be treated as an eligible retire-
ment plan with respect to such distribution". 
(5) Clause (ii) of section 402(aX5XD) is amended by striking out 
"a plan described in subclause (IV) or (V)" and inserting in lieu 
thereof "a trust or plan described in subclause (III) or (IV)". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2867 
(6) Clause (i) of section 402(a)(5)(F) is amended by striking out 
"a transfer described in subparagraph (A)" and inserting in lieu 
thereof "a transfer resulting in any portion of a distribution 
being excluded from gross income under subparagraph (A)". 
(7) Clause (v) of section 402(a)(6)(D) is amended by striking out 
"(7)(B)" and inserting in lieu thereof "(7)". 
(8) Paragraph (20) of section 401(a) is amended by striking out 
"qualifying rollover distribution (determined as if section 
402(a)(5)(D)(i) did not contain subclause (II) thereof) described in 
section 402(a)(5)(A)(i) or 403(a)(4)(A)(i)" and inserting in lieu 
thereof 
"qualified 
total distribution described in section 
402(a)(5)(E)(i)(I)". 
(9) Subsection (e) of section 522 of the Tax Reform Act of 1984 
is amended by striking out "the date of the amendment" and 
inserting in lieu thereof "the date of the enactment". 
(10) Subparagraph (C) of section 403(b)(8) is amended by strik-
ing out "(F)(i)" and inserting in lieu thereof "and (F)(i)". 
(c) AMENDMENTS RELATED TO SECTION 523 OF THE ACT.— 
(1) Subparagraph (B) of section 72(e)(7) (relating to plans 
substantially all the contributions of which are employee con-
tributions) is amended— 
(A) by striking out "any trust or contract" and inserting 
in lieu thereof "any plan or contract", 
(B) by striking out "85 percent of" and inserting in lieu 
thereof "85 percent or more of", and 
(C) by adding at the end thereof the following new sen-
tence: 
"For purposes of clause (ii), deductible employee contribu-
tions (as defined in subsection (o)(5)(A)) shall not be taken 
into account." 
(2) Subparagraph (E) of section 72(q)(2) (relating to 5-percent 
penalty for premature distributions from annuity contracts) is 
amended by striking out "subsection (e)(5)(D)" and inserting in 
lieu thereof "subsection (e)(5)(D) (determined without regard to 
subsection (e)(7))". 
(3) Subsection (f) of section 72 is amended— 
(A) by striking out "subsection (d)(1)" and inserting in 
lieu thereof "subsections (d)(1) and (e)(7)", and 
(B) by striking out "subsection (e)(1)(B)" and inserting in 
lieu thereof "subsection (e)(6)". 
(4) Paragraph (2) of section 72(m) is amended— 
(A) by striking out "3 years)" in subparagraph (B) and 
inserting in lieu thereof "3 years) and subsection (e)(7) 
(relating to plans where substantially all contributions are 
employee contributions)", and 
(B) by striking out "subsection (e)(1)(B)" in subparagraph 
(C) and inserting in lieu thereof "subsection (e)(6)". 
(5) Subsection (b) of section 402 is amended by striking out 
"section 72(e)(1)" and inserting in lieu thereof "section 72(e)(5)". 
(d) AMENDMENTS RELATED TO SECTION 524 OF THE ACT.— 
(1) Subparagraph (A) of section 416(i)(l) (defining key em-
ployee) is amended by adding at the end thereof the following 
new sentence: "Such term shall not include any officer or 
employee of an entity referred to in section 414(d) (relating to 
governmental plans)." 
100 STAT. 2868 
PUBLIC LAW 99-514—OCT. 22, 1986 
(2) Subparagraph (E) of section 416(gX4) (relating to benefits 
not taken into account if employee not employed for last 5 
years) is amended to read as follows: 
"(E) BENEFITS NOT TAKEN INTO ACCOUNT IF EMPLOYEE NOT 
EMPLOYED FOR LAST 5 YEARS.—If any individual has not 
performed services for the employer maintaining the plan 
at any time during the 5-year period ending on the deter-
mination date, any accrued benefit for such individual (and 
the account of such individual) shall not be taken into 
account." 
(e) AMENDMENTS RELATED TO SECTION 525 OF THE ACT.— 
dXA) Subsection (c) of section 2039 (relating to exception of 
certain annuity interests created by community property laws) 
is hereby repealed. 
(B) The amendment made by subparagraph (A) shall apply to 
estates of decedents d3dng after the date of the enactment of 
this Act. 
(2XA) Section 2517 (relating to certain annuities under quali-
fied plans) is hereby repealed. 
(B) The table of sections for subchapter B of chapter 12 is 
amended by striking out the item relating to section 2517. 
(C) Subsection (e) of section 406 is amended by striking out 
paragraph (5). 
(D) Subsection (e) of section 407 is amended by striking out 
paragraph (5). 
(E) The amendments made by this paragraph shall apply to 
transfers after the date of the enactment of this Act. 
(3) Section 5250)) of the Tax Reform Act of 1984 is amended by 
adding at the end thereof the following new paragraph: 
"(4) IRREVOCABLE ELECTION.—For purposes of paragraph (2) 
and section 245(c) of the Tax Equity and Fiscal Responsibility 
Act of 1982, an individual who— 
"(A) separated from service before January 1, 1985, with 
respject to parsigraph (2), or January 1, 1983, with respect to 
section 245(c) of the Tax Equity and Fiscal Responsibility 
Act of 1982, and 
"(B) meets the requirements of such paragraph or such 
section other than the requirement that there be an irrev-
ocable election, and that the individual be in pay status, 
shall be treated as having made an irrevocable election and £is 
being in pay status within the time prescribed with respect to a 
form of benefit if such individual does not change such form of 
benefit before death." 
(f) AMENDMENT RELATED TO SECTION 526 OF THE ACT.—Paragraph 
(2) of section 526(d) of the Tax Reform Act of 1984 is amended by 
striking out "paragraph (6)" and inserting in lieu thereof "para-
graph (7)". 
(g) AMENDMENTS RELATED TO SECTION 527 OF THE ACT.— 
(1) ParEigraph (3) of section 401(k) (relating to application of 
participation and discrimination standards) is amended by 
adding at the end thereof the following new subparagraph: 
"(C) A cash or deferred arrsuigement shall be treated as 
meeting the requirements of subsection (aX4) with respect 
to contributions if the requirements of subparagraph (AXii) 
are met." 
(2) Subparagraph (A) of section 401(kX3) is amended by strik-
ing out the last sentence and inserting in lieu thereof the 
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2869 
following: "If an employee is a participant under 2 or more cash 
or deferred arrangements of the employer, for purposes of 
determining the deferral percentage with respect to such em-
ployee, all such cash or deferred arrangements shall be treated 
as 1 cash or deferred arrangement." 
(3) Subparagraph (C) of section 401(k)(2) is amended by strik-
ing out "are nonforfeitable" and inserting in lieu thereof "is 
nonforfeitable", 
(h) AMENDMENTS RELATED TO SECTION 528 OF THE ACT.— 
(1) Subsection (h) of section 401 (relating to medical, etc., 
benefits for retired employees and their spouses and depend-
ents) is amended— 
(A) by striking out "5-percent owner" each place it ap-
pears in paragraph (6) and inserting in lieu thereof "key 
employee", and 
(B) by striking out the l£ist sentence and inserting in lieu 
thereof the following: 
"For purposes of paragraph (6), the term 'key employee' means any 
employee, who at any time during the plan year or any preceding 
plan year during which contributions were made on behalf of such 
employee, is or was a key employee as defined in section 416(i)." 
(2) Paragraph (1) of section 416(1) (relating to treatment of 
certain medical benefits) is amended by adding at the end 
thereof the following new sentence: "Subparagraph (B) of 
subsection (c)(1) shall not apply to any amount treated as an 
annual addition under the preceding sentence." 
(3) Subsection (1) of section 415 is amended by striking out "a 
defined benefit plan" each place it appears and inserting in lieu 
thereof "a pension or annuity plan". 
(i) AMENDMENT RELATED TO SECTION 4402 OF ERISA.—Section 
4402 of the Employee Retirement Income Security Act of 1974 (29 
U.S.C. 1461) is amended by adding at the end thereof the following 
new subsection: 
"(h)(1) In the case of an employer who entered into a collective 
bargaining agreement— 
"(A) which was effective on January 12, 1979, and which 
remained in effect through May 15,1982, and 
"(B) under which contributions to a multiemployer plan were 
to cease on January 12,1982, 
any withdrawal liability incurred by the employer pursuant to part 
1 of subtitle E £is a result of the complete or partial withdrawal of 
the employer from the multiemployer plan before January 12, 1982, 
shall be void. 
"(2) In any case in which— 
"(A) an employer engaged in the grocery wholesaling busi-
ness— 
"(i) had ceased all covered operations under a multiem-
ployer plan before June 30, 1981, and had relocated its 
operations to a new facility in another State, and 
"(ii) had notified a local union representative on May 14, 
1980, that the employer had tentatively decided to dis-
continue operations and relocate to a new facility in an-
other State, and 
"(B) all State and local approvals with respect to construction 
of and commencement of operations at the new facility had 
been obtained, a contract for construction had been entered 
71-194 0 - 89 - 35 : QL. 3 Part3 
100 STAT. 2870 
PUBLIC LAW 99-514—OCT. 22, 1986 
fh into, and construction of the new facility had begun before 
" " September 26, 1980, 
any withdrawal liability incurred by the employer pursuant to part 
1 of subtitle E as a result of the complete or partial withdrawal of 
the employer from the multiemployer plan before June 30, 1981, 
shall be void.". 
SEC. 1853. AMENDMENTS RELATED TO FRINGE BENEFIT PROVISIONS. 
(a) AMENDMENTS TO SECTION 132.— 
(1) Clause (ii) of section 132(f)(2)(B) (defining dependent chil-
dren) is amended by striking out "are deceased" and inserting 
in lieu thereof "are deceased and who has not attained age 25". 
(2) Subparagraph (A) of section 132(c)(3) (defining employee 
discount) is amended by striking out "are provided to the 
employee by the employer" and inserting in lieu thereof "are 
provided by the employer to an employee for use by such 
employee". 
(3) Subsection (i) of section 132 (relating to customers not to 
include employees) is amended by striking out "subsection 
(c)(2)(B)" and inserting in lieu thereof "subsection (cX2)". 
O
t
>
) AMENDMENTS TO SECTION 125.— 
(1) CLARIFICATION OF BENEFITS WHICH MAY BE PROVIDED UNDER 
CAFETERIA PLANS.— 
(A) Subsections (c) and (d)(1)(B) of section 125 are each 
^,^ 
amended by striking out "statutory nontaxable benefits" 
each place it appears and inserting in lieu thereof "quali-
jg 
fled benefits". 
(B) Subsection (f) of section 125 is amended to read as 
follows: 
"(f) QUALIFIED BENEFITS DEFINED.—For purposes of this section, 
the term 'qualified benefit' means any benefit which, with the 
application of subsection (a), is not includible in the gross income of 
the employee by reason of an express provision of this chapter (other 
than section 117, 124, 127, or 132). Such term includes any group 
term life insurance which is includible in gross income only because 
it exceeds the dollar limitation of section 79 and such term includes 
any other benefit permitted under regulations." 
(2) TRANSITIONAL RULE.—Paragraph (5) of section 5310t)) of the 
Tax Reform Act of 1984 (relating to exception for certain cafe-
teria plans and benefits) is amended by adding at the end 
thereof the following new subparagraph: 
"(D) COLLECTIVE BARGAINING AGREEMENTS.—In the c£ise of 
any cafeteria plan in existence on February 10, 1984, and 
maintained pursuant to 1 or more collective bargaining 
|,,j;, 
agreements between employee representatives and 1 or 
more employers, the date on which the last of such collec-
tive bargaining agreements terminates (determined with-
out regard to any extension thereof agreed to after July 18, 
1984) shall be substituted for 'January 1, 1985' in subpara-
*.r 
graph (A) and for 'July 1, 1985' in subparagraph (B). For 
purposes of the preceding sentence, any plan amendment 
made pursuant to a collective bargaining agreement relat-
ing to the plan which amends the plan solely to conform to 
, . • 
any requirement added by this section (or any requirement 
in the regulations under section 125 of the Internal Reve-
nue Code of 1954 proposed on May 6, 1984) shall not be 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2871 
treated as a termination of such collective bargaining 
agreement," 
(3) SPECIAL RULE WHERE CONTRIBUTIONS OR REIMBURSEMENTS 
SUSPENDED.—Paragraph (5) of section 531(b) of the Tax Reform 
Act of 1984 is amended by adding at the end thereof the 
following new subparagraph: 
"(E) SPECIAL RULE WHERE CONTRIBUTIONS OR REIMBURSE-
MENTS SUSPENDED.—For purposes of subparagraphs (A) and 
(B), a plan shall not be treated as not continuing to fail to 
gr;-ii 
satisfy the rules referred to in such subparagraphs with 
respect to any benefit provided in the form of a flexible 
u . 
spending arrangement merely because contributions or re-
imbursements (or both) with respect to such plan were 
suspended before January 1,1985." 
(c) AMENDMENTS TO SECTION 4977.— 
(1) Paragraph (2) of section 4977(c) is amended to read as 
follows: 
"(2) at all times on or after January 1, 1984, and before the 
close of the calendar year involved, substantially all of the 
employees of the employer were entitled to employee discounts 
on goods or services provided by the employer in 1 line of 
business,". 
(2) Section 4977 (relating to tax on certain fringe benefits 
' 
provided by an employer) is amended by adding at the end 
thereof the following new subsection: 
I 
"(f) SECTION TO APPLY ONLY TO EMPLOYMENT WITHIN THE UNITED 
STATES.—Except as otherwise provided in regulations, this section 
shall apply only with respect to employment within the United 
States." 
(3) For purposes of determining whether the requirements of 
section 4977(c) of the Internal Revenue Code of 1954 are met in 
the case of an agricultural cooperative incorporated in 1964, 
there shall not be taken into account employees of a member of 
the same controlled group as such cooperative which became a 
member during July 1980. 
(d) TREATMENT OF TELEPHONE CONCESSION SERVICE FOR CERTAIN 
RETIREES.—Section 559 of the Tax Reform Act of 1984 is amended by 
adding at the end thereof the following subsection: 
"(e) TELEPHONE SERVICE FOR PRE-DIVESTITURE RETIREES.—In the 
case of an employee who, by reason of retirement or disability, 
separated before January 1, 1984, from the service of an entity 
subject to the modified final judgment— 
"(1) all entities subject to the modified final judgment shall be 
treated as a single employer in the same line of business for 
purposes of determining whether telephone service provided to 
the employee is a no-additional-cost service as defined in section 
132 of the Internal Revenue Code of 1954; and 
"(2) payment by an entity subject to the modified final judg-
ment of all or part of the cost of local telephone service provided 
to the employee by a person other than an entity subject to the 
modified final judgment (including rebate of the amount paid by 
the employee for the service and payment to the person provid-
ing the service) shall be treated as telephone service provided to 
the employee by such single employer for purposes of determin-
ing whether the telephone service is a no-additional-cost service 
as defined in section 132 of the Internal Revenue Code of 1954. 
100 STAT. 2872 
PUBLIC LAW 99-514—OCT. 22, 1986 
For purposes of this subsection, the term 'employee' has the mean-
ing given to such term by section 132(f) of the Internal Revenue 
Code of 1954." 
(e) TREATMENT OF CERTAIN LEASED OPERATIONS OF DEPARTMENT 
STORES.—For purposes of section 132(h)(2)(B) of the Internal Reve-
nue Code of 1954, a leased section of a department store which, in 
connection with the offering of beautician services, customarily 
makes sales of beauty aids in the ordinary course of business shall 
be treated as engaged in over-the-counter sales of property. 
(f) TRANSITIONAL RULES FOR TREATMENT OF CERTAIN REDUCTIONS 
IN TUITION.— 
(1) A tuition reduction plan shall be treated as meeting the 
requirements of section 117(d)(3) of the Internal Revenue Code 
of 1954 if— 
(A) such plan would have met the requirements of such 
ac 
section (as amended by this section but without regard to 
the lack of evidence that benefits under such plan were the 
yi 
subject of good faith bargaining) on the day on which 
eligibility to participate in the plan was closed, 
(B) at all times thereafter, the tuition reductions avail-
ii' 
able under such plan are available on substantially the 
same terms to all employees eligible to participate in such 
plan, and 
:. 
(C) the eligibility to participate in such plan closed on 
June 30,1972, June 30,1974, or December 31,1975. 
(2) For purposes of applying section 117(d)(3) of the Internal 
Revenue Code of 1954 to all tuition reduction plans of an 
employer with at least 1 such plan described in paragraph (1) of 
this subsection, there shall be excluded from consideration 
employees not included in the plan who are included in a unit of 
employees covered by an agreement that the Secretary of the 
TreEisury or his delegate finds to be a collective bargaining 
agreement between employee representatives and 1 or more 
employers, if, with respect to plans other than plans described 
in paragraph (1), there is evidence that such benefits were the 
subject of good faith bargaining. 
' 
(3) Any reduction in tuition provided with respect to a full-
time course of education furnished at the graduate level before 
July 1,1988, shall not be included in gross income if^ 
(A) such reduction would not be included in gross income 
under the Internal Revenue Service regulations in effect on 
the date of the enactment of the Tax Reform Act of 1984, 
and 
(B) such reduction is provided with respect to a student 
who was accepted for admission to such course of education 
'• 
before July 1, 1984, and began such course of education 
before June 30,1985. 
SEC. 1854. AMENDMENTS RELATED TO EMPLOYEE STOCK OWNERSHIP 
PLANS. 
' 
(a) AMENDMENTS RELATED TO SECTION 541.— 
(1) Section 1042(a) (relating to nonrecognition of gai;i) is 
amended— 
(A) by striking out "gain (if any) on such sale" and 
inserting in lieu thereof "gain (if any) on such sale ^hich 
would be recognized as long-term capital gain", and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2873 
(B) by striking out "the taxpayer elects" in paragraph (1) 
and inserting in lieu thereof "the taxpayer or executor 
elects in such form as the Secretary may prescribe". 
(2)(A) Section 1042G))(2) (relating to requirement that employ-
ees must own 30 percent of stock) is amended to read as follows: 
"(2) PLAN MUST HOLD 30 PERCENT OF STOCK AFTER SALE.—The 
plan or cooperative referred to in paragraph (1) owns (after 
application of section 318(a)(4)), immediately after the sale, at 
least 30 percent of— 
"(A) each class of outstanding stock of the corporation 
(other than stock described in section 1504(a)(4)) which 
L^. 
issued the qualified securities, or 
• 
"(B) the total value of all outstanding stock of the cor-
poration (other than stock described in section 1504(a)(4)). 
(B)(i) The requirement that section 1042(b) of the Internal 
Revenue Code of 1954 shall be applied with regard to section 
318(a)(4) of such Code shall apply to sales after May 6, 1986. 
(ii) In the case of sales after July 18, 1984, and before the date 
of the enactment of this Act, paragraph (2) of section 1042(b) of 
such Code shall apply as if it read as follows: 
"(2) EMPLOYEES MUST OWN 30 PERCENT OF STOCK AFTER 
SALE.—The plan or cooperative referred to in paragraph (1) 
owns, immediately after the sale, at least 30 percent of the 
employer securities or 30 percent of the value of employer 
securities (within the meaning of section 409(1)) outstanding 
at the time of sale." 
(3)(A) Section 409 is amended by redesignating subsection (n) 
as subsection (o) and by inserting after subsection (m) the 
following new subsection: 
"(n) SECURITIES RECEIVED IN CERTAIN TRANSACTIONS.— 
"(1) IN GENERAL.—A plan to which section 1042 applies and an 
eligible worker-owned cooperative (within the meaning of sec-
tion 1042(c)) shall provide that no portion of the assets of the 
plan or cooperative attributable to (or allocable in lieu of) 
employer securities acquired by the plan or cooperative in a sale 
to which section 1042 applies may accrue (or be allocated di-
rectly or indirectly under any plan of the employer meeting the 
requirements of section 401(a))— 
"(A) during the nonallocation period, for the benefit of— 
"(i) any taxpayer who makes an election under sec-
tion 1042(a) with respect to employer securities, 
"(ii) any individual who is related to the taxpayer 
(within the meaning of section 267(b)), or 
"(B) for the benefit of any other person who owns (after 
. r - 
application of section 318(a)) more than 25 percent of— 
"(i) any class of outstanding stock of the corporation 
which issued such employer securities or of any cor-
poration which is a member of the same controlled 
? 
group of corporations (within the meaning of subsec-
tion (1)(4)) as such corporation, or 
"(ii) the total value of any class of outstanding stock 
of any such corporation. 
For purposes of subparagraph (B), section 318(a) shall be applied 
without regard to the employee trust exception in paragraph 
(2XBXi). 
"(2) FAILURE TO MEET REQUIREMENTS.—If a plan fails to meet 
the requirements of paragraph (1)— 
100 STAT. 2874 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(A) the plan shall be treated as having distributed to the 
person described in paragraph (1) the amount allocated to 
the account of such person in violation of paragraph (1) at 
't»' 
the time of such allocation, 
"(B) the provisions of section 4979A shall apply, and 
*'' 
"(C) the statutory period for the assessment of any tax 
imposed by section 4979A shall not expire before the date 
"•' -'-^ 
which is 3 years from the later o
f
— 
"(i) the 1st allocation of employer securities in 
connection with a sale to the plan to which section 1042 
applies, or 
"(ii) the date on which the Secretary is notified of 
'^' 
such failure. 
"(3) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
subsection— 
"(A) LINEAL DESCENDANTS.—Paragraph (l)(A)(ii) shall not 
apply to any individual if— 
"(i) such individual is a lineal descendant of the 
taxpayer, and 
,„ ...^ 
"(ii) the aggregate amount allocated to the benefit of 
"y 
': 
all such lineal descendants during the nonallocation 
period does not exceed more than 5 percent of the 
^ , 
employer securities (or amounts allocated in lieu 
thereof) held by the plan which are attributable to a 
sale to the plan by any person related to such descend-
, , : 
ants (within the meaning of section 267(c)(4)) in a trans-
.*' . 
action to which section 1042 applied. 
"(B) 25-PERCENT SHAREHOLDERS.—A person shall be 
treated as failing to meet the stock ownership limitation 
under paragraph (1)(B) if such person fails such limita-
tion— 
. 
"(i) at any time during the 1-year period ending on 
Hr, 
the date of sale of qualified securities to the plan or 
cooperative, or 
;.. 
"(ii) on the date as of which qualified securities are 
sdi - 
allocated to participants in the plan or cooperative. 
"(C) NONALLOCATION PERIOD.—The term 'nonallocation 
— 
period' means the 10-year period beginning on the later 
<.-. 
of-
"(i) the date of the sale of the qualified securities, or 
. ^^q„<. 
"(ii) the date of the plan allocation attributable to the 
final payment of acquisition indebtedness incurred in 
V., ' 
connection with such sale." 
(B) Section 1042(b)(3) is amended by striking out paragraph (3) 
and redesignating paragraph (4) as paragraph (3). 
(C) The amendments made by this paragraph apply to sales of 
securities after the date of the enactment of this Act. 
•m 
(4) Section 
1042(c)(1) (defining 
qualified 
securities) 
is 
amended— 
s3. 
(A) by striking out "securities outstanding that are" in 
subparagraph (A) and inserting in lieu thereof "stock 
fe&iiv outstanding that is", 
flqBTgE 
(B) by inserting "and" at the end of subparagraph (A), 
and 
ii'mm c 
(C) by striking out subparagraph (B) and redesignating 
subparagraph (C) as subparagraph (B). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2875 
(5XA) Paragraph (4) of section 1042(c) (defining qualified 
replacement property) is amended to read as follows: 
(4) QUAUFIED REPLACEMENT PROPERTY.— 
(A) IN GENERAL.—The term 'qualified replacement prop-
erty' means any security issued by a domestic operating 
corporation which— 
"(i) did not, for the taxable year preceding the tax-
'
^ , . 
able year in which such security w£is purchased, have 
..i£i... ; 
passive investment income (as defined in section 
1362(dX3XD)) in excess of 25 percent of the gross re-
ceipts of such corporation for such preceding taxable 
year, and 
"(ii) is not the corporation which issued the qualified 
securities which such security is replacing or a member 
of the same controlled group of corporations (within the 
meaning of section 1563(aXl)) as such corporation. 
For purposes of clause (i), income which is described in 
section 954(cX3) shall not be treated as passive investment 
income. 
l! 
"(B) OPERATING CORPORATION,—For purposes of this 
paragraph— 
"(i) IN GENERAL.—The term 'operating corporation' 
means a corporation more than 50 percent of the assets 
] 
of which were, at the time the security was purchsised 
or before the close of the placement period, used in the 
active conduct of the trade or business. 
, , 
"(ii) FINANCIAL INSTITUTIONS AND INSURANCE COMPA-
-
f 1'. *
^
.
^
! - 
NiES.—The term 'operating corporation' shall include— 
' '- ''"'''^ 
"(I) any financial institution described in section 
581 or 593, and 
*•'" "
^ **' 
"(II) an insurance company subject to tax under 
subchapter L. 
s r. --.u 
"(Q 
CONTROIXING 
AND 
CONTROLLED 
CORPORATIONS 
TREATED AS 1 CORPORATION.— 
'*?' 
"(i) IN GENERAL.—For purposes of applying this para-
• 
graph, if— 
"(I) the corporation issuing the security owns 
* 
stock representing control of 1 or more other 
corporations, 
"(II) 1 or more other corporations own stock 
' •«»' 
representing control of the corporation issuing the 
*"SJ'^ 
security, or 
"(III) both, 
then all such corporations shall be treated as 1 
corpKoration. 
"(ii) (HoNTROL.—For purposes of clause (i), the term 
•^1 
o» 
'control' has the meaning given such term by section 
304(c). In determining control, there shall be dis-
regarded any qusdified replacement property of the 
;i:.A.i;. 
taxpayer with respect to the section 1042 sale being 
tested. 
Ii 
"(D) SECURITY DEFINED.—For purposes of this paragraph, 
I 
the term 'security' has the meaning given such term by 
section 165(gX2), except that such term shall not include 
any security issued by a government or political subdivision 
r 
thereof." 
(B) If-
100 STAT. 2876 
PUBLIC LAW 99-514—OCT. 22, 1986 
*
» 
(i) before January 1, 1987, the taxpayer acquired any 
security (as defined in section 165(g)(2) of the Internal 
Revenue Code of 1954) issued by a domestic corporation or 
•-' 
by any State or political subdivision thereof, 
W-i'"'- 
(ii) the taxpayer treated such security as qualified 
replacement property for purposes of section 1042 of such 
-A'- 
Code, and 
(iii) such property does not meet the requirements of 
section 1042(c)(4) of such Code (as amended by subpara-
graph (A)), 
then, with respect to so much of any gain which the taxpayer 
treated as not recognized under section 1042(a) by reason of the 
acquisition of such property, the replacement period for pur-
poses of such section shall not expire before January 1, 1987. 
(6)(A) Section 1042(c) (relating to definitions and special rules) 
is amended by adding at the end thereof the following new 
^ 
paragraph: 
jnt 
"(Y) SECTION NOT TO APPLY TO GAIN OF C CORPORATION.— 
Subsection (a) shall not apply to any gain on the sale of any 
"' 
qualified securities which is includible in the gross income of 
any C corporation." 
(B) The amendment made by subparagraph (A) shall apply to 
sales after March 28, 1985, except that such amendment shall 
not apply to sales made before July 1, 1985, if made pursuant to 
a binding contract in effect on March 28, 1985, and at all times 
thereafter. 
(C) The amendment made by subparagraph (A) shall not 
apply to any sale occurring on December 20, 1985, with respect 
to which— 
«^f 
(i) a commitment letter was issued by a bank on October 
31,1984, and 
gj^f 
(ii) a final purchase agreement w£is entered into on 
November 5,1985. 
;-.i, 
(D) In the case of a sale on September 27,1985, with respect to 
which a preliminary commitment letter was issued by a bank 
on April 10, 1985, and with respect to which a commitment 
letter was issued by a bank on June 28, 1985, the amendment 
made by subparagraph (A) shall apply but such sale shall be 
; 
treated as having occurred on September 27,1986. 
,.ri:i 
(7) Section 1042(d) (relating to basis of qualified replacement 
property) is amended by adding at the end thereof the following 
new flush sentence: 
"Any reduction in basis under this subsection shall not be taken 
into account for purposes of section 1278(aX2XAXii) (relating to 
definition of market discount)." 
(8XA) Section 1042 is amended by redesignating subsection (e) 
as subsection (f) and by inserting after subsection (d) the follow-
ing new subsection: 
"(e) RECAPTURE OF GAIN ON DISPOSITION OF QUAUFIED REPLACE-
MENT PROPERTY.— 
"(1) IN GENERAL.—If a taxpayer disposes of any qualified 
replacement property, then, notwithstanding any other provi-
sion of this title, gain (if any) shall be recognized to the extent of 
the gain which was not recognized under subsection (a) by 
reason of the acquisition by such taxpayer of such qualified 
replacement property. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2877 
"(2) SPECIAL RULE FOR CORPORATIONS CONTROLLED BY THE TAX-
PAYER.—If— 
"(A) a corporation issuing qualified replacement property 
disposes of a substantial portion of its assets other than in 
the ordinary course of its trade or business, and 
"(B) any taxpayer owning stock representing control 
(within the meaning of section 304(c)) of such corporation at 
the time of such disposition holds any qualified replace-
ment property of such corporation at such time, 
* then the taxpayer shall be treated as having disposed of such 
qualified replacement property at such time. 
^ 
"(3) RECAPTURE NOT TO APPLY IN CERTAIN CASES.—Paragraph 
(1) shall not apply to any transfer of qualified replacement 
property— 
"(A) in any reorganization (within the meaning of section 
368) unless the person making the election under subsection 
«u;«^i'*-i 
(a)(1) owns stock representing control in the acquiring or 
acquired corporation and such property is substituted basis 
property in the hands of the transferee, 
"(B) by reason of the death of the person making such 
"^ 
election, 
"(C) by gift, or 
"(D) in any transaction to which section 1042(a) applies." 
^ 
(B) The amendment made by subparagraph (A) shall apply to 
dispositions after the date of the enactment of this Act, in 
taxable years ending after such date. 
-' 
(9)(A) Chapter 43 (relating to qualified pension, etc. plans) is 
amended by adding at the end thereof the following new section: 
"SEC. 4979A. TAX ON CERTAIN PROHIBITED ALLOCATIONS OF QUALIFIED 
SECURITIES. 
"(a) IMPOSITION OF TAX.—If there is a prohibited allocation of 
qualified securities by any employee stock ownership plan or eligible 
worker-owned cooperative, there is hereby imposed a tax on such 
allocation equal to 50 percent of the amount involved. 
"Ot)) PROHIBITED ALLOCATION.—For purposes of this section, the 
term 'prohibited allocation' means— 
"(1) any allocation of qualified securities acquired in a sale to 
which section 1042 applies which violates the provisions of 
section 409(n), and 
"(2) any benefit which accrues to any person in violation of 
the provisions of section 409(n). 
"(c) LiABiUTY FOR TAX.—The tax imposed by this section shall be 
paid by— 
"(1) the employer sponsoring such plan, or 
"(2) the eligible worker-owned cooperative, 
which made the written statement described in section 10420t)X3XB). 
"(d) DEFINITIONS.—Terms used in this section have the same 
respective meaning as when used in section 4978." 
(B) Subparagraph (B) of section 1042(b)(3) is amended by 
striking out "section 4978(a)" and inserting in lieu thereof 
"sections 4978 and 4979A". 
(C) The table of sections for chapter 43 is amended by adding 
I 
at the end thereof the following new item: 
"Sec. 4979A. Tax on certain prohibited allocations of qualified securities." 
100 STAT. 2878 
PUBLIC LAW 99-514—OCT. 22, 1986 
(D) The amendments made by this paragraph shall apply to 
sales of securities after the date of the enactment of this Act. 
'' 
(10) Paragraph (5) of section 1042(c) (relating to securities 
^ 
acquired by underwriter) is amended— 
(A) by striking out "acquisition" and inserting in lieu 
•^ 
thereof "sale", 
^: 
(B) by inserting "to an employee stock ownership plan or 
"^ * 
eligible worker-owned cooperative" before "in", and 
(C) by striking out "ACQUIRED" in the heading thereof and 
'^ 
inserting in lieu thereof "SOLD". 
(11) The heading for section 1042 is amended by inserting 
"EMPLOYEE" before "STOCK". 
^ 
(12) The table of sections for part III of subchapter O of 
chapter 1 is amended by striking out the item relating to section 
1042 and inserting in lieu thereof the following new item: 
"Sec. 1042. Sales of stock to employee stock ownership plans or certain 
cooperatives." 
(b) AMENDMENTS RELATED TO SECTION 542.— 
^
_ 
(1) Paragraph (5) of section 72(e) is amended by adding at the 
end of subparagraph (D) the following new flush sentence: 
"Any dividend described in section 404(k) which is received by a 
• 
participant or beneficiary shall, for purposes of this subpara-
,^ graph, be treated as paid under a separate contract to which 
^; clause (ii)(I) applies." 
(2) Section 404(k) is amended— 
(A) by adding at the end thereof the following new flush 
sentence: 
"Any deduction under subparagraph (A) or (B) of paragraph (2) shall 
be allowed in the taxable year of the corporation in which the 
dividend is paid or distributed to the participant under paragraph 
(2).", and 
(B) by striking out "during the taxable year" in the 
matter preceding paragraph (1). 
(3) Section 404(k), as amended by paragraph (2), is amended by 
^^1 adding at the end thereof the following new sentence: "A plan 
to which this subsection applies shall not be treated as violating 
the requirements of section 401, 409, or 4975(eX7) merely by 
reason of any distribution described in paragraph (2)." 
(4) Subsection (k) of section 404 is amended by adding at the 
end thereof the following new sentence: 
"The Secretary may disallow the deduction under this subsection for 
any dividend if the Secretary determines that such dividend con-
stitutes, in substance, an avoidance of taxation." 
(5) Paragraph (2) of section 404(k) is amended by striking out 
"participants in the plan" each place it appears and inserting in 
lieu thereof "participants in the plan or their beneficiaries". 
(6) The amendments made by paragraphs (1) and (2) shall not 
apply to dividends paid before January 1, 1986, if the taxpayer 
,, f treated such dividends in a manner inconsistent with such 
amendments on a return filed with the Secretary before the 
date of the enactment of this Act. 
(c) AMENDMENTS RELATED TO SECTION 543.— 
(1) Subparagraph (B) of section 291(eXl) (defining financial 
institution preference item) is amended by adding at the end 
*' thereof the following new clause: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2879 
"(iv) SPECIAL RULES FOR OBUGATIONS TO WHICH SEC-
TION 133 APPUES.—In the case of an obligation to which 
section 133 applies, interest on such obligation shall not 
be treated as exempt from taxes for purposes of this 
subparagraph." 
(2)(A) Section 133 (relating to exemption for interest on cer-
tain loans used to acquire employer securities) is amended by 
adding at the end thereof the following new subsection: 
"(d) APPLICATION WITH SECTION 483 AND ORIGINAL ISSUE DISCOUNT 
RULES.—In applying section 483 and subpart A of part V of sub-
chapter P to any obligation to which this section applies, appro-
priate adjustments shall be made to the applicable Federal rate to 
take into account the exclusion under subsection (a)." 
