PART IX—ITEMS NOT DEDUCTIBLE
Editorial Notes
Amendments
2018—
2017—
1996—
1990—
1988—
1987—
1986—
1984—
1983—
1982—
1980—
1977—
1976—
1971—
1969—
1966—
1964—
1962—
§261. General rule for disallowance of deductions
In computing taxable income no deduction shall in any case be allowed in respect of the items specified in this part.
(Aug. 16, 1954, ch. 736,
§262. Personal, living, and family expenses
(a) General rule
Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.
(b) Treatment of certain phone expenses
For purposes of subsection (a), in the case of an individual, any charge (including taxes thereon) for basic local telephone service with respect to the 1st telephone line provided to any residence of the taxpayer shall be treated as a personal expense.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1988—
Statutory Notes and Related Subsidiaries
Effective Date of 1988 Amendment
§263. Capital expenditures
(a) General rule
No deduction shall be allowed for—
(1) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. This paragraph shall not apply to—
(A) expenditures for the development of mines or deposits deductible under section 616,
(B) research and experimental expenditures deductible under section 174,
(C) soil and water conservation expenditures deductible under section 175,
(D) expenditures by farmers for fertilizer, etc., deductible under section 180,
(E) expenditures for removal of architectural and transportation barriers to the handicapped and elderly which the taxpayer elects to deduct under section 190,
(F) expenditures for tertiary injectants with respect to which a deduction is allowed under section 193,
(G) expenditures for which a deduction is allowed under section 179,
(H) expenditures for which a deduction is allowed under section 179B,
(I) expenditures for which a deduction is allowed under section 179C,
(J) expenditures for which a deduction is allowed under section 179D, or
(K) expenditures for which a deduction is allowed under section 179E.
(2) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.
[(b) Repealed. Pub. L. 101–508, title XI, §11801(a)(16), Nov. 5, 1990, 104 Stat. 1388–520 ]
(c) Intangible drilling and development costs in the case of oil and gas wells and geothermal wells
Notwithstanding subsection (a), and except as provided in subsection (i), regulations shall be prescribed by the Secretary under this subtitle corresponding to the regulations which granted the option to deduct as expenses intangible drilling and development costs in the case of oil and gas wells and which were recognized and approved by the Congress in House Concurrent Resolution 50, Seventy-ninth Congress. Such regulations shall also grant the option to deduct as expenses intangible drilling and development costs in the case of wells drilled for any geothermal deposit (as defined in section 613(e)(2)) to the same extent and in the same manner as such expenses are deductible in the case of oil and gas wells. This subsection shall not apply with respect to any costs to which any deduction is allowed under section 59(e) or 291.
(d) Expenditures in connection with certain railroad rolling stock
In the case of expenditures in connection with the rehabilitation of a unit of railroad rolling stock (except a locomotive) used by a domestic common carrier by railroad which would, but for this subsection, be properly chargeable to capital account, such expenditures, if during any 12-month period they do not exceed an amount equal to 20 percent of the basis of such unit in the hands of the taxpayer, shall, at the election of the taxpayer, be treated (notwithstanding subsection (a)) as deductible repairs under section 162 or 212. An election under this subsection shall be made for any taxable year at such time and in such manner as the Secretary prescribes by regulations. An election may not be made under this subsection for any taxable year to which an election under subsection (e) applies to railroad rolling stock (other than locomotives).
[(e) Repealed. Pub. L. 97–34, title II, §201(c), Aug. 13, 1981, 95 Stat. 219 ]
(f) Railroad ties
In the case of a domestic common carrier by rail (including a railroad switching or terminal company) which uses the retirement-replacement method of accounting for depreciation of its railroad track, expenditures for acquiring and installing replacement ties of any material (and fastenings related to such ties) shall be accorded the same tax accounting treatment as expenditures for replacement ties of wood (and fastenings related to such ties).
(g) Certain interest and carrying costs in the case of straddles
(1) General rule
No deduction shall be allowed for interest and carrying charges properly allocable to personal property which is part of a straddle (as defined in section 1092(c)). Any amount not allowed as a deduction by reason of the preceding sentence shall be chargeable to the capital account with respect to the personal property to which such amount relates.
(2) Interest and carrying charges defined
For purposes of paragraph (1), the term "interest and carrying charges" means the excess of—
(A) the sum of—
(i) interest on indebtedness incurred or continued to purchase or carry the personal property, and
(ii) all other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property, over
(B) the sum of—
(i) the amount of interest (including original issue discount) includible in gross income for the taxable year with respect to the property described in subparagraph (A),
(ii) any amount treated as ordinary income under section 1271(a)(3)(A), 1276, or 1281(a) with respect to such property for the taxable year,
(iii) the excess of any dividends includible in gross income with respect to such property for the taxable year over the amount of any deduction allowable with respect to such dividends under section 243 or 245, and
(iv) any amount which is a payment with respect to a security loan (within the meaning of section 512(a)(5)) includible in gross income with respect to such property for the taxable year.
For purposes of subparagraph (A), the term "interest" includes any amount paid or incurred in connection with personal property used in a short sale.
(3) Exception for hedging transactions
This subsection shall not apply in the case of any hedging transaction (as defined in section 1256(e)).
(4) Application with other provisions
(A) Subsection (c)
In the case of any short sale, this subsection shall be applied after subsection (h).
(B) Section 1277 or 1282
In the case of any obligation to which section 1277 or 1282 applies, this subsection shall be applied after section 1277 or 1282.
(h) Payments in lieu of dividends in connection with short sales
(1) In general
If—
(A) a taxpayer makes any payment with respect to any stock used by such taxpayer in a short sale and such payment is in lieu of a dividend payment on such stock, and
(B) the closing of such short sale occurs on or before the 45th day after the date of such short sale,
then no deduction shall be allowed for such payment. The basis of the stock used to close the short sale shall be increased by the amount not allowed as a deduction by reason of the preceding sentence.
(2) Longer period in case of extraordinary dividends
If the payment described in paragraph (1)(A) is in respect of an extraordinary dividend, paragraph (1)(B) shall be applied by substituting "the day 1 year after the date of such short sale" for "the 45th day after the date of such short sale".
(3) Extraordinary dividend
For purposes of this subsection, the term "extraordinary dividend" has the meaning given to such term by section 1059(c); except that such section shall be applied by treating the amount realized by the taxpayer in the short sale as his adjusted basis in the stock.
(4) Special rule where risk of loss diminished
The running of any period of time applicable under paragraph (1)(B) (as modified by paragraph (2)) shall be suspended during any period in which—
(A) the taxpayer holds, has an option to buy, or is under a contractual obligation to buy, substantially identical stock or securities, or
(B) under regulations prescribed by the Secretary, a taxpayer has diminished his risk of loss by holding 1 or more other positions with respect to substantially similar or related property.
(5) Deduction allowable to extent of ordinary income from amounts paid by lending broker for use of collateral
(A) In general
Paragraph (1) shall apply only to the extent that the payments or distributions with respect to any short sale exceed the amount which—
(i) is treated as ordinary income by the taxpayer, and
(ii) is received by the taxpayer as compensation for the use of any collateral with respect to any stock used in such short sale.
(B) Exception not to apply to extraordinary dividends
Subparagraph (A) shall not apply if one or more payments or distributions is in respect of an extraordinary dividend.
(6) Application of this subsection with subsection (g)
In the case of any short sale, this subsection shall be applied before subsection (g).
(i) Special rules for intangible drilling and development costs incurred outside the United States
In the case of intangible 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
(2) such costs shall—
(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 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.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2018—Subsec. (a)(1)(F), (G).
Subsec. (a)(1)(H) to (L).
2014—Subsec. (a)(1)(H).
Subsec. (g)(2)(B)(iii).
2006—Subsec. (a)(1)(L).
2005—Subsec. (a)(1)(J).
Subsec. (a)(1)(K).
2004—Subsec. (a)(1)(I).
Subsec. (g)(2)(B)(ii).
1997—Subsec. (a)(1)(H).
1990—Subsec. (b).
Subsec. (c).
1988—Subsec. (c).
1986—Subsec. (a)(1)(E) to (H).
Subsec. (c).
Subsec. (g)(2)(B)(iv).
Subsec. (i).
1984—Subsec. (g)(2).
Subsec. (g)(4).
Subsec. (h).
1983—Subsec. (g)(2)(A)(ii).
Subsec. (g)(2)(B)(ii).
1982—Subsec. (c).
1981—Subsec. (a)(1)(H).
Subsec. (e).
Subsec. (g).
1980—Subsec. (a)(1)(G).
1978—Subsec. (c).
1976—Subsec. (a)(1)(F).
Subsec. (a)(3).
Subsec. (d).
Subsec. (e).
Subsec. (f).
1971—Subsec. (e).
Subsec. (f).
1969—Subsec. (e).
1965—Subsec. (a)(3).
Subsec. (d).
1964—Subsec. (a)(3).
1962—Subsec. (a)(1)(E).
1960—Subsec. (a)(1)(D).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by section 221(a)(41)(G) of
Except as otherwise provided in section 221(a) of
Effective Date of 2006 Amendment
Amendment by
Effective Date of 2005 Amendment
Amendment by section 1323(b)(2) of
Amendment by section 1331(b)(4) of
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 402(b)(1) of
"(1)
"(2)
Amendment by section 701(e)(4)(D) of
Amendment by section 1808(b) of
Effective Date of 1984 Amendment
Amendment by section 56(a) of
Amendment by section 102(e)(7), (8) of
Effective Date of 1983 Amendment
Amendment by section 306 of
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1981 Amendment
Amendment by sections 201(c) and 202(d)(1) of
Amendment by section 502 of
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
"(1)
"(2)
Effective Date of 1976 Amendment
Amendment by section 2122(b)(2) of
Effective Date of 1971 Amendment
"(2) The amendment made by subsection (b) [amending this section] shall apply to taxable years ending after December 31, 1970.
"(3) The amendments made by subsection (c) [amending this section] shall apply to taxable years beginning after December 31, 1969."
Effective Date of 1969 Amendment
Effective Date of 1965 Amendment
Effective Date of 1962 Amendment
Effective Date of 1960 Amendment
Amendment by
Short Title of 1965 Amendment
Short Title of 1964 Amendment
Savings Provision
For provisions that nothing in amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For applicability of amendment by section 701(e)(4)(D) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
§263A. Capitalization and inclusion in inventory costs of certain expenses
(a) Nondeductibility 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 capitalized.
(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.
Any cost which (but for this subsection) could not be taken into account in computing taxable income for any taxable year shall not be treated as a cost described in this paragraph.
(b) Property to which section applies
Except as otherwise provided in this section, this section shall apply to—
(1) Property produced by taxpayer
Real or tangible personal property produced by the taxpayer.
(2) Property acquired for resale
Real or personal property described in section 1221(a)(1) which is acquired by the taxpayer for resale.
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 section 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 167(h), 179B, 263(c), 263(i), 291(b)(2), 616, or 617.
(4) Coordination with long-term contract rules
This section shall not apply to any property produced by the taxpayer 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 (e)(4)(B) (after application of the last sentence thereof), and
(B) any real property underlying such trees.
(6) Coordination with section 59(e)
Paragraphs (2) and (3) shall apply to any amount allowable as a deduction under section 59(e) for qualified expenditures described in subparagraphs (B), (C), (D), and (E) of paragraph (2) thereof.
(7) Coordination with section 168(k)(5)
This section shall not apply to any amount allowed as a deduction by reason of section 168(k)(5) (relating to special rules for certain plants bearing fruits and nuts).
(d) Exception for farming businesses
(1) Section not to apply to certain property
(A) In general
This section shall not apply to any of the following which is produced by the taxpayer in a farming business:
(i) Any animal.
(ii) Any plant 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 corporation, partnership, or tax shelter required to use an accrual method of accounting under section 447 or 448(a)(3).
(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 the plants described in subparagraph (A) at all times during the taxable year in which such amounts were paid or incurred, and
(ii) such other person holds any part of the remaining equity interest and materially participates in the planting, maintenance, cultivation, or development of the plants described in subparagraph (A) during the taxable year in which such amounts were paid or incurred.
The determination of whether an individual materially participates in any activity shall be made in a manner similar to the manner in which such determination is made under section 2032A(e)(6).
(C) Special temporary rule for citrus plants lost by reason of casualty
(i) In general
In the case of the replanting of citrus plants, 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 not less than 50 percent in the replanted citrus plants at all times during the taxable year in which such amounts were paid or incurred and such other person holds any part of the remaining equity interest, or
(II) such other person acquired the entirety of such taxpayer's equity interest in the land on which the lost or damaged citrus plants were located at the time of such loss or damage, and the replanting is on such land.
(ii) Termination
Clause (i) shall not apply to any cost paid or incurred after the date which is 10 years after the date of the enactment of the Tax Cuts and Jobs Act.
(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 produced in any farming business carried on by such taxpayer.
(B) Certain persons not eligible
No election may be made under this paragraph by a corporation, partnership, or tax shelter, if such corporation, partnership, or tax shelter is required to use an accrual method of accounting under section 447 or 448(a)(3).
(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, cultivation, 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 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 with respect to which amounts would have been capitalized under subsection (a) but for an election under subsection (d)(3)—
(i) such plant (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 allowable as a deduction to the taxpayer which, but for an election under subsection (d)(3), would have been capitalized with respect to the plant.
(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 application 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 taxpayer's family.
(C) Members of family
For purposes of this paragraph, 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 which will have more than 1 crop or yield, the period before the 1st marketable crop or yield from such plant, or
(ii) in the case of any other plant, the period before such plant is reasonably expected to be disposed of.
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.
(f) Special rules for allocation of interest to property produced by the taxpayer
(1) Interest capitalized only in certain cases
Subsection (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 property shall be assigned to such property, and
(ii) interest on any other indebtedness shall be assigned to such property to the extent that the taxpayer's interest costs could have been reduced if production expenditures (not attributable to indebtedness 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.
(3) Interest relating to property used to produce property
This subsection shall apply to any interest on indebtedness allocable (as determined under paragraph (2)) to property used to produce property to which this subsection applies to the extent such interest is allocable (as so determined) to the produced property.
(4) Exemption for aging process of beer, wine, and distilled spirits
For purposes of this subsection, the production period shall not include the aging period for—
(A) beer (as defined in section 5052(a)),
(B) wine (as described in section 5041(a)), or
(C) distilled spirits (as defined in section 5002(a)(8)), except such spirits that are unfit for use for beverage purposes.
(5) Definitions
For purposes of this subsection—
(A) Long useful life
Property has a long useful life if 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) except as provided in paragraph (4), 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 taxpayer (whether under such contract or otherwise) shall be taken into account in applying subsection (a) to the taxpayer.
(h) Exemption for free lance authors, photographers, and artists
(1) In general
Nothing in this section shall require the capitalization of any qualified creative expense.
(2) Qualified creative expense
For purposes of this subsection, the term "qualified creative expense" means any expense—
(A) which is paid or incurred by an individual in the trade or business of such individual (other than as an employee) of being a writer, photographer, or artist, and
(B) which, without regard to this section, would be allowable as a deduction for the taxable year.
Such term does not include any expense related to printing, photographic plates, motion picture films, video tapes, or similar items.
(3) Definitions
For purposes of this subsection—
(A) Writer
The term "writer" means any individual if the personal efforts of such individual create (or may reasonably be expected to create) a literary manuscript, musical composition (including any accompanying words), or dance score.
(B) Photographer
The term "photographer" means any individual if the personal efforts of such individual create (or may reasonably be expected to create) a photograph or photographic negative or transparency.
(C) Artist
(i) In general
The term "artist" means any individual if the personal efforts of such individual create (or may reasonably be expected to create) a picture, painting, sculpture, statue, etching, drawing, cartoon, graphic design, or original print edition.
(ii) Criteria
In determining whether any expense is paid or incurred in the trade or business of being an artist, the following criteria shall be taken into account:
(I) The originality and uniqueness of the item created (or to be created).
(II) The predominance of aesthetic value over utilitarian value of the item created (or to be created).
(D) Treatment of certain corporations
(i) In general
If—
(I) substantially all of the stock of a corporation is owned by a qualified employee-owner and members of his family (as defined in section 267(c)(4)), and
(II) the principal activity of such corporation is performance of personal services directly related to the activities of the qualified employee-owner and such services are substantially performed by the qualified employee-owner,
this subsection shall apply to any expense of such corporation which directly relates to the activities of such employee-owner in the same manner as if such expense were incurred by such employee-owner.
(ii) Qualified employee-owner
For purposes of this subparagraph, the term "qualified employee-owner" means any individual who is an employee-owner of the corporation (as defined in section 269A(b)(2)) and who is a writer, photographer, or artist.
(i) Exemption for certain small businesses
(1) In general
In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year, this section shall not apply with respect to such taxpayer for such taxable year.
(2) Application of gross receipts test to individuals, etc.
In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership.
(3) Coordination with section 481
Any change in method of accounting made pursuant to this subsection shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.
(j) Regulations
The Secretary shall prescribe such regulations 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).
(Added
Editorial Notes
References in Text
The date of the enactment of the Tax Cuts and Jobs Act, referred to in subsec. (d)(2)(C)(ii), probably means the date of enactment of title I of
Amendments
2020—Subsec. (f)(4).
2019—Subsec. (f)(4)(B).
2017—Subsec. (b)(2).
Subsec. (d)(2)(C).
Subsec. (f)(4), (5).
Subsec. (f)(5)(B)(ii).
Subsecs. (i), (j).
2015—Subsec. (c)(7).
2005—Subsec. (c)(3).
2004—Subsec. (c)(3).
1999—Subsec. (b)(2)(A).
1989—Subsec. (h)(3)(D).
"(i)
"(ii)
"(iii)
1988—Subsec. (a)(2).
Subsec. (c)(3).
Subsec. (c)(6).
Subsec. (d)(1).
Subsec. (d)(1)(A).
Subsec. (d)(2)(B)(i).
Subsec. (d)(2)(B)(ii).
Subsec. (d)(3)(A).
Subsec. (d)(3)(B).
"(i) by a corporation, partnership, or tax shelter, if such corporation, partnership, or tax shelter is required to use an accrual method of accounting under section 447 or 448(a)(3), or
"(ii) with respect to the planting, cultivation, maintenance, or development of pistachio trees."
Subsec. (e).
Subsec. (f)(3).
Subsecs. (h), (i).
Statutory Notes and Related Subsidiaries
Effective Date of 2020 Amendment
Effective Date of 2019 Amendment
Effective Date of 2017 Amendment
"(1)
"(2)
"(3)
Effective Date of 2015 Amendment
Amendment by
Effective Date of 2005 Amendment
Amendment by
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 1008(b)(1)–(4) of
"(1)
"(2)
"(A)
"(B)
Effective Date
"(1)
"(2)
"(A)
"(B)
"(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 adjustments under section 481 by reason of such change shall not exceed 4 years.
"(3)
"(4)
"(A)
"(i) to which the amendments made by section 201 [amending
"(ii) to which the amendments made by section 251 [amending
"(B)
"(5)
"(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 corporation 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)
"(7)
Construction
[
Allocation Ratio for Apportioning Storage Costs and Related Handling Costs
Amortization of Past Service Pension Costs
"(a)
"(b)
"(1)
"(2)
"(A)
"(B)
"(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 of the Treasury or his delegate, and
"(iii) the net amount of adjustments required by section 481 of the Internal Revenue Code of 1986 shall be taken into account over a period not longer than 4 taxable years."
§264. Certain amounts paid in connection with insurance contracts
(a) General rule
No deduction shall be allowed for—
(1) Premiums on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract.
