PART II—METHODS OF ACCOUNTING
Subpart A—Methods of Accounting in General
Editorial Notes
Amendments
1986—
1976—
§446. General rule for methods of accounting
(a) General rule
Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.
(b) Exceptions
If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary, does clearly reflect income.
(c) Permissible methods
Subject to the provisions of subsections (a) and (b), a taxpayer may compute taxable income under any of the following methods of accounting—
(1) the cash receipts and disbursements method;
(2) an accrual method;
(3) any other method permitted by this chapter; or
(4) any combination of the foregoing methods permitted under regulations prescribed by the Secretary.
(d) Taxpayer engaged in more than one business
A taxpayer engaged in more than one trade or business may, in computing taxable income, use a different method of accounting for each trade or business.
(e) Requirement respecting change of accounting method
Except as otherwise expressly provided in this chapter, a taxpayer who changes the method of accounting on the basis of which he regularly computes his income in keeping his books shall, before computing his taxable income under the new method, secure the consent of the Secretary.
(f) Failure to request change of method of accounting
If the taxpayer does not file with the Secretary a request to change the method of accounting, the absence of the consent of the Secretary to a change in the method of accounting shall not be taken into account—
(1) to prevent the imposition of any penalty, or the addition of any amount to tax, under this title, or
(2) to diminish the amount of such penalty or addition to tax.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1984—Subsec. (f).
1976—Subsecs. (b), (c), (e).
Statutory Notes and Related Subsidiaries
Effective Date of 1984 Amendment
§447. Method of accounting for corporations engaged in farming
(a) General rule
Except as otherwise provided by law, the taxable income from farming of—
(1) a corporation engaged in the trade or business of farming, or
(2) a partnership engaged in the trade or business of farming, if a corporation is a partner in such partnership,
shall be computed on an accrual method of accounting. This section shall not apply to the trade or business of operating a nursery or sod farm or to the raising or harvesting of trees (other than fruit and nut trees).
(b) Preproductive period expenses
For rules requiring capitalization of certain preproductive period expenses, see section 263A.
(c) Exception for certain corporations
For purposes of subsection (a), a corporation shall be treated as not being a corporation for any taxable year if it is—
(1) an S corporation, or
(2) a corporation which meets the gross receipts test of section 448(c) for such taxable year.
(d) Coordination with section 481
Any change in method of accounting made pursuant to this section shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.
(e) Certain annual accrual accounting methods
(1) In general
Notwithstanding subsection (a) or section 263A, if—
(A) for its 10 taxable years ending with its first taxable year beginning after December 31, 1975, a corporation or qualified partnership used an annual accrual method of accounting with respect to its trade or business of farming,
(B) such corporation or qualified partnership raises crops which are harvested not less than 12 months after planting, and
(C) such corporation or qualified partnership has used such method of accounting for all taxable years intervening between its first taxable year beginning after December 31, 1975, and the taxable year,
such corporation or qualified partnership may continue to employ such method of accounting for the taxable year with respect to its qualified farming trade or business.
(2) Annual accrual method of accounting defined
For purposes of paragraph (1), the term "annual accrual method of accounting" means a method under which revenues, costs, and expenses are computed on an accrual method of accounting and the preproductive period expenses incurred during the taxable year are charged to harvested crops or deducted in determining the taxable income for such years.
(3) Certain nonrecognition transfers
For purposes of this subsection, if—
(A) a corporation acquired substantially all the assets of a qualified farming trade or business from another corporation in a transaction in which no gain or loss was recognized to the transferor or transferee corporation, or
(B) a qualified partnership acquired substantially all the assets of a qualified farming trade or business from one of its partners in a transaction to which section 721 applies,
the transferee corporation or qualified partnership shall be deemed to have computed its taxable income on an annual accrual method of accounting during the period for which the transferor corporation or partnership computed its taxable income from such trade or business on an annual accrual method.
(4) Qualified partnership defined
For purposes of this subsection—
(A) Qualified partnership
The term "qualified partnership" means a partnership which is engaged in a qualified farming trade or business and each of the partners of which is a corporation other than—
(i) an S corporation, or
(ii) a personal holding company (within the meaning of section 542(a)).
(B) Qualified farming trade or business
(i) In general
The term "qualified farming trade or business" means the trade or business of farming—
(I) sugar cane,
(II) any plant with a preproductive period (as defined in section 263A(e)(3)) of 2 years or less, and
(III) any other plant (other than any citrus or almond tree) if an election by the corporation under this subparagraph is in effect.
In the case of a partnership and for purposes of paragraph (3)(A), subclauses (II) and (III) shall not apply.
(ii) Effect of election
For purposes of paragraphs (1) and (2) of section 263A(e), any election under this subparagraph shall be treated as if it were an election under subsection (d)(3) of section 263A.
(iii) Election
Unless the Secretary otherwise consents, an election under this subparagraph may be made only for the corporation's 1st taxable year which begins after December 31, 1986, and during which the corporation engages in a farming business. Any such election, once made, may be revoked only with the consent of the Secretary.
(Added
Editorial Notes
Amendments
2017—Subsec. (c).
Subsec. (c)(2).
Subsec. (d).
Subsec. (e).
Subsec. (f).
Subsec. (g).
Subsecs. (h), (i).
1997—Subsec. (i)(3).
"(A) the gross receipts of the corporation from the trade or business of farming for the year of the change or any subsequent taxable year, is less than
"(B) such gross receipts for the taxpayer's last taxable year beginning before the year of the change (or for the most recent taxable year for which a reduction in the suspense account was made under this paragraph),
the amount in the suspense account (after taking into account prior reductions) shall be reduced by the percentage by which the amount described in subparagraph (A) is less than the amount described in subparagraph (B)."
Subsec. (i)(4).
Subsec. (i)(5), (6).
1990—Subsec. (g)(1)(A).
Subsec. (g)(4)(B).
1988—Subsec. (b).
Subsec. (g)(1).
1987—Subsec. (c).
"(1) an S corporation,
"(2) a corporation of which at least 50 percent of the total combined voting power of all classes of stock entitled to vote, and at least 50 percent of the total number of shares of all other classes of stock of the corporation, are owned by members of the same family, or
"(3) a corporation the gross receipts of which meet the requirements of subsection (e)."
Subsec. (d).
Subsec. (e).
Subsec. (h)(1).
Subsec. (h)(1)(A), (B).
Subsec. (i).
1986—Subsec. (a).
Subsec. (b).
Subsec. (g)(1).
1982—Subsec. (c)(1).
Subsec. (g)(1).
Subsec. (g)(3).
Subsec. (g)(4).
1978—Subsec. (a).
Subsec. (f)(3).
Subsec. (g)(2).
Subsec. (h).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1987 Amendment
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
Amendment by
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by section 703(d) of
Effective Date
"(A)
"(B)
"(i) members of two families (within the meaning of paragraph (1) of [former] section 447(d) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], as added by paragraph (1)) owned, on October 4, 1976 (directly or through the application of such [former] section 447(d)), at least 65 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, and at least 65 percent of the total number of shares of all other classes of stock of such corporation; or
"(ii) members of three families (within the meaning of paragraph (1) of such [former] section 447(d)) owned, on October 4, 1976 (directly or through the application of such [former] section 447(d)), at least 50 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, and at least 50 percent of the total number of shares of all other classes of stock of such corporation; and substantially all of the stock of such corporation which was not so owned (directly or through the application of such [former] section 447(d)), by members of such three families was owned, on October 4, 1976, directly—
"(I) by employees of the corporation or members of the families (within the meaning of section 267(c)(4) of such Code) of such employees, or
"(II) by a trust for the benefit of the employees of such corporation which is described in section 401(a) of such Code and which is exempt from taxation under section 501(a) of such Code,
the amendments made by paragraph (1) shall apply to taxable years beginning after December 31, 1977."
Accounting for Growing Crops
"(a)
"(1) is a farmer, nurseryman, or florist,
"(2) is on an accrual method of accounting, and
"(3) is not required by section 447 of the Internal Revenue Code of 1954 to capitalize preproductive period expenses.
"(b)
"(c)
"(d)
"(1) shall not require the consent of the Secretary of the Treasury or his delegate, and
"(2) shall be treated, for purposes of section 481 of the Internal Revenue Code of 1954 as a change in the method of accounting initiated by the taxpayer.
"(e)
Automatic Ten-Year Adjustment for Farming Syndicates Changing to Accrual Accounting
"(A) a farming syndicate (within the meaning of [former] section 464(c) of the Internal Revenue Code of 1954 [now
"(B) such syndicate elects an accrual method of accounting (including the capitalization of preproductive period expenses described in section 447(b) of such Code) for a taxable year beginning before January 1, 1979,
then such election shall be treated as having been made with the consent of the Secretary of the Treasury or his delegate and, under regulations prescribed by the Secretary of the Treasury or his delegate, the net amount of the adjustments required by section 481(a) of such Code to be taken into account by the taxpayer in computing taxable income shall be taken into account in each of the 10 taxable years (or the remaining taxable years where there is a stated future life of less than 10 taxable years) beginning with the year of change."
Election To Change From Static Value Method to Accrual Method of Accounting
"(A)
"(i) a corporation has computed its taxable income on an annual accrual method of accounting together with a static value method of accounting for deferred costs of growing crops for the 10 taxable years ending with its first taxable year beginning after December 31, 1975,
"(ii) such corporation raises crops which are harvested not less than 12 months after planting, and
"(iii) such corporation elects, within one year after the date of the enactment of this Act [Oct. 4, 1976] and in such manner as the Secretary of the Treasury or his delegate prescribes, to change to the annual accrual method of accounting (within the meaning of section 447(g)(2) [now section 447(e)(2)] of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) for taxable years beginning after December 31, 1976,
such change shall be treated as having been made with the consent of the Secretary of the Treasury, and, under regulations prescribed by the Secretary of the Treasury or his delegate, the net amount of the adjustments required by section 481(a) of the Internal Revenue Code of 1986 to be taken into account by the taxpayer in computing taxable income shall (except as otherwise provided in such regulations) be taken into account in each of the 10 taxable years beginning with the year of change.
"(B)
"(C)
§448. Limitation on use of cash method of accounting
(a) General rule
Except as otherwise provided in this section, in the case of a—
(1) C corporation,
(2) partnership which has a C corporation as a partner, or
(3) tax shelter,
taxable income shall not be computed under the cash receipts and disbursements method of accounting.
(b) Exceptions
(1) Farming business
Paragraphs (1) and (2) of subsection (a) shall not apply to any farming business.
(2) Qualified personal service corporations
Paragraphs (1) and (2) of subsection (a) shall not apply to a qualified personal service corporation, and such a corporation shall be treated as an individual for purposes of determining whether paragraph (2) of subsection (a) applies to any partnership.
(3) Entities which meet gross receipts test
Paragraphs (1) and (2) of subsection (a) shall not apply to any corporation or partnership for any taxable year if such entity (or any predecessor) meets the gross receipts test of subsection (c) for such taxable year.
(c) Gross receipts test
For purposes of this section—
(1) In general
A corporation or partnership meets the gross receipts test of this subsection for any taxable year if the average annual gross receipts of such entity for the 3-taxable-year period ending with the taxable year which precedes such taxable year does not exceed $25,000,000.
(2) Aggregation rules
All persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414 shall be treated as one person for purposes of paragraph (1).
(3) Special rules
For purposes of this subsection—
(A) Not in existence for entire 3-year period
If the entity was not in existence for the entire 3-year period referred to in paragraph (1), such paragraph shall be applied on the basis of the period during which such entity (or trade or business) was in existence.
(B) Short taxable years
Gross receipts for any taxable year of less than 12 months shall be annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period.
(C) Gross receipts
Gross receipts for any taxable year shall be reduced by returns and allowances made during such year.
(D) Treatment of predecessors
Any reference in this subsection to an entity shall include a reference to any predecessor of such entity.
(4) Adjustment for inflation
In the case of any taxable year beginning after December 31, 2018, the dollar amount in paragraph (1) shall be increased by an amount equal to—
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting "calendar year 2017" for "calendar year 2016" in subparagraph (A)(ii) thereof.
If any amount as increased under the preceding sentence is not a multiple of $1,000,000, such amount shall be rounded to the nearest multiple of $1,000,000.
(d) Definitions and special rules
For purposes of this section—
(1) Farming business
(A) In general
The term "farming business" means the trade or business of farming (within the meaning of section 263A(e)(4)).
(B) Timber and ornamental trees
The term "farming business" includes the raising, harvesting, or growing of trees to which section 263A(c)(5) applies.
(2) Qualified personal service corporation
The term "qualified personal service corporation" means any corporation—
(A) substantially all of the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and
(B) substantially all of the stock of which (by value) is held directly (or indirectly through 1 or more partnerships, S corporations, or qualified personal service corporations not described in paragraph (2) or (3) of subsection (a)) by—
(i) employees performing services for such corporation in connection with the activities involving a field referred to in subparagraph (A),
(ii) retired employees who had performed such services for such corporation,
(iii) the estate of any individual described in clause (i) or (ii), or
(iv) any other person who acquired such stock by reason of the death of an individual described in clause (i) or (ii) (but only for the 2-year period beginning on the date of the death of such individual).
To the extent provided in regulations which shall be prescribed by the Secretary, indirect holdings through a trust shall be taken into account under subparagraph (B).
(3) Tax shelter defined
The term "tax shelter" has the meaning given such term by section 461(i)(3) (determined after application of paragraph (4) thereof). An S corporation shall not be treated as a tax shelter for purposes of this section merely by reason of being required to file a notice of exemption from registration with a State agency described in section 461(i)(3)(A), but only if there is a requirement applicable to all corporations offering securities for sale in the State that to be exempt from such registration the corporation must file such a notice.
(4) Special rules for application of paragraph (2)
For purposes of paragraph (2)—
(A) community property laws shall be disregarded,
(B) stock held by a plan described in section 401(a) which is exempt from tax under section 501(a) shall be treated as held by an employee described in paragraph (2)(B)(i), and
(C) at the election of the common parent of an affiliated group (within the meaning of section 1504(a)), all members of such group may be treated as 1 taxpayer for purposes of paragraph (2)(B) if 90 percent or more of the activities of such group involve the performance of services in the same field described in paragraph (2)(A).
(5) Special rule for certain services
(A) In general
In the case of any person using an accrual method of accounting with respect to amounts to be received for the performance of services by such person, such person shall not be required to accrue any portion of such amounts which (on the basis of such person's experience) will not be collected if—
(i) such services are in fields referred to in paragraph (2)(A), or
(ii) such person meets the gross receipts test of subsection (c) for all prior taxable years.
(B) Exception
This paragraph shall not apply to any amount if interest is required to be paid on such amount or there is any penalty for failure to timely pay such amount.
(C) Regulations
The Secretary shall prescribe regulations to permit taxpayers to determine amounts referred to in subparagraph (A) using computations or formulas which, based on experience, accurately reflect the amount of income that will not be collected by such person. A taxpayer may adopt, or request consent of the Secretary to change to, a computation or formula that clearly reflects the taxpayer's experience. A request under the preceding sentence shall be approved if such computation or formula clearly reflects the taxpayer's experience.
(6) Treatment of certain trusts subject to tax on unrelated business income
For purposes of this section, a trust subject to tax under section 511(b) shall be treated as a C corporation with respect to its activities constituting an unrelated trade or business.
(7) Coordination with section 481
Any change in method of accounting made pursuant to this section shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.
(8) Use of related parties, etc.
The Secretary shall prescribe such regulations as may be necessary to prevent the use of related parties, pass-thru entities, or intermediaries to avoid the application of this section.
(Added
Inflation Adjusted Items for Certain Years
For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under
Editorial Notes
Amendments
2017—Subsec. (b)(3).
Subsec. (c).
"(1)
Subsec. (c)(4).
Subsec. (d)(7).
2002—Subsec. (d)(5).
1988—Subsec. (c)(3)(D).
Subsec. (d)(2).
Subsec. (d)(2)(B).
Subsec. (d)(3).
Subsec. (d)(4)(C).
Subsec. (d)(8).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2002 Amendment
"(1)
"(2)
"(A) such change shall be treated as initiated by the taxpayer,
"(B) such change shall be treated as made with the consent of the Secretary of the Treasury, and
"(C) the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 shall be taken into account over a period of 4 years (or if less, the number of taxable years that the taxpayer used the method permitted under section 448(d)(5) of such Code as in effect before the date of the enactment of this Act) beginning with such first taxable year."
Effective Date of 1988 Amendment
Amendment by section 1008(a)(1), (2), (7)–(9) of
Effective Date
"(1)
"(2)
"(3)
"(A) contracts for the acquisition or transfer of real property, and
"(B) contracts for services related to the acquisition or development of real property,
but only if such contracts were entered into before September 25, 1985, and the sole element of the contract which has not been performed as of September 25, 1985, is payment for such property or services.
"(4)
"(A) was incorporated in the State of Delaware in 1970,
"(B) was the successor to a corporation that was incorporated in the State of Illinois in 1949, and
"(C) used a method of accounting for long-term contracts of accounting [sic] for a substantial part of its income from the performance of engineering services.
"(5)
Subpart B—Taxable Year for Which Items of Gross Income Included
Editorial Notes
Amendments
1988—
1987—
1986—
1980—
1978—
1961—
1958—
1955—Act June 15, 1955, ch. 143, §2(2),
§451. General rule for taxable year of inclusion
(a) General rule
The amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.
(b) Inclusion not later than for financial accounting purposes
(1) Income taken into account in financial statement
(A) In general
In the case of a taxpayer the taxable income of which is computed under an accrual method of accounting, the all events test with respect to any item of gross income (or portion thereof) shall not be treated as met any later than when such item (or portion thereof) is taken into account as revenue in—
(i) an applicable financial statement of the taxpayer, or
(ii) such other financial statement as the Secretary may specify for purposes of this subsection.
(B) Exception
This paragraph shall not apply to—
(i) a taxpayer which does not have a financial statement described in clause (i) or (ii) of subparagraph (A) for a taxable year, or
(ii) any item of gross income in connection with a mortgage servicing contract.
(C) All events test
For purposes of this section, the all events test is met with respect to any item of gross income if all the events have occurred which fix the right to receive such income and the amount of such income can be determined with reasonable accuracy.
(2) Coordination with special methods of accounting
Paragraph (1) shall not apply with respect to any item of gross income for which the taxpayer uses a special method of accounting provided under any other provision of this chapter, other than any provision of part V of subchapter P (except as provided in clause (ii) of paragraph (1)(B)).
(3) Applicable financial statement
For purposes of this subsection, the term "applicable financial statement" means—
(A) a financial statement which is certified as being prepared in accordance with generally accepted accounting principles and which is—
(i) a 10–K (or successor form), or annual statement to shareholders, required to be filed by the taxpayer with the United States Securities and Exchange Commission,
(ii) an audited financial statement of the taxpayer which is used for—
(I) credit purposes,
(II) reporting to shareholders, partners, or other proprietors, or to beneficiaries, or
(III) any other substantial nontax purpose,
but only if there is no statement of the taxpayer described in clause (i), or
(iii) filed by the taxpayer with any other Federal agency for purposes other than Federal tax purposes, but only if there is no statement of the taxpayer described in clause (i) or (ii),
(B) a financial statement which is made on the basis of international financial reporting standards and is filed by the taxpayer with an agency of a foreign government which is equivalent to the United States Securities and Exchange Commission and which has reporting standards not less stringent than the standards required by such Commission, but only if there is no statement of the taxpayer described in subparagraph (A), or
(C) a financial statement filed by the taxpayer with any other regulatory or governmental body specified by the Secretary, but only if there is no statement of the taxpayer described in subparagraph (A) or (B).
(4) Allocation of transaction price
For purposes of this subsection, in the case of a contract which contains multiple performance obligations, the allocation of the transaction price to each performance obligation shall be equal to the amount allocated to each performance obligation for purposes of including such item in revenue in the applicable financial statement of the taxpayer.
(5) Group of entities
For purposes of paragraph (1), if the financial results of a taxpayer are reported on the applicable financial statement (as defined in paragraph (3)) for a group of entities, such statement shall be treated as the applicable financial statement of the taxpayer.
(c) Treatment of advance payments
(1) In general
A taxpayer which computes taxable income under the accrual method of accounting, and receives any advance payment during the taxable year, shall—
(A) except as provided in subparagraph (B), include such advance payment in gross income for such taxable year, or
(B) if the taxpayer elects the application of this subparagraph with respect to the category of advance payments to which such advance payment belongs, the taxpayer shall—
(i) to the extent that any portion of such advance payment is required under subsection (b) to be included in gross income in the taxable year in which such payment is received, so include such portion, and
(ii) include the remaining portion of such advance payment in gross income in the taxable year following the taxable year in which such payment is received.
(2) Election
(A) In general
Except as otherwise provided in this paragraph, the election under paragraph (1)(B) shall be made at such time, in such form and manner, and with respect to such categories of advance payments, as the Secretary may provide.
(B) Period to which election applies
An election under paragraph (1)(B) shall be effective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to revoke such election. For purposes of this title, the computation of taxable income under an election made under paragraph (1)(B) shall be treated as a method of accounting.
(3) Taxpayers ceasing to exist
Except as otherwise provided by the Secretary, the election under paragraph (1)(B) shall not apply with respect to advance payments received by the taxpayer during a taxable year if such taxpayer ceases to exist during (or with the close of) such taxable year.
(4) Advance payment
For purposes of this subsection—
(A) In general
The term "advance payment" means any payment—
(i) the full inclusion of which in the gross income of the taxpayer for the taxable year of receipt is a permissible method of accounting under this section (determined without regard to this subsection),
(ii) any portion of which is included in revenue by the taxpayer in a financial statement described in clause (i) or (ii) of subsection (b)(1)(A) for a subsequent taxable year, and
(iii) which is for goods, services, or such other items as may be identified by the Secretary for purposes of this clause.
(B) Exclusions
Except as otherwise provided by the Secretary, such term shall not include—
(i) rent,
(ii) insurance premiums governed by subchapter L,
(iii) payments with respect to financial instruments,
(iv) payments with respect to warranty or guarantee contracts under which a third party is the primary obligor,
(v) payments subject to section 871(a), 881, 1441, or 1442,
(vi) payments in property to which section 83 applies, and
(vii) any other payment identified by the Secretary for purposes of this subparagraph.
(C) Receipt
For purposes of this subsection, an item of gross income is received by the taxpayer if it is actually or constructively received, or if it is due and payable to the taxpayer.
(D) Allocation of transaction price
For purposes of this subsection, rules similar to subsection (b)(4) shall apply.
(d) Special rule in case of death
In the case of the death of a taxpayer whose taxable income is computed under an accrual method of accounting, any amount accrued only by reason of the death of the taxpayer shall not be included in computing taxable income for the period in which falls the date of the taxpayer's death.
(e) Special rule for employee tips
For purposes of subsection (a), tips included in a written statement furnished an employer by an employee pursuant to section 6053(a) shall be deemed to be received at the time the written statement including such tips is furnished to the employer.
(f) Special rule for crop insurance proceeds or disaster payments
In the case of insurance proceeds received as a result of destruction or damage to crops, a taxpayer reporting on the cash receipts and disbursements method of accounting may elect to include such proceeds in income for the taxable year following the taxable year of destruction or damage, if he establishes that, under his practice, income from such crops would have been reported in a following taxable year. For purposes of the preceding sentence, payments received under the Agricultural Act of 1949, as amended, or title II of the Disaster Assistance Act of 1988, as a result of (1) destruction or damage to crops caused by drought, flood, or any other natural disaster, or (2) the inability to plant crops because of such a natural disaster shall be treated as insurance proceeds received as a result of destruction or damage to crops. An election under this subsection for any taxable year shall be made at such time and in such manner as the Secretary prescribes.
(g) Special rule for proceeds from livestock sold on account of drought, flood, or other weather-related conditions
(1) In general
In the case of income derived from the sale or exchange of livestock in excess of the number the taxpayer would sell if he followed his usual business practices, a taxpayer reporting on the cash receipts and disbursements method of accounting may elect to include such income for the taxable year following the taxable year in which such sale or exchange occurs if he establishes that, under his usual business practices, the sale or exchange would not have occurred in the taxable year in which it occurred if it were not for drought, flood, or other weather-related conditions, and that such conditions had resulted in the area being designated as eligible for assistance by the Federal Government.
(2) Limitation
Paragraph (1) shall apply only to a taxpayer whose principal trade or business is farming (within the meaning of section 6420(c)(3)).
(3) Special election rules
If section 1033(e)(2) applies to a sale or exchange of livestock described in paragraph (1), the election under paragraph (1) shall be deemed valid if made during the replacement period described in such section.
(h) Special rule for utility services
(1) In general
In the case of a taxpayer the taxable income of which is computed under an accrual method of accounting, any income attributable to the sale or furnishing of utility services to customers shall be included in gross income not later than the taxable year in which such services are provided to such customers.
(2) Definition and special rule
For purposes of this subsection—
(A) Utility services
The term "utility services" includes—
(i) the providing of electrical energy, water, or sewage disposal,
(ii) the furnishing of gas or steam through a local distribution system,
(iii) telephone or other communication services, and
(iv) the transporting of gas or steam by pipeline.
(B) Year in which services provided
The taxable year in which services are treated as provided to customers shall not, in any manner, be determined by reference to—
(i) the period in which the customers' meters are read, or
(ii) the period in which the taxpayer bills (or may bill) the customers for such service.
(i) Treatment of interest on frozen deposits in certain financial institutions
(1) In general
In the case of interest credited during any calendar year on a frozen deposit in a qualified financial institution, the amount of such interest includible in the gross income of a qualified individual shall not exceed the sum of—
(A) the net amount withdrawn by such individual from such deposit during such calendar year, and
(B) the amount of such deposit which is withdrawable as of the close of the taxable year (determined without regard to any penalty for premature withdrawals of a time deposit).
(2) Interest tested each year
Any interest not included in gross income by reason of paragraph (1) shall be treated as credited in the next calendar year.
(3) Deferral of interest deduction
No deduction shall be allowed to any qualified financial institution for interest not includible in gross income under paragraph (1) until such interest is includible in gross income.
(4) Frozen deposit
For purposes of this subsection, the term "frozen deposit" means any deposit if, as of the close of the calendar year, any portion of such deposit may not be withdrawn because of—
(A) the bankruptcy or insolvency of the qualified financial institution (or threat thereof), or
(B) any requirement imposed by the State in which such institution is located by reason of the bankruptcy or insolvency (or threat thereof) of 1 or more financial institutions in the State.
(5) Other definitions
For purposes of this subsection, the terms "qualified individual", "qualified financial institution", and "deposit" have the same respective meanings as when used in section 165(l).
(j) Special rule for cash options for receipt of qualified prizes
(1) In general
For purposes of this title, in the case of an individual on the cash receipts and disbursements method of accounting, a qualified prize option shall be disregarded in determining the taxable year for which any portion of the qualified prize is properly includible in gross income of the taxpayer.
(2) Qualified prize option; qualified prize
For purposes of this subsection—
(A) In general
The term "qualified prize option" means an option which—
(i) entitles an individual to receive a single cash payment in lieu of receiving a qualified prize (or remaining portion thereof), and
(ii) is exercisable not later than 60 days after such individual becomes entitled to the qualified prize.
(B) Qualified prize
The term "qualified prize" means any prize or award which—
(i) is awarded as a part of a contest, lottery, jackpot, game, or other similar arrangement,
(ii) does not relate to any past services performed by the recipient and does not require the recipient to perform any substantial future service, and
(iii) is payable over a period of at least 10 years.
(3) Partnership, etc.
The Secretary shall provide for the application of this subsection in the case of a partnership or other pass-through entity consisting entirely of individuals described in paragraph (1).
(k) Special rule for sales or dispositions to implement Federal Energy Regulatory Commission or State electric restructuring policy
(1) In general
In the case of any qualifying electric transmission transaction for which the taxpayer elects the application of this section, qualified gain from such transaction shall be recognized—
(A) in the taxable year which includes the date of such transaction to the extent the amount realized from such transaction exceeds—
(i) the cost of exempt utility property which is purchased by the taxpayer during the 4-year period beginning on such date, reduced (but not below zero) by
(ii) any portion of such cost previously taken into account under this subsection, and
(B) ratably over the 8-taxable year period beginning with the taxable year which includes the date of such transaction, in the case of any such gain not recognized under subparagraph (A).
(2) Qualified gain
For purposes of this subsection, the term "qualified gain" means, with respect to any qualifying electric transmission transaction in any taxable year—
(A) any ordinary income derived from such transaction which would be required to be recognized under section 1245 or 1250 for such taxable year (determined without regard to this subsection), and
(B) any income derived from such transaction in excess of the amount described in subparagraph (A) which is required to be included in gross income for such taxable year (determined without regard to this subsection).
(3) Qualifying electric transmission transaction
For purposes of this subsection, the term "qualifying electric transmission transaction" means any sale or other disposition before January 1, 2008 (before January 1, 2021, in the case of a qualified electric utility), of—
(A) property used in the trade or business of providing electric transmission services, or
(B) any stock or partnership interest in a corporation or partnership, as the case may be, whose principal trade or business consists of providing electric transmission services,
but only if such sale or disposition is to an independent transmission company.
(4) Independent transmission company
For purposes of this subsection, the term "independent transmission company" means—
(A) an independent transmission provider approved by the Federal Energy Regulatory Commission,
(B) a person—
(i) who the Federal Energy Regulatory Commission determines in its authorization of the transaction under section 203 of the Federal Power Act (
(ii) whose transmission facilities to which the election under this subsection applies are under the operational control of a Federal Energy Regulatory Commission-approved independent transmission provider before the close of the period specified in such authorization, but not later than the date which is 4 years after the close of the taxable year in which the transaction occurs, or
(C) in the case of facilities subject to the jurisdiction of the Public Utility Commission of Texas—
(i) a person which is approved by that Commission as consistent with Texas State law regarding an independent transmission provider, or
(ii) a political subdivision or affiliate thereof whose transmission facilities are under the operational control of a person described in clause (i).
(5) Exempt utility property
For purposes of this subsection:
(A) In general
The term "exempt utility property" means property used in the trade or business of—
(i) generating, transmitting, distributing, or selling electricity, or
(ii) producing, transmitting, distributing, or selling natural gas.
(B) Nonrecognition of gain by reason of acquisition of stock
Acquisition of control of a corporation shall be taken into account under this subsection with respect to a qualifying electric transmission transaction only if the principal trade or business of such corporation is a trade or business referred to in subparagraph (A).
(C) Exception for property located outside the United States
The term "exempt utility property" shall not include any property which is located outside the United States.
(6) Qualified electric utility
For purposes of this subsection, the term "qualified electric utility" means a person that, as of the date of the qualifying electric transmission transaction, is vertically integrated, in that it is both—
(A) a transmitting utility (as defined in section 3(23) of the Federal Power Act (
(B) an electric utility (as defined in section 3(22) of the Federal Power Act (
(7) Special rule for consolidated groups
In the case of a corporation which is a member of an affiliated group filing a consolidated return, any exempt utility property purchased by another member of such group shall be treated as purchased by such corporation for purposes of applying paragraph (1)(A).
(8) Time for assessment of deficiencies
If the taxpayer has made the election under paragraph (1) and any gain is recognized by such taxpayer as provided in paragraph (1)(B), then—
(A) the statutory period for the assessment of any deficiency, for any taxable year in which any part of the gain on the transaction is realized, attributable to such gain shall not expire prior to the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of the purchase of exempt utility property or of an intention not to purchase such property, and
(B) such deficiency may be assessed before the expiration of such 3-year period notwithstanding any law or rule of law which would otherwise prevent such assessment.
(9) Purchase
For purposes of this subsection, the taxpayer shall be considered to have purchased any property if the unadjusted basis of such property is its cost within the meaning of section 1012.
(10) Election
An election under paragraph (1) shall be made at such time and in such manner as the Secretary may require and, once made, shall be irrevocable.
(11) Nonapplication of installment sales treatment
Section 453 shall not apply to any qualifying electric transmission transaction with respect to which an election to apply this subsection is made.
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
The Agricultural Act of 1949, as amended, referred to in subsec. (f), is act Oct. 31, 1949, ch. 792,
The Disaster Assistance Act of 1988, referred to in subsec. (f), is
Amendments
2019—Subsec. (k)(3).
2018—Subsec. (k)(3).
2017—Subsecs. (b) to (k).
2015—Subsec. (i)(3).
2014—Subsec. (i)(3).
2013—Subsec. (i)(3).
2010—Subsec. (i)(3).
2008—Subsec. (i)(3).
Subsec. (i)(4)(B)(ii).
Subsec. (i)(5)(C).
Subsec. (i)(6) to (11).
2005—Subsec. (i)(3).
Subsec. (i)(4)(B)(ii).
2004—Subsec. (e)(3).
Subsec. (i).
1998—Subsec. (h).
1997—Subsec. (e).
1988—Subsec. (d).
Subsec. (e)(1).
Subsecs. (f), (g).
1986—Subsec. (f).
1976—Subsec. (d).
Subsec. (e).
1969—Subsec. (d).
1965—Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 2019 Amendment
Effective Date of 2018 Amendment
Effective Date of 2017 Amendment
"(c)
"(d)
"(1)
"(A) such change shall be treated as initiated by the taxpayer, and
"(B) such change shall be treated as made with the consent of the Secretary of the Treasury.
"(2)
"(A) is required by the amendments made by this section, or
"(B) was prohibited under the Internal Revenue Code of 1986 prior to such amendments and is permitted under such Code after such amendments.
"(e)
"(1) the amendments made by this section shall apply to taxable years beginning after December 31, 2018, and
"(2) the period for taking into account any adjustments under section 481 by reason of a qualified change in method of accounting (as defined in subsection (d)) shall be 6 years."