(B) Section 7872(f) is amended by adding at the end thereof 
the following new paragraph: 
, 
"(11) SPECIAL RULE FOR CERTAIN EMPLOYER SECURITY LOANS.— 
g 
This section shall not apply to any loan between a corporation 
I 
(or any member of the controlled group of corporations which 
includes such corporation) and an employee stock ownership 
J 
plan described in section 4975(e)(7) to the extent that the in-
f 
terest rate on such loan is equal to the interest rate paid on a 
related securities acquisition loan (as described in section 133(b)) 
to such corporation." 
(C) Section 1330t))(2) is amended by adding at the end thereof 
the following new flush sentence: 
"For purposes of this paragraph, subparagraphs (A) and (B) 
shall not apply to any loan which, but for such subparagraphs, 
would be a securities acquisition loan if such loan was not 
originated by the employer of any employees who are covered 
by the plan or by any member of the controlled group of 
corporations which includes such employer, except that this 
section shall not apply to any interest received on such loan 
during such time as such loan is held by such employer (or any 
member of such controlled group)." 
(D) Section 133(b) is amended by redesignating paragraph (3) 
as paragraph (4) and by adding after paragraph (2) the following 
new paragraph: 
"(3) TERMS APPLICABLE TO CERTAIN SECURITIES ACQUISITION 
LOANS.—A loan to a corporation shall not fail to be treated as a 
securities acquisition loan merely because the proceeds of such 
loan are lent to an employee stock ownership plan sponsored by 
such corporation (or by any member of the controlled group of 
corporations which includes such corporation) if such loan 
includes— 
"(A) repayment terms which are substantially similar to 
,^ . 
the terms of the loan of such corporation from a lender 
described in subsection (a), or 
...JII 
"(B) repayment terms providing for more rapid repay-
ment of principal or interest on such loan but only i
f
— 
"(i) allocations under the plan attributable to such 
repayment do not discriminate in favor of highly com-
pensated employees (within the meaning of sectio 
414(q)), and 
"(ii) the total commitment period of such loan to the 
corporation does not exceed 7 years." 
(d) AMENDMENTS RELATED TO SECTION 544.— 
100 STAT. 2880 
PUBLIC LAW 99-514—OCT. 22, 1986 
(1)(A) Section 2210(a) (relating to liability for payment of 
estate tax in case of transfer of employer securities to an ESOP 
or worker cooperative) is amended by striking out "and" at the 
end of paragraph (1), by redesignating paragraph (2) as para-
graph (3), and by inserting after paragraph (1) the following new 
paragraph: 
"(2) the executor of the estate of the decedent may (without 
regard to this section) make an election under section 6166 with 
^^ respect to that portion of the tax imposed by section 2001 which 
is attributable to employer securities, and". 
(B) The amendment made by subparagraph (A) shall apply to 
« 
the estates of decedents dying after September 27,1985. 
(2) Section 2210(c) (relating to installment payments) is 
'im amended by adding at the end thereof the following new 
paragraph: 
"(3) SPECIAL RULES FOR APPUCATION OF SECTION 6166(g).—In 
the case of any transfer of employer securities to an employee 
stock ownership plan or eligible worker-owned cooperative to 
which this section applies— 
"(A) TRANSFER DOES NOT TRIGGER ACCELERATION.—Such 
transfer shall not be treated as a disposition or withdrawal 
to which section 6166(g) applies. 
"(B) 
SEPARATE APPLICATION TO ESTATE AND PLAN IN-
Josrf 
J TERESTS.—Section 6166(g) shall be applied separately to the 
interests held after such transfer by the estate and such 
(^ r^' plan or cooperative. 
"(C) REQUIRED DISTRIBUTION NOT TAKEN INTO ACCOUNT.— 
In the case of any distribution of such securities by such 
plan which is described in section 4978(d)(1)— 
"(i) such distribution shall not be treated as a disposi-
tion or withdrawal for purposes of section 6166(g), and 
"(ii) such securities shall not be taken into account in 
V-- 
applying section 6166(g) to any subsequent disposition 
or withdrawal." 
(3) Section 2210(g) (relating to definitions) is amended by 
: 
adding at the end thereof the following new paragraph: 
"(5) TAX IMPOSED BY SECTION 2001.—The term 'tax imposed by 
section 2001' includes any interest, penalty, addition to tax, or 
additional amount relating to any tax imposed by section 2001." 
(4) Section 2210(c)(1) is amended by inserting "any authorized 
officer o f before "the cooperative" in the matter following 
subparagraph (B). 
(5) Section 2210(d) (relating to guarantee of payments) is 
amended— 
(A) by inserting "and any eligible worker-owned coopera-
'" r 
tive" before "shall guarantee" in the matter following para-
graph (2), 
•>' 
(B) by striking out "such plan" and inserting in lieu 
thereof "such plan or cooperative, respectively,", and 
(C) by striking out ", including any interest payable 
under section 6601 which is attributable to such amount". 
(6) Section 2210(g)(3) is amended by striking out "section 
1041(b)(2)" and inserting in lieu thereof "section 1042(cX2)". 
(e) AMENDMENTS RELATED TO SECTION 545.— 
(1) Section 4978(a)(1) (relating to tax on disposition of securi-
ties to which section 1042 applies before close of minimum 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2881 
holding period) is amended by striking out "then" and inserting 
in lieu thereof "than". 
(2) Section 497803)(1) is amended by striking out "paragraph 
(1)" and inserting in lieu thereof "subsection (a)". 
(3) Section 4978(c) is amended by striking out "section 
1042(a)(2)(B)" and inserting in lieu thereof "section 1042(b)(3)". 
(4) Section 4978(d)(1)(C) is amended by striking out "section 
72(m)(5)" and inserting in lieu thereof "section 72(m)(7)". 
(5) Section 4978(e)(2) is amended by striking out "section 
I 1042(b)(1)" and inserting in lieu thereof "section 1042(c)(1)". 
(6) Section 4978(eX3) is amended by striking out "section 
1042(bXl)" and inserting in lieu thereof "section 1042(c)(2)". 
(7) Section 4978(d) (relating to dispositions to which section 
does not apply) is amended by adding at the end thereof the 
following new paragraph: 
"(3) LIQUIDATION OF CORPORATION INTO COOPERATIVE.—In the 
* case of any exchange of qualified securities pursuant to the 
' 
liquidation of the corporation issuing qualified securities into 
" the eligible worker-owned cooperative in a transaction which 
meets the requirements of section 332 (determined by substitut-
ing '100 percent' for '80 percent' each place it appears in section 
332(b)(1)), such exchange shall not be treated as a disposition for 
^ purposes of this section." 
(f) OTHER AMENDMENTS.— 
(1)(A) Section 409(e) (relating to voting rights) is amended by 
adding at the end thereof the following new paragraph: 
"(5) 1 VOTE PER PARTICIPANT.—A plan meets the requirements 
of paragraph (2) or (3) with respect to an issue if— 
"(A) the plan permits each participant 1 vote with respect 
^
, 
to such issue, and 
"(B) the trustee votes the shares held by the plan in the 
; 
proportion determined after application of subparagraph 
: 
(A)." 
(B) Paragraph (3) of section 409(e) (relating to requirement for 
other employers) is amended by striking out all that follows 
i 
"with respect to" and inserting in lieu thereof the following: 
"any corporate matter which involves the voting of such shares 
I 
with respect to the approval or disapproval of any corporate 
I 
merger or consolidation, recapitalization, reclassification, liq-
uidation, dissolution, sale of substantially all assets of a trade or 
I 
business, or such similar transaction as the Secretary may 
prescribe in regulations." 
i 
(C) Paragraphs (2) and (3) of section 409(e) are amended by 
striking out "employer securities" and inserting in lieu thereof 
"securities of the employer". 
(D) Paragraphs (2) and (3) of section 409(e) are amended by 
f 
inserting "or beneficiary" after "participant" each place it 
appears. 
(2) Section 402 is amended by adding at the end thereof the 
following new section: 
"(g) EFFECT OF DISPOSITION OF STOCK BY PLAN ON NET UNREAUZED 
APPRECIATION.— 
"(1) IN GENERAL.—For purposes of subsection (a)(1) or (eX4)(J), 
in the case of any transaction to which this subsection applies, 
the determination of net unrealized appreciation shall be made 
without regard to such transaction. 
100 STAT. 2882 
PUBLIC LAW 99-514—OCT. 22, 1986 
M 
"(2) TRANSACTION TO WHICH SUBSECTION APPUES.—This subsec-
tion shall apply to any transaction in which— 
*
'
* 
"(A) the plan trustee exchanges the plan's securities of 
the employer corporation for other such securities, or 
no^ s
. 
"(B) the plan trustee disposes of securities of the 
" 
employer corporation and uses the proceeds of such disposi-
n
g
^ 
tion to acquire securities of the employer corporation 
within 90 days (or such longer period as the Secretary may 
*
^ *' 
prescribe), except that this subparagraph shall not apply 
to any employee vnth respect to whom a distribution of 
m.' 
money was made during the period after such disposition 
and before such acquisition." 
(3XA) Section 4975(eX7) is amended by inserting ", section 
409(o), and, if applicable, section 409(n)" after "section 409(h)". 
(B) Section 1042(bX3XB) is amended by inserting "and 4979A" 
M
- after "section 4978(a)". 
(C) Section 409(hX2) is amended by striking out "in cash" in 
the second sentence thereof and inserting in lieu thereof "in 
cash, except that such plan may distribute employer securities 
subject to a requirement that such securities may be resold to 
the employer under terms which meet the requirements of 
section 409(o)". 
(4XA) The amendments made by paragraph (IXA) and (3) shall 
take effect on the date of the enactment of this Act. 
(B) The amendments made by subparagraphs (B), (C), and (D) 
of paragraph (1) shall apply after December 31, 1986, to stock 
v|, acquired after December 31,1979. 
(C) The amendments made by paragraph (2) shall apply to any 
transaction occurring after December 31, 1984, except that in 
the case of any transaction occurring before the date of the 
enactment of this Act, the period under which proceeds are 
required to be invested under section 402(g) of the Internal 
Revenue Code of 1954 (as added by paragraph (2)) shall not end 
before the earlier of 1 year after the date of such transaction or 
180 days after the date of the enactment of this Act. 
SEC. 1855. AMENDMENTS RELATED TO MISCELLANEOUS EMPLOYEE 
BENEFIT PROVISIONS. 
(a) AMENDMENT RELATED TO SECTION 555 OF THE ACT.—Subsection 
(c) of section 555 of the Tax Reform Act of 1984 (relating to technical 
amendments to the incentive stock option provisions) is amended— 
(1) by striking out "subsection (a) in paragraph (1) and 
inserting in lieu thereof "subsection (aXD", 
(2) by striking out "subsection (b)" in paragraph (2) and 
inserting in lieu thereof "subsection (aX2)", 
, 
(3) by striking out "after March 20, 1984," in paragraph (2), 
^''' and 
*' 
(4) by striking out "subsection (c)" in paragraph (3) and 
inserting in lieu thereof "subsection (b)". 
(b) AMENDMENT RELATED TO SECTION 556 OF THE ACT.—Section 556 
of the Tax Reform Act of 1984 is amended by striking out so much of 
such section as precedes paragraph (1) thereof and inserting in lieu 
thereof the following: 
"SEC. 556. TIME FOR MAKING CERTAIN SECTION 83(b) ELECTIONS. 
"In the case of any transfer of property in connection with the 
performance of services on or before November 18,1982, the election 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2883 
permitted by section 83(b) of the Internal Revenue Code of 1954 may 
be made, notwithstanding paragraph (2) of such section 83(b), with 
the income tax return for any taxable year ending after July 18, 
1984, and beginning before the date of the enactment of the Tax 
Reform Act of 1986 if—". 
CHAPTER 6—AMENDMENTS RELATED TO TITLE VI OF THE 
ACT 
SEC. 1861. AMENDMENTS RELATED TO SECTION 611 OF THE ACT. 
(a) EXTENSION OF TIME FOR SUBMITTING POLICY STATEMENT.— 
Paragraph (5) of section 103A(j) is amended by adding at the end 
thereof the following new subparagraph: 
"(C) EXTENSION OF TIME.—The Secretary may grant an 
extension of time for the publishing of a report described in 
subparagraph (B) or the submittal of such report to the 
-^ 
Secretary if there is reasonable cause for the failure to 
publish or submit such report in a timely fashion." 
(b) DEFINITION OF QUALIFIED VETERAN.—Subparagraph (B) of sec-
tion 103A(o)(4) (defining qualified veteran) is amended by striking 
out "January 1, 1985" and inserting in lieu thereof "January 31, 
1985". 
(c) CLARIFICATION OF GOOD FAITH EFFORT PROVISIONS.— 
(1) Subparagraph (B) of section 103A(c)(2) (defining qualified 
mortgage issue) is amended by striking out "and (j)" and insert-
ing in lieu thereof "and (j) (D and (2)". 
(2) Subparagraph (C) of section 103A(c)(2) is amended by 
striking out "and (i)" and inserting in lieu thereof "(i), and (j) (3), 
(4), and (5)". 
SEC. 1862. AMENDMENT RELATED TO SECTION 612 OF THE ACT. 
(a) REQUIREMENTS FOR QUALIFIED MORTGAGE CREDIT CERTIFICATE 
PROGRAM.—Subclause (V) of section 25(c)(2)(A)(iii) (defining qualified 
mortgage credit certificate program) is amended by striking out 
"paragraph (1) of subsection (j)" and inserting in lieu thereof 
"subsection (j), other than paragraph (2) thereof. 
(b) GOOD FAITH EFFORT RULES MADE APPLICABLE.—Subparagraph 
(A) of section 25(c)(2) (defining qualified mortgage credit certificate 
program) is amended by adding at the end thereof the following new 
sentence: 
"Under regulations, rules similar to the rules of subpara-
graphs (B) and (C) of section 103A(c)(2) shall apply to the 
requirements of this subparagraph." 
(c) CARRYFORWARD OF EXCESS CREDIT.—Subparagraph (B) of sec-
tion 25(e)(1) (relating to carryforward of unused credit) is amended 
to read as follows: 
"(B) LIMITATION.—The amount of the unused credit 
which may be taken into account under subparagraph (A) 
for any taxable year shall not exceed the amount (if any) by 
which the applicable tax limit for such taxable year exceeds 
the sum o
f
— 
f 
"(i) the credit allowable under subsection (a) for such 
taxable year determined without regard to this para-
graph, and 
"(ii) the amounts which, by reason of this paragraph, 
are carried to such taxable year and are attributable to 
taxable years before the unused credit year." 
100 STAT. 2884 
PUBLIC LAW 99-514—OCT. 22, 1986 
(d) CLERICAL AMENDMENTS.— 
^ * 
.' 
(1) Subparagraph (B) of section 25(a)(1) is amended by striking 
out "paid or incurred" and inserting in lieu thereof "paid or 
^^ 
accrued", 
(2) Subchapter B of chapter 68 is amended by redesignating 
, 
the section 6708 which relates to penalties with respect to 
' 
mortgage credit certificates as section 6709. 
(3) The table of sections for subchapter B of chapter 68 is 
amended by striking out the item relating to the section 6708 
which relates to penalties with respect to mortgage credit cer-
tificates and inserting in lieu thereof the following: 
' • 
' Sec. 6709. Penalties with respect to mortgage credit certificates. 
. ,. 
SEC. 1863. AMENDMENT RELATED TO SECTION 613 OF THE ACT. 
(a) GENERAL RULE.—Section 613 of the Tax Reform Act of 1984 
(relating to authority to borrow from Federal Financing Bank) is 
amended to read as follows: 
"SEC. 613. ADVANCE REFUNDING OF CERTAIN VETERANS' MORTGAGE 
BONDS PERMITTED. 
"(a) IN GENERAL.—Notwithstanding section 
103A(n) of the 
Internal Revenue Code of 1954, an issuer of applicable mortgage 
bonds may issue advance refunding bonds with respect to such 
applicable mortgage bonds. 
"(h) 
LIMITATION 
ON 
AMOUNT 
OF 
ADVANCED REFUNDING.— 
"(1) IN GENERAL.—The amount of advanced refunding bonds 
which may be issued under subsection (a) shall not exceed the 
16SS6F or 
"(A) $300,000,000, or 
"(B) the excess of— 
"(i) the projected aggregate payments of principal on 
f
, *' *' 
the applicable mortgage bonds during the 15-fiscal year 
period beginning with fiscal year 1984, over 
"(ii) the projected aggregate pa3mients during such 
luty* u 
period of principal on mortgages financed by the 
applicable mortgage bonds. 
"(2) ASSUMPTIONS USED IN MAKING PROJECTION.—The com-
putation under paragraph (IXB) shall be made by using the 
following percentages of the prepayment experience of the Fed-
eral Housing Administration in the State or region in which the 
issuer of the advance refunding bonds is located: 
"Fiscal Year: 
Percentage: 
1984 
15 
1985 
20 
1986 
25 
1987 and thereafter 
30. 
"(c) DEFINITIONS.—For purposes of this section.— 
"(1) APPLICABLE MORTGAGE BONDS.—The term 'applicable 
mortgage bonds' means any qualified veterans' mortgage bonds 
issued £is part of an issue— 
"(A) which was outstanding on December 31,1981, 
"(B) with respect to which the excess determined under 
subsection OJXIXB) exceeds 12 percent of the aggregate 
principal amount of such bonds outstanding on July 1,1983, 
' 
"(C) with respect to which the amount of the average 
-f- 
annual prepayments during fiscal years 1981, 1982, and 
1983 was less than 2 percent of the average of the loan 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2885 
r 
balances as of the beginning of each of such fiscal years, 
and 
"(D) which, for fiscal year 1983, had a prepayment experi-
ence rate that did not exceed 20 percent of the prepayment 
experience rate of the Federal Housing Administration in 
the State or region in which the issuer is located. 
"(2) QUALIFIED VETERANS' MORTGAGE BONDS.—The term 'quali-
fied veterans' mortgage bonds' has the meaning given to such 
term by section 103A(c)(3) of the Internal Revenue Code of 1954. 
"(3) FISCAL YEAR.—The term 'fiscal year' means the fiscal year 
of the State." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall take effect on the date of the enactment of this Act; except that 
such amendment shall not apply with respect to any loan made by 
the Federal Financing Bank to the State of Oregon pursuant to a 
credit agreement entered into on April 16, 1985 (as such agreement 
was in effect on such date). The Secretary of the Treasury shall 
guarantee any loan made by the Federal Financing Bank to the 
State of Oregon pursuant to such agreement. 
SEC. 1864. AMENDMENTS RELATED TO SECTION 621 OF THE ACT. 
(a) SPECIAL RULE FOR FACILITIES LOCATED OUTSIDE THE STATE.— 
(1) IN GENERAL.—Subsection (n) of section 103 (relating to 
limitation on aggregate amount of private activity bonds issued 
during any calendar year) is amended by adding at the end 
thereof the following new paragraph: 
"(13) FACILITY MUST BE LOCATED WITHIN STATE.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), no portion of the State ceiling applicable to any State 
for any calendar year may be used with respect to financing 
for a facility located outside such State. 
"(B) EXCEPTION FOR CERTAIN FACILITIES WHERE STATE WILL 
GET PROPORTIONATE SHARE OF BENEFITS.—Subparagraph (A) 
shall not apply to any issue described in subparagraph (E), 
^ 
(G), or (H) of subsection (b)(4) if the issuer establishes that 
' 
the State's share of the use of the facility (or its output) will 
equal or exceed the State's share of the private activity 
bonds issued to finance the facility." 
, 
(2) EFFECTIVE DATE.— 
(A) Except as provided in subparagraph (B), the amend-
ment made by paragraph (1) shall apply to obligations 
issued after the date of the enactment of this Act in taxable 
years ending after such date. 
(B) At the election of the issuer (made at such time and in 
such manner as the Secretary of the Treasury or his dele-
gate shall prescribe), the amendment made by paragraph 
(1) shall apply to any obligation issued on or before the date 
of the enactment of this Act. 
(b) CLARIFICATION OF AUTHORITY FOR DIFFERENT ALLOCATION.— 
Subparagraphs (A) and (BXi) of section 103(n)(6) (relating to State 
may provide for different allocation) are each amended by striking 
out "governmental units" and inserting in lieu thereof "govern-
mental units or other authorities". 
(c) CLARIFICATION OF EXCEPTION FOR CERTAIN FACILITIES.—Clause 
(i) of section 103(nX7)(C) (relating to exception for certain facilities 
described in section 103(b)(4) (C) or (D)) is amended by striking out 
100 STAT. 2886 
PUBLIC LAW 99-514—OCT. 22, 1986 
"the property described in such subparagraph" and inserting in Ueu 
thereof "all of the property to be financed by the obligation". 
(d) INFORMATION REPORTING ON ALLOCATION OF PRIVATE ACTIVITY 
BOND LIMIT.—Paragraph (2) of section 103(1) (relating to information 
reporting requirements for certain bonds) is amended by striking 
out "and" at the end of subparagraph (D), by striking out the period 
at the end of subparagraph (E) and inserting in lieu thereof ", and", 
and by adding at the end thereof the following new subparagraph: 
"(F) if such obligation is a private activity bond (as 
defined in subsection (n)(7)), such information as the Sec-
retary may require for purposes of determining whether 
the requirements of subsection (n) are met with respect to 
such obligation." 
(e) 
CLARIFICATION 
OF 
CARRYFORWARD 
OF 
UNUSED 
BOND 
AUTHORITY.— 
(1) Subparagraph (B) of section 103(n)(10) (relating to election 
must specify project) is amended— 
(A) by striking out "specify the project" in clause (i) and 
inserting in lieu thereof "identify (with reasonable specific-
ity) the project", and 
(B) by striking out "SPECIFY PROJECT" in the subparagraph 
heading and insert in lieu thereof "IDENTIFY PROJECT". 
(2) Subparagraph (D) of section 103(n)(10) is amended by 
striking out "any specification" and inserting in lieu thereof 
"any identification or specification". 
SEC. 1865. AMENDMENT RELATED TO SECTION 622 OF THE ACT. 
(a) CLERICAL AMENDMENT.—Subparagraph (A) of section 103(h)(5) 
(relating to certain obligations subsidized under energy program) is 
amended by striking out "the United States,". 
(b) TREATMENT OF CERTAIN GUARANTEES BY FARMERS HOME 
ADMINISTRATION.—An obligation shall not be treated as federally 
guaranteed for purposes of section 103(h) of the Internal Revenue 
Code of 1954 by reason of a guarantee by the Farmers Home 
Administration i
f
— 
(1) such guarantee is pursuant to a commitment made by the 
Farmers Home Administration before July 1,1984, and 
(2) such obligation is issued to finance a convention center 
project in Carbondale, Illinois. 
(c) TREATMENT OF CERTAIN OBLIGATIONS USED TO FINANCE SOUD 
WASTE DISPOSAL FACILITY.— 
(1) IN GENERAL.—Any obligation which is part of an issue a 
substantial portion of the proceeds of which is to be used to 
finance a solid waste disposal facility described in paragraph (2) 
shall not, for purposes of section 103(h) of the Internal Revenue 
Code of 1954, be treated as an obligation which is federally 
guaranteed by reason of the sale of fuel, steam, electricity, or 
other forms of usable energy to the Federal Government or any 
agency or instrumentality thereof. 
(2) SOLID WASTE DISPOSAL FACILITY.—A solid waste disposal 
facility is described in this paragraph if such facility is 
described in section 1030t))(4)(E) of such Code and— 
(A)if-
(i) a public State authority created pursuant to State 
Bii 
legislation which took effect on July 1, 1980, took 
formal action before October 19, 1983, to commit devel-
opment funds for such facility. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2887 
(ii) such authority issues obligations for such facility 
before January 1,1988, and 
(iii) expenditures have been made for the develop-
ment of such facility before October 19,1983, 
(B) if-
(i) such facility is operated by the South Eastern 
Public Service Authority of Virginia, and 
(ii) on December 20, 1984, the Internal Revenue Serv-
ice issued a ruling concluding that a portion of the 
obligations with respect to such facility would not be 
treated as federally guaranteed under section 103(h) of 
such Code by reason of the transitional rule contained 
in section 631(c)(3)(A)(i) of the Tax Reform Act of 1984, 
, : :- 
( C ) i ^ • 
(i) a political subdivision of a State took formal action 
on April 1, 1980, to commit development funds for such 
facility, 
(ii) such facility has a contract to sell steam to a 
naval base, 
- ^ ^ 
(iii) such political subdivision issues obligations for 
such facility before January 1,1988, and 
(iv) expenditures have been made for the develop-
ment of such facility before October 19,1983, or 
(D) if-
(i) such facility is a thermal transfer facility, 
(ii) is to be built and operated by the Elk Regional 
•;v. 
Resource Authority, and 
(iii) is to be on land leased from the United States Air 
Force at Arnold Engineering Development Center near 
Tullahoma, Tennessee. 
(3) LIMITATIONS.— 
(A) In the case of a solid waste disposal facility described 
in paragraph (2)(A), the aggregate face amount of obliga-
tions to which paragraph (1) applies shall not exceed 
$65,000,000. 
(B) In the case of a solid waste disposal facility described 
in paragraph (2)(B), the aggregate face amount of obliga-
tions to which paragraph (1) applies shall not exceed 
$20,000,000. Such amount shall be in addition to the 
amount permitted under the Internal Revenue Service 
ruling referred to in paragraph (2)(BXii). 
^ 
(C) In the case of a solid waste disposal facility described 
in paragraph (2)(C), the aggregate face amount of obliga-
tions to which paragraph (1) applies shall not exceed 
$75,000,000. 
(D) In the case of a solid waste disposal facility described 
in paragraph (2)(D), the aggregate face amount of obliga-
tions to which paragraph (1) applies shall not exceed 
$25,000,000. 
SEC. 1866. TRANSITIONAL RULE FOR LIMIT ON SMALL ISSUE EXCEPTION. 
The amendment made by section 623 of the Tax Reform Act of 
1984 shall not apply to any obligation issued to refund another tax-
exempt IDB to which the amendment made by such section 623 did 
not apply if— 
(1) the refunding obligation has a maturity date not later than 
the maturity date of the refunded obligation, 
100 STAT. 2888 
PUBLIC LAW 99-514—OCT. 22, 1986 
'/tj; 
(2) the amount of the refunding obligation does not exceed the 
amount of the refunded obligation, 
(3) the interest rate on the refunding obligation is lower than 
the interest rate on the refunded issue, and 
(4) the proceeds of the refunding obligation are used to 
redeem the refunded obligation not later than 30 days after the 
date of the issuance of the refunding obligation. 
For purposes of the preceding sentence, the term "tax-exempt IDB" 
means any industrial development bond (as defined in section 103(b) 
of the Internal Revenue Code of 1954) the interest on which is 
exempt from tax under section 103(a) of such Code. 
SEC. 1867. AMENDMENTS RELATED TO SECTION 624 OF THE ACT. 
(a) Paragraph (2) of section 624(c) of the Tax Reform Act of 1984 
(relating to effective date for limitations on arbitrage on nonpurpose 
obligations) is amended by striking out "by the Essex C!ounty Port 
Authority of New York and New Jersey as part of an issue ap-
proved" and inserting in lieu thereof "for the Essex (Dounty New 
Jersey Resource Recovery Project authorized by the Port Authority 
of New York and New Jersey on November 10, 1983, as part of an 
agreement approved". 
(b) The amendment made by section 624 of the Tax Reform Act of 
1984 shall not apply to obligations issued with respect to the Down-
town Muskogee Revitalization Project for which a UDAG grant was 
preliminarily approved on May 5,1981, if— 
(1) such obligation is issued before Jsmuary 1,1986, or 
(2) such obligation is issued after such date to provide addi-
tional financing for such project except that the aggregate 
amount of obligations to which this subsection applies shall not 
exceed $10,000,000. 
SEC. 1868. AMENDMENT RELATED TO SECTION 625 OF THE ACT. 
Subparagraph (C) of section 625(aX3) of the Tax Reform Act of 
1984 (relating to arbitrage regulations) is amended by striking out 
"obligation issued exclusively" and inserting in lieu thereof "obliga-
tion (or series of refunding obligations) issued exclusively". 
SEC. 1869. AMENDMENTS RELATED TO SECTION 626 OF THE ACT. 
(a) (DHANGE IN DEFINED TERM.—Subsection (o) of section 103 (relat-
ing to denial of tax exemption for consumer loan bonds) is 
amended— 
(1) by striking out "consumer loan bond" each place it ap-
pears and inserting in lieu thereof "private loan bond", 
(2) by striking out "(CONSUMER LOAN BONDS" in the subsection 
heading and inserting in lieu thereof "PRIVATE LOAN BONDS", 
and 
(3) by striking out "CONSUMER LOAN BONDS" in the heading for 
paragraph (2) and inserting in lieu thereof "PRIVATE LOAN 
BONDS". 
(b) CILERICAL AMENDMENTS.— 
"
^ -
(1) Clause (ii) of section 103(oX2XC) (relating to excluded loans) 
is amended by striking out "subsection (cX6XGXi)" and inserting 
in lieu thereof "subsection (cX6XHXi)". 
(2) Section 103 is amended by redesignating the subsection vo) 
(relating to cross references) as subsection (p). 
(c) T^NSITIONAL RULES.— 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2889 
(1) TREATMENT OF CERTAIN OBLIGATIONS ISSUED BY THE CITY OF 
BALTIMORE.—Obligations issued by the city of Baltimore, Mary-
land, after June 30, 1985, shall not be treated as private loan 
bonds for purposes of section 103(o) of the Internal Revenue 
Code of 1954 (or as private activity bonds for purposes of section 
103 and part IV of subchapter A of chapter 1 of the Internal 
Revenue Code of 1986, as amended by title XIII of this Act) by 
reason of the use of a portion of the proceeds of such obligations 
to finance or refinance temporary advances made by the city of 
Baltimore in connection with loans to persons who are not 
exempt persons (within the meaning of section 1030t))(3) of such 
Code) if— 
(A) such obligations are not industrial development bonds 
(within the meaning of section 103(b)(2) of the Internal 
Revenue Code of 1954), 
(B) the portion of the proceeds of such obligations so used 
is attributable to debt approved by voter referendum on or 
before November 2,1982, 
-. 
(C) the loans to such nonexempt persons were approved 
by the Board of Estimates of the city of Baltimore on or 
before October 19,1983, and 
(D) the aggregate amount of such temporary advances 
financed or refinanced by such obligations does not exceed 
$27,000,000. 
(2) WHITE PINE POWER PROJECT.—The amendment made by 
section 626(a) of the Tax Reform Act of 1984 shall not apply to 
any obligation issued during 1984 to provide financing for the 
White Pine Power Project in Nevada. 
(3) TAX INCREMENT BONDS.—The amendment made by section 
626(a) of the Tax Reform Act of 1984 shall not apply to any tax 
increment financing obligation issued before August 16, 1986, 
if— 
(A) substantially all of the proceeds of the issue are to be 
used to finance— 
(i) sewer, street, lighting, or other governmental 
improvements to real property, 
(ii) the acquisition of any interest in real property 
., 
pursuant to the exercise of eminent domain, the 
preparation of such property for new use, or the trans-
,,, 
fer of such interest to a private developer, or 
(iii) payments of reasonable relocation costs of prior 
users of such real property, 
(B) all of the activities described in subparagraph (A) are 
pursuant to a redevelopment plan adopted by the issuing 
authority before the issuance of such issue, 
(C) repayment of such issue is secured exclusively by 
pledges of that portion of any increase in real property tax 
revenues (or their equivalent) attributable to the redevelop-
ment resulting from the issue, and 
(D) none of the property described in subparagraph (A) is 
., 
subject to a real property or other tax based on a rate or 
valuation method which differs from the rate and valuation 
method applicable to any other similar property located 
within the jurisdiction of the issuing authority. 
(4) EASTERN MAINE ELECTRIC COOPERATIVE.—The amendment 
made by section 626(a) of the Tax Reform Act of 1984 shall not 
100 STAT. 2890 
PUBLIC LAW 99-514—OCT. 22, 1986 
-io apply to obligations issued by Meissachusetts Municipal Whole-
-V- sale Electric Company Project No. 6 i
f
— 
(A) such obligation is issued before January 1, 1986, 
(B) such obligation is issued after such date to refund a 
prior obligation for such project, except that the aggregate 
amount of obligations to which this subparagraph applies 
^cf 
V shall not exceed $100,000,000, or 
ftrt 
(C) such obligation is issued after such date to provide 
additional financing for such project except that the aggre-
gate amount of obligations to which this subparagraph 
applies shall not exceed $45,000,000. 
Subparagraph (B) shall not apply to any obligation issued for 
abr the advance refunding of any obligation. 
IBH 
(5) CLARIFICATION OF TRANSITIONAL RULE FOR CERTAIN STUDENT 
L
O
A
N PROGRAMS.—Subparagraph (A) of section 6260t)X2) of the 
• 9f Tax Reform Act of 1984 is amended by striking out "$11 mil-
lion" in the table contained in such subparagraph and inserting 
in lieu thereof "$70 million". 
IJ&Y 
(6) TREATMENT OF OBUGATIONS TO FINANCE ST. JOHNS RIVER 
to 
POWER PARK.— 
(A) IN GENERAL.—The amendment made by section 626(a) 
•!'!. '- of the Tax Reform Act of 1984 shall not apply to any 
irj .M 
obligation issued to finance the project described in 
subparagraph (B) if^ 
-•• i 
(i) such obligation is issued before September 27, 
o. 
1985, 
' -i .' 
(ii) such obligation is issued after such date to refund 
a prior tax exemption obligation for such project, the 
. ^ 3, 
amount of such obligation does not exceed the 
' -• 
outstanding amount of the refunded obligation, and 
such prior tax exempt obligation is retired not later 
than the date 30 days after the issuance of the refund-
^n !;. 
«
. ing obligation, or 
(iii) such obligation is issued after such date to pro-
>r' .3iw' t 
vide additional financing for such project except that 
the aggregate sunount of obligations to which this 
^ h'iv, ^ 
clause applies shall not exceed $150,000,000. 
Clause (ii) shall not apply to any obligation issued for the 
advance refunding of any obligation. 
(B) DESCRIPTION OF PROJECT.—The project described in 
loif - this subparagraph in the St. Johns River Power Park 
system in Florida which was authorized by legislation 
enacted by the Florida Legislature in February of 1982. 
SEC. 1870. AMENDMENT RELATED TO SECTION 627 OF THE ACT. 
Subparagraph (A) of section 103(bX16) (relating to limitation on 
use for land acquisition) is amended by striking out "clause (i)" in 
the last sentence and inserting in lieu thereof "clause (ii)". 
SEC. 1871. AMENDMENTS RELATED TO SECTION 628 OF THE ACT. 
(a) CERTAIN RESTRICTIONS APPLY TO EXEMPTIONS NOT (DONTAINED 
IN INTERNAL REVENUE CODE OF 1954.— 
(1) IN GENERAL.—Paragraph (1) of section 103(m) (relating to 
obligations exempt other than under this title) is amended by 
striking out "(k), (1), and (n)" and inserting in lieu thereof "(j), 
(k),(l),(n),and(o)". 