(2) Any amount paid or accrued on indebtedness incurred or continued to purchase or carry a single premium life insurance, endowment, or annuity contract.
(3) Except as provided in subsection (d), any amount paid or accrued on indebtedness incurred or continued to purchase or carry a life insurance, endowment, or annuity contract (other than a single premium contract or a contract treated as a single premium contract) pursuant to a plan of purchase which contemplates the systematic direct or indirect borrowing of part or all of the increases in the cash value of such contract (either from the insurer or otherwise).
(4) Except as provided in subsection (e), any interest paid or accrued on any indebtedness with respect to 1 or more life insurance policies owned by the taxpayer covering the life of any individual, or any endowment or annuity contracts owned by the taxpayer covering any individual.
Paragraph (2) shall apply in respect of annuity contracts only as to contracts purchased after March 1, 1954. Paragraph (3) shall apply only in respect of contracts purchased after August 6, 1963. Paragraph (4) shall apply with respect to contracts purchased after June 20, 1986.
(b) Exceptions to subsection (a)(1)
Subsection (a)(1) shall not apply to—
(1) any annuity contract described in section 72(s)(5), and
(2) any annuity contract to which section 72(u) applies.
(c) Contracts treated as single premium contracts
For purposes of subsection (a)(2), a contract shall be treated as a single premium contract—
(1) if substantially all the premiums on the contract are paid within a period of 4 years from the date on which the contract is purchased, or
(2) if an amount is deposited after March 1, 1954, with the insurer for payment of a substantial number of future premiums on the contract.
(d) Exceptions
Subsection (a)(3) shall not apply to any amount paid or accrued by a person during a taxable year on indebtedness incurred or continued as part of a plan referred to in subsection (a)(3)—
(1) if no part of 4 of the annual premiums due during the 7-year period (beginning with the date the first premium on the contract to which such plan relates was paid) is paid under such plan by means of indebtedness,
(2) if the total of the amounts paid or accrued by such person during such taxable year for which (without regard to this paragraph) no deduction would be allowable by reason of subsection (a)(3) does not exceed $100,
(3) if such amount was paid or accrued on indebtedness incurred because of an unforeseen substantial loss of income or unforeseen substantial increase in his financial obligations, or
(4) if such indebtedness was incurred in connection with his trade or business.
For purposes of applying paragraph (1), if there is a substantial increase in the premiums on a contract, a new 7-year period described in such paragraph with respect to such contract shall commence on the date the first such increased premium is paid.
(e) Special rules for application of subsection (a)(4)
(1) Exception for key persons
Subsection (a)(4) shall not apply to any interest paid or accrued on any indebtedness with respect to policies or contracts covering an individual who is a key person to the extent that the aggregate amount of such indebtedness with respect to policies and contracts covering such individual does not exceed $50,000.
(2) Interest rate cap on key persons and pre-1986 contracts
(A) In general
No deduction shall be allowed by reason of paragraph (1) or the last sentence of subsection (a) with respect to interest paid or accrued for any month beginning after December 31, 1995, to the extent the amount of such interest exceeds the amount which would have been determined if the applicable rate of interest were used for such month.
(B) Applicable rate of interest
For purposes of subparagraph (A)—
(i) In general
The applicable rate of interest for any month is the rate of interest described as Moody's Corporate Bond Yield Average-Monthly Average Corporates as published by Moody's Investors Service, Inc., or any successor thereto, for such month.
(ii) Pre-1986 contracts
In the case of indebtedness on a contract purchased on or before June 20, 1986—
(I) which is a contract providing a fixed rate of interest, the applicable rate of interest for any month shall be the Moody's rate described in clause (i) for the month in which the contract was purchased, or
(II) which is a contract providing a variable rate of interest, the applicable rate of interest for any month in an applicable period shall be such Moody's rate for the third month preceding the first month in such period.
For purposes of subclause (II), the term "applicable period" means the 12-month period beginning on the date the policy is issued (and each successive 12-month period thereafter) unless the taxpayer elects a number of months (not greater than 12) other than such 12-month period to be its applicable period. Such an election shall be made not later than the 90th day after the date of the enactment of this sentence and, if made, shall apply to the taxpayer's first taxable year ending on or after October 13, 1995, and all subsequent taxable years unless revoked with the consent of the Secretary.
(3) Key person
For purposes of paragraph (1), the term "key person" means an officer or 20-percent owner, except that the number of individuals who may be treated as key persons with respect to any taxpayer shall not exceed the greater of—
(A) 5 individuals, or
(B) the lesser of 5 percent of the total officers and employees of the taxpayer or 20 individuals.
(4) 20-percent owner
For purposes of this subsection, the term "20-percent owner" means—
(A) if the taxpayer is a corporation, any person who owns directly 20 percent or more of the outstanding stock of the corporation or stock possessing 20 percent or more of the total combined voting power of all stock of the corporation, or
(B) if the taxpayer is not a corporation, any person who owns 20 percent or more of the capital or profits interest in the taxpayer.
(5) Aggregation rules
(A) In general
For purposes of paragraph (4)(A) and applying the $50,000 limitation in paragraph (1)—
(i) all members of a controlled group shall be treated as one taxpayer, and
(ii) such limitation shall be allocated among the members of such group in such manner as the Secretary may prescribe.
(B) Controlled group
For purposes of this paragraph, 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 members of a controlled group.
(f) Pro rata allocation of interest expense to policy cash values
(1) In general
No deduction shall be allowed for that portion of the taxpayer's interest expense which is allocable to unborrowed policy cash values.
(2) Allocation
For purposes of paragraph (1), the portion of the taxpayer's interest expense which is allocable to unborrowed policy cash values is an amount which bears the same ratio to such interest expense as—
(A) the taxpayer's average unborrowed policy cash values of life insurance policies, and annuity and endowment contracts, issued after June 8, 1997, bears to
(B) the sum of—
(i) in the case of assets of the taxpayer which are life insurance policies or annuity or endowment contracts, the average unborrowed policy cash values of such policies and contracts, and
(ii) in the case of assets of the taxpayer not described in clause (i), the average adjusted bases (within the meaning of section 1016) of such assets.
(3) Unborrowed policy cash value
For purposes of this subsection, the term "unborrowed policy cash value" means, with respect to any life insurance policy or annuity or endowment contract, the excess of—
(A) the cash surrender value of such policy or contract determined without regard to any surrender charge, over
(B) the amount of any loan with respect to such policy or contract.
If the amount described in subparagraph (A) with respect to any policy or contract does not reasonably approximate its actual value, the amount taken into account under subparagraph (A) shall be the greater of the amount of the insurance company liability or the insurance company reserve with respect to such policy or contract (as determined for purposes of the annual statement approved by the National Association of Insurance Commissioners) or shall be such other amount as is determined by the Secretary.
(4) Exception for certain policies and contracts
(A) Policies and contracts covering 20-percent owners, officers, directors, and employees
Paragraph (1) shall not apply to any policy or contract owned by an entity engaged in a trade or business if such policy or contract covers only 1 individual and if such individual is (at the time first covered by the policy or contract)—
(i) a 20-percent owner of such entity, or
(ii) an individual (not described in clause (i)) who is an officer, director, or employee of such trade or business.
A policy or contract covering a 20-percent owner of such entity shall not be treated as failing to meet the requirements of the preceding sentence by reason of covering the joint lives of such owner and such owner's spouse.
(B) Contracts subject to current income inclusion
Paragraph (1) shall not apply to any annuity contract to which section 72(u) applies.
(C) Coordination with paragraph (2)
Any policy or contract to which paragraph (1) does not apply by reason of this paragraph shall not be taken into account under paragraph (2).
(D) 20-percent owner
For purposes of subparagraph (A), the term "20-percent owner" has the meaning given such term by subsection (e)(4).
(E) Master contracts
If coverage for each insured under a master contract is treated as a separate contract for purposes of sections 817(h), 7702, and 7702A, coverage for each such insured shall be treated as a separate contract for purposes of subparagraph (A). For purposes of the preceding sentence, the term "master contract" shall not include any group life insurance contract (as defined in section 848(e)(2)).
(5) Exception for policies and contracts held by natural persons; treatment of partnerships and S corporations
(A) Policies and contracts held by natural persons
(i) In general
This subsection shall not apply to any policy or contract held by a natural person.
(ii) Exception where business is beneficiary
If a trade or business is directly or indirectly the beneficiary under any policy or contract, such policy or contract shall be treated as held by such trade or business and not by a natural person.
(iii) Special rules
(I) Certain trades or businesses not taken into account
Clause (ii) shall not apply to any trade or business carried on as a sole proprietorship and to any trade or business performing services as an employee.
(II) Limitation on unborrowed cash value
The amount of the unborrowed cash value of any policy or contract which is taken into account by reason of clause (ii) shall not exceed the benefit to which the trade or business is directly or indirectly entitled under the policy or contract.
(iv) Reporting
The Secretary shall require such reporting from policyholders and issuers as is necessary to carry out clause (ii).
(B) Treatment of partnerships and S corporations
In the case of a partnership or S corporation, this subsection shall be applied at the partnership and corporate levels.
(6) Special rules
(A) Coordination with subsection (a) and section 265
If interest on any indebtedness is disallowed under subsection (a) or section 265—
(i) such disallowed interest shall not be taken into account for purposes of applying this subsection, and
(ii) the amount otherwise taken into account under paragraph (2)(B) shall be reduced (but not below zero) by the amount of such indebtedness.
(B) Coordination with section 263A
This subsection shall be applied before the application of section 263A (relating to capitalization of certain expenses where taxpayer produces property).
(7) Interest expense
The term "interest expense" means the aggregate amount allowable to the taxpayer as a deduction for interest (within the meaning of section 265(b)(4)) for the taxable year (determined without regard to this subsection, section 265(b), and section 291).
(8) Aggregation rules
(A) In general
All members of a controlled group (within the meaning of subsection (e)(5)(B)) shall be treated as 1 taxpayer for purposes of this subsection.
(B) Treatment of insurance companies
This subsection shall not apply to an insurance company subject to tax under subchapter L, and subparagraph (A) shall be applied without regard to any member of an affiliated group which is an insurance company.
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
The date of the enactment of this sentence, referred to in subsec. (e)(2)(B)(ii), probably means the date of enactment of
Codification
Another section 1084(b) of
Amendments
1998—Subsec. (a)(3).
Subsec. (a)(4).
Subsec. (f)(3).
Subsec. (f)(4)(E).
Subsec. (f)(5)(A)(iv).
Subsec. (f)(8)(A).
1997—Subsec. (a)(1).
Subsec. (a)(4).
"(A) is an officer or employee of, or
"(B) is financially interested in,
any trade or business carried on by the taxpayer."
"(A) is or was an officer or employee, or
"(B) is or was financially interested in,
any trade or business carried on (currently or formerly) by the taxpayer."
Subsecs. (b), (c).
Subsec. (d).
Subsec. (d)(2)(B)(ii).
Subsec. (d)(4)(B).
Subsec. (e).
Subsec. (f).
1996—Subsec. (a)(4).
Subsec. (d).
1986—Subsec. (a).
1964—Subsec. (a).
Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 1998 Amendments
Amendment by
Amendment by
Effective Date of 1997 Amendment
Amendment by section 1084(a), (b)(1), (c) of
Amendment by section 1602(f)(1)–(3) of
Effective Date of 1996 Amendment
"(1)
"(2)
"(A)
"(i) indebtedness incurred before January 1, 1996, or
"(ii) indebtedness incurred before January 1, 1997 with respect to any contract or policy entered into in 1994 or 1995,
the amendments made by this section shall not apply to qualified interest paid or accrued on such indebtedness after October 13, 1995, and before January 1, 1999.
"(B)
"(i) in the case of any interest paid or accrued after December 31, 1995, indebtedness with respect to no more than 20,000 insured individuals were taken into account, and
"(ii) the lesser of the following rates of interest were used for such month:
"(I) The rate of interest specified under the terms of the indebtedness as in effect on October 13, 1995 (and without regard to modification of such terms after such date).
"(II) The applicable percentage of the rate of interest described as Moody's Corporate Bond Yield Average-Monthly Average Corporates as published by Moody's Investors Service, Inc., or any successor thereto, for such month.
For purposes of clause (i), all persons treated as a single employer under subsection (a) or (b) of section 52 of the Internal Revenue Code of 1986 or subsection (m) or (o) of section 414 of such Code shall be treated as 1 person. Subclause (II) of clause (ii) shall not apply to any month before January 1, 1996.
"(C)
| For calendar year: | The percentage is: |
|---|---|
| 1996 | 100 percent |
| 1997 | 90 percent |
| 1998 | 80 percent." |
Effective Date of 1986 Amendment
Effective Date of 1964 Amendment
Spread of Income Inclusion on Surrender, Etc. of Contracts
"(1)
"(A) on the complete surrender, redemption, or maturity of such policy or contract during calendar year 1996, 1997, or 1998, or
"(B) in full discharge during any such calendar year of the obligation under the policy or contract which is in the nature of a refund of the consideration paid for the policy or contract,
then (in lieu of any other inclusion in gross income) such amount shall be includible in gross income ratably over the 4-taxable year period beginning with the taxable year such amount would (but for this paragraph) be includible. The preceding sentence shall only apply to the extent the amount is includible in gross income for the taxable year in which the event described in subparagraph (A) or (B) occurs.
"(2)
"(A) failing to meet the requirement of section 264(c)(1) of the Internal Revenue Code of 1986, or
"(B) a single premium contract under section 264(b)(1) of such Code,
solely by reason of an occurrence described in subparagraph (A) or (B) of paragraph (1) of this subsection or solely by reason of a lapse occurring after October 13, 1995, by reason of no additional premiums being received under the contract.
"(3)
"(A) section 848 of the Internal Revenue Code of 1986 shall not apply to the unamortized balance (if any) of the specified policy acquisition expenses attributable to such policy or contract immediately before the insurance company's taxable year in which such event occurs, and
"(B) there shall be allowed as a deduction to such company for such taxable year under
§265. Expenses and interest relating to tax-exempt income
(a) General rule
No deduction shall be allowed for—
(1) Expenses
Any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this subtitle, or any amount otherwise allowable under section 212 (relating to expenses for production of income) which is allocable to interest (whether or not any amount of such interest is received or accrued) wholly exempt from the taxes imposed by this subtitle.
(2) Interest
Interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the taxes imposed by this subtitle.
(3) Certain regulated investment companies
In the case of a regulated investment company which distributes during the taxable year an exempt-interest dividend (including exempt-interest dividends paid after the close of the taxable year as described in section 855), that portion of any amount otherwise allowable as a deduction which the amount of the income of such company wholly exempt from taxes under this subtitle bears to the total of such exempt income and its gross income (excluding from gross income, for this purpose, capital gain net income, as defined in section 1222(9)).
(4) Interest related to exempt-interest dividends
Interest on indebtedness incurred or continued to purchase or carry shares of stock of a regulated investment company which during the taxable year of the holder thereof distributes exempt-interest dividends.
(5) Special rules for application of paragraph (2) in the case of short sales
For purposes of paragraph (2)—
(A) In general
The term "interest" includes any amount paid or incurred—
(i) by any person making a short sale in connection with personal property used in such short sale, or
(ii) by any other person for the use of any collateral with respect to such short sale.
(B) Exception where no return on cash collateral
If—
(i) the taxpayer provides cash as collateral for any short sale, and
(ii) the taxpayer receives no material earnings on such cash during the period of the sale,
subparagraph (A)(i) shall not apply to such short sale.
(6) Section not to apply with respect to parsonage and military housing allowances
No deduction shall be denied under this section for interest on a mortgage on, or real property taxes on, the home of the taxpayer by reason of the receipt of an amount as—
(A) a military housing allowance, or
(B) a parsonage allowance excludable from gross income under section 107.
(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 acquired on August 7, 1986.
(B) Qualified tax-exempt obligation
(i) In general
For purposes of subparagraph (A), the term "qualified tax-exempt obligation" means a tax-exempt obligation—
(I) which is issued after August 7, 1986, by a qualified small issuer,
(II) which is not a private activity bond (as defined in section 141), and
(III) which is designated by the issuer for purposes of this paragraph.
(ii) Certain bonds not treated as private activity bonds
For purposes of clause (i)(II), there shall not be treated as a private activity bond—
(I) any qualified 501(c)(3) bond (as defined in section 145), or
(II) any obligation issued to refund (or which is part of a series of obligations issued to refund) an obligation issued before August 8, 1986, which was not an industrial development bond (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) or a private loan bond (as defined in section 103(o)(2)(A), as so in effect, but without regard to any exemption from such definition other than section 103(o)(2)(A)).
(C) Qualified small issuer
(i) In general
For purposes of subparagraph (B), the term "qualified small issuer" means, with respect to obligations issued during any calendar year, any issuer if the reasonably anticipated amount of tax-exempt obligations (other than obligations described in clause (ii)) which will be issued by such issuer during such calendar year does not exceed $10,000,000.
(ii) Obligations not taken into account in determining status as qualified small issuer
For purposes of clause (i), an obligation is described in this clause if such obligation is—
(I) a private activity bond (other than a qualified 501(c)(3) bond, as defined in section 145),
(II) an obligation to which section 141(a) does not apply by reason of section 1312, 1313, 1316(g), or 1317 of the Tax Reform Act of 1986 and which would (if issued on August 15, 1986) have been an industrial development bond (as defined in section 103(b)(2) as in effect on the day before the date of the enactment of such Act) or a private loan bond (as defined in section 103(o)(2)(A), as so in effect, but without regard to any exception from such definition other than section 103(o)(2)(A)), or
(III) an obligation issued to refund (other than to advance refund within the meaning of section 149(d)(5)) 1 any obligation to the extent the amount of the refunding obligation does not exceed the outstanding amount of the refunded obligation.
(iii) Allocation of amount of issue in certain cases
In the case of an issue under which more than 1 governmental entity receives benefits, if—
(I) all governmental entities receiving benefits from such issue irrevocably agree (before the date of issuance of the issue) on an allocation of the amount of such issue for purposes of this subparagraph, and
(II) such allocation bears a reasonable relationship to the respective benefits received by such entities,
then the amount of such issue so allocated to an entity (and only such amount with respect to such issue) shall be taken into account under clause (i) with respect to such entity.
(D) Limitation on amount of obligations which may be designated
(i) In general
Not more than $10,000,000 of obligations issued by an issuer during any calendar year may be designated by such issuer for purposes of this paragraph.
(ii) Certain refundings of designated obligations deemed designated
Except as provided in clause (iii), in the case of a refunding (or series of refundings) of a qualified tax-exempt obligation, the refunding obligation shall be treated as a qualified tax-exempt obligation (and shall not be taken into account under clause (i)) if—
(I) the refunding obligation was not taken into account under subparagraph (C) by reason of clause (ii)(III) thereof,
(II) the average maturity date of the refunding obligations issued as part of the issue of which such refunding obligation is a part is not later than the average maturity date of the obligations to be refunded by such issue, and
(III) the refunding obligation has a maturity date which is not later than the date which is 30 years after the date the original qualified tax-exempt obligation was issued.
Subclause (II) shall not apply if the average maturity of the issue of which the original qualified tax-exempt obligation was a part (and of the issue of which the obligations to be refunded are a part) is 3 years or less. For purposes of this clause, average maturity shall be determined in accordance with section 147(b)(2)(A).
(iii) Certain obligations may not be designated or deemed designated
No obligation issued as part of an issue may be designated under this paragraph (or may be treated as designated under clause (ii)) if—
(I) any obligation issued as part of such issue is issued to refund another obligation, and
(II) the aggregate face amount of such issue exceeds $10,000,000.