Effective Date of 2015 Amendment
Effective Date of 2014 Amendment
Effective Date of 2013 Amendment
Effective Date of 2005 Amendment
"(1)
"(2)
Effective Date of 2010 Amendment
Effective Date of 2008 Amendment
"(1)
"(2)
"(3)
Effective Date of 2004 Amendment
Effective Date of 1998 Amendment
"(1)
"(2)
"(A) clause (ii) of such section 451(h)(2)(A) [now 451(j)(2)(A)] shall not apply, and
"(B) such option shall be treated as a qualified prize option if it is exercisable only during all or part of the 18-month period beginning on July 1, 1999."
Effective Date of 1997 Amendment
Effective Date of 1988 Amendment
Amendment by section 1009(d)(3) of
Effective Date of 1986 Amendment
"(1)
"(2)
"(A) such change shall be treated as initiated by the taxpayer,
"(B) such change shall be treated as having been made with the consent of the Secretary, and
"(C) the adjustments under section 481 of the Internal Revenue Code of 1954 [now 1986] by reason of such change shall be taken into account ratably over a period no longer than the first 4 taxable years beginning after December 31, 1986.
"(3)
"(1)
"(2)
"(A) The amendment made by subsection (b) [amending this section] shall apply to taxable years beginning after December 31, 1982, and before January 1, 1987, only if the qualified individual elects to have such amendment apply for all such taxable years.
"(B) In the case of interest attributable to the period beginning January 1, 1983, and ending December 31, 1987, the interest deduction of financial institutions shall be determined without regard to paragraph (3) of section 451(f) [now 451(h)] of the Internal Revenue Code of 1986 (as added by subsection (b))."
Effective Date of 1976 Amendment
Effective Date of 1969 Amendment
Effective Date of 1965 Amendment
Amendment by
Tax Treatment of Incentive Payment
Voluntary separation incentives paid to members of Armed Forces under
Overpayments or Underpayments of Tax Attributable to Certain Amendments by Pub. L. 99–514 or Pub. L. 100–647
For provisions relating to credit or refund of overpayments of tax, and assessment of underpayments of tax, due to amendments by section 905 of
Modification of Regulations on the Completed Contract Method of Accounting
"(a)
"(1) clarify the time at which a contract is to be considered completed,
"(2) clarify when—
"(A) one agreement will be treated as more than one contract, and
"(B) two or more agreements will be treated as one contract, and
"(3) properly allocate all costs which directly benefit, or are incurred by reason of, the extended period long-term contract activities of the taxpayer.
"(b)
"(1)
"(2)
"(A)
"(i) who estimates (at the time such contract is entered into) that such contract will be completed within the 3-year period beginning on the contract commencement date of such contract, or
"(ii) whose average annual gross receipts over the 3 taxable years preceding the taxable year in which such contract is entered into do not exceed $25,000,000.
"(B)
"(i) all trades or businesses (whether or not incorporated) which are under common control with the taxpayer (within the meaning of section 52(b)), and
"(ii) all members of any controlled group of corporations of which the taxpayer is a member,
for the 3 taxable years of such persons preceding the taxable year in which the contract described in subparagraph (A) is entered into shall be included in the gross receipts of the taxpayer for the period described in subparagraph (A). The Secretary shall prescribe regulations which provide attribution rules that take into account, in addition to the persons and entities described in the preceding sentence, taxpayers who engage in construction contracts through partnerships, joint ventures, and corporations.
"(C)
"(i) 'more than 50 percent' shall be substituted for 'at least 80 percent' each place it appears in section 1563(a)(1), and
"(ii) the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.
"(3)
"(4)
"(c)
"(1)
"(2)
"(A)
"(B)
| "If the taxable year begins in calendar year: | The applicable percentage is: |
|---|---|
| 1983 | 331/3 |
| 1984 | 662/3 |
| 1985 or thereafter | 100. |
"(3)
"(A)
"(B)
"(i) solely by reason of any modification to regulations made under subsection (a)(2), or
"(ii) solely by reason of any modifications to regulations made under both paragraphs (1) and (2) of subsection (a),
shall be treated as having been completed on the first day after December 31, 1982, on which any contract which was severed from such contract (by reason of the modifications made by subsection (a)(2)) is completed (determined after the application of any modifications to regulations made under subsection (a)(1)).
"(4)
Private Deferred Compensation Plans; Taxable Years Ending on or after February 1, 1978
"(a)
"(b)
"(1)
"(A) where the person for whom the service is performed is not a State (within the meaning of paragraph (1) of section 457(d) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) and not an organization which is exempt from tax under section 501 of such Code, and
"(B) under which the payment or otherwise making available of compensation is deferred.
"(2)
"(A) a plan described in section 401(a) of the Internal Revenue Code of 1986 which includes a trust, exempt from tax under section 501(a) of such Code,
"(B) an annuity plan or contract described in section 403 of such Code,
"(C) a qualified bond purchase plan described in section 405(a) of such Code,
"(D) that portion of any plan which consists of a transfer of property described in section 83 (determined without regard to subsection (e) thereof of such Code, and
"(E) that portion of any plan which consists of a trust to which section 402(b) of such Code applies.
"(c)
Year of Inclusion for Disaster or Deficiency Payments Received in 1978; Election
"(a)
"(1)(A) the taxpayer receives in his first taxable year beginning in 1978 payments under the Agricultural Act of 1949, as amended, [see Short Title note set out under
"(i) the destruction or damage to crops caused by drought, flood, or any other natural disaster, or
"(ii) the inability to plant crops because of such a natural disaster, and
"(B) the taxpayer establishes that, under his practice, income from such crops could have been reported for his last taxable year beginning in 1977, or
"(2)(A) the taxpayer receives in his first taxable year beginning in 1978 deficiency (or 'target price') payments under the Agricultural Act of 1949, as amended, for any 1977 crop, and
"(B) the fifth month of such crop's marketing year ends before December 1, 1977,
then the taxpayer may elect to include such proceeds in income for his last taxable year beginning in 1977.
"(b)
[§452. Repealed. June 15, 1955, ch. 143, §1(a), 69 Stat. 134 ]
Section, act Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal effective with respect to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 3 of act June 15, 1955, set out as an Effective Date of 1955 Amendment note under
Savings Provision
For provisions concerning increase in tax in any taxable year ending on or before June 15, 1955 by reason of enactment of act June 15, 1955, see section 4 of act June 15, 1955, set out as a note under
§453. Installment method
(a) General rule
Except as otherwise provided in this section, income from an installment sale shall be taken into account for purposes of this title under the installment method.
(b) Installment sale defined
For purposes of this section—
(1) In general
The term "installment sale" means a disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs.
(2) Exceptions
The term "installment sale" does not include—
(A) Dealer dispositions
Any dealer disposition (as defined in subsection (l)).
(B) Inventories of personal property
A disposition of personal property of a kind which is required to be included in the inventory of the taxpayer if on hand at the close of the taxable year.
(c) Installment method defined
For purposes of this section, the term "installment method" means a method under which the income recognized for any taxable year from a disposition is that proportion of the payments received in that year which the gross profit (realized or to be realized when payment is completed) bears to the total contract price.
(d) Election out
(1) In general
Subsection (a) shall not apply to any disposition if the taxpayer elects to have subsection (a) not apply to such disposition.
(2) Time and manner for making election
Except as otherwise provided by regulations, an election under paragraph (1) with respect to a disposition may be made only on or before the due date prescribed by law (including extensions) for filing the taxpayer's return of the tax imposed by this chapter for the taxable year in which the disposition occurs. Such an election shall be made in the manner prescribed by regulations.
(3) Election revocable only with consent
An election under paragraph (1) with respect to any disposition may be revoked only with the consent of the Secretary.
(e) Second dispositions by related persons
(1) In general
If—
(A) any person disposes of property to a related person (hereinafter in this subsection referred to as the "first disposition"), and
(B) before the person making the first disposition receives all payments with respect to such disposition, the related person disposes of the property (hereinafter in this subsection referred to as the "second disposition"),
then, for purposes of this section, the amount realized with respect to such second disposition shall be treated as received at the time of the second disposition by the person making the first disposition.
(2) 2-year cutoff for property other than marketable securities
(A) In general
Except in the case of marketable securities, paragraph (1) shall apply only if the date of the second disposition is not more than 2 years after the date of the first disposition.
(B) Substantial diminishing of risk of ownership
The running of the 2-year period set forth in subparagraph (A) shall be suspended with respect to any property for any period during which the related person's risk of loss with respect to the property is substantially diminished by—
(i) the holding of a put with respect to such property (or similar property),
(ii) the holding by another person of a right to acquire the property, or
(iii) a short sale or any other transaction.
(3) Limitation on amount treated as received
The amount treated for any taxable year as received by the person making the first disposition by reason of paragraph (1) shall not exceed the excess of—
(A) the lesser of—
(i) the total amount realized with respect to any second disposition of the property occurring before the close of the taxable year, or
(ii) the total contract price for the first disposition, over
(B) the sum of—
(i) the aggregate amount of payments received with respect to the first disposition before the close of such year, plus
(ii) the aggregate amount treated as received with respect to the first disposition for prior taxable years by reason of this subsection.
(4) Fair market value where disposition is not sale or exchange
For purposes of this subsection, if the second disposition is not a sale or exchange, an amount equal to the fair market value of the property disposed of shall be substituted for the amount realized.
(5) Later payments treated as receipt of tax paid amounts
If paragraph (1) applies for any taxable year, payments received in subsequent taxable years by the person making the first disposition shall not be treated as the receipt of payments with respect to the first disposition to the extent that the aggregate of such payments does not exceed the amount treated as received by reason of paragraph (1).
(6) Exception for certain dispositions
For purposes of this subsection—
(A) Reacquisitions of stock by issuing corporation not treated as first dispositions
Any sale or exchange of stock to the issuing corporation shall not be treated as a first disposition.
(B) Involuntary conversions not treated as second dispositions
A compulsory or involuntary conversion (within the meaning of section 1033) and any transfer thereafter shall not be treated as a second disposition if the first disposition occurred before the threat or imminence of the conversion.
(C) Dispositions after death
Any transfer after the earlier of—
(i) the death of the person making the first disposition, or
(ii) the death of the person acquiring the property in the first disposition,
and any transfer thereafter shall not be treated as a second disposition.
(7) Exception where tax avoidance not a principal purpose
This subsection shall not apply to a second disposition (and any transfer thereafter) if it is established to the satisfaction of the Secretary that neither the first disposition nor the second disposition had as one of its principal purposes the avoidance of Federal income tax.
(8) Extension of statute of limitations
The period for assessing a deficiency with respect to a first disposition (to the extent such deficiency is attributable to the application of this subsection) shall not expire before the day which is 2 years after the date on which the person making the first disposition furnishes (in such manner as the Secretary may by regulations prescribe) a notice that there was a second disposition of the property to which this subsection may have applied. Such deficiency may be assessed notwithstanding the provisions of any law or rule of law which would otherwise prevent such assessment.
(f) Definitions and special rules
For purposes of this section—
(1) Related person
Except for purposes of subsections (g) and (h), the term "related person" means—
(A) a person whose stock would be attributed under section 318(a) (other than paragraph (4) thereof) to the person first disposing of the property, or
(B) a person who bears a relationship described in section 267(b) to the person first disposing of the property.
(2) Marketable securities
The term "marketable securities" means any security for which, as of the date of the disposition, there was a market on an established securities market or otherwise.
(3) Payment
Except as provided in paragraph (4), the term "payment" does not include the receipt of evidences of indebtedness of the person acquiring the property (whether or not payment of such indebtedness is guaranteed by another person).
(4) Purchaser evidences of indebtedness payable on demand or readily tradable
Receipt of a bond or other evidence of indebtedness which—
(A) is payable on demand, or
(B) is readily tradable,
shall be treated as receipt of payment.
(5) Readily tradable defined
For purposes of paragraph (4), the term "readily tradable" means a bond or other evidence of indebtedness which is issued—
(A) with interest coupons attached or in registered form (other than one in registered form which the taxpayer establishes will not be readily tradable in an established securities market), or
(B) in any other form designed to render such bond or other evidence of indebtedness readily tradable in an established securities market.
(6) Like-kind exchanges
In the case of any exchange described in section 1031(b)—
(A) the total contract price shall be reduced to take into account the amount of any property permitted to be received in such exchange without recognition of gain,
(B) the gross profit from such exchange shall be reduced to take into account any amount not recognized by reason of section 1031(b), and
(C) the term "payment", when used in any provision of this section other than subsection (b)(1), shall not include any property permitted to be received in such exchange without recognition of gain.
Similar rules shall apply in the case of an exchange which is described in section 356(a) and is not treated as a dividend.
(7) Depreciable property
The term "depreciable property" means property of a character which (in the hands of the transferee) is subject to the allowance for depreciation provided in section 167.
(8) Payments to be received defined
The term "payments to be received" includes—
(A) the aggregate amount of all payments which are not contingent as to amount, and
(B) the fair market value of any payments which are contingent as to amount.
(g) Sale of depreciable property to controlled entity
(1) In general
In the case of an installment sale of depreciable property between related persons—
(A) subsection (a) shall not apply,
(B) for purposes of this title—
(i) except as provided in clause (ii), all payments to be received shall be treated as received in the year of the disposition, and
(ii) in the case of any payments which are contingent as to the amount but with respect to which the fair market value may not be reasonably ascertained, the basis shall be recovered ratably, and
(C) the purchaser may not increase the basis of any property acquired in such sale by any amount before the time such amount is includible in the gross income of the seller.
(2) Exception where tax avoidance not a principal purpose
Paragraph (1) shall not apply if it is established to the satisfaction of the Secretary that the disposition did not have as one of its principal purposes the avoidance of Federal income tax.
(3) Related persons
For purposes of this subsection, the term "related persons" has the meaning given to such term by section 1239(b), except that such term shall include 2 or more partnerships having a relationship to each other described in section 707(b)(1)(B).
(h) Use of installment method by shareholders in certain liquidations
(1) Receipt of obligations not treated as receipt of payment
(A) In general
If, in a liquidation to which section 331 applies, the shareholder receives (in exchange for the shareholder's stock) an installment obligation acquired in respect of a sale or exchange by the corporation during the 12-month period beginning on the date a plan of complete liquidation is adopted and the liquidation is completed during such 12-month period, then, for purposes of this section, the receipt of payments under such obligation (but not the receipt of such obligation) by the shareholder shall be treated as the receipt of payment for the stock.
(B) Obligations attributable to sale of inventory must result from bulk sale
Subparagraph (A) shall not apply to an installment obligation acquired in respect of a sale or exchange of—
(i) stock in trade of the corporation,
(ii) other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, and
(iii) property held by the corporation primarily for sale to customers in the ordinary course of its trade or business,
unless such sale or exchange is to 1 person in 1 transaction and involves substantially all of such property attributable to a trade or business of the corporation.
(C) Special rule where obligor and shareholder are related persons
If the obligor of any installment obligation and the shareholder are married to each other or are related persons (within the meaning of section 1239(b)), to the extent such installment obligation is attributable to the disposition by the corporation of depreciable property—
(i) subparagraph (A) shall not apply to such obligation, and
(ii) for purposes of this title, all payments to be received by the shareholder shall be deemed received in the year the shareholder receives the obligation.
(D) Coordination with subsection (e)(1)(A)
For purposes of subsection (e)(1)(A), disposition of property by the corporation shall be treated also as disposition of such property by the shareholder.
(E) Sales by liquidating subsidiaries
For purposes of subparagraph (A), in the case of a controlling corporate shareholder (within the meaning of section 368(c)) of a selling corporation, an obligation acquired in respect of a sale or exchange by the selling corporation shall be treated as so acquired by such controlling corporate shareholder. The preceding sentence shall be applied successively to each controlling corporate shareholder above such controlling corporate shareholder.
(2) Distributions received in more than 1 taxable year of shareholder
If—
(A) paragraph (1) applies with respect to any installment obligation received by a shareholder from a corporation, and
(B) by reason of the liquidation such shareholder receives property in more than 1 taxable year,
then, on completion of the liquidation, basis previously allocated to property so received shall be reallocated for all such taxable years so that the shareholder's basis in the stock of the corporation is properly allocated among all property received by such shareholder in such liquidation.
(i) Recognition of recapture income in year of disposition
(1) In general
In the case of any installment sale of property to which subsection (a) applies—
(A) notwithstanding subsection (a), any recapture income shall be recognized in the year of the disposition, and
(B) any gain in excess of the recapture income shall be taken into account under the installment method.
(2) Recapture income
For purposes of paragraph (1), the term "recapture income" means, with respect to any installment sale, the aggregate amount which would be treated as ordinary income under section 1245 or 1250 (or so much of section 751 as relates to section 1245 or 1250) for the taxable year of the disposition if all payments to be received were received in the taxable year of disposition.
(j) Regulations
(1) In general
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provisions of this section.
(2) Selling price not readily ascertainable
The regulations prescribed under paragraph (1) shall include regulations providing for ratable basis recovery in transactions where the gross profit or the total contract price (or both) cannot be readily ascertained.
(k) Current inclusion in case of revolving credit plans, etc.
In the case of—
(1) any disposition of personal property under a revolving credit plan, or
(2) any installment obligation arising out of a sale of—
(A) stock or securities which are traded on an established securities market, or
(B) to the extent provided in regulations, property (other than stock or securities) of a kind regularly traded on an established market,
subsection (a) shall not apply, and, for purposes of this title, all payments to be received shall be treated as received in the year of disposition. The Secretary may provide for the application of this subsection in whole or in part for transactions in which the rules of this subsection otherwise would be avoided through the use of related parties, pass-thru entities, or intermediaries.
(l) Dealer dispositions
For purposes of subsection (b)(2)(A)—
(1) In general
The term "dealer disposition" means any of the following dispositions:
(A) Personal property
Any disposition of personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan.
(B) Real property
Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer's trade or business.
(2) Exceptions
The term "dealer disposition" does not include—
(A) Farm property
The disposition on the installment plan of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e)(4) or (5)).
(B) Timeshares and residential lots
(i) In general
Any dispositions described in clause (ii) on the installment plan if the taxpayer elects to have paragraph (3) apply to any installment obligations which arise from such dispositions. An election under this paragraph shall not apply with respect to an installment obligation which is guaranteed by any person other than an individual.
(ii) Dispositions to which subparagraph applies
A disposition is described in this clause if it is a disposition in the ordinary course of the taxpayer's trade or business to an individual of—
(I) a timeshare right to use or a timeshare ownership interest in residential real property for not more than 6 weeks per year, or a right to use specified campgrounds for recreational purposes, or
(II) any residential lot, but only if the taxpayer (or any related person) is not to make any improvements with respect to such lot.
For purposes of subclause (I), a timeshare right to use (or timeshare ownership interest in) property held by the spouse, children, grandchildren, or parents of an individual shall be treated as held by such individual.
(C) Carrying charges or interest
Any carrying charges or interest with respect to a disposition described in subparagraph (A) or (B) which are added on the books of account of the seller to the established cash selling price of the property shall be included in the total contract price of the property and, if such charges or interest are not so included, any payments received shall be treated as applying first against such carrying charges or interest.
(3) Payment of interest on timeshares and residential lots
(A) In general
In the case of any installment obligation to which paragraph (2)(B) applies, the tax imposed by this chapter for any taxable year for which payment is received on such obligation shall be increased by the amount of interest determined in the manner provided under subparagraph (B).
(B) Computation of interest
(i) In general
The amount of interest referred to in subparagraph (A) for any taxable year shall be determined—
(I) on the amount of the tax for such taxable year which is attributable to the payments received during such taxable year on installment obligations to which this subsection applies,
(II) for the period beginning on the date of sale, and ending on the date such payment is received, and
(III) by using the applicable Federal rate under section 1274 (without regard to subsection (d)(2) thereof) in effect at the time of the sale compounded semiannually.
(ii) Interest not taken into account
For purposes of clause (i), the portion of any tax attributable to the receipt of any payment shall be determined without regard to any interest imposed under subparagraph (A).
(iii) Taxable year of sale
No interest shall be determined for any payment received in the taxable year of the disposition from which the installment obligation arises.
(C) Treatment as interest
Any amount payable under this paragraph shall be taken into account in computing the amount of any deduction allowable to the taxpayer for interest paid or accrued during such taxable year.
(Added
Editorial Notes
Prior Provisions
A prior section 453, acts Aug. 16, 1954, ch. 736,
Amendments
2004—Subsec. (f)(4)(B).
2000—Subsecs. (a), (d)(1), (i)(1), (k).
1999—Subsec. (a).
Subsecs. (d)(1), (i)(1), (k).
1988—Subsec. (f)(1).
Subsec. (f)(8).
Subsec. (g)(1).
"(A) subsection (a) shall not apply, and
"(B) for purposes of this title—
"(i) except as provided in clause (ii), all payments to be received shall be treated as received in the year of the disposition, and
"(ii) in the case of any payments which are contingent as to amount but with respect to which the fair market value may not be reasonably ascertained—
"(I) the basis shall be recovered ratably, and
"(II) the purchaser may not increase the basis of any property acquired in such sale by any amount before such time as the seller includes such amount in income."
Subsec. (g)(3).
Subsec. (h)(1)(B).
Subsec. (h)(1)(E).
Subsec. (j).
Subsec. (k).
Subsec. (l)(1)(A).
1987—Subsec. (b)(2)(A).
Subsec. (l).
1986—Subsec. (f)(1).
Subsec. (f)(8).
Subsec. (g).
Subsec. (g)(1).
Subsec. (h).
Subsec. (h)(1)(A).
Subsec. (h)(1)(B).
Subsec. (h)(1)(E).
Subsec. (i)(2).
Subsec. (j).
1984—Subsec. (g).
Subsec. (h)(1)(C).
Subsec. (i).
1983—Subsec. (f)(6)(C).
1981—Subsecs. (i), (j).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Effective Date and Construction of 2000 Amendment
"(a)
"(b)
Effective Date of 1999 Amendment
Effective Date of 1988 Amendment
Amendment by sections 1006(e)(7), (i)(1), (2), 1008(g)(1), and 1018(u)(25), (26) of
Amendment by section 2004(d)(1), (5) of
Effective Date of 1987 Amendment
"(1)
"(2)
"(A)
"(B)
"(i)
"(ii)
"(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.
"(C)
"(3)
"(A)
"(B)
"(i)
"(ii)
"(C)
"(i) dispositions after August 16, 1986, and before the 1st day of such taxable year shall be treated as made on such 1st day, and
"(ii) subsections (b)(2)(B) and (c)(4) of section 453A of such Code shall be applied separately with respect to such dispositions by substituting for '$5,000,000' the amount which bears the same ratio to $5,000,000 as the number of days after August 16, 1986, and before such 1st day bears to 365.
"(4)
"(5)
Effective Date of 1986 Amendment
Amendment by section 631(e)(8) of
Amendment by section 642(a)(1)(D), (3), (b) of
"(1)
"(2)
"(3)
"(A) such change shall be treated as initiated by the taxpayer,
"(B) such change shall be treated as having been made with the consent of the Secretary,
"(C) the period for taking into account adjustments under section 481 of such Code by reason of such change shall be equal to 4 years, and
"(D) except as provided in paragraph (4), the amount taken into account in each of such 4 years shall be the applicable percentage (determined in accordance with the following table) of the net adjustment:
| "In the case of the: | The applicable percentage is: |
|---|---|
| 1st taxable year | 15 |
| 2nd taxable year | 25 |
| 3rd taxable year | 30 |
| 4th taxable year | 30. |
If the taxpayer's last taxable year beginning before January 1, 1987, was the taxpayer's 1st taxable year in which sales were made under a revolving credit plan, all adjustments under section 481 of such Code shall be taken into account in the taxpayer's 1st taxable year beginning after December 31, 1986.
"(4)
"(A)
"(i) the percentage determined under subparagraph (B) shall be substituted for the applicable percentage which would otherwise apply under paragraph (3)(D), and
"(ii) any increase in the applicable percentage by reason of clause (i) shall be applied to reduce the applicable percentage determined under paragraph (3)(D) for subsequent taxable years in the adjustment period (beginning with the 1st of such subsequent taxable years).
"(B)
"(i) the percentage determined by dividing the aggregate contraction in revolving installment obligations by the aggregate face amount of such obligations outstanding as of the close of the taxpayer's last taxable year beginning before January 1, 1987, over
"(ii) the sum of the applicable percentages under paragraph (3)(D) (as modified by this paragraph) for prior taxable years in the adjustment period.
"(C)
"(i) the aggregate face amount of the revolving installment obligations outstanding as of the close of the taxpayer's last taxable year beginning before January 1, 1987, exceeds
"(ii) the aggregate face amount of the revolving installment obligations outstanding as of the close of the taxable year involved.
"(D)
"(E)
"(i) which was disposed of to an unrelated person on or before October 26, 1987, or
"(ii) was disposed of to an unrelated person on or after such date pursuant to a binding written contract in effect on October 26, 1987, and at all times thereafter before such disposition.
For purposes of the preceding sentence, the term 'unrelated person' means any person who is not a related person (as defined in section 453(g) of the Internal Revenue Code of 1986).
"(5)
"(A) no losses from such dispositions shall be recognized, and
"(B) the aggregate amount of the adjustment for taxable years in the adjustment period (in reverse order of time) shall be reduced by the amount of such losses.
"(6)
Amendment by section 1809(c) of
Effective Date of 1984 Amendment
"(1)
"(2)
"(3)
Amendment by section 421(b)(6)(B), (C) of
Effective Date of 1983 Amendment
Effective Date of 1981 Amendment
Amendment by
Effective Date; Application of Former Section 453(b) to Certain Dispositions
"(1)
"(2)
"(3)
"(4)
"(5)
"(6)
"(7)
"(A) paragraph (2) of such section 453(b), and
"(B) any requirement that more than 1 payment be received."
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
§453A. Special rules for nondealers
(a) General rule
In the case of an installment obligation to which this section applies—
(1) interest shall be paid on the deferred tax liability with respect to such obligation in the manner provided under subsection (c), and
(2) the pledging rules under subsection (d) shall apply.
(b) Installment obligations to which section applies
(1) In general
This section shall apply to any obligation which arises from the disposition of any property under the installment method, but only if the sales price of such property exceeds $150,000.
(2) Special rule for interest payments
For purposes of subsection (a)(1), this section shall apply to an obligation described in paragraph (1) arising during a taxable year only if—
(A) such obligation is outstanding as of the close of such taxable year, and
(B) the face amount of all such obligations held by the taxpayer which arose during, and are outstanding as of the close of, such taxable year exceeds $5,000,000.
Except as provided in regulations, all persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as one person for purposes of this paragraph and subsection (c)(4).
(3) Exception for personal use and farm property
An installment obligation shall not be treated as described in paragraph (1) if it arises from the disposition—
(A) by an individual of personal use property (within the meaning of section 1275(b)(3)), or
(B) of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e)(4) or (5)).
(4) Special rule for timeshares and residential lots
An installment obligation shall not be treated as described in paragraph (1) if it arises from a disposition described in section 453(l)(2)(B), but the provisions of section 453(l)(3) (relating to interest payments on timeshares and residential lots) shall apply to such obligation.
(5) Sales price
For purposes of paragraph (1), all sales or exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange.
(c) Interest on deferred tax liability
(1) In general
If an obligation to which this section applies is outstanding as of the close of any taxable year, the tax imposed by this chapter for such taxable year shall be increased by the amount of interest determined in the manner provided under paragraph (2).
(2) Computation of interest
For purposes of paragraph (1), the interest for any taxable year shall be an amount equal to the product of—
(A) the applicable percentage of the deferred tax liability with respect to such obligation, multiplied by
(B) the underpayment rate in effect under section 6621(a)(2) for the month with or within which the taxable year ends.
(3) Deferred tax liability
For purposes of this section, the term "deferred tax liability" means, with respect to any taxable year, the product of—
(A) the amount of gain with respect to an obligation which has not been recognized as of the close of such taxable year, multiplied by
(B) the maximum rate of tax in effect under section 1 or 11, whichever is appropriate, for such taxable year.
For purposes of applying the preceding sentence with respect to so much of the gain which, when recognized, will be treated as long-term capital gain, the maximum rate on net capital gain under section 1(h) shall be taken into account.
(4) Applicable percentage
For purposes of this subsection, the term "applicable percentage" means, with respect to obligations arising in any taxable year, the percentage determined by dividing—
(A) the portion of the aggregate face amount of such obligations outstanding as of the close of such taxable year in excess of $5,000,000, by
(B) the aggregate face amount of such obligations outstanding as of the close of such taxable year.
(5) Treatment as interest
Any amount payable under this subsection shall be taken into account in computing the amount of any deduction allowable to the taxpayer for interest paid or accrued during the taxable year.
(6) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this subsection including regulations providing for the application of this subsection in the case of contingent payments, short taxable years, and pass-thru entities.
(d) Pledges, etc., of installment obligations
(1) In general
For purposes of section 453, if any indebtedness (hereinafter in this subsection referred to as "secured indebtedness") is secured by an installment obligation to which this section applies, the net proceeds of the secured indebtedness shall be treated as a payment received on such installment obligation as of the later of—
(A) the time the indebtedness becomes secured indebtedness, or
(B) the time the proceeds of such indebtedness are received by the taxpayer.
(2) Limitation based on total contract price
The amount treated as received under paragraph (1) by reason of any secured indebtedness shall not exceed the excess (if any) of—
(A) the total contract price, over
(B) any portion of the total contract price received under the contract before the later of the times referred to in subparagraph (A) or (B) of paragraph (1) (including amounts previously treated as received under paragraph (1) but not including amounts not taken into account by reason of paragraph (3)).
(3) Later payments treated as receipt of tax paid amounts
If any amount is treated as received under paragraph (1) with respect to any installment obligation, subsequent payments received on such obligation shall not be taken into account for purposes of section 453 to the extent that the aggregate of such subsequent payments does not exceed the aggregate amount treated as received under paragraph (1).
(4) Secured indebtedness
For purposes of this subsection indebtedness is secured by an installment obligation to the extent that payment of principal or interest on such indebtedness is directly secured (under the terms of the indebtedness or any underlying arrangements) by any interest in such installment obligation. A payment shall be treated as directly secured by an interest in an installment obligation to the extent an arrangement allows the taxpayer to satisfy all or a portion of the indebtedness with the installment obligation.
(e) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations—
(1) disallowing the use of the installment method in whole or in part for transactions in which the rules of this section otherwise would be avoided through the use of related persons, pass-thru entities, or intermediaries, and
(2) providing that the sale of an interest in a partnership or other pass-thru entity will be treated as a sale of the proportionate share of the assets of the partnership or other entity.
(Added
Editorial Notes
Prior Provisions
Provisions similar to those comprising this section were contained in former
Amendments
2017—Subsec. (c)(3).
1999—Subsec. (d)(4).
1993—Subsec. (c)(3).
1989—Subsec. (b)(2)(B).
Subsec. (b)(3).
Subsec. (c)(5), (6).
Subsec. (d)(1)(B).
Subsec. (d)(2)(B).
1988—
Subsec. (b)(1).
Subsec. (b)(2).
Subsec. (b)(3).
"(A) by an individual of personal use property (within the meaning of section 1275(b)(3)), or
"(B) of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e)(4) or (5))."
Subsec. (c).
Subsec. (e).
1987—
1986—Subsec. (a)(2).
Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by sections 7812(c)(2) and 7815(g) of
Amendment by section 7821(a)(1)–(3), (4)(B) of
Effective Date of 1988 Amendment
Amendment by section 1008(g)(2) of
Amendment by section 2004(d)(2), (7), (8) of
"(1)
"(2)
"(A) such sale is pursuant to a written binding contract in effect on October 21, 1988, and at all times thereafter before such sale,
"(B) such sale is pursuant to a letter of intent in effect on October 21, 1988, or
"(C) there is a board of directors or shareholder approval for such sale on or before October 21, 1988."
Effective Date of 1987 Amendment
Amendment by
Effective Date
For effective date, see section 6(a)(4) of
Certain Repledges Permitted
"(a)
"(b)
"(c)
"(1) a refinancing is attributable to the calling of indebtedness by the creditor, and
"(2) such refinancing is not with the creditor under the refinanced indebtedness or a person related to such creditor,
such refinancing shall, to the extent the refinanced indebtedness qualifies under subsections (a) and (b), be treated as a continuation of such refinanced indebtedness."
Amendment by Pub. L. 99–514 Treated as Change in Method of Accounting
For provisions requiring change in accounting method in the case of any taxpayer who made sales under revolving credit plan and was on installment method under this section for such taxpayer's last taxable year beginning before Jan. 1, 1987, see section 812(c)(2) of
§453B. Gain or loss on disposition of installment obligations
(a) General rule
If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and—
(1) the amount realized, in the case of satisfaction at other than face value or a sale or exchange, or
(2) the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange.
any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received.
(b) Basis of obligation
The basis of an installment obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.
(c) Special rule for transmission at death
Except as provided in section 691 (relating to recipients of income in respect of decedents), this section shall not apply to the transmission of installment obligations at death.
(d) Exception for distributions to which section 337(a) applies
Subsection (a) shall not apply to any distribution to which section 337(a) applies.
(e) Life insurance companies
(1) In general
In the case of a disposition of an installment obligation by any person other than a life insurance company (as defined in section 816(a)) to such an insurance company or to a partnership of which such an insurance company is a partner, no provision of this subtitle providing for the nonrecognition of gain shall apply with respect to any gain resulting under subsection (a). If a corporation which is a life insurance company for the taxable year was (for the preceding taxable year) a corporation which was not a life insurance company, such corporation shall, for purposes of this subsection and subsection (a), be treated as having transferred to a life insurance company, on the last day of the preceding taxable year, all installment obligations which it held on such last day. A partnership of which a life insurance company becomes a partner shall, for purposes of this subsection and subsection (a), be treated as having transferred to a life insurance company, on the last day of the preceding taxable year of such partnership, all installment obligations which it holds at the time such insurance company becomes a partner.
(2) Special rule where life insurance company elects to treat income as not related to insurance business
Paragraph (1) shall not apply to any transfer or deemed transfer of an installment obligation if the life insurance company elects (at such time and in such manner as the Secretary may by regulations prescribe) to determine its life insurance company taxable income—
(A) by returning the income on such installment obligation under the installment method prescribed in section 453, and
(B) as if such income were an item attributable to a noninsurance business.