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2891 
" (2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
shall apply to obligations issued after March 28,1985, in taxable 
years ending after such date. 
(b) CONFORMING AMENDMENTS TO REPEAL OF ADVANCE REFUNDING 
OF QUALIFIED PUBUC FACILITIES.—Paragraphs (13), (14XA), and 
(17XA) of section 103(b) are each amended by striking out "(6), and 
(7)" and inserting in lieu thereof "and (6)". 
SEC. 1872. AMENDMENTS RELATED TO SECTION 631 OF THE ACT. 
(a) CLARIFICATION OF GENERAL EFFECTIVE DATE.— 
(1) Paragraph (1) of section 631(c) of the Tax Reform Act of 
1984 (relating to effective date for other provisions relating to 
t 
tax-exempt bonds) is amended by striking out "made by this 
subtitle" and inserting in lieu thereof "made by sections 622, 
8 
623, 627, and 628 (c), (d), and (e) (and the provisions of sections 
625(c), 628(0, and 629(b))". 
(2XA) Subparagraph (A) of section 631(cX3) of the Tax Reform 
t 
Act of 1984 is amended by striking out "amendments made by 
- 
this subtitle (other than section 621)" and inserting in lieu 
^ 
thereof "amendments (and provisions) referred to in paragraph 
t 
(1)". 
(B) Effective with respect to obligations issued after March 28, 
1985, subparagraph (A) of section 631(cX3) of the Tax Reform 
• 
Act of 1984 is amended by striking out clauses (i) and (ii) and 
inserting in lieu thereof the following: 
"(i) the original use of which commences with the 
taxpayer and the construction, reconstruction, or 
•'' 
'' 
rehabilitation of which began before October 19, 1983, 
and was completed on or after such date, 
- ' ' 
"(ii) the original use of which commences with the 
taxpayer and with respect to which a binding contract 
to incur significant expenditures for construction, 
'
^ 
reconstruction, or rehabilitation w£is entered into 
before October 19, 1983, and some of such expenditures 
V 
are incurred on or after such date, or 
"(iii) acquired after October 19, 1983, pursuant to a 
<s«ifvt5 
binding contract entered into on or before such date." 
(3) Paragraph (3) of section 631(c) of the Tsix Reform Act of 
' 
1984 is amended by adding at the end thereof the following new 
subparagraph: 
^ 
"(C) EXCEPTION.—Subparagraph (A) shall not apply with 
respect to the amendment made by section 628(e) and the 
• 
provisions of sections 628(f) and 629(b)." 
(4) Subparagraph (B) of section 631(cX3) of the Tax Reform Act 
of 1984 is amended by striking out "subsection (bX2XA)" and 
inserting in lieu thereof "subsection (bX2)". 
(b) SPECIAL RULE FOR HEALTH CLUB FACILITIES.—Subsection (c) of 
section 631 of the Tax Reform Act of 1984 is amended by adding at 
the end thereof the following new paragraph: 
"(5) SPECIAL RULE FOR HEALTH CLUB FACILITIES.—In the case of 
any health club facility, with respect to the amendment made 
by section 627(c)— 
"(A) paragraph (1) shall be applied by substituting 
^J^t 
'April 12,1984' for 'December 31,1983', and 
XB) paragraph (3) shall be applied by substituting 
-OMfl 
'April 13, 1984^ for 'October 19, 1983' each place it 
appears." 
100 STAT. 2892 
PUBLIC LAW 99-514—OCT. 22, 1986 
(c) TREATMENT OF CERTAIN SOUD WASTE DISPOSAL FACIUTIES.—-
(1) IN GENERAL.—Subsection (d) of section 631 of the Tax 
Reform Act of 1984 (relating to provisions of subtitle not to 
; 4^1 apply to certain property) is amended by adding at the end 
f>ii,; thereof the following: 
i^,. 
"(5) Any solid waste disposal facility described in section 
103(bX4XE) of the Internal Revenue Code of 1954 if— 
"(A) a city government, by resolutions adopted on 
April 10, 1980, and December 27, 1982, took formal action 
to authorize the submission of a proposal for a feasibility 
)f\ :-./ 
study for such facility and to authorize the presentation to 
- f •• 
the Department of the Army (U.S. Army Missile Command) 
of a proposed agreement to jointly pursue construction and 
operation of such facility, 
"(B) such city government (or a public authority on its 
behalf) issues obligations for such facility before January 1, 
. 1988, and 
!. 
"(C) expenditures have been made for the development of 
,} ; ; 
such facility before October 19, 1983. Notwithstanding the 
ji ft. • 
foregoing provisions of this subsection, the amendments 
made by section 624 (relating to arbitrage) shall apply to 
obligations issued to finance property described in para-
r 
graph (5)." 
(2) CONFORMING AMENDMENT.—Paragraph (1) of section 632(a) 
of the Tax Reform Act of 1984 is hereby repealed. 
SEC. 1873. AMENDMENTS RELATED TO SECTION 632 OF THE ACT. 
(a) CLERICAL AMENDMENT.—Subsection (a) of section 632 of the 
Tax Reform Act of 1984 is amended by striking out "section 623" in 
the matter preceding paragraph (1) thereof and inserting in lieu 
thereof "section 624". 
(b) CERTAIN OBUGATIONS NOT TREATED AS PRIVATE LOAN BONDS.— 
Subsection (d) of section 632 of the Tax Reform Act of 1984 is 
amended by adding at the end thereof the following new sentence: 
"The amendment made by section 626 shall not apply to any 
obligations described in the preceding sentence." 
(c) TREATMENT OF CERTAIN OBUGATIONS TO FINANCE HYDRO-
ELECTRIC GENERATING FACILITY.—If— 
(1) obligations are to be issued in an amount not to exceed 
$9,500,000 to finance the construction of an approximately 4 
megawatt hydroelectric generating facility owned and operated 
by the city of Hastings, Minnesota, and located on United States 
Army Corps of Engineers lock and dam No. 2 or are issued to 
refund any of such obligations, 
(2) substantially all of the electrical power generated by such 
facility is to be sold to a nongovernmental person pursuant to a 
long-term power sales agreement in accordance with the Public 
Utilities Regulatory Policies Act of 1978, and 
(3) the initially issued obligations are issued on or before 
December 31, 1986, and any of such refunding obligations are 
issued on or before December 31,1996, 
then the person referred to in paragraph (2) shall not be treated as 
the principal user of such facilities by reason of such sales for 
purposes of subparagraphs (D) and (E) of section 103(bX6) of the 
Internal Revenue Code of 1954. 
(d) TREATMENT OF CERTAIN OBLIGATIONS TO FINANCE HYDRO-
ELECTRIC GENERATING FACILITY.—If^ 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2893 
(1) obligations are to be issued in an amount not to exceed 
$6,500,000 to finance the construction of an approximately 2.6 
megawatt hydroelectric generating facility located on the 
Schroon 
River 
in 
Warren 
County, 
New 
York, 
near 
Warrensburg, New York, 
(2) such facility has a Federal Energy Regulatory Commission 
project number 8719-0000 under a preliminary permit issued on 
; 
November 8,1985, and 
3 
(3) substantially all of the electrical power generated by such 
facility is to be sold to a nongovernmental person pursuant to a 
long-term power sales agreement in accordance with the Public 
Utilities Regulatory Policies Act of 1978, 
then the person referred to in paragraph (3) shall not be treated as 
the principal user of such facilities by reason of such sales for 
purposes of subparagraphs (D) and (E) of section 103(bX6) of the 
Internal Revenue Code of 1954. 
(e) TREATMENT OF CERTAIN OBUGATIONS TO FINANCE HYDRO-
ELECTRIC GENERATING FACIUTIES.—If— 
(1) obligations in the amount of $6,000,000 issued on Novem-
ber 30,1984, to finance the construction of an approximately 1.0 
megawatt hydroelectric generating facility and an approxi-
' 
mately .6 megawatt hydroelectric generating facility, both of 
which are located near Los Banos, California, 
(2) such facilities have Federal Energy Regulatory Commis-
sion project numbers 5129-001 and 5128-001, respectively, 
under license exemptions issued on December 6, 1983, and 
(3) substantially all of the electrical power generated by such 
facility is to be sold to a nongovernmental person pursuant to a 
' 
long-term power sales agreement in accordance with the Public 
Utilities Regulatory Policies Act of 1978, 
then the person referred to in paragraph (3) shall not be treated as 
the principal user of such facilities by reason of such sales for 
purposes of subparagraphs (D) and (E) of section 103(b)(6) of the 
Internal Revenue Code of 1954. 
(f) TREATMENT OF CERTAIN OBUGATIONS TO FINANCE METHANE 
RECOVERY ELECTRIC GENERATING FACILITIES.—If— 
(1) obligations are to be issued in an amount not to exceed 
^ 
$3,000,000 to finance the construction of a methane recovery 
' 
electric generating facility located on a sanitary landfill near 
I 
Richmond, California, and 
J 
(2) substantially all of the electrical power generated by such 
J 
facility is to be sold to a nongovernmental person pursuant to a 
long-term power sales agreement entered into on April 16, 1985, 
in accordance with the Public Utilities Regulatory Policies Act 
of 1978, 
then the person referred to in paragraph (2) shall not be treated as 
the principal user of such facilities by reason of such sales for 
purposes of subparagraphs (D) and (E) of section 103(bX6) of the 
Internal Revenue Code of 1954. 
(g) TREATMENT OF CERTAIN OBLIGATIONS TO FINANCE HYDRO-
ELECTRIC GENERATING FACIUTIES.—If— 
(1) obligations are to be issued in an amount not to exceed 
$6,000,000 to finance the construction of a hydroelectric 
' 
generating facility having a Federal Energy 
Regulatory 
Commission license number 3189, and located near Placerville, 
California, 
100 STAT. 2894 
PUBLIC LAW 99-514—OCT. 22, 1986 
(2) an inducement resolution for such project w£is adopted in 
March 1985, and 
(3) substantially all of the electrical power generated by such 
facility is to be sold to a nongovernmental person pursuant to a 
long-term power sales agreement in accordance with the Public 
Utilities Regulatory Policies Act of 1978, 
then the person referred to in paragraph (3) shall not be treated as 
the principal user of such facilities by reason of such sales for 
purposes of subparagraphs (D) and (E) of section 103(bX6) of the 
Internal Revenue Code of 1954. 
CHAPTER 7—MISCELLANEOUS PROVISIONS 
SEC. 1875. AMENDMENTS RELATED TO TITLE VII OF THE ACT. 
(a) AMENDMENT RELATED TO SECTION 711(a).—Subsection (c) of 
section 58 (relating to estates and trusts) is amended by striking out 
"of tax preference" and inserting in lieu thereof "of tax preference 
(and any itemized deductions)". 
(b) AMENDMENT RELATED TO SECTION 712(1).—Paragraph (1) of 
section 304(a) (relating to treatment of certain stock purchases) is 
amended by striking out "In any such case" and inserting in lieu 
thereof "To the extent that such distribution is treated as a distribu-
tion to which section 301 applies". 
(c) AMENDMENTS RELATED T
O SECTION 713.— 
dXA) Section 402(aX5XFXii) (relating to special rules for key 
employees) is amended to read as follows: 
"(ii) 5-PERCENT OWNERS.—An eligible retirement plan 
described in subclause (III) or (IV) of subparagraph 
(EXiv) shall not be treated as an eligible retirement 
plan for the transfer of a distribution if the employee is 
a 5-percent owner at the time such distribution is 
• ' ^ 
made. For purposes of the preceding sentence, the term 
r?i; ' 
; '5-percent owner' means any individual who is a 5-
percent owner (as defined in section 416(iXlXB)) at any 
' ^ =''"'*'>' '-^ time during the 5 plan years preceding the plan year in 
which the distribution is made." 
•' 
(B) The amendments made by subparagraph (A) shall apply to 
distributions after the date of the enactment of this Act. Such 
amendments shall apply also to distributions after 1983 and on 
or before the date of the enactment of this Act to individuals 
''- 
who are 
not 
5-percent 
owners (as defined 
in 
section 
402(aX5XFXii) of the Internal Revenue CJode of 1954 (as amended 
by this paragraph)). 
(2) Section 713(c) of the Tax Reform Act of 1984 is amended by 
adding at the end thereof the following new paragraph: 
"(4) EFFECTIVE DATE FOR PARAGRAPH (3).—The amendment 
made by paragraph (3) shall apply to distributions after July 18, 
.-'-M 1984." 
(3) Section 62(7) (relating to pension, profit-sharing, and annu-
t«i ity plans of self-employed individuals) is amended by striking 
out "to the extent attributable to contributions made on behalf 
of such individual". 
(4) Section 219(fXl) (defining compensation) is amended by 
striking out "reduced by any amount allowable as a deduction 
to the individual in computing adjusted gross income under 
paragraph (7) of section 62 '. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2895 
(5) Section 713(dXl) of the Tax Reform Act of 1984 is amended 
by striking out "Paragraph" and inserting in lieu thereof 
"Effective with respect to contributions made in taxable years 
beginning after December 31,1983, paragraph". 
(6XA) Section 408(dX5) (relating to certain distributions of 
excess contributions after due date) is amended by striking out 
"$15,000" and inserting in lieu thereof "the dollar limitation in 
• 
effect under section 415(cXlXA) for such taxable year". 
(B) Subparagraph (C) of section 2190t)X2) is amended by strik-
ing out "the $15,000 amount specified in subparagraph (AXii)" 
V 
and inserting in lieu thereof "the dollar limitation in effect 
under section 415(cXlXA)". 
(7XA) Subpareigraph (C) of section 404(aX8) is amended by 
striking out "the earned income of such individusd" and insert-
"'^ 
ing in lieu thereof "the earned income of such individual 
(determined without regard to the deductions allowed by this 
section)". 
(B) Effective with respect to taxable years beginning after 
December 31, 1984, subparagraph (D) of section 404(aX8) is 
amended by striking out "(determined without regard to the 
deductions allowed by this section and section 405(c))'. 
«i 
(8) Subparagraph (A) of section 408(dX3) is amended— 
(A) by striking out "(other than a trust forming part of a 
^i,*"'.' 
plan under which the individual was an employee within 
^ /•' 
the meaning of section 401(cXl) at the time contributions 
were made on his behalf under the plan)" in clause (ii), 
(B) by striking out "(other than a plan under which the 
5 
individual was an employee within the meaning of section 
- 
401(cXl) at the time contributions were made on his behalf 
••': 
under the plan)" in clause (ii), and 
£5 
(C) by adding at the end thereof the following new 
sentence: 
"Clause (ii) shall not apply during the 5-year period begin-
.;C2i V 
ning on the date of the qualified total distribution referred 
to in such clause if the individual was treated as a 5-percent 
* > 'f 
owner with respect to such distribution under section 
402(aX5XFXii)." 
(9) Clause (iii) of section 4150t)X2XE) is amended by striking 
s 
out "adjusting any benefit or limitation under subparagraph 
•I 
(B), (C), or (D)" and inserting in lieu thereof "this subsection". 
(10) SubparEigraph (B) of section 3405(dXl) is amended by 
striking out "or ' at the end of clause (ii), and by striking out the 
s 
material following clause (ii) and inserting in lieu thereof the 
following: 
"(iii) any amount which is subject to withholding 
under subchapter A of chapter 3 (relating to withhold-
ing of tax on nonresident aliens and foreign corpora-
tions) by the person pa3ring such amount or which 
would be so subject but for a tax treaty, or 
"(iv) any distribution described in section 404(kX2)." 
(11) Subparagraph (C) of section 415(cX3) is amended by strik-
n 
ing out "a profit-sharing or stock bonus plan" and inserting in 
lieu thereof "any defined contribution plan". 
(12) The amendments made by paragraphs (3), (4), and (6) 
shall take effect as if included in the amendments made by 
section 238 of the Tax Equity and Fiscal Responsibility Act of 
1982. 
100 STAT. 2896 
PUBLIC LAW 99-514—OCT. 22, 1986 
(d) AMENDMENTS RELATING TO SECTION 714 OF THE ACT.— 
(1) PERIOD OF UMITATIONS.—Section 6229 is amended by 
adding at the end thereof the following new subsection: 
"(g) PERIOD OF LIMITATIONS FOR PENALTIES.—The provisions of this 
section shall apply also in the case of any addition to tax or an 
additional amount imposed under subchapter A of chapter 68 which 
arises with respect to any tax imposed under subtitle A in the same 
manner as if such addition or additional amount were a tax imposed 
by subtitle A." 
(2) COORDINATION WITH DEFICIENCY PROCEEDINGS.— 
(A) IN GENERAL.—Subsection (a) of section 6230 is 
amended to read as follows: 
"(a) COORDINATION WITH DEFICIENCY PROCEEDINGS.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), sub-
chapter B of this chapter shall not apply to the assessment or 
^j J, collection of any computational adjustment. 
"(2) DEFICIENCY PROCEEDINGS TO APPLY IN CERTAIN CASES.— 
"(A) Subchapter B shall apply to any deficiency attrib-
utable to— 
> r ;xr 
"(i) affected items which require partner level deter-
minations, or 
"(ii) items which have become nonpartnership items 
and are described in section 6231(eXlXB). 
"(B) Subchapter B shall be applied separately with 
respnect to each deficiency described in subparagraph (A) 
attributable to each partnership. 
"(C) Notwithstanding any other law or rule of law, any 
notice or proceeding under subchapter B with respect to a 
deficiency described in this paragraph shall not preclude or 
be precluded by any other notice, proceeding, or determina-
w>ii r 
tion with respect to a partner's tax liability for a taxable 
year." 
(B) TECHNICAL AMENDMENTS.— 
(i) Paragraph (4) of section 6213(h) is amended to read 
f 
as follows: 
"(4) For provisions relating to application of this subchapter in the case 
of certain partnership items, etc., see section 6230(a)." 
'•^""' 
(ii) Paragraph (1) of section 6503(a) is amended by 
striking out "section 6501 or 6502" and inserting in lieu 
thereof "section 6501 or 6502 (or section 6229, but only 
with respect to a deficiency described in section 
6230(aX2XA))." 
'5. i 
(C) EFFECTIVE DATE.—The amendments made by this 
paragraph shall take effect as if included in the Tax Equity 
and Fiscal Responsibility Act of 1982. 
(3) EFFECTIVE DATE PROVISION.—Notwithstanding section 715 
of the Tax Reform Act of 1984, the amendments made by section 
714(nX2) of such Act shall apply only to applications filed after 
July 18,1984. 
(3) ESTATE AND TRUST INTERESTS HELD BY NOMINEES.— 
(A) IN GENERAL.—Section 6034A is amended— 
(i) by striking out "The fiduciary" and inserting in 
lieu thereof "(a) GENERAL RULE.—The fiduciary", 
• ? 
(ii) by striking out "each beneficiary" and inserting 
in lieu thereof '^ach beneficiary (or nominee thereof)', 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2897 
(iii) by adding at the end thereof the following new 
subsection: 
"
O
t
>
) NOMINEE REPORTING.—Any person who holds an interest in 
an estate or trust as a nominee for another person— 
"(1) shall furnish to the estate or trust, in the manner pre-
scribed by the Secretary, the name and address of such other 
person, and any other information for the taxable year as the 
- 
Secretary may by form and regulations prescribe, and 
"(2) shall furnish in the manner prescribed by the Secretary 
to such other person the information provided by the estate or 
trust under subsection (a)." 
(B) EFFECTIVE DATE.—The amendments made by this 
paragraph shsdl apply to taxable years of estates and trusts 
beginning after the date of the enactment of this Act. 
(e) AMENDMENT RELATED TO SECTION 734 OF THE ACT.—Subsection 
(a) of section 201 of the Land and Water Conservation Fund Act of 
1965 (16 U.S.C. 4601-11) is amended by striking out "section 209(fK5) 
of the Highway Revenue Act of 1956 and inserting in lieu thereof 
"section 9503(cX4XB) of the Internal Revenue Code of 1954". 
(f) AMENDMENT RELATED TO SECTION 735 OF THE ACT.—The table of 
sections for part I of subchapter A of chapter 32 is amended by 
striking out "guzzlers" and inserting in lieu thereof "guzzler'. 
(g) AMENDMENT OF SECTION 1248.— 
(1) IN GENERAL.—Subsection (g) of section 1248 (relating to 
exceptions) is amended by inserting "or" at the end of para-
qr graph (1), by striking out paragraph (2), and by redesignating 
paragraph (3) as paragraph (2). 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
shall apply to exchanges after March 1,1986. 
(3) TRANSITIONAL RULE.—An exchange shall be treated as 
occurring on or before March 1,1986, if— 
(A) on or before such date, the taxpayer adopts a plan of 
reorganization to which section 356 applies, and 
(B) such plan or reorganization is implemented and dis-
1^.. 
tributions pursuant to such plan are completed on or before 
the date of enactment of this Act. 
SEC. 1876. AMENDMENTS RELATED TO TITLE VIII OF THE ACT. 
(a) TREATMENT OF SECTION 923(aX2) NON-EXEMPT INCOME.— 
(1) Paragraph (6) of section 927(d) (defining section 923(aX2) 
non-exempt income) is amended by adding at the end thereof 
the following new sentence: "Such term shall not include any 
income which is effectively connected with the conduct of a 
,. trade or business within the United States (determined without 
regard to this subpart)." 
(2) Paragraph (6) of section 1248(d) (relating to foreign trade 
income) is amended to read as follows: 
"(6) FOREIGN TRADE INCOME.—Earnings and profits of the 
^ 
foreign corporation attributable to foreign trade income of a 
* 
FSC other than foreign trade income which— 
"(A) is section 923(aX2) non-exempt income (within the 
meaning of section 927(dX6)), or 
"(B) would not (but for section 923(aX4)) be treated as 
exempt foreign trade income. 
For purposes of the preceding sentence, the terms 'foreign trade 
income' and 'exempt foreign trade income' have the respective 
meanings given such terms by section 923." 
100 STAT. 2898 
PUBLIC LAW 99-514—OCT. 22, 1986 
(b) CLARIFICATION OF PREFERENCE CUTBACKS.— 
(1) Paragraph (4) of section 291(a) (relating to 20-percent 
•s reduction in certain preference items, etc.) is amended to read 
as follows: 
f 
"(4) CERTAIN FSC INCOME.—In the case of taxable years begin-
f
; ning after December 31, 1984, section 923(a) shall be applied 
. with respect to any FSC by substituting— 
"(A) '30 percent' for '32 percent' in paragraph (2), and 
T 
"(B) '15/23' for 'i%3' in paragraph (3). 
•
^
f If all of the stock in the FSC is not held by 1 or more C 
corporations throughout the taxable year, under regulations, 
.. proper adjustments shall be made in the application of the 
Ai preceding sentence to take into account stock held by persons 
T
- other than C corporations." 
(2) Subparagraph (F) of section 995(b)(1) (relating to deemed 
distributions from a DISC) is amended— 
(A) by inserting "in the case of a shareholder which is a C 
»
«
' 
corporation," before "one-seventeenth" in clause (i), and 
(B) by striking out "the amount determined under clause 
'
•
^ 
(i)" in clause (ii) and inserting in lieu thereof "^Vn of the 
^'f 
excess referred to in clause (i),". 
(3) Subsection (a) of section 923 (defining exempt foreign trade 
income) is amended by adding at the end thereof the following 
v« new paragraph: 
••'"-" "(6) CROSS REFERENCE.— 
"For reduction in amount of exempt foreign trade income, see section 
291(a)(4)." 
(c) TREATMENT OF FOREIGN TRADE INCOME UNDER SUBPART F.— 
(1) Subsection O3) of section 952 (relating to exclusion of 
United States income) is amended by adding at the end thereof 
.|^ the following new sentence: "For purposes of the preceding 
sentence, income described in paragraph (2) or (3) of section 
921(d) shall be treated as derived from sources within the 
;: United States." 
(2) Paragraph (1) of section 951(e) is amended by striking out 
the last sentence. 
(d) DIVIDENDS RECEIVED DEDUCTION FOR CERTAIN DISTRIBUTIONS 
FROM A FSC— 
> ,.,, 
,v 
(1) DEDUCTION FOR CERTAIN DIVIDENDS.— 
' 
^ "
^
^
^ • 
(A) Paragraph (1) of section 245(c) (relating to certain 
.' 
dividends received from FSC) is amended to read as follows: 
"(1) IN GENERAL.—In the case of a domestic corporation, there 
shall be allowed as a deduction an amount equal to— 
"(A) 100 percent of any dividend received by such cor-
poration from another corporation which is distributed out 
of earnings and profits attributable to foreign trade income 
for a period during which such other corporation was a 
; 
FSC, and 
"(B) 85 percent of any dividend received by such corpora-
..^ ^ 
tion from another corporation which is distributed out of 
' ' 
• earnings and profits attributable to qualified interest and 
carrying charges received or accrued by such other corpora-
tion while such other corporation was a FSC. 
^ J The deduction allowable under the preceding sentence with 
]*; respect to any dividend shall be in lieu of any deduction allow-
able under subsection (a) or (b) with respect to such dividend." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2899 
(B) Paragraph (3) of section 245(c) (relating to definitions) 
is simended by adding at the end thereof the following new 
sentence: "For purposes of this subsection, the term 'quali-
fied interest and carrying charges' means any interest or 
carrying charges (as defined in section 927(dXl)) derived 
from a transaction which results in foreign trade income." 
j,^ 
(2) SEPARATE APPUCATION OF SECTION 904.—Subpareigraph (D) 
of section 904(dXl) is amended to read as follows: 
"(D) distributions from a FSC (or a former FSC) out of 
earnings and profits attributable to foreign trade income 
(within the meaning of section 923(b)) or qualified interest 
•,^ 
and carrying charges (as defined in section 245(c)), and". 
(3) (COORDINATION OF SECTIONS 906 AND 902.—Subsection 0)) of 
I section 906 (relating to nonresident alien individuals and for-
.. \ eign corporations) is amended by adding at the end thereof the 
following new paragraph: 
., 
"(6) For purposes of section 902, any income, war profits, and 
excess profits taxes paid or accrued (or deemed paid or accrued) 
to any foreign country or possession of the United States with 
respect to income effectively connected with the conduct of a 
_^, trade or business within the United States shall not be taken 
into account, and any accumulated profits attributable to such 
income shall not be taken into account." 
(e) EXCHANGE OF INFORMATION REQUIREMENTS.— 
(1) Paragraph (3) of section 927(e) (relating to exchange of 
information requirements) is amended— 
(A) by striking out "unless, at the same time such cor-
poration was created or organized, there was" and inserting 
in lieu thereof "unless there is", 
(B) by striking out "section 274(hX6XC)" in subparagraph 
(A) and inserting in lieu thereof "section 274(hX6)(C) (deter-
mined by treating any reference to a beneficiary country as 
' 
being a reference to any foreign country and by applying 
such section without regard to clause (ii) thereof", and 
(C) by amending subparagraph (B) to read as follows: 
i : • 
"(B) an income tax treaty which contains an exchange of 
information program— 
"(i) which the Secretary certifies (and has not 
' 
revoked such certification) is satisfactory in practice for 
purposes of this title, and 
:, 
"(ii) to which the FSC is subject." 
(2) Effective for periods after March 28, 1985, paragraph (2) of 
section 924(c) (relating to requirement that FSC be managed 
. outside the United States) is amended to read as follows: 
"(2) the principal bank account of the corporation is main-
,, tained in a foreign country which meets the requirements of 
'' section 927(eX3) or in a possession of the United States at all 
times during the taxable year, and". 
(f) COORDINATION WITH POSSESSIONS TAXATION.— 
(1) Paragraph (5) of section 927(e) (relating to exemption from 
certain other taxes) is amended to read EIS follows: 
"(5) COORDINATION WITH POSSESSIONS TAXATION.— 
"(A) EXEMPTION.—No tax shall be imposed by any posses-
sion of the United States on any foreign trade income 
derived before January 1, 1987. The preceding sentence 
shall not apply to any income attributable to the sale of 
100 STAT. 2900 
PUBLIC LAW 99-514—OCT. 22, 1986 
property or the performance of services for ultimate use, 
consumption, or disposition within the possession. 
"(B) CLARIFICATION THAT POSSESSION MAY EXEMPT CERTAIN 
INCOME FROM TAX.—Nothing in any provision of law shall 
be construed as prohibiting any possession of the United 
States from exempting from tax any foreign trade income of 
"; 
a FSC or any other income of a FSC described in paragraph 
(2) or (3) of section 921(d). 
'^ 
"(C) N o COVER OVER OF TAXES IMPOSED ON FSC.—Nothing 
> 
in any provision of law shall be construed as requiring any 
• 
tax imposed by this title on a FSC to be covered over (or 
otherwise transferred) to any possession of the United 
^i 
States." 
(2) CLERICAL AMENDMENT.—Section 934 is amended by strik-
' 
ing out the subsection (f) added by section 801(dX7) of the Tax 
Reform Act of 1984. 
' 
(g) CLARIFICATION OF INTEREST ON DISC-RELATED DEFERRED TAX 
LIABILITY.—Subsection (f) of section 995 (relating to interest on 
DISC-related deferred tax liability) is amended by adding at the end 
thereof the following new paragraph: 
"(7) DISC INCLUDES FORMER DISC.—For purposes of this subsec-
tion, the term 'DISC includes a former DISC." 
(h) 
CLARIFICATION 
OF 
EXEMPTION 
OF 
ACCUMULATED DISC 
INCOME.—Subparagraph (A) of section 805(b)(2) of the Tax Reform 
Act of 1984 (relating to exemption of accumulated DISC income from 
tax) is amended by adding at the end thereof the following new 
sentence: "For purposes of the preceding sentence, the term 'actual 
distribution' includes a distribution in liquidation, and the earnings 
and profits of any corporation receiving a distribution not included 
in gross income by reason of the preceding sentence shall be in-
creased by the amount of such distribution." 
(i) CLARIFICATION OF EFFECTIVE DATE FOR REQUIREMENT THAT 
TAXABLE YEAR OF DISC AND FSC CONFORM TO TAXABLE YEAR OF 
MAJORITY SHAREHOLDER.—Paragraph (4) of section 805(a) of the Tax 
Reform Act of 1984 is amended to read as follows: 
"(4) SECTION 803.—The amendments made by section 803 shall 
apply to taxable years beginning after December 31, 1984." 
(j) APPUCATION OF DIVIDENDS RECEIVED DEDUCTION WITH RESPECT 
T
O CERTAIN DIVIDENDS.—Subsection (c) of section 245 (relating to 
dividends received from certain foreign corporations) is amended by 
redesignating paragraph (3) as paragraph (4) and by inserting after 
paragraph (2) the following new paragraph: 
"(3) COORDINATION WITH SUBSECTIONS (a) AND (b).—The gross 
income giving rise to the earnings and profits described in 
- subparagraph (A) or (B) of paragraph (1) (and not described in 
i 
paragraph (2)) shall not be taken into account under subsections 
(a) and (b)." 
(k) 
TREATMENT OF CERTAIN QUALIFYING DISTRIBUTIONS FROM 
DISC.—Paragraph (2) of section 996(a) (relating to qualifying dis-
tributions) is amended by striking out the last sentence and insert-
ing in lieu thereof the following: "In the case of any amount of any 
actual distribution to a C corporation made pursuant to section 
992(c) which is required to satisfy the condition of section 
992(aXlXA), the preceding sentence shall apply to 16/17ths of such 
amount and paragraph (1) shall apply to the remaining l/17th of 
such amount.' 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2901 
(1) TREATMENT OF CERTAIN RECEIPTS FROM OTHER FSC.—Para-
graph (1) of section 924(f) (relating to certain receipts not included in 
foreign trade gross receipts) is amended by adding at the end thereof 
the following new sentence: 
"In the case of gross receipts of a FSC from a transaction 
involving any property, subparagraph (C) shall not apply if such 
FSC (and all other FSC's which are members of the same 
controlled group and which receive gross receipts from a trans-
action involving such property) do not use the pricing rules 
under paragraph (1) of section 925(a) (or the corresponding 
provisions of the regulations prescribed under section 925(b)) 
with respect to any transaction involving such property." 
(m) TREATMENT OF CERTAIN FORMER EXPORT TRADE CORPORA-
TIONS.—If^ 
(1) a corporation which is not an export trading corporation 
for its most recent taxable year ending before the date of the 
enactment of the Tax Reform Act of 1984 but was an export 
trading corporation for any prior taxable year, and 
(2XA) such corporation may not qualify as an export trade 
corporation for any taxable year beginning after December 31, 
1984, by reason of section 971(aX3) of the Internal Revenue Code 
of 1954, or (B) such corporation makes an election, before the 
date 6 months after the date of the enactment of this Act, not to 
be treated as an export trade corporation with respect to tax-
able years beginning after December 31,1984, 
rules similar to the rules of paragraphs (2) and (4) of section 8050t)) of 
the Tax Reform Act of 1984 shall apply to such corporation. For 
purposes of the preceding sentence, the term "export trade corpora-
tion" has the meaning given such term by section 971 of such Code. 
(n) TREATMENT OF DISTRIBUTION OF ACCUMULATED DISC INCOME 
RECEIVED BY COOPERATIVES.—Paragraph (2) of section 805(b) of the 
Tax Reform Act of 1984 (relating to transition rules for DISC's) is 
amended by adding at the end thereof the following new subpara-
graph: 
"(C) TREATMENT OF DISTRIBUTION OF ACCUMULATED DISC 
INCOME RECEIVED BY COOPERATIVES.—In the case of any 
actual distribution received by an organization described in 
section 1381 of such Code and excluded from the gross 
income of such corporation by reason of subparagraph (A)— 
"(i) such amount shall not be included in the gross 
income of any member of such organization when 
distributed in the form of a patronage dividend or 
otherwise, and 
"(ii) no deduction shall be allowed to such organiza-
tion by reason of any such distribution." 
(o) TREATMENT OF CERTAIN CONTRACTS.—Paragraph (2) of section 
805(a) of the Tax Reform Act of 1984 (relating to transitional rule for 
certain contracts) is amended to read as follows: 
"(2) SPECIAL RULE FOR CERTAIN CONTRACTS.—To the extent 
provided in regulations prescribed by the Secretary of the 
Treasury or his delegate, any event or activity required to occur 
or required to be performed, before January 1, 1985, by section 
924 (c) or (d) or 925(c) of the Internal Revenue Code of 1954 shall 
be treated as meeting the requirements of such section if such 
event or activity is with respect to— 
"(A) any lease of more than 3 years duration which was 
entered into before January 1,1985, 
71-19A 0 - 89 - 36 : QL. 3 P a r t 3 
100 STAT. 2902 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(B) any contract with respect to which the taxpayer uses 
the completed contract method of accounting which was 
entered into before January 1,1985, or 
"(C) in the case of any contract other than a lease or 
contract described in subparagraph (A) or (B), any contract 
which was entered into before January 1, 1985; except that 
this subparagraph shall only apply to the first 3 taxable 
years of the FSC ending after January 1, 1985, or such later 
taxable years as the Secretary of the Treasury or his dele-
gate may prescribe." 
(p) CLERICAL AMENDMENTS.— 
(1) Subsection (f) of section 995 is amended by redesignating 
the paragraphs following the paragraph (3) relating to deferred 
DISC income as paragraphs (4), (5), and (6). 
(2) Subsection (h) of section 901 is amended by striking out 
"section 927(d)(6)" and inserting in lieu thereof "section 
927(d)(6))". 