(E) Aggregation of issuers
For purposes of subparagraphs (C) and (D)—
(i) an issuer and all entities which issue obligations on behalf of such issuer shall be treated as 1 issuer,
(ii) all obligations issued by a subordinate entity shall, for purposes of applying subparagraphs (C) and (D) to each other entity to which such entity is subordinate, be treated as issued by such other entity, and
(iii) an entity formed (or, to the extent provided by the Secretary, availed of) to avoid the purposes of subparagraph (C) or (D) and all entities benefiting thereby shall be treated as 1 issuer.
(F) Treatment of composite issues
In the case of an obligation which is issued as part of a direct or indirect composite issue, such obligation shall not be treated as a qualified tax-exempt obligation unless—
(i) the requirements of this paragraph are met with respect to such composite issue (determined by treating such composite issue as a single issue), and
(ii) the requirements of this paragraph are met with respect to each separate lot of obligations which are part of the issue (determined by treating each such separate lot as a separate issue).
(G) Special rules for obligations issued during 2009 and 2010
(i) Increase in limitation
In the case of obligations issued during 2009 or 2010, subparagraphs (C)(i), (D)(i), and (D)(iii)(II) shall each be applied by substituting "$30,000,000" for "$10,000,000".
(ii) Qualified 501(c)(3) bonds treated as issued by exempt organization
In the case of a qualified 501(c)(3) bond (as defined in section 145) issued during 2009 or 2010, this paragraph shall be applied by treating the 501(c)(3) organization for whose benefit such bond was issued as the issuer.
(iii) Special rule for qualified financings
In the case of a qualified financing issue issued during 2009 or 2010—
(I) subparagraph (F) shall not apply, and
(II) any obligation issued as a part of such issue shall be treated as a qualified tax-exempt obligation if the requirements of this paragraph are met with respect to each qualified portion of the issue (determined by treating each qualified portion as a separate issue which is issued by the qualified borrower with respect to which such portion relates).
(iv) Qualified financing issue
For purposes of this subparagraph, the term "qualified financing issue" means any composite, pooled, or other conduit financing issue the proceeds of which are used directly or indirectly to make or finance loans to 1 or more ultimate borrowers each of whom is a qualified borrower.
(v) Qualified portion
For purposes of this subparagraph, the term "qualified portion" means that portion of the proceeds which are used with respect to each qualified borrower under the issue.
(vi) Qualified borrower
For purposes of this subparagraph, the term "qualified borrower" means a borrower which is a State or political subdivision thereof or an organization described in section 501(c)(3) and exempt from taxation under section 501(a).
(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, section 264, and section 291). For purposes of the preceding sentence, the term "interest" includes 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(a)(2).
(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 adjusted 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 taxpayer produces property).
(7) De minimis exception for bonds issued during 2009 or 2010
(A) In general
In applying paragraph (2)(A), there shall not be taken into account tax-exempt obligations issued during 2009 or 2010.
(B) Limitation
The amount of tax-exempt obligations not taken into account by reason of subparagraph (A) shall not exceed 2 percent of the amount determined under paragraph (2)(B).
(C) Refundings
For purposes of this paragraph, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
The date of the enactment of the Tax Reform Act of 1986, referred to in subsec. (b)(3)(B)(ii)(II), (C)(ii)(II), is the date of enactment of
Sections 1312, 1313, 1316(g), and 1317 of the Tax Reform Act of 1986, referred to in subsec. (b)(3)(C)(ii)(II), are sections 1312, 1313, 1316(g), and 1317 of
Section 149(d)(5), referred to in subsec. (b)(3)(C)(ii)(III), was redesignated section 149(d)(2) by
Codification
Another section 1084(c) of
Amendments
2009—Subsec. (b)(3)(G).
Subsec. (b)(7).
1997—Subsec. (b)(4)(A).
1990—Subsec. (a)(2).
1988—Subsec. (b)(3).
1986—
Par. (2).
Par. (6).
1984—Par. (2).
Par. (5).
1981—Par. (2).
1980—Par. (2).
1976—Par. (2).
Pars. (3), (4).
1964—Par. (2).
Statutory Notes and Related Subsidiaries
Effective Date of 2009 Amendment
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1988 Amendment
"(B) In the case of any obligation issued after August 7, 1986, and before January 1, 1987, the time for making a designation with respect to such obligation under section 265(b)(3)(B)(i)(III) of the 1986 Code shall not expire before January 1, 1989.
"(C) If—
"(i) an obligation is issued on or after January 1, 1986, and on or before August 7, 1986,
"(ii) when such obligation was issued, the issuer made a designation that it intended to qualify under section 802(e)(3) of H.R. 3838 of the 99th Congress as passed by the House of Representatives [H.R. 3838 was enacted as
"(iii) the issuer makes an election under this subparagraph with respect to such obligation,
for purposes of section 265(b)(3) of the 1986 Code, such obligation shall be treated as issued on August 8, 1986.
"(D)(i) Except as provided in clause (ii), the following provisions of section 265(b)(3) of the 1986 Code (as amended by this subparagraph (A)) shall apply to obligations issued after June 30, 1987:
"(I) subparagraph (C)(ii)(III),
"(II) clauses (ii) and (iii) of subparagraph (D), and
"(III) subparagraphs (E) and (F).
"(ii) At the election of an issuer (made at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe), the provisions referred to in clause (i) shall apply to such issuer as if included in the amendments made by section 902(a) of the Tax Reform Act of 1986 [section 902(a) of
Amendment by
Effective Date of 1986 Amendment
Amendment by section 144 of
"(1)
"(2)
"(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)
"(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.
"(E) Dalton, Georgia, Towne Square project.
"(F) Milwaukee, Wisconsin, Standard Electric Supply Company—distribution facility.
"(G) Wausau, Wisconsin, urban renewal project.
"(H) Cassville, Missouri, UDAG project.
"(I) Outlook Envelope Company—plant expansion.
"(J) Woodstock, Connecticut, Crabtree Warehouse partnership.
"(K) Louisville, Kentucky, Speed Mansion renovation project.
"(L) Charleston, South Carolina, 2 Festival Market Place projects at Union Pier Terminal and 1 project at the Remount Road Container Yard, State Pier No. 15 at North Charleston Terminal.
"(M) New Orleans, Louisiana, Upper Pontalba Building renovation.
"(N) Woodward Wight Building.
"(O) Minneapolis, Minnesota, Miller Milling Company—flour mill project.
"(P) Homewood, Alabama, the 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.
"(T) Bellows Falls, Vermont—building project.
"(U) East Broadway Project, Louisville, Kentucky.
"(V) O.K. Industries, Oklahoma.
"(4)
Effective Date of 1984 Amendment
Amendment by section 16(a) of
Amendment by section 56(c) of
Effective Date of 1981 Amendment
"(1)
"(2)
Effective and Termination Dates of 1980 Amendment
Effective Date of 1976 Amendment
Amendment by section 1901(a)(37) of
Amendment by section 2137(e) of
Effective Date of 1964 Amendment
Savings Provision
For provisions that nothing in amendment by
Clarification of Treatment of Amounts Excluded Under Section 597
1 See References in Text note below.
§266. Carrying charges
No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1976—
§267. Losses, expenses, and interest with respect to transactions between related taxpayers
(a) In general
(1) Deduction for losses disallowed
No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b). The preceding sentence shall not apply to any loss of the distributing corporation (or the distributee) in the case of a distribution in complete liquidation.
(2) Matching of deduction and payee income item in the case of expenses and interest
If—
(A) by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not (unless paid) includible in the gross income of such person, and
(B) at the close of the taxable year of the taxpayer for which (but for this paragraph) the amount would be deductible under this chapter, both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of subsection (b),
then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made (or, if later, as of the day on which it would be so allowable but for this paragraph). 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 269A(b)(2), as modified by section 441(i)(2)) shall be treated as persons specified in subsection (b).
(3) Payments to foreign persons
(A) In general
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.
(B) Special rule for certain foreign entities
(i) In general
Notwithstanding subparagraph (A), in the case of any item payable to a controlled foreign corporation (as defined in section 957) or a passive foreign investment company (as defined in section 1297), a deduction shall be allowable to the payor with respect to such amount for any taxable year before the taxable year in which paid only to the extent that an amount attributable to such item is includible (determined without regard to properly allocable deductions and qualified deficits under section 952(c)(1)(B)) during such prior taxable year in the gross income of a United States person who owns (within the meaning of section 958(a)) stock in such corporation.
(ii) Secretarial authority
The Secretary may by regulation exempt transactions from the application of clause (i), including any transaction which is entered into by a payor in the ordinary course of a trade or business in which the payor is predominantly engaged and in which the payment of the accrued amounts occurs within 8½ months after accrual or within such other period as the Secretary may prescribe.
(b) Relationships
The persons referred to in subsection (a) are:
(1) Members of a family, as defined in subsection (c)(4);
(2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
(3) Two corporations which are members of the same controlled group (as defined in subsection (f));
(4) A grantor and a fiduciary of any trust;
(5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;
(6) A fiduciary of a trust and a beneficiary of such trust;
(7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;
(8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust;
(9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;
(10) A corporation and a partnership if the same persons own—
(A) more than 50 percent in value of the outstanding stock of the corporation, and
(B) more than 50 percent of the capital interest, or the profits interest, in the partnership;
(11) An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation;
(12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or
(13) Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.
(c) Constructive ownership of stock
For purposes of determining, in applying subsection (b), the ownership of stock—
(1) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;
(2) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;
(3) An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner;
(4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and
(5) Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.
(d) Amount of gain where loss previously disallowed
(1) In general
If—
(A) in the case of a sale or exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection (a)(1), and
(B) the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in the taxpayer's hands is determined directly or indirectly by reference to such property) at a gain,
then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise disposed of by the taxpayer.
(2) Exception for wash sales
Paragraph (1) shall not apply if the loss sustained by the transferor is not allowable to the transferor as a deduction by reason of section 1091 (relating to wash sales).
(3) Exception for transfers from tax indifferent parties
Paragraph (1) shall not apply to the extent any loss sustained by the transferor (if allowed) would not be taken into account in determining a tax imposed under section 1 or 11 or a tax computed as provided by either of such sections.
(e) Special rules for pass-thru entities
(1) In general
In the case of any amount paid or incurred by, to, or on behalf of, a pass-thru entity, for purposes of applying subsection (a)(2)—
(A) such entity,
(B) in the case of—
(i) a partnership, any person who owns (directly or indirectly) any capital interest or profits interest of such partnership, or
(ii) an S corporation, any person who owns (directly or indirectly) any of the stock of such corporation,
(C) any person who owns (directly or indirectly) any capital interest or profits interest of a partnership in which such entity owns (directly or indirectly) any capital interest or profits interest, and
(D) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to a person described in subparagraph (B) or (C),
shall be treated as persons specified in a paragraph of subsection (b). Subparagraph (C) shall apply to a transaction only if such transaction is related either to the operations of the partnership described in such subparagraph or to an interest in such partnership.
(2) Pass-thru entity
For purposes of this section, the term "pass-thru entity" means—
(A) a partnership, and
(B) an S corporation.
(3) Constructive ownership in the case of partnerships
For purposes of determining ownership of a capital interest or profits interest of a partnership, the principles of subsection (c) shall apply, except that—
(A) paragraph (3) of subsection (c) shall not apply, and
(B) interests owned (directly or indirectly) by or for a C corporation shall be considered as owned by or for any shareholder only if such shareholder owns (directly or indirectly) 5 percent or more in value of the stock of such corporation.
(4) Subsection (a)(2) not to apply to certain guaranteed payments of partnerships
In the case of any amount paid or incurred by a partnership, subsection (a)(2) shall not apply to the extent that section 707(c) applies to such amount.
(5) Exception for certain expenses and interest of partnerships owning low-income housing
(A) In general
This subsection shall not apply with respect to qualified expenses and interest paid or incurred by a partnership owning low-income housing to—
(i) any qualified 5-percent or less partner of such partnership, or
(ii) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to any qualified 5-percent or less partner of such partnership.
(B) Qualified 5-percent or less partner
For purposes of this paragraph, the term "qualified 5-percent or less partner" means any partner who has (directly or indirectly) an interest of 5 percent or less in the aggregate capital and profits interests of the partnership but only if—
(i) such partner owned the low-income housing at all times during the 2-year period ending on the date such housing was transferred to the partnership, or
(ii) such partnership acquired the low-income housing pursuant to a purchase, assignment, or other transfer from the Department of Housing and Urban Development or any State or local housing authority.
For purposes of the preceding sentence, a partner shall be treated as holding any interest in the partnership which is held (directly or indirectly) by any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to such partner.
(C) Qualified expenses and interest
For purpose of this paragraph, the term "qualified expenses and interest" means any expense or interest incurred by the partnership with respect to low-income housing held by the partnership but—
(i) only if the amount of such expense or interest (as the case may be) is unconditionally required to be paid by the partnership not later than 10 years after the date such amount was incurred, and
(ii) in the case of such interest, only if such interest is incurred at an annual rate not in excess of 12 percent.
(D) Low-income housing
For purposes of this paragraph, the term "low-income housing" means—
(i) any interest in property described in clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B), and
(ii) any interest in a partnership owning such property.
(6) Cross reference
For additional rules relating to partnerships, see section 707(b).
(f) Controlled group defined; special rules applicable to controlled groups
(1) Controlled group defined
For purposes of this section, the term "controlled group" has the meaning given to such term by section 1563(a), except that—
(A) "more than 50 percent" shall be substituted for "at least 80 percent" each place it appears in section 1563(a), and
(B) the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.
(2) Deferral (rather than denial) of loss from sale or exchange between members
In the case of any loss from the sale or exchange of property which is between members of the same controlled group and to which subsection (a)(1) applies (determined without regard to this paragraph but with regard to paragraph (3))—
(A) subsections (a)(1) and (d) shall not apply to such loss, but
(B) such loss shall be deferred until the property is transferred outside such controlled group and there would be recognition of loss under consolidated return principles or until such other time as may be prescribed in regulations.
(3) Loss deferral rules not to apply in certain cases
(A) Transfer to DISC
For purposes of applying subsection (a)(1), the term "controlled group" shall not include a DISC.
(B) Certain sales of inventory
Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to the sale or exchange of property between members of the same controlled group (or persons described in subsection (b)(10)) if—
(i) such property in the hands of the transferor is property described in section 1221(a)(1),
(ii) such sale or exchange is in the ordinary course of the transferor's trade or business,
(iii) such property in the hands of the transferee is property described in section 1221(a)(1), and
(iv) the transferee or the transferor is a foreign corporation.
(C) Certain foreign currency losses
To the extent provided in regulations, subsection (a)(1) shall not apply to any loss sustained by a member of a controlled group on the repayment of a loan made to another member of such group if such loan is payable in a foreign currency or is denominated in such a currency and such loss is attributable to a reduction in value of such foreign currency.
(D) Redemptions by fund-of-funds regulated investment companies
Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to any distribution in redemption of stock of a regulated investment company if—
(i) such company issues only stock which is redeemable upon the demand of the stockholder, and
(ii) such redemption is upon the demand of another regulated investment company.
(4) Determination of relationship resulting in disallowance of loss, for purposes of other provisions
For purposes of any other section of this title which refers to a relationship which would result in a disallowance of losses under this section, deferral under paragraph (2) shall be treated as disallowance.
(g) Coordination with section 1041
Subsection (a)(1) shall not apply to any transfer described in section 1041(a) (relating to transfers of property between spouses or incident to divorce).
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2015—Subsec. (d).
"(1) in the case of a sale or exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection (a)(1); and
"(2) the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in his hands is determined directly or indirectly by reference to such property) at a gain,
then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise disposed of by the taxpayer. This subsection shall not apply if the loss sustained by the transferor is not allowable to the transferor as a deduction by reason of section 1091 (relating to wash sales)."
2014—Subsec. (d).
Subsec. (d)(1).
Subsec. (d)(2).
2010—Subsec. (f)(3)(D).
2004—Subsec. (a)(3).
1999—Subsec. (f)(3)(B)(i), (iii).
1997—Subsec. (b)(13).
Subsec. (f)(4).
1988—Subsec. (a)(1).
Subsec. (a)(2).
1986—Subsec. (a)(2).
Subsec. (a)(3).
Subsec. (b)(12).
Subsec. (e)(5)(D).
Subsec. (e)(6).
Subsec. (f)(3)(B).
Subsec. (g).
1984—Subsec. (a).
Subsec. (b)(3).
Subsec. (b)(10).
Subsec. (b)(12).
Subsec. (e).
Subsec. (f).
1982—Subsec. (b)(10) to (12).
Subsec. (f).
1978—Subsec. (e).
Statutory Notes and Related Subsidiaries
Effective Date of 2015 Amendment
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2010 Amendment
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
If any interest costs incurred after Dec. 31, 1986, are attributable to costs incurred before Jan. 1, 1987, the amendment by section 803(b)(5) of
Amendment by section 803(b)(5) of
Amendment by section 806(c)(2) of
Amendment by sections 1812(c)(1), (2), (3)(C), (4)(A) and 1842(a) of
Effective Date of 1984 Amendment
"(1)
"(2)
"(A)
"(B)
"(3)
"(A)
"(i) on indebtedness incurred on or before September 29, 1983, or
"(ii) pursuant to a contract which was binding on September 29, 1983, and at all times thereafter before the amount is paid or incurred.
"(B)
Amendment by section 721(s) of
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1978 Amendment
Construction of Section 806 of Pub. L. 99–514
Nothing in section 806 of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Exception for Certain Indebtedness
§267A. Certain related party amounts paid or accrued in hybrid transactions or with hybrid entities
(a) In general
No deduction shall be allowed under this chapter for any disqualified related party amount paid or accrued pursuant to a hybrid transaction or by, or to, a hybrid entity.
(b) Disqualified related party amount
For purposes of this section—
(1) Disqualified related party amount
The term "disqualified related party amount" means any interest or royalty paid or accrued to a related party to the extent that—
(A) such amount is not included in the income of such related party under the tax law of the country of which such related party is a resident for tax purposes or is subject to tax, or
(B) such related party is allowed a deduction with respect to such amount under the tax law of such country.
Such term shall not include any payment to the extent such payment is included in the gross income of a United States shareholder under section 951(a).
(2) Related party
The term "related party" means a related person as defined in section 954(d)(3), except that such section shall be applied with respect to the person making the payment described in paragraph (1) in lieu of the controlled foreign corporation otherwise referred to in such section.
(c) Hybrid transaction
For purposes of this section, the term "hybrid transaction" means any transaction, series of transactions, agreement, or instrument one or more payments with respect to which are treated as interest or royalties for purposes of this chapter and which are not so treated for purposes the tax law of the foreign country of which the recipient of such payment is resident for tax purposes or is subject to tax.
(d) Hybrid entity
For purposes of this section, the term "hybrid entity" means any entity which is either—
(1) treated as fiscally transparent for purposes of this chapter but not so treated for purposes of the tax law of the foreign country of which the entity is resident for tax purposes or is subject to tax, or
(2) treated as fiscally transparent for purposes of such tax law but not so treated for purposes of this chapter.