(3) Noninsurance business
(A) In general
For purposes of this subsection, the term "noninsurance business" means any activity which is not an insurance business.
(B) Certain activities treated as insurance businesses
For purposes of subparagraph (A), any activity which is not an insurance business shall be treated as an insurance business if—
(i) it is of a type traditionally carried on by life insurance companies for investment purposes, but only if the carrying on of such activity (other than in the case of real estate) does not constitute the active conduct of a trade or business, or
(ii) it involves the performance of administrative services in connection with plans providing life insurance, pension, or accident and health benefits.
(f) Obligation becomes unenforceable
For purposes of this section, if any installment obligation is canceled or otherwise becomes unenforceable—
(1) the obligation shall be treated as if it were disposed of in a transaction other than a sale or exchange, and
(2) if the obligor and obligee are related persons (within the meaning of section 453(f)(1)), the fair market value of the obligation shall be treated as not less than its face amount.
(g) Transfers between spouses or incident to divorce
In the case of any transfer described in subsection (a) of section 1041 (other than a transfer in trust)—
(1) subsection (a) of this section shall not apply, and
(2) the same tax treatment with respect to the transferred installment obligation shall apply to the transferee as would have applied to the transferor.
(h) Certain liquidating distributions by S corporations
If—
(1) an installment obligation is distributed by an S corporation in a complete liquidation, and
(2) receipt of the obligation is not treated as payment for the stock by reason of section 453(h)(1),
then, except for purposes of any tax imposed by subchapter S, no gain or loss with respect to the distribution of the obligation shall be recognized by the distributing corporation. Under regulations prescribed by the Secretary, the character of the gain or loss to the shareholder shall be determined in accordance with the principles of section 1366(b).
(Added
Editorial Notes
Prior Provisions
Provisions similar to those comprising this section were contained in former
Amendments
2018—
2017—Subsec. (e)(2)(B).
Subsec. (e)(3).
1990—Subsec. (d).
"(1) an installment obligation is distributed in a liquidation to which section 332 (relating to complete liquidations of subsidiaries) applies, and
"(2) the basis of such obligation in the hands of the distributee is determined under section 334(b)(1),
then no gain or loss with respect to the distribution of such obligation shall be recognized by the distributing corporation."
1988—Subsec. (h).
1986—Subsec. (d).
Subsec. (e)(2)(B).
Subsec. (g).
1984—Subsec. (d)(2).
Subsec. (e)(1).
Subsec. (e)(2).
Subsec. (g).
1983—Subsec. (d)(2).
1980—Subsec. (d).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 631(e)(9) of
Amendment by section 1842(c) of
Effective Date of 1984 Amendment
Amendment by section 43(c)(2) of
Amendment by section 211(b)(6) of
Amendment by section 421(b)(3) of
Amendment by section 492(b)(3) of
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1980 Amendment
For effective date of amendment by
Effective Date
For effective date, see section 6(a)(1), (5) of
Repeal of Modification of Installment Method
"(a)
"(b)
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
Treatment of Elections Under Section 453B(e)(2)
[§453C. Repealed. Pub. L. 100–203, title X, §10202(a)(1), Dec. 22, 1987, 101 Stat. 1330–388 ]
Section, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to dispositions in taxable years beginning after Dec. 31, 1987, with special rules for dealers and non-dealers, and coordination with Tax Reform Act of 1986, see section 10202(e)(1)–(3), (5) of
Applicability of Amendments by Pub. L. 100–203 and Pub. L. 100–647
Effective Date; Allocation of Indebtedness as Payment on Installment Obligation
"(1)
"[(2) Repealed.
"(3)
"(A) 125/8 percent subordinated debentures with a total face amount of $175,000,000 issued pursuant to a trust indenture dated as of September 1, 1985.
"(B) A revolving credit term loan in the maximum amount of $130,000,000 made pursuant to a revolving credit and security agreement dated as of September 6, 1985, payable in various stages with final payment due on August 31, 1992.
This paragraph shall also apply to indebtedness which replaces indebtedness described in this paragraph if such indebtedness does not exceed the amount and maturity of the indebtedness it replaces.
"(4)
"(A) for which a contract to purchase land for the project was entered into at least 5 years before the date of the enactment of this Act,
"(B) with respect to which land for the project was purchased before September 26, 1985,
"(C) with respect to which building permits for the project were obtained, and construction commenced, before September 26, 1985,
"(D) in conjunction with which not less than 80 units of low-income housing are deeded to a tax-exempt organization designated by a local government, and
"(E) with respect to which at least $1,000,000 of expenses were incurred before September 26, 1985.
"(5)
"(A) such corporation was incorporated on May 25, 1984, for the purpose of acquiring all of the stock of another corporation,
"(B) such acquisition took place on October 23, 1984,
"(C) in connection with such acquisition, the corporation incurred indebtedness of approximately $151,000,000, and
"(D) substantially all of the stock of the corporation is owned directly or indirectly by employees of the corporation the stock of which was acquired on October 23, 1984.
"(6)
"(A) in the 1st taxable year of the taxpayer ending after December 31, 1986, shall be taken into account ratably over the 3 taxable years beginning with such 1st taxable year, and
"(B) in the 2nd taxable year of the taxpayer ending after December 31, 1986, shall be taken into account ratably over the 2 taxable years beginning with such 2nd taxable year.
"(7)
"(A) any increase in tax imposed by
"(B) any increase in tax imposed by such
"(8)
"(A) such note agreement was executed pursuant to an agreement of purchase and sale dated April 25, 1980,
"(B) more than ½ of the installment payments of the aggregate principal of such notes have been received by August 29, 1986, and
"(C) the last installment payment of the principal of such notes is due August 29, 1989,
shall be taxed at a rate of 28 percent.
"(9)
"(A)
"(B)
[
["(1)
["(2)
["(A) such changes shall be treated as initiated by the taxpayer,
["(B) such changes shall be treated as made with the consent of the Secretary of the Treasury, and
["(C) the net amount of the adjustments required to be taken into account under section 481(a) of the Internal Revenue Code of 1986 shall be taken into account ratably over the 4 taxable year period beginning with the first taxable year beginning more than 1 year after the date of the enactment of this Act."]
§454. Obligations issued at discount
(a) Non-interest-bearing obligations issued at a discount
If, in the case of a taxpayer owning any non-interest-bearing obligation issued at a discount and redeemable for fixed amounts increasing at stated intervals or owning an obligation described in paragraph (2) of subsection (c), the increase in the redemption price of such obligation occurring in the taxable year does not (under the method of accounting used in computing his taxable income) constitute income to him in such year, such taxpayer may, at his election made in his return for any taxable year, treat such increase as income received in such taxable year. If any such election is made with respect to any such obligation, it shall apply also to all such obligations owned by the taxpayer at the beginning of the first taxable year to which it applies and to all such obligations thereafter acquired by him and shall be binding for all subsequent taxable years, unless on application by the taxpayer the Secretary permits him, subject to such conditions as the Secretary deems necessary, to change to a different method. In the case of any such obligations owned by the taxpayer at the beginning of the first taxable year to which his election applies, the increase in the redemption price of such obligations occurring between the date of acquisition (or, in the case of an obligation described in paragraph (2) of subsection (c), the date of acquisition of the series E bond involved) and the first day of such taxable year shall also be treated as income received in such taxable year.
(b) Short-term obligations issued on discount basis
In the case of any obligation—
(1) of the United States; or
(2) of a State or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia,
which is issued on a discount basis and payable without interest at a fixed maturity date not exceeding 1 year from the date of issue, the amount of discount at which such obligation is originally sold shall not be considered to accrue until the date on which such obligation is paid at maturity, sold, or otherwise disposed of.
(c) Matured United States savings bonds
In the case of a taxpayer who—
(1) holds a series E United States savings bond at the date of maturity, and
(2) pursuant to regulations prescribed under
the increase in redemption value (to the extent not previously includible in gross income) in excess of the amount paid for such series E bond shall be includible in gross income in the taxable year in which the obligation is finally redeemed or in the taxable year of final maturity, whichever is earlier. This subsection shall not apply to a corporation, and shall not apply in the case of any taxable year for which the taxpayer's taxable income is computed under an accrual method of accounting or for which an election made by the taxpayer under subsection (a) applies.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1983—Subsec. (c)(2).
1976—Subsec. (a).
Subsec. (b)(2).
1959—Subsec. (c)(2).
§455. Prepaid subscription income
(a) Year in which included
Prepaid subscription income to which this section applies shall be included in gross income for the taxable years during which the liability described in subsection (d)(2) exists.
(b) Where taxpayer's liability ceases
In the case of any prepaid subscription income to which this section applies—
(1) If the liability described in subsection (d)(2) ends, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which the liability ends.
(2) If the taxpayer dies or ceases to exist, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which such death, or such cessation of existence, occurs.
(c) Prepaid subscription income to which this section applies
(1) Election of benefits
This section shall apply to prepaid subscription income if and only if the taxpayer makes an election under this section with respect to the trade or business in connection with which such income is received. The election shall be made in such manner as the Secretary may by regulations prescribe. No election may be made with respect to a trade or business if in computing taxable income the cash receipts and disbursements method of accounting is used with respect to such trade or business.
(2) Scope of election
An election made under this section shall apply to all prepaid subscription income received in connection with the trade or business with respect to which the taxpayer has made the election; except that the taxpayer may, to the extent permitted under regulations prescribed by the Secretary, include in gross income for the taxable year of receipt the entire amount of any prepaid subscription income if the liability from which it arose is to end within 12 months after the date of receipt. An election made under this section shall not apply to any prepaid subscription income received before the first taxable year for which the election is made.
(3) When election may be made
(A) With consent
A taxpayer may, with the consent of the Secretary, make an election under this section at any time.
(B) Without consent
A taxpayer may, without the consent of the Secretary, make an election under this section for his first taxable year in which he receives prepaid subscription income in the trade or business. Such election shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with respect to which such election is made.
(4) Period to which election applies
An election under this section shall be effective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. For purposes of this title, the computation of taxable income under an election made under this section shall be treated as a method of accounting.
(d) Definitions
For purposes of this section—
(1) Prepaid subscription income
The term "prepaid subscription income" means any amount (includible in gross income) which is received in connection with, and is directly attributable to, a liability which extends beyond the close of the taxable year in which such amount is received, and which is income from a subscription to a newspaper, magazine, or other periodical.
(2) Liability
The term "liability" means a liability to furnish or deliver a newspaper, magazine, or other periodical.
(3) Receipt of prepaid subscription income
Prepaid subscription income shall be treated as received during the taxable year for which it is includible in gross income under section 451 (without regard to this section).
(e) Deferral of income under established accounting procedures
Notwithstanding the provisions of this section, any taxpayer who has, for taxable years prior to the first taxable year to which this section applies, reported his income under an established and consistent method or practice of accounting for prepaid subscription income (to which this section would apply if an election were made) may continue to report his income for taxable years to which this title applies in accordance with such method or practice.
(Added
Editorial Notes
Amendments
1976—Subsec. (c).
Subsec. (c)(3)(B).
Statutory Notes and Related Subsidiaries
Effective Date of 1976 Amendment
Amendment by section 1901(a)(67) of
Effective Date
§456. Prepaid dues income of certain membership organizations
(a) Year in which included
Prepaid dues income to which this section applies shall be included in gross income for the taxable years during which the liability described in subsection (e)(2) exists.
(b) Where taxpayer's liability ceases
In the case of any prepaid dues income to which this section applies—
(1) If the liability described in subsection (e)(2) ends, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which the liability ends.
(2) If the taxpayer ceases to exist, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which such cessation of existence occurs.
(c) Prepaid dues income to which this section applies
(1) Election of benefits
This section shall apply to prepaid dues income if and only if the taxpayer makes an election under this section with respect to the trade or business in connection with which such income is received. The election shall be made in such manner as the Secretary may by regulations prescribe. No election may be made with respect to a trade or business if in computing taxable income the cash receipts and disbursements method of accounting is used with respect to such trade or business.
(2) Scope of election
An election made under this section shall apply to all prepaid dues income received in connection with the trade or business with respect to which the taxpayer has made the election; except that the taxpayer may, to the extent permitted under regulations prescribed by the Secretary, include in gross income for the taxable year of receipt the entire amount of any prepaid dues income if the liability from which it arose is to end within 12 months after the date of receipt. Except as provided in subsection (d), and election made under this section shall not apply to any prepaid dues income received before the first taxable year for which the election is made.
(3) When election may be made
(A) With consent
A taxpayer may, with the consent of the Secretary, make an election under this section at any time.
(B) Without consent
A taxpayer may, without the consent of the Secretary, make an election under this section for its first taxable year in which it receives prepaid dues income in the trade or business. Such election shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with respect to which such election is made.
(4) Period to which election applies
An election under this section shall be effective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. For purposes of this title, the computation of taxable income under an election made under this section shall be treated as a method of accounting.
(d) Transitional rule
(1) Amount includible in gross income for election years
If a taxpayer makes an election under this section with respect to prepaid dues income, such taxpayer shall include in gross income, for each taxable year to which such election applies, not only that portion of prepaid dues income received in such year otherwise includible in gross income for such year under this section, but shall also include in gross income for such year an additional amount equal to the amount of prepaid dues income received in the 3 taxable years preceding the first taxable year to which such election applies which would have been included in gross income in the taxable year had the election been effective 3 years earlier.
(2) Deductions of amounts included in income more than once
A taxpayer who makes an election with respect to prepaid dues income, and who includes in gross income for any taxable year to which the election applies an additional amount computed under paragraph (1), shall be permitted to deduct, for such taxable year and for each of the 4 succeeding taxable years, an amount equal to one-fifth of such additional amount, but only to the extent that such additional amount was also included in the taxpayer's gross income during any of the 3 taxable years preceding the first taxable year to which such election applies.
(e) Definitions
For purposes of this section—
(1) Prepaid dues income
The term "prepaid dues income" means any amount (includible in gross income) which is received by a membership organization in connection with, and is directly attributable to, a liability to render services or make available membership privileges over a period of time which extends beyond the close of the taxable year in which such amount is received.
(2) Liability
The term "liability" means a liability to render services or make available membership privileges over a period of time which does not exceed 36 months, which liability shall be deemed to exist ratably over the period of time that such services are required to be rendered, or that such membership privileges are required to be made available.
(3) Membership organization
The term "membership organization" means a corporation, association, federation, or other organization—
(A) organized without capital stock of any kind, and
(B) no part of the net earnings of which is distributable to any member.
(4) Receipt of prepaid dues income
Prepaid dues income shall be treated as received during the taxable year for which it is includible in gross income under section 451 (without regard to this section).
(Added
Editorial Notes
Amendments
1976—Subsec. (c).
Subsec. (c)(3)(B).
Statutory Notes and Related Subsidiaries
Effective Date of 1976 Amendment
Amendment by section 1901(a)(68) of
Effective Date
§457. Deferred compensation plans of State and local governments and tax-exempt organizations
(a) Year of inclusion in gross income
(1) In general
Any amount of compensation deferred under an eligible deferred compensation plan, and any income attributable to the amounts so deferred, shall be includible in gross income only for the taxable year in which such compensation or other income—
(A) is paid to the participant or other beneficiary, in the case of a plan of an eligible employer described in subsection (e)(1)(A), and
(B) is paid or otherwise made available to the participant or other beneficiary, in the case of a plan of an eligible employer described in subsection (e)(1)(B).
(2) Special rule for rollover amounts
To the extent provided in section 72(t)(9), section 72(t) shall apply to any amount includible in gross income under this subsection.
(3) Special rule for health and long-term care insurance
In the case of a plan of an eligible employer described in subsection (e)(1)(A), to the extent provided in section 402(l), paragraph (1) shall not apply to amounts otherwise includible in gross income under this subsection.
(b) Eligible deferred compensation plan defined
For purposes of this section, the term "eligible deferred compensation plan" means a plan established and maintained by an eligible employer—
(1) in which only individuals who perform service for the employer may be participants,
(2) which provides that (except as provided in paragraph (3)) the maximum amount which may be deferred under the plan for the taxable year (other than rollover amounts) shall not exceed the lesser of—
(A) the applicable dollar amount, or
(B) 100 percent of the participant's includible compensation,
(3) which may provide that, for 1 or more of the participant's last 3 taxable years ending before he attains normal retirement age under the plan, the ceiling set forth in paragraph (2) shall be the lesser of—
(A) twice the dollar amount in effect under subsection (b)(2)(A), or
(B) the sum of—
(i) the plan ceiling established for purposes of paragraph (2) for the taxable year (determined without regard to this paragraph), plus
(ii) so much of the plan ceiling established for purposes of paragraph (2) for taxable years before the taxable year as has not previously been used under paragraph (2) or this paragraph,
(4) which provides that compensation—
(A) in the case of an eligible employer described in subsection (e)(1)(A), will be deferred only if an agreement providing for such deferral has been entered into before the compensation is currently available to the individual, and
(B) in any other case, will be deferred for any calendar month only if an agreement providing for such deferral has been entered into before the beginning of such month,
(5) which meets the distribution requirements of subsection (d), and
(6) except as provided in subsection (g), which provides that—
(A) all amounts of compensation deferred under the plan,
(B) all property and rights purchased with such amounts, and
(C) all income attributable to such amounts, property, or rights,
shall remain (until made available to the participant or other beneficiary) solely the property and rights of the employer (without being restricted to the provision of benefits under the plan), subject only to the claims of the employer's general creditors.
A plan which is established and maintained by an employer which is described in subsection (e)(1)(A) and which is administered in a manner which is inconsistent with the requirements of any of the preceding paragraphs shall be treated as not meeting the requirements of such paragraph as of the 1st plan year beginning more than 180 days after the date of notification by the Secretary of the inconsistency unless the employer corrects the inconsistency before the 1st day of such plan year. A plan which is established and maintained by an employer which is described in subsection (e)(1)(A) shall not be treated as failing to meet the requirements of this subsection solely because the plan, or another plan maintained by the employer which meets the requirements of section 401(a) or 403(b), provides for matching contributions on account of qualified student loan payments as described in section 401(m)(13).
(c) Limitation
The maximum amount of the compensation of any one individual which may be deferred under subsection (a) during any taxable year shall not exceed the amount in effect under subsection (b)(2)(A) (as modified by any adjustment provided under subsection (b)(3)).
(d) Distribution requirements
(1) In general
For purposes of subsection (b)(5), a plan meets the distribution requirements of this subsection if—
(A) under the plan amounts will not be made available to participants or beneficiaries earlier than—
(i) the calendar year in which the participant attains age 70½ (in the case of a plan maintained by an employer described in subsection (e)(1)(A), age 59½),
(ii) when the participant has a severance from employment with the employer,
(iii) when the participant is faced with an unforeseeable emergency (determined in the manner prescribed by the Secretary in regulations), or
(iv) except as may be otherwise provided by regulations, in the case of a plan maintained by an employer described in subsection (e)(1)(A), with respect to amounts invested in a lifetime income investment (as defined in section 401(a)(38)(B)(ii)), the date that is 90 days prior to the date that such lifetime income investment may no longer be held as an investment option under the plan,
(B) the plan meets the minimum distribution requirements of paragraph (2),
(C) in the case of a plan maintained by an employer described in subsection (e)(1)(A), the plan meets requirements similar to the requirements of section 401(a)(31), and
(D) except as may be otherwise provided by regulations, in the case of amounts described in subparagraph (A)(iv), such amounts will be distributed only in the form of a qualified distribution (as defined in section 401(a)(38)(B)(i)) or a qualified plan distribution annuity contract (as defined in section 401(a)(38)(B)(iv)).
Any amount transferred in a direct trustee-to-trustee transfer in accordance with section 401(a)(31) shall not be includible in gross income for the taxable year of transfer.
(2) Minimum distribution requirements
A plan meets the minimum distribution requirements of this paragraph if such plan meets the requirements of section 401(a)(9).
(3) Special rule for government plan
An eligible deferred compensation plan of an employer described in subsection (e)(1)(A) shall not be treated as failing to meet the requirements of this subsection solely by reason of making a distribution described in subsection (e)(9)(A).
(4) Participant certification
In determining whether a distribution to a participant is made when the participant is faced with an unforeseeable emergency, the administrator of a plan maintained by an eligible employer described in subsection (e)(1)(A) may rely on a written certification by the participant that the distribution is—
(A) made when the participant is faced with an unforeseeable emergency of a type which is described in regulations prescribed by the Secretary as an unforeseeable emergency, and
(B) not in excess of the amount required to satisfy the emergency need, and
that the participant has no alternative means reasonably available to satisfy such emergency need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the participant's certification, and for procedures for addressing cases of participant misrepresentation.
(e) Other definitions and special rules
For purposes of this section—
(1) Eligible employer
The term "eligible employer" means—
(A) a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State, and
(B) any other organization (other than a governmental unit) exempt from tax under this subtitle.
(2) Performance of service
The performance of service includes performance of service as an independent contractor and the person (or governmental unit) for whom such services are performed shall be treated as the employer.
(3) Participant
The term "participant" means an individual who is eligible to defer compensation under the plan.
(4) Beneficiary
The term "beneficiary" means a beneficiary of the participant, his estate, or any other person whose interest in the plan is derived from the participant.
(5) Includible compensation
The term "includible compensation" has the meaning given to the term "participant's compensation" by section 415(c)(3).
(6) Compensation taken into account at present value
Compensation shall be taken into account at its present value.
(7) Community property laws
The amount of includible compensation shall be determined without regard to any community property laws.
(8) Income attributable
Gains from the disposition of property shall be treated as income attributable to such property.
(9) Benefits of tax exempt organization plans not treated as made available by reason of certain elections, etc.
In the case of an eligible deferred compensation plan of an employer described in subsection (e)(1)(B)—
(A) Total amount payable is dollar limit or less
The total amount payable to a participant under the plan shall not be treated as made available merely because the participant may elect to receive such amount (or the plan may distribute such amount without the participant's consent) if—
(i) the portion of such amount which is not attributable to rollover contributions (as defined in section 411(a)(11)(D)) does not exceed the dollar limit under section 411(a)(11)(A), and
(ii) such amount may be distributed only if—
(I) no amount has been deferred under the plan with respect to such participant during the 2-year period ending on the date of the distribution, and
(II) there has been no prior distribution under the plan to such participant to which this subparagraph applied.
A plan shall not be treated as failing to meet the distribution requirements of subsection (d) by reason of a distribution to which this subparagraph applies.
(B) Election to defer commencement of distributions
The total amount payable to a participant under the plan shall not be treated as made available merely because the participant may elect to defer commencement of distributions under the plan if—
(i) such election is made after amounts may be available under the plan in accordance with subsection (d)(1)(A) and before commencement of such distributions, and
(ii) the participant may make only 1 such election.
(10) Transfers between plans
A participant shall not be required to include in gross income any portion of the entire amount payable to such participant solely by reason of the transfer of such portion from 1 eligible deferred compensation plan to another eligible deferred compensation plan.
(11) Certain plans excluded
(A) In general
The following plans shall be treated as not providing for the deferral of compensation:
(i) Any bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plan.
(ii) Any plan paying solely length of service awards to bona fide volunteers (or their beneficiaries) on account of qualified services performed by such volunteers.
(B) Special rules applicable to length of service award plans
(i) Bona fide volunteer
An individual shall be treated as a bona fide volunteer for purposes of subparagraph (A)(ii) if the only compensation received by such individual for performing qualified services is in the form of—
(I) reimbursement for (or a reasonable allowance for) reasonable expenses incurred in the performance of such services, or
(II) reasonable benefits (including length of service awards), and nominal fees for such services, customarily paid by eligible employers in connection with the performance of such services by volunteers.
(ii) Limitation on accruals
A plan shall not be treated as described in subparagraph (A)(ii) if the aggregate amount of length of service awards accruing with respect to any year of service for any bona fide volunteer exceeds $6,000.
(iii) Cost of living adjustment
In the case of taxable years beginning after December 31, 2017, the Secretary shall adjust the $6,000 amount under clause (ii) at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter beginning July 1, 2016, and any increase under this paragraph that is not a multiple of $500 shall be rounded to the next lowest multiple of $500.
(iv) Special rule for application of limitation on accruals for certain plans
In the case of a plan described in subparagraph (A)(ii) which is a defined benefit plan (as defined in section 414(j)), the limitation under clause (ii) shall apply to the actuarial present value of the aggregate amount of length of service awards accruing with respect to any year of service. Such actuarial present value with respect to any year shall be calculated using reasonable actuarial assumptions and methods, assuming payment will be made under the most valuable form of payment under the plan with payment commencing at the later of the earliest age at which unreduced benefits are payable under the plan or the participant's age at the time of the calculation.
(C) Qualified services
For purposes of this paragraph, the term "qualified services" means fire fighting and prevention services, emergency medical services, and ambulance services.
(D) Certain voluntary early retirement incentive plans
(i) In general
If an applicable voluntary early retirement incentive plan—
(I) makes payments or supplements as an early retirement benefit, a retirement-type subsidy, or a benefit described in the last sentence of section 411(a)(9), and
(II) such payments or supplements are made in coordination with a defined benefit plan which is described in section 401(a) and includes a trust exempt from tax under section 501(a) and which is maintained by an eligible employer described in paragraph (1)(A) or by an education association described in clause (ii)(II),
such applicable plan shall be treated for purposes of subparagraph (A)(i) as a bona fide severance pay plan with respect to such payments or supplements to the extent such payments or supplements could otherwise have been provided under such defined benefit plan (determined as if section 411 applied to such defined benefit plan).
(ii) Applicable voluntary early retirement incentive plan
For purposes of this subparagraph, the term "applicable voluntary early retirement incentive plan" means a voluntary early retirement incentive plan maintained by—
(I) a local educational agency (as defined in section 8101 of the Elementary and Secondary Education Act of 1965), or
(II) an education association which principally represents employees of 1 or more agencies described in subclause (I) and which is described in section 501(c)(5) or (6) and exempt from tax under section 501(a).
(12) Exception for nonelective deferred compensation of nonemployees
(A) In general
This section shall not apply to nonelective deferred compensation attributable to services not performed as an employee.
(B) Nonelective deferred compensation
For purposes of subparagraph (A), deferred compensation shall be treated as nonelective only if all individuals (other than those who have not satisfied any applicable initial service requirement) with the same relationship to the payor are covered under the same plan with no individual variations or options under the plan.
(13) Special rule for churches
The term "eligible employer" shall not include a church (as defined in section 3121(w)(3)(A)) or qualified church-controlled organization (as defined in section 3121(w)(3)(B)).
(14) Treatment of qualified governmental excess benefit arrangements
Subsections (b)(2) and (c)(1) shall not apply to any qualified governmental excess benefit arrangement (as defined in section 415(m)(3)), and benefits provided under such an arrangement shall not be taken into account in determining whether any other plan is an eligible deferred compensation plan.
(15) Applicable dollar amount
(A) In general
The applicable dollar amount is $15,000.
(B) Cost-of-living adjustments
In the case of taxable years beginning after December 31, 2006, the Secretary shall adjust the $15,000 amount under subparagraph (A) at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter beginning July 1, 2005, and any increase under this paragraph which is not a multiple of $500 shall be rounded to the next lowest multiple of $500.
(16) Rollover amounts
(A) General rule
In the case of an eligible deferred compensation plan established and maintained by an employer described in subsection (e)(1)(A), if—
(i) any portion of the balance to the credit of an employee in such plan is paid to such employee in an eligible rollover distribution (within the meaning of section 402(c)(4)),
(ii) the employee transfers any portion of the property such employee receives in such distribution to an eligible retirement plan described in section 402(c)(8)(B), and
(iii) in the case of a distribution of property other than money, the amount so transferred consists of the property distributed,
then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid.
(B) Certain rules made applicable
The rules of paragraphs (2) through (7), (9), and (11) of section 402(c) and section 402(f) shall apply for purposes of subparagraph (A).
(C) Reporting
Rollovers under this paragraph shall be reported to the Secretary in the same manner as rollovers from qualified retirement plans (as defined in section 4974(c)).
(17) Trustee-to-trustee transfers to purchase permissive service credit
No amount shall be includible in gross income by reason of a direct trustee-to-trustee transfer to a defined benefit governmental plan (as defined in section 414(d)) if such transfer is—
(A) for the purchase of permissive service credit (as defined in section 415(n)(3)(A)) under such plan, or
(B) a repayment to which section 415 does not apply by reason of subsection (k)(3) thereof.
(18) Coordination with catch-up contributions for individuals age 50 or older
In the case of an individual who is an eligible participant (as defined by section 414(v)) and who is a participant in an eligible deferred compensation plan of an employer described in paragraph (1)(A), subsections (b)(3) and (c) shall be applied by substituting for the amount otherwise determined under the applicable subsection the greater of—
(A) the sum of—
(i) the plan ceiling established for purposes of subsection (b)(2) (without regard to subsection (b)(3)), plus
(ii) the lesser of any designated Roth contributions made by the participant to the plan or the applicable dollar amount for the taxable year determined under section 414(v)(2)(B)(i), or
(B) the amount determined under the applicable subsection (without regard to this paragraph).
(f) Tax treatment of participants where plan or arrangement of employer is not eligible
(1) In general
In the case of a plan of an eligible employer providing for a deferral of compensation, if such plan is not an eligible deferred compensation plan, then—
(A) the compensation shall be included in the gross income of the participant or beneficiary for the 1st taxable year in which there is no substantial risk of forfeiture of the rights to such compensation, and
(B) the tax treatment of any amount made available under the plan to a participant or beneficiary shall be determined under section 72 (relating to annuities, etc.).
(2) Exceptions
Paragraph (1) shall not apply to—
(A) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a),
(B) an annuity plan or contract described in section 403,
(C) that portion of any plan which consists of a transfer of property described in section 83,
(D) that portion of any plan which consists of a trust to which section 402(b) applies,
(E) a qualified governmental excess benefit arrangement described in section 415(m), and
(F) that portion of any applicable employment retention plan described in paragraph (4) with respect to any participant.
(3) Definitions
For purposes of this subsection—
(A) Plan includes arrangements, etc.
The term "plan" includes any agreement or arrangement.
(B) Substantial risk of forfeiture
The rights of a person to compensation are subject to a substantial risk of forfeiture if such person's rights to such compensation are conditioned upon the future performance of substantial services by any individual.
(4) Employment retention plans
For purposes of paragraph (2)(F)—
(A) In general
The portion of an applicable employment retention plan described in this paragraph with respect to any participant is that portion of the plan which provides benefits payable to the participant not in excess of twice the applicable dollar limit determined under subsection (e)(15).
(B) Other rules
(i) Limitation
Paragraph (2)(F) shall only apply to the portion of the plan described in subparagraph (A) for years preceding the year in which such portion is paid or otherwise made available to the participant.
(ii) Treatment
A plan shall not be treated for purposes of this title as providing for the deferral of compensation for any year with respect to the portion of the plan described in subparagraph (A).
(C) Applicable employment retention plan
The term "applicable employment retention plan" means an employment retention plan maintained by—
(i) a local educational agency (as defined in section 8101 of the Elementary and Secondary Education Act of 1965 (
(ii) an education association which principally represents employees of 1 or more agencies described in clause (i) and which is described in section 501(c)(5) or (6) and exempt from taxation under section 501(a).
(D) Employment retention plan
The term "employment retention plan" means a plan to pay, upon termination of employment, compensation to an employee of a local educational agency or education association described in subparagraph (C) for purposes of—
(i) retaining the services of the employee, or
(ii) rewarding such employee for the employee's service with 1 or more such agencies or associations.
(g) Governmental plans must maintain set-asides for exclusive benefit of participants
(1) In general
A plan maintained by an eligible employer described in subsection (e)(1)(A) shall not be treated as an eligible deferred compensation plan unless all assets and income of the plan described in subsection (b)(6) are held in trust for the exclusive benefit of participants and their beneficiaries.
(2) Taxability of trusts and participants
For purposes of this title—
(A) a trust described in paragraph (1) shall be treated as an organization exempt from taxation under section 501(a), and
(B) notwithstanding any other provision of this title, amounts in the trust shall be includible in the gross income of participants and beneficiaries only to the extent, and at the time, provided in this section.
(3) Custodial accounts and contracts
For purposes of this subsection, custodial accounts and contracts described in section 401(f) shall be treated as trusts under rules similar to the rules under section 401(f).
(4) Death benefits under USERRA-qualified active military service
A plan described in paragraph (1) shall not be treated as an eligible deferred compensation plan unless such plan meets the requirements of section 401(a)(37).
(Added
Inflation Adjusted Items for Certain Years
For inflation adjustment of certain items in this section, see Internal Revenue Notices listed in a table under
Amendment of Subsection (d)(1)(A)
"(v) as provided in section 401(a)(39),".
See 2022 Amendment note below.
Editorial Notes
References in Text
Section 8101 of the Elementary and Secondary Education Act of 1965, referred to in subsec. (e)(11)(D)(ii)(I), is classified to
Amendments
2022—Subsec. (b).
Subsec. (b)(4).
Subsec. (d)(1)(A)(v).
Subsec. (d)(4).
Subsec. (e)(18)(A)(ii).
2019—Subsec. (d)(1)(A)(i).
Subsec. (d)(1)(A)(iv).
Subsec. (d)(1)(D).
2018—Subsec. (f)(4)(C)(i).
2017—Subsec. (e)(11)(B)(ii).
Subsec. (e)(11)(B)(iii).
Subsec. (e)(11)(B)(iv).
2015—Subsec. (e)(11)(D)(ii)(I).
2014—Subsec. (e)(15)(A).
2008—Subsec. (g)(4).
2006—Subsec. (a)(3).
Subsec. (e)(11)(D).
Subsec. (e)(16)(B).
Subsec. (f)(2)(F).
Subsec. (f)(4).
2002—Subsec. (e)(5).
Subsec. (e)(18).
2001—Subsec. (a).
Subsec. (b)(2).
Subsec. (b)(2)(A).
Subsec. (b)(2)(B).
Subsec. (b)(3)(A).