(3) Paragraph (3) of section 802(c) of the Tax Reform Act of 
1984 is hereby repealed. 
(4) Subparagraph (A) of section 805(a)(2) of the Tax Reform 
Act of 1984 is amended by striking out "the taxpayer" and 
inserting in lieu thereof "the DISC or a related party . 
(5) Paragraph (2) of section 927(e) is amended by striking out 
"clauses (i) and (ii)" and inserting in lieu thereof "clauses (ii) 
and (iii)". 
SEC. 1877. AMENDMENTS RELATED TO TITLE IX OF THE ACT. 
(a) AMENDMENT RELATED TO SECTION 911 OF THE ACT.—Paragraph 
(3) of section 34(a) (relating to credit for certain uses of gasoline and 
special fuels) is amended to read as follows: 
"(3) under section 6427— 
"(A) with respect to fuels used for nontaxable purposes or 
resold, or 
"(B) with respect to any qualified diesel-powered highway 
vehicle purchased (or deemed purchased under section 
6427(g)(6)), 
during the taxable year (determined without regard to section 
64270"))." 
(b) AMENDMENTS RELATED TO SECTION 915 OF THE ACT.— 
(1) Paragraph (2) of section 6427(b) (relating to intercity, local, 
or school buses) is amended by redesignating subparagraphs (B) 
and (C) as subparagraphs (C) and (D), respectively, and by 
inserting after subparagraph (A) the following new subpara-
graph: 
"(B) 
EXCEPTION FOR SCHOOL BUS TRANSPORTATION.— 
Subparagraph (A) shall not apply to fuel used in an auto-
mobile bus while engaged in the transportation described in 
paragraph (1)(B)." 
(2) Subparagraph (A) of section 64270t>)(2) is amended by strik-
ing out "subparagraph (B)" and inserting in lieu thereof "sub-
paragraphs (B) and (C)". 
(3) The heading for subparagraph (C) of section 6427(b)(2), as 
redesignated by paragraph (1), is amended by striking out 
"EXCEPTION" and inserting in lieu thereof "EXCEPTION FOR CER-
TAIN INTRACITY TRANSPORTATION". 
(c) AMENDMENT RELATED TO SECTION 921 OF THE ACT.—Paragraph 
(3) of section 4051(d) (relating to temporary reduction in tax on 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2903 
certain piggyback trailers) is amended by adding at the end thereof 
the following new sentence: 
"No tax shall be imposed by reason of this paragraph on any 
use or resale which occurs more than 6 years after the date of 
the first retail sale." 
SEC. 1878. AMENDMENTS RELATED TO TITLE X OF THE ACT. 
(a) AMENDMENT RELATED TO SECTION 1001 OF THE ACT.—Subsec-
tion O
t
>
) of section 1001 of the Tax Reform Act of 1984 is amended by 
adding at the end thereof the following new paragraph: 
"(24) Clause (i) of section 1278(aXlXB) (relating to short-term 
obligations)." 
(h) AMENDMENT RELATED TO SECTION 1015 OF THE ACT.—Subpara-
graph (I) of section 4162(aX6) (defining sport fishing equipment) is 
amended to read as follows: 
"(I) fishing hook disgorgers, and". 
(c) AMENDMENTS RELATED TO SECTION 1018 OF THE ACT.— 
(1) Paragraph (1) of section 4041(1) (relating to exemption for 
certain helicopter uses) is amended to read as follows: 
"(1) transporting individuals, equipment, or supplies in the 
exploration for, or the development or removal of, hard min-
erals, oil, or gas, or". 
(2) Paragraph (1) of section 4261(e) (relating to exemption for 
certain helicopter uses) is amended to read as follows: 
"(1) transporting individuals, equipment, or supplies in the 
exploration for, or the development or removal of, hard min-
erals, oil, or gas, or". 
(d) AMENDMENTS RELATED TO SECTION 1028 OF THE ACT.—Subsec-
tion (b) of section 1028 of the Tax Reform Act of 1984 (relating to 
credit against estate tax for transfers to Toiyabe National Forest) is 
amended to read as follows: 
"
O
t
>
) AMOUNT OF CREDIT.— 
"(1) IN GENERAL.—The amount allowed as a credit under 
subsection (a) shall be equal to the lesser of— 
"(A) the fair market value of the real property trans-
ferred by each estate as of the valuation date used for 
purposes of the tax imposed by chapter 11 of such CJode, or 
"(B) the Federal estate tax liability (and interest thereon) 
of each estate. 
"(2) SPECIAL RULE FOR RABE ESTATE.—In the case of the estate 
described in paragraph (2) of subsection (a), the amount allowed 
as a credit under subsection (a) shall be equal to the Federal 
estate tax liability (and interest accruing thereon through the 
date of a transfer described in paragraph (1) of subsection (c)) of 
such estate." 
(e) AMENDMENTS RELATED TO SECTION 1034 OF THE ACT.— 
(1) The last sentence of section 514(cX9XB) (relating to excep-
tions) is amended by striking out "would be unrelated business 
taxable income (determined without regard to this paragraph)" 
and inserting in lieu thereof "is unrelated business taxable 
income". 
(2) Clause (i) of section 514(cX9XC) is amended by striking out 
"section 509(a)" and inserting in lieu thereof "section 509(aX3)". 
(3) Clause (vi) of section 514(cX9XB) is amended to read as 
follows: 
100 STAT. 2904 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(vi) the real property is held by a partnership (which 
does not fail to meet the requirements of clauses (i) 
through (v)), and— 
? 
"(I) any partner of the partnership is not a quali-
fied organization, and 
"(II) the principal purpose of any allocation to 
any partner of the partnership which is a qualified 
organization which is not a qualified allocation 
(within the meaning of section 1680*)(9)) is the 
avoidance of income tax. 
For purposes of subclause (I) of clause (vi), an organization 
shall not be treated as a qualified organization if any 
income of such organization would be unrelated business 
taxable income (determined without regard to this para-
graph. For purposes of clause (vi), an interest in a mortgage 
shall in no event be treated as real property." 
(f) AMENDMENTS RELATED TO SECTION 1041 OF THE ACT.— 
(1) The subsection (j) of section 51 (relating to targeted jobs 
credit) added by section 1041 of the Tax Reform Act of 1984 is 
hereby redesignated as subsection (k). 
(2) Subparagraph (B) of section 1041(c)(5) of the Tax Reform 
Act of 1984 is amended by striking out "section 51(j)" and 
inserting in lieu thereof "section 51(k)". 
(g) AMENDMENT RELATED TO SECTION 1053 OF THE ACT.—Para-
graph (2) of section 1034(h) (relating to members of armed forces) is 
amended by striking out "before the last day described" and insert-
ing in lieu thereof "before the day which is 1 year after the last day 
described". 
(h) AMENDMENT RELATED TO SECTION 1063 OF THE ACT.—Subsec-
tion (c) of section 1063 of the Tax Reform Act of 1984 (relating to 
permanent disallowance of deduction for expenses of demolition of 
certain structures) is amended to read as follows: 
"(c) EFFECTIVE DATES.— 
"(1) The amendments made by this section shall apply to 
taxable years ending after December 31, 1983, but shall not 
apply to any demolition (other than of a certified historic 
structure) commencing before July 19,1984. 
"(2) For purposes of paragraph (1), if a demolition is delayed 
until the completion of the replacement structure on the same 
site, the demolition shall be treated as commencing when 
construction of the replacement structure commences. 
"(3) The amendments made by this section shall not apply to 
any demolition commencing before September 1, 1984, pursuant 
to a bank headquarters building project i
f
— 
"(A) on April 1,1984, a corporation was retained to advise 
the bank on the final completion of the project, and 
"(B) on June 12, 1984, the Comptroller of the Currency 
approved the project. 
"(4) The amendments made by this section shall not apply to 
the remaining adjusted basis at the time of demolition of any 
structure if— 
"(A) such structure was used in the manufacture, storage, 
or distribution of lead alkyl antiknock products and inter-
mediate and related products at facilities located in or near 
Baton Rouge, Louisiana, and Houston, Texas, owned by the 
same corporation, and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2905 
"(B) demolition of at least one such structure at the Baton 
Rouge facility commenced before January 1,1984." 
(i) AMENDMENT RELATED TO SECTION 1065 OF THE ACT.—Subsection 
Q>) of section 1065 of the Tax Reform Act of 1984 (relating to rules 
treating Indian tribal governments as States) is amended by striking 
out "section 7871" and inserting in lieu thereof "section 7871(a)". 
(j) AMENDMENTS RELATED TO SECTION 1071 OF THE ACT.— 
(1) Subsection (a) of section 852 (relating to taxation of regu-
lated investment companies and their shareholders) is amended 
by adding "and" at the end of paragraph (1), by striking out 
paragraph (2), and by redesignating parsigraph (3) as paragraph 
(2). 
(2) Paragraph (1) of section 8520?) (relating to imposition of 
tax on regulated investment companies) is amended by striking 
out the last sentence and inserting in lieu thereof the following: 
"In the case of a regulated investment company which is a 
personal holding company (as defined in section 542) or which 
fails to comply for the taxable year with regulations prescribed 
by the Secretary for the purpose of ascertaining the actual 
ownership of its stock, such tax shall be computed at the highest 
rate of tsix specified in section 110t>)." 
SEC. 1879. MISCELLANEOUS PROVISIONS. 
(a) WAIVER OF ESTIMATED TAX PENALTIES.—No addition to tax 
shall be made under section 6654 or 6655 of the Internal Revenue 
Code of 1954 (relating to failure to pay estimated income tax) for any 
period before April 16, 1985 (March 16, 1985 in the case of a 
taxpayer subject to section 6655 of such Code), with respect to any 
underpayment, to the extent that such underpajonent was created 
or increased by any provision of the Teix Reform Act of 1984. 
(b) AMENDMENTS RELATED TO ORPHAN DRUG CREDIT.— 
(1) Clause (ii) of section 280t)X2XA) (defining clinical testing) is 
amended— 
(A) by striking out "the date of such drug" in subclause (I) 
and inserting in lieu thereof "the date such drug", and 
(B) by striking out "of such Act" in subclause (II) and 
inserting in lieu thereof "of such Act or, if the drug is a 
biological product, before the date on which a license for 
such drug is issued under section 351 of the Public Health 
Services Act". 
(2) Paragraph (1) of section 28(d) (defining rare disease or 
condition) is amended to read as follows: 
"(1) RARE DISEASE OR CONDITION.—For purposes of this section, 
the term 'rare disease or condition' means any disease or condi-
tion which— 
"(A) affects less than 200,000 persons in the United 
States, or 
"(B) affects more than 200,000 persons in the United 
States but for which there is no reasonable expectation that 
the cost of developing and making available in the United 
States a drug for such disease or condition will be recovered 
from sales in the United States of such drug. 
Determinations under the preceding sentence with respect to 
any drug shall be made on the basis of the facts and cir-
cumstances as of the date such drug is designated under section 
526 of the Federal Food, Drug, and Cosmetic Act." 
100 STAT. 2906 
PUBLIC LAW 99-514—OCT. 22, 1986 
(3) The amendments made by this subsection shall apply to 
amounts paid or incurred after December 31, 1982, in taxable 
years ending after such date. 
(c) TREATMENT OF SALES WITHIN AFFIUATED GROUP FOR PURPOSES 
OF SECTION 29.— 
(1) Paragraph (8) of section 29(d) (relating to related persons) 
is amended by adding at the end thereof the following new 
sentence: "In the case of a corporation which is a member of an 
affiliated group of corporations filing a consolidated return, 
such corporation shall be treated as selling qualified fuels to an 
unrelated person if such fuels are sold to such a person by 
another member of such group." 
(2) The amendment made by paragraph (1) shall take effect as 
if included in the amendments made by section 231 of Public 
Law 96-223. 
(d) RETURNS AND RECORDS WITH RESPECT TO CERTAIN FRINGE 
BENEFITS.— 
(1) Subsection (d) of section 6039D (added by section 1 of 
Public Law 98-611) is amended to read as follows: 
"(d) DEFINITIONS.—For purposes of this section— 
"(1) SPECIFIED FRINGE BENEFIT PLAN.—The term 'specified 
fringe benefit plan' means— 
"(A) any qualified group legal services plan (as defined in 
section 120), 
"(B) any cafeteria plan (as defined in section 125), and 
"(C) any educational assistance plan (as defined in section 
127). 
"(2) APPLICABLE EXCLUSION.—The term 'applicable exclusion' 
means— 
"(A) section 120 in the case of a qualified group legal 
services plan, 
"(B) section 125 in the case of a cafeteria plan, and 
"(C) section 127 in the case of an educational assistance 
plan." 
(2) The section 6039D added by section 1 of Public Law 98-612 
is hereby repealed. 
(e) REPEAL OF JOINT COMMITTEE REPORT REQUIREMENT.—Section 
6405 (relating to reports of refunds and credits) is amended by 
striking out subsection (b) and redesignating subsections (c), (d), and 
(e) as subsections (b), (c), and (d), respectively. 
if) AMENDMENTS RELATED TO PUBLIC LAW 99-121.— 
(1) The table contained in section 467(eX3XA) is amended— 
(A) by striking out "18-year real property" and inserting 
in lieu thereof "19-year real property", and 
(B) by striking out "18 years" and inserting in lieu 
thereof "19 years". 
(2) The amendments made by paragraph (1) shall take effect 
as if included in the amendments made by section 103 of Public 
Law 99-121. 
(g) DEFINED CONTRIBUTION PLAN OF RURAL ELECTRIC COOPERATIVE 
MAY INCLUDE QUAUFIED CASH OR DEFERRED ARRANGEMENT.— 
(1) IN GENERAL.—Paragraphs (1) and (2) of section 401(k) 
(relating to cash or deferred arrangements) are each amended 
by striking out "(or a pre-ERISA money purchase plan)" and 
inserting in lieu thereof ", a pre-ERISA money purchase plan, 
or a rural electric cooperative plan". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2907 
(2) RURAL ELECTRIC COOPERATIVE PLAN DEFINED.—Subsection 
(k) of section 401 is amended by adding at the end thereof the 
following new paragraph: 
"(6) RURAL ELECTRIC COOPERATIVE PLAN.—For purposes of this 
subsection, the term 'rural electric cooperative plan means any 
pension plan— 
"(A) which is a defined contribution plan (as defined in 
section 414(i)), and 
"(B) which is established and maintained by a rural 
electric cooperative (as defined in section 457(d)(9)(B)) or a 
national association of such rural electric cooperatives." 
(3) EFFECTIVE DATE.—The amendments made by this subsec-
tion shall apply to plan years beginning after December 31, 
1984. 
(h) CLARIFICATION OF DEFINITION OF NEWLY DISCOVERED OIL.— 
(1) IN GENERAL.—Paragraph (2) of section 4991(e) (defining 
newly discovered oil) is amended by adding at the end thereof 
the following new sentences: "Such term includes any produc-
tion from a property which did not produce oil in commercial 
quantities during calendar year 1978. For purposes of the 
preceding sentence, a property shall not be treated as producing 
oil in commercial quantities during calendar year 1978 if, 
during calendar year 1978 (A) the aggregate amount of oil 
produced from such property did not exceed 2,200 barrels 
(whether or not such oil was sold), and (B) no well on such 
property was in production for a total of more than 72 hours." 
(2) EFFECTIVE DATE.—The amendments made by paragraph (1) 
shall apply to oil removed after February 29,1980. 
(i) MEDICINAL ALCOHOL, ETC. BROUGHT INTO THE UNITED STATES 
FROM PUERTO RICO OR THE VIRGIN ISLANDS EUGIBLE FOR DRAW-
BACK.— 
(1) Section 7652 (relating to shipments to the United States) is 
amended by adding at the end thereof the following new subsec-
tion: 
"(g) DRAWBACK FOR MEDICINAL ALCOHOL, ETC.—In the c£ise of 
medicines, medicinal preparations, food products, flavors, or flavor-
ing extracts containing distilled spirits, which are unfit for beverage 
purposes and which are brought into the United States from Puerto 
Rico or the Virgin Islands— 
"(1) subpart F of part II of subchapter A of chapter 51 shall be 
applied as i
f
— 
"(A) the use and tax determination described in section 
5131(a) had occurred in the United States by a United 
States person at the time the article is brought into the 
United States, and 
"(B) the rate of tax were the rate applicable under subsec-
tion (f) of this section, and 
"(2) no amount shall be covered into the treasuries of Puerto 
Rico or the Virgin Islands." 
(2) The amendment made by paragraph (1) shall apply to 
articles brought into the United States after the date of the 
enactment of this Act. 
(3)(A) Section 7652 of the Internal Revenue Code of 1954 
(other than subsection (f) thereof) shall not prevent the payment 
to Puerto Rico or the Virgin Islands of amounts with respect to 
medicines, medicinal preparations, food products, flavors, or 
flavoring extracts containing distilled spirits, which are unfit 
100 STAT. 2908 
PUBLIC LAW 99-514—OCT. 22, 1986 
for beverage purposes and which are brought into the United 
States from Puerto Rico or the Virgin Islands on or before the 
date of the enactment of this Act. 
(B) With respect to articles brought into the United States 
after September 27, 1985, subparagraph (A) shall apply only if 
the Secretary of the Treasury or his delegate is satisfied that 
the amounts paid to Puerto Rico or the Virgin Islands under 
subparagraph (A) are being repaid to the proper persons who 
used the distilled spirits in such articles. 
0) ALLOWANCE OF INVESTMENT CREDIT TO EUGIBLE SECTION 50 
Kd* 
ORGANIZATIONS.— 
(1) IN GENERAL.—Section 48 (relating to definitions and spe-
ciaJ rules) is amended by redesignating subsection (r) as subsec-
tion (s) and by inserting after subsection (q) the following new 
subsection: 
"(r) CERTAIN SECTION 501(d) ORGANIZATIONS.— 
"(1) IN GENERAL.—In the case of eligible section 501(d) 
organizations— 
"(A) any business engeiged in by such organization for the 
common benefit of its members and the taxable income 
from which is included in the gross income of its members 
shall be treated as an unrelated business for purposes of 
paragraph (4) of subsection (a), 
"(B) the qualified investment for each taxable year with 
respect to such business shall be apportioned pro rata 
among such members in the same manner as the taxable 
income of such organization, and 
"(C) any individual to whom any investment has been 
apportioned under subparagraph (B) shedl be treated for 
purposes of this subpart (other than section 47) as the 
taxpayer with respect to such investment, and such invest-
ment shall not 0)y reason of such apportionment) lose its 
character as an investment in new section 38 property or 
used section 38 property, as the case may be. 
"(2) LIMITATION ON USED SECTION 38 PROPERTY APPUED AT 
ORGANIZATION LEVEL.—The limitetion under subparagraph (A) 
of subsection (cX2) shall apply with respect to the section 501(d) 
organization. 
*(3) RECAPTURE.—For purposes of appl)dng section 47 to any 
property for which credit was allowed under section 38 by 
reason of this subsection— 
"(A) the section 501(d) organization shall be treated as the 
taxpayer to which the credit under section 38 was allowed, 
"(B) the amount of such credit allowed with respect to the 
property shall be treated as the amount which would have 
been allowed to the section 501(d) organization were such 
credit allowable to such organization, 
"(C) subparagraph (D) of section 47(aX5) shall not apply, 
and 
"(D) the amount of the increase in tax under section 47 
for any taxable year with respect to property to which this 
subsection applies shall be allocated pro rata among the 
members of such organization in the same manner as such 
organization's taxable income for such year is allocated 
among such members. 
"(4) No INVESTMENT CREDIT ALLOWED TO MEMBER IF MEMBER 
CLAIMS OTHER INVESTMENT CREDIT.—No Credit shall be allowed 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2909 
to an individual by reason of this subsection if such individual 
claims a credit under section 38 without regard to this subsec-
tion. The amount of the credit not allowed by reason of the 
preceding sentence shall not be allowed to any other person. 
"(5) ELIGIBLE SECTION 501 (d) ORGANIZATION.—For purposes of 
this subsection, the term 'eligible section 501(d) organization' 
means any organization— 
"(A) which elects to be treated as an organization 
described in section 501(d) and which is exempt from tax 
under section 501(a), and 
"(B) which does not provide a substantially higher stand-
ard of living for any person or persons than it does for the 
majority of the members of the community." 
(2) EFFECTIVE DATE.—The amendments made by this subsec-
tion shall apply to periods after December 31, 1978 (under rules 
similar to the rules of section 48(m) of the Internal Revenue 
Code of 1954), in taxable years ending after such date. 
(3) SPECIAL RULE.—If refund or credit of any overpayment of 
tax resulting from the application of this subsection is pre-
vented at any time before the close of the date which is 1 year 
after the date of the enactment of this Act by operation of any 
law or rule of law (including res judicata), refund or credit of 
such overpayment (to the extent attributable to the application 
of the amendments made by this subsection) may, nevertheless, 
be made or allowed if claim therefor is filed before the close of 
such 1-year period. 
(k) AMENDMENT RELATED TO MUTUAL SAVINGS BANKS DESCRIBED 
IN SECTION 59103).— 
(1) IN GENERAL.—Subparagraph (B) of section 501(c)(14) (relat-
ing to list of tax-exempt organizations) is amended— 
(A) by striking out "or" at the end of clause (ii), 
(B) by striking out the period at the end of clause (iii) and 
inserting in lieu thereof a comma and "or", and 
(C) by inserting at the end thereof the following new 
clause: 
"(iv) mutual savings banks described in section 
5910t))". 
(2) EFFECTIVE DATE.—The amendments made by this subsec-
tion shall apply to taxable years ending after August 13, 1981. 
(1) AMENDMENT TO SECTION 368(a)(2)(F).— 
(1) IN GENERAL.—Clause (ii) of section 368(aX2XF) (relating to 
certain transactions involving 2 or more investment companies) 
is amended to read as follows: 
"(ii) A corporation meets the requirements of this 
clause if not more than 25 percent of the value of its 
total assets is invested in the stock and securities of 
any one issuer (other than stock in a regulated invest-
ment company, a real estate investment trust, or an 
investment company which meets the requirements of 
this clause (ii)), and not more than 50 percent of the 
value of its total assets is invested in the stock and 
securities of 5 or fewer issuers (other than stock in a 
regulated investment company, a real estate invest-
ment trust, or an investment company which meets the 
requirements of this clause (ii)). For purposes of this 
clause, all members of a controlled group of corpora-
100 STAT. 2910 
PUBLIC LAW 99-514—OCT. 22, 1986 
tions (within the meaning of section 1563(a)) shall be 
treated as one issuer." 
(2) EFFECTIVE DATE.—The amendment made by this subsection 
shall apply as if included in section 2131 of the Tax Reform Act 
of 1976. 
(m) AMENDMENTS RELATING TO SUBCHAPTER S CORPORATIONS.— 
(1) IN GENERAL.— 
(A) Section 1361(dX3) (relating to qualified subchapter S 
trusts) is amended by adding at the end thereof the follow-
ing new sentence: "A substantially separate and independ-
ent share of a trust treated as a separate trust under 
section 663(c) shall be treated as a separate trust for pur-
poses of this subsection and subsection (c)." 
(B) Section 1368(eXl) (relating to definitions and special 
rules) is amended by striking out the period at the end of 
subparagraph (A) and inserting in lieu thereof "and no 
adjustment shall be made for Federal taxes attributable to 
any taxable year in which the corporation was a C corpora-
tion." 
(2) EFFECTIVE DATE.—The amendments made by this subsec-
tion shall apply to taxable years beginning after December 31, 
1982. 
(n) AMENDMENT RELATING TO SECTION 2523.— 
(1) IN GENERAL.—Subparagraph (A) of section 2523(fK4) (relat-
ing to election with respect to life estate for donee spouse) is 
amended to read as follows: 
"(A) TIME AND MANNER.—An election under this subsec-
tion with respect to any property shall be made on or before 
the date prescribed by section 6075(b) for filing a gift tsix 
return with respect to the transfer (determined without 
regard to section 6019(2)) and shall be made in such manner 
as the Secretary shall by regulations prescribe." 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
shall apply to transfers made after December 31,1985. 
(3) SPECIAL RULE FOR CERTAIN TRANSFERS IN OCTOBER 1984.— 
An election under section 2523(f) of the Internal Revenue (Dode 
of 1954 with respect to an interest in property which— 
(A) was transferred during October 1984, and 
(B) was transferred pursuant to a trust instrument stat-
ing that the grantor's intention was that the property of the 
trust would constitute qualified terminable interest prop-
erty as to which a Federal gift tax marital deduction would 
be allowed upon the grantor's election, 
shall be made on the return of tax imposed by section 2501 of 
such Ck)de for the calendar year 1984 which is filed on or before 
the due date of such return or, if a timely return is not filed, on 
the first such return filed after the due date of such return and 
before December 31,1986. 
(o) AMENDMENTS RELATING TO SECTION 4994.— 
(1) For purposes of section 49910t)), a "qualified charitable 
interest" shall include an economic interest in crude oil held by 
the Episcopal Royalty Company, an entity created in 1961 £is a 
subsidiary of the Protestant Episcopal Church Foundation of 
the Diocese of Oklahoma. 
(2) The amendment made by this subsection shall apply to oil 
removed after February 29, 1980. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2911 
(p) AMENDMENT RELATED TO SECTION 252 OF THE ECONOMIC RECOV-
ERY TAX ACT OF 1981.— 
(1) Notwithstanding subsection (c) of section 252 of the BIco-
nomic Recovery Tax Act of 1981, the amendment made by 
subsection (a) of such section 252 (and the provisions of subsec-
tion (b) of such section 252) shall apply to any transfer of stock 
to any person i
f
— 
(A) such transfer occurred in November or December of 
1973 and was pursuant to the exercise of an option granted 
in November or December of 1971, 
(B) in December 1973 the corporation granting the option 
was acquired by another corporation in a transaction 
qualifying as a reorganization under section 368 of the 
Internal Revenue Code of 1954, 
(C) the fair market value (as of July 1, 1974) of the stock 
received by such person in the reorganization in exchange 
for the stock transferred to him pursuant to the exercise of 
such option was less than 50 percent of the fair market 
value of the stock so received (as of December 4, 1973), 
(D) in 1975 or 1976 such person sold substantially all of 
the stock received in such reorganization, and 
(E) such person makes an election under this section at 
such time and in such manner as the Secretary of the 
Treasury or his delegate shall prescribe. 
(2) LIMITATION ON AMOUNT OF BENEFIT.—Subsection (a) shall 
not apply to transfers with respect to any employee to the 
extent that the application of subsection (a) with respect to such 
employee would (but for this paragraph) result in a reduction in 
liability for income tax with respect to such employee for all 
taxable years in excess of $100,000 (determined without regard 
to any interest). 
(3) STATUTE OF LIMITATIONS.— 
(A) OVERPAYMENTS.—If refund or credit of any overpay-
ment of tax resulting from the application of subsection (a) 
is prevented on the date of the enactment of this Act (or at 
any time within 6 months after such date of enactment) by 
the operation of any law or rule of law, refund or credit of 
such overpayment (to the extent attributable to the applica-
tion of subsection (a)) may, nevertheless, be made or al-
lowed if claim therefor is filed before the close of such 6-
month period. 
(B) DEFICIENCIES.—If the assessment of any deficiency of 
tax resulting from the application of subsection (a) is pre-
vented on the date of the enactment of this Act (or at any 
time within 6 months after such date of enactment) by the 
operation of any law or rule of law, assessment of such 
deficiency (to the extent attributable to the application of 
subsection (a)) may, nevertheless, be made within such 6-
month period. 
(q) TREATMENT OF CERTAIN SELF-INSURED WORKERS' COMPENSA-
TION FUNDS.— 
(1) 
MORATORIUM ON COLLECTION ACTIVITIES.—During 
the 
period beginning on the date of the enactment of this Act and 
ending on August 16, 1987, the Secretary of the Treasury or his 
delegate— 
100 STAT. 2912 
PUBLIC LAW 99-514—OCT. 22, 1986 
(A) shall suspend any pending audit of any self-insured 
workers' compensation fund where the audit involves the 
issue of whether such fund is a mutual insurance company, 
(B) shall not initiate any audit of any such fund involving 
such issue, and 
(C) shall take no steps to collect from such fund any 
underpayment, interest, or penalty involving such issue. 
(2) SUSPENSION OF RUNNING OF INTEREST.—No interest shall be 
payable under chapter 67 of the Internal Revenue Code of 1986 
on any underpayment by a self-insured workers' compensation 
fund involving such issue for the period beginning on August 16, 
1986, and ending on August 16,1987. 
(3) ADDITIONAL TIME TO FILE TAX COURT PROCEEDING.—If the 
period during which a petition involving such issue could have 
been filed with the TEIX Court by any self-insured workers' 
compensation fund had not expired before August 16,1986, such 
period shall not expire before August 16,1987. 
(4) SELF-INSURED WORKERS' COMPENSATION FUND.—For pur-
poses of this subsection, the term "self-insured workers' com-
pensation fund" means any self-insured workers' compensation 
fund established pursuant to applicable State law regulating 
self-insured workers' compensation funds. 
(r) RETURNS OF ALCOHOL, TOBACCO, AND FIREARMS TAXES.— 
(1) IN GENERAL.—Subsection (b) of section 6091 of such Code 
(relating to place for filing returns or other documents) is 
amended by adding at the end thereof the following new para-
graph: 
"(6) ALCOHOL, TOBACCO, AND FIREARMS RETURNS, ETC.—In the 
case of any return of tax imposed by subtitle E (relating to taxes 
on alcohol, tobacco, and firearms), subsection (a) shall apply 
(and this subsection shall not apply)." 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
shall take effect on the first day of the first calendar month 
which begins more than 90 days after the date of the enactment 
of this Act. 
(s) TREATMENT OF STRIPPING TAX-EXEMPT BONDS. 
(1) IN GENERAL.—Subsection (d) of section 1286 is amended to 
read as follows: 
"(d) SPECIAL RULES FOR TAX-EXEMPT OBUGATIONS.—In the case of 
any tax-exempt obligation (as defined in section 1275(aX3)) from 
which 1 or more coupons have been stripped— 
"(1) the amount of original issue discount determined under 
subsection (a) with respect to any stripped bond or stripped 
coupon from such obligation shall be the amount which pro-
duces a jdeld to maturity (as of the purchase date) equal to the 
lower of— 
"(A) the coupon rate of interest on such obligation before 
the separation of coupons, or 
"(B) the yield to maturity (on the basis of purchase price) 
of the stripped obligation or coupon, 
"(2) the amount of original issue discount determined under 
paragraph (1) shall be taken into account in determining the 
adjusted basis of the holder under section 1288, 
(3) subsection (bXD shall not apply, and 
"(4) subsection Ot)X2) shall be applied by increasing the basis of 
the bond or coupon by the interest accrued but not paid before 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2913 
the time such bond or coupon was disposed of (and not pre-
viously reflected in basis)." 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
shall apply to any purchase or sale of any stripped tax-exempt 
obligation or stripped coupon from such an obligation after the 
date of the enactment of this Act. 
(t) DISPOSITION OF CERTAIN SUBSIDIARY.—If for a taxable year of an 
affiliated group filing a consolidated return ending on or before 
December 31, 1987, there is 1 disposition of stock of a subsidiary 
incorporated in Delaware on December 24, 1969, and whose prin-
cipal place of business is in New Orleans, Louisiana (within the 
meaning of Treasury Regulation section 1.1502-19), the amount 
required to be included in income with respect to such disposition 
under Treasury Regulation section 1.1502-19(a) shall, notwithstand-
ing such section, be included in income ratably over the 15-year 
period beginning with the taxable year in which the disposition 
occurs and ending with the 14th succeeding taxable year. 
(u) AMENDMENTS RELATED TO SINGLE EMPLOYER PENSION PLAN 
AMENDMENTS ACT OF 1986.— 
(1) CLARIFICATION OF APPUCABILITY OF NOTICE REQUIREMENT 
FOR SIGNIFICANT REDUCTIONS IN BENEFIT ACCRUALS.—Section 
206(h) of the Employee Retirement Income Security Act of 1974 
(29 U.S.C. 1054(h); 100 Stat. 243) is amended— 
(A) by striking out "single-employer plan" and inserting 
in lieu thereof "plan described in paragraph (2)"; 
(B) by redesignating paragraphs (1), (2), and (3) £is sub-
paragraphs (A), (B), and (C), respectively; 
(C) by striking out "paragraph (1), (2), or (3)" and insert-
ing in lieu thereof "subparagraph (A), (B), or (C)"; 
(D) by inserting "(1)" after "(h)"; and 
(E) by adding at the end the following new paragraph: 
"(2) A plan is described in this paragraph if such plan is— 
"(A) a defined benefit plan, or 
"(B) an individual account plan which is subject to the fund-
ing standards of section 302." 
(2) TREATMENT OF SECTION 4049 TRUSTS ESTABLISHED PURSUANT 
TO SECTION 4042(i).—Section 4049(a) of the Employee Retirement 
Income Security Act of 1974 (29 U.S.C. 1349(a); 100 Stat. 258) is 
amended by inserting "or 4042(i)" after "section 4041(c)(3)(B) (ii) 
or (iii)". 
(3) CORRECTION OF DEFINITION OF MULTIEMPLOYER PLAN FOR 
PURPOSES OF TITLE I.—Section 11016(c)(1) of the Single-Employer 
Pension Plan Amendments Act of 1986 (100 Stat. 273) and the 
amendment made thereby are repealed. 
(4) EFFECTIVE DATE.— 
(A) GENERAL RULE.—Except as provided in subparagraph 
(B), the preceding provisions of this subsection shall be 
effective as if such provisions were included in the enact-
ment of the Single-Employer Pension Plan Amendments 
Act of 1986. 
(B) SPECIAL RULE.—Subparagraph (B) of section 206(hX2) 
of the Employee Retirement Income Security Act of 1974 
(as amended by paragraph (1)) shall apply only with respect 
to plan amendments adopted on or after the date of the 
enactment of this Act. 
100 STAT. 2914 
PUBLIC LAW 99-514—OCT. 22, 1986 
CHAPTER 8~EFFECTIVE DATE 
SEC. 1881. EFFECTIVE DATE. 
Except as otherwise provided in this subtitle, any amendment 
made by this subtitle shall take effect as if included in the provision 
of the Tax Reform Act of 1984 to which such amendment relates. 
Subtitle B—Related to Other Programs Affected 
by the Deficit Reduction Act of 1984 
CHAPTER 1—AMENDMENTS RELATED TO 
SOCIAL SECURITY ACT PROGRAMS 
SEC. 1882. AMENDMENTS RELATED TO COVERAGE OF CHURCH EMPLOY-
EES (SECTION 2603 OF THE DEFICIT REDUCTION ACT). 
(a) CLARIFICATION OF EXCEPTION FOR MEMBERS OF CERTAIN REU-
Gious FAITHS.—Subsection (g) of section 1402 of the Internal Reve-
nue Code of 1954 (relating to members of certain religious faiths) is 
amended by adding at the end thereof the following new paragraph: 
"(5) SUBSECTION NOT TO APPLY TO CERTAIN CHURCH EMPLOY-
EES.—This subsection shall not apply with respect to services 
which are described in subparagraph (B) of section 31210bX8) 
(and are not described in subparagraph (A) of such section)." 