(e) Regulations
The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance providing for—
(1) rules for treating certain conduit arrangements which involve a hybrid transaction or a hybrid entity as subject to subsection (a),
(2) rules for the application of this section to branches or domestic entities,
(3) rules for treating certain structured transactions as subject to subsection (a),
(4) rules for treating a tax preference as an exclusion from income for purposes of applying subsection (b)(1) if such tax preference has the effect of reducing the generally applicable statutory rate by 25 percent or more,
(5) rules for treating the entire amount of interest or royalty paid or accrued to a related party as a disqualified related party amount if such amount is subject to a participation exemption system or other system which provides for the exclusion or deduction of a substantial portion of such amount,
(6) rules for determining the tax residence of a foreign entity if the entity is otherwise considered a resident of more than one country or of no country,
(7) exceptions from subsection (a) with respect to—
(A) cases in which the disqualified related party amount is taxed under the laws of a foreign country other than the country of which the related party is a resident for tax purposes, and
(B) other cases which the Secretary determines do not present a risk of eroding the Federal tax base,1
(8) requirements for record keeping and information reporting in addition to any requirements imposed by section 6038A.
(Added
Statutory Notes and Related Subsidiaries
Effective Date
1 So in original. Probably should be followed by "and".
§268. Sale of land with unharvested crop
Where an unharvested crop sold by the taxpayer is considered under the provisions of section 1231 as "property used in the trade or business", in computing taxable income no deduction (whether or not for the taxable year of the sale and whether for expenses, depreciation, or otherwise) attributable to the production of such crop shall be allowed.
(Aug. 16, 1954, ch. 736,
§269. Acquisitions made to evade or avoid income tax
(a) In general
If—
(1) any person or persons acquire, directly or indirectly, control of a corporation, or
(2) any corporation acquires, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation,
and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then the Secretary may disallow such deduction, credit, or other allowance. For purposes of paragraphs (1) and (2), control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation.
(b) Certain liquidations after qualified stock purchases
(1) In general
If—
(A) there is a qualified stock purchase by a corporation of another corporation,
(B) an election is not made under section 338 with respect to such purchase,
(C) the acquired corporation is liquidated pursuant to a plan of liquidation adopted not more than 2 years after the acquisition date, and
(D) the principal purpose for such liquidation is the evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which the acquiring corporation would not otherwise enjoy,
then the Secretary may disallow such deduction, credit, or other allowance.
(2) Meaning of terms
For purposes of paragraph (1), the terms "qualified stock purchase" and "acquisition date" have the same respective meanings as when used in section 338.
(c) Power of Secretary to allow deduction, etc., in part
In any case to which subsection (a) or (b) applies the Secretary is authorized—
(1) to allow as a deduction, credit, or allowance any part of any amount disallowed by such subsection, if he determines that such allowance will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or
(2) to distribute, apportion, or allocate gross income, and distribute, apportion, or allocate the deductions, credits, or allowances the benefit of which was sought to be secured, between or among the corporations, or properties, or parts thereof, involved, and to allow such deductions, credits, or allowances so distributed, apportioned, or allocated, but to give effect to such allowance only to such extent as he determines will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or
(3) to exercise his powers in part under paragraph (1) and in part under paragraph (2).
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2014—Subsec. (a).
1984—Subsecs. (b), (c).
1976—Subsecs. (a), (b).
Subsec. (c).
1964—Subsec. (a).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Effective Date of 1984 Amendment
Effective Date of 1964 Amendment
§269A. Personal service corporations formed or availed of to avoid or evade income tax
(a) General rule
If—
(1) substantially all of the services of a personal service corporation are performed for (or on behalf of) 1 other corporation, partnership, or other entity, and
(2) the principal purpose for forming, or availing of, such personal service corporation is the avoidance or evasion of Federal income tax by reducing the income of, or securing the benefit of any expense, deduction, credit, exclusion, or other allowance for, any employee-owner which would not otherwise be available,
then the Secretary may allocate all income, deductions, credits, exclusions, and other allowances between such personal service corporation and its employee-owners, if such allocation is necessary to prevent avoidance or evasion of Federal income tax or clearly to reflect the income of the personal service corporation or any of its employee-owners.
(b) Definitions
For purposes of this section—
(1) Personal service corporation
The term "personal service corporation" means a corporation the principal activity of which is the performance of personal services and such services are substantially performed by employee-owners.
(2) Employee-owner
The term "employee-owner" means any employee who owns, on any day during the taxable year, more than 10 percent of the outstanding stock of the personal service corporation. For purposes of the preceding sentence, section 318 shall apply, except that "5 percent" shall be substituted for "50 percent" in section 318(a)(2)(C).
(3) Related persons
All related persons (within the meaning of section 144(a)(3)) shall be treated as 1 entity.
(Added
Editorial Notes
Amendments
1986—Subsec. (b)(3).
Statutory Notes and Related Subsidiaries
Effective Date of 1986 Amendment
Amendment by
Effective Date
§269B. Stapled entities
(a) General rule
Except as otherwise provided by regulations, for purposes of this title—
(1) if a domestic corporation and a foreign corporation are stapled entities, the foreign corporation shall be treated as a domestic corporation.
(2) in applying section 1563, stock in a second corporation which constitutes a stapled interest with respect to stock of a first corporation shall be treated as owned by such first corporation, and
(3) in applying subchapter M for purposes of determining whether any stapled entity is a regulated investment company or a real estate investment trust, all entities which are stapled entities with respect to each other shall be treated as 1 entity.
(b) Secretary to prescribe regulations
The Secretary shall prescribe such regulations as may be necessary to prevent avoidance or evasion of Federal income tax through the use of stapled entities. Such regulations may include (but shall not be limited to) regulations providing the extent to which 1 of such entities shall be treated as owning the other entity (to the extent of the stapled interest) and regulations providing that any tax imposed on the foreign corporation referred to in subsection (a)(1) may, if not paid by such corporation, be collected from the domestic corporation referred to in such subsection or the shareholders of such foreign corporation.
(c) Definitions
For purposes of this section—
(1) Entity
The term "entity" means any corporation, partnership, trust, association, estate, or other form of carrying on a business or activity.
(2) Stapled entities
The term "stapled entities" means any group of 2 or more entities if more than 50 percent in value of the beneficial ownership in each of such entities consists of stapled interests.
(3) Stapled interests
Two or more interests are stapled interests if, by reason of form of ownership, restrictions on transfer, or other terms or conditions, in connection with the transfer of 1 of such interests the other such interests are also transferred or required to be transferred.
(d) Special rule for treaties
Nothing in section 894 or 7852(d) or in any other provision of law shall be construed as permitting an exemption, by reason of any treaty obligation of the United States heretofore or hereafter entered into, from the provisions of this section.
(e) Subsection (a)(1) not to apply in certain cases
(1) In general
Subsection (a)(1) 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 corporation is foreign owned if less than 50 percent of—
(A) the total combined voting power of all classes of stock of such corporation entitled to vote, and
(B) the total value of the stock of the corporation,
is held directly (or indirectly through applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of section 318(a)) by United States persons (as defined in section 7701(a)(30)).
(Added
Editorial Notes
Amendments
1986—Subsec. (b).
Subsec. (e).
Statutory Notes and Related Subsidiaries
Effective Date of 1986 Amendment
Amendment by
Effective Date
"(1)
"(2)
"(3)
"(A) all members of such group were stapled entities as of June 30, 1983, and
"(B) as of June 30, 1983, such group included one or more real estate investment trusts.
"(4)
"(A) Paragraph (1) of section 269B(a) of such Code shall not apply to a domestic corporation and a qualified Puerto Rican corporation which, on June 30, 1983, were stapled entities.
"(B) For purposes of subparagraph (A), the term 'qualified Puerto Rican corporation' means any corporation organized in Puerto Rico—
"(i) which is described in section 957(c) of such Code or would be so described if any dividends it received from any other corporation described in such section 957(c) were treated as gross income of the type described in such section 957(c), and
"(ii) does not, at any time during the taxable year, own (within the meaning of section 958 of such Code but before applying paragraph (2) of section 269B(a) of such Code) any stock of any corporation which is not described in such section 957(c).
"(5)
"(6)
"(A)
"(B)
"(C)
"(7)
"(A)
"(i) which was created pursuant to a written board of directors resolution adopted on April 5, 1984, and
"(ii) all members of such group were stapled entities as of June 16, 1985.
"(B)
"(i) at least 75 percent of the gross income of which is derived from interest on obligations secured by mortgages on real property (as defined in section 856 of such Code),
"(ii) with respect to which the interest on the obligations described in clause (i) made or acquired by such trust (other than to persons who are independent contractors, as defined in section 856(d)(3) of such Code) is at an arm's length rate or a rate not more than 1 percentage point greater than the associated borrowing cost of the trust, and
"(iii) with respect to which any real property held by the trust is not used in the trade or business of any other member of the group of stapled entities."
Termination of Exception for Certain Real Estate Investment Trusts From the Treatment of Stapled Entities
"(a)
"(b)
"(1)
"(2)
"(A) the acquisition is pursuant to a written agreement (including a put option, buy-sell agreement, and an agreement relating to a third party default) which was binding on such date and at all times thereafter on such REIT or stapled entity; or
"(B) the acquisition is described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission.
"(3)
"(A)
"(i) any improvement to land owned or leased by the exempt REIT or any member of the stapled REIT group; and
"(ii) any repair to, or improvement of, any improvement owned or leased by the exempt REIT or any member of the stapled REIT group,
if such ownership or leasehold interest is a qualified real property interest.
"(B)
"(i) any lease of a qualified real property interest if such lease is not otherwise such an interest; or
"(ii) any renewal of a lease which is a qualified real property interest,
but only if the rent on any lease referred to in clause (i) or any renewal referred to in clause (ii) does not exceed an arm's length rate.
"(C)
"(i)
"(I) the cost of such property; or
"(II) if such property is substituted basis property (as defined in section 7701(a)(42) of the Internal Revenue Code of 1986), the fair market value of the property at the time of acquisition.
"(ii)
"(4)
"(5)
"(A) such stapled entity was a stapled entity with respect to such REIT as of March 26, 1998, and at all times thereafter; and
"(B) as of March 26, 1998, and at all times thereafter, such REIT was a real estate investment trust.
"(6)
"(c)
"(1)
"(2)
"(A)
"(B)
"(3)
"(4)
"(A) percentage ownership of an entity shall be determined in accordance with subsection (e)(4);
"(B) interests in the entity which are acquired by an exempt REIT or a member of the stapled REIT group in any acquisition described in an agreement, announcement, or filing described in subsection (b)(2) shall be treated as acquired on March 26, 1998; and
"(C) except as provided in guidance prescribed by the Secretary, any change in proportionate ownership which is attributable solely to fluctuations in the relative fair market values of different classes of stock shall not be taken into account.
"(5)
"(A)
"(i) an exempt REIT or stapled entity held directly or indirectly at least 60 percent of the capital or profits interest in a partnership; and
"(ii) 90 percent or more of the capital interests and 90 percent or more of the profits interests in such partnership (other than interests held directly or indirectly by the exempt REIT or stapled entity) are, or will be, redeemable or exchangeable for consideration the amount of which is determined by reference to the value of shares of stock in the exempt REIT or stapled entity (or both),
paragraph (3) shall not apply to such partnership, and such REIT or entity shall be treated for all purposes of this section as holding all of the capital and profits interests in such partnership.
"(B)
"(C)
"(d)
"(1)
"(A) the interest income from such obligation which is properly allocable to the property described in paragraph (2); and
"(B) the income of any member of the stapled REIT group from services described in paragraph (2) with respect to such property.
If the income referred to in subparagraph (A) or (B) is of a 10-percent subsidiary entity, only the portion of such income which is properly allocable to the exempt REIT's or the stapled entity's interest in the subsidiary entity shall be taken into account.
"(2)
"(3)
"(A) payments under which would be treated as interest if received by a REIT; and
"(B) the rate of interest on which does not exceed an arm's length rate.
"(4)
"(A) which is secured on March 26, 1998, by an interest in real property; and
"(B) which is held on such date by the exempt REIT or any entity which is a member of the stapled REIT group on such date and at all times thereafter,
but only so long as such obligation is secured by such interest, and the interest payable on such obligation is not changed to a rate which exceeds an arm's length rate unless such change is pursuant to the terms of the obligation in effect on March 26, 1998. The preceding sentence shall not cease to apply by reason of the refinancing of the obligation if (immediately after the refinancing) the principal amount of the obligation resulting from the refinancing does not exceed the principal amount of the refinanced obligation (immediately before the refinancing) and the interest payable on such refinanced obligation does not exceed an arm's length rate.
"(5)
"(6)
"(7)
"(e)
"(1)
"(A) paragraphs (2), (3), and (6) of section 856(c) of the Internal Revenue Code of 1986; and
"(B) section 857(b)(5) of such Code.
"(2)
"(3)
"(A) all entities which are stapled entities with respect to the exempt REIT; and
"(B) all entities which are 10-percent subsidiary entities of the exempt REIT or any such stapled entity.
"(4) 10-
"(A)
"(B)
"(C) 10-
"(i) in the case of an interest in a corporation, ownership of 10 percent (by vote or value) of the stock in such corporation;
"(ii) in the case of an interest in a partnership, ownership of 10 percent of the capital or profits interest in the partnership; and
"(iii) in any other case, ownership of 10 percent of the beneficial interests in the entity.
"(5)
"(f)
"(g)
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
[§270. Repealed. Pub. L. 91–172, title II, §213(b), Dec. 30, 1969, 83 Stat. 572 ]
Section, act Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to taxable years beginning after Dec. 31, 1969, see section 213(d) of
§271. Debts owed by political parties, etc.
(a) General rule
In the case of a taxpayer (other than a bank as defined in section 581) no deduction shall be allowed under section 166 (relating to bad debts) or under section 165(g) (relating to worthlessness of securities) by reason of the worthlessness of any debt owed by a political party.
(b) Definitions
(1) Political party
For purposes of subsection (a), the term "political party" means—
(A) a political party;
(B) a national, State, or local committee of a political party; or
(C) a committee, association, or organization which accepts contributions or makes expenditures for the purpose of influencing or attempting to influence the election of presidential or vice-presidential electors or of any individual whose name is presented for election to any Federal, State, or local elective public office, whether or not such individual is elected.
(2) Contributions
For purposes of paragraph (1)(C), the term "contributions" includes a gift, subscription, loan, advance, or deposit, of money, or anything of value, and includes a contract, promise, or agreement to make a contribution, whether or not legally enforceable.
(3) Expenditures
For purposes of paragraph (1)(C), the term "expenditures" includes a payment, distribution, loan, advance, deposit, or gift, of money, or anything of value, and includes a contract, promise, or agreement to make an expenditure, whether or not legally enforceable.
(c) Exception
In the case of a taxpayer who uses an accrual method of accounting, subsection (a) shall not apply to a debt which accrued as a receivable on a bona fide sale of goods or services in the ordinary course of the taxpayer's trade or business if—
(1) for the taxable year in which such receivable accrued, more than 30 percent of all receivables which accrued in the ordinary course of the trades and businesses of the taxpayer were due from political parties, and
(2) the taxpayer made substantial continuing efforts to collect on the debt.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1976—Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 1976 Amendment
§272. Disposal of coal or domestic iron ore
Where the disposal of coal or iron ore is covered by section 631, no deduction shall be allowed for expenditures attributable to the making and administering of the contract under which such disposition occurs and to the preservation of the economic interest retained under such contract, except that if in any taxable year such expenditures plus the adjusted depletion basis of the coal or iron ore disposed of in such taxable year exceed the amount realized under such contract, such excess, to the extent not availed of as a reduction of gain under section 1231, shall be a loss deductible under section 165(a). This section shall not apply to any taxable year during which there is no income under the contract.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1964—
Statutory Notes and Related Subsidiaries
Effective Date of 1964 Amendment
§273. Holders of life or terminable interest
Amounts paid under the laws of a State, the District of Columbia, a possession of the United States, or a foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1976—
Statutory Notes and Related Subsidiaries
Effective Date of 1976 Amendment
Amendment by
§274. Disallowance of certain entertainment, etc., expenses
(a) Entertainment, amusement, recreation, or qualified transportation fringes
(1) In general
No deduction otherwise allowable under this chapter shall be allowed for any item—
(A) Activity
With respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or
(B) Facility
With respect to a facility used in connection with an activity referred to in subparagraph (A).
(2) Special rules
For purposes of applying paragraph (1)—
(A) Dues or fees to any social, athletic, or sporting club or organization shall be treated as items with respect to facilities.
(B) An activity described in section 212 shall be treated as a trade or business.
(3) Denial of deduction for club dues
Notwithstanding the preceding provisions of this subsection, no deduction shall be allowed under this chapter for amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or other social purpose.
(4) Qualified transportation fringes
No deduction shall be allowed under this chapter for the expense of any qualified transportation fringe (as defined in section 132(f)) provided to an employee of the taxpayer.
(b) Gifts
(1) Limitation
No deduction shall be allowed under section 162 or section 212 for any expense for gifts made directly or indirectly to any individual to the extent that such expense, when added to prior expenses of the taxpayer for gifts made to such individual during the same taxable year, exceeds $25. For purposes of this section, the term "gift" means any item excludable from gross income of the recipient under section 102 which is not excludable from his gross income under any other provision of this chapter, but such term does not include—
(A) an item having a cost to the taxpayer not in excess of $4.00 on which the name of the taxpayer is clearly and permanently imprinted and which is one of a number of identical items distributed generally by the taxpayer, or
(B) a sign, display rack, or other promotional material to be used on the business premises of the recipient.
(2) Special rules
(A) In the case of a gift by a partnership, the limitation contained in paragraph (1) shall apply to the partnership as well as to each member thereof.
(B) For purposes of paragraph (1), a husband and wife shall be treated as one taxpayer.
(c) Certain foreign travel
(1) In general
In the case of any individual who travels outside the United States away from home in pursuit of a trade or business or in pursuit of an activity described in section 212, no deduction shall be allowed under section 162 or section 212 for that portion of the expenses of such travel otherwise allowable under such section which, under regulations prescribed by the Secretary, is not allocable to such trade or business or to such activity.
(2) Exception
Paragraph (1) shall not apply to the expenses of any travel outside the United States away from home if—
(A) such travel does not exceed one week, or
(B) the portion of the time of travel outside the United States away from home which is not attributable to the pursuit of the taxpayer's trade or business or an activity described in section 212 is less than 25 percent of the total time on such travel.
(3) Domestic travel excluded
For purposes of this subsection, travel outside the United States does not include any travel from one point in the United States to another point in the United States.
(d) Substantiation required
No deduction or credit shall be allowed—
(1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home),
(2) for any expense for gifts, or
(3) with respect to any listed property (as defined in section 280F(d)(4)),
unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement (A) the amount of such expense or other item, (B) the time and place of the travel or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of the person receiving the benefit. The Secretary may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations. This subsection shall not apply to any qualified nonpersonal use vehicle (as defined in subsection (i)).
(e) Specific exceptions to application of subsection (a)
Subsection (a) shall not apply to—
(1) Food and beverages for employees
Expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for his employees.
(2) Expenses treated as compensation
(A) In general
Except as provided in subparagraph (B), expenses for goods, services, and facilities, to the extent that the expenses are treated by the taxpayer, with respect to the recipient of the entertainment, amusement, or recreation, as compensation to an employee on the taxpayer's return of tax under this chapter and as wages to such employee for purposes of
(B) Specified individuals
(i) In general
In the case of a recipient who is a specified individual, subparagraph (A) and paragraph (9) shall each be applied by substituting "to the extent that the expenses do not exceed the amount of the expenses which" for "to the extent that the expenses".
(ii) Specified individual
For purposes of clause (i), the term "specified individual" means any individual who—
(I) is subject to the requirements of section 16(a) of the Securities Exchange Act of 1934 with respect to the taxpayer or a related party to the taxpayer, or
(II) would be subject to such requirements if the taxpayer (or such related party) were an issuer of equity securities referred to in such section.
For purposes of this clause, a person is a related party with respect to another person if such person bears a relationship to such other person described in section 267(b) or 707(b).