Subsec. (c).
Subsec. (c)(1).
Subsec. (c)(2).
Subsec. (d)(1).
Subsec. (d)(1)(A)(ii).
Subsec. (d)(2).
Subsec. (d)(3).
Subsec. (e)(9).
Subsec. (e)(9)(A)(i).
Subsec. (e)(15).
Subsec. (e)(16).
Subsec. (e)(17).
1997—Subsec. (e)(9)(A).
1996—Subsec. (b)(6).
Subsec. (c)(2)(B)(i).
Subsec. (e)(9).
"(A) the total amount payable to a participant under the plan does not exceed $3,500, and
"(B) no additional amounts may be deferred under the plan with respect to the participant,
the amount payable to the participant under the plan shall not be treated as made available merely because such participant may elect to receive a lump sum payable after separation from service and within 60 days of the election."
Subsec. (e)(11).
Subsec. (e)(14).
Subsec. (e)(15).
Subsec. (f)(2)(E).
Subsec. (g).
1992—Subsec. (c)(2)(B)(i).
1989—Subsec. (d)(1)(A)(iii).
Subsec. (d)(2)(B)(i)(I).
Subsec. (e)(13).
1988—Subsec. (c)(2).
Subsec. (d)(1)(A).
Subsec. (d)(2)(B)(i)(I).
Subsec. (d)(10).
Subsec. (d)(11).
"(A)
"(B)
Subsec. (e)(9).
Subsec. (e)(11).
Subsec. (e)(12).
Subsec. (e)(13).
1986—
1984—Subsec. (e)(2).
1980—Subsec. (d)(9)(B).
Statutory Notes and Related Subsidiaries
Effective Date of 2022 Amendment
Amendment by section 110(f) of
Amendment by section 312(c) of
Amendment by section 334(b)(5) of
Amendment by section 603(b)(2) of
Effective Date of 2019 Amendment
Amendment by section 104(b) of
Amendment by section 109(d) of
Effective Date of 2017 Amendment
Effective Date of 2015 Amendment
Amendment by
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2008 Amendment
Amendment by
Effective Date of 2006 Amendment
Amendment by section 829(a)(4) of
Amendment by section 845(b)(3) of
"(1)
"(2)
"(3) ERISA
"(4)
Effective Date of 2002 Amendment
Amendment by
Effective Date of 2001 Amendment
Amendment by section 611(d)(3)(B), (e) of
Amendment by section 641(a)(1)(A)–(C) of
Amendment by section 646(a)(3) of
Amendment by section 647(b) of
Amendment by section 648(b) of
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by section 1421(b)(3)(C) of
Amendment by section 1444(b)(2), (3) of
"(1)
"(2)
Effective Date of 1992 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 1011(e)(1), (2), (10) of
"(1)
"(2)
"(A)
"(B)
"(C)
"(3)
"(A) if such amounts were deferred from periods before July 14, 1988, or
"(B) if—
"(i) such amounts are deferred from periods on or after such date pursuant to an agreement which—
"(I) was in writing on such date, and
"(II) on such date provides for a deferral for each taxable year covered by the agreement of a fixed amount or of an amount determined pursuant to a fixed formula, and
"(ii) the individual with respect to whom the deferral is made was covered under such agreement on such date.
Subparagraph (B) shall not apply to any taxable year ending after the date on which any modification of the amount or formula described in subparagraph (B)(i)(II) agreed to in writing before January 1, 1989, is effective. The preceding sentence shall not apply to a modification agreed to in writing before January 1, 1989, which does not increase any benefit of a participant. Amounts described in the first sentence of this paragraph shall be taken into account for purposes of applying section 457 of the 1986 Code to other amounts deferred under any eligible deferred compensation plan.
"(4)
[The due date for the report on the study referred to in section 6064(d)(4) of
Amendment by section 6071(c) of
Effective Date of 1986 Amendment
"(1)
"(2)
"(3)
"(A)
"(B)
"(i) were deferred from taxable years beginning before January 1, 1987, or
"(ii) are deferred from taxable years beginning after December 31, 1986, pursuant to an agreement which—
"(I) was in writing on August 16, 1986,
"(II) on such date provides for a deferral for each taxable year covered by the agreement of a fixed amount or of an amount determined pursuant to a fixed formula.
Clause (ii) shall not apply to any taxable year ending after the date on which any modification to the amount or formula described in subclause (II) is effective. Amounts described in the first sentence shall be taken into account for applying section 457 to other amounts deferred under any deferred compensation plan. This subparagraph shall only apply to individuals who were covered under the plan and agreement on August 16, 1986.
"(4)
"(5)
"(A) to employees on August 16, 1986, of a nonprofit corporation organized under the laws of the State of Alabama maintaining a deferred compensation plan with respect to which the Internal Revenue Service issued a ruling dated March 17, 1976, that the plan would not affect the tax-exempt status of the corporation, or
"(B) to to [sic] individuals eligible to participate on August 16, 1986, in a deferred compensation plan with respect to which a letter dated November 6, 1975, submitted the original plan to the Internal Revenue Service, an amendment was submitted on November 19, 1975, and the Internal Revenue Service responded with a letter dated December 24, 1975,
but only with respect to deferrals under such plan."
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1980 Amendment
Amendment by
Effective Date
Eligibility for Participation in Retirement Plans
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, 1994
For provisions directing that if any amendments made by subtitle B [§§521–523] of title V 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 [§§1100–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Transitional Rules
"(A)
"(i) any amount of compensation deferred under a plan of a State providing for a deferral of compensation (other than a plan described in section 457(e)(2) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]), and any income attributable to the amounts so deferred, shall be includible in gross income only for the taxable year in which such compensation or other income is paid or otherwise made available to the participant or other beneficiary, but
"(ii) the maximum amount of the compensation of any one individual which may be excluded from gross income by reason of clause (i) and by reason of section 457(a) of such Code during any such taxable year shall not exceed the lesser of—
"(I) $7,500, or
"(II) 331/3 percent of the participant's includible compensation.
"(B)
"(C)
"(D)
Deferred Compensation Plans for State Judges
"(A)
"(B)
"(i) such plan has been continuously in existence since December 31, 1978,
"(ii) under such plan, all judges eligible to benefit under the plan—
"(I) are required to participate, and
"(II) are required to contribute the same fixed percentage of their basic or regular rate of compensation as judge,
"(iii) under such plan, no judge has an option as to contributions or benefits the exercise of which would affect the amount of includible compensation,
"(iv) the retirement payments of a judge under the plan are a percentage of the compensation of judges of that State holding similar positions, and
"(v) the plan during any year does not pay benefits with respect to any participant which exceed the limitations of section 415(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]."
§457A. Nonqualified deferred compensation from certain tax indifferent parties
(a) In general
Any compensation which is deferred under a nonqualified deferred compensation plan of a nonqualified entity shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation.
(b) Nonqualified entity
For purposes of this section, the term "nonqualified entity" means—
(1) any foreign corporation unless substantially all of its income is—
(A) effectively connected with the conduct of a trade or business in the United States, or
(B) subject to a comprehensive foreign income tax, and
(2) any partnership unless substantially all of its income is allocated to persons other than—
(A) foreign persons with respect to whom such income is not subject to a comprehensive foreign income tax, and
(B) organizations which are exempt from tax under this title.
(c) Determinability of amounts of compensation
(1) In general
If the amount of any compensation is not determinable at the time that such compensation is otherwise includible in gross income under subsection (a)—
(A) such amount shall be so includible in gross income when determinable, and
(B) the tax imposed under this chapter for the taxable year in which such compensation is includible in gross income shall be increased by the sum of—
(i) the amount of interest determined under paragraph (2), and
(ii) an amount equal to 20 percent of the amount of such compensation.
(2) Interest
For purposes of paragraph (1)(B)(i), the interest determined under this paragraph for any taxable year is the amount of interest at the underpayment rate under section 6621 plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such deferred compensation is not subject to a substantial risk of forfeiture.
(d) Other definitions and special rules
For purposes of this section—
(1) Substantial risk of forfeiture
(A) In general
The rights of a person to compensation shall be treated as subject to a substantial risk of forfeiture only if such person's rights to such compensation are conditioned upon the future performance of substantial services by any individual.
(B) Exception for compensation based on gain recognized on an investment asset
(i) In general
To the extent provided in regulations prescribed by the Secretary, if compensation is determined solely by reference to the amount of gain recognized on the disposition of an investment asset, such compensation shall be treated as subject to a substantial risk of forfeiture until the date of such disposition.
(ii) Investment asset
For purposes of clause (i), the term "investment asset" means any single asset (other than an investment fund or similar entity)—
(I) acquired directly by an investment fund or similar entity,
(II) with respect to which such entity does not (nor does any person related to such entity) participate in the active management of such asset (or if such asset is an interest in an entity, in the active management of the activities of such entity), and
(III) substantially all of any gain on the disposition of which (other than such deferred compensation) is allocated to investors in such entity.
(iii) Coordination with special rule
Paragraph (3)(B) shall not apply to any compensation to which clause (i) applies.
(2) Comprehensive foreign income tax
The term "comprehensive foreign income tax" means, with respect to any foreign person, the income tax of a foreign country if—
(A) such person is eligible for the benefits of a comprehensive income tax treaty between such foreign country and the United States, or
(B) such person demonstrates to the satisfaction of the Secretary that such foreign country has a comprehensive income tax.
(3) Nonqualified deferred compensation plan
(A) In general
The term "nonqualified deferred compensation plan" has the meaning given such term under section 409A(d), except that such term shall include any plan that provides a right to compensation based on the appreciation in value of a specified number of equity units of the service recipient.
(B) Exception
Compensation shall not be treated as deferred for purposes of this section if the service provider receives payment of such compensation not later than 12 months after the end of the taxable year of the service recipient during which the right to the payment of such compensation is no longer subject to a substantial risk of forfeiture.
(4) Exception for certain compensation with respect to effectively connected income
In the case of a foreign corporation with income which is taxable under section 882, this section shall not apply to compensation which, had such compensation been paid in cash on the date that such compensation ceased to be subject to a substantial risk of forfeiture, would have been deductible by such foreign corporation against such income.
(5) Application of rules
Rules similar to the rules of paragraphs (5) and (6) of section 409A(d) shall apply.
(e) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations disregarding a substantial risk of forfeiture in cases where necessary to carry out the purposes of this section.
(Added
Editorial Notes
Amendments
2018—Subsec. (d)(4).
Statutory Notes and Related Subsidiaries
Effective Date
"(1)
"(2)
"(A) the last taxable year beginning before 2018, or
"(B) the taxable year in which there is no substantial risk of forfeiture of the rights to such compensation (determined in the same manner as determined for purposes of section 457A of the Internal Revenue Code of 1986, as added by this section).
"(3)
"(4)
"(5)
§458. Magazines, paperbacks, and records returned after the close of the taxable year
(a) Exclusion from gross income
A taxpayer who is on an accrual method of accounting may elect not to include in the gross income for the taxable year the income attributable to the qualified sale of any magazine, paperback, or record which is returned to the taxpayer before the close of the merchandise return period.
(b) Definitions and special rules
For purposes of this section—
(1) Magazine
The term "magazine" includes any other periodical.
(2) Paperback
The term "paperback" means any book which has a flexible outer cover and the pages of which are affixed directly to such outer cover. Such term does not include a magazine.
(3) Record
The term "record" means a disc, tape, or similar object on which musical, spoken, or other sounds are recorded.
(4) Separate application with respect to magazines, paperbacks, and records
If a taxpayer makes qualified sales of more than one category of merchandise in connection with the same trade or business, this section shall be applied as if the qualified sales of each such category were made in connection with a separate trade or business. For purposes of the preceding sentence, magazines, paperbacks, and records shall each be treated as a separate category of merchandise.
(5) Qualified sale
A sale of a magazine, paperback, or record is a qualified sale if—
(A) at the time of sale, the taxpayer has a legal obligation to adjust the sales price of such magazine, paperback, or record if it is not resold, and
(B) the sales price of such magazine, paperback, or record is adjusted by the taxpayer because of a failure to resell it.
(6) Amount excluded
The amount excluded under this section with respect to any qualified sale shall be the lesser of—
(A) the amount covered by the legal obligation described in paragraph (5)(A), or
(B) the amount of the adjustment agreed to by the taxpayer before the close of the merchandise return period.
(7) Merchandise return period
(A) Except as provided in subparagraph (B), the term "merchandise return period" means, with respect to any taxable year—
(i) in the case of magazines, the period of 2 months and 15 days first occurring after the close of taxable year, or
(ii) in the case of paperbacks and records, the period of 4 months and 15 days first occurring after the close of the taxable year.
(B) The taxpayer may select a shorter period than the applicable period set forth in subparagraph (A).
(C) Any change in the merchandise return period shall be treated as a change in the method of accounting.
(8) Certain evidence may be substituted for physical return of merchandise
Under regulations prescribed by the Secretary, the taxpayer may substitute, for the physical return of magazines, paperbacks, or records required by subsection (a), certification or other evidence that the magazine, paperback, or record has not been resold and will not be resold if such evidence—
(A) is in the possession of the taxpayer at the close of the merchandise return period, and
(B) is satisfactory to the Secretary.
(9) Repurchase by the taxpayer not treated as resale
A repurchase by the taxpayer shall be treated as an adjustment of the sales price rather than as a resale.
(c) Qualified sales to which section applies
(1) Election of benefits
This section shall apply to qualified sales of magazines, paperbacks, or records, as the case may be, if and only if the taxpayer makes an election under this section with respect to the trade or business in connection with which such sales are made. An election under this section may be made without the consent of the Secretary. The election shall be made in such manner as the Secretary may by regulations prescribe and shall be made for any taxable year not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).
(2) Scope of election
An election made under this section shall apply to all qualified sales of magazines, paperbacks, or records, as the case may be, made in connection with the trade or business with respect to which the taxpayer has made the election.
(3) Period to which election applies
An election under this section shall be effective for the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election.
(4) Treatment as method of accounting
Except to the extent inconsistent with the provisions of this section, for purposes of this subtitle, the computation of taxable income under an election made under this section shall be treated as a method of accounting.
(d) 5-year spread of transitional adjustments for magazines
In applying section 481(c) with respect to any election under this section which applies to magazines, the period for taking into account any decrease in taxable income resulting from the application of section 481(a)(2) shall be the taxable year for which the election is made and the 4 succeeding taxable years.
(e) Suspense account for paperbacks and records
(1) In general
In the case of any election under this section which applies to paperbacks or records, in lieu of applying section 481, the taxpayer shall establish a suspense account for the trade or business for the taxable year for which the election is made.
(2) Initial opening balance
The opening balance of the account described in paragraph (1) for the first taxable year to which the election applies shall be the largest dollar amount of returned merchandise which would have been taken into account under this section for any of the 3 immediately preceding taxable years if this section had applied to such preceding 3 taxable years. This paragraph and paragraph (3) shall be applied by taking into account only amounts attributable to the trade or business for which such account is established.
(3) Adjustments in suspense account
At the close of each taxable year the suspense account shall be—
(A) reduced the excess (if any) of—
(i) the opening balance of the suspense account for the taxable year, over
(ii) the amount excluded from gross income for the taxable year under subsection (a), or
(B) increased (but not in excess of the initial opening balance) by the excess (if any) of—
(i) the amount excluded from gross income for the taxable year under subsection (a), over
(ii) the opening balance of the account for the taxable year.
(4) Gross income adjustments
(A) Reductions excluded from gross income
In the case of any reduction under paragraph (3)(A) in the account for the taxable year, an amount equal to such reduction shall be excluded from gross income for such taxable year.
(B) Increases added to gross income
In the case of any increase under paragraph (3)(B) in the account for the taxable year, an amount equal to such increase shall be included in gross income for such taxable year.
If the initial opening balance exceeds the dollar amount of returned merchandise which would have been taken into account under subsection (a) for the taxable year preceding the first taxable year for which the election is effective if this section had applied to such preceding taxable year, then an amount equal to the amount of such excess shall be included in gross income for such first taxable year.
(5) Subchapter C transactions
The application of this subsection with respect to a taxpayer which is a party to any transaction with respect to which there is nonrecognition of gain or loss to any party to the transaction by reason of subchapter C shall be determined under regulations prescribed by the Secretary.
(Added
Editorial Notes
Amendments
2018—Subsec. (b)(9).
Subsec. (c)(1).
Statutory Notes and Related Subsidiaries
Effective Date
§460. Special rules for long-term contracts
(a) Requirement that percentage of completion method be used
In the case of any long-term contract, the taxable income from such contract shall be determined under the percentage of completion method (as modified by subsection (b)).
(b) Percentage of completion method
(1) Requirements of percentage of completion method
Except as provided in paragraph (3), in the case of any long-term contract with respect to which the percentage of completion method is used—
(A) the percentage of completion shall be determined by comparing costs allocated to the contract under subsection (c) and incurred before the close of the taxable year with the estimated total contract costs, and
(B) upon completion of the contract (or, with respect to any amount properly taken into account after completion of the contract, when such amount is so properly taken into account), the taxpayer shall pay (or shall be entitled to receive) interest computed under the look-back method of paragraph (2).
In the case of any long-term contract with respect to which the percentage of completion method is used, except for purposes of applying the look-back method of paragraph (2), any income under the contract (to the extent not previously includible in gross income) shall be included in gross income for the taxable year following the taxable year in which the contract was completed. For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under subparagraph (B) shall be treated as an increase in the tax imposed by this chapter for the taxable year in which the contract is completed (or, in the case of interest payable with respect to any amount properly taken into account after completion of the contract, for the taxable year in which the amount is so properly taken into account).
(2) Look-back method
The interest computed under the look-back method of this paragraph shall be determined by—
(A) first, allocating income under the contract among taxable years before the year in which the contract is completed on the basis of the actual contract price and costs instead of the estimated contract price and costs,
(B) second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each taxable year referred to in subparagraph (A) which would result solely from the application of subparagraph (A), and
(C) then using the adjusted overpayment rate (as defined in paragraph (7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B).
For purposes of the preceding sentence, any amount properly taken into account after completion of the contract shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such amount was properly taken into account) such amount to its value as of the completion of the contract. The taxpayer may elect with respect to any contract to have the preceding sentence not apply to such contract.
(3) Special rules
(A) Simplified method of cost allocation
In the case of any long-term contract, the Secretary may prescribe a simplified procedure for allocation of costs to such contract in lieu of the method of allocation under subsection (c).
(B) Look-back method not to apply to certain contracts
Paragraph (1)(B) shall not apply to any contract—
(i) the gross price of which (as of the completion of the contract) does not exceed the lesser of—
(I) $1,000,000, or
(II) 1 percent of the average annual gross receipts of the taxpayer for the 3 taxable years preceding the taxable year in which the contract was completed, and
(ii) which is completed within 2 years of the contract commencement date.
For purposes of this subparagraph, rules similar to the rules of subsections (e)(2) and (f)(3) shall apply.
(4) Simplified look-back method for pass-thru entities
(A) In general
In the case of a pass-thru entity—
(i) the look-back method of paragraph (2) shall be applied at the entity level,
(ii) in determining overpayments and underpayments for purposes of applying paragraph (2)(B)—
(I) any increase in the income under the contract for any taxable year by reason of the allocation under paragraph (2)(A) shall be treated as giving rise to an underpayment determined by applying the highest rate for such year to such increase, and
(II) any decrease in such income for any taxable year by reason of such allocation shall be treated as giving rise to an overpayment determined by applying the highest rate for such year to such decrease, and
(iii) any interest required to be paid by the taxpayer under paragraph (2) shall be paid by such entity (and any interest entitled to be received by the taxpayer under paragraph (2) shall be paid to such entity).
(B) Exceptions
(i) Closely held pass-thru entities
This paragraph shall not apply to any closely held pass-thru entity.
(ii) Foreign contracts
This paragraph shall not apply to any contract unless substantially all of the income from such contract is from sources in the United States.
(C) Other definitions
For purposes of this paragraph—
(i) Highest rate
The term "highest rate" means—
(I) the highest rate of tax specified in section 11, or
(II) if at all times during the year involved more than 50 percent of the interests in the entity are held by individuals directly or through 1 or more other pass-thru entities, the highest rate of tax specified in section 1.
(ii) Pass-thru entity
The term "pass-thru entity" means any—
(I) partnership,
(II) S corporation, or
(III) trust.
(iii) Closely held pass-thru entity
The term "closely held pass-thru entity" means any pass-thru entity if, at any time during any taxable year for which there is income under the contract, 50 percent or more (by value) of the beneficial interests in such entity are held (directly or indirectly) by or for 5 or fewer persons. For purposes of the preceding sentence, rules similar to the constructive ownership rules of section 1563(e) shall apply.
(5) Election to use 10-percent method
(A) General rule
In the case of any long-term contract with respect to which an election under this paragraph is in effect, the 10-percent method shall apply in determining the taxable income from such contract.
(B) 10-percent method
For purposes of this paragraph—
(i) In general
The 10-percent method is the percentage of completion method, modified so that any item which would otherwise be taken into account in computing taxable income with respect to a contract for any taxable year before the 10-percent year is taken into account in the 10-percent year.
(ii) 10-percent year
The term "10-percent year" means the 1st taxable year as of the close of which at least 10 percent of the estimated total contract costs have been incurred.
(C) Election
An election under this paragraph shall apply to all long-term contracts of the taxpayer which are entered into during the taxable year in which the election is made or any subsequent taxable year.
(D) Coordination with other provisions
(i) Simplified method of cost allocation
This paragraph shall not apply to any taxpayer which uses a simplified procedure for allocation of costs under paragraph (3)(A).
(ii) Look-back method
The 10-percent method shall be taken into account for purposes of applying the look-back method of paragraph (2) to any taxpayer making an election under this paragraph.
(6) Election to have look-back method not apply in de minimis cases
(A) Amounts taken into account after completion of contract
Paragraph (1)(B) shall not apply with respect to any taxable year (beginning after the taxable year in which the contract is completed) if—
(i) the cumulative taxable income (or loss) under the contract as of the close of such taxable year, is within
(ii) 10 percent of the cumulative look-back taxable income (or loss) under the contract as of the close of the most recent taxable year to which paragraph (1)(B) applied (or would have applied but for subparagraph (B)).
(B) De minimis discrepancies
Paragraph (1)(B) shall not apply in any case to which it would otherwise apply if—
(i) the cumulative taxable income (or loss) under the contract as of the close of each prior contract year, is within
(ii) 10 percent of the cumulative look-back income (or loss) under the contract as of the close of such prior contract year.
(C) Definitions
For purposes of this paragraph—
(i) Contract year
The term "contract year" means any taxable year for which income is taken into account under the contract.
(ii) Look-back income or loss
The look-back income (or loss) is the amount which would be the taxable income (or loss) under the contract if the allocation method set forth in paragraph (2)(A) were used in determining taxable income.
(iii) Discounting not applicable
The amounts taken into account after the completion of the contract shall be determined without regard to any discounting under the 2nd sentence of paragraph (2).
(D) Contracts to which paragraph applies
This paragraph shall only apply if the taxpayer makes an election under this subparagraph. Unless revoked with the consent of the Secretary, such an election shall apply to all long-term contracts completed during the taxable year for which election is made or during any subsequent taxable year.
(7) Adjusted overpayment rate
(A) In general
The adjusted overpayment rate for any interest accrual period is the overpayment rate in effect under section 6621 for the calendar quarter in which such interest accrual period begins.
(B) Interest accrual period
For purposes of subparagraph (A), the term "interest accrual period" means the period—
(i) beginning on the day after the return due date for any taxable year of the taxpayer, and
(ii) ending on the return due date for the following taxable year.
For purposes of the preceding sentence, the term "return due date" means the date prescribed for filing the return of the tax imposed by this chapter (determined without regard to extensions).
(c) Allocation of costs to contract
(1) Direct and certain indirect costs
In the case of a long-term contract, all costs (including research and experimental costs) which directly benefit, or are incurred by reason of, the long-term contract activities of the taxpayer shall be allocated to such contract in the same manner as costs are allocated to extended period long-term contracts under section 451 and the regulations thereunder.
(2) Costs identified under cost-plus and certain Federal contracts
In the case of a cost-plus long-term contract or a Federal long-term contract, any cost not allocated to such contract under paragraph (1) shall be allocated to such contract if such cost is identified by the taxpayer (or a related person), pursuant to the contract or Federal, State, or local law or regulation, as being attributable to such contract.
(3) Allocation of production period interest to contract
(A) In general
Except as provided in subparagraphs (B) and (C), in the case of a long-term contract, interest costs shall be allocated to the contract in the same manner as interest costs are allocated to property produced by the taxpayer under section 263A(f).
(B) Production period
In applying section 263A(f) for purposes of subparagraph (A), the production period shall be the period—
(i) beginning on the later of—
(I) the contract commencement date, or
(II) in the case of a taxpayer who uses an accrual method with respect to long-term contracts, the date by which at least 5 percent of the total estimated costs (including design and planning costs) under the contract have been incurred, and
(ii) ending on the contract completion date.
(C) Application of de minimis rule
In applying section 263A(f) for purposes of subparagraph (A), paragraph (1)(B)(iii) of such section shall be applied on a contract-by-contract basis; except that, in the case of a taxpayer described in subparagraph (B)(i)(II) of this paragraph, paragraph (1)(B)(iii) of section 263A(f) shall be applied on a property-by-property basis.
(4) Certain costs not included
This subsection shall not apply to any—
(A) independent research and development expenses,
(B) expenses for unsuccessful bids and proposals, and
(C) marketing, selling, and advertising expenses.
(5) Independent research and development expenses
For purposes of paragraph (4), the term "independent research and development expenses" means any expenses incurred in the performance of research or development, except that such term shall not include—
(A) any expenses which are directly attributable to a long-term contract in existence when such expenses are incurred, or
(B) any expenses under an agreement to perform research or development.
(6) Special rule for allocation of bonus depreciation with respect to certain property
(A) In general
Solely for purposes of determining the percentage of completion under subsection (b)(1)(A), the cost of qualified property shall be taken into account as a cost allocated to the contract as if subsection (k) of section 168 had not been enacted.
(B) Qualified property
For purposes of this paragraph, the term "qualified property" means property described in section 168(k)(2) which—
(i) has a recovery period of 7 years or less, and
(ii) is placed in service before January 1, 2027 (January 1, 2028 in the case of property described in section 168(k)(2)(B)).
(d) Federal long-term contract
For purposes of this section—
(1) In general
The term "Federal long-term contract" means any long-term contract—
(A) to which the United States (or any agency or instrumentality thereof) is a party, or
(B) which is a subcontract under a contract described in subparagraph (A).
(2) Special rules for certain taxable entities
For purposes of paragraph (1), the rules of section 168(h)(2)(D) (relating to certain taxable entities not treated as instrumentalities) shall apply.
(e) Exception for certain construction contracts
(1) In general
Subsections (a), (b), and (c)(1) and (2) shall not apply to—
(A) any home construction contract, or
(B) any other construction contract entered into by a taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3))—
(i) who estimates (at the time such contract is entered into) that such contract will be completed within the 2-year period beginning on the contract commencement date of such contract, and
(ii) who meets the gross receipts test of section 448(c) for the taxable year in which such contract is entered into.
In the case of a home construction contract with respect to which the requirements of clauses (i) and (ii) of subparagraph (B) are not met, section 263A shall apply notwithstanding subsection (c)(4) thereof.
(2) Rules related to gross receipts test
(A) Application of gross receipts test to individuals, etc.
For purposes of paragraph (1)(B)(ii), 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.
(B) Coordination with section 481
Any change in method of accounting made pursuant to paragraph (1)(B)(ii) shall be treated as initiated by the taxpayer and made with the consent of the Secretary. Such change shall be effected on a cut-off basis for all similarly classified contracts entered into on or after the year of change.
(3) Construction contract
For purposes of this subsection, the term "construction contract" means any contract for the building, construction, reconstruction, or rehabilitation of, or the installation of any integral component to, or improvements of, real property.
(4) Special rule for residential construction contracts which are not home construction contracts
In the case of any residential construction contract which is not a home construction contract, subsection (a) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1989) shall apply except that such subsection shall be applied—
(A) by substituting "70 percent" for "90 percent" each place it appears, and
(B) by substituting "30 percent" for "10 percent".
(5) Definitions relating to residential construction contracts
For purposes of this subsection—
(A) Home construction contract
The term "home construction contract" means any construction contract if 80 percent or more of the estimated total contract costs (as of the close of the taxable year in which the contract was entered into) are reasonably expected to be attributable to activities referred to in paragraph (4) with respect to—
(i) dwelling units (as defined in section 168(e)(2)(A)(ii)) contained in buildings containing 4 or fewer dwelling units (as so defined), and
(ii) improvements to real property directly related to such dwelling units and located on the site of such dwelling units.
For purposes of clause (i), each townhouse or rowhouse shall be treated as a separate building.
(B) Residential construction contract
The term "residential construction contract" means any contract which would be described in subparagraph (A) if clause (i) of such subparagraph reads as follows:
"(i) dwelling units (as defined in section 168(e)(2)(A)(ii)), and".
(f) Long-term contract
For purposes of this section—
(1) In general
The term "long-term contract" means any contract for the manufacture, building, installation, or construction of property if such contract is not completed within the taxable year in which such contract is entered into.
(2) Special rule for manufacturing contracts
A contract for the manufacture of property shall not be treated as a long-term contract unless such contract involves the manufacture of—
(A) any unique item of a type which is not normally included in the finished goods inventory of the taxpayer, or
(B) any item which normally requires more than 12 calendar months to complete (without regard to the period of the contract).
(3) Aggregation, etc.
For purposes of this subsection, under regulations prescribed by the Secretary—
(A) 2 or more contracts which are interdependent (by reason of pricing or otherwise) may be treated as 1 contract, and
(B) a contract which is properly treated as an aggregation of separate contracts may be so treated.
(g) Contract commencement date
For purposes of this section, the term "contract commencement date" means, with respect to any contract, the first date on which any costs (other than bidding expenses or expenses incurred in connection with negotiating the contract) allocable to such contract are incurred.
(h) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations to prevent the use of related parties, pass-thru entities, intermediaries, options, or other similar arrangements to avoid the application of this section.
(Added
Editorial Notes
References in Text
The date of the enactment of the Revenue Reconciliation Act of 1989, referred to in subsec. (e)(4), is the date of enactment of title VII of
Amendments
2018—Subsec. (b)(2)(A).
2017—Subsec. (c)(6)(B)(ii).
Subsec. (e)(1)(B).
Subsec. (e)(1)(B)(ii).
Subsec. (e)(2).
Subsec. (e)(3) to (6).
2015—Subsec. (c)(6)(B)(ii).
Subsec. (c)(6)(B)(ii).
2014—Subsec. (c)(6)(B)(ii).
2013—Subsec. (c)(6)(B)(ii).
2010—Subsec. (c)(6).
1997—Subsec. (b)(2)(C).
Subsec. (b)(6).
Subsec. (b)(7).
1996—Subsec. (b)(1).
Subsec. (e)(6)(B).
1990—Subsec. (e)(6)(A)(i).
1989—Subsec. (a).
"(1)
"(A) 90 percent of the items with respect to such contract shall be taken into account under the percentage of completion method (as modified by subsection (b)), and
"(B) 10 percent of the items with respect to such contract shall be taken into account under the taxpayer's normal method of accounting.
"(2) 90
Subsec. (a)(2).
Subsec. (b)(1).
Subsec. (b)(2).
Subsec. (b)(2)(B).
Subsec. (b)(3).
Subsec. (b)(3)(B).
Subsec. (b)(4).
Subsec. (b)(4)(A)(i).
Subsec. (b)(4)(A)(ii).
Subsec. (b)(4)(A)(ii)(I).
Subsec. (b)(4)(A)(iii).
Subsec. (b)(5).
Subsec. (e)(2)(C).
Subsec. (e)(5).
Subsec. (e)(6)(A).
Subsec. (e)(6)(A)(i).
1988—Subsec. (a)(1)(A).
Subsec. (a)(1)(B).
Subsec. (a)(2).
Subsec. (b)(2).
Subsec. (b)(2)(B).
Subsec. (b)(3).
Subsec. (b)(3)(B).
Subsec. (b)(3)(C).
Subsec. (b)(4).
Subsec. (b)(5).
Subsec. (e)(1).
"(A) who estimates (at the time such contract is entered into) that such contract will be completed within the 2-year period beginning on the contract commencement date of such contract, and
"(B) whose average annual gross receipts for the 3 taxable years preceding the taxable year in which such contract is entered into do not exceed $10,000,000."
Subsec. (e)(5).
Subsec. (e)(6).
Subsec. (h).
1987—Subsec. (a).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by section 13102(d) of
Amendment by section 13201 of
Effective Date of 2015 Amendment
Amendment by section 143(a)(2) of
Amendment by section 143(b)(6)(I) of
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2013 Amendment
Amendment by
Effective Date of 2010 Amendment
Effective Date of 1997 Amendment
"(1)
"(2)
Effective Date of 1996 Amendment
Amendment by section 1702(h)(15) of
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1989 Amendment
"(1)
"(2)
"(3)
Amendment by sections 7811(e) and 7815(e)(1) of
Effective Date of 1988 Amendment
Amendment by section 1008(c)(1), (2), (4) of
"(1)
"(A)
"(B)
"(C)
"(2)
Effective Date of 1987 Amendment
"(1)
"(2)
"(A)
"(B)
"(i) such ships will not be constructed (directly or indirectly) for the Federal Government, and
"(ii) the taxpayer reasonably expects to complete such contract within 5 years of the contract commencement date (as defined in section 460(g) of the Internal Revenue Code of 1986)."
Effective Date of 1986 Amendment
"(1)
"(2)
"(A)
"(i) any independent research and development expenses taken into account in determining the total contract price shall not be severable from the contract, and
"(ii) any independent research and development expenses shall not be treated as amounts chargeable to capital account.