(b) 
TREATMENT 
OF 
INCOME 
OF 
CERTAIN 
CHURCH, ETC., 
EMPLOYEES.— 
(1) AMENDMENTS OF INTERNAL REVENUE CODE OF 1954.— 
(A) IN GENERAL.—Section 1402 of such Code (relating to 
definitions for purposes of the tax on self-employment 
income) is amended by adding at the end thereof the follow-
ing new subsection: 
"(j) SPECIAL RULES FOR CERTAIN CHURCH EMPLOYEE INCOME.— 
"(1) COMPUTATION OF NET EARNINGS.—In applying subsection 
( a ) -
"(A) church employee income shall not be reduced by any 
deduction; 
"(B) church employee income and deductions attributable 
to such income shall not be taken into account in determin-
ing the amount of other net earnings from self-employment. 
"(2) COMPUTATION OF SELF-EMPLOYMENT INCOME.— 
"(A) SEPARATE APPUCATION OF SUBSECTION (bX2).—Para-
graph (2) of subsection (b) shall be applied separately— 
"(i) to church employee income, and 
"(ii) to other net earnings from self-employment. 
"(B) $100 FLOOR.—In applying paragraph (2) of subsection 
(b) to church employee income, '$100' shall be substituted 
for '$400'. 
"(3) COORDINATION WITH SUBSECTION (axi 
2).—Paragraph (1) 
shall not apply to any amount allowable as a deduction under 
subsection (aX12), and paragraph (1) shall be applied before 
determining the amount so allowable. 
"(4) CHURCH EMPLOYEE INCOME DEFINED.—For purposes of this 
section, the term 'church employee income' means gross income 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2915 
for services which are described in section 3121(bX8XB) (and are 
not described in section 3121(bX8XA))." 
(B) TECHNICAL AND CONFORMING AMENDMENTS.— 
(i) NET EARNINGS.—Paragraph (14) of section 1402(a) 
of such Code (defining net earnings from self-employ-
ment) is amended to read as follows: 
"(14) in the case of church employee income, the special rules 
of subsection (jXD shall apply." 
(ii) SELF-EMPLOYMENT INCOME.—Subsection (b) of sec-
tion 1402 of such Code is amended by adding at the end 
thereof the following new sentence: "In the case of 
church employee income, the special rules of subsection 
(jX2) shall apply for purposes of paragraph (2)." 
(iii) CONFORMING AMENDMENT.—The second sentence 
of section 1402(b) of such Code is amended by striking 
out "clause (1)" and inserting in lieu thereof "para-
graph (1)". 
(2) AMENDMENTS OF SOCIAL SECURITY ACT.— 
(A) IN GENERAL.—Section 211 of the Social Security Act is 
amended by adding at the end thereof the following new 
subsection: 
"(iXD In appljring subsection (a)— 
"(A) church employee income shall not be reduced by any 
deduction; 
"(B) church employee income and deductions attributable to 
such income shall not be taken into account in determining the 
amount of other net earnings from self-employment. 
"(2XA) Subsection (bX2) shall be applied separately— 
"(i) to church employee income, and 
"(ii) to other net earnings from self-employment. 
"(B) In appl3dng subsection (bX2) to church employee income, 
'$100' shall be substituted for '$400'. 
"(3) Paragraph (1) shall not apply to any amount allowable as a 
deduction under subsection (aXll), and paragraph (1) shall be ap-
plied before determining the amount so allowable. 
"(4) For purposes of this section, the term 'church employee 
income' means gross income for services which are described in 
section 210(aX8XB) (and are not described in section 210(aX8XA))." 
(B) TECHNICAL AND CONFORMING AMENDMENTS.— 
(i) NET EARNINGS.—Section 211(aX13) of such Act is 
amended to read as follows: 
"(13) In the case of church employee income, the special rules 
of subsection (iXD shall apply." 
(ii) SELF-EMPLOYMENT INCOME.—Section 211(b) of such 
Act is amended by adding at the end thereof the follow-
ing new sentence: "In the case of church employee 
income, the special rules of subsection (iX2) shall apply 
for purposes of paragraph (2)." 
(3) EFFECTIVE DATE.—The amendments made by this subsec-
tion shall apply to remuneration paid or derived in taxable 
years beginning after December 31,1985. 
(c) REVOCATION OF ELECTION UNDER SECTION 3121(W).—Paragraph 
(2) of section 3121(w) of the Internal Revenue Code of 1954 (relating 
to timing and duration of election) is amended by striking out the 
last 2 sentences and inserting in lieu thereof the following: "The 
election may be revoked by the church or organization under regula-
tions prescribed by the Secretary. The election shall be revoked by 
100 STAT. 2916 
PUBLIC LAW 99-514—OCT. 22, 1986 
the Secretary if such church or organization fails to furnish the 
information required under section 6051 to the Secretary for a 
period of 2 years or more with respect to remuneration paid for such 
services by such church or organization, and, upon request by the 
Secretary, fails to furnish all such previously unfurnished informa-
tion for the period covered by the election. Any revocation under the 
preceding sentence shall apply retroactively to the beginning of the 
2-year period for which the information was not furnished." 
SEC. 1883. TECHNICAL CORRECTIONS IN OTHER PROVISIONS RELATED 
TO SOCIAL SECURITY ACT PROGRAMS. 
(a) AMENDMENTS RELATING TO O A S D I PROGRAM.— 
(1) Section 202(cX5)(B) of the Social Security Act is amended 
by striking out "or (I)" and inserting in lieu thereof "or (J)". 
(2) Section 202(qX5XAXi) of such Act is amended by striking 
out "prescribed by him" and inserting in lieu thereof "pre-
scribed by the Secretary". 
(3) Section 202(qX5XC) of such Act is amended by striking out 
"she shall be deemed" and inserting in lieu thereof "he or she 
shall be deemed". 
(4) Section 210(aX5XG) of such Act is amended by striking out 
"Any other service" and inserting in lieu thereof "any other 
service". 
(5) Effective on the date of the enactment of the Deficit 
Reduction Act of 1984— 
(A) section 2601(dXlXBXii) of that Act is amended by 
striking out "210(aX5)(gXiii)" and inserting in lieu thereof 
"210(aX5XGXiii)"; and 
(B) section 2663(cXl) of that Act is amended by striking 
out subparagraph (B). 
(6) Section 211(cX2) of the Social Security Act is amended by 
indenting subparagraph (G) two additional ems (for a total 
indentation of four ems) so as to align its left margin with the 
margins of the other subparagraphs in such section. 
(7) Section 215(iX5XB) of such Act is amended— 
(A) by striking out "subdivision (I)" in clause (ii) and 
inserting in lieu thereof "clause (iXD"; and 
(B) by striking out "subdivisions (I) and (II)" in the matter 
^ 
between clauses (iii) and (iv) and inserting in lieu thereof 
"clause (i)". 
(8) The heading of section 218(m) of such Act is amended to 
read as follows: 
"Wisconsin Retirement Fund". 
(9) Section 221(e) of such Act is amended by striking out 
"under this section" in the first sentence. 
(10) Section 223(gXl) of such Act is amended by striking out 
the second comma after the term "benefits" where such term 
first appears in the matter following subparagraph (C). 
(IIXA) Section 1402(cX2) of the Internal Revenue Code of 1954 
is amended by indenting subparagraph (G) two additional ems 
(for a total indentation of four ems) so as to align its left margin 
with the margins of the other subparagraphs in such section. 
(B) Section 3121(aX8) of such C!ode is amended by moving 
subparagraph (B) two ems to the left, so that its left margin is in 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2917 
flush alignment with the margin of subparagraph (A) of such 
section. 
(b) AMENDMENTS 
RELATING TO 
A F D C 
AND 
CHILD 
SUPPORT 
PROGRAMS.— 
(1)(A) Section 402(a)(31)(A) of the Social Security Act is 
amended by striking out "(or such lesser amount as the Sec-
retary may prescribe in the case of an individual not engaged in 
fulltime employment or not employed throughout the month)". 
(B) The amendment made by this paragraph shall be effective 
beginning October 1,1984. 
(2)(A) Section 402(a)(38)(B) of such Act is amended by striking 
out "section 406(a)," and inserting in lieu thereof "section 406(a) 
or in section 40'7(a) (if such section is applicable to the State),". 
(B) Section 402(a)(38) of such Act (as amended by subpara-
graph (A) of this paragraph) is further amended by relocating so 
much of subparagraph (B) as follows "section 407(a) (if such 
section is applicable to the State)," and placing it after and 
below subparagraph (B), beginning flush, and indenting it two 
ems so that its left margin is aligned with the left margin of 
that portion of section 402(a)(38) that precedes subparagraph (A) 
thereof. 
(C) The amendments made by this paragraph shall be effec-
tive beginning October 1,1984. 
(3)(A) Section 402(a)(39) of such Act is amended by striking out 
"under the age selected by the State pursuant to section 
406(a)(2)" and inserting in lieu thereof "under the age of 18". 
(B) The amendment made by subparagraph (A) shall be effec-
tive beginning October 1,1984. 
(4)(A) Section 402(a) of such Act is amended by striking out 
"and" after the semicolon at the end of paragraph (37), and by 
making any additional changes which may be necessary to 
assure that paragraphs (34) through (37) each end with a semi-
colon, paragraph (38) ends with "; and", and paragraph (39) ends 
with a period. 
(B) Effective on the date of the enactment of the Deficit 
Reduction Act of 1984, section 2639(a) of that Act is amended by 
striking out the period immediately following "utility providing 
home energy" (in the quoted matter) and inserting in lieu 
thereof a semicolon. 
(5) The placement of the last sentence of section 402(a) of the 
Social Security Act is modified to the extent necessary to assure 
that it begins flush to the full left margin without any indenta-
tion, immediately after and below the last of the numbered 
paragraphs. 
(6) Section 457(c) of such Act is amended by striking out 
"subsection (b)(3) (A) and (B)" in the matter following paragraph 
(2) and inserting in lieu thereof "subsection (b)(4) (A) and (B)". 
(7) Section 458(d) of such Act is amended by striking out "on 
behalf of individuals residing in another State" and inserting in 
lieu thereof "at the request of another State". 
(8) Section 464(b)(2)(A) of such Act is amended by striking out 
"threshhold" and inserting in lieu thereof "threshold". 
(9) Section 474(a) of such Act is amended by moving para-
graph (4) two ems to the left, so that its left margin is in flush 
alignment with the margins of the preceding paragraphs. 
(10)(A) Part E of title IV of such Act is amended by adding at 
the end thereof the following new section: 
100 STAT. 2918 
PUBLIC LAW 99-514—OCT. 22, 1986 
"EXCLUSION FROM AFDC UNIT OF CHILD FOR WHOM FOSTER CARE 
MAINTENANCE PAYMENTS ARE MADE 
"SEC. 478. Notwithstanding any other provision of this title, a 
child with respect to whom foster care maintenance payments are 
made under this part shall not, for the period for which such 
payments are made, be regarded as a member of a family for 
purposes of determining the amount of the benefits of the family 
under part A, and the income and resources of such child shall not 
be counted as the income and resources of a family under such 
part.". 
(B) The amendment made by subparagraph (A) shall become 
effective October 1,1984. 
(IIXA) The failure by a State to comply with the provisions of 
any amendment made by paragraph (1), (2), (3), or (10) or the 
imposition by a State of any requirement inconsistent with such 
provisions, in the administration of its plan approved under 
section 402(a) of the Social Security Act during the period 
beginning October 1, 1984, and ending on the day preceding the 
date of the enactment of this Act, shall not be considered to be 
failure to comply substantially with a provision required to be 
included in the State's plan, or to constitute (solely by reeison of 
such inconsistency) the imposition of a prohibited requirement 
in the administration of the plan, for purposes of section 404(a) 
of such Act. 
(B) No State shall be considered to have made any overpay-
ment or underpa3mient of aid, under its plan approved under 
section 402(a) of the Social Security Act, by reason of its compli-
ance or noncompliance with the provisions of any amendment 
made by paragraph (1), (2), (3), or (10) (or solely because of the 
extent to which its requirements are consistent or inconsistent 
with such provisions) in the administration of the plan during 
the period specified in subparagraph (A). 
(c) AMENDMENTS TO GENERAL PROVISIONS.— 
(1) Section 1101(a) of such Act is amended by shifting para-
graphs (3), (4), and (5) to the right to the extent necessary to 
assure that their left margins are gdigned with the left margins 
of the other numbered paragraphs. 
(2) Section 1136(bX7) of such Act is amended by striking out 
"nongovermental" and inserting in lieu thereof "nongovern-
mental". 
(d) AMENDMENTS RELATING TO SSI PROGRAM.— 
(1) The heading of section 1631(g) of such Act is amended to 
read as follows: 
"Reimbursement to States for Interim Assistance Payments". 
(2) Section 1612(aXl)(C) of such Act is amended by striking out 
"section 43" and inserting in lieu thereof "section 32". 
(3) Section 1612(b) of such Act is amended— 
(A) by striking out the semicolon at the end of paragraph 
(2)(A) and inserting in lieu thereof ", and"; 
(B) by striking out the period at the end of paragraph 
(2)(B) and inserting in lieu thereof a semicolon; and 
(C) by making any changes which may be necessary to 
assure that paragraph (11) ends with a semicolon, para-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2919 
graph (12) ends with "; and", and paragraph (13) ends with 
a period. 
(e) AMENDMENTS RELATING TO SOCIAL SERVICES PROGRAM.— 
(IXA) Section 2003(d) of such Act is repealed. 
(B) Section 2003(b) of such Act is amended by striking out 
"(subject to subsection (d))". 
(2) Section 2007 of such Act is repealed. 
(f) EFFECTIVE DATE.—Except as otherwise provided in this section, 
the amendments made by this section shall take effect on the date of 
the enactment of this Act. 
CHAPTER 2—AMENDMENTS RELATED TO UNEMPLOYMENT 
COMPENSATION PROGRAM 
SEC. 1884. TECHNICAL CORRECTIONS IN FEDERAL UNEMPLOYMENT TAX 
ACT. 
The Federal Unemplo)mnient Tax Act is amended as follows: 
(1) Subparagraph (B) of section 3302(cX2) (relating to a limit 
on the credit against the unemployment tax) is amended— 
(A) by striking out "determination" the second place it 
appears in the material preceding clause (i) and inserting in 
lieu thereof "denominator", and 
(B) in clause (i)— 
(i) by striking out "percent" immediately preceding 
the comma at the end thereof, and 
(ii) by inserting "percent" after "2.7". 
(2) Subparagraph (A) of section 3302(fX8) (relating to a partial 
limitation on the reduction of the credit against the unemploy-
ment tax) is amended by striking out "1987" and inserting in 
lieu thereof "1986". 
(3) Clause (i) of section 3306(oXlXA) (relating to crew leaders 
who are registered or provide specialized agricultured labor) is 
amended by striking out "Farm Labor Contractor Registration 
Act of 1963" and inserting in lieu thereof "Migrant and Sea-
sonal Agricultural Worker Protection Act". 
CHAPTER 3—AMENDMENTS RELATED TO TRADE AND 
TARIFF PROGRAMS 
SEC. 1885. AMENDMENTS TO THE TARIFF SCHEDULES. 
(a) IN GENERAL.—The Tariff Schedules of the United States are 
amended as follows: 
(1) TELECOMMUNICATIONS PRODUCT CLASSIFICATION CORREC-
TIONS.— 
(A) Schedule 6 is amended as follows: 
(i) Headnote 1 to subpart C of part 4 is amended by 
striking out "688.43" and inserting in lieu thereof 
"688.42". 
(ii) Headnote 3 of part 5 of schedule 6 is amended bv 
striking out "items 685.11 through 685.19, inclusive, 
and inserting in lieu thereof "items 684.92, 684.98, 
685.00, and 685.08". 
(iii) Item 685.34 is amended by inserting "35% ad 
val." in Column No. 2. 
(iv) Item 685.55 is amended by striking out "685.11 to 
685.50" and inserting in lieu thereof "684.92 to 685.49". 
100 STAT. 2920 
PUBLIC LAW 99-514—OCT. 22, 1986 
(B) Headnote 2(ii) to part 7 of schedule 8 is amended by 
striking out "688.43" and inserting in lieu thereof "688.42". 
(C) Subpart B of part 2 of schedule 6 is amended by 
inserting before the superior heading to items 608.26 and 
608.29, and at the same indention level as that heading, the 
following new item: 
608.25 
Silicon 
electrical 
steel 
5.6% ad val. 
+ 
additional 
duties (see 
headnote 4) 
5.1% ad val. 
+ 
additional 
duties (see 
headnote 
4XD) 
Free (E, I) 
33% ad val. 
additional 
duties (see 
headnote 
4) 
(2) CORRECTIONS TO THE APPENDIX.—Subpart B of part 1 to the 
Appendix is amended as follows: 
(A) The article description for item 906.38 is amended to 
read as follows: "N-Acetylsulfanilyl chloride (provided for 
in item 405.31, part IB, schedule 4)". 
(B) Item 907.38 is amended by striking out "411.87" and 
inserting in lieu thereof "411.82". 
(C) Item 912.13 is amended by striking out "670.20" and 
inserting in lieu thereof "670.21". 
(D) Item 907.63 is amended by striking out "(provided for 
in item 437.13" and inserting in lieu thereof "put up in 
measured doses in chewing gum form (provided for in item 
438.02". 
(3) MISCELLANEOUS CORRECTIONS.—The Schedules are further 
amended as follows: 
(A) Headnote 1 of subpart D of part 4 of schedule 1 is 
amended by striking out "(casein plus albumin)" and insert-
ing in lieu thereof "(casein plus lactalbumin)". 
(B) Headnote 1 of subpart C of part 4 of schedule 3 is 
amended— 
(i) by inserting "or" after the semicolon at the end of 
clause (v); and 
(ii) by striking out "; or" at the end of clause (vi) and 
inserting in lieu thereof a period. 
(b) EFFECTIVE DATE.— 
(1) The amendments made by this section shall apply with 
respect to articles entered, or withdrawn from warehouse, for 
consumption on or after the date that is 15 days after the date 
of enactment of this Act. 
(2) Notwithstanding section 514 of the Tariff Act of 1930 or 
any other provision of law, upon proper request filed with the 
customs officer concerned on or before the date that is 90 days 
after the date of enactment of this Act, the entry of any 
article— 
(A) which was made on or after November 14, 1984, and 
before the date that is 15 days after the date of enactment 
of this Act; and 
(B) with respect to which there would have been no duty, 
or a lesser duty, by reason of any amendment made by 
subsection (a) if such entry were made on or after the date 
that is 15 days after the date of enactment of this Act, 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2921 
shall be liquidated or reliquidated as though such entry had 
been made on the date that is 15 days after the date of enact-
ment of this Act. 
(3) The rate of duty in column number 1 for item 608.25 of the 
Tariff Schedules of the United States shall be subject to all 
staged rate reductions for item 608.38 of such Schedules that— 
(A) take effect after the date of enactment of this Act, and 
(B) were proclaimed by the President before the date of 
enactment of this Act. 
SEC. 1886. TECHNICAL CORRECTIONS TO COUNTERVAILING AND ANTI-
DUMPING DUTY PROVISIONS. 
(a) IN GENERAL.—Title VII of the Tariff Act of 1930 is amended as 
follows: 
(IXA) Subsection (c) of section 701 (19 U.S.C. 1671(c)) is 
redesignated as subsection (d). 
(B) Subsection (g) of such section 701 (as added by section 
613(b) of the Trade and Tariff Act of 1984) is— 
(i) amended by striking out "(g) Whenever" and inserting 
in lieu thereof "(c) UPSTREAM SUBSIDY.—Whenever"; and 
(ii) inserted immediately after subsection (b) of that 
section. 
(2) Sections 702a)Xl), 7320b)(l), and 733(b)(2) (19 U.S.C. 
1671a(b)(l); 1673a(b)(l); 1673b(b)(2)) are each amended by strik-
ing out "(C), (D), or (E)" each place it appears and inserting in 
lieu thereof "(C), (D), (E), or (F)". 
(3) Subsection (h) of section 703 (19 U.S.C. 1671b(h)) is redesig-
nated as subsection (g), and— 
(A) paragraph (2XA) of that subsection (as so redesig-
nated) is amended by striking out "days under section 
705(aXl) or 225 days under section 705(aX2), as appropriate" 
and inserting in lieu thereof "or 225 days, as appropriate, 
under section 705(aXl)"; and 
(B) paragraph (2XBXii) of that subsection (as so redesig-
nated) is amended by striking out "days under section 
705(aX2)" and inserting in lieu thereof "or 225 days, as 
appropriate, under section 705(aXl)". 
(4) Section 704 is amended— 
(A) by amending subsection (d)— 
(i) by redesignating paragraph (2) as paragraph (3); 
and 
(ii) by inserting after paragraph (1) the following new 
paragraph: 
"(2) EXPORTS OF MERCHANDISE TO UNITED STATES NOT TO 
INCREASE DURING INTERIM PERIOD.—The administering authority 
may not accept any agreement under subsection (b) unless that 
agreement provides a means of ensuring that the quantity of 
the merchandise covered by that agreement exported to the 
United States during the period provided for elimination or 
offset of the subsidy or cessation of exports does not exceed the 
quantity of such merchandise exported to the United States 
during the most recent representative period determined by the 
administering authority."; and 
(B) by amending subsection (iXlXD) by striking out "inter-
national" and inserting in lieu thereof "intentional". 
100 STAT. 2922 
PUBLIC LAW 99-514—OCT. 22, 1986 
(5) Paragraph (2) of section 706(a) is amended by aligning the 
margin of the matter appearing after subparagraph (B) with the 
margin of the matter appearing before subparagraph (A). 
(6)(A) Section 708 is amended by striking out "SEC. 708." and 
inserting in lieu thereof the following flush section heading: 
"SEC. 
708. EFFECT OF DEROGATION 
OF EXPORT-IMPORT BANK 
FINANCING.". 
(B) The table of contents for such title VII is amended by 
inserting in numerical sequence the following: 
"Sec. 708. Effect of derogation of Export-Import Bank financing." 
(7) Paragraph (1) of section 736(c) (19 U.S.C. 1673e(c)(l)) is 
amended by inserting ", and was sold to any person that is not 
related to such manufacturer, producer, or exporter," imme-
diately before "on or after the date of publication of^". 
(8) The last sentence of section 151(hXl) (19 U.S.C. 1675(b)(1)) is 
amended by inserting "or countervailing duty" after "anti-
dumping" each place it appears. 
(9) Clause (i) of section 771(7)(F) (19 U.S.C. 1677(7)(F)(i)) is 
amended— 
(A) by striking "any merchandise" in that part which 
precedes subclause (I) and inserting in lieu thereof "the 
merchandise"; and 
(B) by striking out "find orders" in subclause (VIII) and 
inserting in lieu thereof "final orders". 
(10) Subsection (a) of section 771A (19 U.S.C. 1677-l(a)) is 
amended by striking out "(ii), or (iii)" and inserting in lieu 
thereof "(ii),(iii), or (iv)". 
(11) Subsection (g) of section 773 (19 U.S.C. 1677b(g)) is redesig-
nated as subsection (f). 
(12) Section 775 (19 U.S.C. 1677d) is amended by striking out 
"an proceeding" each place it appears in the text and in the 
heading and inserting in lieu thereof "a proceeding". 
(13) Section 777 (19 U.S.C. 16770 is amended— 
(A) by striking out "confidential", "nonconfidential", and 
"confidentiality" each place they appear in the text and in 
the side headings and inserting in lieu thereof "propri-
etary", "non-proprietary", and "proprietary status", respec-
tively; and 
(B) by inserting "or the Commission" after "administer-
ing authority" in subsection (b)(lXB)(i). 
Ot)) AMENDMENTS TO EFFECTIVE DATE PROVISIONS.—Section 626(b) 
of the Trade and Tariff Act of 1984 (relating to the effective dates of 
the amendments made therein to title VII of the Tariff Act of 1930) 
is amended— 
(1) by amending paragraph (1) by inserting ", and to reviews 
begun under section 751 of that Act," after "1930"; and 
(2) by adding at the end thereof the following new paragraphs: 
"(3) The administering authority may delay implementation of 
any of the amendments referred to in subsections (a) and (b)(1) with 
respect to any investigation in progress on the date of enactment of 
this Act if the administering authority determines that immediate 
implementation would prevent compliance with a statutory deadline 
in title VII of the Tariff Act of 1930 that is applicable to that 
investigation. 
PUBLIC LAW 99-514-OCT. 22, 1986 
100 STAT. 2923 
"(4) The amendment made by section 621 shall apply with respect 
to merchandise that is unliquidated on or after November 4, 1984.". 
SEC. 1887. AMENDMENTS TO THE TRADE ACT OF 1974. 
(a) IN GENERAL.—The Trade Act of 1974 is amended £is follows: 
(1) Subclause (II) of section 102(b)(4)(B)(ii) of the Trade Act of 
1974 (19 U.S.C. 2112(b)(4)(B)(iiXII)) is amended by striking out 
"subsection (AXiiXD" and inserting in lieu thereof "subpara-
graph (AXiiXI)". 
(2) Subsection (n) of section 135 (as added by section 
306(c)(2XBXv) of the Trade and Tariff Act of 1984) is redesig-
nated as subsection (m). 
(3) Section 141(dX6) is amended by striking out "3679(b) of the 
Revised Statutes (31 U.S.C. 665(b))" and inserting in lieu thereof 
"1342 of title 31, United States Code". 
(4) Subsection (d) of section 141 (19 U.S.C. 2171(d)) is 
amended— 
(A) by striking out "and" at the end of paragraph (9), 
(B) by striking out the period at the end of paragraph (10) 
and inserting in lieu thereof "; and", and 
(C) by redesignating the paragraph added by section 
304(dX2XAXiii) of the Trade and Tariff Act of 1984 as para-
graph (11). 
(5) Subparagraphs (A), (B), and (C) of section 5020bX4) (19 
U.S.C. 2462(bX4)) are amended to read £is follows: 
"(A) has nationalized, expropriated, or otherwise seized 
ownership or control of property, including patents, trade-
marks, or copyrights, owned by a United States citizen or 
by a corporation, partnership, or association which is 50 
percent or more beneficially owned by United States 
citizens, 
"(B) h£is taken steps to repudiate or nullify an existing 
contract or agreement with a United States citizen or a 
corporation, partnership, or association which is 50 percent 
or more beneficially owned by United States citizens, the 
effect of which is to nationalize, expropriate, or otherwise 
seize ownership or control of property, including patents, 
trademarks, or copyrights, so owned, or 
"(C) has imposed or enforced taxes or other exactions, 
restrictive maintenance or operational conditions, or other 
measures with respect to property, including patents, trade-
marks, or copyrights, so owned, the effect of which is to 
nationalize, expropriate, or otherwise seize ownership or 
control of such property,". 
(6) 
That 
part 
of 
section 
504(cX3XDXii) 
(19 
U.S.C. 
2464(cX3XDXii)) that precedes subclause (I) is amended— 
(A) by striking out "from any beneficiary developing 
country"; 
(B) by striking out "1984 which exceeds 15" and inserting 
in lieu thereof "1986 the aggregate value of which exceeds 
15"; and 
(C) by striking out "if for the preceding calendar year 
such beneficiary developing country—" and inserting in 
lieu thereof "from those beneficiary developing countries 
which for the preceding calendar year—". 
0)) TRANSISTORS.— 
100 STAT. 2924 
PUBLIC LAW 99-514—OCT. 22, 1986 
(1) Section 128(b) of the Trade Act of 1974 (19 U.S.C. 2138) is 
amended by striking out "587.70" in paragraph (1) and inserting 
in lieu thereof "687.70". 
(2)(A) Item 687.70 of the Tariff Schedules of the United States 
is amended by striking out "4.2% ad val." and inserting in lieu 
thereof "Free". 
(B) The amendment made by subparagraph (A) shall apply 
with respect to articles entered, or withdrawn from warehouse, 
for consumption on or after the date that is 15 days after the 
date of enactment of this Act. 
(C) Notwithstanding section 514 of the Tariff Act of 1930 or 
any other provision of law, upon proper request filed with the 
customs officer concerned on or before the date that is 90 days 
after the date of enactment of this Act, the entry of any article 
described in item 687.70 of the Tariff Schedules of the United 
States which was made on or after March 1, 1985, and before 
the date that is 15 days after the date of enactment of this Act 
shall be liquidated or reliquidated as though such entry had 
been made on the date that is 15 days after the date of enact-
ment of this Act. 
SEC. 1888. AMENDMENTS TO THE TARIFF ACT OF 1930. 
The Tariff Act of 1930 is amended as follows: 
(1) Subsection (c) of section 304 (19 U.S.C. 1304(c)) is 
amended— 
(A) by striking out "No" and inserting in lieu thereof the 
following: "(1) Except as provided in paragraph (2), no"; and 
(B) by adding at the end thereof the following new 
paragraph: 
"(2) If, because of the nature of an article, it is technically or 
commercially infeasible to mark it by one of the four methods 
specified in paragraph (1), the article may be marked by an equally 
permanent method of marking such as paint stenciling or, in the 
case of small diameter pipe, tube, and fittings, by tagging the 
containers or bundles.". 
(2) Subsection (j) of section 313 (19 U.S.C. 13130')) is amended— 
(A) by redesignating the paragraphs (3) and (4) inserted 
by section 202(1XB) of the Trade and Tariff Act of 1984 as 
paragraphs (2) and (3), respectively; and 
(B) by amending the paragraph redesignated as para-
graph (4) by section 202(1)(A) of the Trade and Tariff Act of 
1984 to read as follows: 
"(4) The performing of incidental operations (including, but not 
limited to, testing, cleaning, repacking, and inspecting) on— 
"(A) the imported merchandise itself in cases to which para-
graph (1) applies, or 
"(B) the merchandise of the same kind and quality in cases to 
which paragraph (2) applies, 
that does not amount to manufacture or production for drawback 
purposes under the preceding provisions of this section shall not be 
treated as a use of that merchandise for purposes of applying 
paragraph (IXB) or (2)(C).". 
(3) Section 339(c)(2XA) (19 U.S.C. 1339) is amended by striking 
out "relief and inserting in lieu thereof "injury". 
(4) Section 514(a) (19 U.S.C. 1514(a)) is amended by striking 
out "as defined in section 771(9) (C), (D), (E), and (F) of this Act . 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2925 
(5) Section 516(aX2) (19 U.S.C. 1516(aX2)) is amended by adding 
at the end thereof the following new sentence: 
"Such term includes an association, a majority of whose members is 
composed of persons described in subparagraph (A), (B), or (C).". 
(6) Section 516A(aX3) (19 U.S.C. 1516a(aX3)) is amended by 
striking 
out 
"(2XAXii)" 
and 
inserting 
in 
lieu 
thereof 
"(2XAXiXn)". 
(7) Section 613a of the Tariff Act of 1930 (19 U.S.C. 1613a), as 
added by section 317 of the Joint Resolution entitled "A Joint 
Resolution making appropriations for fiscal year 1985, and for 
other purposes.", approved October 12, 1984 (98 Stat. 2054, 
Public Law 98-473), is repealed. 
(8) Section 641 (19 U.S.C. 1641) is amended by adding at the 
end thereof the following new subsection: 
"(i) (COMPENSATION OF OCEAN FREIGHT FORWARDERS.— 
"(1) IN GENERAL.—Notwithstanding any other provision of 
law, no conference or group of two or more ocean common 
carriers in the foreign commerce of the United States that is 
authorized to agree upon the level of compensation paid to 
ocean freight forwarders may— 
"(A) deny to any member of such conference or group 
the right, upon notice of not more than 10 calendar 
days, to take independent action on any level of com-
pensation paid to an ocean freight forwarder who is 
also a customs broker, and 
"(B) agree to limit the payment of compensation to 
an ocean freight forwarder who is also a customs 
broker to less than 1.25 percent of the aggregate of all 
rates and charges applicable under the tariff assessed 
against the cai^o on which the forwarding services are 
provided. 
"(2) ADMINISTRATION.—The provisions of this subsection shall 
be enforced by the agency responsible for administration of the 
Shipping Act of 1984 (46 U.S.C. 1701, et seq.). 
"(3) REMEDIES.—Any person injured by reason of a violation of 
paragraph (1) may, in addition to any other remedy, file a 
complaint for reparation as provided in section 11 of the Ship-
ping Act of 1984 (46 U.S.C. 1710), which may be enforced 
pursuant to section 14 of such Act (46 U.S.C. 1713). 
"(4) DEFINITIONS.—For purposes of this subsection, the terms 
'conference', 'ocean common carrier', and 'ocean freight for-
warder' have the respective meaning given to such terms by 
section 3 of the Shipping Act of 1984 (46 U.S.C. 1702)." 
SEC. 1889. AMENDMENTS TO THE TRADE AND TARIFF ACT OF 1984. 
The Trade and Tariff Act of 1984 (Public Law 98-573) is amended 
as follows: 
(1) Section 126 is amended by striking out the following: 
"(3) Paragraphs (1) and (2) of section 126 of the bill are amended to 
read as follows:". 
(2) Section 174(b) is amended by adding at the end of the table 
appearing therein the following: 
"January 1, 1987 
4.9% ad val.". 
(3) Paragraph (7) of subsection (b) of section 212 is redesig-
nated as subsection (c) of that section. 
100 STAT. 2926 
PUBLIC LAW 99-514—OCT. 22, 1986 
(4) The table in section 234(a) is amended by striking out 
"711.49" and inserting in lieu thereof "712.49". 
(5) Paragraph (3) of section 307(b) is amended by striking out 
"or paragraph (3)". 
(6) Paragraph (4) of section 404(e) is amended by striking out 
"147.44" and inserting in lieu thereof "147.33". 
(7) Section 504 is amended by striking out "Tariff Act of 1930" 
and inserting in lieu thereof "Trade Act of 1974". 
(8) Paragraph (3) of section 619 is amended by striking out 
"subsection Ot>)" and inserting in lieu thereof "subsection ft)Xl)". 
SEC. 1890. AMENDMENTS TO THE CARIBBEAN BASIN ECONOMIC RECOV-
ERY ACT. 
Section 213 of the Caribbean Basin Economic Recovery Act (19 
U.S.C. 2703) is amended— 
(1) by amending paragraph (3) of subsection (a) (as added by 
section 235 of the Trade and Tariff Act of 1984)— 
(A) by redesignating that paragraph as pareigraph (4), and 
aligning its margin with that of paragraph (3), and 
(B) by striking out "such" the first time it appears 
therein and inserting in lieu thereof "any beneficiary"; and 
(2) by striking out "138.42" in subsection (fK5XB) and inserting 
in lieu thereof "138.46". 
SEC. 1891. CONFORMING AMENDMENTS REGARDING CUSTOMS BROKERS. 
Title 28 of the United States Code is amended— 
(1) by striking out "(3) or (c)" in section 1581(gXl) and insert-
ing in lieu thereof "(3)"; and 
(2) by striking out "641(aXlXC)" in section 1582(1) and insert-
ing in lieu thereof "641(bX6)". 
SEC. 1892. SPECIAL EFFECTIVE DATE PROVISIONS FOR CERTAIN ARTI-
CLES GIVEN DUTY-FREE TREATMENT UNDER THE TRADE 
AND TARIFF ACT OF 1984. 