(3) Reimbursed expenses
Expenses paid or incurred by the taxpayer, in connection with the performance by him of services for another person (whether or not such other person is his employer), under a reimbursement or other expense allowance arrangement with such other person, but this paragraph shall apply—
(A) where the services are performed for an employer, only if the employer has not treated such expenses in the manner provided in paragraph (2), or
(B) where the services are performed for a person other than an employer, only if the taxpayer accounts (to the extent provided by subsection (d)) to such person.
(4) Recreational, etc., expenses for employees
Expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees (within the meaning of section 414(q))). For purposes of this paragraph, an individual owning less than a 10-percent interest in the taxpayer's trade or business shall not be considered a shareholder or other owner, and for such purposes an individual shall be treated as owning any interest owned by a member of his family (within the meaning of section 267(c)(4)). This paragraph shall not apply for purposes of subsection (a)(3).
(5) Employees, stockholder, etc., business meetings
Expenses incurred by a taxpayer which are directly related to business meetings of his employees, stockholders, agents, or directors.
(6) Meetings of business leagues, etc.
Expenses directly related and necessary to attendance at a business meeting or convention of any organization described in section 501(c)(6) (relating to business leagues, chambers of commerce, real estate boards, and boards of trade) and exempt from taxation under section 501(a).
(7) Items available to public
Expenses for goods, services, and facilities made available by the taxpayer to the general public.
(8) Entertainment sold to customers
Expenses for goods or services (including the use of facilities) which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money's worth.
(9) Expenses includible in income of persons who are not employees
Expenses paid or incurred by the taxpayer for goods, services, and facilities to the extent that the expenses are includible in the gross income of a recipient of the entertainment, amusement, or recreation who is not an employee of the taxpayer as compensation for services rendered or as a prize or award under section 74. The preceding sentence shall not apply to any amount paid or incurred by the taxpayer if such amount is required to be included (or would be so required except that the amount is less than $600) in any information return filed by such taxpayer under part III of subchapter A of
For purposes of this subsection, any item referred to in subsection (a) shall be treated as an expense.
(f) Interest, taxes, casualty losses, etc.
This section shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity). In the case of a taxpayer which is not an individual, the preceding sentence shall be applied as if it were an individual.
(g) Treatment of entertainment, etc., type facility
For purposes of this chapter, if deductions are disallowed under subsection (a) with respect to any portion of a facility, such portion shall be treated as an asset which is used for personal, living, and family purposes (and not as an asset used in the trade or business).
(h) Attendance at conventions, etc.
(1) In general
In the case of any individual who attends a convention, seminar, or similar meeting which is held outside the North American area, no deduction shall be allowed under section 162 for expenses allocable to such meeting unless the taxpayer establishes that the meeting is directly related to the active conduct of his trade or business and that, after taking into account in the manner provided by regulations prescribed by the Secretary—
(A) the purpose of such meeting and the activities taking place at such meeting,
(B) the purposes and activities of the sponsoring organizations or groups,
(C) the residences of the active members of the sponsoring organization and the places at which other meetings of the sponsoring organization or groups have been held or will be held, and
(D) such other relevant factors as the taxpayer may present,
it is as reasonable for the meeting to be held outside the North American area as within the North American area.
(2) Conventions on cruise ships
In the case of any individual who attends a convention, seminar, or other meeting which is held on any cruise ship, no deduction shall be allowed under section 162 for expenses allocable to such meeting, unless the taxpayer meets the requirements of paragraph (5) and establishes that the meeting is directly related to the active conduct of his trade or business and that—
(A) the cruise ship is a vessel registered in the United States; and
(B) all ports of call of such cruise ship are located in the United States or in possessions of the United States.
With respect to cruises beginning in any calendar year, not more than $2,000 of the expenses attributable to an individual attending one or more meetings may be taken into account under section 162 by reason of the preceding sentence.
(3) Definitions
For purposes of this subsection—
(A) North American area
The term "North American area" means the United States, its possessions, and the Trust Territory of the Pacific Islands, and Canada and Mexico.
(B) Cruise ship
The term "cruise ship" means any vessel sailing within or without the territorial waters of the United States.
(4) Subsection to apply to employer as well as to traveler
(A) Except as provided in subparagraph (B), this subsection shall apply to deductions otherwise allowable under section 162 to any person, whether or not such person is the individual attending the convention, seminar, or similar meeting.
(B) This subsection shall not deny a deduction to any person other than the individual attending the convention, seminar, or similar meeting with respect to any amount paid by such person to or on behalf of such individual if includible in the gross income of such individual. The preceding sentence shall not apply if the amount is required to be included in any information return filed by such person under part III of subchapter A of
(5) Reporting requirements
No deduction shall be allowed under section 162 for expenses allocable to attendance at a convention, seminar, or similar meeting on any cruise ship unless the taxpayer claiming the deduction attaches to the return of tax on which the deduction is claimed—
(A) a written statement signed by the individual attending the meeting which includes—
(i) information with respect to the total days of the trip, excluding the days of transportation to and from the cruise ship port, and the number of hours of each day of the trip which such individual devoted to scheduled business activities,
(ii) a program of the scheduled business activities of the meeting, and
(iii) such other information as may be required in regulations prescribed by the Secretary; and
(B) a written statement signed by an officer of the organization or group sponsoring the meeting which includes—
(i) a schedule of the business activities of each day of the meeting,
(ii) the number of hours which the individual attending the meeting attended such scheduled business activities, and
(iii) such other information as may be required in regulations prescribed by the Secretary.
(6) Treatment of conventions in certain Caribbean countries
(A) In general
For purposes of this subsection, the term "North American area" includes, with respect to any convention, seminar, or similar meeting, any beneficiary country if (as of the time such meeting begins)—
(i) there is in effect a bilateral or multilateral agreement described in subparagraph (C) between such country and the United States providing for the exchange of information between the United States and such country, and
(ii) there is not in effect a finding by the Secretary that the tax laws of such country discriminate against conventions held in the United States.
(B) Beneficiary country
For purposes of this paragraph, the term "beneficiary country" has the meaning given to such term by section 212(a)(1)(A) of the Caribbean Basin Economic Recovery Act; except that such term shall include Bermuda.
(C) Authority to conclude exchange of information agreements
(i) In general
The Secretary is authorized to negotiate and conclude an agreement for the exchange of information with any beneficiary country. Except as provided in clause (ii), an exchange of information agreement shall provide for the exchange of such information (not limited to information concerning nationals or residents of the United States or the beneficiary country) as may be necessary or appropriate to carry out and enforce the tax laws of the United States and the beneficiary country (whether criminal or civil proceedings), including information which may otherwise be subject to nondisclosure provisions of the local law of the beneficiary country such as provisions respecting bank secrecy and bearer shares. The exchange of information agreement shall be terminable by either country on reasonable notice and shall provide that information received by either country will be disclosed only to persons or authorities (including courts and administrative bodies) involved in the administration or oversight of, or in the determination of appeals in respect of, taxes of the United States or the beneficiary country and will be used by such persons or authorities only for such purposes.
(ii) Nondisclosure of qualified confidential information sought for civil tax purposes
An exchange of information agreement need not provide for the exchange of qualified confidential information which is sought only for civil tax purposes if—
(I) the Secretary of the Treasury, after making all reasonable efforts to negotiate an agreement which includes the exchange of such information, determines that such an agreement cannot be negotiated but that the agreement which was negotiated will significantly assist in the administration and enforcement of the tax laws of the United States, and
(II) the President determines that the agreement as negotiated is in the national security interest of the United States.
(iii) Qualified confidential information defined
For purposes of this subparagraph, the term "qualified confidential information" means information which is subject to the nondisclosure provisions of any local law of the beneficiary country regarding bank secrecy or ownership of bearer shares.
(iv) Civil tax purposes
For purposes of this subparagraph, the determination of whether information is sought only for civil tax purposes shall be made by the requesting party.
(D) Coordination with other provisions
Any exchange of information agreement negotiated under subparagraph (C) shall be treated as an income tax convention for purposes of section 6103(k)(4). The Secretary may exercise his authority under subchapter A of
(E) Determinations published in the Federal Register
The following shall be published in the Federal Register—
(i) any determination by the President under subparagraph (C)(ii) (including the reasons for such determination),
(ii) any determination by the Secretary under subparagraph (C)(ii) (including the reasons for such determination), and
(iii) any finding by the Secretary under subparagraph (A)(ii) (and any termination thereof).
(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.
(i) Qualified nonpersonal use vehicle
For purposes of subsection (d), the term "qualified nonpersonal use vehicle" means any vehicle which, by reason of its nature, is not likely to be used more than a de minimis amount for personal purposes.
(j) Employee achievement awards
(1) General rule
No deduction shall be allowed under section 162 or section 212 for the cost of an employee achievement award except to the extent that such cost does not exceed the deduction limitations 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
(i) In general
The term "employee achievement award" means an item of tangible personal 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 payment of disguised compensation.
(ii) Tangible personal property
For purposes of clause (i), the term "tangible personal property" shall not include—
(I) cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or
(II) vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.
(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 achievement awards which are provided by the employer during the year, and which would be qualified plan awards but for this subparagraph, exceeds $400. For 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 achievement award made by a partnership, the deduction limitations contained in paragraph (2) shall apply to the partnership 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.
(C) Safety achievement awards
An item provided by an employer to an employee shall not be treated as having been provided for safety achievement if—
(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, administrator, clerical employee, or other professional employee.
(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—
(A) any expense described in paragraph (2), (3), (4), (7), (8), or (9) of subsection (e), and
(B) any other expense to the extent provided in regulations.
(l) Transportation and commuting benefits
(1) In general
No deduction shall be allowed under this chapter for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee's residence and place of employment, except as necessary for ensuring the safety of the employee.
(2) Exception
In the case of any qualified bicycle commuting reimbursement (as described in section 132(f)(5)(F)), this subsection shall not apply for any amounts paid or incurred after December 31, 2017, and before January 1, 2026.
(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 aggregate 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 serving 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
(ii) any expense described in 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.
(3) Travel expenses of spouse, dependent, or others
No deduction shall be allowed under this chapter (other than section 217) for travel expenses paid or incurred with respect to a spouse, dependent, or other individual accompanying the taxpayer (or an officer or employee of the taxpayer) on business travel, unless—
(A) the spouse, dependent, or other individual is an employee of the taxpayer,
(B) the travel of the spouse, dependent, or other individual is for a bona fide business purpose, and
(C) such expenses would otherwise be deductible by the spouse, dependent, or other individual.
(n) Only 50 percent of meal expenses allowed as deduction
(1) In general
The amount allowable as a deduction under this chapter for any expense for food or beverages shall not exceed 50 percent of the amount of such expense which would (but for this paragraph) be allowable as a deduction under this chapter.
(2) Exceptions
Paragraph (1) shall not apply to any expense if—
(A) such expense is described in paragraph (2), (3), (4), (7), (8), or (9) of subsection (e),
(B) in the case of an employer who pays or reimburses moving expenses of an employee, such expenses are includible in the income of the employee under section 82,
(C) such expense is for food or beverages—
(i) required by any Federal law to be provided to crew members of a commercial vessel,
(ii) provided to crew members of a commercial vessel—
(I) which is operating on the Great Lakes, the Saint Lawrence Seaway, or any inland waterway of the United States, and
(II) which is of a kind which would be required by Federal law to provide food and beverages to crew members if it were operated at sea,
(iii) provided on an oil or gas platform or drilling rig if the platform or rig is located offshore, or
(iv) provided on an oil or gas platform or drilling rig, or at a support camp which is in proximity and integral to such platform or rig, if the platform or rig is located in the United States north of 54 degrees north latitude, or
(D) such expense is—
(i) for food or beverages provided by a restaurant, and
(ii) paid or incurred before January 1, 2023.
Clauses (i) and (ii) of subparagraph (C) shall not apply to vessels primarily engaged in providing luxury water transportation (determined under the principles of subsection (m)). In the case of the employee, the exception of subparagraph (A) shall not apply to expenses described in subparagraph (B).
(3) Special rule for individuals subject to Federal hours of service
In the case of any expenses for food or beverages consumed while away from home (within the meaning of section 162(a)(2)) by an individual during, or incident to, the period of duty subject to the hours of service limitations of the Department of Transportation, paragraph (1) shall be applied by substituting "80 percent" for "50 percent".
(o) 1 Regulatory authority
The Secretary shall prescribe such regulations as he may deem necessary to carry out the purposes of this section, including regulations prescribing whether subsection (a) or subsection (b) applies in cases where both such subsections would otherwise apply.
(Added
Amendment of Section
(o) Meals provided at convenience of employer
No deduction shall be allowed under this chapter for—
(1) any expense for the operation of a facility described in section 132(e)(2), and any expense for food or beverages, including under section 132(e)(1), associated with such facility, or
(2) any expense for meals described in section 119(a).
See 2017 Amendment note below.
Editorial Notes
References in Text
Section 16 of the Securities Exchange Act of 1934, referred to in subsec. (e)(2)(B)(ii), is classified to
Section 212(a)(1)(A) of the Caribbean Basin Economic Recovery Act, referred to in subsec. (h)(6)(B), is classified to
Amendments
2020—Subsec. (n)(2)(D).
2017—Subsec. (a).
Subsec. (a)(1).
Subsec. (a)(1)(A).
Subsec. (a)(2)(C).
Subsec. (a)(4).
Subsec. (d).
Subsec. (d)(2) to (4).
Subsec. (j)(3)(A).
Subsec. (l).
Subsec. (n).
Subsec. (n)(1).
Subsec. (n)(2).
Subsec. (n)(2)(B).
Subsec. (n)(2)(C).
Subsec. (n)(2)(D), (E).
Subsecs. (o), (p).
2014—Subsec. (n)(3).
2005—Subsec. (e)(2)(B)(ii).
2004—Subsec. (e)(2).
1997—Subsec. (n)(3).
1993—Subsec. (a)(3).
Subsec. (e)(4).
Subsec. (m)(3).
Subsec. (n).
1990—Subsec. (l)(2).
Subsec. (n)(2).
Subsec. (n)(2)(D) to (F).
Subsec. (n)(3).
"(A) an expense for food or beverages is not separately stated,
"(B) more than 50 percent of the participants are away from home,
"(C) at least 40 individuals attend, and
"(D) such food and beverages are part of a program which includes a speaker."
1989—Subsec. (n)(2).
Subsec. (n)(2)(F)(i).
1988—Subsec. (b)(1).
Subsec. (h)(1), (2).
Subsec. (k)(2).
Subsec. (m)(1)(B)(ii).
Subsec. (n)(2).
1986—Subsec. (b)(1).
"(i) the cost of such item to the taxpayer does not exceed $400, or
"(ii) such item is a qualified plan award."
Subsec. (b)(3).
Subsec. (e)(1).
Subsec. (e)(2).
Subsec. (e)(3).
Subsec. (e)(4).
Subsec. (e)(5) to (10).
Subsec. (h).
Subsec. (j).
Subsec. (k).
Subsecs. (l) to (n).
Subsec. (o).
1985—Subsec. (d).
Subsecs. (i), (j).
1984—Subsec. (d).
Subsec. (h)(6)(D).
1983—Subsec. (e)(3).
Subsec. (h)(2).
Subsec. (h)(5).
Subsec. (h)(6).
1982—Subsec. (e)(3).
1981—Subsec. (b)(1)(C).
Subsec. (b)(3).
1980—Subsec. (a)(2)(C).
Subsec. (e)(10).
Subsec. (h)
1978—Subsec. (a)(1).
Subsec. (a)(2)(C).
Subsec. (h)(3).
Subsec. (h)(6)(D).
Subsec. (h)(6)(E).
1976—Subsecs. (c)(1), (d).
Subsec. (h).
Subsec. (i).
1964—Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 2020 Amendment
Effective Date of 2017 Amendment
"(1)
"(2)
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2005 Amendment
Amendments by
Effective Date of 2004 Amendment
Effective Date of 1997 Amendment
Effective Date of 1993 Amendment
Effective Date of 1989 Amendment
Amendment by section 7816(a) of
Effective Date of 1988 Amendment
Amendment by section 1001(g)(1)–(4)(A), (5) of
"(1) Clauses (i) and (ii) of section 274(n)(2)(F) [now 274(n)(2)(C)] of the 1986 Code, as added by subsection (a), shall apply to taxable years beginning after December 31, 1988.
"(2) Clauses (iii) and (iv) of section 274(n)(2)(F) [now 274(n)(2)(C)] of the 1986 Code, as added by subsection (a), shall apply to taxable years beginning after December 31, 1987."
Effective Date of 1986 Amendment
Amendment by section 122(c), (d) of
Amendment by section 142(a)–(c) of
Amendment by section 1114(b)(6) of
Effective Date of 1985 Amendment
"(a)
"(b)
"(c)
Effective Date of 1984 Amendment
Amendment by section 179(b)(1) of
Amendment by section 801(c) of
Effective Date of 1983 Amendment
Effective Date of 1981 Amendment
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
Effective Date of 1976 Amendment
Effective Date of 1964 Amendment
Effective Date
Section applicable with respect to taxable years ending after Dec. 31, 1962, but only in respect of periods after such date, see section 4(c) of
Regulations
Secretary of the Treasury or his delegate to issue before Feb. 1, 1988, final regulations to carry out amendments made by section 1114 of
Savings Provision
For provisions that nothing in amendment by
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Certain Recordkeeping Requirements
For treatment of use of automobile by I.R.S. special agent for purposes of this section and
Substantiation by Adequate Contemporaneous Records
Use of Facilities in Case of Independent Contractors, Etc.
"(i)
"(ii)
"(iii)
Executive Documents
Termination of Trust Territory of the Pacific Islands
For termination of Trust Territory of the Pacific Islands, see note set out preceding
1 See Amendment of Section note below.
§275. Certain taxes
(a) General rule
No deduction shall be allowed for the following taxes:
(1) Federal income taxes, including—
(A) the tax imposed by section 3101 (relating to the tax on employees under the Federal Insurance Contributions Act);
(B) the taxes imposed by sections 3201 and 3211 (relating to the taxes on railroad employees and railroad employee representatives); and
(C) the tax withheld at source on wages under section 3402.
(2) Federal war profits and excess profits taxes.
(3) Estate, inheritance, legacy, succession, and gift taxes.
(4) Income, war profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States if the taxpayer chooses to take to any extent the benefits of section 901.
(5) Taxes on real property, to the extent that section 164(d) requires such taxes to be treated as imposed on another taxpayer.
(6) Taxes imposed by chapters 37, 41, 42, 43, 44, 45, 46, 50A, and 54.
Paragraph (1) shall not apply to any taxes to the extent such taxes are allowable as a deduction under section 164(f).
(b) Cross reference
For disallowance of certain other taxes, see section 164(c).
(Added
Editorial Notes
References in Text
The Federal Insurance Contributions Act, referred to in subsec. (a)(1)(A), is act Aug. 16, 1954, ch. 736, §§3101, 3102, 3111, 3112, 3121 to 3128,
Codification
Amendments
2022—Subsec. (a)(6).
2014—Subsec. (a).
2007—Subsec. (a)(4).
"(A) the taxpayer chooses to take to any extent the benefits of section 901, or
"(B) such taxes are paid or accrued with respect to foreign trade income (within the meaning of section 923(b)) of a FSC,."
2004—Subsec. (a).
Subsec. (a)(4).
Subsec. (a)(6).
2000—Subsec. (a).
Subsec. (a)(4)(C).
1987—Subsec. (a)(6).
1986—Subsec. (a).
1984—Subsec. (a)(4).
Subsec. (a)(6).
1983—Subsec. (a).