"(B)
Regulations
Savings Provision
For provisions that nothing in amendment by
Method of Accounting for Naval Shipbuilders
"(a)
"(b)
"(1) the amount of tax which would have been imposed during such period if this section had not been enacted, over
"(2) the amount of tax so imposed during such period.
"(c)
"(1)
"(2)
"(3)
"(d)
"(e)
Amortization of Past Service Pension Costs
Allocable costs (within the meaning of subsec. (c) of this section) with respect to any property to include contributions paid to or under a pension or annuity plan whether or not such contributions represent past service costs, see section 10204 of
Subpart C—Taxable Year for Which Deductions Taken
Editorial Notes
Amendments
2004—
1987—
1986—
1984—
1978—
1976—
1975—
1955—Act June 15, 1955, ch. 143, §2(3),
§461. General rule for taxable year of deduction
(a) General rule
The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.
(b) Special rule in case of death
In the case of the death of a taxpayer whose taxable income is computed under an accrual method of accounting, any amount accrued as a deduction or credit only by reason of the death of the taxpayer shall not be allowed in computing taxable income for the period in which falls the date of the taxpayer's death.
(c) Accrual of real property taxes
(1) In general
If the taxable income is computed under an accrual method of accounting, then, at the election of the taxpayer, any real property tax which is related to a definite period of time shall be accrued ratably over that period.
(2) When election may be made
(A) Without consent
A taxpayer may, without the consent of the Secretary, make an election under this subsection for his first taxable year in which he incurs real property taxes. Such an election shall be made not later than the time prescribed by law for filing the return for such year (including extensions thereof).
(B) With consent
A taxpayer may, with the consent of the Secretary, make an election under this subsection at any time.
(d) Limitation on acceleration of accrual of taxes
(1) General rule
In the case of a taxpayer whose taxable income is computed under an accrual method of accounting, to the extent that the time for accruing taxes is earlier than it would be but for any action of any taxing jurisdiction taken after December 31, 1960, then, under regulations prescribed by the Secretary, such taxes shall be treated as accruing at the time they would have accrued but for such action by such taxing jurisdiction.
(2) Limitation
Under regulations prescribed by the Secretary, paragraph (1) shall be inapplicable to any item of tax to the extent that its application would (but for this paragraph) prevent all persons (including successors in interest) from ever taking such item into account.
(e) Dividends or interest paid on certain deposits or withdrawable accounts
Except as provided in regulations prescribed by the Secretary, amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts (if such amounts paid or credited are withdrawable on demand subject only to customary notice to withdraw) by a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, or a cooperative bank shall not be allowed as a deduction for the taxable year to the extent such amounts are paid or credited for periods representing more than 12 months. Any such amount not allowed as a deduction as the result of the application of the preceding sentence shall be allowed as a deduction for such other taxable year as the Secretary determines to be consistent with the preceding sentence.
(f) Contested liabilities
If—
(1) the taxpayer contests an asserted liability,
(2) the taxpayer transfers money or other property to provide for the satisfaction of the asserted liability,
(3) the contest with respect to the asserted liability exists after the time of the transfer, and
(4) but for the fact that the asserted liability is contested, a deduction would be allowed for the taxable year of the transfer (or for an earlier taxable year) determined after application of subsection (h),
then the deduction shall be allowed for the taxable year of the transfer. This subsection shall not apply in respect of the deduction for income, war profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States.
(g) Prepaid interest
(1) In general
If the taxable income of the taxpayer is computed under the cash receipts and disbursements method of accounting, interest paid by the taxpayer which, under regulations prescribed by the Secretary, is properly allocable to any period—
(A) with respect to which the interest represents a charge for the use or forbearance of money, and
(B) which is after the close of the taxable year in which paid,
shall be charged to capital account and shall be treated as paid in the period to which so allocable.
(2) Exception
This subsection shall not apply to points paid in respect of any indebtedness incurred in connection with the purchase or improvement of, and secured by, the principal residence of the taxpayer to the extent that, under regulations prescribed by the Secretary, such payment of points is an established business practice in the area in which such indebtedness is incurred, and the amount of such payment does not exceed the amount generally charged in such area.
(h) Certain liabilities not incurred before economic performance
(1) In general
For purposes of this title, in determining whether an amount has been incurred with respect to any item during any taxable year, the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs.
(2) Time when economic performance occurs
Except as provided in regulations prescribed by the Secretary, the time when economic performance occurs shall be determined under the following principles:
(A) Services and property provided to the taxpayer
If the liability of the taxpayer arises out of—
(i) the providing of services to the taxpayer by another person, economic performance occurs as such person provides such services,
(ii) the providing of property to the taxpayer by another person, economic performance occurs as the person provides such property, or
(iii) the use of property by the taxpayer, economic performance occurs as the taxpayer uses such property.
(B) Services and property provided by the taxpayer
If the liability of the taxpayer requires the taxpayer to provide property or services, economic performance occurs as the taxpayer provides such property or services.
(C) Workers compensation and tort liabilities of the taxpayer
If the liability of the taxpayer requires a payment to another person and—
(i) arises under any workers compensation act, or
(ii) arises out of any tort,
economic performance occurs as the payments to such person are made. Subparagraphs (A) and (B) shall not apply to any liability described in the preceding sentence.
(D) Other items
In the case of any other liability of the taxpayer, economic performance occurs at the time determined under regulations prescribed by the Secretary.
(3) Exception for certain recurring items
(A) In general
Notwithstanding paragraph (1) an item shall be treated as incurred during any taxable year if—
(i) the all events test with respect to such item is met during such taxable year (determined without regard to paragraph (1)),
(ii) economic performance with respect to such item occurs within the shorter of—
(I) a reasonable period after the close of such taxable year, or
(II) 8½ months after the close of such taxable year,
(iii) such item is recurring in nature and the taxpayer consistently treats items of such kind as incurred in the taxable year in which the requirements of clause (i) are met, and
(iv) either—
(I) such item is not a material item, or
(II) the accrual of such item in the taxable year in which the requirements of clause (i) are met results in a more proper match against income than accruing such item in the taxable year in which economic performance occurs.
(B) Financial statements considered under subparagraph (A)(iv)
In making a determination under subparagraph (A)(iv), the treatment of such item on financial statements shall be taken into account.
(C) Paragraph not to apply to workers compensation and tort liabilities
This paragraph shall not apply to any item described in subparagraph (C) of paragraph (2).
(4) All events test
For purposes of this subsection, the all events test is met with respect to any item if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy.
(5) Subsection not to apply to certain items
This subsection shall not apply to any item for which a deduction is allowable under a provision of this title which specifically provides for a deduction for a reserve for estimated expenses.
(i) Special rules for tax shelters
(1) Recurring item exception not to apply
In the case of a tax shelter, economic performance shall be determined without regard to paragraph (3) of subsection (h).
(2) Special rule for spudding of oil or gas wells
(A) In general
In the case of a tax shelter, economic performance with respect to amounts paid during the taxable year for drilling an oil or gas well shall be treated as having occurred within a taxable year if drilling of the well commences before the close of the 90th day after the close of the taxable year.
(B) Deduction limited to cash basis
(i) Tax shelter partnerships
In the case of a tax shelter which is a partnership, in applying section 704(d) to a deduction or loss for any taxable year attributable to an item which is deductible by reason of subparagraph (A), the term "cash basis" shall be substituted for the term "adjusted basis".
(ii) Other tax shelters
Under regulations prescribed by the Secretary, in the case of a tax shelter other than a partnership, the aggregate amount of the deductions allowable by reason of subparagraph (A) for any taxable year shall be limited in a manner similar to the limitation under clause (i).
(C) Cash basis defined
For purposes of subparagraph (B), a partner's cash basis in a partnership shall be equal to the adjusted basis of such partner's interest in the partnership, determined without regard to—
(i) any liability of the partnership, and
(ii) any amount borrowed by the partner with respect to such partnership which—
(I) was arranged by the partnership or by any person who participated in the organization, sale, or management of the partnership (or any person related to such person within the meaning of section 465(b)(3)(C)), or
(II) was secured by any asset of the partnership.
(3) Tax shelter defined
For purposes of this subsection, the term "tax shelter" means—
(A) any enterprise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having the authority to regulate the offering of securities for sale,
(B) any syndicate (within the meaning of section 1256(e)(3)(B)), and
(C) any tax shelter (as defined in section 6662(d)(2)(C)(ii)).
(4) Special rules for farming
In the case of the trade or business of farming (as defined in section 464(e)), in determining whether an entity is a tax shelter, the definition of farming syndicate in subsection (k) shall be substituted for subparagraphs (A) and (B) of paragraph (3).
(5) Economic performance
For purposes of this subsection, the term "economic performance" has the meaning given such term by subsection (h).
(j) Limitation on excess farm losses of certain taxpayers
(1) Limitation
If a taxpayer other than a C corporation receives any applicable subsidy for any taxable year, any excess farm loss of the taxpayer for the taxable year shall not be allowed.
(2) Disallowed loss carried to next taxable year
Any loss which is disallowed under paragraph (1) shall be treated as a deduction of the taxpayer attributable to farming businesses in the next taxable year.
(3) Applicable subsidy
For purposes of this subsection, the term "applicable subsidy" means—
(A) any direct or counter-cyclical payment under title I of the Food, Conservation, and Energy Act of 2008, or any payment elected to be received in lieu of any such payment, or
(B) any Commodity Credit Corporation loan.
(4) Excess farm loss
For purposes of this subsection—
(A) In general
The term "excess farm loss" means the excess of—
(i) the aggregate deductions of the taxpayer for the taxable year which are attributable to farming businesses of such taxpayer (determined without regard to whether or not such deductions are disallowed for such taxable year under paragraph (1)), over
(ii) the sum of—
(I) the aggregate gross income or gain of such taxpayer for the taxable year which is attributable to such farming businesses, plus
(II) the threshold amount for the taxable year.
(B) Threshold amount
(i) In general
The term "threshold amount" means, with respect to any taxable year, the greater of—
(I) $300,000 ($150,000 in the case of married individuals filing separately), or
(II) the excess (if any) of the aggregate amounts described in subparagraph (A)(ii)(I) for the 5-consecutive taxable year period preceding the taxable year over the aggregate amounts described in subparagraph (A)(i) for such period.
(ii) Special rules for determining aggregate amounts
For purposes of clause (i)(II)—
(I) notwithstanding the disregard in subparagraph (A)(i) of any disallowance under paragraph (1), in the case of any loss which is carried forward under paragraph (2) from any taxable year, such loss (or any portion thereof) shall be taken into account for the first taxable year in which a deduction for such loss (or portion) is not disallowed by reason of this subsection, and
(II) the Secretary shall prescribe rules for the computation of the aggregate amounts described in such clause in cases where the filing status of the taxpayer is not the same for the taxable year and each of the taxable years in the period described in such clause.
(C) Farming business
(i) In general
The term "farming business" has the meaning given such term in section 263A(e)(4).
(ii) Certain trades and businesses included
If, without regard to this clause, a taxpayer is engaged in a farming business with respect to any agricultural or horticultural commodity—
(I) the term "farming business" shall include any trade or business of the taxpayer of the processing of such commodity (without regard to whether the processing is incidental to the growing, raising, or harvesting of such commodity), and
(II) if the taxpayer is a member of a cooperative to which subchapter T applies, any trade or business of the cooperative described in subclause (I) shall be treated as the trade or business of the taxpayer.
(D) Certain losses disregarded
For purposes of subparagraph (A)(i), there shall not be taken into account any deduction for any loss arising by reason of fire, storm, or other casualty, or by reason of disease or drought, involving any farming business.
(5) Application of subsection in case of partnerships and S corporations
In the case of a partnership or S corporation—
(A) this subsection shall be applied at the partner or shareholder level, and
(B) each partner's or shareholder's proportionate share of the items of income, gain, or deduction of the partnership or S corporation for any taxable year from farming businesses attributable to the partnership or S corporation, and of any applicable subsidies received by the partnership or S corporation during the taxable year, shall be taken into account by the partner or shareholder in applying this subsection to the taxable year of such partner or shareholder with or within which the taxable year of the partnership or S corporation ends.
The Secretary may provide rules for the application of this paragraph to any other pass-thru entity to the extent necessary to carry out the provisions of this subsection.
(6) Additional reporting
The Secretary may prescribe such additional reporting requirements as the Secretary determines appropriate to carry out the purposes of this subsection.
(7) Coordination with section 469
This subsection shall be applied before the application of section 469.
(k) Farming syndicate defined
(1) In general
For purposes of subsection (i)(4), the term "farming syndicate" means—
(A) a partnership or any other enterprise other than a corporation which is not an S corporation engaged in the trade or business of farming, if at any time interests in such partnership or enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having authority to regulate the offering of securities for sale, or
(B) a partnership or any other enterprise other than a corporation which is not an S corporation engaged in the trade or business of farming, if more than 35 percent of the losses during any period are allocable to limited partners or limited entrepreneurs.
(2) Holdings attributable to active management
For purposes of paragraph (1)(B), the following shall be treated as an interest which is not held by a limited partner or a limited entrepreneur:
(A) in the case of any individual who has actively participated (for a period of not less than 5 years) in the management of any trade or business of farming, any interest in a partnership or other enterprise which is attributable to such active participation,
(B) in the case of any individual whose principal residence is on a farm, any partnership or other enterprise engaged in the trade or business of farming such farm,
(C) in the case of any individual who is actively participating in the management of any trade or business of farming or who is an individual who is described in subparagraph (A) or (B), any participation in the further processing of livestock which was raised in such trade or business (or in the trade or business referred to in subparagraph (A) or (B)),
(D) in the case of an individual whose principal business activity involves active participation in the management of a trade or business of farming, any interest in any other trade or business of farming, and,
(E) any interest held by a member of the family (or a spouse of any such member) of a grandparent of an individual described in subparagraph (A), (B), (C), or (D) if the interest in the partnership or the enterprise is attributable to the active participation of the individual described in subparagraph (A), (B), (C), or (D).
For purposes of subparagraph (A), where one farm is substituted for or added to another farm, both farms shall be treated as one farm. For purposes of subparagraph (E), the term "family" has the meaning given to such term by section 267(c)(4).
(3) Farming
For purposes of this subsection, the term "farming" has the meaning given to such term by section 464(e).
(4) Limited entrepreneur
For purposes of this subsection, the term "limited entrepreneur" means a person who—
(A) has an interest in an enterprise other than as a limited partner, and
(B) does not actively participate in the management of such enterprise.
(l) Limitation on excess business losses of noncorporate taxpayers
(1) Limitation
In the case of a taxpayer other than a corporation—
(A) for any taxable year beginning after December 31, 2017, and before January 1, 2026, subsection (j) (relating to limitation on excess farm losses of certain taxpayers) shall not apply, and
(B) for any taxable year beginning after December 31, 2020, and before January 1, 2026, any excess business loss of the taxpayer for the taxable year shall not be allowed.
(2) Disallowed loss carryover
Any loss which is disallowed under paragraph (1) shall be treated as a net operating loss for the taxable year for purposes of determining any net operating loss carryover under section 172(b) for subsequent taxable years.
(3) Excess business loss
For purposes of this subsection—
(A) In general
The term "excess business loss" means the excess (if any) of—
(i) the aggregate deductions of the taxpayer for the taxable year which are attributable to trades or businesses of such taxpayer (determined without regard to whether or not such deductions are disallowed for such taxable year under paragraph (1) and without regard to any deduction allowable under section 172 or 199A), over
(ii) the sum of—
(I) the aggregate gross income or gain of such taxpayer for the taxable year which is attributable to such trades or businesses, plus
(II) $250,000 (200 percent of such amount in the case of a joint return).
Such excess shall be determined without regard to any deductions, gross income, or gains attributable to any trade or business of performing services as an employee.
(B) Treatment of capital gains and losses
(i) Losses
Deductions for losses from sales or exchanges of capital assets shall not be taken into account under subparagraph (A)(i).
(ii) Gains
The amount of gains from sales or exchanges of capital assets taken into account under subparagraph (A)(ii) shall not exceed the lesser of—
(I) the capital gain net income determined by taking into account only gains and losses attributable to a trade or business, or
(II) the capital gain net income.
(C) Adjustment for inflation
In the case of any taxable year beginning after December 31, 2018, the $250,000 amount in subparagraph (A)(ii)(II) shall be increased by an amount equal to—
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting "2017" for "2016" in subparagraph (A)(ii) thereof.
If any amount as increased under the preceding sentence is not a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000.
(4) Application of subsection in case of partnerships and S corporations
In the case of a partnership or S corporation—
(A) this subsection shall be applied at the partner or shareholder level, and
(B) each partner's or shareholder's allocable share of the items of income, gain, deduction, or loss of the partnership or S corporation for any taxable year from trades or businesses attributable to the partnership or S corporation shall be taken into account by the partner or shareholder in applying this subsection to the taxable year of such partner or shareholder with or within which the taxable year of the partnership or S corporation ends.
For purposes of this paragraph, in the case of an S corporation, an allocable share shall be the shareholder's pro rata share of an item.
(5) Additional reporting
The Secretary shall prescribe such additional reporting requirements as the Secretary determines necessary to carry out the purposes of this subsection.
(6) Coordination with section 469
This subsection shall be applied after the application of section 469.
(Aug. 16, 1954, ch. 736,
Amendment of Subsection (l)(1)
Inflation Adjusted Items for Certain Years
For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under
Editorial Notes
References in Text
The Food, Conservation, and Energy Act of 2008, referred to in subsec. (j)(3)(A), is
Codification
Subsec. (c) of
Amendments
2022—Subsec. (l)(1).
2021—Subsec. (l)(1).
2020—Subsec. (l)(1).
"(A) subsection (j) (relating to limitation on excess farm losses of certain taxpayers) shall not apply, and
"(B) any excess business loss of the taxpayer for the taxable year shall not be allowed."
Subsec. (l)(2).
Subsec. (l)(3)(A).
Subsec. (l)(3)(A)(i).
Subsec. (l)(3)(B), (C).
2018—Subsec. (i)(4).
Subsecs. (j), (k).
2017—Subsec. (l).
2014—Subsec. (i)(4).
Subsec. (j).
Subsec. (j)(1).
Subsec. (j)(3), (4).
2008—Subsec. (j).
2005—Subsec. (i)(3)(C).
1996—Subsec. (i)(3)(C).
1990—Subsec. (i)(3)(C).
1989—Subsec. (i)(3)(C).
1988—Subsec. (h)(5)(B), (C).
Subsec. (i)(2).
1987—Subsec. (h)(5).
"(A) Section 463 (relating to vacation pay).
"(B) Any other provisions of this title which specifically provides for a deduction for a reserve for estimated expenses."
1986—Subsec. (h)(5)(A).
Subsec. (h)(5)(B).
Subsec. (h)(5)(C).
Subsec. (h)(5)(D).
Subsec. (i).
Subsec. (i)(1).
Subsec. (i)(2).
Subsec. (i)(4).
"(A) any tax shelter described in paragraph (3)(C) shall be treated as a farming syndicate for purposes of section 464; except that this subparagraph shall not apply for purposes of determining the income of an individual meeting the requirements of section 464(c)(2),
"(B) section 464 shall be applied before this subsection, and
"(C) in determining whether an entity is a tax shelter, the definition of farming syndicate in section 464(c) shall be substituted for subparagraphs (A) and (B) of paragraph (3)."
Subsec. (i)(4)(A).
1984—Subsec. (f)(4).
Subsecs. (h), (i).
1976—Subsec. (c)(2), (3).
Subsecs. (d), (e).
Subsec. (g).
1964—Subsec. (f).
1962—Subsec. (e).
1960—Subsec. (d).
Statutory Notes and Related Subsidiaries
Effective Date of 2022 Amendment
Effective Date of 2021 Amendment
Effective Date of 2020 Amendment
"(1)
"(2)
Effective Date of 2017 Amendment
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2008 Amendment
Amendment of this section and repeal of
[
Effective Date of 1989 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1987 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 801(b) of
Amendment by section 805(c)(5) of
Amendment by section 823 of
Amendment by section 1807(a)(1), (2) of
Effective Date of 1984 Amendment
"(g)
"(1)
"(A) in the case of amounts to which section 461(h) of such Code (as added by such amendments) applies, the date of the enactment of this Act [July 18, 1984], and
"(B) in the case of amounts to which section 461(i) of such Code (as so added) applies, after March 31, 1984.
"(2)
"(A)
"(i) are incurred on or before the date of the enactment of this Act [July 18, 1984] (determined without regard to such amendments), and
"(ii) are incurred after the date of the enactment of this Act (determined with regard to such amendments).
The Secretary of the Treasury or his delegate may by regulations provide that (in lieu of an election under the preceding sentence) a taxpayer may (subject to such conditions as such regulations may provide) elect to have subsection (h) of section 461 of such Code apply to the taxpayer's entire taxable year in which occurs July 19, 1984.
"(B)
"(i) initiated by the taxpayer,
"(ii) made with the consent of the Secretary of the Treasury, and
"(iii) with respect to which section 481 of such Code shall be applied by substituting a 3-year adjustment period for a 10-year adjustment period.
"(3)
"(4)
"(5)
"(6)
"(h)
"(1)
"(A) for land disturbed before the date of the enactment of this Act [July 18, 1984], or
"(B) to which paragraph (2) applies,
shall be treated as having been incurred when the land was disturbed.
"(2)
"(A)
"(B)
"(i) to any extension of any contract beyond the period such contract was in effect on March 1, 1984, or
"(ii) to any renegotiation of, or other change in, the terms and conditions of such contract in effect on March 1, 1984.
"(i)
"(1)
"(A) with respect to whom a deduction was allowable (other than under section 463 of the Internal Revenue Code of 1986) for vested accrued vacation pay for the last taxable year ending before the date of the enactment of this Act [July 18, 1984], and
"(B) who elects the application of section 463 of such Code for the first taxable year ending after the date of the enactment of this Act,
then, for purposes of section 463(b) of such Code, the opening balance of the taxpayer with respect to any vested accrued vacation pay shall be determined under section 463(b)(1) of such Code.
"(2)
Effective Date of 1976 Amendment
Amendment by section 1901(a)(69) of
"(1)
"(2)
Effective Date of 1964 Amendment
"(1) the amendment made by subsection (a)(1) [amending this section] shall apply to taxable years beginning after December 31, 1953, and ending after August 16, 1954, and
"(2) the amendment made by subsection (a)(2) [amending section 43 of the Internal Revenue Code of 1939] shall apply to taxable years to which the Internal Revenue Code of 1939 applies."
Effective Date of 1962 Amendment
Effective Date of 1960 Amendment
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
Transitional Rule for Certain Amounts
"(A) such payment was made before November 23, 1985, for indemnification against a tort liability relating to personal injury or death caused by inhalation or ingestion of dust from asbestos-containing insulation products,
"(B) such insurance company is unrelated to taxpayer,
"(C) such payment is not refundable, and
"(D) the taxpayer is not engaged in the mining of asbestos nor is any member of any affiliated group which includes the taxpayer so engaged."
Transition Rule
"(1) is a partnership which was founded in 1936,
"(2) has over 1,000 professional employees,
"(3) used a long-term contract method of accounting for a substantial part of its income from the performance of architectural and engineering services, and
"(4) is headquartered in Chicago, Illinois."
Election as to Transfers in Taxable Years Beginning Before Jan. 1, 1964
"(1) The amendments made by subsection (a) [amending this section and section 43 of the Internal Revenue Code of 1939] shall not apply to any transfer of money or other property described in subsection (a) made in a taxable year beginning before January 1, 1964, if the taxpayer elects, in the manner provided by regulations prescribed by the Secretary of the Treasury or his delegate, to have this paragraph apply. Such an election—
"(A) must be made within one year after the date of the enactment of this Act [Feb. 26, 1964],
"(B) may not be revoked after the expiration of such one-year period, and
"(C) shall apply to all transfers described in the first sentence of this paragraph (other than transfers described in paragraph (2)).
In the case of any transfer to which this paragraph applies, the deduction shall be allowed only for the taxable year in which the contest with respect to such transfer is settled.
"(2) Paragraph (1) shall not apply to any transfer if the assessment of any deficiency which would result from the application of the election in respect of such transfer is, on the date of the election under paragraph (1), prevented by the operation of any law or rule of law.
"(3) If the taxpayer makes an election under paragraph (1), and if, on the date of such election, the assessment of any deficiency which results from the application of the election in respect of any transfer is not prevented by the operation of any law or rule of law, the period within which assessment of such deficiency may be made shall not expire earlier than 2 years after the date of the enactment of this Act [Feb. 26, 1964]."
Certain Other Transfers in Taxable Years Beginning Before Jan. 1, 1964
"(1) no deduction has been allowed in respect of such transfer for any taxable year before the taxable year in which the contest with respect to such transfer is settled, and
"(2) refund or credit of any overpayment which would result from the application of such amendments to such transfer is prevented by the operation of any law or rule of law.
In the case of any transfer to which this subsection applies, the deduction shall be allowed for the taxable year in which the contest with respect to such transfer is settled."
[§462. Repealed. June 15, 1955, ch. 143, §1(b), 69 Stat. 134 ]
Section, act Aug. 16, 1954, ch. 736
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal effective with respect to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 3 of Act June 15, 1955, set out as an Effective Date of 1955 Amendment note under
Savings Provision
For provisions concerning increase in tax in any taxable year ending on or before June 15, 1955 by reason of enactment of act June 15, 1955, see section 4 of act June 15, 1955, set out as a note under
[§463. Repealed. Pub. L. 100–203, title X, §10201(a), Dec. 22, 1987, 101 Stat. 1330–387 ]
Section, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to taxable years beginning after Dec. 31, 1987, see section 10201(c)(1) of
Change in Method of Accounting Required by Pub. L. 100–203
"(A) such change shall be treated as initiated by the taxpayer,
"(B) such change shall be treated as having been made with the consent of the Secretary, and
"(C) the net amount of adjustments required by section 481 of such Code to be taken into account by the taxpayer—
"(i) shall be reduced by the balance in the suspense account under section 463(c) of such Code as of the close of such last taxable year, and
"(ii) shall be taken into account over the 4-taxable year period beginning with the taxable year following such last taxable year as follows:
| "In the case of the: | The percentage taken into account is: |
|---|---|
| 1st year | 25 |
| 2nd year | 5 |
| 3rd year | 35 |
| 4th year | 35. |
Notwithstanding subparagraph (C)(ii), if the period the adjustments are required to be taken into account under section 481 of such Code is less than 4 years, such adjustments shall be taken into account ratably over such shorter period."
§464. Limitations on deductions for certain farming expenses
(a) General rule
In the case of any taxpayer to whom subsection (d) applies, a deduction (otherwise allowable under this chapter) for amounts paid for feed, seed, fertilizer, or other similar farm supplies shall only be allowed for the taxable year in which such feed, seed, fertilizer, or other supplies are actually used or consumed, or, if later, for the taxable year for which allowable as a deduction (determined without regard to this section).
(b) Certain poultry expenses
In the case of any taxpayer to whom subsection (d) applies—
(1) the cost of poultry (including egg-laying hens and baby chicks) purchased for use in a trade or business (or both for use in a trade or business and for sale) shall be capitalized and deducted ratably over the lesser of 12 months or their useful life in the trade or business, and
(2) the cost of poultry purchased for sale shall be deducted for the taxable year in which the poultry is sold or otherwise disposed of.
(c) Exception
Subsection (a) shall not apply to any amount paid for supplies which are on hand at the close of the taxable year on account of fire, storm, or other casualty, or on account of disease or drought.
(d) Certain persons prepaying 50 percent or more of certain farming expenses
(1) Taxpayer to whom subsection applies
This subsection applies to any taxpayer for any taxable year if such taxpayer—
(A) does not use an accrual method of accounting,
(B) has excess prepaid farm supplies for the taxable year, and
(C) is not a qualified farm-related taxpayer.
(2) Qualified farm-related taxpayer
(A) In general
For purposes of this subsection, the term "qualified farm-related taxpayer" means any farm-related taxpayer if—
(i)(I) the aggregate prepaid farm supplies for the 3 taxable years preceding the taxable year are less than 50 percent of,
(II) the aggregate deductible farming expenses (other than prepaid farm supplies) for such 3 taxable years, or
(ii) the taxpayer has excess prepaid farm supplies for the taxable year by reason of any change in business operation directly attributable to extraordinary circumstances.
(B) Farm-related taxpayer
For purposes of this paragraph, the term "farm-related taxpayer" means any taxpayer—
(i) whose principal residence (within the meaning of section 121) is on a farm,
(ii) who has a principal occupation of farming, or
(iii) who is a member of the family (within the meaning of section 461(k)(2)(E)) of a taxpayer described in clause (i) or (ii).
(3) Definitions
For purposes of this subsection—
(A) Excess prepaid farm supplies
The term "excess prepaid farm supplies" means the prepaid farm supplies for the taxable year to the extent the amount of such supplies exceeds 50 percent of the deductible farming expenses for the taxable year (other than prepaid farm supplies).
(B) Prepaid farm supplies
The term "prepaid farm supplies" means any amounts which are described in subsection (a) or (b) and would be allowable for a subsequent taxable year under the rules of subsections (a) and (b).
(C) Deductible farming expenses
The term "deductible farming expenses" means any amount allowable as a deduction under this chapter (including any amount allowable as a deduction for depreciation or amortization) which is properly allocable to the trade or business of farming.
(e) Farming
For purposes of this section, the term "farming" means the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity including the raising, shearing, feeding, caring for, training, and management of animals. For purposes of the preceding sentence, trees (other than trees bearing fruit or nuts) shall not be treated as an agricultural or horticultural commodity.
(Added
Editorial Notes
Amendments
2018—
Subsec. (d)(2)(B)(iii).
2014—Subsecs. (a), (b).
Subsec. (c).
Subsec. (d).
Subsec. (e).
Subsec. (f).
Subsec. (g).
1997—Subsec. (f)(3)(B)(i).
1988—Subsec. (g).
1986—
Subsec. (d).
"(1) any amount paid for supplies which are on hand at the close of the taxable year on account of fire, storm, flood, or other casualty or on account of disease or drought, or
"(2) any amount required to be charged to capital account under section 278."
Subsec. (f).
1982—Subsec. (c)(1)(A), (B).
1978—Subsec. (c)(2).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Effective Date of 1997 Amendment
Amendment by
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)(8) of
Amendment by section 803(b)(8) of
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date
"(A)
"(B)
§465. Deductions limited to amount at risk
(a) Limitation to amount at risk
(1) In general
In the case of—
(A) an individual, and
(B) a C corporation with respect to which the stock ownership requirement of paragraph (2) of section 542(a) is met,
engaged in an activity to which this section applies, any loss from such activity for the taxable year shall be allowed only to the extent of the aggregate amount with respect to which the taxpayer is at risk (within the meaning of subsection (b)) for such activity at the close of the taxable year.
(2) Deduction in succeeding year
Any loss from an activity to which this section applies not allowed under this section for the taxable year shall be treated as a deduction allocable to such activity in the first succeeding taxable year.
(3) Special rules for applying paragraph (1)(B)
For purposes of paragraph (1)(B)—
(A) section 544(a)(2) shall be applied as if such section did not contain the phrase "or by or for his partner"; and
(B) sections 544(a)(4)(A) and 544(b)(1) shall be applied by substituting "the corporation meet the stock ownership requirements of section 542(a)(2)" for "the corporation a personal holding company".
(b) Amounts considered at risk
(1) In general
For purposes of this section, a taxpayer shall be considered at risk for an activity with respect to amounts including—
(A) the amount of money and the adjusted basis of other property contributed by the taxpayer to the activity, and
(B) amounts borrowed with respect to such activity (as determined under paragraph (2)).
(2) Borrowed amounts
For purposes of this section, a taxpayer shall be considered at risk with respect to amounts borrowed for use in an activity to the extent that he—
(A) is personally liable for the repayment of such amounts, or
(B) has pledged property, other than property used in such activity, as security for such borrowed amount (to the extent of the net fair market value of the taxpayer's interest in such property).
No property shall be taken into account as security if such property is directly or indirectly financed by indebtedness which is secured by property described in paragraph (1).
(3) Certain borrowed amounts excluded
(A) In general
Except to the extent provided in regulations, for purposes of paragraph (1)(B), amounts borrowed shall not be considered to be at risk with respect to an activity if such amounts are borrowed from any person who has an interest in such activity or from a related person to a person (other than the taxpayer) having such an interest.
(B) Exceptions
(i) Interest as creditor
Subparagraph (A) shall not apply to an interest as a creditor in the activity.
(ii) Interest as shareholder with respect to amounts borrowed by corporation
In the case of amounts borrowed by a corporation from a shareholder, subparagraph (A) shall not apply to an interest as a shareholder.
(C) Related person
For purposes of this subsection, a person (hereinafter in this paragraph referred to as the "related person") is related to any person if—
(i) the related person bears a relationship to such person specified in section 267(b) or section 707(b)(1), or
(ii) the related person and such person are engaged in trades or business under common control (within the meaning of subsections (a) and (b) of section 52).
For purposes of clause (i), in applying section 267(b) or 707(b)(1), "10 percent" shall be substituted for "50 percent".
(4) Exception
Notwithstanding any other provision of this section, a taxpayer shall not be considered at risk with respect to amounts protected against loss through nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements.
(5) Amounts at risk in subsequent years
If in any taxable year the taxpayer has a loss from an activity to which subsection (a) applies, the amount with respect to which a taxpayer is considered to be at risk (within the meaning of subsection (b)) in subsequent taxable years with respect to that activity shall be reduced by that portion of the loss which (after the application of subsection (a)) is allowable as a deduction.
(6) Qualified nonrecourse financing treated as amount at risk
For purposes of this section—
(A) In general
Notwithstanding any other provision of this subsection, in the case of an activity of holding real property, a taxpayer shall be considered at risk with respect to the taxpayer's share of any qualified nonrecourse financing which is secured by real property used in such activity.
(B) Qualified nonrecourse financing
For purposes of this paragraph, the term "qualified nonrecourse financing" means any financing—
(i) which is borrowed by the taxpayer with respect to the activity of holding real property,
(ii) which is borrowed by the taxpayer from a qualified person or represents a loan from any Federal, State, or local government or instrumentality thereof, or is guaranteed by any Federal, State, or local government,
(iii) except to the extent provided in regulations, with respect to which no person is personally liable for repayment, and
(iv) which is not convertible debt.