(a) IN GENERAL.—Notwithstanding section 514 of the Tariff Act of 
1930 or any other provision of law, upon proper request filed with 
the appropriate customs officer on or before the date that is 90 days 
after the date of ^nactment of this Act, any entry— 
(1) which [was made after the applicable date and before 
November 14,1984, and 
(2) with resjiect to which there would have been no duty or a 
lesser duty by reason of any amendment made by section 112, 
115, 118, 167, or 179 of the Trade and Tariff Act of 1984 if such 
entry were made on November 14,1984, 
shall be liquidated or reliquidated as though such entry had been 
made on November 14,1984. 
O
t
)
) APPUCABLE DATE.—For purposes of this section— 
(1) The term "applicable date" means— 
(A) with respect to any entry for which the amendment 
described in subsection (aX2) is any amendment made by 
section 118 of the Trade and Tariff Act of 1984, June 1, 
1982; 
(B) with respect to any entry for which the amendment 
described in subsection (aX2) is any amendment made by 
section 112, 115, or 179 of the Trade and Tariff Act of 1984, 
June 30,1983; and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2927 
(C) with respect to any entry for which the amendment 
described in subsection (aX2) is the amendment made by 
section 167 of the Trade and Tariff Act of 1984, October 30, 
1983. 
(2) The term 
"entry" includes any withdrawal 
from 
warehouse. 
SEC. 1893. TECHNICAL AMENDMENTS RELATING TO CUSTOMS USER FEES. 
(a) SCHEDULE OF FEES.— 
(1) Subsection (a) of section 13031 of the Consolidated Omni-
bus Budget Reconciliation Act of 1985 (19 U.S.C. 58c(a)) is 
amended— 
(A) by striking out "Subject to the limitation in subsec-
tion (b)(2), for" in paragraph (2) and inserting in lieu thereof 
"For", 
(B) by adding at the end thereof the following new 
paragraph: 
"(8) For the arrival of a barge or other bulk carrier from 
Canada or Mexico, $100." 
(2) Paragraph (3) of section 13031(a) of the Consolidated Omni-
bus Budget Reconciliation Act of 1985 (19 U.S.C. 58c(aX3)) is 
amended to read as follows: 
"(3) For the arrival of each railroad car carrjdng passengers 
or commercial freight, $7.50." 
(b) LIMITATIONS ON FEES.— 
(1) Subsection (b) of section 13031 of the Consolidated Omni-
bus Budget Reconciliation Act of 1985 (19 U.S.C. 58c(b)) is 
amended by adding at the end thereof the following new 
paragraphs: 
"(4) No fee may be charged under subsection (aX5) with 
respect to the arrival of any passenger— 
"(A) who is in transit to a destination outside the customs 
territory of the United States, and 
"(B) for whom customs inspectional services are not 
provided. 
"(5) No fee may be charged under subsection (aXD for the 
arrival of— 
"(A) a vessel during a calendar year gifter a total of $5,955 
in fees charged under pargigraph (1) or (8) of subsection (a) 
has been paid to the Secretary of the Treasury for the 
provision of customs services for all arrivals of such vessel 
during such calendar year, 
"(B) any vessel which, at the time of the arrival, is being 
used solely as a tugboat, or 
"(C) any barge or other bulk carrier from Canada or 
Mexico. 
"(6) No fee may be chained under subsection (aX8) for the 
arrival of a barge or other bulk carrier during a calendar year 
after a total of ^1,500 in fees charged under paragraph (1) or (8) 
of subsection (a) has been paid to the Secretary of the Treasury 
for the provision of customs services for all arrivals of such 
barge or other bulk carrier during such calendar year. 
"(7) No fee may be charged under paragraphs (2), (3), or (4) of 
subsection (a) for the arrival of any— 
"(A) commercial truck, 
"(B) railroad car, or 
"(C) private vessel. 
100 STAT. 2928 
PUBLIC LAW 99-514—OCT. 22, 1986 
that is being transported, at the time of the arrival, by any 
vessel that is not a ferry." 
(2) Subparagraph (A) of section 13031(b)(1) of the Consolidated 
Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 
58c(b)(l)(A)) is amended to read as follows: 
"(A) the arrival of any passenger whose journey— 
"(i) originated in— 
"(I) Canada, 
"(II) Mexico, 
"(III) a territory or possession of the United 
States, or 
"(IV) any adjacent island (within the meaning of 
section 1010t))(5) of the Immigration and National-
ity Act (8 U.S.C. 11010))(5)), or 
"(ii) originated in the United States and was limited 
to— 
"(I) Canada, 
"(II) Mexico, 
"(III) territories and possessions of the United 
States, and 
"(IV) such adjacent islands;". 
(3) Paragraph (1) of section 130310t)) of the Consolidated Omni-
bus Budget Reconciliation Act of 1985 (19 U.S.C. 58cOt)Xl)) is 
amended— 
(A) by striking out the period at the end of subparagraph 
(B) and inserting in lieu thereof "; or ", and 
(B) by adding at the end thereof the following new 
subparagraph: 
"(C) the arrival of any ferry." 
(4) Subsection (c) of section 13031 of the Consolidated Omnibus 
Budget Reconciliation Act of 1985 (19 U.S.C. 58c(c)) is 
amended— 
(A) by amending paragraph (1) to read as follows: 
"(1) The term 'ferry' means any vessel which is being used— 
"(A) to provide transportation only between places that 
are no more than 300 miles apart, and 
"(B) to transport only— 
"(i) passengers, or 
"(ii) vehicles, or railroad cars, which are being used, 
or have been used, in transporting passengers or 
goods.", and 
(B) by adding at the end thereof the following new 
paragraph: 
"(5) The term 'barge or other bulk carrier' means any vessel 
which— 
"(A) is not self-propelled, or 
"(B) transports fungible goods that are not packaged in 
any form." 
(c) SPECIAL PROVISIONS RELATING TO CUSTOMS BROKER PERMITS.— 
(1) Subsection (d) of section 13031 of the Consolidated Omni-
bus Budget Reconciliation Act of 1985 (19 U.S.C. 58c(d)) is 
amended by adding at the end thereof the following new 
paragraph: 
"(4XA) Notice of the date on which payment of the fee 
imposed by subsection (a)(7) is due shall be published by the 
Secretary of the Treasury in the Federal Register by no later 
than the date that is 60 days before such due date. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2929 
"(B) A customs broker permit may be revoked or suspended 
for nonpayment of the fee imposed by subsection (a)(7) only if 
notice of the date on which payment of 
J such fee is due was 
published in the Federal Register at least 60 days before such 
due date. 
"(C) The customs broker's license issued under section 641(b) 
of the Tariff Act of 1930 (19 U.S.C. 16410b)) may not be revoked 
or suspended merely by reeison of nonpayment of the fee 
imposed under subsection (a)(7)." 
(2) Notwithstanding section 13031(a)(7) of the Consolidated 
Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 58c(a)(7)), 
the fee imposed by section 13031(a) of such Act with respect to 
each customs broker permit held by an individual, partnership, 
association, or corporate customs broker for calendar year 1986 
is $62.50. 
(3)(A) The Secretary of the Treasury shall reinstate any cus-
toms broker's license or customs broker permit issued under 
subsection (b) or (c) of section 641 of the Tariff Act of 1930 (19 
U.S.C. 1641) that was suspended or revoked on or before the 
date of enactment of this Act solely by reason of nonpayment of 
the fee imposed by section 13031(a)(7) of the (Donsolidated Omni-
bus Budget Reconciliation Act of 1985. 
(B) Notwithstanding any other provision of law, the Secretary 
of the Treasury may not suspend or revoke any customs broker 
permit issued under section 641(c) of the Tariff Act of 1930 (19 
U.S.C. 1641(c)) solely by reason of nonpayment of the fee 
imposed by section 13031(a)(7) of the Consolidated Omnibus 
Budget Reconciliation Act of 1985 before the date that is 60 days 
after the date of enactment of this Act. 
(d) PROVISION OF FOREIGN PRE-CLEARANCE SERVICES.— 
(1) Paragraph (1) of section 13031(e) of the Consolidated Omni-
bus Budget Reconciliation Act of 1985 (19 U.S.C. 58c(e)(l)) is 
amended to read as follows: 
"(1) Notwithstanding section 451 of the Tariff Act of 1930 (19 
U.S.C. 1451) or any other provision of law (other than paragraph 
(2)), the customs services required to be provided to passengers 
upon arrival in the United States shall be adequately provided 
in connection with scheduled airline flights at customs serviced 
airports when needed and at no cost (other than the fees 
imposed 
under 
subsection 
(a)) to 
airlines 
and 
airline 
passengers." 
(2) Subsection (e) of section 13031 of such Act is amended by— 
(A) striking out "This subsection" in paragraph (2) and 
inserting in lieu thereof "Paragraph (1)", and 
(B) by adding at the end thereof the following new 
paragraph: 
"(3) Notwithstanding section 451 of the Tariff Act of 1930 (19 
U.S.C. 1451) or any other provision of law— 
"(A) the customs services required to be provided to 
passengers upon arrival in the United States shall be ade-
quately provided in connection with scheduled airline 
flights when needed at places located outside the customs 
territory of the United States at which a customs officer is 
stationed for the purpose of providing such customs serv-
ices, and 
"(B) other than the fees imposed under subsection (a), the 
airlines and airline passengers shall not be required to 
100 STAT. 2930 
PUBLIC LAW 99-514—OCT. 22, 1986 
reimburse the Secretary of the Treasury for the costs of 
providing overtime customs inspectional services at such 
places." 
(e) REGULATIONS ON REMITTANCE OF FEES.—Subsection (g) of sec-
tion 13031 of the Consolidated Omnibus Budget Reconciliation Act 
of 1985 (19 U.S.C. 58c(g)) is amended by adding at the end thereof the 
following new sentence: "Regulations issued by the Secretary of the 
Treasury under this subsection with respect to the collection of the 
fees charged under subsection (aX5) and the remittance of such fees 
to the Treasury of the United States shall be consistent with the 
regulations issued by the Secretary of the Treasury for the collection 
and remittance of the taxes imposed by subchapter C of chapter 33 
of the Internal Revenue Code of 1954, but only to the extent the 
regulations issued with respect to such taxes do not conflict with the 
provisions of this section." 
(f) REINSTATING LIMIT ON CHARGES FOR OTHER INSPECTION SERV-
ICES.—Section 53 of the Airport and Airway Development Act of 
1970 (49 U.S.C. 1741), as amended by section 13031(hX2) of the 
Consolidated Omnibus Budget Reconciliation Act of 1985, is further 
amended by adding at the end thereof the following new subsection: 
"(eXD The cost of any inspection or quarantine service which is 
required to be performed by the Federal (government or any agency 
thereof at airports of entry or other places of inspection as a 
consequence of the operation of aircraft, and which is performed 
during regularly established hours of service on Sundays or holidays 
shall be reimbursed by the owners or operators of such aircraft only 
to the same extent as if such service had been performed during 
regularly 
established 
hours 
of 
service 
on 
weekdays. 
Not-
withstanding any other provision of law, administrative overhead 
costs associated with any inspection or quarantine service required 
to be performed by the United States Government, or any agency 
thereof, at airports of entry as a result of the operation of aircraft, 
shall not be assessed against the owners or operators thereof. 
"(2) Nothing in this subsection may be construed as requiring 
reimbursement for costs incurred by the Secretary of the Treasury 
in providing customs services described in section 13031(eXl) of the 
Consolidated Omnibus Budget Reconciliation Act of 1985." 
(g) EFFECTIVE DATE; REFUNDS.— 
(1) The amendments made by this section shall apply with 
respect to services rendered after the date that is 15 days after 
the date of enactment of this Act. 
(2) Upon written request filed by any person with the Sec-
retary of the Treasury (hereafter in this subsection referred to 
as the "Secretary") before the date that is 90 days after the date 
of enactment of this Act which is accompanied by such docu-
mentation establishing proof of payment as the Secretary may 
require, the Secretary shall refund (out of funds in the Treasury 
of the United States not otherwise appropriated) to such person 
an amount equal to the excess of— 
(A) the amount of fees imposed by section 13031 of the 
Consolidated Omnibus Budget Reconciliation Act of 1985 
that were paid by such person to the Secretary with respect 
to customs services provided— 
(i) after July 6,1986, and 
(ii) on or before the date that is 15 days after the date 
of enactment of this Act, over 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2931 
(B) the amount of fees such person would have been 
required to pay to the Secretary by reason of such section 
with respect to such services if the amendments made by 
subsections (a)(1) and (b) applied with respect to such serv-
ices. 
(3) If the customs broker permit fee paid by any person for 
calendar year 1986 under section 13031(a)(7) of the Consolidated 
Omnibus Budget Reconciliation Act of 1985 exceeds $62.50, the 
Secretary shall either— 
(A) refund (out of funds in the Treasury of the United 
States not otherwise appropriated) to such person the 
amount of the excess, or 
(B) if requested by such person, credit the amount of the 
excess to the fee due under such section 13031(aX7) with 
respect to such permit for calendar year 1987. 
SEC. 1894. FOREIGN TRADE ZONES. 
Section 3 of the Act of June 18, 1934 (48 Stat. 999, chapter 590; 19 
U.S.C. 81c) is amended by adding at the end thereof the following 
new subsection: 
"(c) Notwithstanding the provisions of the fifth proviso of subsec-
tion (a), any article (within the meaning of section 5002(a)(14) of the 
Internal Revenue Code of 1986) may be manufactured or produced 
from domestic denatured distilled spirits, and articles thereof, in a 
zone." 
Subtitle C—Miscellaneous 
CHAPTER 1~AMENDMENTS RELATED TO THE CONSOLI-
DATED OMNIBUS BUDGET RECONCILIATION ACT OF 1985 
SEC. 1895. COBRA TECHNICAL CORRECTIONS RELATING TO SOCIAL SECU-
RITY ACT PROGRAMS. 
(a) 
AMENDMENT RELATING TO THE O A S D I PROGRAM.—Section 
12108(b) of the Consolidated Omnibus Budget Reconciliation Act of 
1985 is amended by striking out "1985" and inserting in lieu thereof 
"1986". 
(b) AMENDMENTS RELATING TO THE MEDICARE PROGRAM.— 
(1) INDIRECT MEDICAL EDUCATION.—(A) Parsigraph (2XCXi) of 
subsection (d) of section 1886 of the Social Security Act (42 
U.S.C. 1395ww) is amended by striking out "(taking into 
account, for discharges occurring after September 30, 1986, the 
amendments made by section 9104(a) of the Medicare and 
Medicaid Budget Reconciliation Amendments of 1985)". 
(B) Paragraph (3)(A) of such subsection is amended by adding 
at the end the following: "If the formula under paragraph (5)(B) 
for determining payments for the indirect costs of medical 
education is changed for any fiscal year, the Secretary shall 
readjust the standardized amounts previously determined for 
each hospital to take into account the changes in that 
formula.". 
(C) Clause (ii) of paragraph (3)(C) of such subsection is 
amended to read as follows: 
100 STAT. 2932 
PUBLIC LAW 99-514—OCT. 22, 1986 
"(ii) REDUCING FOR SAVINGS FROM AMENDMENT TO INDIRECT 
TEACHING ADJUSTMENT FOR DISCHARGES AFTER SEPTEMBER 30, 
1986.—The Secretary shall further reduce each of the average 
standardized amounts by a proportion equal to the proportion 
(estimated by the Secretary) of the amount of payments under 
this subsection based on DRG prospective payment amounts 
which is the difference between— 
"(I) the sum of the additional payment amounts under 
paragraph (5)(B) (relating to indirect costs of medical edu-
cation) if the indirect teaching adjustment factor were 
equal to 1.159r (as *r' is defined in paragraph (5XB)(ii)), and 
"(11) that sum using the factor specified in paragraph 
(5)(BXii)(II).". 
(DXi) Except as provided in clause (ii), the amendments made 
by this paragraph apply to discharges occurring on or after 
October 1,1986. 
(ii) The amendments made by this paragraph shall not be first 
applied to discharges occurring as of a date unless, for dis-
charges occurring on that date, the amendments made by sec-
tion 9105(a) of the Consolidated Omnibus Budget Reconciliation 
Act of 1985 (incorporating the amendments made by paragraph 
(2) of this subsection) are also being applied. 
(2) DISPROPORTIONATE SHARE.—(A) Paragraph (2)(C) of subsec-
tion (d) of section 1886 of the Social Security Act (42 U.S.C. 
1395ww), as amended by section 9105(b) of the (Consolidated 
Omnibus Budget Reconciliation Act of 1985 (in this section 
referred to as "COBRA") is amended— 
(i) by adding "and" at the end of clause (ii), 
(ii) by striking out ", and" at the end of clause (iii) and 
inserting in lieu thereof a period, and 
(iii) by striking out clause (iv). 
(B) Paragraph (3XC) of such subsection is amended by adding 
at the end the following: 
"(iii) REDUCING FOR DISPROPORTIONATE SHARE PAYMENTS.—The 
Secretary shall further reduce each of the average standardized 
amounts by reducing the standardized amount for each hospital 
(as previously determined without regard to this clause) by a 
proportion equal to the proportion (established by the Sec-
retary) of the amount of payments under this subsection based 
on DRG prospective payment amounts which are additional 
pajmients described in paragraph (5)(F) (relating to dispropor-
tionate share payments) for subsection (d) hospitals.". 
(C) Paragraph (5)(FXvi)(I) of such subsection is amended— 
(i) by striking out "supplementary" and inserting in lieu 
thereof "supplemental", and 
(ii) by striking out "fiscal year" and inserting in lieu 
thereof "period". 
(D) The amendments made by subparagraph (C) apply to 
discharges occurring on or after May 1, 1986, and the amend-
ments made by subparagraphs (A) and (B) apply to discharges 
occurring on or after October 1,1986. 
(3) AuGNMENT CORRECTION.—Subparagraph (B) of section 
1886(gX2) of the Social Security Act (as added by section 
9107(aXlXC) of the (Donsolidated Omnibus Budget Reconciliation 
Act of 1985) is amended by moving its alignment (and the 
alignment of each of its clauses) two additional ems to the left. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2933 
(4) EMERGENCY CARE REQUIREMENT.—Section 1867(e)(3) of the 
Social Security Act (42 U.S.C. 1395dd(e)(3)), as inserted by sec-
tion 9121(b) of COBRA, is amended by striking out "and has, 
under the agreement, obligated itself to comply with the 
requirements of this section". 
(5) REDESIGNATING OVERLAPPING PROVISIONS.—Paragraph (1) 
of section 1866(a) of the Social Security Act (42 U.S.C. 1395cc(a)) 
is amended— 
(A) by striking out "and" inserted at the end of subpara-
graph (I) by section 9122(a)(2) of COBRA, 
(B) by striking out the period at the end of subparagraph 
(J) and inserting in lieu thereof ", and", and 
(C) by redesignating the subparagraph (I) inserted by 
section 9403(b) of COBRA as subparagraph (K) and transfer-
ring and inserting such subparagraph after subparagraph 
(J). 
(6) CHAMPUS.—Section 91220?) of COBRA is amended by 
striking out "to agreements entered into or renewed on or after 
the date of the enactment of this Act, but shall apply only". 
(7) 
SKILLED 
NURSING 
FACIUTY 
PAYMENTS.—(A) 
Section 
1888(d)(1) of the Social Security Act (42 U.S.C. 1395yy(d)(l)), as 
added by section 9126(a) of COBRA, is amended by striking out 
"fiscal year" each place it appears and inserting in lieu thereof 
"cost reporting period". 
(B) Section 1888(d)(4) of the Social Security Act is amended— 
(i) in the first sentence, by striking out "each fiscal year" 
and inserting in lieu thereof "cost reporting periods begin-
ning in a fiscal year", and 
(ii) in the second sentence, by striking out "fiscal year" 
and all that follows up to the period and inserting in lieu 
thereof "cost reporting period no later than 30 days before 
the beginning of that period". 
(C) Section 9126(d)(1) of COBRA is amended by striking out 
"fiscal years" and inserting in lieu thereof "cost reporting 
periods . 
(D) The amendments made by subparagraphs (A) and (B) 
apply to cost reporting periods beginning on or after October 1, 
1986. 
(8) PROP 
AC—Section 91270)) of COBRA is amended by insert-
ing ", except that the Director may provide initially for such 
terms £is will insure that (on a continuing basis) the terms of no 
more than eight members will expire in any one year" after 
"years". 
(9) DIRECT MEDICAL EDUCATION.—Section 1886(h) of the Social 
Security Act (42 U.S.C. 1395ww(h)), added by 9202(a) of COBRA, 
is amended— 
(A) in paragraph (2)(C), by striking out "paragraph (B)" 
and inserting in lieu thereof "subparagraph (B)", 
(B) in the matter preceding subclause (I) of paragraph 
(4)(E)(ii), by inserting "but before July 1, 1987," after 
"1986,", 
(C) by redesignating subparagraph (E) of paragraph (4) as 
subparagraph (D), and 
(D) in paragraph (5)(B), by striking out "As used in this 
paragraph, the" and inserting in lieu thereof "The". 
(10) CITATION CORRECTION.—Section 9202(j) of COBRA is 
amended by inserting "or section 402 of the Social Security 
71-19A 0 - 89 - 37 : QL. 3 Part3 
100 STAT. 2934 
PUBLIC LAW 99-514—OCT. 22, 1986 
Amendments of 1967" after "section 1886(c) of the Social Secu-
rity Act". 
(11) 
HMO/CMP 
RATES.—(A) The matter 
in 
section 
1876(aXlXA) 
of the 
Social 
Security 
Act (42 U.S.C. 
1395mm(aXlXA)) preceding clause (i), as amended by section 
9211(d) of COBRA, is amended by striking out "publish" and 
inserting in lieu thereof "announce (in a manner intended to 
provide notice to interested parties)". 
(B) The amendment made by subparagraph (A) shall apply to 
determinations of per capita pajnnent rates for 1987 and subse-
quent years. 
(12) INDENTATION.—Section 1837(iXl) of the Social Security 
Act (42 U.S.C. 1395p(iXl)), as amended by section 9219(aX2XA) of 
COBRA, is amended by moving the alignment of subparagraph 
(A) two additional ems to the left so as to align its left margin 
with the left margins of subparagraphs (B) and (C) of such 
section. 
(13) ACCESS DEMONSTRATION PROJECT.—Section 9221(a) of 
COBRA is amended by striking out "September 30, 1986" and 
inserting in lieu thereof "July 31,1987". 
(14) PHYSICIAN PAYMENT.—(A) Section 1842(bX4XC) of the 
Social Security Act (42 U.S.C. 1395u(bX4XC)), as amended by 
section 9301(bXlXC) of COBRA, is amended— 
(i) by striking out clause (ii), and 
(ii) by striking out "(i)" in clause (i). 
(B) Section 9301(cX5) of COBRA is amended by striking out 
"18420t)X7)" and insertmg in lieu thereof "1842(hX7)". 
(15) REDUNDANT WORDS.—Section 1842(h) of the Social Secu-
rity Act (42 U.S.C. 1395u(h)), as amended by section 9301(c) of 
COBRA, is amended— 
(A) in paragraph (5), as redesignated by section 
9301(cX3XD) of COBRA, by striking out "such" each place it 
appears, and 
(B) in paragraph (6); as so redesignated, by striking out 
"the the" and inserting in lieu thereof "the". 
(16) ASSISTANTS AT SURGERY.—(A) Section 1842(k) of the Social 
Security Act (42 U.S.C. 1395u(k)), added by section 9307(c) of 
COBRA, is amended by inserting "presents or causes to be 
presented a claim or" after "willfully" each place it appears. 
(B) The amendment made by subparagraph (A) shall apply to 
claims presented after the date of the enactment of this Act. 
(C) For purposes of section 1862(aX15) of the Social Security 
Act (42 U.S.C. 1395y(aX15)), added by section 9307(aX3) of 
COBRA, and for surgical procedures performed during the 
period beginning on April 1, 1986, and ending on December 15, 
1986, a carrier is deemed to have approved the use of an 
assistant in a surgical procedure, before the surgery is per-
formed, based on the existence of a complicating medical condi-
tion if the carrier determines after the surgery is performed 
that the use of the assistant in the procedure was appropriate 
based on the existence of a complicating medical condition 
before or during the surgery. 
(17) QTATION.-Section 1164(bX4XB) of the Social Security Act 
(42 U.S.C. 1320c-13a)X4XB)), as added by section 9401(b) of 
COBRA, is amended by striking out "paragraphs" and inserting 
in lieu thereof "subparagraphs '. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2935 
(18) MEDICARE TAX ON STATE AND LOCAL EMPLOYEES.—(A) Sec-
tion 3121(u)(2)(B)(ii) of the Internal Revenue Code of 1954, as 
added by section 13205(a)(1) of COBRA, is amended— 
(i) by striking out "or" at the end of subclause (III), 
(ii) by striking out the period at the end of subclause (IV) 
and inserting in lieu thereof ", or", and 
(iii) by adding at the end the following: 
"(V) by an election official or election worker if 
the remuneration paid in a calendar year for such 
service is less than $100." 
(B) Section 210(p)(2) of the Social Security Act (42 U.S.C. 
410(p)(2)), as added by section 13205(b)(1) of COBRA, is 
amended— 
(i) by striking out "or" at the end of subparagraph (C), 
(ii) by striking out the period at the end of subparagraph 
(D) and inserting in lieu thereof ", or", and 
(iii) by adding at the end the following: 
"(E) by an election official or election worker if the remunera-
tion paid in a calendar year for such service is less than $100." 
(C) The amendments made by this paragraph shall apply to 
services performed after March 31,1986. 
(19) PUNCTUATION.—Section 210(p)(4XB) of the Social Security 
Act (42 U.S.C. 410(p)(4)(B)), as amended by section 13205(b)(1) of 
COBRA, is amended by striking out any quotation marks that 
appear before "(A)". 
(c) AMENDMENTS RELATING TO THE MEDICAID PROGRAM.— 
(1) EXTRA WORD.—Section 1902(aX13XD) of the Social Security 
Act 
(42 U.S.C. 
1396a(aX13XD)), as 
inserted 
by 
section 
9505(cXlXC) of COBRA and as amended and redesignated by 
paragraphs (2) and (3) of section 9509(a) of COBRA, is amended 
by adding "and" at the end. 
(2) CAPITAUZATION.—Section 1903(m)(2XF) of the Social Secu-
rity Act (42 U.S.C. 1396b(mX2XF)), as amended by section 
9517(a)(2)(A) of COBRA, is amended by striking out "in the 
case" and inserting in lieu thereof "In the case". 
(3) CASE-MANAGEMENT SERVICES.—(A) Section 1905(a) of the 
Social Security Act (42 U.S.C. 1395d(a)) is amended— 
(i) by striking out "and" at the end of paragraph (18), 
(ii) by redesignating paragraph (19) as paragraph (20), and 
(iii) by inserting after paragraph (18) the following new 
paragraph: 
"(19) case-management 
services (as defined 
in 
section 
1915(gX2)); and". 
(B) Section 1902(j) of the Social Security Act (42 U.S.C. 
1396ag*)), as amended by section 9505(dXl) of COBRA, is 
amended by striking out "(19)" and inserting in lieu thereof 
"(20)". 
(C) Section 1902(aX10XCXiv) of the Social Security Act (42 
U.S.C. 1396a(aX10)(CXiv)), as amended by section 9505(dX2) of 
COBRA, is amended by striking out "through (18)" and insert-
ing in lieu thereof "through (19) . 
(4) HEALTH INSURING ORGANIZATIONS.—Section 9517(cX2) of 
COBRA is amended— 
(A) in subparagraph (A), by adding at the end the follow-
ing: "For purposes of this paragraph, a health insuring 
organization is not considered to be operational until the 
date on which it first enrolls patients."; 
100 STAT. 2936 
PUBLIC LAW 99-514—OCT. 22, 1986 
(B) in subparagraph (B), by striking out "(iv)" and insert-
ing in lieu thereof "(vi)"; and 
(C) by adding at the end the following new subparagraph: 
"(C) In the case of the Hartford Health Network, Inc., clauses (ii) 
and (vi) of section 1903(mK2XA) of the Social Security Act shall not 
apply during the period for which a waiver by the Secretary of 
Health and Human Services, under section 1915(b) of such Act, of 
certain requirements of section 1902 of such Act is in effect (pursu-
ant to a request for a waiver under section 19150?) of such Act 
submitted before January 1,1986)." 
(5) REFERENCES TO OTHER PROVISIONS.—Section 1920(a) of 
the 
Social Security Act (42 U.S.C. 1396s(a)), as added by section 9526 
of COBRA, is amended— 
(A) in paragraph (1)— 
(i) by redesignating subparagraphs (B) and (C) sis 
subparagraphs (C) and (D), respectively, and 
(ii) by inserting after "—(A)" the following: "Section 
402(aX32) of this Act (relating to individuals who are 
deemed recipients of aid but for whom a payment is not 
made). 
(B) in paragraph (2)— 
(i) by inserting "(A)" after the dash, and 
(ii) by adding at the end the following new subpara-
graph: 
"(B) Section 1634(b) of this Act (relating to preservation of 
benefit status for disabled widows and widowers who lost SSI 
benefits because of 1983 changes in actuarial reduction for-
mula)."; and 
(C) in paragraph (3), by striking out "Section 47306)" and 
inserting in lieu thereof ^'Sections 472(h) and 473(b)". 
(6) REFERENCE CORRECTION.—Section 9528(a) of COBRA is 
amended by striking out "1101(aX8XP)" and inserting in lieu 
thereof "1101(aX8XB)". 
(7) INDENTATION.—Section 1902(aX10XAXii)), of the Social 
Security Act (42 U.S.C. 1396a(aX10XAXii)), as amended by sec-
tions 9505a)X2) and 95290bXl) of COBRA, is amended— 
(A) by indenting subclause (VII) two additional ems so as 
to £dign its left margin with the left margins of subclauses 
(I) through (VI) of such section, and 
(B) by indenting subclause (VIII) (and each of its subdivi-
sions) four additional ems so as to align its left margin with 
the left margins of subclauses (I) through (VI) of such 
section. 
(d) AMENDMENTS RELATING TO CONTINUATION OF EMPLOYER-BASED 
HEALTH INSURANCE COVERAGE.— 
(1) EFFECT OF MODIFICATIONS TO PLAN COVERAGE PROVISIONS.— 
(A) IRC AMENDMENT.—Subparagraph (A) of section 
162(kX2) (relating to type of benefit coverage) is amended by 
adding at the end the following: "If coverage under the plan 
is modified for any group of similarly situated beneficiaries, 
the coverage shall also be modified in the same manner for 
all individuals who are qualified beneficiaries under the 
plan pursuant to this subsection in connection with such 
group.". 
(B) ERISA AMENDMENT.—Paragraph (1) of section 602 of 
the Employee Retirement Income Security Act of 1974 (29 
U.S.C. 1162(1); 100 Stat. 228) is amended by adding at the 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2937 
end the following: "If coverage is modified under the plan 
for any group of similarly situated beneficiaries, such cov-
erage shall also be modified in the same manner for all 
individuals who are qualified beneficiaries under the plan 
pursuant to this part in connection with such group." 
(C) PHSA AMENDMENT.—Paragraph (1) of section 2202 of 
the Public Health Service Act is amended by adding at the 
end the following: "If coverage is modified under the plan 
for any group of similarly situated beneficiaries, such cov-
erage shall also be modified in the same manner for all 
individuals who are qualified beneficiaries under the plan 
pursuant to this part in connection with such group." 
(2) MAXIMUM REQUIRED PERIOD OF CONTINUATION COVERAGE.— 
(A) IRC AMENDMENT.—Clause (i) of section 162(kX2XB) 
(relating to maximum period of coverage) is amended to 
read £is follows: 
"(i) MAXIMUM REQUIRED PERIOD^ 
"(I) GENERAL RULE FOR TERMINATIONS AND RE-
DUCED HOURS.—In the case of a qualifying event 
described in paragraph (3XB), except as provided in 
subclause (II), the date which is 18 months after 
the date of the qualifying event. 
"(II) 
SPECIAL RULE FOR MULTIPLE QUAUFYING 
EVENTS.—If a qualifying event occurs during the 18 
months after the date of a qualifying event de-
scribed in paragraph (3XB), the date which is 36 
months after the date of the qualifying event de-
scribed in paragraph (3)(B). 
"(Ill) GENERAL RULE FOR OTHER QUAUFYING 
EVENTS.—In the case of a qualifying event not 
described in paragraph (3XB), the date which is 36 
months after the date of the qualifying event." 
(B) ERISA AMENDMENT.—Subparagraph (A) of section 
602(2) of the Employee Retirement Income Security Act of 
1974 (29 U.S.C. 1162(2); 100 Stat. 228) is amended to read as 
follows: 
"(A) MAXIMUM REQUIRED PERIOD.— 
"(i) GENERAL RULE FOR TERMINATIONS AND REDUCED 
HOURS.—In the case of a qualifying event described in 
section 603(2), except as provided in clause (ii), the date 
which is 18 months after the date of the qualif)ring 
event. 
"(ii) 
SPECIAL 
RULE 
FOR 
MULTIPLE 
QUAUFYING 
EVENTS.—If a qualifying event occurs during the 18 
months after the date of a qualifying event described in 
section 603(2), the date which is 36 months after the 
date of the qualifying event described in section 603(2). 
"(iii) GENERAL RULE FOR OTHER QUAUFYING EVENTS.— 
In the case of a qualifying event not described in 
section 603(2), the date which is 36 months after the 
date of the qualifying event." 
(C) PHSA AMENDMENT.—Subparagraph (A) of section 
2202(2) of the Public Health Service Act is amended to read 
as follows: 
"(A) MAXIMUM REQUIRED PERIOD.— 
"(i) GENERAL RULE FOR TERMINATIONS AND REDUCED 
HOURS.—In the case of a qualif3dng event described in 
100 STAT. 2938 
PUBLIC LAW 99-514—OCT. 22, 1986 
section 2203(2), except £is provided in clause (ii), the 
date which is 18 months after the date of the qualifying 
event. 
"(ii) 
SPECIAL 
RULE 
FOR 
MULTIPLE 
QUALIFYING 
EVENTS.—If a qualifying event occurs during the 18 
months after the date of a qualifying event described in 
section 2203(2), the date which is 36 months after the 
date of the qualifying event described in section 2203(2). 
"(iii) GENERAL RULE FOR OTHER QUAUFYING EVENTS.— 
In the case of a qualifying event not described in 
section 2203(2), the date which is 36 months after the 
date of the qualifying event." 
(3) GRACE PERIOD FOR PAYMENT OF PREMIUMS.— 
(A) IRC AMENDMENT.—Clause (iii) of section 162(k)(2XB) 
(relating to failure to pay premium) is amended by adding 
at the end the following: "The payment of any premium 
(other than any payment referred to in the last sentence of 
subparagraph (C)) shall be considered to be timely if made 
within 30 days after the date due or within such longer 
period as applies to or under the plan.". 
(B) ERISA AMENDMENT.—Subparagraph (C) of section 
602(2) of the Employee Retirement Income Security Act of 
1974 (29 U.S.C. 1162(2)(C); 100 Stat. 228) is amended by 
adding at the end the following: "The payment of any 
premium (other than any payment referred to in the last 
sentence of paragraph (3)) shall be considered to be timely if 
made within 30 days after the date due or within such 
longer period as applies to or under the plan." 