Subsec. (a)(1).
1982—Subsec. (a)(1).
1976—Subsec. (a)(1)(C).
Subsec. (a)(6).
1974—Subsec. (a)(6).
Statutory Notes and Related Subsidiaries
Effective Date of 2022 Amendment
Amendment by section 10201(b) of
Amendment by section 11003(b) of
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2004 Amendment
Amendment by section 101(b)(5) of
Amendment by section 802(b)(1) of
Effective Date of 2000 Amendment
Amendment by
Effective Date of 1987 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by section 67(b)(2) of
Amendment by section 801(d)(5) of
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1976 Amendment
For effective date of amendment by section 1307(d)(2)(A) of
For effective date of amendment by section 1605(b)(1) of
Amendment by section 1901(a)(39) of
Effective Date of 1974 Amendment
Amendment by
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1963, see section 207(c) of
§276. Certain indirect contributions to political parties
(a) Disallowance of deduction
No deduction otherwise allowable under this chapter shall be allowed for any amount paid or incurred for—
(1) advertising in a convention program of a political party, or in any other publication if any part of the proceeds of such publication directly or indirectly inures (or is intended to inure) to or for the use of a political party or a political candidate,
(2) admission to any dinner or program, if any part of the proceeds of such dinner or program directly or indirectly inures (or is intended to inure) to or for the use of a political party or a political candidate, or
(3) admission to an inaugural ball, inaugural gala, inaugural parade, or inaugural concert, or to any similar event which is identified with a political party or a political candidate.
(b) Definitions
For purposes of this section—
(1) Political party
The term "political party" means—
(A) a political party;
(B) a National, State, or local committee of a political party; or
(C) a committee, association, or organization, whether incorporated or not, which directly or indirectly accepts contributions (as defined in section 271(b)(2)) or make expenditures (as defined in section 271(b)(3)) for the purpose of influencing or attempting to influence the selection, nomination, or election of any individual to any Federal, State, or local elective public office, or the election of presidential and vice-presidential electors, whether or not such individual or electors are selected, nominated, or elected.
(2) Proceeds inuring to or for the use of political candidates
Proceeds shall be treated as inuring to or for the use of a political candidate only if—
(A) such proceeds may be used directly or indirectly for the purpose of furthering his candidacy for selection, nomination, or election to any elective public office, and
(B) such proceeds are not received by such candidate in the ordinary course of a trade or business (other than the trade or business of holding elective public office).
(c) Cross reference
For disallowance of certain entertainment, etc., expenses, see section 274.
(Added
Editorial Notes
Amendments
1974—Subsecs. (c), (d).
1968—Subsecs. (c), (d).
Statutory Notes and Related Subsidiaries
Effective Date of 1974 Amendment
Amendment by
Effective Date of 1968 Amendment
Effective Date
Program Advertising for Presidential and Vice-Presidential Nominating Conventions
§277. Deductions incurred by certain membership organizations in transactions with members
(a) General rule
In the case of a social club or other membership organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation, deductions for the taxable year attributable to furnishing services, insurance, goods, or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members (including income derived during such year from institutes and trade shows which are primarily for the education of members). If for any taxable year such deductions exceed such income, the excess shall be treated as a deduction attributable to furnishing services, insurance, goods, or other items of value to members paid or incurred in the succeeding taxable year. The deductions provided by sections 243 and 245 (relating to dividends received by corporations) shall not be allowed to any organization to which this section applies for the taxable year.
(b) Exceptions
Subsection (a) shall not apply to any organization—
(1) which for the taxable year is subject to taxation under subchapter H or L,
(2) which has made an election before October 9, 1969, under section 456(c) or which is affiliated with such an organization,
(3) which for each day of any taxable year is a national securities exchange subject to regulation under the Securities Exchange Act of 1934 or a contract market subject to regulation under the Commodity Exchange Act, or
(4) which is engaged primarily in the gathering and distribution of news to its members for publication.
(Added
Editorial Notes
References in Text
The Securities Exchange Act of 1934, referred to in subsec. (b)(3), is act June 6, 1934, ch. 404,
The Commodity Exchange Act, referred to in subsec. (b)(3), is act Sept. 21, 1922, ch. 369,
Amendments
2014—Subsec. (a).
1986—Subsec. (b)(4).
1976—Subsec. (a).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Except as otherwise provided in section 221(a) of
Effective Date of 1986 Amendment
Effective Date of 1976 Amendment
Amendment by
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1970, see section 121(g) of
[§278. Repealed. Pub. L. 99–514, title VIII, §803(b)(6), Oct. 22, 1986, 100 Stat. 2356 ]
Section, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
If any interest costs incurred after Dec. 31, 1986, are attributable to costs incurred before Jan. 1, 1987, the repeal of this section is applicable to such interest costs only to the extent such interest costs are attributable to costs which were required to be capitalized under section 263 of the Internal Revenue Code of 1954 and which would have been taken into account in applying section 189 of the Internal Revenue Code of 1954 (as in effect before its repeal by section 803 of
Repeal applicable to costs incurred after Dec. 31, 1986, in taxable years ending after such date, except as otherwise provided, see section 803(d) of
§279. Interest on indebtedness incurred by corporation to acquire stock or assets of another corporation
(a) General rule
No deduction shall be allowed for any interest paid or incurred by a corporation during the taxable year with respect to its corporate acquisition indebtedness to the extent that such interest exceeds—
(1) $5,000,000, reduced by
(2) the amount of interest paid or incurred by such corporation during such year on obligations (A) issued to provide consideration for an acquisition described in paragraph (1) of subsection (b), but (B) which are not corporate acquisition indebtedness.
(b) Corporate acquisition indebtedness
For purposes of this section, the term "corporate acquisition indebtedness" means any obligation evidenced by a bond, debenture, note, or certificate or other evidence of indebtedness issued by a corporation (hereinafter in this section referred to as "issuing corporation") if—
(1) such obligation is issued to provide consideration for the acquisition of—
(A) stock in another corporation (hereinafter in this section referred to as "acquired corporation"), or
(B) assets of another corporation (hereinafter in this section referred to as "acquired corporation") pursuant to a plan under which at least two-thirds (in value) of all the assets (excluding money) used in trades and businesses carried on by such corporation are acquired,
(2) such obligation is either—
(A) subordinated to the claims of trade creditors of the issuing corporation generally, or
(B) expressly subordinated in right of payment to the payment of any substantial amount of unsecured indebtedness, whether outstanding or subsequently issued, of the issuing corporation,
(3) the bond or other evidence of indebtedness is either—
(A) convertible directly or indirectly into stock of the issuing corporation, or
(B) part of an investment unit or other arrangement which includes, in addition to such bond or other evidence of indebtedness, an option to acquire, directly or indirectly, stock in the issuing corporation, and
(4) as of a day determined under subsection (c)(1), either—
(A) the ratio of debt to equity (as defined in subsection (c)(2)) of the issuing corporation exceeds 2 to 1, or
(B) the projected earnings (as defined in subsection (c)(3)) do not exceed 3 times the annual interest to be paid or incurred (determined under subsection (c)(4)).
(c) Rules for application of subsection (b)(4)
For purposes of subsection (b)(4)—
(1) Time of determination
Determinations are to be made as of the last day of any taxable year of the issuing corporation in which it issues any obligation to provide consideration for an acquisition described in subsection (b)(1) of stock in, or assets of, the acquired corporation.
(2) Ratio of debt to equity
The term "ratio of debt to equity" means the ratio which the total indebtedness of the issuing corporation bears to the sum of its money and all its other assets (in an amount equal to their adjusted basis for determining gain) less such total indebtedness.
(3) Projected earnings
(A) The term "projected earnings" means the "average annual earnings" (as defined in subparagraph (B)) of—
(i) the issuing corporation only, if clause (ii) does not apply, or
(ii) both the issuing corporation and the acquired corporation, in any case where the issuing corporation has acquired control (as defined in section 368(c)), or has acquired substantially all of the properties, of the acquired corporation.
(B) The average annual earnings referred to in subparagraph (A) is, for any corporation, the amount of its earnings and profits for any 3-year period ending with the last day of a taxable year of the issuing corporation described in paragraph (1), computed without reduction for—
(i) interest paid or incurred,
(ii) depreciation or amortization allowed under this chapter,
(iii) liability for tax under this chapter, and
(iv) distributions to which section 301(c)(1) applies (other than such distributions from the acquired to the issuing corporation),
and reduced to an annual average for such 3-year period pursuant to regulations prescribed by the Secretary. Such regulations shall include rules for cases where any corporation was not in existence for all of such 3-year period or such period includes only a portion of a taxable year of any corporation.
(4) Annual interest to be paid or incurred
The term "annual interest to be paid or incurred" means—
(A) if subparagraph (B) does not apply, the annual interest to be paid or incurred by the issuing corporation only, determined by reference to its total indebtedness outstanding, or
(B) if projected earnings are determined under clause (ii) of paragraph (3)(A), the annual interest to be paid or incurred by both the issuing corporation and the acquired corporation, determined by reference to their combined total indebtedness outstanding.
(5) Special rules for banks and lending or finance companies
With respect to any corporation which is a bank (as defined in section 581) or is primarily engaged in a lending or finance business—
(A) in determining under paragraph (2) the ratio of debt to equity of such corporation (or of the affiliated group of which such corporation is a member), the total indebtedness of such corporation (and the assets of such corporation) shall be reduced by an amount equal to the total indebtedness owed to such corporation which arises out of the banking business of such corporation, or out of the lending or finance business of such corporation, as the case may be;
(B) in determining under paragraph (4) the annual interest to be paid or incurred by such corporation (or by the issuing and acquired corporations referred to in paragraph (4)(B) or by the affiliated group of which such corporation is a member) the amount of such interest (determined without regard to this paragraph) shall be reduced by an amount which bears the same ratio to the amount of such interest as the amount of the reduction for the taxable year under subparagraph (A) bears to the total indebtedness of such corporation; and
(C) in determining under paragraph (3)(B) the average annual earnings, the amount of the earnings and profits for the 3-year period shall be reduced by the sum of the reductions under subparagraph (B) for such period.
For purposes of this paragraph, the term "lending or finance business" means a business of making loans or purchasing or discounting accounts receivable, notes, or installment obligations.
(d) Taxable years to which applicable
In applying this section—
(1) First year of disallowance
The deduction of interest on any obligation shall not be disallowed under subsection (a) before the first taxable year of the issuing corporation as of the last day of which the application of either subparagraph (A) or subparagraph (B) of subsection (b)(4) results in such obligation being corporate acquisition indebtedness.
(2) General rule for succeeding years
Except as provided in paragraphs (3), (4), and (5), if an obligation is determined to be corporate acquisition indebtedness as of the last day of any taxable year of the issuing corporation, it shall be corporate acquisition indebtedness for such taxable year and all subsequent taxable years.
(3) Redetermination where control, etc., is acquired
If an obligation is determined to be corporate acquisition indebtedness as of the close of a taxable year of the issuing corporation in which clause (i) of subsection (c)(3)(A) applied, but would not be corporate acquisition indebtedness if the determination were made as of the close of the first taxable year of such corporation thereafter in which clause (ii) of subsection (c)(3)(A) could apply, such obligation shall be considered not to be corporate acquisition indebtedness for such later taxable year and all taxable years thereafter.
(4) Special 3-year rule
If an obligation which has been determined to be corporate acquisition indebtedness for any taxable year would not be such indebtedness for each of any 3 consecutive taxable years thereafter if subsection (b)(4) were applied as of the close of each of such 3 years, then such obligation shall not be corporate acquisition indebtedness for all taxable years after such 3 consecutive taxable years.
(5) 5 percent stock rule
In the case of obligations issued to provide consideration for the acquisition of stock in another corporation, such obligations shall be corporate acquisition indebtedness for a taxable year only if at some time before the close of such year the issuing corporation owns 5 percent or more of the total combined voting power of all classes of stock entitled to vote of such other corporation.
(e) Certain nontaxable transactions
An acquisition of stock of a corporation of which the issuing corporation is in control (as defined in section 368(c)) in a transaction in which gain or loss is not recognized shall be deemed an acquisition described in paragraph (1) of subsection (b) only if immediately before such transaction (1) the acquired corporation was in existence, and (2) the issuing corporation was not in control (as defined in section 368(c)) of such corporation.
(f) Exemption for certain acquisitions of foreign corporations
For purposes of this section, the term "corporate acquisition indebtedness" does not include any indebtedness issued to any person to provide consideration for the acquisition of stock in, or assets of, any foreign corporation substantially all of the income of which, for the 3-year period ending with the date of such acquisition or for such part of such period as the foreign corporation was in existence, is from sources without the United States.
(g) Affiliated groups
In any case in which the issuing corporation is a member of an affiliated group, the application of this section shall be determined, pursuant to regulations prescribed by the Secretary, by treating all of the members of the affiliated group in the aggregate as the issuing corporation, except that the ratio of debt to equity of, projected earnings of, and annual interest to be paid or incurred by any corporation (other than the issuing corporation determined without regard to this subsection) shall be included in the determinations required under subparagraphs (A) and (B) of subsection (b)(4) as of any day only if such corporation is a member of the affiliated group on such day, and, in determining projected earnings of such corporation under subsection (c)(3), there shall be taken into account only the earnings and profits of such corporation for the period during which it was a member of the affiliated group. For purposes of the preceding sentence, the term "affiliated group" has the meaning assigned to such term by section 1504(a), except that all corporations other than the acquired corporation shall be treated as includible corporations (without any exclusion under section 1504(b)) and the acquired corporation shall not be treated as an includible corporation.
(h) Changes in obligation
For purposes of this section—
(1) Any extension, renewal, or refinancing of an obligation evidencing a preexisting indebtedness shall not be deemed to be the issuance of a new obligation.
(2) Any obligation which is corporate acquisition indebtedness of the issuing corporation is also corporate acquisition indebtedness of any corporation which becomes liable for such obligation as guarantor, endorser, or indemnitor or which assumes liability for such obligation in any transaction.
(i) Effect on other provisions
No inference shall be drawn from any provision in this section that any instrument designated as a bond, debenture, note, or certificate or other evidence of indebtedness by its issuer represents an obligation or indebtedness of such issuer in applying any other provision of this title.
(Added
Editorial Notes
Amendments
2014—Subsec. (a)(2).
Subsec. (b).
Subsec. (d)(5).
Subsecs. (i), (j).
"(1) stock or assets pursuant to a binding written contract which was in effect on October 9, 1969, and at all times thereafter before such acquisition, or
"(2) stock in any corporation where the issuing corporation, on October 9, 1969, and at all times thereafter before such acquisition, owned at least 50 percent of the total combined voting power of all classes of stock entitled to vote of the acquired corporation."
1976—Subsecs. (c)(3)(B), (g).
Subsec. (i).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
"(i) apply to obligations issued on or before October 9, 1969 (determined in the same manner as under section 279 of the Internal Revenue Code of 1986 as in effect before such amendments), and
"(ii) be construed to require interest on obligations issued on or before December 31, 1967, to be taken into account under section 279(a)(2) of such Code (as in effect after such amendments)."
Except as otherwise provided in section 221(a) of
Effective Date of 1976 Amendment
Effective Date
[§280. Repealed. Pub. L. 99–514, title VIII, §803(b)(2)(A), Oct. 22, 1986, 100 Stat. 2355 ]
Section, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
If any interest costs incurred after Dec. 31, 1986, are attributable to costs incurred before Jan. 1, 1987, the repeal of this section is applicable to such interest costs only to the extent such interest costs are attributable to costs which were required to be capitalized under section 263 of the Internal Revenue Code of 1954 and which would have been taken into account in applying section 189 of the Internal Revenue Code of 1954 (as in effect before its repeal by section 803 of
Repeal applicable to costs incurred after Dec. 31, 1986, in taxable years ending after such date, except as otherwise provided, see section 803(d) of
§280A. Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc.
(a) General rule
Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.
(b) Exception for interest, taxes, casualty losses, etc.
Subsection (a) shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity).
(c) Exceptions for certain business or rental use; limitation on deductions for such use
(1) Certain business use
Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis—
(A) as the principal place of business for any trade or business of the taxpayer,
(B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or
(C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer's trade or business.
In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. For purposes of subparagraph (A), the term "principal place of business" includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.
(2) Certain storage use
Subsection (a) shall not apply to any item to the extent such item is allocable to space within the dwelling unit which is used on a regular basis as a storage unit for the inventory or product samples of the taxpayer held for use in the taxpayer's trade or business of selling products at retail or wholesale, but only if the dwelling unit is the sole fixed location of such trade or business.
(3) Rental use
Subsection (a) shall not apply to any item which is attributable to the rental of the dwelling unit or portion thereof (determined after the application of subsection (e)).
(4) Use in providing day care services
(A) In general
Subsection (a) shall not apply to any item to the extent that such item is allocable to the use of any portion of the dwelling unit on a regular basis in the taxpayer's trade or business of providing day care for children, for individuals who have attained age 65, or for individuals who are physically or mentally incapable of caring for themselves.
(B) Licensing, etc., requirement
Subparagraph (A) shall apply to items accruing for a period only if the owner or operator of the trade or business referred to in subparagraph (A)—
(i) has applied for (and such application has not been rejected),
(ii) has been granted (and such granting has not been revoked), or
(iii) is exempt from having,
a license, certification, registration, or approval as a day care center or as a family or group day care home under the provisions of any applicable State law. This subparagraph shall apply only to items accruing in periods beginning on or after the first day of the first month which begins more than 90 days after the date of the enactment of the Tax Reduction and Simplification Act of 1977.
(C) Allocation formula
If a portion of the taxpayer's dwelling unit used for the purposes described in subparagraph (A) is not used exclusively for those purposes, the amount of the expenses attributable to that portion shall not exceed an amount which bears the same ratio to the total amount of the items allocable to such portion as the number of hours the portion is used for such purposes bears to the number of hours the portion is available for use.
(5) Limitation on deductions
In the case of a use described in paragraph (1), (2), or (4), and in the case of a use described in paragraph (3) where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of—
(A) the gross income derived from such use for the taxable year, over
(B) the sum of—
(i) the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used, and
(ii) the deductions allocable to the trade or business (or rental activity) 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. Any amount taken into account for any taxable year under the preceding sentence shall be subject to the limitation of the 1st sentence of this paragraph whether or not the dwelling unit is used as a residence during such taxable year.
(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 taxpayer uses the dwelling unit (or portion) in performing services as an employee of the employer.
(d) Use as residence
(1) In general
For purposes of this section, a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of—
(A) 14 days, or
(B) 10 percent of the number of days during such year for which such unit is rented at a fair rental.
For purposes of subparagraph (B), a unit shall not be treated as rented at a fair rental for any day for which it is used for personal purposes.
(2) Personal use of unit
For purposes of this section, the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used—
(A) for personal purposes by the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c)(4)) of the taxpayer or such other person;
(B) by any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit); or
(C) by any individual (other than an employee with respect to whose use section 119 applies), unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental.
The Secretary shall prescribe regulations with respect to the circumstances under which use of the unit for repairs and annual maintenance will not constitute personal use under this paragraph, except that if the taxpayer is engaged in repair and maintenance on a substantially full time basis for any day, such authority shall not allow the Secretary to treat a dwelling unit as being used for personal use by the taxpayer on such day merely because other individuals who are on the premises on such day are not so engaged.
(3) Rental to family member, etc., for use as principal residence
(A) In general
A taxpayer shall not be treated as using a dwelling unit for personal purposes by reason of a rental arrangement for any period if for such period such dwelling unit is rented, at a fair rental, to any person for use as such person's principal residence.