(C) Special rule for partnerships
In the case of a partnership, a partner's share of any qualified nonrecourse financing of such partnership shall be determined on the basis of the partner's share of liabilities of such partnership incurred in connection with such financing (within the meaning of section 752).
(D) Qualified person defined
For purposes of this paragraph—
(i) In general
The term "qualified person" has the meaning given such term by section 49(a)(1)(D)(iv).
(ii) Certain commercially reasonable financing from related persons
For purposes of clause (i), section 49(a)(1)(D)(iv) shall be applied without regard to subclause (I) thereof (relating to financing from related persons) if the financing from the related person is commercially reasonable and on substantially the same terms as loans involving unrelated persons.
(E) Activity of holding real property
For purposes of this paragraph—
(i) Incidental personal property and services
The activity of holding real property includes the holding of personal property and the providing of services which are incidental to making real property available as living accommodations.
(ii) Mineral property
The activity of holding real property shall not include the holding of mineral property.
(c) Activities to which section applies
(1) Types of activities
This section applies to any taxpayer engaged in the activity of—
(A) holding, producing, or distributing motion picture films or video tapes,
(B) farming (as defined in section 464(e)),
(C) leasing any section 1245 property (as defined in section 1245(a)(3)),
(D) exploring for, or exploiting, oil and gas resources, or
(E) exploring for, or exploiting, geothermal deposits (as defined in section 613(e)(2)) 1
as a trade or business or for the production of income.
(2) Separate activities
For purposes of this section—
(A) In general
Except as provided in subparagraph (B), a taxpayer's activity with respect to each—
(i) film or video tape,
(ii) section 1245 property which is leased or held for leasing,
(iii) farm,
(iv) oil and gas property (as defined under section 614), or
(v) geothermal property (as defined under section 614),
shall be treated as a separate activity.
(B) Aggregation rules
(i) Special rule for leases of section 1245 property by partnerships or S corporations
In the case of any partnership or S corporation, all activities with respect to section 1245 properties which—
(I) are leased or held for lease, and
(II) are placed in service in any taxable year of the partnership or S corporation,
shall be treated as a single activity.
(ii) Other aggregation rules
Rules similar to the rules of subparagraphs (B) and (C) of paragraph (3) shall apply for purposes of this paragraph.
(3) Extension to other activities
(A) In general
This section also applies to each activity—
(i) engaged in by the taxpayer in carrying on a trade or business or for the production of income, and
(ii) which is not described in paragraph (1).
(B) Aggregation of activities where taxpayer actively participates in management of trade or business
Except as provided in subparagraph (C), for purposes of this section, activities described in subparagraph (A) which constitute a trade or business shall be treated as one activity if—
(i) the taxpayer actively participates in the management of such trade or business, or
(ii) such trade or business is carried on by a partnership or an S corporation and 65 percent or more of the losses for the taxable year is allocable to persons who actively participate in the management of the trade or business.
(C) Aggregation or separation of activities under regulations
The Secretary shall prescribe regulations under which activities described in subparagraph (A) shall be aggregated or treated as separate activities.
(D) Application of subsection (b)(3)
In the case of an activity described in subparagraph (A), subsection (b)(3) shall apply only to the extent provided in regulations prescribed by the Secretary.
(4) Exclusion for certain equipment leasing by closely-held corporations
(A) In general
In the case of a corporation described in subsection (a)(1)(B) actively engaged in equipment leasing—
(i) the activity of equipment leasing shall be treated as a separate activity, and
(ii) subsection (a) shall not apply to losses from such activity.
(B) 50-percent gross receipts test
For purposes of subparagraph (A), a corporation shall not be considered to be actively engaged in equipment leasing unless 50 percent or more of the gross receipts of the corporation for the taxable year is attributable, under regulations prescribed by the Secretary, to equipment leasing.
(C) Component members of controlled group treated as a single corporation
For purposes of subparagraph (A), the component members of a controlled group of corporations shall be treated as a single corporation.
(5) Waiver of controlled group rule where there is substantial leasing activity
(A) In general
In the case of the component members of a qualified leasing group, paragraph (4) shall be applied—
(i) by substituting "80 percent" for "50 percent" in subparagraph (B) thereof, and
(ii) as if paragraph (4) did not include subparagraph (C) thereof.
(B) Qualified leasing group
For purposes of this paragraph, the term "qualified leasing group" means a controlled group of corporations which, for the taxable year and each of the 2 immediately preceding taxable years, satisfied each of the following 3 requirements:
(i) At least 3 employees
During the entire year, the group had at least 3 full-time employees substantially all of the services of whom were services directly related to the equipment leasing activity of the qualified leasing members.
(ii) At least 5 separate leasing transactions
During the year, the qualified leasing members in the aggregate entered into at least 5 separate equipment leasing transactions.
(iii) At least $1,000,000 equipment leasing receipts
During the year, the qualified leasing members in the aggregate had at least $1,000,000 in gross receipts from equipment leasing.
The term "qualified leasing group" does not include any controlled group of corporations to which, without regard to this paragraph, paragraph (4) applies.
(C) Qualified leasing member
For purposes of this paragraph, a corporation shall be treated as a qualified leasing member for the taxable year only if for each of the taxable years referred to in subparagraph (B)—
(i) it is a component member of the controlled group of corporations, and
(ii) it meets the requirements of paragraph (4)(B) (as modified by subparagraph (A)(i) of this paragraph).
(6) Definitions relating to paragraphs (4) and (5)
For purposes of paragraphs (4) and (5)—
(A) Equipment leasing
The term "equipment leasing" means—
(i) the leasing of equipment which is section 1245 property, and
(ii) the purchasing, servicing, and selling of such equipment.
(B) Leasing of master sound recordings, etc., excluded
The term "equipment leasing" does not include the leasing of master sound recordings, and other similar contractual arrangements with respect to tangible or intangible assets associated with literary, artistic, or musical properties.
(C) Controlled group of corporations; component member
The terms "controlled group of corporations" and "component member" have the same meanings as when used in section 1563. The determination of the taxable years taken into account with respect to any controlled group of corporations shall be made in a manner consistent with the manner set forth in section 1563.
(7) Exclusion of active businesses of qualified C corporations
(A) In general
In the case of a taxpayer which is a qualified C corporation—
(i) each qualifying business carried on by such taxpayer shall be treated as a separate activity, and
(ii) subsection (a) shall not apply to losses from such business.
(B) Qualified C corporation
For purposes of subparagraph (A), the term "qualified C corporation" means any corporation described in subparagraph (B) of subsection (a)(1) which is not—
(i) a personal holding company (as defined in section 542(a)), or
(ii) a personal service corporation (as defined in section 269A(b) but determined by substituting "5 percent" for "10 percent" in section 269A(b)(2)).
(C) Qualifying business
For purposes of this paragraph, the term "qualifying business" means any active business if—
(i) during the entire 12-month period ending on the last day of the taxable year, such corporation had at least 1 full-time employee substantially all the services of whom were in the active management of such business,
(ii) during the entire 12-month period ending on the last day of the taxable year, such corporation had at least 3 full-time, nonowner employees substantially all of the services of whom were services directly related to such business,
(iii) the amount of the deductions attributable to such business which are allowable to the taxpayer solely by reason of sections 162 and 404 for the taxable year exceeds 15 percent of the gross income from such business for such year, and
(iv) such business is not an excluded business.
(D) Special rules for application of subparagraph (C)
(i) Partnerships in which taxpayer is a qualified corporate partner
In the case of an active business of a partnership, if—
(I) the taxpayer is a qualified corporate partner in the partnership, and
(II) during the entire 12-month period ending on the last day of the partnership's taxable year, there was at least 1 full-time employee of the partnership (or of a qualified corporate partner) substantially all the services of whom were in the active management of such business,
then the taxpayer's proportionate share (determined on the basis of its profits interest) of the activities of the partnership in such business shall be treated as activities of the taxpayer (and clause (i) of subparagraph (C) shall not apply in determining whether such business is a qualifying business of the taxpayer).
(ii) Qualified corporate partner
For purposes of clause (i), the term "qualified corporate partner" means any corporation if—
(I) such corporation is a general partner in the partnership,
(II) such corporation has an interest of 10 percent or more in the profits and losses of the partnership, and
(III) such corporation has contributed property to the partnership in an amount not less than the lesser of $500,000 or 10 percent of the net worth of the corporation.
For purposes of subclause (III), any contribution of property other than money shall be taken into account at its fair market value.
(iii) Deduction for owner employee compensation not taken into account
For purposes of clause (iii) of subparagraph (C), there shall not be taken into account any deduction in respect of compensation for personal services rendered by any employee (other than a non-owner employee) of the taxpayer or any member of such employee's family (within the meaning of section 318(a)(1)).
(iv) Special rule for banks
For purposes of clause (iii) of subparagraph (C), in the case of a bank (as defined in section 581) or a financial institution to which section 591 applies—
(I) gross income shall be determined without regard to the exclusion of interest from gross income under section 103, and
(II) in addition to the deductions described in such clause, there shall also be taken into account the amount of the deductions which are allowable for amounts paid or credited to the accounts of depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts under section 163 or 591.
(v) Special rule for life insurance companies
(I) In general
Clause (iii) of subparagraph (C) shall not apply to any insurance business of a qualified life insurance company.
(II) Insurance business
For purposes of subclause (I), the term "insurance business" means any business which is not a noninsurance business (within the meaning of section 453B(e)(3)).
(III) Qualified life insurance company
For purposes of subclause (I), the term "qualified life insurance company" means any company which would be a life insurance company as defined in section 816 if unearned premiums were not taken into account under subsections (a)(2) and (c)(2) of section 816.
(E) Definitions
For purposes of this paragraph—
(i) Non-owner employee
The term "non-owner employee" means any employee who does not own, at any time during the taxable year, more than 5 percent in value of the outstanding stock of the taxpayer. 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).
(ii) Excluded business
The term "excluded business" means—
(I) equipment leasing (as defined in paragraph (6)), and
(II) any business involving the use, exploitation, sale, lease, or other disposition of master sound recordings, motion picture films, video tapes, or tangible or intangible assets associated with literary, artistic, musical, or similar properties.
(iii) Special rules relating to communications industry, etc.
(I) Business not excluded where taxpayer not completely at risk
A business involving the use, exploitation, sale, lease, or other disposition of property described in subclause (II) of clause (ii) shall not constitute an excluded business by reason of such subclause if the taxpayer is at risk with respect to all amounts paid or incurred (or chargeable to capital account) in such business.
(II) Certain licensed businesses not excluded
For purposes of subclause (II) of clause (ii), the provision of radio, television, cable television, or similar services pursuant to a license or franchise granted by the Federal Communications Commission or any other Federal, State, or local authority shall not constitute an excluded business by reason of such subclause.
(F) Affiliated group treated as 1 taxpayer
For purposes of this paragraph—
(i) In general
Except as provided in subparagraph (G), the component members of an affiliated group of corporations shall be treated as a single taxpayer.
(ii) Affiliated group of corporations
The term "affiliated group of corporations" means an affiliated group (as defined in section 1504(a)) which files or is required to file consolidated income tax returns.
(iii) Component member
The term "component member" means an includible corporation (as defined in section 1504) which is a member of the affiliated group.
(G) Loss of 1 member of affiliated group may not offset income of personal holding company or personal service corporation
Nothing in this paragraph shall permit any loss of a member of an affiliated group to be used as an offset against the income of any other member of such group which is a personal holding company (as defined in section 542(a)) or a personal service corporation (as defined in section 269A(b) but determined by substituting "5 percent" for "10 percent" in section 269A(b)(2)).
(d) Definition of loss
For purposes of this section, the term "loss" means the excess of the deductions allowable under this chapter for the taxable year (determined without regard to the first sentence of subsection (a)) and allocable to an activity to which this section applies over the income received or accrued by the taxpayer during the taxable year from such activity (determined without regard to subsection (e)(1)(A)).
(e) Recapture of losses where amount at risk is less than zero
(1) In general
If zero exceeds the amount for which the taxpayer is at risk in any activity at the close of any taxable year—
(A) the taxpayer shall include in his gross income for such taxable year (as income from such activity) an amount equal to such excess, and
(B) an amount equal to the amount so included in gross income shall be treated as a deduction allocable to such activity for the first succeeding taxable year.
(2) Limitation
The excess referred to in paragraph (1) shall not exceed—
(A) the aggregate amount of the reductions required by subsection (b)(5) with respect to the activity by reason of losses for all prior taxable years beginning after December 31, 1978, reduced by
(B) the amounts previously included in gross income with respect to such activity under this subsection.
(Added
Editorial Notes
Amendments
2017—Subsec. (c)(7)(D)(v)(II).
2014—Subsec. (c)(3)(A).
2004—Subsec. (c)(7)(B).
1990—Subsec. (b)(6)(D).
Subsec. (c)(1)(E).
1986—Subsec. (b)(3)(C).
Subsec. (b)(6).
Subsec. (c)(3)(D), (E).
Subsec. (c)(7)(D)(v)(II).
1984—Subsec. (a)(1)(B).
Subsec. (b)(3).
Subsec. (c)(2).
Subsec. (c)(7).
1982—Subsec. (a)(1).
Subsec. (a)(3).
Subsec. (c)(2).
Subsec. (c)(3)(B)(ii).
Subsec. (c)(4)(A).
1980—Subsec. (a)(1)(C), (3).
Subsec. (b)(5).
Subsec. (c)(3)(D).
Subsec. (c)(4) to (6).
Subsec. (d).
Subsec. (e)(2)(A).
1978—
Subsec. (a).
Subsec. (c)(1)(E).
Subsec. (c)(2)(E).
Subsec. (c)(3).
Subsec. (d).
Subsec. (e).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1990 Amendment
Amendment by section 11813(b)(15) of
Effective Date of 1986 Amendment
Amendment by section 201(d)(7)(A) of
Amendment by section 201(d)(7)(A) of
"(1)
"(2)
"(3)
Amendment by section 1011(b)(1) of
Effective Date of 1984 Amendment
Amendment by section 721(x)(2) of
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date and Transitional Rules
"(1)
"(2)
"(A)
"(i) deductions for depreciation or amortization with respect to property the principal production of which began before September 11, 1975, and for the purchase of which there was on September 11, 1975, and at all times thereafter a binding contract, and
"(ii) deductions attributable to producing or distributing property the principal production of which began before September 11, 1975.
"(B)
"(i) on September 10, 1975, there was an agreement with the director or a principal motion picture star, or on or before September 10, 1975, there had been expended (or committed to the production) an amount not less than the lower of $100,000 or 10 percent of the estimated costs of producing the film, and
"(ii) the production takes place in the United States.
Subparagraph (A) shall apply only to taxpayers who held their interests on September 10, 1975. Subparagraph (B) shall apply only to taxpayers who held their interests on December 31, 1975.
"(3)
"(A)
"(i) leases entered into before January 1, 1976, and
"(ii) leases where the property was ordered by the lessor or lessee before January 1, 1976.
"(B)
"(C)
"(i) subparagraph (A) shall be applied by substituting 'May 1, 1976' for 'January 1, 1976' each place it appears therein, and
"(ii) subparagraph (B) shall be applied by substituting 'April 30, 1976' for 'December 31, 1975'."
Savings Provision
For provisions that nothing in amendment by
Transitional Rules for Recapture Provisions and Leasing Activities
"(1)
"(2)
"(A)
"(i) leases entered into before November 1, 1978, and
"(ii) leases where the property was ordered by the lessor or lessee before November 1, 1978.
"(B)
1 So in original. Probably should be followed by a comma.
[§466. Repealed. Pub. L. 99–514, title VIII, §823(a), Oct. 22, 1986, 100 Stat. 2373 ]
Section, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
"(1)
"(2)
"(A) such change shall be treated as initiated by the taxpayer,
"(B) such change shall be treated as having been made with the consent of the Secretary, and
"(C) the net amount of adjustments required by section 481 of the Internal Revenue Code of 1986 to be taken into account by the taxpayer shall—
"(i) be reduced by the balance in the suspense account under section 466(e) of such Code as of the close of such last taxable year, and
"(ii) be taken into account over a period not longer than 4 years."
§467. Certain payments for the use of property or services
(a) Accrual method on present value basis
In the case of the lessor or lessee under any section 467 rental agreement, there shall be taken into account for purposes of this title for any taxable year the sum of—
(1) the amount of the rent which accrues during such taxable year as determined under subsection (b), and
(2) interest for the year on the amounts which were taken into account under this subsection for prior taxable years and which are unpaid.
(b) Accrual of rental payments
(1) Allocation follows agreement
Except as provided in paragraph (2), the determination of the amount of the rent under any section 467 rental agreement which accrues during any taxable year shall be made—
(A) by allocating rents in accordance with the agreement, and
(B) by taking into account any rent to be paid after the close of the period in an amount determined under regulations which shall be based on present value concepts.
(2) Constant rental accrual in case of certain tax avoidance transactions, etc.
In the case of any section 467 rental agreement to which this paragraph applies, the portion of the rent which accrues during any taxable year shall be that portion of the constant rental amount with respect to such agreement which is allocable to such taxable year.
(3) Agreements to which paragraph (2) applies
Paragraph (2) applies to any rental payment agreement if—
(A) such agreement is a disqualified leaseback or long-term agreement, or
(B) such agreement does not provide for the allocation referred to in paragraph (1)(A).
(4) Disqualified leaseback or long-term agreement
For purposes of this subsection, the term "disqualified leaseback or long-term agreement" means any section 467 rental agreement if—
(A) such agreement is part of a leaseback transaction or such agreement is for a term in excess of 75 percent of the statutory recovery period for the property, and
(B) a principal purpose for providing increasing rents under the agreement is the avoidance of tax imposed by this subtitle.
(5) Exceptions to disqualification in certain cases
The Secretary shall prescribe regulations setting forth circumstances under which agreements will not be treated as disqualified leaseback or long-term agreements, including circumstances relating to—
(A) changes in amounts paid determined by reference to price indices,
(B) rents based on a fixed percentage of lessee receipts or similar amounts,
(C) reasonable rent holidays, or
(D) changes in amounts paid to unrelated 3rd parties.
(c) Recapture of prior understated inclusions under leaseback or long-term agreements
(1) In general
If—
(A) the lessor under any section 467 rental agreement disposes of any property subject to such agreement during the term of such agreement, and
(B) such agreement is a leaseback or long-term agreement to which paragraph (2) of subsection (b) did not apply,
the recapture amount shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Recapture amount
For purposes of paragraph (1), the term "recapture amount" means the lesser of—
(A) the prior understated inclusions, or
(B) the excess of the amount realized (or in the case of a disposition other than a sale, exchange, or involuntary conversion, the fair market value of the property) over the adjusted basis of such property.
The amount determined under subparagraph (B) shall be reduced by the amount of any gain treated as ordinary income on the disposition under any other provision of this subtitle.
(3) Prior understated inclusions
For purposes of this subsection, the term "prior understated inclusion" means the excess (if any) of—
(A) the amount which would have been taken into account by the lessor under subsection (a) for periods before the disposition if subsection (b)(2) had applied to the agreement, over
(B) the amount taken into account under subsection (a) by the lessor for periods before the disposition.
(4) Leaseback or long-term agreement
For purposes of this subsection, the term "leaseback or long-term agreement" means any agreement described in subsection (b)(4)(A).
(5) Special rules
Under regulations prescribed by the Secretary—
(A) exceptions similar to the exceptions applicable under section 1245 or 1250 (whichever is appropriate) shall apply for purposes of this subsection,
(B) any transferee in a disposition excepted by reason of subparagraph (A) who has a transferred basis in the property shall be treated in the same manner as the transferor, and
(C) for purposes of sections 170(e) and 751(c), amounts treated as ordinary income under this section shall be treated in the same manner as amounts treated as ordinary income under section 1245 or 1250.
(d) Section 467 rental agreements
(1) In general
Except as otherwise provided in this subsection, the term "section 467 rental agreements" means any rental agreement for the use of tangible property under which—
(A) there is at least one amount allocable to the use of property during a calendar year which is to be paid after the close of the calendar year following the calendar year in which such use occurs, or
(B) there are increases in the amount to be paid as rent under the agreement.
(2) Section not to apply to agreements involving payments of $250,000 or less
This section shall not apply to any amount to be paid for the use of property if the sum of the following amounts does not exceed $250,000—
(A) the aggregate amount of payments received as consideration for such use of property, and
(B) the aggregate value of any other consideration to be received for such use of property.
For purposes of the preceding sentence, rules similar to the rules of clauses (ii) and (iii) of section 1274(c)(4)(C) shall apply.
(e) Definitions
For purposes of this section—
(1) Constant rental amount
The term "constant rental amount" means, with respect to any section 467 rental agreement, the amount which, if paid as of the close of each lease period under the agreement, would result in an aggregate present value equal to the present value of the aggregate payments required under the agreement.
(2) Leaseback transaction
A transaction is a leaseback transaction if it involves a leaseback to any person who had an interest in such property at any time within 2 years before such leaseback (or to a related person).
(3) Statutory recovery period
(A) In general
| In the case of: | The statutory recovery period is: |
|---|---|
| 3-year property | 3 years |
| 5-year property | 5 years |
| 7-year property | 7 years |
| 10-year property | 10 years |
| 15-year and 20-year property | 15 years |
| Residential rental property and nonresidential real property | 19 years |
| Any railroad grading or tunnel bore | 50 years. |
(B) Special rule for property not depreciable under section 168
In the case of property to which section 168 does not apply, subparagraph (A) shall be applied as if section 168 applies to such property.
(4) Discount and interest rate
For purposes of computing present value and interest under subsection (a)(2), the rate used shall be equal to 110 percent of the applicable Federal rate determined under section 1274(d) (compounded semiannually) which is in effect at the time the agreement is entered into with respect to debt instruments having a maturity equal to the term of the agreement.
(5) Related person
The term "related person" has the meaning given to such term by section 465(b)(3)(C).
(6) Certain options of lessee to renew not taken into account
Except as provided in regulations prescribed by the Secretary, there shall not be taken into account in computing the term of any agreement for purposes of this section any extension which is solely at the option of the lessee.
(f) Comparable rules where agreement for decreasing payments
Under regulations prescribed by the Secretary, rules comparable to the rules of this section shall also apply in the case of any agreement where the amount paid under the agreement for the use of property decreases during the term of the agreement.
(g) Comparable rules for services
Under regulations prescribed by the Secretary, rules comparable to the rules of subsection (a)(2) shall also apply in the case of payments for services which meet requirements comparable to the requirements of subsection (d). The preceding sentence shall not apply to any amount to which section 404 or 404A (or any other provision specified in regulations) applies.
(h) Regulations
The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations providing for the application of this section in the case of contingent payments.
(Added
Editorial Notes
Amendments
2003—Subsec. (c)(5)(C).
1988—Subsec. (c)(5)(C).
Subsec. (e)(3)(A).
1986—Subsec. (b)(4)(A).
Subsec. (c)(4).
Subsec. (c)(5)(C).
Subsec. (d)(2).
Subsec. (e)(3)(A).
Subsec. (e)(3)(B).
Subsec. (e)(5).
Subsec. (g).
Statutory Notes and Related Subsidiaries
Effective Date of 2003 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 201(d)(8) of
Amendment by section 201(d)(8) of
Amendment by section 511(d)(2)(A) of
Amendment by section 631(e)(10) of
Amendment by section 1807(b) of
Effective Date
"(1)
"(2)
"(A) to any agreement entered into pursuant to a written agreement which was binding on June 8, 1984, and at all times thereafter,
"(B) subject to the provisions of paragraph (3), to any agreement to lease property if—
"(i) there was in effect a firm plan, evidenced by a board of directors' resolution, memorandum of agreement, or letter of intent on March 15, 1984, to enter into such an agreement, and
"(ii) construction of the property was commenced (but such property was not placed in service) on or before March 15, 1984, and
"(C) to any agreement to lease property if—
"(i) the lessee of such property adopted a firm plan to lease the property, evidenced by a resolution of the Finance Committee of the Board of Directors of such lessee, on February 10, 1984,
"(ii) the sum of the present values of the rents payable by the lessee under the lease at the inception thereof equals at least $91,223,034, assuming for purposes of this clause—
"(I) the annual discount rate is 12.6 percent,
"(II) the initial payment of rent occurs 12 months after the commencement of the lease, and
"(III) subsequent payments of rents occur on the anniversary date of the initial payment, and
"(iii) during—
"(I) the first 5 years of the lease, at least 9 percent of the rents payable by the lessee under the agreement are paid, and
"(II) the second 5 years of the lease, at least 16.25 percent of the rents payable by the lessee under the agreement are paid.
Paragraph (3)(B)(ii)(II) shall apply for purposes of clauses (ii) and (iii) of subparagraph (C), as if, as of the beginning of the last stage, the separate agreements were treated as 1 single agreement relating to all property covered by the agreements, including any property placed in service before the property to which the agreement for the last stage relates. If the lessor under the agreement described in subparagraph (C) leases the property from another person, this exception shall also apply to any agreement between the lessor and such person which is integrally related to, and entered into at the same time as, such agreement, and which calls for comparable payments of rent over the primary term of the agreement.
"(3)
"(A)
"(i) the amount of rents actually paid under the agreement during the taxable year, or
"(ii) the amount of rents determined in accordance with the schedule under subparagraph (B) for such taxable year.
"(B)
"(i)
| "Portion of lease term: | Cumulative percentage of total rent deemed paid: |
|---|---|
| 1st 1/5 | 10 |
| 2nd 1/5 | 25 |
| 3rd 1/5 | 45 |
| 4th 1/5 | 70 |
| Last 1/5 | 100. |
"(ii)
"(I) the rent allocable to each taxable year within any portion of a lease term described in such schedule shall be a level pro rata amount properly allocable to such taxable year, and
"(II) any agreement relating to property which is to be placed in service in 2 or more stages shall be treated as 2 or more separate agreements.
"(C)
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
§468. Special rules for mining and solid waste reclamation and closing costs
(a) Establishment of reserves for reclamation and closing costs
(1) Allowance of deduction
If a taxpayer elects the application of this section with respect to any mining or solid waste disposal property, the amount of any deduction for qualified reclamation or closing costs for any taxable year to which such election applies shall be equal to the current reclamation or closing costs allocable to—
(A) in the case of qualified reclamation costs, the portion of the reserve property which was disturbed during such taxable year, and
(B) in the case of qualified closing costs, the production from the reserve property during such taxable year.
(2) Opening balance and adjustments to reserve
(A) Opening balance
The opening balance of any reserve for its first taxable year shall be zero.
(B) Increase for interest
A reserve shall be increased each taxable year by an amount equal to the amount of interest which would have been earned during such taxable year on the opening balance of such reserve for such taxable year if such interest were computed—
(i) at the Federal short-term rate or rates (determined under section 1274) in effect, and
(ii) by compounding semiannually.
(C) Reserve to be charged for amounts paid
Any amount paid by the taxpayer during any taxable year for qualified reclamation or closing costs allocable to portions of the reserve property for which the election under paragraph (1) was in effect shall be charged to the appropriate reserve as of the close of the taxable year.
(D) Reserve increased by amount deducted
A reserve shall be increased each taxable year by the amount allowable as a deduction under paragraph (1) for such taxable year which is allocable to such reserve.
(3) Allowance of deduction for excess amounts paid
There shall be allowed as a deduction for any taxable year the excess of—
(A) the amounts described in paragraph (2)(C) paid during such taxable year, over
(B) the closing balance of the reserve for such taxable year (determined without regard to paragraph (2)(C)).
(4) Limitation on balance as of the close of any taxable year
(A) Reclamation reserves
In the case of any reserve for qualified reclamation costs, there shall be included in gross income for any taxable year an amount equal to the excess of—
(i) the closing balance of the reserve for such taxable year, over
(ii) the current reclamation costs of the taxpayer for all portions of the reserve property disturbed during any taxable year to which the election under paragraph (1) applies.
(B) Closing costs reserves
In the case of any reserve for qualified closing costs, there shall be included in gross income for any taxable year an amount equal to the excess of—
(i) the closing balance of the reserve for such taxable year, over
(ii) the current closing cost of the taxpayer with respect to the reserve property, determined as if all production with respect to the reserve property for any taxable year to which the election under paragraph (1) applies had occurred in such taxable year.
(C) Order of application
This paragraph shall be applied after all adjustments to the reserve have been made for the taxable year.
(5) Income inclusions on completion or disposition
Proper inclusion in income shall be made upon—
(A) the revocation of an election under paragraph (1), or
(B) completion of the closing, or disposition of any portion, of a reserve property.
(b) Allocation for property where election not in effect for all taxable years
If the election under subsection (a)(1) is not in effect for 1 or more taxable years in which the reserved property is disturbed (or production occurs), items with respect to the reserve property shall be allocated to the reserve in such manner as the Secretary may prescribe by regulations.
(c) Revocation of election; separate reserves
(1) Revocation of election
(A) In general
The taxpayer may revoke an election under subsection (a)(1) with respect to any property. Such revocation, once made, shall be irrevocable.
(B) Time and manner of revocation
Any revocation under subparagraph (A) shall be made at such time and in such manner as the Secretary may prescribe.
(2) Separate reserves required
If a taxpayer makes an election under subsection (a)(1), the taxpayer shall establish with respect to the property for which the election was made—
(A) a separate reserve for qualified reclamation costs, and
(B) a separate reserve for qualified closing costs.
(d) Definitions and special rules relating to reclamation and closing costs
For purposes of this section—
(1) Current reclamation and closing costs
(A) Current reclamation costs
The term "current reclamation costs" means the amount which the taxpayer would be required to pay for qualified reclamation costs if the reclamation activities were performed currently.
(B) Current closing costs
(i) In general
The term "current closing costs" means the amount which the taxpayer would be required to pay for qualified closing costs if the closing activities were performed currently.
(ii) Costs computed on unit-of-production or capacity method
Estimated closing costs shall—
(I) in the case of the closing of any mine site, be computed on the unit-of-production method of accounting, and
(II) in the case of the closing of any solid waste disposal site, be computed on the unit-of-capacity method.
(2) Qualified reclamation or closing costs
The term "qualified reclamation or closing costs" means any of the following expenses:
(A) Mining reclamation and closing costs
Any expenses incurred for any land reclamation or closing activity which is conducted in accordance with a reclamation plan (including an amendment or modification thereof)—
(i) which—
(I) is submitted pursuant to the provisions of section 511 or 528 of the Surface Mining Control and Reclamation Act of 1977 (as in effect on January 1, 1984), and
(II) is part of a surface mining and reclamation permit granted under the provisions of title V of such Act (as so in effect), or
(ii) which is submitted pursuant to any other Federal or State law which imposes surface mining reclamation and permit requirements substantially similar to the requirements imposed by title V of such Act (as so in effect).
(B) Solid waste disposal and closing costs
(i) In general
Any expenses incurred for any land reclamation or closing activity in connection with any solid waste disposal site which is conducted in accordance with any permit issued pursuant to—
(I) any provision of the Solid Waste Disposal Act (as in effect on January 1, 1984) requiring such activity, or
(II) any other Federal, State, or local law which imposes requirements substantially similar to the requirements imposed by the Solid Waste Disposal Act (as so in effect).
(ii) Exception for certain hazardous waste sites
Clause (i) shall not apply to that portion of any property which is disturbed after the property is listed in the national contingency plan established under section 105 of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980.
(3) Property
The term "property" has the meaning given such term by section 614.
(4) Reserve property
The term "reserve property" means any property with respect to which a reserve is established under subsection (a)(1).
(Added
Editorial Notes
References in Text
The Surface Mining Control and Reclamation Act of 1977, referred to in subsec. (d)(2)(A), is
The Solid Waste Disposal Act, referred to in subsec. (d)(2)(B)(i), is title II of
Section 105 of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, referred to in subsec. (d)(2)(B)(ii), is classified to
Amendments
1990—Subsec. (a)(2)(B).
1986—Subsec. (a)(1).
Subsec. (a)(2)(D).
Subsec. (d)(2)(B)(ii).
Statutory Notes and Related Subsidiaries
Effective Date of 1986 Amendment
Amendment by section 1807(a)(3)(A), (C) of
Effective Date
Section effective July 18, 1984, with respect to taxable years ending after such date, except as otherwise provided, see section 91(g)(4) 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
§468A. Special rules for nuclear decommissioning costs
(a) In general
If the taxpayer elects the application of this section, there shall be allowed as a deduction for any taxable year the amount of payments made by the taxpayer to a Nuclear Decommissioning Reserve Fund (hereinafter referred to as the "Fund") during such taxable year.
(b) Limitation on amounts paid into Fund
The amount which a taxpayer may pay into the Fund for any taxable year shall not exceed the ruling amount applicable to such taxable year.
(c) Income and deductions of the taxpayer
(1) Inclusion of amounts distributed
There shall be includible in the gross income of the taxpayer for any taxable year—
(A) any amount distributed from the Fund during such taxable year, other than any amount distributed to pay costs described in subsection (e)(4)(B), and
(B) except to the extent provided in regulations, amounts properly includible in gross income in the case of any deemed distribution under subsection (e)(6), any termination under subsection (e)(7), or the disposition of any interest in the nuclear powerplant.
(2) Deduction when economic performance occurs
In addition to any deduction under subsection (a), there shall be allowable as a deduction for any taxable year the amount of the nuclear decommissioning costs with respect to which economic performance (within the meaning of section 461(h)(2)) occurs during such taxable year.
(d) Ruling amount
For purposes of this section—
(1) Request required
No deduction shall be allowed for any payment to the Fund unless the taxpayer requests, and receives, from the Secretary a schedule of ruling amounts. For purposes of the preceding sentence, the taxpayer shall request a schedule of ruling amounts upon each renewal of the operating license of the nuclear powerplant.