(C) PHSA AMENDMENT.—Subparagraph (C) of section 
2202(2) of the Public Health Service Act is amended by 
adding at the end the following: "The payment of any 
premium (other than any payment referred to in the last 
sentence of paragraph (3)) shall be considered to be timely if 
made within 30 days after the date due or within such 
longer period as applies to or under the plan." 
(4) TERMINATION OF CONTINUATION COVERAGE UPON COVERAGE 
BY OTHER GROUP HEALTH PLAN RATHER THAN UPON REEMPLOY-
MENT OR REMARRIAGE.— 
(A) IRC AMENDMENT.—Subparagraph (B) of section 
162(kX2) (relating to period of coverage) is amended— 
(i) by striking out clause (v); and 
(ii) by striking out subclause (I) of clause (iv) and 
inserting in lieu thereof the following: 
"(I) covered under any other group health plan 
(as an employee or otherwise), or '; 
and 
(iii) by striking out the heading for clause (iv) and 
inserting in lieu thereof the following: "GROUP HEALTH 
PLAN COVERAGE OR MEDICARE ELIGIBIUTY.—". 
(B) ERISA AMENDMENT.—Section 602(2) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1162(2); 
100 Stat. 228) is amended— 
(i) by striking out subparagraph (E); 
(ii) by striking out clause (i) of subparagraph (D) and 
inserting in lieu thereof the following: 
"(i) covered under any other group health plan (as an 
employee or otherwise), or"; and 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2939 
(iii) by striking out the heading for subparagraph (D) 
and inserting in lieu thereof the following: "GROUP 
HEALTH PLAN COVERAGE OR MEDICARE EUGIBIUTY.—". 
(C) PHSA AMENDMENT.—Section 2202(2) of the Public 
Health Service Act is amended— 
(i) by striking out subparagraph (E); 
(ii) by striking out clause (i) of subparagraph (D) and 
inserting in lieu thereof the following: 
"(i) covered under any other group health plan (as an 
employee or otherwise), or"; and 
(iii) by striking out the heading for subparagraph (D) 
and inserting in lieu thereof the following: "GROUP 
HEALTH PLAN COVERAGE OR MEDICARE EUGIBILITY.—". 
(5) CLARIFICATION RELATING TO ELECTION BY BENEFICIARIES.— 
(A) IRC AMENDMENT.—Subparagraph (B) of section 
162(kX2) (relating to effect of election on other beneficiaries) 
is amended— 
(i) by inserting "of continuation coverage" after "any 
election"; and 
(ii) by adding at the end the following: "If there is a 
choice among types of coverage under the plan, each 
qualified beneficiary is entitled to make a separate 
selection among such types of coverage.". 
(B) ERISA AMENDMENT.—Section 605(2) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1165(2); 
100 Stat. 230) is amended— 
(i) by inserting "of continuation coverage" after "any 
election"; and 
(ii) by adding at the end the following: "If there is a 
choice among t5rpes of coverage under the plan, each 
qualified beneficiary is entitled to make a separate 
selection among such types of coverage.''. 
(C) PHSA AMENDMENT.—Section 2205(2) of the Public 
Health Service Act is amended— 
(i) by inserting "of continuation coverage" after "any 
election"; and 
(ii) by adding at the end the following: "If there is a 
choice among tjrpes of coverage under the plan, each 
qualified beneficiary is entitled to make a separate 
selection among such t3T)es of coverage.". 
(6) NOTICE REQUIREMENT.— 
(A) IRC AMENDMENT.—Subparagraph (C) of section 
162(k)(6) (relating to notice requirements) is amended by 
inserting "within 60 days after the date of the qualifying 
event" after "paragraph (3)". 
(B) ERISA AMENDMENT.—Paragraph (3) of section 606 of 
the Employee Retirement Income Security Act of 1974 (29 
U.S.C. 1166(3); 100 Stat. 230) is amended by inserting 
"within 60 days after the date of the qualifying event" after 
"section 603". 
(C) PHSA AMENDMENT.—Paragraph (3) of section 2206 of 
the Public Health Service Act is amended by inserting 
"within 60 days after the date of the qualifying event" after 
"section 603". 
(D) EFFECTIVE DATE.—The amendments made by this 
paragraph shall only apply with respect to qualifying 
events occurring after the date of the enactment of this Act. 
100 STAT. 2940 
PUBLIC LAW 99-514—OCT. 22, 1986 
(7) 
NONRESIDENT AUENS.—Subparagraph 
(B) 
of 
section 
162(k)(7) (relating to qualified beneficiaries) is amended by 
adding at the end thereof the following new clause: 
"(iii) EXCEPTION FOR NONRESIDENT AUENS.—Notwith-
standing clauses (i) and (ii), the term 'qualified bene-
ficiary' does not include an individual whose status as a 
•3^ 
' 
covered employee is attributable to a period in which 
such individual was a nonresident alien who received 
fts -J' 
no earned income (within the meaning of section 
911(d)(2)) from the employer which constituted income 
from sources within the United States (within the 
meaning of section 861(a)(3)). If an individual is not a 
qualified beneficiary pursuant to the previous sentence, 
a spouse or dependent child of such individual shall not 
be considered a qualified beneficiary by virtue of the 
relationship to the individual.". 
(8) DEFINITION OF GROUP HEALTH PLAN FOR ERISA.—Para-
graph (1) of section 607 of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1167(1); 100 Stat. 231) is amended 
to read as follows: 
"(1) GROUP HEALTH PLAN.—The term 'group health plan' 
means an employee welfare benefit plan providing medical care 
(as defined in section 213(d) of the Internal Revenue Code of 
1954) to participants or beneficiaries directly or through insur-
ance, reimbursement, or otherwise.". 
(9) AGGREGATION RULES FOR EMPLOYER FOR ERISA.— 
(A) IN GENERAL.—Section 607 of the Employee Retire-
ment Income Security Act of 1974 (29 U.S.C. 1167; 100 Stat. 
231) is amended by adding at the end the following new 
paragraph: 
"(4) EMPLOYER.—Subsection (n) (relating to leased employees) 
and subsection (t) (relating to application of controlled group 
rules to certain employee benefits) of section 414 of the Internal 
Revenue Code of 1986 shall apply for purposes of this part in the 
same manner and to the same extent as such subsections apply 
for purposes of section 106 of such Code. Any regulations pre-
scribed by the Secretary pursuant to the preceding sentence 
shall be consistent and coextensive with any regulations pre-
scribed for similar purposes by the Secretary of the Treasury (or 
such Secretary's delegate) under such subsections.". 
(B) EFFECTIVE DATE.—The amendment made by subpara-
graph (A) shall take effect in the same manner and to the 
same extent as the amendments made by subsections (e) 
and (i) of section 1151 of this Act. 
(e) EFFECTIVE DATE.—Except as otherwise provided in this section, 
the amendments made by this section shall be effective as if in-
cluded in the enactment of the Consolidated Omnibus Budget Rec-
onciliation Act of 1985. 
SEC. 1896. EXTENSION OF TIME FOR FILING FOR CREDIT OR REFUND 
WITH RESPECT TO CERTAIN CHANGES INVOLVING INSOL-
VENT FARMERS. 
Section 13208 of the Consolidated Omnibus Budget Reconciliation 
Act of 1985 (relating to certain insolvent taxpayers allowed to 
reduce capital gains preference item for purposes of the individual 
minimum tax) is amended by adding at the end thereof the following 
new subsection: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2941 
"(c) STATUTE OF LIMITATIONS.—If refund or credit of any overpay-
ment of tax resulting from the application of the amendment made 
by subsection (a) is prevented at any time before the close of the date 
which is 1 year after the date of the enactment of this Act, by the 
operation of any law or rule of law (including res judicata), refund or 
credit of such overpayment (to the extent attributable to the applica-
tion of such amendment) may, nevertheless, be made or allowed if 
claim therefor is filed on or before the close of such 1-year period." 
SEC. 1897. CORRECTION OF CLERICAL ERROR IN AMENDMENTS TO COAL 
TAX. 
(a) IN GENERAL.—Subsection (b) of section 4121 (relating to excise 
tax on coal) is amended by striking out ", in the case of sales during 
any calendar year beginning after December 31,1985". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall take effect as if included in the amendment made by section 
13203 of the Consolidated Omnibus Budget Reconciliation Act of 
1985. 
CHAPTER 2—AMENDMENTS RELATED TO THE RETIREMENT 
EQUITY ACT OF 1984 
SEC. 1898. TECHNICAL CORRECTIONS TO THE RETIREMENT EQUITY ACT 
OF 1984. 
(a) AMENDMENTS RELATED TO SECTIONS 102 AND 202 OF THE ACT.— 
(1) TREATMENT OF CLASS-YEAR PLANS.— 
(A) AMENDMENT OF INTERNAL REVENUE CODE.—Paragraph 
(4) of section 411(d) (relating to class-year plans) is amended 
to read as follows: 
"(4) CLASS-YEAR PLANS.— 
"(A) IN GENERAL.—The requirements of subsection (a)(2) 
shall be treated as satisfied in the case of a class-year plan 
if such plan provides that 100 percent of each employee's 
right to or derived from the contributions of the employer 
on the employee's behalf with respect to any plan year is 
nonforfeitable not later than when such participant was 
performing services for the employer as of the close of each 
of 5 plan years (whether or not consecutive) after the plan 
year for which the contributions were made. 
"(B) 5-YEAR BREAK IN SERVICE.—For purposes of subpara-
graph (A) i
f
— 
"(i) any contributions are made on behalf of a partici-
pant with respect to any plan year, and 
"(ii) before such participant meets the requirements 
of subparagraph (A), such participant was not perform-
ing services for the employer as of the close of each of 
any 5 consecutive plan years after such plan year, 
then the plan may provide that the participant forfeits any 
right to or derived from the contributions made with re-
spect to such plan year. 
"(C) CLASS-YEAR PLAN.—For purposes of this section, the 
term 'class-year plan' means a profit-sharing, stock bonus, 
or money purchase plan which provides for the separate 
nonforfeitability of employees' rights to or derived from the 
contributions for each plan year." 
100 STAT. 2942 
PUBLIC LAW 99-514—OCT. 22, 1986 
(B) AMENDMENT OF ERISA.—Paragraph (3) of section 203(c) 
of the Employee Retirement Income Security Act of 1974 is 
amended to read as follows: 
"(3)(A) The requirements of subsection (aX2) shall be treated as 
satisfied in the case of a class-year plan if such plan provides that 
100 percent of each employee's right to or derived from the contribu-
tions of the employer on the employee's behalf with respect to any 
plan year is nonforfeitable not later than when such participant was 
performing services for the employer as of the close of each of 5 plan 
years (whether or not consecutive) after the plan year for which the 
contributions were made. 
"(B) For purposes of subparagraph (A) if— 
"(i) any contributions are made on behalf of a participant 
with respect to any plan year, and 
"(ii) before such participant meets the requirements of 
subparagraph (A), such participant was not performing services 
for the employer as of the close of each of any 5 consecutive plan 
years after such plan year, 
then the plan may provide that the participant forfeits any right to 
or derived from the contributions made with respect to such plan 
year. 
"(C) For purposes of this part, the term 'class year plan' means a 
profit-sharing, stock bonus, or money purchase plan which provides 
for the separate nonforfeitability of employees' rights to or derived 
from the contributions for each plan year." 
(C) EFFECTIVE DATE.—The amendments made by this 
paragraph shall apply to contributions made for plan years 
beginning after the date of the enactment of this Act; 
except that, in the case of a plan described in section 302(b) 
of the Retirement Equity Act of 1984, such amendments 
shall not apply to any plan year to which the amendments 
made by such Act do not apply by reason of such section 
302(b). 
(2) RULES RELATING TO LUMP SUM TREATMENT.—Subsection (e) 
of section 402 (relating to tax on lump sum distributions) is 
amended by adding at the end thereof the following new 
paragraph: 
"(6) TREATMENT OF POTENTIAL FUTURE VESTING.— 
"(A) IN GENERAL.—For purposes of determining whether 
any distribution which becomes payable to the recipient on 
account of the employee's separation from service is a lump 
sum distribution, the balance to the credit of the employee 
shall be determined without regard to any increase in 
vesting which may occur if the employee is re-employed by 
the employer. 
"(B) RECAPTURE IN CERTAIN CASES.—If— 
"(i) an amount is treated as a lump sum distribution 
by reason of subparagraph (A), 
"(ii) special lump sum treatment applies to such 
V 
distribution, 
"(iii) the employee is subsequently re-employed by 
the employer; and 
"(iv) as a result of services performed after being so 
re-employed, there is an increase in the employee's 
vesting for benefits accrued before the separation re-
ferred to in subparagraph (A), 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2943 
under regulations prescribed by the Secretary, the tax im-
posed by this chapter for the taxable year (in which the 
increase in vesting first occurs) shall be increased by the 
reduction in tax which resulted from the special lump sum 
treatment (and any election under paragraph (4)(B) shall 
not be taken into account for purposes of determining 
whether the employee may make another election under 
paragraph (4)(B)). 
"(C) SPECIAL LUMP SUM TREATMENT.—For purposes of this 
paragraph, special lump sum treatment applies to any 
distribution if any portion of such distribution— 
"(i) is taxed under this subsection by reason of an 
election under paragraph (4XB), or 
"(ii) is treated as long-term capital gain under subsec-
tion (a)(2) of this section or section 403(a)(2). 
"(D) VESTING.—For purposes of this paragraph the term 
'vesting' means the portion of the accrued benefits derived 
from employer contributions to which the participant has a 
nonforfeitable right." 
(3) RULES RELATING TO ROLLOVERS.—Paragraph (6) of section 
402(a) (relating to special rollover rules) is amended by adding 
at the end thereof the following new subparagraph: 
"(G) TREATMENT OF POTENTIAL FUTURE VESTING.— 
"(i) IN GENERAL.—For purposes of paragraph (5), in 
determining whether any portion of a distribution on 
account of the employee's separation from service may 
be transferred in a transfer to which paragraph (5XA) 
applies, the balance to the credit of the employee shall 
be determined without regard to any increase in vest-
ing which may occur if the employee is re-employed by 
the employer, 
"(ii) TREATMENT OF SUBSEQUENT DISTRIBUTIONS.—If— 
"(I) any portion of a distribution is transferred in 
a transfer to which paragraph (5XA) applies by 
reason of clause (i), 
"(II) the employee is subsequently re-employed 
by the employer, and 
"(III) as a result of service performed after being 
so re-employed, there is an increase in the employ-
ee's vesting for benefits accrued before the separa-
tion referred to in clause (i), 
then the provisions of paragraph (5XDXiii) shall apply 
to any distribution from the plan after the distribution 
referred to in clause (i). The preceding sentence shall 
not apply if the distribution referred to in subclause (I) 
is made without the consent of the participant." 
(4) TREATMENT OF WITHDRAWAL OF MANDATORY CONTRIBU-
TIONS.— 
(A) AMENDMENTS OF INTERNAL REVENUE CODE.— 
(i) Clause (ii) of section 411(aX3XD) is amended by 
striking out the last sentence and inserting in lieu 
thereof the following: "The plan provision required 
under this clause may provide that such repayment 
must be made (I) in the case of a withdrawal on account 
of separation from service, before the earlier of 5 years 
after the first date on which the participant is subse-
quently re-employed by the employer, or the close of 
100 STAT. 2944 
PUBLIC LAW 99-514—OCT. 22, 1986 
the first period of 5 consecutive 1-year breaks in service 
commencing after the withdrawal; or (II) in the case of 
any other withdrawal, 5 years after the date of the 
withdrawal." 
(ii) Subparagraph (C) of section 411(aX7) is amended 
by striking out the last sentence and inserting in lieu 
thereof the following: 
"The plan provision required under this subparagraph may 
provide that such repayment must be made (I) in the case of 
a withdrawal on account of separation from service, before 
the earlier of 5 years after the first date on which the 
participant is subsequently re-employed by the employer, or 
the close of the first period of 5 consecutive 1-year breaks in 
service commencing after the withdrawal; or (II) in the case 
of any other withdrawal, 5 years after the date of the 
withdrawal." 
(B) AMENDMENTS OF ERISA.— 
(i) Clause (ii) of section 203(aX3XD) of the Employee 
Retirement Income Security Act of 1974 is amended by 
striking out the last sentence and inserting in lieu 
thereof the following: "The plan provision required 
under this clause may provide that such repayment 
must be made (I) in the case of a withdrawal on account 
of separation from service, before the earlier of 5 years 
after the first date on which the participant is subse-
quently re-employed by the employer, or the close of 
the first period of 5 consecutive 1-year breaks in service 
commencing after the withdrawal; or (II) in the case of 
any other withdrawal, 5 years after the date of the 
withdrawal." 
(ii) Subsection (e) of section 204 of the Employee 
Retirement Income Security Act of 1974 is amended by 
striking out the last sentence and inserting in lieu 
thereof the following: 
"The plan provision required under this subsection may provide 
that such repayment must be made (A) in the case of a withdrawal 
on account of separation from service, before the earlier of 5 years 
after the first date on which the participant is subsequently re-
employed by the employer, or the close of the first period of 5 
consecutive 1-year breaks in service commencing after the with-
drawal; or (B) in the C£ise of any other withdrawal, 5 years after the 
date of the withdrawal." 
(5) PARTICIPATION REQUIREMENTS UNDER SIMPUFIED EMPLOYEE 
PENSIONS.—Effective with respect to plan years beginning after 
the date of the enactment of this Act, subparagraph (A) of 
section 408(kX2) (relating to participation requirements) is 
amended by striking out "age 25" and inserting in lieu thereof 
"age 21". 
(b) AMENDMENTS RELATED TO SECTIONS 103 AND 203 OF THE ACT.— 
(1) CLARIFICATION OF QUAUFIED PRERETIREMENT SURVIVOR 
ANNUITY IN CASE OF TERMINATED VESTED PARTICIPANT.— 
(A) AMENDMENT OF INTERNAL REVENUE CODE.—Paragraph 
(1) of section 417(c) (defining qualified preretirement survi-
vor annuity) is amended by adding at the end thereof the 
following new sentence: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2945 
"In the case of an individual who separated from service before 
the date of such individual's death, subparagraph (A)(ii)(I) shall 
not apply." 
(B) AMENDMENT OP ERISA.—Paragraph (1) of section 205(e) 
of the Employee Retirement Income Security Act of 1974 
(defining qualified preretirement survivor annuity) is 
amended by adding at the end thereof the following new 
sentence: 
"In the case of an individual who separated from service before 
the date of such individual's death, subparagraph (A)(ii)(I) shall 
not apply." 
(2) CLARIFICATION OF TRANSFEREE PLAN RULES.— 
(A) AMENDMENTS OF INTERNAL REVENUE CODE.— 
(i) Subclause (III) of section 401(aXll)(B)(iii) (relating 
to plans to which requirements of joint and survivor 
annuity and preretirement survivor annuity apply) is 
amended by striking out "indirect transferee' and 
inserting in lieu thereof "indirect transferee (in a 
transfer after December 31,1984)". 
(ii) Subparagraph (B) of section 401(a)(ll) is amended 
by adding at the end thereof the following new 
sentence: 
"Clause (iii)(III) shall apply only with respect to the trans-
ferred assets (and income therefrom) if the plan separately 
accounts for such assets and any income therefrom.' 
(B) AMENDMENTS OF ERISA.— 
(i) Clause (iii) of section 205(b)(1)(C) of the Employee 
Retirement Income Security Act of 1974 is amended by 
striking out "a transferee" and inserting in lieu thereof 
"a direct or indirect transferee (in a transfer after 
December 31,1984)". 
(ii) Paragraph (1) of section 205(b) of such Act is 
amended by adding at the end thereof the following 
new sentence: 
"Clause (iii) of subparagraph (C) shall apply only with respect to the 
transferred assets (and income therefrom) if the plan separately 
accounts for such assets and any income therefrom." 
(3) CLARIFICATION OF COORDINATION BETWEEN QUAUFIED JOINT 
AND SURVIVOR ANNUITY AND QUALIFIED PRERETIREMENT SURVI-
VOR ANNUITY.— 
(A) AMENDMENT OF INTERNAL REVENUE CODE.—Clause (i) 
of section 401(a)(llXA) is amended by striking out "who 
retires under the plan" and inserting in lieu thereof "who 
does not die before the annuity starting date". 
(B) AMENDMENT OF ERISA.—Paragraph (1) of section 205(a) 
of the Employee Retirement Income Security Act of 1974 is 
amended by striking out "who retires under the plan" and 
inserting in lieu thereof "who does not die before the 
annuity starting date". 
(4) REQUIREMENT OF SPOUSAL CONSENT FOR USING PLAN ASSETS 
AS SECURITY FOR LOANS.— 
(A) AMENDMENTS OF INTERNAL REVENUE CODE.— 
(i) Subparagraph (B) of section 417(aXl) is amended 
by striking out pargigraphs (2) and (3)" and inserting 
in lieu thereof "paragraphs (2), (3), and (4)". 
(ii) Subsection (a) of section 417 is amended by re-
designating paragraphs (4) and (5) as paragraphs (5) 
100 STAT. 2946 
PUBLIC LAW 99-514—OCT. 22, 1986 
and (6), respectively, and by inserting after paragraph 
(3) the following new paragraph: 
"(4) REQUIREMENT OF SPOUSAL CONSENT FOR USING PLAN ASSETS 
AS SECURITY FOR LOANS.—Each plan shall provide that, if section 
401(a)(ll) applies to a participant when part or all of the 
participant's accrued benefit is to be used as security for a loan, 
no portion of the participant's accrued benefit may be used as 
security for such loan unless— 
"(A) the spouse of the participant (if any) consents in 
I ; 
writing to such use during the 90-day period ending on the 
date on which the loan is to be so secured, and 
"(B) requirements comparable to the requirements of 
paragraph (2) are met with respect to such consent." 
(iii) Subsection (f) of section 417 is amended by re-
designating paragraph (5) as paragraph (6) and by 
inserting after 
paragraph (4) the following new 
paragraph: 
"(5) DISTRIBUTIONS BY REASON OF SECURITY INTERESTS.—If the 
use of any participant's accrued benefit (or any portion thereof) 
as security for a loan meets the requirements of subsection 
(a)(4), nothing in this section or section 411(aXll) shall prevent 
any distribution required by reason of a failure to comply with 
the terms of such loan." 
(B) AMENDMENT OF ERISA.— 
(i) Subparagraph (B) of section 205(cXl) of the Em-
ployee Retirement Income Security Act of 1974 is 
amended by striking out "paragraphs (2) and (3)" and 
inserting in lieu thereof "paragraphs (2), (3), and (4)". 
(ii) Subsection (c) of section 205 of such Act is 
amended by redesignating paragraphs (4), (5), and (6) as 
paragraphs (5), (6), and (7), respectively, and by insert-
ing after paragraph (3) the following new paragraph: 
"(4) Each plan shall provide that, if this section applies to a 
participant when part or all of the participant's accrued benefit is to 
be used as security for a loan, no portion of the participant's accrued 
benefit may be used as security for such loan unless— 
"(A) the spouse of the participant (if any) consents in writing 
to such use during the 90-day period ending on the date on 
which the loan is to be so secured, and 
"(B) requirements comparable to the requirements of para-
graph (2) are met with respect to such consent." 
(iii) Section 205 of such Act is amended by redesignat-
ing subsection (j) as subsection (k) and by inserting 
after subsection (i) the following new subsection: 
"(j) If the use of any participant's accrued benefit (or any portion 
thereof) as security for a loan meets the requirements of subsection 
(c)(4), nothing in this section shall prevent any distribution required 
by re£ison of a failure to comply with the terms of such loan." 
_^, ^^, , 
(C) EFFECTIVE DATES.— 
(i) The amendments made by this paragraph shall 
apply with respect to loans made after August 18, 1985. 
; H f
- i 
(ii) III the case of any loan which was made on or 
^^ 
*
* 
before August 18, 1985, and which is secured by a 
portion of the participant's accrued benefit, nothing in 
the amendments made by sections 103 and 203 of the 
Retirement Equity Act of 1984 shall prevent any dis-
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2947 
tribution required by reason of a failure to comply with 
the terms of such loan. 
(iii) For purposes of this subparagraph, any loan 
which is revised, extended, renewed, or renegotiated 
after August 18, 1985, shall be treated as made after 
August 18,1985. 
(5) CLARIFICATION OF NOTICE REQUIREMENT FOR INDIVIDUALS 
WHO BECOME PARTICIPANTS AFTER AGE 35, ETC.— 
(A) AMENDMENT OF INTERNAL REVENUE CODE.—Subpara-
graph (B) of section 417(a)(3) (relating to plan to provide 
written explanations) is amended to read as follows: 
"(B) EXPLANATION OF QUAUFIED PRERETIREMENT SURVIVOR 
ANNUITY.— 
"(i) IN GENERAL.—Each plan shall provide to each 
participant, within the applicable period with respect 
to such participant (and consistent with such regula-
tions as the Secretary may prescribe), a written expla-
nation with respect to the qualified preretirement 
survivor annuity comparable to that required under 
subparagraph (A). 
"(ii) APPLICABLE PERIOD.—For purposes of clause (i), 
the term 'applicable period' means, with respect to a 
participant, whichever of the following periods ends 
last: 
"(I) The period beginning with the first day of 
the plan year in which the participant attains age 
32 and ending with the close of the plan year 
preceding the plan year in which the participant 
attains age 35. 
"(II) A reasonable period after the individual 
becomes a participant. 
"(Ill) A reasonable period ending after para-
graph (5) ceases to apply to the participant. 
"(IV) A reasonable period ending after section 
401(aXll) applies to the participant. 
"(V) A reasonable period after separation from 
service in case of a participant who separates 
before attaining age 35.' 
(B) AMENDMENT OF ERISA.—Subparagraph (B) of section 
205(c)(3) of the Employee Retirement Income Security Act 
of 1974 is amended to read as follows: 
"(B)(i) Each plan shall provide to each participant, within the 
applicable period with respect to such participant (and consistent 
with such regulations as the Secretary may prescribe), a written 
explanation with respect to the qualified preretirement survivor 
annuity comparable to that required under subparagraph (A). 
"(ii) For purposes of clause (i), the term 'applicable period' means, 
with respect to a participant, whichever of the following periods 
ends last: 
"(I) The period beginning with the first day of the plan year in 
which the participant attains age 32 and ending with the close 
of the plan year preceding the plan year in which the partici-
pant attains age 35. 
"(II) A reasonable period after the individual becomes a 
participant. 
"(Ill) A reasonable period ending after paragraph (5) ceases to 
apply to the participant. 
100 STAT. 2948 
PUBLIC LAW 99-514-OCT. 22, 1986 
"(IV) A reasonable period ending after section 401(a)(ll) ap-
plies to the participant. 
"(V) A reasonable period after separation from service in case 
of a participant who separates before attaining age 35." 
(6) SPOUSAL CONSENT FOR CHANGES IN DESIGNATIONS.— 
(A) AMENDMENT OF INTERNAL REVENUE CODE.—Subpara-
graph (A) of section 417(a)(2) (relating to requirement that 
spouse consent to election) is amended to read as follows: 
"(A)(i) the spouse of the participant consents in writing to 
such election, (ii) such election designates a beneficiary (or 
a form of benefits) which may not be changed without 
''c spousal consent (or the consent of the spouse expressly 
permits designations by the participant without any 
requirement of further consent by the spouse), and (iii) the 
spouse's consent acknowledges the effect of such election 
and is witnessed by a plan representative or a notary 
public, or". 
(B) AMENDMENT OF ERISA.—Subparagraph (A) of section 
205(c)(2) of the Employee Retirement Income Security Act 
of 1974 is amended to read as follows: 
"(A)(i) the spouse of the participant consents in writing to 
such election, (ii) such election designates a beneficiary (or a 
form of benefits) which may not be changed without spousal 
consent (or the consent of the spouse expressly permits designa-
tions by the participant without any requirement of further 
consent by the spouse), and (iii) the spouse's consent acknowl-
edges the effect of such election and is witnessed by a plan 
representative or a notary public, or". 
(C) EFFECTIVE DATE.—The amendments made by this 
paragraph shall apply to plan years beginning after the 
date of the enactment of this Act. 
(7) CLARIFICATION OF NONFORFEITABLE ACCRUED BENEFIT.— 
(A) AMENDMENT OF INTERNAL REVENUE CODE.—Subclause 
(I) of section 401(a)(ll)(B)(iii) is amended by striking out 
"the participant's nonforfeitable accrued benefit" and 
inserting in lieu thereof "the participant's nonforfeitable 
accrued benefit (reduced by any security interest held 
by the plan by reason of a loan outstanding to such 
participant)". 
(B) AMENDMENT OF ERISA.—Subparagraph (C) of section 
205(b)(1) of the Employee Retirement Income Security Act 
of 1974 is amended by striking out "the participant's non-
forfeitable accrued benefit" and inserting in lieu thereof 
"the participant's nonforfeitable accrued benefit (reduced 
by any security interest held by the plan by reason of a loan 
outstanding to such participant)". 
(8) CLARIFICATION OF DEFINITION OF VESTED PARTICIPANT.— 
c
; i 
(A) AMENDMENT OF INTERNAL REVENUE CODE.—Paragraph 
(1) of section 417(f) (defining vested participant) is amended 
by striking out "the accrued benefit derived from employer 
contributions" and inserting in lieu thereof "such partici-
f 
pant's accrued benefit". 
(B) AMENDMENT OF ERISA.—Paragraph (1) of section 205(h) 
n 
of the Employee Retirement Income Security Act of 1974 is 
amended by striking out "the accrued benefit derived from 
a 
I 
employer contributions" and inserting in lieu thereof "such 
participant's accrued benefit". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2949 
(9) CLARIFICATION OF QUAUFIED PRERETIREMENT SURVIVOR 
ANNUITY.— 
(A) AMENDMENTS OF INTERNAL REVENUE CODE.— 
(i) Paragraph (2) of section 417(c) (defining qualified 
preretirement survivor annuity) is amended by striking 
out "the account balance of the participant as of the 
date of death" and inserting in lieu thereof "the por-
tion of the account balance of the participant (as of the 
date of death) to which the participant had a non-
forfeitable right (within the meaning of section 411(a))". 
(ii) Subsection (c) of section 417 (defining qualified 
preretirement survivor annuity) is amended by adding 
at the end thereof the following new paragraph: 
"(3) SECURITY INTERESTS TAKEN INTO ACCOUNT.—For purposes 
of paragraphs (1) and (2), any security interest held by the plan 
by reason of a loan outstanding to the participant shall be taken 
into account in determining the amount of the qualified pre-
retirement survivor annuity." 
(B) AMENDMENTS OF ERISA.— 
(i) Paragraph (2) of section 205(e) of the Employee 
Retirement Income Security Act of 1974 is amended by 
striking out "the account balance of the participant as 
of the date of death" and inserting in lieu thereof "the 
portion of the account balance of the participant (as of 
the date of death) to which the participant had a 
nonforfeitable accrued benefit". 
(ii) Subsection (e) of section 205 of the Employee 
Retirement Income Security Act of 1974 is amended by 
adding at the end thereof the following new paragraph: 
"(3) For purposes of paragraphs (1) and (2), any security 
interest held by the plan by reason of a loan outstanding to the 
participant shall be taken into account in determining the 
amount of the qualified preretirement survivor annuity." 
(10) CLARIFICATION OF REQUIREMENTS FOR SPOUSAL CONSENT.— 
(A) AMENDMENT OF INTERNAL REVENUE CODE.—Subsection 
(f) of section 417 (as amended by paragraph (4)) is amended 
by redesignating paragraph (6) as paragraph (7) and by 
inserting after paragraph (5) the following new paragraph: 
"(6) REQUIREMENTS FOR CERTAIN SPOUSAL CONSENTS.—No con-
sent of a spouse shall be effective for purposes of subsection 
(eXD or (eX2) (as the case may be) unless requirements com-
parable to the requirements for spousal consent to an election 
under subsection (a)(lXA) are met." 
(B) AMENDMENT TO ERISA.—Section 205 of the Employee 
Retirement Income Security Act of 1974 (as amended by 
paragraph (4)) is amended by redesignating subsection (k) as 
subsection (1) and by inserting after subsection (j) the follow-
ing new subsection: 
"(k) No consent of a spouse shall be effective for purposes of 
subsection (gXD or (gX2) (as the case may be) unless requirements 
comparable to the requirements for spousal consent to an election 
under subsection (cXlXA) are met." 
(11) CLARIFICATION OF RULE FOR SUBSIDIZED PLANS.— 
(A) AMENDMENT OF INTERNAL REVENUE CODE.—Subpara-
graph (A) of section 417(aX5) (as redesignated by paragraph 
(4XA)) is amended by striking out "if the plan and insert-
71-194 0 - 89 - 38 : QL. 3 Part3 
100 STAT. 2950 
PUBLIC LAW 99-514—OCT. 22, 1986 
ij^ ing in lieu thereof "if such benefit may not be waived (or 
another beneficiary selected) and if the plan", 
(B) AMENDMENT TO ERISA.—Subparagraph (A) of section 
205(cX5) of the Employee Retirement Income Security Act 
of 1974 (as redesignated bv paragraph (4XB)) is amended by 
striking out "if the plan' and inserting in lieu thereof "if 
such benefit may not be waived (or another beneficiary 
selected) and if the plan". 
(12) CLARIFICATION OF ANNUITY STARTING DATE.— 
(A) AMENDMENT OF INTERNAL REVENUE CODE.—Paragraph 
(2) of section 417(f) (defining annuity starting date) is 
amended to read as follows: 
"(2) ANNUITY STARTING DATE.— 
"(A) IN GENERAL.—The term 'annuity starting date' 
^^ means— 
"(i) the first day of the first period for which an 
amount is payable as an annuity, or 
•-> 
"(ii) in the case of a benefit not payable in the form of 
an annuity, the first day on which all events have 
occurred which entitle the participant to such benefit. 
^' 
"(B) SPECIAL RULE FOR DISABILITY BENEFITS.—For purposes 
* of subparagraph (A), the first day of the first period for 
which a benefit is to be received by reason of disability shall 
be treated as the annuity starting date only if such benefit 
is not an auxiliary benefit." 
(B) AMENDMENT TO ERISA.—Paragraph (2) of section 205(h) 
of the Employee Retirement Income Security Act of 1974 is 
amended to read as follows: 
"(2XA) The term 'annuity starting date' means— 
"(i) the first day of the first period for which an amount is 
pavable as an ginnuity, or 
'(ii) in the case of a benefit not payable in the form of an 
-;, annuity, the first day on which all events have occurred 
which entitle the participant to such benefit. 
"(B) For purposes of subparagraph (A), the first day of the 
first period for which a benefit is to be received by reason of 
disability shall be treated as the annuity starting date only if 
such benefit is not an auxiliary benefit." 
(13) 
CLARIFICATION 
OF PLANS TO WHICH 
REQUIREMENTS 
APPLY.— 
(A) AMENDMENT TO INTERNAL REVENUE CODE.—Subclause 
(I) of section 401(aXllXBXiii) is amended by striking out 
"section 417(aX2XA)" and inserting in lieu thereof "section 
417(aX2)". 
fjt 
(B) 
AMENDMENT 
TO ERISA.—Clause (i) of 
section 
205(bXlXC) of the Employee Retirement Income Security 
Act of 1974 is amended by striking out "subsection (cX2XA)' 
and inserting in lieu thereof "subsection (cX2)". 