(B) Special rules for rental to person having interest in unit
(i) Rental must be pursuant to shared equity financing agreement
Subparagraph (A) shall apply to a rental to a person who has an interest in the dwelling unit only if such rental is pursuant to a shared equity financing agreement.
(ii) Determination of fair rental
In the case of a rental pursuant to a shared equity financing agreement, fair rental shall be determined as of the time the agreement is entered into and by taking into account the occupant's qualified ownership interest.
(C) Shared equity financing agreement
For purposes of this paragraph, the term "shared equity financing agreement" means an agreement under which—
(i) 2 or more persons acquire qualified ownership interests in a dwelling unit, and
(ii) the person (or persons) holding 1 or more of such interests—
(I) is entitled to occupy the dwelling unit for use as a principal residence, and
(II) is required to pay rent to 1 or more other persons holding qualified ownership interests in the dwelling unit.
(D) Qualified ownership interest
For purposes of this paragraph, the term "qualified ownership interest" means an undivided interest for more than 50 years in the entire dwelling unit and appurtenant land being acquired in the transaction to which the shared equity financing agreement relates.
(4) Rental of principal residence
(A) In general
For purposes of applying subsection (c)(5) to deductions allocable to a qualified rental period, a taxpayer shall not be considered to have used a dwelling unit for personal purposes for any day during the taxable year which occurs before or after a qualified rental period described in subparagraph (B)(i), or before a qualified rental period described in subparagraph (B)(ii), if with respect to such day such unit constitutes the principal residence (within the meaning of section 121) of the taxpayer.
(B) Qualified rental period
For purposes of subparagraph (A), the term "qualified rental period" means a consecutive period of—
(i) 12 or more months which begins or ends in such taxable year, or
(ii) less than 12 months which begins in such taxable year and at the end of which such dwelling unit is sold or exchanged, and
for which such unit is rented, or is held for rental, at a fair rental.
(e) Expenses attributable to rental
(1) In general
In any case where a taxpayer who is an individual or an S corporation uses a dwelling unit for personal purposes on any day during the taxable year (whether or not he is treated under this section as using such unit as a residence), the amount deductible under this chapter with respect to expenses attributable to the rental of the unit (or portion thereof) for the taxable year shall not exceed an amount which bears the same relationship to such expenses as the number of days during each year that the unit (or portion thereof) is rented at a fair rental bears to the total number of days during such year that the unit (or portion thereof) is used.
(2) Exception for deductions otherwise allowable
This subsection shall not apply with respect to deductions which would be allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was rented.
(f) Definitions and special rules
(1) Dwelling unit defined
For purposes of this section—
(A) In general
The term "dwelling unit" includes a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit.
(B) Exception
The term "dwelling unit" does not include that portion of a unit which is used exclusively as a hotel, motel, inn, or similar establishment.
(2) Personal use by shareholders of S corporation
In the case of an S corporation, subparagraphs (A) and (B) of subsection (d)(2) shall be applied by substituting "any shareholder of the S corporation" for "the taxpayer" each place it appears.
(3) Coordination with section 183
If subsection (a) applies with respect to any dwelling unit (or portion thereof) for the taxable year—
(A) section 183 (relating to activities not engaged in for profit) shall not apply to such unit (or portion thereof) for such year, but
(B) such year shall be taken into account as a taxable year for purposes of applying subsection (d) of section 183 (relating to 5-year presumption).
(4) Coordination with section 162(a)(2)
Nothing in this section shall be construed to disallow any deduction allowable under section 162(a)(2) (or any deduction which meets the tests of section 162(a)(2) but is allowable under another provision of this title) by reason of the taxpayer's being away from home in the pursuit of a trade or business (other than the trade or business of renting dwelling units).
(g) Special rule for certain rental use
Notwithstanding any other provision of this section or section 183, if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then—
(1) no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and
(2) the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61.
(Added
Editorial Notes
References in Text
The date of enactment of the Tax Reduction and Simplification Act of 1977, referred to in subsec. (c)(4)(B), is the date of enactment of
Amendments
1997—Subsec. (c)(1).
Subsec. (d)(4)(A).
1996—Subsec. (c)(1)(A).
Subsec. (c)(2).
1988—Subsec. (c)(5).
1986—Subsec. (c)(5)(B).
Subsec. (c)(6).
1982—Subsecs. (a), (e)(1).
Subsec. (f)(2).
Subsec. (f)(4).
1981—Subsec. (c)(1)(A).
Subsec. (d)(2).
Subsec. (d)(3), (4).
Subsec. (f)(4).
1978—Subsec. (d)(3).
1977—Subsec. (c)(4), (5).
Statutory Notes and Related Subsidiaries
Effective Date of 1997 Amendment
Amendment by section 312(d)(1) of
Effective Date of 1996 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Dates of 1982 Amendment
Amendment by
Amendment by
Effective Date of 1981 Amendment
Effective Date of 1978 Amendment
Effective Date of 1977 Amendment
Effective Date
§280B. Demolition of structures
In the case of the demolition of any structure—
(1) no deduction otherwise allowable under this chapter shall be allowed to the owner or lessee of such structure for—
(A) any amount expended for such demolition, or
(B) any loss sustained on account of such demolition; and
(2) amounts described in paragraph (1) shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located.
(Added
Editorial Notes
Amendments
1984—
1981—Subsec. (a).
Subsec. (b).
1980—Subsec. (c).
1978—Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 1984 Amendment
"(1) The amendments made by this section [amending 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 [amending this section] shall not apply to any demolition commencing before September 1, 1984, pursuant to a bank headquarters building project if—
"(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 intermediate and related products at facilities located in or near Baton Rouge, Louisiana, and Houston, Texas, owned by the same corporation, and
"(B) demolition of at least one such structure at the Baton Rouge facility commenced before January 1, 1984."
Effective Date of 1981 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date
§280C. Certain expenses for which credits are allowable
(a) Rule for employment credits
No deduction shall be allowed for that portion of the wages or salaries paid or incurred for the taxable year which is equal to the sum of the credits determined for the taxable year under sections 45A(a), 45P(a), 45S(a), 51(a), and 1396(a). In the case of a corporation which is a member of a controlled group of corporations (within the meaning of section 52(a)) or a trade or business which is treated as being under common control with other trades or businesses (within the meaning of section 52(b)), this subsection shall be applied under rules prescribed by the Secretary similar to the rules applicable under subsections (a) and (b) of section 52.
(b) Credit for qualified clinical testing expenses for certain drugs
(1) In general
No deduction shall be allowed for that portion of the qualified clinical testing expenses (as defined in section 45C(b)) otherwise allowable as a deduction for the taxable year which is equal to the amount of the credit allowable for the taxable year under section 45C (determined without regard to section 38(c)).
(2) Similar rule where taxpayer capitalizes rather than deducts expenses
If—
(A) the amount of the credit allowable for the taxable year under section 45C (determined without regard to section 38(c)), exceeds
(B) the amount allowable as a deduction for the taxable year for qualified clinical testing expenses (determined without regard to paragraph (1)),
the amount chargeable to capital account for the taxable year for such expenses shall be reduced by the amount of such excess.
(3) Election of reduced credit
(A) In general
In the case of any taxable year for which an election is made under this paragraph—
(i) paragraphs (1) and (2) shall not apply, and
(ii) the amount of the credit under section 45C(a) shall be the amount determined under subparagraph (B).
(B) Amount of reduced credit
The amount of credit determined under this subparagraph for any taxable year shall be the amount equal to the excess of—
(i) the amount of credit determined under section 45C(a) without regard to this paragraph, over
(ii) the product of—
(I) the amount described in clause (i), and
(II) the maximum rate of tax under section 11(b).
(C) Election
An election under this paragraph for any taxable year shall be made not later than the time for filing the return of tax for such year (including extensions), shall be made on such return, and shall be made in such manner as the Secretary shall prescribe. Such an election, once made, shall be irrevocable.
(4) Controlled groups
In the case of a corporation which is a member of a controlled group of corporations (within the meaning of section 41(f)(5)) or a trade or business which is treated as being under common control with other trades or business (within the meaning of section 41(f)(1)(B)), this subsection shall be applied under rules prescribed by the Secretary similar to the rules applicable under subparagraphs (A) and (B) of section 41(f)(1).
(c) Credit for increasing research activities
(1) In general
If—
(A) the amount of the credit determined for the taxable year under section 41(a)(1), exceeds
(B) the amount allowable as a deduction for such taxable year for qualified research expenses or basic research expenses,
the amount chargeable to capital account for the taxable year for such expenses shall be reduced by the amount of such excess.
(2) Election of reduced credit
(A) In general
In the case of any taxable year for which an election is made under this paragraph—
(i) paragraph (1) shall not apply, and
(ii) the amount of the credit under section 41(a) shall be the amount determined under subparagraph (B).
(B) Amount of reduced credit
The amount of credit determined under this subparagraph for any taxable year shall be the amount equal to the excess of—
(i) the amount of credit determined under section 41(a) without regard to this paragraph, over
(ii) the product of—
(I) the amount described in clause (i), and
(II) the maximum rate of tax under section 11(b).
(C) Election
An election under this paragraph for any taxable year shall be made not later than the time for filing the return of tax for such year (including extensions), shall be made on such return, and shall be made in such manner as the Secretary may prescribe. Such an election, once made, shall be irrevocable.
(3) Controlled groups
Paragraph (3) of subsection (b) shall apply for purposes of this subsection.
(d) Credit for low sulfur diesel fuel production
The deductions otherwise allowed under this chapter for the taxable year shall be reduced by the amount of the credit determined for the taxable year under section 45H(a).
(e) Mine rescue team training credit
No deduction shall be allowed for that portion of the expenses otherwise allowable as a deduction for the taxable year which is equal to the amount of the credit determined for the taxable year under section 45N(a).
(f) Credit for security of agricultural chemicals
No deduction shall be allowed for that portion of the expenses otherwise allowable as a deduction taken into account in determining the credit under section 45O for the taxable year which is equal to the amount of the credit determined for such taxable year under section 45O(a).
(g) Credit for health insurance premiums
No deduction shall be allowed for the portion of the premiums paid by the taxpayer for coverage of 1 or more individuals under a qualified health plan which is equal to the amount of the credit determined for the taxable year under section 36B(a) with respect to such premiums.
(h) Credit for employee health insurance expenses of small employers
No deduction shall be allowed for that portion of the premiums for qualified health plans (as defined in section 1301(a) of the Patient Protection and Affordable Care Act), or for health insurance coverage in the case of taxable years beginning in 2010, 2011, 2012, or 2013, paid by an employer which is equal to the amount of the credit determined under section 45R(a) with respect to the premiums.
(Added
Editorial Notes
References in Text
Section 1301(a) of the Patient Protection and Affordable Care Act, referred to in subsec. (h), is classified to
Codification
Amendments
2018—Subsec. (a).
Subsec. (g).
2017—Subsec. (a).
Subsec. (b)(3), (4).
Subsec. (c)(1).
Subsec. (c)(2).
Subsec. (c)(3).
Subsec. (c)(3)(B)(ii)(II).
Subsec. (c)(4).
2010—Subsec. (g).
Subsec. (h).
2008—Subsec. (a).
Subsec. (f).
2007—Subsec. (d).
2006—Subsec. (e).
2005—Subsec. (a).
2004—Subsec. (d).
2000—Subsec. (c)(1).
1999—Subsec. (c)(1).
1996—Subsec. (b)(1).
Subsec. (b)(2)(A).
1993—Subsec. (a).
1989—Subsec. (c)(1), (2)(A).
Subsec. (c)(3).
Subsec. (c)(3)(B)(ii)(I).
Subsec. (c)(4).
1988—Subsec. (c).
1986—Subsec. (b)(1), (2)(A).
Subsec. (b)(3).
1984—Subsec. (a).
Subsec. (b).
Subsec. (b)(1), (2)(A).
Subsec. (b)(3).
Subsec. (c).
1983—
Subsec. (c).
1978—
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by section 13001(b)(1)(A) of
Amendment by section 13206(d)(2) of
Amendment by section 13401(b) of
Amendment by section 13403(d)(1) of
Effective Date of 2010 Amendment
Amendment by section 1401(b) of
Amendment by section 1421(d)(1) of
Amendment by section 9023(c)(2) of
Amendment by section 10105(e)(3) of
Effective Date of 2008 Amendment
Amendment of this section and repeal of
Amendment by section 15343(c) of
Amendment by
Effective Date of 2007 Amendment
Amendment by
Effective Date of 2006 Amendment
Amendment by
Effective Date of 2004 Amendment
Amendment by
Effective Date of 2000 Amendment
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1993 Amendment
Amendment by section 13322(c)(1) of
Effective Date of 1989 Amendment
Amendment by section 7110(c)(1) of
Amendment by section 7814(e)(2)(A) of
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 231(d)(3)(E) of
Amendment by section 1847(b)(8) of
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1978 Amendment
"(1)
"(2)
"(A)
"(B)
[
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1976, and to credit carrybacks from such years, see section 202(e) of
Savings Provision
For provisions that amendment made by section 401(d)(3)(B)(iii) of
For provisions that amendment made by section 401(d)(6)(B)(iv) of
For provisions that nothing in amendment by section 401(d)(3)(B)(iii), (6)(B)(iv) of
Time and Form of Certain Elections Under Subsection (c)(2)
"(i) at any time before the date which is 75 days after such date of enactment, and
"(ii) in such form and manner as the Secretary of the Treasury or his delegate may prescribe."
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
[§280D. Repealed. Pub. L. 100–418, title I, §1941(b)(4)(A), Aug. 23, 1988, 102 Stat. 1324 ]
Section, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to crude oil removed from the premises on or after Aug. 23, 1988, see section 1941(c) of
§280E. Expenditures in connection with the illegal sale of drugs
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
(Added
Editorial Notes
References in Text
The Controlled Substances Act, referred to in text, is title II of
Statutory Notes and Related Subsidiaries
Effective Date
§280F. Limitation on depreciation for luxury automobiles; limitation where certain property used for personal purposes
(a) Limitation on amount of depreciation for luxury automobiles
(1) Depreciation
(A) Limitation
The amount of the depreciation deduction for any taxable year for any passenger automobile shall not exceed—
(i) $10,000 for the 1st taxable year in the recovery period,
(ii) $16,000 for the 2nd taxable year in the recovery period,
(iii) $9,600 for the 3rd taxable year in the recovery period, and
(iv) $5,760 for each succeeding taxable year in the recovery period.
(B) Disallowed deductions allowed for years after recovery period
(i) In general
Except as provided in clause (ii), the unrecovered basis of any passenger automobile shall be treated as an expense for the 1st taxable year after the recovery period. Any excess of the unrecovered basis over the limitation of clause (ii) shall be treated as an expense in the succeeding taxable year.
(ii) $5,760 limitation
The amount treated as an expense under clause (i) for any taxable year shall not exceed $5,760.
(iii) Property must be depreciable
No amount shall be allowable as a deduction by reason of this subparagraph with respect to any property for any taxable year unless a depreciation deduction would be allowable with respect to such property for such taxable year.
(iv) Amount treated as depreciation deduction
For purposes of this subtitle, any amount allowable as a deduction by reason of this subparagraph shall be treated as a depreciation deduction allowable under section 168.
(2) Coordination with reductions in amount allowable by reason of personal use, etc.
This subsection shall be applied before—
(A) the application of subsection (b), and
(B) the application of any other reduction in the amount of any depreciation deduction allowable under section 168 by reason of any use not qualifying the property for such credit or depreciation deduction.
(b) Limitation where business use of listed property not greater than 50 percent
(1) Depreciation
If any listed property is not predominantly used in a qualified business use for any taxable year, the deduction allowed under section 168 with respect to such property for such taxable year and any subsequent taxable year shall be determined under section 168(g) (relating to alternative depreciation system).
(2) Recapture
(A) Where business use percentage does not exceed 50 percent
If—
(i) property is predominantly used in a qualified business use in a taxable year in which it is placed in service, and
(ii) such property is not predominantly used in a qualified business use for any subsequent taxable year,
then any excess depreciation shall be included in gross income for the taxable year referred to in clause (ii), and the depreciation deduction for the taxable year referred to in clause (ii) and any subsequent taxable years shall be determined under section 168(g) (relating to alternative depreciation system).
(B) Excess depreciation
For purposes of subparagraph (A), the term "excess depreciation" means the excess (if any) of—
(i) the amount of the depreciation deductions allowable with respect to the property for taxable years before the 1st taxable year in which the property was not predominantly used in a qualified business use, over
(ii) the amount which would have been so allowable if the property had not been predominantly used in a qualified business use for the taxable year in which it was placed in service.
(3) 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.
(c) Treatment of leases
(1) Lessor's deductions not affected
This section shall not apply to any listed property leased or held for leasing by any person regularly engaged in the business of leasing such property.
(2) Lessee's deductions reduced
For purposes of determining the amount allowable as a deduction under this chapter for rentals or other payments under a lease for a period of 30 days or more of listed property, only the allowable percentage of such payments shall be taken into account.
(3) Allowable percentage
For purposes of paragraph (2), the allowable percentage shall be determined under tables prescribed by the Secretary. Such tables shall be prescribed so that the reduction in the deduction under paragraph (2) is substantially equivalent to the applicable restrictions contained in subsections (a) and (b).
(4) Lease term
In determining the term of any lease for purposes of paragraph (2), the rules of section 168(i)(3)(A) shall apply.
(5) Lessee recapture
Under regulations prescribed by the Secretary, rules similar to the rules of subsection (b)(3) shall apply to any lessee to which paragraph (2) applies.
(d) Definitions and special rules
For purposes of this section—
(1) Coordination with section 179
Any deduction allowable under section 179 with respect to any listed property shall be subject to the limitations of subsections (a) and (b), and the limitation of paragraph (3) of this subsection, in the same manner as if it were a depreciation deduction allowable under section 168.
(2) Subsequent depreciation deductions reduced for deductions allocable to personal use
Solely for purposes of determining the amount of the depreciation deduction for subsequent taxable years, if less than 100 percent of the use of any listed property during any taxable year is use in a trade or business (including the holding for the production of income), all of the use of such property during such taxable year shall be treated as use so described.
(3) Deductions of employee
(A) In general
Any employee use of listed property shall not be treated as use in a trade or business for purposes of determining the amount of any depreciation deduction allowable to the employee (or the amount of any deduction allowable to the employee for rentals or other payments under a lease of listed property) unless such use is for the convenience of the employer and required as a condition of employment.
(B) Employee use
For purposes of subparagraph (A), the term "employee use" means any use in connection with the performance of services as an employee.
(4) Listed property
(A) In general
Except as provided in subparagraph (B), the term "listed property" means—
(i) any passenger automobile,
(ii) any other property used as a means of transportation,
(iii) any property of a type generally used for purposes of entertainment, recreation, or amusement, and
(iv) any other property of a type specified by the Secretary by regulations.
(B) Exception for property used in business of transporting persons or 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) Passenger automobile
(A) In general
Except as provided in subparagraph (B), the term "passenger automobile" means any 4-wheeled vehicle—
(i) which is manufactured primarily for use on public streets, roads, and highways, and
(ii) which is rated at 6,000 pounds unloaded gross vehicle weight or less.
In the case of a truck or van, clause (ii) shall be applied by substituting "gross vehicle weight" for "unloaded gross vehicle weight".
(B) Exception for certain vehicles
The term "passenger automobile" shall not include—
(i) any ambulance, hearse, or combination ambulance-hearse used by the taxpayer directly in a trade or business,
(ii) any vehicle used by the taxpayer directly in the trade or business of transporting persons or property for compensation or hire, and
(iii) under regulations, any truck or van.