(2) Ruling amount
The term "ruling amount" means, with respect to any taxable year, the amount which the Secretary determines under paragraph (1) to be necessary to—
(A) fund the total nuclear decommissioning costs with respect to such power plant over the estimated useful life of such power plant, and
(B) prevent any excessive funding of such costs or the funding of such costs at a rate more rapid than level funding, taking into account such discount rates as the Secretary deems appropriate.
(3) Review of amount
The Secretary shall at least once during the useful life of the nuclear powerplant (or, more frequently, upon the request of the taxpayer) review, and revise if necessary, the schedule of ruling amounts determined under paragraph (1).
(e) Nuclear Decommissioning Reserve Fund
(1) In general
Each taxpayer who elects the application of this section shall establish a Nuclear Decommissioning Reserve Fund with respect to each nuclear powerplant to which such election applies.
(2) Taxation of Fund
(A) In general
There is hereby imposed on the gross income of the Fund for any taxable year a tax at the rate of 20 percent, except that—
(i) there shall not be included in the gross income of the Fund any payment to the Fund with respect to which a deduction is allowable under subsection (a), and
(ii) there shall be allowed as a deduction to the Fund any amount paid by the Fund which is described in paragraph (4)(B) (other than an amount paid to the taxpayer) and which would be deductible under this chapter for purposes of determining the taxable income of a corporation.
(B) Tax in lieu of other taxation
The tax imposed by subparagraph (A) shall be in lieu of any other taxation under this subtitle of the income from assets in the Fund.
(C) Fund treated as corporation
For purposes of subtitle F—
(i) the Fund shall be treated as if it were a corporation, and
(ii) any tax imposed by this paragraph shall be treated as a tax imposed by section 11.
(3) Contributions to Fund
Except as provided in subsection (f), the Fund shall not accept any payments (or other amounts) other than payments with respect to which a deduction is allowable under subsection (a).
(4) Use of Fund
The Fund shall be used exclusively for—
(A) satisfying, in whole or in part, any liability of any person contributing to the Fund for the decommissioning of a nuclear powerplant (or unit thereof),
(B) to pay administrative costs (including taxes) and other incidental expenses of the Fund (including legal, accounting, actuarial, and trustee expenses) in connection with the operation of the Fund, and
(C) to the extent that a portion of the Fund is not currently needed for purposes described in subparagraph (A) or (B), making investments.
(5) Prohibitions against self-dealing
Under regulations prescribed by the Secretary, for purposes of section 4951 (and so much of this title as relates to such section), the Fund shall be treated in the same manner as a trust described in section 501(c)(21).
(6) Disqualification of Fund
In any case in which the Fund violates any provision of this section or section 4951, the Secretary may disqualify such Fund from the application of this section. In any case to which this paragraph applies, the Fund shall be treated as having distributed all of its funds on the date such determination takes effect.
(7) Termination upon completion
Upon substantial completion of the nuclear decommissioning of the nuclear powerplant with respect to which a Fund relates, the taxpayer shall terminate such Fund.
(f) Transfers into qualified funds
(1) In general
Notwithstanding subsection (b), any taxpayer maintaining a Fund to which this section applies with respect to a nuclear power plant may transfer into such Fund not more than an amount equal to the present value of the portion of the total nuclear decommissioning costs with respect to such nuclear power plant previously excluded for such nuclear power plant under subsection (d)(2)(A) as in effect immediately before the date of the enactment of this subsection.
(2) Deduction for amounts transferred
(A) In general
Except as provided in subparagraph (C), the deduction allowed by subsection (a) for any transfer permitted by this subsection shall be allowed ratably over the remaining estimated useful life (within the meaning of subsection (d)(2)(A)) of the nuclear power plant beginning with the taxable year during which the transfer is made.
(B) Denial of deduction for previously deducted amounts
No deduction shall be allowed for any transfer under this subsection of an amount for which a deduction was previously allowed to the taxpayer (or a predecessor) or a corresponding amount was not included in gross income of the taxpayer (or a predecessor). For purposes of the preceding sentence, a ratable portion of each transfer shall be treated as being from previously deducted or excluded amounts to the extent thereof.
(C) Transfers of qualified funds
If—
(i) any transfer permitted by this subsection is made to any Fund to which this section applies, and
(ii) such Fund is transferred thereafter,
any deduction under this subsection for taxable years ending after the date that such Fund is transferred shall be allowed to the transferor for the taxable year which includes such date.
(D) Special rules
(i) Gain or loss not recognized on transfers to Fund
No gain or loss shall be recognized on any transfer described in paragraph (1).
(ii) Transfers of appreciated property to Fund
If appreciated property is transferred in a transfer described in paragraph (1), the amount of the deduction shall not exceed the adjusted basis of such property.
(3) New ruling amount required
Paragraph (1) shall not apply to any transfer unless the taxpayer requests from the Secretary a new schedule of ruling amounts in connection with such transfer.
(4) No basis in qualified funds
Notwithstanding any other provision of law, the taxpayer's basis in any Fund to which this section applies shall not be increased by reason of any transfer permitted by this subsection.
(g) Nuclear powerplant
For purposes of this section, the term "nuclear powerplant" includes any unit thereof.
(h) Time when payments deemed made
For purposes of this section, a taxpayer shall be deemed to have made a payment to the Fund on the last day of a taxable year if such payment is made on account of such taxable year and is made within 2½ months after the close of such taxable year.
(Added
Editorial Notes
References in Text
The date of the enactment of this subsection, referred to in subsec. (f)(1), is the date of enactment of
Amendments
2005—Subsec. (b).
"(1) the amount of nuclear decommissioning costs allocable to the Fund which is included in the taxpayer's cost of service for ratemaking purposes for such taxable year, or
"(2) the ruling amount applicable to such taxable year."
Subsec. (d)(1).
Subsec. (d)(2)(A).
Subsec. (e)(2)(A).
Subsec. (e)(2)(B) to (D).
"(i) 22 percent in the case of taxable years beginning in calendar year 1994 or 1995, and
"(ii) 20 percent in the case of taxable years beginning after December 31, 1995."
Subsec. (e)(3).
Subsecs. (f) to (h).
1996—Subsec. (e)(2)(A).
1992—Subsec. (e)(2)(A).
Subsec. (e)(2)(B) to (D).
Subsec. (e)(4)(C).
1986—Subsec. (a).
Subsec. (c)(1)(A).
Subsec. (d).
Subsec. (e).
Subsec. (e)(1).
Subsec. (e)(2).
"(A) there shall not be included in the gross income of the Fund any payment to the Fund with respect to which a deduction is allowable under subsection (a), and
"(B) there shall be allowed as a deduction any amount paid by the Fund described in paragraph (4)(B) (other than to the taxpayer)."
Subsec. (e)(4)(C).
Subsec. (e)(6).
Subsec. (f).
Subsec. (g).
Statutory Notes and Related Subsidiaries
Effective Date of 2005 Amendment
Effective Date of 1992 Amendment
"(1)
"(2)
Effective Date of 1986 Amendment
Amendment by
Effective Date
Section effective July 18, 1984, with respect to taxable years ending after such date, see section 91(g)(5) 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
Transitional Rule
§468B. Special rules for designated settlement funds
(a) In general
For purposes of section 461(h), economic performance shall be deemed to occur as qualified payments are made by the taxpayer to a designated settlement fund.
(b) Taxation of designated settlement fund
(1) In general
There is imposed on the gross income of any designated settlement fund for any taxable year a tax at a rate equal to the maximum rate in effect for such taxable year under section 1(e).
(2) Certain expenses allowed
For purposes of paragraph (1), gross income for any taxable year shall be reduced by the amount of any administrative costs (including State and local taxes) and other incidental expenses of the designated settlement fund (including legal, accounting, and actuarial expenses)—
(A) which are incurred in connection with the operation of the fund, and
(B) which would be deductible under this chapter for purposes of determining the taxable income of a corporation.
No other deduction shall be allowed to the fund.
(3) Transfers to the fund
In the case of any qualified payment made to the fund—
(A) the amount of such payment shall not be treated as income of the designated settlement fund,
(B) the basis of the fund in any property which constitutes a qualified payment shall be equal to the fair market value of such property at the time of payment, and
(C) the fund shall be treated as the owner of the property in the fund (and any earnings thereon).
(4) Tax in lieu of other taxation
The tax imposed by paragraph (1) shall be in lieu of any other taxation under this subtitle of income from assets in the designated settlement fund.
(5) Coordination with subtitle F
For purposes of subtitle F—
(A) a designated settlement fund shall be treated as a corporation, and
(B) any tax imposed by this subsection shall be treated as a tax imposed by section 11.
(c) Deductions not allowed for transfer of insurance amounts
No deduction shall be allowable for any qualified payment by the taxpayer of any amounts received from the settlement of any insurance claim to the extent such amounts are excluded from the gross income of the taxpayer.
(d) Definitions
For purposes of this section—
(1) Qualified payment
The term "qualified payment" means any money or property which is transferred to any designated settlement fund pursuant to a court order, other than—
(A) any amount which may be transferred from the fund to the taxpayer (or any related person), or
(B) the transfer of any stock or indebtedness of the taxpayer (or any related person).
(2) Designated settlement fund
The term "designated settlement fund" means any fund—
(A) which is established pursuant to a court order and which extinguishes completely the taxpayer's tort liability with respect to claims described in subparagraph (D),
(B) with respect to which no amounts may be transferred other than in the form of qualified payments,
(C) which is administered by persons a majority of whom are independent of the taxpayer,
(D) which is established for the principal purpose of resolving and satisfying present and future claims against the taxpayer (or any related person or formerly related person) arising out of personal injury, death, or property damage,
(E) under the terms of which the taxpayer (or any related person) may not hold any beneficial interest in the income or corpus of the fund, and
(F) with respect to which an election is made under this section by the taxpayer.
An election under this section shall be made at such time and in such manner as the Secretary shall by regulation prescribe. Such an election, once made, may be revoked only with the consent of the Secretary.
(3) Related person
The term "related person" means a person related to the taxpayer within the meaning of section 267(b).
(e) Nonapplicability of section
This section (other than subsection (g)) shall not apply with respect to any liability of the taxpayer arising under any workers' compensation Act or any contested liability of the taxpayer within the meaning of section 461(f).
(f) Other funds
Except as provided in regulations, any payment in respect of a liability described in subsection (d)(2)(D) (and not described in subsection (e)) to a trust fund or escrow fund which is not a designated settlement fund shall not be treated as constituting economic performance.
(g) Clarification of taxation of certain funds
(1) In general
Except as provided in paragraph (2), nothing in any provision of law shall be construed as providing that an escrow account, settlement fund, or similar fund is not subject to current income tax. The Secretary shall prescribe regulations providing for the taxation of any such account or fund whether as a grantor trust or otherwise.
(2) Exemption from tax for certain settlement funds
An escrow account, settlement fund, or similar fund shall be treated as beneficially owned by the United States and shall be exempt from taxation under this subtitle if—
(A) it is established pursuant to a consent decree entered by a judge of a United States District Court,
(B) it is created for the receipt of settlement payments as directed by a government entity for the sole purpose of resolving or satisfying one or more claims asserting liability under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
(C) the authority and control over the expenditure of funds therein (including the expenditure of contributions thereto and any net earnings thereon) is with such government entity, and
(D) upon termination, any remaining funds will be disbursed to such government entity for use in accordance with applicable law.
For purposes of this paragraph, the term "government entity" means the United States, any State or political subdivision thereof, the District of Columbia, any possession of the United States, and any agency or instrumentality of any of the foregoing.
(Added
Editorial Notes
References in Text
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, referred to in subsec. (g)(2)(B), is
Amendments
2006—Subsec. (g).
Subsec. (g)(3).
1990—Subsec. (e).
1988—Subsec. (b)(2).
Subsec. (b)(2)(B).
Subsec. (d)(1)(A).
Subsec. (d)(2)(A).
Subsec. (d)(2)(E).
Subsec. (g).
Statutory Notes and Related Subsidiaries
Effective Date of 2006 Amendment
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date
Section effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984,
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
Special Rule for Taxpayer in Bankruptcy Reorganization
"(i) any portion of such fund which is established pursuant to a court order and with qualified payments, which meets the requirements of subparagraphs (C) and (D) of section 468B(d)(2) of the Internal Revenue Code of 1954 [now 1986] (as added by this paragraph), and with respect to which an election is made under subparagraph (F) thereof, shall be treated as a designated settlement fund for purposes of section 468B of such Code,
"(ii) such corporation (or any successor thereof) shall be liable for the tax imposed by section 468B of such Code on such portion of the fund (and the fund shall not be liable for such tax), such tax shall be deductible by the corporation, and the rate of tax under section 468B of such Code for any taxable year shall be equal to 15 percent, and
"(iii) any transaction by any portion of the fund not described in clause (i) shall be treated as a transaction made by the corporation."
Clarification of Law With Respect to Certain Funds
§469. Passive activity losses and credits limited
(a) Disallowance
(1) In general
If for any taxable year the taxpayer is described in paragraph (2), neither—
(A) the passive activity loss, nor
(B) the passive activity credit,
for the taxable year shall be allowed.
(2) Persons described
The following are described in this paragraph:
(A) any individual, estate, or trust,
(B) any closely held C corporation, and
(C) any personal service corporation.
(b) Disallowed loss or credit carried to next year
Except as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year.
(c) Passive activity defined
For purposes of this section—
(1) In general
The term "passive activity" means any activity—
(A) which involves the conduct of any trade or business, and
(B) in which the taxpayer does not materially participate.
(2) Passive activity includes any rental activity
Except as provided in paragraph (7), the term "passive activity" includes any rental activity.
(3) Working interests in oil and gas property
(A) In general
The term "passive activity" shall not include any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the liability of the taxpayer with respect to such interest.
(B) Income in subsequent years
If any taxpayer has any loss for any taxable year from a working interest in any oil or gas property which is treated as a loss which is not from a passive activity, then any net income from such property (or any property the basis of which is determined in whole or in part by reference to the basis of such property) for any succeeding taxable year shall be treated as income of the taxpayer which is not from a passive activity. If the preceding sentence applies to the net income from any property for any taxable year, any credits allowable under subpart B (other than section 27) or D of part IV of subchapter A for such taxable year which are attributable to such property shall be treated as credits not from a passive activity to the extent the amount of such credits does not exceed the regular tax liability of the taxpayer for the taxable year which is allocable to such net income.
(4) Material participation not required for paragraphs (2) and (3)
Paragraphs (2) and (3) shall be applied without regard to whether or not the taxpayer materially participates in the activity.
(5) Trade or business includes research and experimentation activity
For purposes of paragraph (1)(A), the term "trade or business" includes any activity involving research or experimentation (within the meaning of section 174).
(6) Activity in connection with trade or business or production of income
To the extent provided in regulations, for purposes of paragraph (1)(A), the term "trade or business" includes—
(A) any activity in connection with a trade or business, or
(B) any activity with respect to which expenses are allowable as a deduction under section 212.
(7) Special rules for taxpayers in real property business
(A) In general
If this paragraph applies to any taxpayer for a taxable year—
(i) paragraph (2) shall not apply to any rental real estate activity of such taxpayer for such taxable year, and
(ii) this section shall be applied as if each interest of the taxpayer in rental real estate were a separate activity.
Notwithstanding clause (ii), a taxpayer may elect to treat all interests in rental real estate as one activity. Nothing in the preceding provisions of this subparagraph shall be construed as affecting the determination of whether the taxpayer materially participates with respect to any interest in a limited partnership as a limited partner.
(B) Taxpayers to whom paragraph applies
This paragraph shall apply to a taxpayer for a taxable year if—
(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and
(ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.
In the case of a joint return, the requirements of the preceding sentence are satisfied if and only if either spouse separately satisfies such requirements. For purposes of the preceding sentence, activities in which a spouse materially participates shall be determined under subsection (h).
(C) Real property trade or business
For purposes of this paragraph, the term "real property trade or business" means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
(D) Special rules for subparagraph (B)
(i) Closely held C corporations
In the case of a closely held C corporation, the requirements of subparagraph (B) shall be treated as met for any taxable year if more than 50 percent of the gross receipts of such corporation for such taxable year are derived from real property trades or businesses in which the corporation materially participates.
(ii) Personal services as an employee
For purposes of subparagraph (B), personal services performed as an employee shall not be treated as performed in real property trades or businesses. The preceding sentence shall not apply if such employee is a 5-percent owner (as defined in section 416(i)(1)(B)) in the employer.
(d) Passive activity loss and credit defined
For purposes of this section—
(1) Passive activity loss
The term "passive activity loss" means the amount (if any) by which—
(A) the aggregate losses from all passive activities for the taxable year, exceed
(B) the aggregate income from all passive activities for such year.
(2) Passive activity credit
The term "passive activity credit" means the amount (if any) by which—
(A) the sum of the credits from all passive activities allowable for the taxable year under—
(i) subpart D of part IV of subchapter A, or
(ii) subpart B (other than section 27) of such part IV, exceeds
(B) the regular tax liability of the taxpayer for the taxable year allocable to all passive activities.
(e) Special rules for determining income or loss from a passive activity
For purposes of this section—
(1) Certain income not treated as income from passive activity
In determining the income or loss from any activity—
(A) In general
There shall not be taken into account—
(i) any—
(I) gross income from interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business,
(II) expenses (other than interest) which are clearly and directly allocable to such gross income, and
(III) interest expense properly allocable to such gross income, and
(ii) gain or loss not derived in the ordinary course of a trade or business which is attributable to the disposition of property—
(I) producing income of a type described in clause (i), or
(II) held for investment.
For purposes of clause (ii), any interest in a passive activity shall not be treated as property held for investment.
(B) Return on working capital
For purposes of subparagraph (A), any income, gain, or loss which is attributable to an investment of working capital shall be treated as not derived in the ordinary course of a trade or business.
(2) Passive losses of certain closely held corporations may offset active income
(A) In general
If a closely held C corporation (other than a personal service corporation) has net active income for any taxable year, the passive activity loss of such taxpayer for such taxable year (determined without regard to this paragraph)—
(i) shall be allowable as a deduction against net active income, and
(ii) shall not be taken into account under subsection (a) to the extent so allowable as a deduction.
A similar rule shall apply in the case of any passive activity credit of the taxpayer.
(B) Net active income
For purposes of this paragraph, the term "net active income" means the taxable income of the taxpayer for the taxable year determined without regard to—
(i) any income or loss from a passive activity, and
(ii) any item of gross income, expense, gain, or loss described in paragraph (1)(A).
(3) Compensation for personal services
Earned income (within the meaning of section 911(d)(2)(A)) shall not be taken into account in computing the income or loss from a passive activity for any taxable year.
(4) Dividends reduced by dividends received deduction
For purposes of paragraphs (1) and (2), income from dividends shall be reduced by the amount of any dividends received deduction under section 243 or 245.
(f) Treatment of former passive activities
For purposes of this section—
(1) In general
If an activity is a former passive activity for any taxable year—
(A) any unused deduction allocable to such activity under subsection (b) shall be offset against the income from such activity for the taxable year,
(B) any unused credit allocable to such activity under subsection (b) shall be offset against the regular tax liability (computed after the application of paragraph (1)) allocable to such activity for the taxable year, and
(C) any such deduction or credit remaining after the application of subparagraphs (A) and (B) shall continue to be treated as arising from a passive activity.
(2) Change in status of closely held C corporation or personal service corporation
If a taxpayer ceases for any taxable year to be a closely held C corporation or personal service corporation, this section shall continue to apply to losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation or personal service corporation, whichever is applicable.
(3) Former passive activity
The term "former passive activity" means any activity which, with respect to the taxpayer—
(A) is not a passive activity for the taxable year, but
(B) was a passive activity for any prior taxable year.
(g) Dispositions of entire interest in passive activity
If during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply:
(1) Fully taxable transaction
(A) In general
If all gain or loss realized on such disposition is recognized, the excess of—
(i) any loss from such activity for such taxable year (determined after the application of subsection (b)), over
(ii) any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)),
shall be treated as a loss which is not from a passive activity.
(B) Subparagraph (A) not to apply to disposition involving related party
If the taxpayer and the person acquiring the interest bear a relationship to each other described in section 267(b) or section 707(b)(1), then subparagraph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is acquired (in a transaction described in subparagraph (A)) by another person who does not bear such a relationship to the taxpayer.
(C) Income from prior years
To the extent provided in regulations, income or gain from the activity for preceding taxable years shall be taken into account under subparagraph (A)(ii) for the taxable year to the extent necessary to prevent the avoidance of this section.
(2) Disposition by death
If an interest in the activity is transferred by reason of the death of the taxpayer—
(A) paragraph (1)(A) shall apply to losses described in paragraph (1)(A) to the extent such losses are greater than the excess (if any) of—
(i) the basis of such property in the hands of the transferee, over
(ii) the adjusted basis of such property immediately before the death of the taxpayer, and
(B) any losses to the extent of the excess described in subparagraph (A) shall not be allowed as a deduction for any taxable year.
(3) Installment sale of entire interest
In the case of an installment sale of an entire interest in an activity to which section 453 applies, paragraph (1) shall apply to the portion of such losses for each taxable year which bears the same ratio to all such losses as the gain recognized on such sale during such taxable year bears to the gross profit from such sale (realized or to be realized when payment is completed).
(h) Material participation defined
For purposes of this section—
(1) In general
A taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is—
(A) regular,
(B) continuous, and
(C) substantial.
(2) Interests in limited partnerships
Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.
(3) Treatment of certain retired individuals and surviving spouses
A taxpayer shall be treated as materially participating in any farming activity for a taxable year if paragraph (4) or (5) of section 2032A(b) would cause the requirements of section 2032A(b)(1)(C)(ii) to be met with respect to real property used in such activity if such taxpayer had died during the taxable year.
(4) Certain closely held C corporations and personal service corporations
A closely held C corporation or personal service corporation shall be treated as materially participating in an activity only if—
(A) 1 or more shareholders holding stock representing more than 50 percent (by value) of the outstanding stock of such corporation materially participate in such activity, or
(B) in the case of a closely held C corporation (other than a personal service corporation), the requirements of section 465(c)(7)(C) (without regard to clause (iv)) are met with respect to such activity.
(5) Participation by spouse
In determining whether a taxpayer materially participates, the participation of the spouse of the taxpayer shall be taken into account.
(i) $25,000 offset for rental real estate activities
(1) In general
In the case of any natural person, subsection (a) shall not apply to that portion of the passive activity loss or the deduction equivalent (within the meaning of subsection (j)(5)) of the passive activity credit for any taxable year which is attributable to all rental real estate activities with respect to which such individual actively participated in such taxable year (and if any portion of such loss or credit arose in another taxable year, in such other taxable year).
(2) Dollar limitation
The aggregate amount to which paragraph (1) applies for any taxable year shall not exceed $25,000.
(3) Phase-out of exemption
(A) In general
In the case of any taxpayer, the $25,000 amount under paragraph (2) shall be reduced (but not below zero) by 50 percent of the amount by which the adjusted gross income of the taxpayer for the taxable year exceeds $100,000.
(B) Special phase-out of rehabilitation credit
In the case of any portion of the passive activity credit for any taxable year which is attributable to the rehabilitation credit determined under section 47, subparagraph (A) shall be applied by substituting "$200,000" for "$100,000".
(C) Exception for low-income housing credit
Subparagraph (A) shall not apply to any portion of the passive activity credit for any taxable year which is attributable to any credit determined under section 42.
(D) Ordering rule
Paragraph (1) shall be applied for any taxable year—
(i) first, to the passive activity loss,
(ii) second, to the portion of the passive activity credit to which subparagraph (B) and 1 (C) does not apply,
(iii) third, to the portion of such credit to which subparagraph (B) applies, and
(iv) then, to the portion of such credit to which subparagraph (C) applies.
(E) Adjusted gross income
For purposes of this paragraph, adjusted gross income shall be determined without regard to—
(i) any amount includible in gross income under section 86,
(ii) the amounts excludable from gross income under sections 85(c), 135, and 137,
(iii) the amounts allowable as a deduction under sections 219, 221, and 250, and
(iv) any passive activity loss or any loss allowable by reason of subsection (c)(7).
(4) Special rule for estates
(A) In general
In the case of taxable years of an estate ending less than 2 years after the date of the death of the decedent, this subsection shall apply to all rental real estate activities with respect to which such decedent actively participated before his death.
(B) Reduction for surviving spouse's exemption
For purposes of subparagraph (A), the $25,000 amount under paragraph (2) shall be reduced by the amount of the exemption under paragraph (1) (without regard to paragraph (3)) allowable to the surviving spouse of the decedent for the taxable year ending with or within the taxable year of the estate.
(5) Married individuals filing separately
(A) In general
Except as provided in subparagraph (B), in the case of any married individual filing a separate return, this subsection shall be applied by substituting—
(i) "$12,500" for "$25,000" each place it appears,
(ii) "$50,000" for "$100,000" in paragraph (3)(A), and
(iii) "$100,000" for "$200,000" in paragraph (3)(B).
(B) Taxpayers not living apart
This subsection shall not apply to a taxpayer who—
(i) is a married individual filing a separate return for any taxable year, and
(ii) does not live apart from his spouse at all times during such taxable year.
(6) Active participation
(A) In general
An individual shall not be treated as actively participating with respect to any interest in any rental real estate activity for any period if, at any time during such period, such interest (including any interest of the spouse of the individual) is less than 10 percent (by value) of all interests in such activity.
(B) No participation requirement for low-income housing or rehabilitation credit
Paragraphs (1) and (4)(A) shall be applied without regard to the active participation requirement in the case of—
(i) any credit determined under section 42 for any taxable year, or
(ii) any rehabilitation credit determined under section 47,2
(C) Interest as a limited partner
Except as provided in regulations, no interest as a limited partner in a limited partnership shall be treated as an interest with respect to which the taxpayer actively participates.
(D) Participation by spouse
In determining whether a taxpayer actively participates, the participation of the spouse of the taxpayer shall be taken into account.
(j) Other definitions and special rules
For purposes of this section—
(1) Closely held C corporation
The term "closely held C corporation" means any C corporation described in section 465(a)(1)(B).
(2) Personal service corporation
The term "personal service corporation" has the meaning given such term by section 269A(b)(1), except that section 269A(b)(2) shall be applied—
(A) by substituting "any" for "more than 10 percent", and
(B) by substituting "any" for "50 percent or more in value" in section 318(a)(2)(C).
A corporation shall not be treated as a personal service corporation unless more than 10 percent of the stock (by value) in such corporation is held by employee-owners (within the meaning of section 269A(b)(2), as modified by the preceding sentence).
(3) Regular tax liability
The term "regular tax liability" has the meaning given such term by section 26(b).
(4) Allocation of passive activity loss and credit
The passive activity loss and the passive activity credit (and the $25,000 amount under subsection (i)) shall be allocated to activities, and within activities, on a pro rata basis in such manner as the Secretary may prescribe.
(5) Deduction equivalent
The deduction equivalent of credits from a passive activity for any taxable year is the amount which (if allowed as a deduction) would reduce the regular tax liability for such taxable year by an amount equal to such credits.
(6) Special rule for gifts
In the case of a disposition of any interest in a passive activity by gift—
(A) the basis of such interest immediately before the transfer shall be increased by the amount of any passive activity losses allocable to such interest with respect to which a deduction has not been allowed by reason of subsection (a), and
(B) such losses shall not be allowable as a deduction for any taxable year.
(7) Qualified residence interest
The passive activity loss of a taxpayer shall be computed without regard to qualified residence interest (within the meaning of section 163(h)(3)).
(8) Rental activity
The term "rental activity" means any activity where payments are principally for the use of tangible property.
(9) Election to increase basis of property by amount of disallowed credit
For purposes of determining gain or loss from a disposition of any property to which subsection (g)(1) applies, the transferor may elect to increase the basis of such property immediately before the transfer by an amount equal to the portion of any unused credit allowable under this chapter which reduced the basis of such property for the taxable year in which such credit arose. If the taxpayer elects the application of this paragraph, such portion of the passive activity credit of such taxpayer shall not be allowed for any taxable year.
(10) Coordination with section 280A
If a passive activity involves the use of a dwelling unit to which section 280A(c)(5) applies for any taxable year, any income, deduction, gain, or loss allocable to such use shall not be taken into account for purposes of this section for such taxable year.
(11) Aggregation of members of affiliated groups
Except as provided in regulations, all members of an affiliated group which files a consolidated return shall be treated as 1 corporation.
(12) Special rule for distributions by estates or trusts
If any interest in a passive activity is distributed by an estate or trust—
(A) the basis of such interest immediately before such distribution shall be increased by the amount of any passive activity losses allocable to such interest, and
(B) such losses shall not be allowable as a deduction for any taxable year.
(k) Separate application of section in case of publicly traded partnerships
(1) In general
This section shall be applied separately with respect to items attributable to each publicly traded partnership (and subsection (i) shall not apply with respect to items attributable to any such partnership). The preceding sentence shall not apply to any credit determined under section 42, or any rehabilitation credit determined under section 47, attributable to a publicly traded partnership to the extent the amount of any such credits exceeds the regular tax liability attributable to income from such partnership.
(2) Publicly traded partnership
For purposes of this section, the term "publicly traded partnership" means any partnership if—
(A) interests in such partnership are traded on an established securities market, or
(B) interests in such partnership are readily tradable on a secondary market (or the substantial equivalent thereof).
(3) Coordination with subsection (g)
For purposes of subsection (g), a taxpayer shall not be treated as having disposed of his entire interest in an activity of a publicly traded partnership until he disposes of his entire interest in such partnership.
(4) Application to regulated investment companies
For purposes of this section, a regulated investment company (as defined in section 851) holding an interest in a qualified publicly traded partnership (as defined in section 851(h)) shall be treated as a taxpayer described in subsection (a)(2) with respect to items attributable to such interest.
(l) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out provisions of this section, including regulations—
(1) which specify what constitutes an activity, material participation, or active participation for purposes of this section,
(2) which provide that certain items of gross income will not be taken into account in determining income or loss from any activity (and the treatment of expenses allocable to such income),
(3) requiring net income or gain from a limited partnership or other passive activity to be treated as not from a passive activity,
(4) which provide for the determination of the allocation of interest expense for purposes of this section, and
(5) which deal with changes in marital status and changes between joint returns and separate returns.
(Added
Editorial Notes
Amendments
2021—Subsec. (i)(3)(E)(ii).
2020—Subsec. (i)(3)(E)(iii).
2018—Subsecs. (c)(3)(B), (d)(2)(A)(ii).
Subsec. (i)(3)(C).
Subsec. (i)(3)(D).
Subsec. (i)(3)(E), (F).
Subsec. (i)(6)(B).
Subsec. (i)(6)(B)(iii).
2017—Subsec. (i)(3)(F)(iii).
2014—Subsec. (e)(4).
Subsec. (m).
2004—Subsec. (i)(3)(F)(iii).
Subsec. (k)(4).
2002—Subsec. (i)(3)(E)(ii) to (iv).
"(ii) second to the portion of the passive activity credit to which subparagraph (B) or (D) does not apply,
"(iii) third to the portion of such credit to which subparagraph (B) applies,
"(iv) fourth to the portion of such loss to which subparagraph (C) applies, and".
2001—Subsec. (i)(3)(F)(iii).
2000—Subsec. (i)(3)(C) to (F).
"(i) first to the passive activity loss,
"(ii) second to the portion of the passive activity credit to which subparagraph (B) or (C) does not apply,
"(iii) third to the portion of such credit to which subparagraph (B) applies, and
"(iv) then to the portion of such credit to which subparagraph (C) applies."
Subsec. (i)(6)(B).
Subsec. (i)(6)(B)(iii).
1998—Subsec. (i)(3)(E)(iii).
1996—Subsec. (c)(3)(B).
Subsec. (g)(1)(A).
"(i) the sum of—
"(I) any loss from such activity for such taxable year (determined after application of subsection (b)), plus
"(II) any loss realized on such disposition, over
"(ii) net income or gain for such taxable year from all passive activities (determined without regard to losses described in clause (i)),
shall be treated as a loss which is not from a passive activity."
Subsec. (i)(3)(E)(ii).
1993—Subsec. (c)(2).
Subsec. (c)(7).
Subsec. (i)(3)(E)(iv).
1990—Subsec. (i)(3)(B), (6)(B)(ii).
Subsec. (k)(1).
Subsec. (m)(3)(A).
1989—Subsec. (i)(3)(B), (C).
"(B)
"(C)
"(i) first to the passive activity loss,
"(ii) second to the portion of the passive activity credit to which subparagraph (B) does not apply, and
"(iii) then to the portion of such credit to which subparagraph (B) applies."
Subsec. (i)(3)(D), (E).
1988—Subsec. (e)(1)(A)(ii).
Subsec. (g)(1)(A).
"(i) Income or gain from the passive activity for the taxable year (including any gain recognized on the disposition).
"(ii) Net income or gain for the taxable year from all passive activities.
"(iii) Any other income or gain."
Subsec. (g)(1)(C).
Subsec. (g)(2)(A).
Subsec. (g)(3).
Subsec. (h)(4).
Subsec. (i)(1).
Subsec. (i)(3)(D).
Subsec. (i)(6)(C).
Subsec. (j)(6)(A).
Subsec. (j)(10), (11).
Subsec. (j)(12).
Subsec. (k)(3).
Subsec. (m).
Subsec. (m)(1).
"(A) is attributable to a pre-enactment interest, but
"(B) is not attributable to a carryforward to such taxable year of any loss or credit which was disallowed under this section for a preceding taxable year,
there shall be disallowed under subsection (a) only the applicable percentage of the amount which (but for this subsection) would have been disallowed under subsection (a) for such taxable year."
Subsec. (m)(2).
Subsec. (m)(3)(A).
"(i) the passive activity loss for such taxable year, or
"(ii) the passive activity loss for such taxable year determined by taking into account only pre-enactment interests.
For purposes of this subparagraph, the deduction equivalent (within the meaning of subsection (j)(5)) of a passive activity credit shall be taken into account."
1987—Subsecs. (k) to (m).