(14) CERTAIN PLANS DO NOT NEED TO PROVIDE CERTAIN SURVIVOR 
BENEFITS.— 
(A) AMENDMENT TO INTERNAL REVENUE CODE.—Paragraph 
. 
(11) of section 401(a) is amended by redesignating subpara-
''''' graph (D) as subparagraph (E) and by inserting after 
subparagraph (C) the following new subparagraph: 
"(D) SPECIAL RULE WHERE PARTICIPANT AND SPOUSE MAR-
RIED LESS THAN 1 YEAR.—A plan shall not be treated as 
failing to meet the requirements of subparagraphs (BXiii) or 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2951 
(C) merely because the plan provides that benefits will not 
be payable to the surviving spouse of the participant unless 
the participant and such spouse had been married through-
out the 1-year period ending on the earlier of the partici-
pant's annuity starting date or the date of the participant's 
death." 
(B) AMENDMENT TO ERISA.—Section 20503) of the Em-
ployee Retirement Income Security Act of 1974 is amended 
by adding at the end thereof the following new paragraph: 
"(3) A plan shall not be treated as failing to meet the require-
ments of paragraph (1)(C) or (2) merely because the plan provides 
that benefits will not be payable to the surviving spouse of the 
participant unless the participant and such spouse had been mar-
ried throughout the 1-year period ending on the earlier of the 
participant's annuity starting date or the date of the participant's 
death." 
(15) CLERICAL AMENDMENTS.— 
(A) Paragraph (1) of section 417(a) is amended by striking 
out "section 401(a)(ii)" and inserting in lieu thereof "section 
401(a)(ll)". 
(B) Paragraph (1) of section 417(c) is amended by striking 
out "survivor annuity or the life o f in the matter preced-
ing subparagraph (A) and inserting in lieu thereof "survi-
vor annuity for the life of. 
(C) Subparagraph (B) of section 4150t)X2) is amended by 
striking out "as defined in section 401(aXllXGXiii)" and 
inserting in lieu thereof "as defined in section 417". 
(c) AMENDMENTS RELATED TO SECTIONS 104 AND 204 OF THE ACT.— 
(1) TREATMENT OF QUAUFIED DOMESTIC RELATIONS ORDERS FOR 
INDIVIDUALS OTHER THAN SPOUSE OR FORMER SPOUSE.— 
(A) IN GENERAL.—Paragraph (9) of section 402(a) (relating 
to alternate payee under qualified domestic relations order 
treated as distributee) is amended by striking out "the 
alternate payee shall be treated" and inserting in lieu 
thereof "any alternate payee who is the spouse or former 
spouse of the participant shall be treated". 
(B) CONFORMING AMENDMENT.—Section 72(mX10) (relat-
ing to determination of investment in the contract in the 
case of qualified domestic relations orders) is amended by 
inserting "who is the spouse or former spouse of the partici-
pant" after "alternate payee". 
(C) EFFECTIVE DATE.—The amendments made by this 
paragraph shall apply to payments made after the date of 
the enactment of this Act. 
(2) PROCEDURES FOR PERIOD DURING WHICH DETERMINATION IS 
BEING MADE.— 
(A) AMENDMENTS OF THE INTERNAL REVENUE CODE.— 
(i) Subparagraph (A) of section 414(p)(7) (relating to 
procedures for period during which determination is 
being made) is amended by striking out "shall seg-
regate in a separate account in the plan or in an escrow 
account the amounts" and inserting in lieu thereof 
"shall separately account for the amounts (hereinafter 
in this paragraph referred to as the 'segregated 
amounts')". 
100 STAT. 2952 
PUBLIC LAW 99-514—OCT. 22, 1986 
I 
(ii) Subparagraph (B) of section 414(p)(7) (relating to 
payment to alternate payee if order is determined to be 
qualified domestic relations order) is amended— 
(I) by striking out "18 months" and inserting in 
lieu thereof "the 18-month period described in 
subparagraph (E)", and 
' " 
(II) by striking out "plus any interest" and 
inserting in lieu thereof "including any interest". 
(iii) 
Subparagraph 
(C) of 
section 
414(pX7) 
is 
amended— 
(I) by striking out "18 months" and inserting in 
lieu thereof "the 18-month period described in 
subparagraph (E)", and 
(II) by striking out "plus any interest" and 
inserting in lieu thereof "including any interest". 
(iv) Subparagraph (D) of section 414(p)(7) is amended 
by striking out "the 18-month period" and inserting in 
lieu thereof "the 18-month period described in subpara-
graph (E)". 
(v) Paragraph (7) of section 414(p) is amended by 
adding 
at 
the 
end 
thereof 
the 
following 
new 
subparagraph: 
"(E) DETERMINATION OF 18-MONTH PERIOD.—For purposes 
of this paragraph, the 18-month period described in this 
subparagraph is the 18-month period beginning with the 
date on which the first payment would be required to be 
made under the domestic relations order." 
(B) AMENDMENTS OF ERISA.— 
(i) Clause (i) of section 206(dX3XH) of the Employee 
Retirement Income Security Act of 1974 is amended by 
striking out "shall segregate in a separate account in 
the plan or in an escrow account the amounts" and 
inserting in lieu thereof "shall separately account for 
the amounts (hereinafter in this subparagraph referred 
to as the 'segregated amounts')". 
(ii) Clause (ii) of section 206(dX3XH) of such Act is 
amended— 
(I) by striking out "18 months" and inserting in 
lieu thereof "the 18-month period described in 
clause (v)", and 
(II) by striking out "plus any interest" and 
inserting in lieu thereof "including any interest". 
^ 
(iii) Clause (iii) of section 206(dX3XH) of such Act is 
•- 
amended— 
(I) by striking out "18 months" and inserting in 
c' •' ; 
lieu thereof "the 18-month period described in 
clause (v)", and 
(II) by striking out "plus any interest" and 
inserting in lieu thereof "including any interest". 
(iv) Clause (iv) of section 206(dX3XH) of such Act is 
amended by striking out "the 18-month period" and 
inserting in lieu thereof "the 18-month period de-
scribed in clause (v)". 
(v) Subparagraph (H) of section 206(dX3) of such Act 
{
K 
is amended by adding at the end thereof the following 
new clause: 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2953 
"(v) For purposes of this subparagraph, the 18-month period de-
scribed in this clause is the 18-month period beginning with the date 
on which the first payment would be required to be made under the 
domestic relations order." 
(3) COORDINATION WITH QUALIFIED PLAN REQUIREMENTS.—Sec-
tion 401 is amended by redesignating the subsection relating to 
cross references as subsection (n) and by inserting after subsec-
tion (1) the following new subsection: 
"(m) 
COORDINATION 
WITH 
QUALIFIED 
DOMESTIC 
RELATIONS 
ORDERS.—The Secretary shall prescribe such rules or regulations as 
may be necessary to coordinate the requirements of subsection 
(a)(13)(B) and section 414(p) (and the regulations issued by the 
Secretary of Labor thereunder) with the other provisions of this 
chapter." 
(4) CLARIFICATION OF APPLICATION OF DOMESTIC RELATION 
PROVISIONS.— 
(A) AMENDMENT OF INTERNAL REVENUE CODE.—Subsection 
(p) of section 414 is amended by redesignating paragraph (9) 
as paragraph (11) and by inserting after paragraph (8) the 
following new paragraph: 
"(9) SUBSECTION NOT TO APPLY TO PLANS TO WHICH SECTION 
401 (a) (13) DOES NOT APPLY.—This subsection shall not apply to 
any plan to which section 401(a)(13) does not apply." 
(B) AMENDMENT OF ERISA.—Paragraph (3) of section 206(d) 
of the Employee Retirement Income Security Act of 1974 is 
amended by redesignating subparagraph (L) as subpara-
graph (N) and by inserting after subparagraph (K) the 
following new subparagraph: 
"(L) This paragraph shall not apply to any plan to which para-
graph (1) does not apply." 
(5) BENEFIT PAYMENTS MADE IN ACCORDANCE WITH QUAUFIED 
DOMESTIC RELATIONS ORDERS NOT TREATED AS GARNISHMENTS FOR 
PURPOSES OF CONSUMER CREDIT PROTECTION ACT.—Paragraph (3) 
of section 206(d) of the Employee Retirement Income Security 
Act of 1974 (as amended by paragraph (4)(B)) is further amended 
by inserting after subparagraph (L) the following new subpara-
graph: 
"(M) Payment of benefits by a pension plan in accordance with the 
applicable requirements of a qualified domestic relations order shall 
not be treated as garnishment for purposes of section 303(a) of the 
Consumer Credit Protection Act.". 
(6) TREATMENT OF CERTAIN SPOUSES.— 
(A) AMENDMENT OF THE INTERNAL REVENUE CODE.— 
Subparagraph (A) of section 414(p)(5) (relating to treatment 
of former spouse as surviving spouse for purposes of deter-
mining survivor benefits) is amended by striking out "sec-
tions 401(a)(ll) and 417" and inserting in lieu thereof "sec-
tions 401(aXll) and 417 (and any spouse of the participant 
shall not be treated as a spouse of the participant for such 
purposes)". 
(B) 
AMENDMENT 
OF ERISA.—Clause (i) of section 
206(d)(3)(F) of the Employee Retirement Income Security 
Act of 1974 is amended by striking out "section 205" and 
inserting in lieu thereof "section 205 (and any spouse of the 
participant shall not be treated as a spouse of the partici-
pant for such purposes)". 
(7) CLERICAL AMENDMENTS.— 
100 STAT. 2954 
PUBLIC LAW 99-514—OCT. 22, 1986 
(A) AMENDMENTS OF INTERNAL REVENUE CODE.— 
(i) Subparagraph (F) of section 402(aX6) is amended 
by striking out "paragraph (5XA)" and inserting in lieu 
thereof "paragraph (5)". 
^' 
(ii) Clause (i) of section 414(p)(l)(B) is amended by 
striking out "to a spouse," and inserting in lieu thereof 
"to a spouse, former spouse,". 
(iii) Clause (i) of section 414(p)(6XA) is amended by 
striking out "any other alternate pavee" and inserting 
in lieu thereof "each alternate payee . 
(iv) Subparagraph (B) of section 414(pX5) is amended 
by striking out "the surviving spouse" and inserting in 
:r 
lieu thereof "the surviving former spouse". 
(v) Subsection (p) of section 414 is amended by strik-
ing out the last sentence of paragraph (5) and by insert-
ing after paragraph (9) the following new paragraph: 
"(10) WAIVER OF CERTAIN DISTRIBUTION REQUIREMENTS.—With 
respect to the requirements of subsections (a) and (k) of section 
401 and section 409(d), a plan shall not be treated as failing to 
meet such requirements solely by reason of payments to an 
alternative payee pursuant to a qualified domestic relations 
order." 
(vi) Paragraph (4XA) of section 414(p) is amended— 
(I) by striking out "In the C£ise of any payment 
before a participant has separated from service, a" 
and inserting in lieu thereof "A", and 
(II) by inserting "in the case of any payment 
before a participant has separated from service," 
before "on or" in clause (i). 
(vii) Subparagraph (B) of section 414(pX4) is amended 
to read as follows: 
"(B) EARUEST RETIREMENT AGE.—For purposes of this 
paragraph, the term 'earliest retirement age' means earlier 
of— 
"(i) in the date on which the participant is entitled to 
a distribution under the plan, or 
"(ii) in the later o
f
— 
"(I) the date the participant attains age 50, or 
"(II) the earliest date on which the participant 
could begin receiving benefits under the plan if the 
participant separated from service." 
(B) AMENDMENTS OF ERISA.— 
(i) Clause (ii) of section 206(dX3XF) of the Employee 
Retirement Income Security Act of 1974 is amended by 
striking out "the former spouse" and inserting in lieu 
thereof "the surviving former spouse". 
(ii) Subclause (I) of section 206(dX3XGXi) of such Act is 
amended by striking out "any other alternate payee" 
and inserting in lieu thereof "each alternate payee". 
(iii) Subparagraph (E) of section 206(dX3) of such Act 
is amended— 
(I) by striking out "In the case of any payment 
before a participant has separated from service, a" 
in clause (i) and inserting in lieu thereof "A", and 
(II) by inserting "in the case of any payment 
before a participant has separated from service," 
before "on or" in subclause (I). 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2955 
(iv) Clause (ii) of section 206(d)(3)(E) of such Act is 
amended to read as follows: 
"(ii) For purposes of this subparagraph, the term 'earliest retire-
ment age' means the earlier o
f
— 
"(I) the date on which the participant is entitled to a distribu-
tion under the plan, or 
"(II) the later of the date of the participant attains age 50 or 
the earliest date on which the participant could begin receiving 
benefits under the plan if the participant separated from serv-
ice." 
(d) AMENDMENTS RELATED TO SECTIONS 105 AND 205 OF THE ACT.— 
(1) VESTED ACCRUED BENEFIT.— 
(A) AMENDMENTS TO THE INTERNAL REVENUE CODE.— 
(i) Subparagraph (A) of section 411(a)(ll) (relating to 
restrictions on certain mandatory distributions) is 
amended to read as follows: 
"(A) IN GENERAL.—If the present value of any vested 
accrued benefit exceeds $3,500, a plan meets the require-
ments of this paragraph only if such plan provides that 
such benefit may not be immediately distributed without 
the consent of the participant." 
(ii) Subsection (a) of section 411 is amended by strik-
ing out "paragraphs (1) and (2)" in the matter preced-
ing paragraph (1) and inserting in lieu thereof "para-
graphs (1), (2), and (11)". 
(B) AMENDMENTS TO ERISA.—Paragraph (1) of section 203 
of the Employee Retirement Income Security Act of 1974 is 
amended to read £is follows: 
"(1) If the present value of any vested accrued benefit exceeds 
$3,500, a pension plan shall provide that such benefit may not be 
immediately distributed without the consent of the participant." 
(2) DISTRIBUTIONS UNDER SECTION 404 (k) .— 
(A) AMENDMENT TO THE INTERNAL REVENUE CODE.—Sec-
tion 411(a)(ll) is amended by adding at the end thereof the 
following new subparagraph: 
"(C) DIVIDEND DISTRIBUTIONS OF ESOPS ARRANGEMENT.— 
This paragraph shall not apply to any distribution of divi-
dends to which section 404(k) applies." 
(B) AMENDMENT TO ERISA.—Section 203(e) of the Em-
ployee Retirement Income Security Act of 1974 is amended 
by adding at the end thereof the following new paragraph: 
"(3) This subsection shall not apply to any distribution of divi-
dends to which section 404(k) of the Internal Revenue Code of 1954 
applies." 
(e) AMENDMENTS RELATED TO SECTION 207 OF THE ACT.— 
(1) Paragraph (1) of section 402(f) (relating to written 
explanation to recipients of distributions eligible for rollover 
treatment) is amended by striking out "qualifying rollover dis-
tribution" and inserting in lieu thereof "eligible rollover dis-
tribution". 
(2) Paragraph (2) of section 402(f) is amended to read as 
follows: 
"(2) DEFINITIONS.—For purposes of this subsection— 
"(A) ELIGIBLE ROLLOVER DISTRIBUTION.—The term 'eligible 
rollover distribution' means any distribution any portion of 
which may be excluded from gross income under subsection 
(a)(5) of this section or subsection (a)(4) of section 403 if 
100 STAT. 2956 
PUBLIC LAW 99-514—OCT. 22, 1986 
-u 
f- , transferred to an eligible retirement plan in accordance 
with the requirements of such subsection. 
^ . ^- 
"(B) EuGiBLE RETIREMENT PLAN.—The term 'eligible 
retirement plan' has the meaning given such term by 
subsection (aXSXEXiv)." 
(f) AMENDMENT RELATED TO SECTION 301 OF THE ACT.— 
(1) SPECIAL RULE FOR ESOPS.— 
(A) AMENDMENT TO THE INTERNAL REVENUE CODE.—Sec-
tion 411(dX6) is amended by adding at the end thereof the 
following new subparagraph: 
'•"''^'- 
"(C) SPECIAL RULE FOR ESOPS.—For purposes of this para-
graph, any— 
"(i) tax credit employee stock ownership plan (as 
• ' 
defined in section 409(a)), or 
"(ii) employee stock ownership plan (as defined in 
section 4975(eX7)), 
" 
shall not be treated as failing to meet the requirements of 
this paragraph merely because it modifies distribution 
options in a nondiscriminatory manner." 
fi'. ifA 
(g) 
AMENDMENT 
TO ERISA.—Section 
204(g) of the 
Employee Retirement Income Security Act of 1974 is 
' 
' amended by adding at the end thereof the following new 
paragraph: 
"(3)Forpurposesof this subsection, any— 
"(A) tax credit employee stock ownership plan (as defined in 
, section 409(a) of the Internal Revenue C!ode of 1954), or 
"(B) employee stock ownership plan (as defineid in section 
4975(eX7) of such Code), 
shall not be treated as failing to meet the requirements of this 
subsection merely because it modifies distribution options in a 
nondiscriminatory manner." 
(2) CLERICAL AMENDMENT.—Paragraph (1) of section 204(g) of 
the Employee Retirement Income Security Act of 1974 is 
amended by striking out "section 302(cX8)" and inserting in lieu 
thereof "section 302(cX8) or 4281". 
(g) AMENDMENT RELATED TO SECTION 302 OF THE ACT.—Paragraph 
(2) of section 3020t>) of the Retirement Equity Act of 1984 is amended 
by striking out "Jgmuary 1,1987" and inserting in lieu thereof "July 
1,1988". 
(h) AMENDMENTS RELATED TO SECTION 303 OF THE ACT.— 
(IXA) Subsection (c) of section 303 of the Retirement Equity 
^5t 
Act of 1984 (relating to transitional rule for requirement of joint 
and survivor annuity and preretirement survivor annuity) is 
amended by adding at the end thereof the following new 
paragraph: 
"(4) EUMINATION OF DOUBLE DEATH BENEFITS.— 
"(A) IN GENERAL.—In the case of a participant described 
t:: 
in paragraph (2), death benefits (other than a qualified joint 
and survivor annuity or a qualified preretirement survivor 
3
*
s bi»»"t annuity) payable to any beneficiary shall be reduced by the 
amount payable to the surviving spouse of such participant 
by reason of paragraph (2). The reduction under the preced-
.' 
ing sentence shall be made on the basis of the respective 
present values {as of the date of the participant's death) of 
,'\ r 
{ such death benefits and the amount so payable to the 
1 
surviving spouse. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2957 
"(B) SPOUSE MAY WAIVE PROVISIONS OF PARAGRAPH (2).—In 
the case of any participant described in paragraph (2), the 
surviving spouse of such participant may waive the provi-
sions of paragraph (2). Such waiver shall be made on or 
before the close of the second plan year to which the 
amendments made by section 103 of this Act apply. Such a 
waiver shall not be treated as a transfer of property for 
purposes of chapter 12 of the Internal Revenue Code of 1954 
and shall not be treated as an assignment or alienation for 
purposes of section 401(aX13) of the Internal Revenue Code 
of 1954 or section 206(d) of the Employee Retirement 
Income Security Act of 1974." 
(B) Section 2503 is amended by adding at the end thereof the 
following new subsection: 
"(0 WAIVER OF CERTAIN PENSION RIGHTS.—If any individual 
waives, before the death of a participant, any survivor benefit, or 
right to such benefit, under section 401(aXll) or 417, such waiver 
shall not be treated as a transfer of property by gift for purposes of 
this chapter." 
(2) Subparagraph (A) of section 303(eX2) of the Retirement 
Equity Act of 1984 (relating to treatment of certain participants 
who perform services on or after January 1,1976) is amended by 
striking out "in the firs-t plan year" and inserting in lieu thereof 
"in £uiy plan year". 
(3) Paragraph (2) of section 303(c) of the Retirement Equity 
Act is amended by adding at the end thereof the following new 
sentence: "In the case of a profit-sharing or stock bonus plan to 
which this paragraph applies, the plan shall be treated as 
meeting the requirements of the amendments made by sections 
103 and 203 with respect to any participant if the plan made a 
distribution in a form other than a life annuity to the surviving 
spouse of the participant of such participant's nonforfeitable 
benefit." 
(i) TECHNICAL AMENDMENT TO SECTION 408(d) OF ERISA,— 
(1) Subsection (d) of section 408 of the Employee Retirement 
Income Security Act of 1974 is amended by striking out "(a),". 
(2) The amendment made by pargigraph (1) shall apply to 
transactions after the date of the enactment of this Act. 
(j) EFFECTIVE DATE.—Except as otherwise provided in this section, 
any amendment made by this section shall take effect £is if included 
in the provision of the Retirement Equity Act of 1984 to which such 
amendment relates. 
CHAPTER 
3—AMENDMENT 
RELATED 
TO 
THE 
CHILD 
SUPPORT ENFORCEMENT AMENDMENTS OF 1984 
SEC. 1899. AMENDMENT RELATED TO THE CHILD SUPPORT ENFORCE-
MENT AMENDMENTS OF 1984. 
(a) IN GENERAL.—Section 457(bX3) of the Social Security Act is 
amended by inserting "or administrative" after "court". 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
become effective on the date of the enactment of this Act 
100 STAT. 2958 
PUBLIC LAW 99-514—OCT. 22, 1986 
CHAPTER 4—MISCELLANEOUS AMENDMENTS CORRECTING 
ERRORS OF SPELLING, PUNCTUATION, ETC. 
SEC. 1899A. MISCELLANEOUS AMENDMENTS CORRECTING ERRORS OF 
SPELLING, PUNCTUATION, ETC. 
(1) Paragraph (4) of section 25(f) is amended by striking out 
"insure" and inserting in lieu thereof "ensure". 
(2) Subparagraph (A) of section 103(h)(2) (relating to prohibition of 
discrimination) is amended by striking out "guaranted" and insert-
ing in lieu thereof "guaranteed". 
(3) Subparagraph (B) of section 103(m)(3) (relating to exceptions) is 
amended by striking out "section 608(6)(A)" and inserting in lieu 
thereof "section 608(a)(6)(A)". 
(4) Paragraph (4) of section 103(p) is amended by striking out 
"October" and all that follows and inserting in lieu thereof "October 
27,1949 (48 U.S.C. 1403)." 
(5) Clause (i) of section 132(h)(3)(B) (defining qualified automobile 
demonstration use) is amended by striking out "such use in" and 
inserting in lieu thereof "such use is". 
(6) Paragraph (6) of section 172(d) is amended by inserting "MODI-
FICATIONS RELATED T
O REAL ESTATE INVESTMENT TRUSTS.—" after 
"(6)". 
(7) Clause (i) of section 338(h)(3)(C) is amended by striking out 
"subparagraph (A) and (B)" and inserting in lieu thereof "subpara-
graphs (A) and (B)". 
(8) Paragraph (12) of section 341(e) is amended by striking out 
"1245(a).—" in the heading and inserting in lieu thereof "1245(a), 
ETC.—". 
(9) Clause (iii) of section 374(e)(1)(A) is amended by striking out 
"Court of Claims" and inserting in lieu thereof "United States 
Claims Court". 
(10) Paragraph (22) of section 401(a) is amended by striking out 
"if and inserting in lieu thereof "If. 
(11) Subsection (d) of section 409 is amended by striking out 
"participants's" and inserting in lieu thereof "participant's". 
(12) Subparagraph (B) of section 414(p)(3) is amended by striking 
out the comma after "benefits". 
(13) Subsection (k) of section 415 is amended to read as follows: 
"(k) DEFINITIONS OF DEFINED CONTRIBUTION PLAN AND DEFINED 
BENEFIT PLAN.—For purposes of this title, the term 'defined con-
tribution plan' or 'defined benefit plan' means a defined contribu-
tion plan (within the meaning of section 414(i)) or a defined benefit 
plan (within the meaning of section 414(j)), whichever applies, which 
is— 
"(1) a plan described in section 401(a) which includes a trust 
which is exempt from tax under section 501(a), 
' ij 
"(2) an annuity plan described in section 403(a), 
"(3) an annuity contract described in section 403(b), 
^ *
. 
"(4) an individual retirement account described in section 
* ' 408(a), 
, 
"(5) an individual retirement annuity described in section 
" 
408(b), or 
"(6) a simplified employee pension." 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2959 
(14) Clause (ii) of section 468(d)(2)(B) is amended by striking out 
"Comprehensive Environmental, Compensation, and Liability Act of 
1980" and inserting in lieu thereof "Comprehensive Environmental 
Response, (Dompensation, and Liability Act of 1980". 
(15) Clause (i) of section 501(cXlXA) is amended by striking out 
"the date of the enactment of the Tax Reform Act of 1984" and 
inserting in lieu thereof "July 18,1984". 
(16) Paragraph (2) of section 505(c) is amended by striking out "the 
date of the enactment of the Tax Reform Act of 1984" and inserting 
in lieu thereof "July 18,1984". 
(17) Clause (i) of section 5350t)X5XC) and subparagraph (C) of 
section 5350t)X8) are each amended by striking out "the date of the 
enactment of the Tax Reform Act of 1984" and inserting in lieu 
thereof "July 18,1984". 
(18) Subparagraph (B) of section 543(aXl) is amended by striking 
out "46 U.S.C." and inserting in lieu thereof "46 U.S.C. App.". 
(19) The second sentence of section 751(c) is amended by striking 
out "section 617(fX2), stock" and inserting in lieu thereof "section 
617(D(2)), stock". 
(20) Subsection (a) of section 844 is amended by striking our "prior 
law),, unused loss" and inserting in lieu thereof "prior law), unused 
loss". 
(21) Paragraph (2) of section 864(c) is amended by striking out 
"section 871(h) section 881(a)" and inserting in lieu thereof "section 
871(h), section 881(a)". 
(22) Subparagraph (A) of section 8810t)X2) is amended by striking 
out "Paragraph" and inserting in lieu thereof "paragraph". 
(23) Subparagraph (C) of section 881(cX3) is amended by striking 
out "section 864(dX4)." and inserting in lieu thereof "section 
864(dX4))." 
(24) The paragraph heading of section 904(dXl) is amended to read 
as follows: 
"(1) IN GENERAL.—". 
(25) Paragraphs (23), (24), (25), and (26) of section 1016(a) are each 
amended by striking out the comma at the end thereof and inserting 
in lieu thereof a semicolon. 
(26) Subsection (c) of section 1042 is amended by striking out "this 
section.—" in the material preceding paragraph (1) and inserting in 
lieu thereof "this section—" 
100 STAT. 2960 
PUBLIC LAW 99-514—OCT. 22, 1986 
(27) Paragraphs (1) and (2) of section 1060 are each amended by 
striking out "46 U.S.C." and inserting in heu thereof "46 U.S.C. 
App.". 
(28) Subsection (e) of section 1276 is amended by striking out "the 
date of the enactment of this section" and inserting in lieu thereof 
"July 18,1984". 
(29) Subparagraph (C) of section 12770a)(l) is amended by striking 
out "this paragaph" and inserting in lieu thereof "this paragraph". 
(30) The heading for subparagraph (C) of section 1277(b)(2) is 
amended by striking out "PARAGRAPH i.—" and inserting in lieu 
thereof "PARAGRAPH (l).—". 
(31) Subsection (d) of section 1277 is amended by striking out "the 
date of the enactment of this section" and inserting in lieu thereof 
"July 18, 1984". 
(32) Paragraph (4) of section 1278(a) is amended by striking out 
"means o f and inserting in lieu thereof "means". 
(33) Paragraph (1) of section 1371(e) is amended by inserting 
"(within the meaning of section 1368(e))" after "accumulated adjust-
ments account". 
(34) Paragraph (2) of section 1371(e) is amended by striking out 
"(within the meaning of section 1368(e))". 
(35) Paragraph (2)(A) of section 1504(c) is amended by striking out 
"subsection (b)(2) includes" and inserting in lieu thereof "subsection 
03)(2)) includes". 
(36) Subsection (c) of section 1551 is amended by striking out 
"section 2690))" and inserting in lieu thereof "section 269(c)". 
(37) Subsection (d) of section 2210 is amended by striking out "may 
prescibe" and inserting in lieu thereof "may prescribe". 
(38) Clause (ii) of section 3121(v)(2)(A) is amended by striking out 
"forefeiture" and inserting in lieu thereof "forfeiture". 
(39) The first sentence of paragraph (1) of section 3121(w) is 
amended by striking out "chapter 21 of this Code" and inserting in 
lieu thereof "this chapter". 
(40) Paragraph (2) of section 3121(w) is amended by striking out 
"the date of the enactment of this subsection" and inserting in lieu 
thereof"Julyl8,1984". 
(41) Subsection (e) of section 3231 is amended by redesignating the 
paragraph (6) added by Public Law 98-612 as paragraph (7). 
(42) Paragraph (1) of section 3301 is amended by striking out 
"unemployed" and inserting in lieu thereof "unemployment". 
(43) Clause (iii) of section 3304(a)(6)(A) is amended by striking out 
"and" at the end thereof. 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2961 
(44) Subparagraph (A) of section 330603X2) is amended by striking 
out "workman's compensation" and inserting in lieu thereof "work-
men's compensation'. 
(45) Paragraph (13) of section 33060b) is amended by striking out 
the comma at the end thereof and inserting in heu thereof a 
semicolon. 
(46) The heading for paragraph (6) of section 34060)) is amended by 
striking out "6041 (A)(a)" and inserting in lieu thereof "604lA(a)'. 
(47) Paragraph (1) of section 4051(d) is amended by striking out 
"the date of the enactment of the Tax Reform Act of 1984" and 
inserting in lieu thereof "July 18, 1984". 
(48) Clause (ii) of section 4161(bXlXB) is amended by striking out 
the period at the end thereof and inserting in lieu thereof a comma. 
(49) Section 4227 is amended to read as follows: 
"SEC. 4227. CROSS REFERENCE. 
"For exception for a sale to an Indian tribal government (or its subdivi-
' '' '^-i-' sion) for the exclusive use of an Indian tribal government (or its subdivi-
sion), see section 7871." 
(50) The heading for paragraph (1) of section 4961(c) is amended by 
striking out "COURT OF CLAIMS" and inserting in lieu thereof 
"UNITED STATES CLAIMS COURT". 
(51) The second sentence of subsection (d) of section 4975 is 
amended by striking out "and (12) shall not" and inserting in lieu 
thereof "and (12)) shall not". 
(52) Subsection (f) of section 6011 is amended by striking out 
"sections 6012 to 6019, inclusive" and inserting in lieu thereof 
"subparts B and C". 
(53) Clause (v) of section 6103(1X7XD) is amended by striking out 
"this Code" and inserting in lieu thereof "this title". 
(54) Subparagraph (B) of section 6111(dXl) is amended by striking 
out "subpargraph" and inserting in lieu thereof "subparagraph". 
(55) Paragraph (1) of section 64270)) is amended by striking out 
"provided in paragraph (2)" and inserting in lieu thereof "otherwise 
provided in this subsection". 
(56) Paragraph (1) of section 6427(g) is amended by striking out 
"anount" and inserting in lieu thereof "amount". 
(57) The heading for section 6660 is amended by striking out "THE 
ESTATE" and inserting in lieu thereof "ESTATE". 
(58) Subparagraph (B) of section 7422(gXl) is amended by striking 
out "section 4962" and inserting in lieu thereof "section 4963". 
100 STAT. 2962 
PUBLIC LAW 99-514—OCT. 22, 1986 
(59) Paragraph (1) of section 7476(c) is amended by striking out 
"plan,, or" and inserting in lieu thereof "plan, or". 
(60) Subparagraph (E) of section 7482(bXl) is amended by striking 
out "partnership," and inserting in lieu thereof "partnership.". 
(61) Subsection (i) of section 7611 is amended— 
(A) by redesignating subparagraphs (A), (B), (C), (D), and (E) as 
' paragraphs (1), (2), (3), (4), and (5), respectively. 
(B) by striking out "etc)," in paragraph (3) (sis so redesignated) 
' 
and inserting in lieu thereof "etc.),", and 
^
" 
(C) by striking out "the title" in paragraph (5) (as so redesig-
nated) and inserting in lieu thereof "the title". 
(62) Paragraph (1) of section 7611(a) is amended by striking out all 
that follows subparagraph (A) and inserting in lieu thereof the 
following: 
"(B) the notice requirements of paragraph (3), have been 
met." 
(63) Clause (i) of section 7701(bX4XE) is amended by striking out 
"preceeding" and inserting in lieu thereof "preceding". 
(64) Paragraph (5) of section 7701(e) is amended by striking out 
"section 168(CX2XF))" and inserting in lieu thereof 
"section 
i68(cX2)(F))". 
(65) Subparagraph (F) of section 7871(aX6) is amended by striking 
out the period at the end thereof and inserting in lieu thereof 
"; and". 
(66) Paragraph (2) of section 1010?) of the Tax Reform Act of 1984 
is amended by inserting "(as such paragraphs (4) and (5) are 
amended by this section and section 102)" after "(4), and (5)". 
(67) Subparagraph (C) of section 102(eX3) of the Tax Reform Act of 
1984 is amended by striking out "paragraph (7XA) (including the 
heading)" and inserting in lieu thereof "paragraphs (6XB) and (7XA) 
(including any headings)". 
(68) Paragraph (1) of section 127(b) of the Tax Reform Act of 1984 
is amended by inserting "(as amended by section 128)" after "subsec-
tion (c)". 
(69) Subparagraph (A) of section 221(dX2) of the Tax Reform Act of 
1984 is amended by striking out "rapid that" and inserting in lieu 
thereof "rapid than". 
PUBLIC LAW 99-514—OCT. 22, 1986 
100 STAT. 2963 
(70) The item relating to tax credit employee stock ownership 
plans in the table of sections for subpart A of part I of subchapter D 
of chapter 1 is amended to read as follows: 
"Sec. 409. Qualifications for tax credit employee stock ownership plans." 
(71) The table of sections for subpart C of part II of subchapter E 
of chapter 1 is amended in the item relating to section 467 by 
inserting "the" before "use". 
' ' 
(72) The table of subparts for part V of subchapter P of chapter 1 
is amended by inserting "on bonds" after "discount" in the item 
relating to subpart B. 
(73) The table of sections for subchapter B of chapter 3 is amended 
by striking out the item relating to section 1461 and inserting in lieu 
thereof the following: 
"Sec. 1461. Liability for withheld tax." 
(74) The table of sections for subchapter G of chapter 32 is 
amended by striking out "references" in the item relating to section 
4227 and inserting in lieu thereof "reference". 
(75) The table of sections for chapter 43 is amended by— 
(A) inserting "section" before "403(b)" in the item relating to 
section 4973, and 
(B) striking out "and allocations" in the item relating to 
section 4978. 
Approved October 22, 1986. 
LEGISLATIVE HISTORY—H.R. 3838: 
HOUSE REPORTS: No. 99-426 (Comm. on Ways and Means) and No. 99-841 (Comm. 
of C!onference). 
SENATE REPORTS: No. 99-313 (Comm. on Finance). 
CONGRESSIONAL RECORD: 
Vol. 131 (1985): Dec. 17, considered and passed House. 
Vol. 132 (1986): June 4, 9-13, 16-24, considered and passed Senate, amended. 
Sept. 25, House agreed to conference report. 
Sept 26, 27, Senate agreed to conference report. 
WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 22 (1986): 
Oct. 22, Presidential remarks.