(6) Business use percentage
(A) In general
The term "business use percentage" means the percentage of the use of any listed property during any taxable year which is a qualified business use.
(B) Qualified business use
Except as provided in subparagraph (C), the term "qualified business use" means any use in a trade or business of the taxpayer.
(C) Exception for certain use by 5-percent owners and related persons
(i) In general
The term "qualified business use" shall not include—
(I) leasing property to any 5-percent owner or related person,
(II) use of property provided as compensation for the performance of services by a 5-percent owner or related person, or
(III) use of property provided as compensation for the performance of services by any person not described in subclause (II) unless an amount is included in the gross income of such person with respect to such use, and, where required, there was withholding under
(ii) Special rule for aircraft
Clause (i) shall not apply with respect to any aircraft if at least 25 percent of the total use of the aircraft during the taxable year consists of qualified business use not described in clause (i).
(D) Definitions
For purposes of this paragraph—
(i) 5-percent owner
The term "5-percent owner" means any person who is a 5-percent owner with respect to the taxpayer (as defined in section 416(i)(1)(B)(i)).
(ii) Related person
The term "related person" means any person related to the taxpayer (within the meaning of section 267(b)).
(7) Automobile price inflation adjustment
(A) In general
In the case of any passenger automobile placed in service after 2018, subsection (a) shall be applied by increasing each dollar amount contained in such subsection by the automobile price inflation adjustment for the calendar year in which such automobile is placed in service. Any increase under the preceding sentence shall be rounded to the nearest multiple of $100 (or if the increase is a multiple of $50, such increase shall be increased to the next higher multiple of $100).
(B) Automobile price inflation adjustment
For purposes of this paragraph—
(i) In general
The automobile price inflation adjustment for any calendar year is the percentage (if any) by which—
(I) the C-CPI-U automobile component for October of the preceding calendar year, exceeds
(II) the automobile component of the CPI (as defined in section 1(f)(4)) for October of 2017, multiplied by the amount determined under 1(f)(3)(B).
(ii) C-CPI-U automobile component
The term "C-CPI-U automobile component" means the automobile component of the Chained Consumer Price Index for All Urban Consumers (as described in section 1(f)(6)).
(8) Unrecovered basis
For purposes of subsection (a)(1), 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).
(9) All taxpayers holding interests in passenger automobile treated as 1 taxpayer
All taxpayers holding interests in any passenger automobile shall be treated as 1 taxpayer for purposes of applying subsection (a) to such automobile, and the limitations of subsection (a) shall be allocated among such taxpayers in proportion to their interests in such automobile.
(10) Special rule for property acquired in nonrecognition transactions
For purposes of subsection (a)(1) any property acquired in a nonrecognition transaction shall be treated as a single property originally placed in service in the taxable year in which it was placed in service after being so acquired.
(e) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations with respect to items properly included in, or excluded from, the adjusted basis of any listed property.
(Added
Inflation Adjusted Items for Certain Calendar Years
For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table below.
Editorial Notes
Amendments
2017—Subsec. (a)(1)(A)(i).
Subsec. (a)(1)(A)(ii).
Subsec. (a)(1)(A)(iii).
Subsec. (a)(1)(A)(iv).
Subsec. (a)(1)(B)(ii).
Subsec. (d)(4)(A)(iv), (v).
Subsec. (d)(4)(B), (C).
Subsec. (d)(7)(A).
Subsec. (d)(7)(B).
Subsec. (d)(7)(B)(i)(II).
2014—Subsec. (a)(1)(C).
Subsec. (d)(8), (10).
2010—Subsec. (d)(4)(A).
2002—Subsec. (a)(1)(C)(iii).
1998—Subsec. (a)(1)(C)(ii).
1997—Subsec. (a)(1)(C).
1996—Subsec. (a).
1990—
Subsec. (a)(1).
Subsec. (a)(2).
Subsec. (a)(2)(B).
Subsec. (a)(3).
Subsec. (a)(4).
Subsec. (b).
Subsec. (c)(1).
Subsec. (d)(3)(A).
1989—Subsec. (d)(4)(A)(v), (vi).
1988—Subsec. (b)(3)(B)(i).
Subsec. (d)(1).
Subsec. (d)(3)(A).
1986—Subsec. (a)(2)(A).
"(i) $3,200 for the first taxable year in the recovery period, and
"(ii) $4,800 for each succeeding taxable year in the recovery period."
Subsec. (a)(2)(B).
Subsec. (a)(3)(B).
Subsec. (b)(2).
Subsec. (b)(3)(A).
Subsec. (b)(4).
Subsec. (c)(4).
Subsec. (d)(1).
Subsec. (d)(2).
Subsec. (d)(3)(A).
Subsec. (d)(4)(A)(iv).
Subsec. (d)(4)(B).
Subsec. (d)(4)(C).
Subsec. (d)(5)(A).
Subsec. (d)(8).
"(A) the unadjusted basis (as defined in section 168(d)(1)(A)) of the passenger automobile, over
"(B) the amount of the recovery deductions which would have been allowable for taxable years in the recovery period determined after the application of subsection (a) and as if all use during the recovery period were use described in section 168(c)(1)."
Subsec. (d)(10).
1985—Subsec. (a)(1).
Subsec. (a)(2)(A)(i).
Subsec. (a)(2)(A)(ii), (B)(ii).
Subsec. (d)(7)(A).
Subsec. (d)(7)(B)(i).
Subsec. (d)(7)(B)(i)(II).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by section 11002(d)(8) of
Effective Date of 2014 Amendment
Amendment by section 221(a)(34)(E) of
Effective Date of 2010 Amendment
Effective Date of 2002 Amendment
Effective Date of 1998 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1989 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 201(d)(4) of
Amendment by section 201(d)(4) of
Amendment by section 1812(e)(1)(A), (C), (2)–(5) of
Effective Date of 1985 Amendment
"(1) Except as provided in paragraph (2), the amendments made by section 4 [amending this section] shall apply to—
"(A) property placed in service after April 2, 1985, in taxable years ending after such date, and
"(B) property leased after April 2, 1985, in taxable years ending after such date.
"(2) The amendments made by section 4 [amending this section] shall not apply to any property—
"(A) acquired by the taxpayer pursuant to a binding contract in effect on April 1, 1985, and at all times thereafter, but only if the property is placed in service before August 1, 1985, or
"(B) of which the taxpayer is the lessee, but only if the lease is pursuant to a binding contract in effect on April 1, 1985, and at all times thereafter, and only if the taxpayer first uses such property under the lease before August 1, 1985."
Effective Date
"(1)
"(A) Except as provided in subparagraph (B), the amendments made by subsections (a) and (c) [enacting this section] shall apply to—
"(i) property placed in service after June 18, 1984, in taxable years ending after such date, and
"(ii) property leased after June 18, 1984, in taxable years ending after such date.
"(B) The amendments made by subsections (a) and (c) shall not apply to any property—
"(i) acquired by the taxpayer pursuant to a binding contract in effect on June 18, 1984, and at all times thereafter (or under construction on such date) but only if the property is placed in service before January 1, 1985 (January 1, 1987, in the case of 15-year real property), or
"(ii) of which the taxpayer is the lessee but only if the lease is pursuant to a binding contract in effect on June 18, 1984, and at all times thereafter and only if the taxpayer first uses such property under the lease before January 1, 1985 (January 1, 1987, in the case of 15-year real property).
For purposes of the preceding sentence, the term '15-year real property' includes 18-year real property.
"(2)
Savings Provision
For provisions that nothing in amendment by
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Inflation Adjusted Items for Certain Years
Provisions relating to inflation adjustment of items in this section for certain years were contained in the following:
2023—Revenue Procedure 2023–14.
2022—Revenue Procedure 2022–17.
2021—Revenue Procedure 2021–31.
2020—Revenue Procedure 2020–37.
2019—Revenue Procedure 2019–26.
2018—Revenue Procedure 2018–25.
2017—Revenue Procedure 2017–29.
2016—Revenue Procedure 2016–23.
2015—Revenue Procedure 2015–19.
2014—Revenue Procedure 2014–21.
2013—Revenue Procedure 2013–21.
2012—Revenue Procedure 2012–23.
2011—Revenue Procedure 2011–21.
2010—Revenue Procedure 2010–18.
2009—Revenue Procedure 2009–24.
2008—Revenue Procedure 2008–22.
2007—Revenue Procedure 2007–30.
2006—Revenue Procedure 2006–18.
2005—Revenue Procedure 2005–13.
2004—Revenue Procedure 2004–20.
2003—Revenue Procedure 2003–75.
2002—Revenue Procedure 2002–14.
2001—Revenue Procedure 2001–19.
2000—Revenue Procedure 2000–18.
1999—Revenue Procedure 99–14.
1998—Revenue Procedures 98–24 and 98–30.
1997—Revenue Procedure 97–20.
1996—Revenue Procedure 96–25.
§280G. Golden parachute payments
(a) General rule
No deduction shall be allowed under this chapter for any excess parachute payment.
(b) Excess parachute payment
For purposes of this section—
(1) In general
The term "excess parachute payment" means an amount equal to the excess of any parachute payment over the portion of the base amount allocated to such payment.
(2) Parachute payment defined
(A) In general
The term "parachute payment" means any payment in the nature of compensation to (or for the benefit of) a disqualified individual if—
(i) such payment is contingent on a change—
(I) in the ownership or effective control of the corporation, or
(II) in the ownership of a substantial portion of the assets of the corporation, and
(ii) the aggregate present value of the payments in the nature of compensation to (or for the benefit of) such individual which are contingent on such change equals or exceeds an amount equal to 3 times the base amount.
For purposes of clause (ii), payments not treated as parachute payments under paragraph (4)(A), (5), or (6) shall not be taken into account.
(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.
(C) Treatment of certain agreements entered into within 1 year before change of ownership
For purposes of subparagraph (A)(i), any payment pursuant to—
(i) an agreement entered into within 1 year before the change described in subparagraph (A)(i), or
(ii) an amendment made within such 1-year period of a previous agreement,
shall be presumed to be contingent on such change unless the contrary is established by clear and convincing evidence.
(3) Base amount
(A) In general
The term "base amount" means the individual's annualized includible compensation for the base period.
(B) Allocation
The portion of the base amount allocated to any parachute payment shall be an amount which bears the same ratio to the base amount as—
(i) the present value of such payment, bears to
(ii) the aggregate present value of all such payments.
(4) Treatment of amounts which taxpayer establishes as reasonable compensation
In the case of any payment described in paragraph (2)(A)—
(A) the amount treated as a parachute payment shall not include the portion of such payment which the taxpayer 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 (2)(A)(i), 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 rendered before the date of the change described in paragraph (2)(A)(i).
For purposes of subparagraph (B), reasonable compensation for services actually rendered before the date of the change described in paragraph (2)(A)(i) shall be first offset against the base amount.
(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 change described in paragraph (2)(A)(i)) was a small business corporation (as defined in section 1361(b) but without regard to paragraph (1)(C) thereof), and
(ii) any payment to a disqualified individual with respect to a corporation (other than a corporation described in clause (i)) if—
(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 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 corporation and interests in such other entity are readily tradeable on an established securities market, or otherwise. Stock described in section 1504(a)(4) shall not be taken into account under clause (ii)(I) if the payment does not adversely affect the shareholder's redemption and liquidation rights.
(B) Shareholder approval requirements
The shareholder approval requirements of this subparagraph are met with respect to any payment if—
(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
(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.
The regulations prescribed under subsection (e) shall include regulations providing for the application of this subparagraph in the case of shareholders which are not individuals (including the treatment of nonvoting interests in an entity which is a shareholder) and where an entity holds a de minimis amount of stock in the corporation.
(6) Exemption for payments under qualified plans
Notwithstanding paragraph (2), the term "parachute payment" 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),
(C) a simplified employee pension (as defined in section 408(k)), or
(D) a simple retirement account described in section 408(p).
(c) Disqualified individuals
For purposes of this section, the term "disqualified individual" means any individual who is—
(1) an employee, independent contractor, or other person specified in regulations by the Secretary who performs personal services for any corporation, and
(2) is an officer, shareholder, or highly-compensated individual.
For purposes of this section, a personal service corporation (or similar entity) shall be treated as an individual. For purposes of paragraph (2), the term "highly-compensated individual" only includes an individual 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.
(d) Other definitions and special rules
For purposes of this section—
(1) Annualized includible compensation for base period
The term "annualized includible compensation for the base period" means the average annual compensation which—
(A) was payable by the corporation with respect to which the change in ownership or control described in paragraph (2)(A) of subsection (b) occurs, and
(B) was includible in the gross income of the disqualified individual for taxable years in the base period.
(2) Base period
The term "base period" means the period consisting of the most recent 5 taxable years ending before the date on which the change in ownership or control described in paragraph (2)(A) of subsection (b) occurs (or such portion of such period during which the disqualified individual performed personal services for the corporation).
(3) Property transfers
Any transfer of property—
(A) shall be treated as a payment, and
(B) shall be taken into account as its fair market value.
(4) Present value
Present value shall be determined by using a discount rate equal to 120 percent of the applicable Federal rate (determined under section 1274(d)), compounded semiannually.
(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 1504(b)) shall be treated as 1 corporation for purposes of this section. Any person who is an officer of any member of such group shall be treated as an officer of such 1 corporation.
(e) Special rule for application to employers participating in the Troubled Assets Relief Program
(1) In general
In the case of the severance from employment of a covered executive of an applicable employer during the period during which the authorities under section 101(a) of the Emergency Economic Stabilization Act of 2008 are in effect (determined under section 120 of such Act), this section shall be applied to payments to such executive with the following modifications:
(A) Any reference to a disqualified individual (other than in subsection (c)) shall be treated as a reference to a covered executive.
(B) Any reference to a change described in subsection (b)(2)(A)(i) shall be treated as a reference to an applicable severance from employment of a covered executive, and any reference to a payment contingent on such a change shall be treated as a reference to any payment made during an applicable taxable year of the employer on account of such applicable severance from employment.
(C) Any reference to a corporation shall be treated as a reference to an applicable employer.
(D) The provisions of subsections (b)(2)(C), (b)(4), (b)(5), and (d)(5) shall not apply.
(2) Definitions and special rules
For purposes of this subsection:
(A) Definitions
Any term used in this subsection which is also used in section 162(m)(5) shall have the meaning given such term by such section.
(B) Applicable severance from employment
The term "applicable severance from employment" means any severance from employment of a covered executive—
(i) by reason of an involuntary termination of the executive by the employer, or
(ii) in connection with any bankruptcy, liquidation, or receivership of the employer.
(C) Coordination and other rules
(i) In general
If a payment which is treated as a parachute payment by reason of this subsection is also a parachute payment determined without regard to this subsection, this subsection shall not apply to such payment.
(ii) Regulatory authority
The Secretary may prescribe such guidance, rules, or regulations as are necessary—
(I) to carry out the purposes of this subsection and the Emergency Economic Stabilization Act of 2008, including the extent to which this subsection applies in the case of any acquisition, merger, or reorganization of an applicable employer,
(II) to apply this section and section 4999 in cases where one or more payments with respect to any individual are treated as parachute payments by reason of this subsection, and other payments with respect to such individual are treated as parachute payments under this section without regard to this subsection, and
(III) to prevent the avoidance of the application of this section through the mischaracterization of a severance from employment as other than an applicable severance from employment.
(f) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section (including regulations for the application of this section in the case of related corporations and in the case of personal service corporations).
(Added
Editorial Notes
References in Text
The Emergency Economic Stabilization Act of 2008, referred to in subsec. (e)(1), (2)(C)(ii)(I), is
Amendments
2008—Subsecs. (e), (f).
1996—Subsec. (b)(6)(D).
1988—Subsec. (b)(5)(A).
Subsec. (b)(5)(B).
Subsec. (d)(5).
1986—Subsec. (b)(2)(A).
Subsec. (b)(2)(B).
Subsec. (b)(4).
Subsec. (b)(5).
Subsec. (b)(6).
Subsec. (c).
Subsec. (d)(2).
Subsec. (d)(5).
Statutory Notes and Related Subsidiaries
Effective Date of 2008 Amendment
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1985 Amendment
Amendment by
Effective Date
"(1)
"(2)
Plan Amendments Not Required Until January 1, 1998
For provisions directing that if any amendments made by subtitle D [§§1401–1465] of title I of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
§280H. Limitation on certain amounts paid to employee-owners by personal service corporations electing alternative taxable years
(a) General rule
If—
(1) an election by a personal service corporation under section 444 is in effect for a taxable year, and
(2) such corporation does not meet the minimum distribution requirements of subsection (c) for such taxable year,
then the deduction otherwise allowed under this chapter for applicable amounts paid or incurred by such corporation to employee-owners shall not exceed the maximum deductible amount. The preceding sentence shall not apply for purposes of subchapter G (relating to personal holding companies).
(b) Carryover of nondeductible amounts
If any amount is not allowed as a deduction for a taxable year under subsection (a), such amount shall be treated as paid or incurred in the succeeding taxable year.
(c) Minimum distribution requirement
For purposes of this section—
(1) In general
A personal service corporation meets the minimum distribution requirements of this subsection if the applicable amounts paid or incurred during the deferral period of the taxable year (determined without regard to subsection (b)) equal or exceed the lesser of—
(A) the product of—
(i) the applicable amounts paid during the preceding taxable year, divided by the number of months in such taxable year, multiplied by
(ii) the number of months in the deferral period of the preceding taxable year, or
(B) the applicable percentage of the adjusted taxable income for the deferral period of the taxable year.
(2) Applicable percentage
The term "applicable percentage" means the percentage (not in excess of 95 percent) determined by dividing—
(A) the applicable amounts paid or incurred during the 3 taxable years immediately preceding the taxable year, by
(B) the adjusted taxable income of such corporation for such 3 taxable years.
(d) Maximum deductible amount
For purposes of this section, the term "maximum deductible amount" means the sum of—
(1) the applicable amounts paid during the deferral period, plus
(2) an amount equal to the product of—
(A) the amount determined under paragraph (1), divided by the number of months in the deferral period, multiplied by
(B) the number of months in the nondeferral period.
(e) Disallowance of net operating loss carrybacks
No net operating loss carryback shall be allowed to (or from) any taxable year of a personal service corporation to which an election under section 444 applies.
(f) Other definitions and special rules
For purposes of this section—
(1) Applicable amount
The term "applicable amount" means any amount paid to an employee-owner which is includible in the gross income of such employee, other than—
(A) any gain from the sale or exchange of property between the owner-employee and the corporation, or
(B) any dividend paid by the corporation.
(2) Employee-owner
The term "employee-owner" has the meaning given such term by section 269A(b)(2) (as modified by section 441(i)(2)).
(3) Nondeferral and deferral periods
(A) Deferral period
The term "deferral period" has the meaning given to such term by section 444(b)(4).
(B) Nondeferral period
The term "nondeferral period" means the portion of the taxable year of the personal service corporation which occurs after the portion of such year constituting the deferral period.
(4) Adjusted taxable income
The term "adjusted taxable income" means taxable income determined without regard to—
(A) any amount paid to an employee-owner which is includible in the gross income of such employee-owner, and
(B) any net operating loss carryover to the extent such carryover is attributable to amounts described in subparagraph (A).
(5) Personal service corporation
The term "personal service corporation" has the meaning given to such term by section 441(i)(2).
(Added
Editorial Notes
Amendments
1988—Subsecs. (c)(1)(A)(i), (d)(1).
Subsec. (f)(2).
Subsec. (f)(4).
Subsec. (f)(5).
Statutory Notes and Related Subsidiaries
Effective Date of 1988 Amendment
Amendment by
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1986, see section 10206(d)(1) of