Statutory Notes and Related Subsidiaries
Effective Date of 2021 Amendment
Amendment by
Effective Date of 2020 Amendment
Amendment by
Effective Date of 2017 Amendment
Amendment by section 13305(b)(1) of
Amendment by section 14202(b)(3) of
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 2004 Amendment
Amendment by section 102(d)(5) of
Effective Date of 2002 Amendment
Amendment by
Effective Date of 2001 Amendment
Amendment by
Effective Date of 1998 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by section 1807(c)(4) of
Effective Date of 1993 Amendment
Effective Date of 1990 Amendment
Amendment by section 11813(b)(16) of
Effective Date of 1989 Amendment
"(1)
"(2)
Effective Date of 1988 Amendment
Amendment by section 1005(a)(1)–(9), (11), (12) of
Amendment by section 2004(g) of
Amendment by section 6009(c)(3) of
Effective Date of 1987 Amendment
Amendment by
Effective Date
"(1)
"(2)
"[(3) Repealed.
"(4)
"(A) gain is recognized in a taxable year beginning after December 31, 1986, from a sale or exchange of an interest in an activity in a taxable year beginning before January 1, 1987, and
"(B) such gain would have been treated as gain from a passive activity had section 469 of the Internal Revenue Code of 1986 (as added by this section) been in effect for the taxable year in which the sale or exchange occurred and for all succeeding taxable years,
then such gain shall be treated as gain from a passive activity for purposes of such section."
Savings Provision
Amendment by section 401(d)(5)(B)(i)–(iii) of
For provisions that nothing in amendment by
For provisions that nothing in amendment by section 11813(b)(16) of
Amounts Attributable to Activities Subject to Limitations Under Section 469 Treated as Deduction Allocable to Such Activity
"(A) any amount was disallowed as a deduction under section 163(d) of the Internal Revenue Code of 1954 [now 1986] (as in effect on the day before the date of the enactment of the Reform Act [Oct. 22, 1986]),
"(B) such amount would (but for this paragraph) be treated as investment interest paid or accrued by the taxpayer in the taxpayer's first taxable year beginning after December 31, 1986, and
"(C) the taxpayer makes an election under this paragraph at such time and in such manner as the Secretary of the Treasury or his delegate shall prescribe,
to the extent such amount is attributable to an activity subject to the limitations of section 469 of the 1986 Code, such amount shall not be treated as investment interest but shall be treated as a deduction allocable to such activity for such first taxable year. [Former] Subsection (m) of section 469 of the 1986 Code and section 501(c)(2) of the Reform Act [
Transitional Rule for Low-Income Housing
"(a)
"(b)
"(1) the 6th taxable year after the taxable year in which the investor made his initial investment,
"(2) the 1st taxable year after the taxable year in which the investor is obligated to make his last investment, or
"(3) the taxable year preceding the 1st taxable year for which such project ceased to be a qualified low-income housing project.
"(c)
"(1) such project meets the requirements of clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B) [of the Internal Revenue Code of 1986] as of the date placed in service and for each taxable year thereafter which begins after 1986 and for which a passive loss may be allowable with respect to such project,
"(2) the operator certifies to the Secretary of the Treasury or his delegate that such project met the requirements of paragraph (1) on the date of the enactment of this Act [Oct. 22, 1986] (or, if later, when placed in service) and annually thereafter,
"(3) such project is constructed or acquired pursuant to a binding written contract entered into on or before August 16, 1986, and
"(4) such project is placed in service before January 1, 1989.
"(d)
"(1)
"(A) if—
"(i) in the case of a project placed in service on or before August 16, 1986, such person held an interest in such project on August 16, 1986, and such person made his initial investment after December 31, 1983, or
"(ii) in the case of a project placed in service after August 16, 1986, such person made his initial investment after December 31, 1983, and such person held an interest in such project on December 31, 1986, and
"(B) if such investor is required to make payments after December 31, 1986, of 50 percent or more of the total original obligated investment for such interest.
For purposes of subparagraph (A), a person shall be treated as holding an interest on August 16, 1986, or December 31, 1986, if on such date such person had a binding contract to acquire such interest.
"(2)
"(3)
"(A) which placed such property in service on or after December 31, 1985, and before August 17, 1986, and continuously held such property through the close of the taxable year for which the determination is being made, and
"(B) which was not treated as a new partnership or as terminated at any time on or after the date on which such property was placed in service and through the close of the taxable year for which the determination is being made,
paragraph (1)(A)(i) shall be applied by substituting 'December 31, 1988' for 'August 16, 1986' the 2nd place it appears.
"(4)
"(A) is assisted under section 515 of the Housing Act of 1949 [
"(B) is located in a town with a population of less than 10,000 and which is not part of a metropolitan statistical area,
paragraph (1)(B) shall be applied by substituting '35 percent' for '50 percent' and subsection (b)(1) shall be applied by substituting '5th taxable year' for '6th taxable year'. The preceding sentence shall not apply to any interest unless, on December 31, 1986, at least one-half of the number of payments required with respect to such interest remain to be paid.
"(e)
"(1)
"(2)
"(3)
[
1 So in original. Probably should be "or".
2 So in original. The comma probably should be a period.
§470. Limitation on deductions allocable to property used by governments or other tax-exempt entities
(a) Limitation on losses
Except as otherwise provided in this section, a tax-exempt use loss for any taxable year shall not be allowed.
(b) Disallowed loss carried to next year
Any tax-exempt use loss with respect to any tax-exempt use property which is disallowed under subsection (a) for any taxable year shall be treated as a deduction with respect to such property in the next taxable year.
(c) Definitions
For purposes of this section—
(1) Tax-exempt use loss
The term "tax-exempt use loss" means, with respect to any taxable year, the amount (if any) by which—
(A) the sum of—
(i) the aggregate deductions (other than interest) directly allocable to a tax-exempt use property, plus
(ii) the aggregate deductions for interest properly allocable to such property, exceed
(B) the aggregate income from such property.
(2) Tax-exempt use property
(A) In general
The term "tax-exempt use property" has the meaning given to such term by section 168(h), except that such section shall be applied—
(i) without regard to paragraphs (1)(C) and (3) thereof, and
(ii) as if section 197 intangible property (as defined in section 197), and property described in paragraph (1)(B) or (2) of section 167(f), were tangible property.
(B) Exception for partnerships
Such term shall not include any property which would (but for this subparagraph) be tax-exempt use property solely by reason of section 168(h)(6).
(C) Cross reference
For treatment of partnerships as leases to which section 168(h) applies, see section 7701(e).
(d) Exception for certain leases
This section shall not apply to any lease of property which meets the requirements of all of the following paragraphs:
(1) Availability of funds
(A) In general
A lease of property meets the requirements of this paragraph if (at all times during the lease term) not more than an allowable amount of funds are—
(i) subject to any arrangement referred to in subparagraph (B), or
(ii) set aside or expected to be set aside,
to or for the benefit of the lessor or any lender, or to or for the benefit of the lessee to satisfy the lessee's obligations or options under the lease. For purposes of clause (ii), funds shall be treated as set aside or expected to be set aside only if a reasonable person would conclude, based on the facts and circumstances, that such funds are set aside or expected to be set aside.
(B) Arrangements
The arrangements referred to in this subparagraph include a defeasance arrangement, a loan by the lessee to the lessor or any lender, a deposit arrangement, a letter of credit collateralized with cash or cash equivalents, a payment undertaking agreement, prepaid rent (within the meaning of the regulations under section 467), a sinking fund arrangement, a guaranteed investment contract, financial guaranty insurance, and any similar arrangement (whether or not such arrangement provides credit support).
(C) Allowable amount
(i) In general
Except as otherwise provided in this subparagraph, the term "allowable amount" means an amount equal to 20 percent of the lessor's adjusted basis in the property at the time the lease is entered into.
(ii) Higher amount permitted in certain cases
To the extent provided in regulations, a higher percentage shall be permitted under clause (i) where necessary because of the credit-worthiness of the lessee. In no event may such regulations permit a percentage of more than 50 percent.
(iii) Option to purchase
If under the lease the lessee has the option to purchase the property for a fixed price or for other than the fair market value of the property (determined at the time of exercise), the allowable amount at the time such option may be exercised may not exceed 50 percent of the price at which such option may be exercised.
(iv) No allowable amount for certain arrangements
The allowable amount shall be zero with respect to any arrangement which involves—
(I) a loan from the lessee to the lessor or a lender,
(II) any deposit received, letter of credit issued, or payment undertaking agreement entered into by a lender otherwise involved in the transaction, or
(III) in the case of a transaction which involves a lender, any credit support made available to the lessor in which any such lender does not have a claim that is senior to the lessor.
For purposes of subclause (I), the term "loan" shall not include any amount treated as a loan under section 467 with respect to a section 467 rental agreement.
(2) Lessor must make substantial equity investment
(A) In general
A lease of property meets the requirements of this paragraph if—
(i) the lessor—
(I) has at the time the lease is entered into an unconditional at-risk equity investment (as determined by the Secretary) in the property of at least 20 percent of the lessor's adjusted basis in the property as of that time, and
(II) maintains such investment throughout the term of the lease, and
(ii) the fair market value of the property at the end of the lease term is reasonably expected to be equal to at least 20 percent of such basis.
(B) Risk of loss
For purposes of subparagraph (A)(ii), the fair market value at the end of the lease term shall be reduced to the extent that a person other than the lessor bears a risk of loss in the value of the property.
(C) Paragraph not to apply to short-term leases
This paragraph shall not apply to any lease with a lease term of 5 years or less.
(3) Lessee may not bear more than minimal risk of loss
(A) In general
A lease of property meets the requirements of this paragraph if there is no arrangement under which the lessee bears—
(i) any portion of the loss that would occur if the fair market value of the leased property were 25 percent less than its reasonably expected fair market value at the time the lease is terminated, or
(ii) more than 50 percent of the loss that would occur if the fair market value of the leased property at the time the lease is terminated were zero.
(B) Exception
The Secretary may by regulations provide that the requirements of this paragraph are not met where the lessee bears more than a minimal risk of loss.
(C) Paragraph not to apply to short-term leases
This paragraph shall not apply to any lease with a lease term of 5 years or less.
(4) Property with more than 7-year class life
In the case of a lease—
(A) of property with a class life (as defined in section 168(i)(1)) of more than 7 years, other than fixed-wing aircraft and vessels, and
(B) under which the lessee has the option to purchase the property,
the lease meets the requirements of this paragraph only if the purchase price under the option equals the fair market value of the property (determined at the time of exercise).
(e) Special rules
(1) Treatment of former tax-exempt use property
(A) In general
In the case of any former tax-exempt use property—
(i) any deduction allowable under subsection (b) with respect to such property for any taxable year shall be allowed only to the extent of any net income (without regard to such deduction) from such property for such taxable year, and
(ii) any portion of such unused deduction remaining after application of clause (i) shall be treated as a deduction allowable under subsection (b) with respect to such property in the next taxable year.
(B) Former tax-exempt use property
For purposes of this subsection, the term "former tax-exempt use property" means any property which—
(i) is not tax-exempt use property for the taxable year, but
(ii) was tax-exempt use property for any prior taxable year.
(2) Disposition of entire interest in property
If during the taxable year a taxpayer disposes of the taxpayer's entire interest in tax-exempt use property (or former tax-exempt use property), rules similar to the rules of section 469(g) shall apply for purposes of this section.
(3) Coordination with section 469
This section shall be applied before the application of section 469.
(4) Coordination with sections 1031 and 1033
(A) In general
Sections 1031(a) and 1033(a) shall not apply if—
(i) the exchanged or converted property is tax-exempt use property subject to a lease which was entered into before March 13, 2004, and which would not have met the requirements of subsection (d) had such requirements been in effect when the lease was entered into, or
(ii) the replacement property is tax-exempt use property subject to a lease which does not meet the requirements of subsection (d).
(B) Adjusted basis
In the case of property acquired by the lessor in a transaction to which section 1031 or 1033 applies, the adjusted basis of such property for purposes of this section shall be equal to the lesser of—
(i) the fair market value of the property as of the beginning of the lease term, or
(ii) the amount which would be the lessor's adjusted basis if such sections did not apply to such transaction.
(f) Other definitions
For purposes of this section—
(1) Related parties
The terms "lessor", "lessee", and "lender" each include any related party (within the meaning of section 197(f)(9)(C)(i)).
(2) Lease term
The term "lease term" has the meaning given to such term by section 168(i)(3).
(3) Lender
The term "lender" means, with respect to any lease, a person that makes a loan to the lessor which is secured (or economically similar to being secured) by the lease or the leased property.
(4) Loan
The term "loan" includes any similar arrangement.
(g) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations which—
(1) allow in appropriate cases the aggregation of property subject to the same lease, and
(2) provide for the determination of the allocation of interest expense for purposes of this section.
(Added
Editorial Notes
Amendments
2018—Subsec. (d)(2)(B).
2007—Subsec. (c)(2).
"(A) without regard to paragraphs (1)(C) and (3) thereof, and
"(B) as if property described in—
"(i) section 167(f)(1)(B),
"(ii) section 167(f)(2), and
"(iii) section 197 intangible,
were tangible property.
Such term shall not include property which would (but for this sentence) be tax-exempt use property solely by reason of section 168(h)(6) if any credit is allowable under section 42 or 47 with respect to such property."
Subsec. (d)(1)(A).
Statutory Notes and Related Subsidiaries
Effective Date of 2007 Amendment
Amendment by
Effective Date
"(a)
"(b)
"(1)
"(2)
"(A) was submitted for approval to the Federal Transit Administration (an agency of the Department of Transportation) after June 30, 2003, and before March 13, 2004,
"(B) is approved by the Federal Transit Administration before January 1, 2006, and
"(C) includes a description of such property and the value of such property.
"(3)
"(4)
Subpart D—Inventories
Editorial Notes
Amendments
1993—
1986—
1981—
1980—
§471. General rule for inventories
(a) General rule
Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.
(b) Estimates of inventory shrinkage permitted
A method of determining inventories shall not be treated as failing to clearly reflect income solely because it utilizes estimates of inventory shrinkage that are confirmed by a physical count only after the last day of the taxable year if—
(1) the taxpayer normally does a physical count of inventories at each location on a regular and consistent basis, and
(2) the taxpayer makes proper adjustments to such inventories and to its estimating methods to the extent such estimates are greater than or less than the actual shrinkage.
(c) 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—
(A) subsection (a) shall not apply with respect to such taxpayer for such taxable year, and
(B) the taxpayer's method of accounting for inventory for such taxable year shall not be treated as failing to clearly reflect income if such method either—
(i) treats inventory as non-incidental materials and supplies, or
(ii) conforms to such taxpayer's method of accounting reflected in an applicable financial statement of the taxpayer with respect to such taxable year or, if the taxpayer does not have any applicable financial statement with respect to such taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer's accounting procedures.
(2) Applicable financial statement
For purposes of this subsection, the term "applicable financial statement" has the meaning given the term in section 451(b)(3).
(3) 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.
(4) 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.
(d) Cross reference
For rules relating to capitalization of direct and indirect costs of property, see section 263A.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2017—Subsecs. (c), (d).
1997—Subsecs. (b), (c).
1986—
1976—
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 1997 Amendment
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
Amendment by
Coordination With Section 481
"(A) such changes shall be treated as initiated by the taxpayer,
"(B) such changes shall be treated as made with the consent of the Secretary of the Treasury, and
"(C) the period for taking into account the adjustments under section 481 [
Study of Accounting Methods for Inventory; Report Not Later Than December 31, 1982
§472. Last-in, first-out inventories
(a) Authorization
A taxpayer may use the method provided in subsection (b) (whether or not such method has been prescribed under section 471) in inventorying goods specified in an application to use such method filed at such time and in such manner as the Secretary may prescribe. The change to, and the use of, such method shall be in accordance with such regulations as the Secretary may prescribe as necessary in order that the use of such method may clearly reflect income.
(b) Method applicable
In inventorying goods specified in the application described in subsection (a), the taxpayer shall:
(1) Treat those remaining on hand at the close of the taxable year as being: First, those included in the opening inventory of the taxable year (in the order of acquisition) to the extent thereof; and second, those acquired in the taxable year;
(2) Inventory them at cost; and
(3) Treat those included in the opening inventory of the taxable year in which such method is first used as having been acquired at the same time and determine their cost by the average cost method.
(c) Condition
Subsection (a) shall apply only if the taxpayer establishes to the satisfaction of the Secretary that the taxpayer has used no procedure other than that specified in paragraphs (1) and (3) of subsection (b) in inventorying such goods to ascertain the income, profit, or loss of the first taxable year for which the method described in subsection (b) is to be used, for the purpose of a report or statement covering such taxable year—
(1) to shareholders, partners, or other proprietors, or to beneficiaries, or
(2) for credit purposes.
(d) 3-year averaging for increases in inventory value
The beginning inventory for the first taxable year for which the method described in subsection (b) is used shall be valued at cost. Any change in the inventory amount resulting from the application of the preceding sentence shall be taken into account ratably in each of the 3 taxable years beginning with the first taxable year for which the method described in subsection (b) is first used.
(e) Subsequent inventories
If a taxpayer, having complied with subsection (a), uses the method described in subsection (b) for any taxable year, then such method shall be used in all subsequent taxable years unless—
(1) with the approval of the Secretary a change to a different method is authorized; or,
(2) the Secretary determines that the taxpayer has used for any such subsequent taxable year some procedure other than that specified in paragraph (1) of subsection (b) in inventorying the goods specified in the application to ascertain the income, profit, or loss of such subsequent taxable year for the purpose of a report or statement covering such taxable year (A) to shareholders, partners, or other proprietors, or beneficiaries, or (B) for credit purposes; and requires a change to a method different from that prescribed in subsection (b) beginning with such subsequent taxable year or any taxable year thereafter.
If paragraph (1) or (2) of this subsection applies, the change to, and the use of, the different method shall be in accordance with such regulations as the Secretary may prescribe as necessary in order that the use of such method may clearly reflect income.
(f) Use of government price indexes in pricing inventory
The Secretary shall prescribe regulations permitting the use of suitable published governmental indexes in such manner and circumstances as determined by the Secretary for purposes of the method described in subsection (b).
(g) Conformity rules applied on controlled group basis
(1) In general
Except as otherwise provided in regulations, all members of the same group of financially related corporations shall be treated as 1 taxpayer for purposes of subsections (c) and (e)(2).
(2) Group of financially related corporations
For purposes of paragraph (1), the term "group of financially related corporations" means—
(A) any affiliated group as defined in section 1504 determined by substituting "50 percent" for "80 percent" each place it appears in section 1504(a) and without regard to section 1504(b), and
(B) any other group of corporations which consolidate or combine for purposes of financial statements.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1984—Subsec. (g).
1981—Subsec. (d).
Subsec. (f).
1976—Subsecs. (a), (c), (e).
Subsec. (f).
Statutory Notes and Related Subsidiaries
Effective Date of 1984 Amendment
Effective Date of 1981 Amendment
Effective Date of 1976 Amendment
Amendment by section 1901(b)(36)(A) of
§473. Qualified liquidations of LIFO inventories
(a) General rule
If, for any liquidation year—
(1) there is a qualified liquidation of goods which the taxpayer inventories under the LIFO method, and
(2) the taxpayer elects to have the provisions of this section apply with respect to such liquidation,
then the gross income of the taxpayer for such taxable year shall be adjusted as provided in subsection (b).
(b) Adjustment for replacements
If the liquidated goods are replaced (in whole or in part) during any replacement year and such replacement is reflected in the closing inventory for such year, then the gross income for the liquidation year shall be—
(1) decreased by an amount equal to the excess of—
(A) the aggregate replacement cost of the liquidated goods so replaced during such year, over
(B) the aggregate cost of such goods reflected in the opening inventory of the liquidation year, or
(2) increased by an amount equal to the excess of—
(A) the aggregate cost reflected in such opening inventory of the liquidated goods so replaced during such year, over
(B) such aggregate replacement cost.
(c) Qualified liquidation defined
For purposes of this section—
(1) In general
The term "qualified liquidation" means—
(A) a decrease in the closing inventory of the liquidation year from the opening inventory of such year, but only if
(B) the taxpayer establishes to the satisfaction of the Secretary that such decrease is directly and primarily attributable to a qualified inventory interruption.
(2) Qualified inventory interruption defined
(A) In general
The term "qualified inventory interruption" means a regulation, request, or interruption described in subparagraph (B) but only to the extent provided in the notice published pursuant to subparagraph (B).
(B) Determination by Secretary
Whenever the Secretary, after consultation with the appropriate Federal officers, determines—
(i) that—
(I) any Department of Energy regulation or request with respect to energy supplies, or
(II) any embargo, international boycott, or other major foreign trade interruption,
has made difficult or impossible the replacement during the liquidation year of any class of goods for any class of taxpayers, and
(ii) that the application of this section to that class of goods and taxpayers is necessary to carry out the purposes of this section,
he shall publish a notice of such determinations in the Federal Register, together with the period to be affected by such notice.
(d) Other definitions and special rules
For purposes of this section—
(1) Liquidation year
The term "liquidation year" means the taxable year in which occurs the qualified liquidation to which this section applies.
(2) Replacement year
The term "replacement year" means any taxable year in the replacement period; except that such term shall not include any taxable year after the taxable year in which replacement of the liquidated goods is completed.
(3) Replacement period
The term "replacement period" means the shorter of—
(A) the period of the 3 taxable years following the liquidation year, or
(B) the period specified by the Secretary in a notice published in the Federal Register with respect to that qualified inventory interruption.
Any period specified by the Secretary under subparagraph (B) may be modified by the Secretary in a subsequent notice published in the Federal Register.
(4) LIFO method
The term "LIFO method" means the method of inventorying goods described in section 472.
(5) Election
(A) In general
An election under subsection (a) shall be made subject to such conditions, and in such manner and form and at such time, as the Secretary may prescribe by regulation.
(B) Irrevocable election
An election under this section shall be irrevocable and shall be binding for the liquidation year and for all determinations for prior and subsequent taxable years insofar as such determinations are affected by the adjustments under this section.
(e) Replacement; inventory basis
For purposes of this chapter—
(1) Replacements
If the closing inventory of the taxpayer for any replacement year reflects an increase over the opening inventory of such goods for such year, the goods reflecting such increase shall be considered, in the order of their acquisition, as having been acquired in replacement of the goods most recently liquidated (whether or not in a qualified liquidation) and not previously replaced.
(2) Amount at which replacement goods taken into account
In the case of any qualified liquidation, any goods considered under paragraph (1) as having been acquired in replacement of the goods liquidated in such liquidation shall be taken into purchases and included in the closing inventory of the taxpayer for the replacement year at the inventory cost basis of the goods replaced.
(f) Special rules for application of adjustments
(1) Period of limitations
If—
(A) an adjustment is required under this section for any taxable year by reason of the replacement of liquidated goods during any replacement year, and
(B) the assessment of a deficiency, or the allowance of a credit or refund of an overpayment of tax attributable to such adjustment, for any taxable year, is otherwise prevented by the operation of any law or rule of law (other than section 7122, relating to compromises),
then such deficiency may be assessed, or credit or refund allowed, within the period prescribed for assessing a deficiency or allowing a credit or refund for the replacement year if a notice for deficiency is mailed, or claim for refund is filed, within such period.
(2) Interest
Solely for purposes of determining interest on any overpayment or underpayment attributable to an adjustment made under this section, such overpayment or underpayment shall be treated as an overpayment or underpayment (as the case may be) for the replacement year.
(g) Coordination with section 472
The Secretary shall prescribe such regulations as may be necessary to coordinate the provisions of this section with the provisions of section 472.
(Added
Statutory Notes and Related Subsidiaries
Effective Date
§474. Simplified dollar-value LIFO method for certain small businesses
(a) General rule
An eligible small business may elect to use the simplified dollar-value method of pricing inventories for purposes of the LIFO method.
(b) Simplified dollar-value method of pricing inventories
For purposes of this section—
(1) In general
The simplified dollar-value method of pricing inventories is a dollar-value method of pricing inventories under which—
(A) the taxpayer maintains a separate inventory pool for items in each major category in the applicable Government price index, and
(B) the adjustment for each such separate pool is based on the change from the preceding taxable year in the component of such index for the major category.
(2) Applicable Government price index
The term "applicable Government price index" means—
(A) except as provided in subparagraph (B), the Producer Price Index published by the Bureau of Labor Statistics, or
(B) in the case of a retailer using the retail method, the Consumer Price Index published by the Bureau of Labor Statistics.
(3) Major category
The term "major category" means—
(A) in the case of the Producer Price Index, any of the 2-digit standard industrial classifications in the Producer Prices Data Report, or
(B) in the case of the Consumer Price Index, any of the general expenditure categories in the Consumer Price Index Detailed Report.
(c) Eligible small business
For purposes of this section, a taxpayer is an eligible small business for any taxable year if the average annual gross receipts of the taxpayer for the 3 preceding taxable years do not exceed $5,000,000. For purposes of the preceding sentence, rules similar to the rules of section 448(c)(3) shall apply.
(d) Special rules
For purposes of this section—
(1) Controlled groups
(A) In general
In the case of a taxpayer which is a member of a controlled group, all persons which are component members of such group shall be treated as 1 taxpayer for purposes of determining the gross receipts of the taxpayer.
(B) Controlled group defined
For purposes of subparagraph (A), persons shall be treated as being component members of a controlled group if such persons would be treated as a single employer under section 52.
(2) Election
(A) In general
The election under this section may be made without the consent of the Secretary.
(B) Period to which election applies
The election under this section shall apply—
(i) to the taxable year for which it is made, and
(ii) to all subsequent taxable years for which the taxpayer is an eligible small business,
unless the taxpayer secures the consent of the Secretary to the revocation of such election.
(3) LIFO method
The term "LIFO method" means the method provided by section 472(b).
(4) Transitional rules
(A) In general
In the case of a year of change under this section—
(i) the inventory pools shall—
(I) in the case of the 1st taxable year to which such an election applies, be established in accordance with the major categories in the applicable Government price index, or
(II) in the case of the 1st taxable year after such election ceases to apply, be established in the manner provided by regulations under section 472;
(ii) the aggregate dollar amount of the taxpayer's inventory as of the beginning of the year of change shall be the same as the aggregate dollar value as of the close of the taxable year preceding the year of change, and
(iii) the year of change shall be treated as a new base year in accordance with procedures provided by regulations under section 472.
(B) Year of change
For purposes of this paragraph, the year of change under this section is—
(i) the 1st taxable year to which an election under this section applies, or
(ii) in the case of a cessation of such an election, the 1st taxable year after such election ceases to apply.
(Added
Editorial Notes
Amendments
1986—
Statutory Notes and Related Subsidiaries
Effective Date of 1986 Amendment
"(1)
"(2)
Effective Date
§475. Mark to market accounting method for dealers in securities
(a) General rule
Notwithstanding any other provision of this subpart, the following rules shall apply to securities held by a dealer in securities:
(1) Any security which is inventory in the hands of the dealer shall be included in inventory at its fair market value.
(2) In the case of any security which is not inventory in the hands of the dealer and which is held at the close of any taxable year—
(A) the dealer shall recognize gain or loss as if such security were sold for its fair market value on the last business day of such taxable year, and
(B) any gain or loss shall be taken into account for such taxable year.
Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this paragraph at times other than the times provided in this paragraph.
(b) Exceptions
(1) In general
Subsection (a) shall not apply to—
(A) any security held for investment,
(B)(i) any security described in subsection (c)(2)(C) which is acquired (including originated) by the taxpayer in the ordinary course of a trade or business of the taxpayer and which is not held for sale, and (ii) any obligation to acquire a security described in clause (i) if such obligation is entered into in the ordinary course of such trade or business and is not held for sale, and
(C) any security which is a hedge with respect to—
(i) a security to which subsection (a) does not apply, or
(ii) a position, right to income, or a liability which is not a security in the hands of the taxpayer.
To the extent provided in regulations, subparagraph (C) shall not apply to any security held by a person in its capacity as a dealer in securities.
(2) Identification required
A security shall not be treated as described in subparagraph (A), (B), or (C) of paragraph (1), as the case may be, unless such security is clearly identified in the dealer's records as being described in such subparagraph before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe).
(3) Securities subsequently not exempt
If a security ceases to be described in paragraph (1) at any time after it was identified as such under paragraph (2), subsection (a) shall apply to any changes in value of the security occurring after the cessation.
(4) Special rule for property held for investment
To the extent provided in regulations, subparagraph (A) of paragraph (1) shall not apply to any security described in subparagraph (D) or (E) of subsection (c)(2) which is held by a dealer in such securities.
(c) Definitions
For purposes of this section—
(1) Dealer in securities defined
The term "dealer in securities" means a taxpayer who—
(A) regularly purchases securities from or sells securities to customers in the ordinary course of a trade or business; or
(B) regularly offers to enter into, assume, offset, assign or otherwise terminate positions in securities with customers in the ordinary course of a trade or business.
(2) Security defined
The term "security" means any—
(A) share of stock in a corporation;
(B) partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust;
(C) note, bond, debenture, or other evidence of indebtedness;
(D) interest rate, currency, or equity notional principal contract;
(E) evidence of an interest in, or a derivative financial instrument in, any security described in subparagraph (A), (B), (C), or (D), or any currency, including any option, forward contract, short position, and any similar financial instrument in such a security or currency; and
(F) position which—
(i) is not a security described in subparagraph (A), (B), (C), (D), or (E),
(ii) is a hedge with respect to such a security, and
(iii) is clearly identified in the dealer's records as being described in this subparagraph before the close of the day on which it was acquired or entered into (or such other time as the Secretary may by regulations prescribe).
Subparagraph (E) shall not include any contract to which section 1256(a) applies.
(3) Hedge
The term "hedge" means any position which manages the dealer's risk of interest rate or price changes or currency fluctuations, including any position which is reasonably expected to become a hedge within 60 days after the acquisition of the position.
(4) Special rules for certain receivables
(A) In general
Paragraph (2)(C) shall not include any nonfinancial customer paper.
(B) Nonfinancial customer paper
For purposes of subparagraph (A), the term "nonfinancial customer paper" means any receivable which—
(i) is a note, bond, debenture, or other evidence of indebtedness;
(ii) arises out of the sale of nonfinancial goods or services by a person the principal activity of which is the selling or providing of nonfinancial goods or services; and
(iii) is held by such person (or a person who bears a relationship to such person described in section 267(b) or 707(b)) at all times since issue.
(d) Special rules
For purposes of this section—
(1) Coordination with certain rules
The rules of sections 263(g), 263A, and 1256(a) shall not apply to securities to which subsection (a) applies, and section 1091 shall not apply (and section 1092 shall apply) to any loss recognized under subsection (a).
(2) Improper identification
If a taxpayer—
(A) identifies any security under subsection (b)(2) as being described in subsection (b)(1) and such security is not so described, or
(B) fails under subsection (c)(2)(F)(iii) to identify any position which is described in subsection (c)(2)(F) (without regard to clause (iii) thereof) at the time such identification is required,
the provisions of subsection (a) shall apply to such security or position, except that any loss under this section prior to the disposition of the security or position shall be recognized only to the extent of gain previously recognized under this section (and not previously taken into account under this paragraph) with respect to such security or position.
(3) Character of gain or loss
(A) In general
Except as provided in subparagraph (B) or section 1236(b)—
(i) In general
Any gain or loss with respect to a security under subsection (a)(2) shall be treated as ordinary income or loss.
(ii) Special rule for dispositions
If—
(I) gain or loss is recognized with respect to a security before the close of the taxable year, and
(II) subsection (a)(2) would have applied if the security were held as of the close of the taxable year,
such gain or loss shall be treated as ordinary income or loss.
(B) Exception
Subparagraph (A) shall not apply to any gain or loss which is allocable to a period during which—
(i) the security is described in subsection (b)(1)(C) (without regard to subsection (b)(2)),
(ii) the security is held by a person other than in connection with its activities as a dealer in securities, or
(iii) the security is improperly identified (within the meaning of subparagraph (A) or (B) of paragraph (2)).
(e) Election of mark to market for dealers in commodities
(1) In general
In the case of a dealer in commodities who elects the application of this subsection, this section shall apply to commodities held by such dealer in the same manner as this section applies to securities held by a dealer in securities.
(2) Commodity
For purposes of this subsection and subsection (f), the term "commodity" means—
(A) any commodity which is actively traded (within the meaning of section 1092(d)(1));
(B) any notional principal contract with respect to any commodity described in subparagraph (A);
(C) any evidence of an interest in, or a derivative instrument in, any commodity described in subparagraph (A) or (B), including any option, forward contract, futures contract, short position, and any similar instrument in such a commodity; and
(D) any position which—
(i) is not a commodity described in subparagraph (A), (B), or (C),
(ii) is a hedge with respect to such a commodity, and
(iii) is clearly identified in the taxpayer's records as being described in this subparagraph before the close of the day on which it was acquired or entered into (or such other time as the Secretary may by regulations prescribe).
(3) Election
An election under this subsection may be made without the consent of the Secretary. Such an election, once made, shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.
(f) Election of mark to market for traders in securities or commodities
(1) Traders in securities
(A) In general
In the case of a person who is engaged in a trade or business as a trader in securities and who elects to have this paragraph apply to such trade or business—
(i) such person shall recognize gain or loss on any security held in connection with such trade or business at the close of any taxable year as if such security were sold for its fair market value on the last business day of such taxable year, and
(ii) any gain or loss shall be taken into account for such taxable year.
Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this subparagraph at times other than the times provided in this subparagraph.
(B) Exception
Subparagraph (A) shall not apply to any security—
(i) which is established to the satisfaction of the Secretary as having no connection to the activities of such person as a trader, and
(ii) which is clearly identified in such person's records as being described in clause (i) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe).
If a security ceases to be described in clause (i) at any time after it was identified as such under clause (ii), subparagraph (A) shall apply to any changes in value of the security occurring after the cessation.
(C) Coordination with section 1259
Any security to which subparagraph (A) applies and which was acquired in the normal course of the taxpayer's activities as a trader in securities shall not be taken into account in applying section 1259 to any position to which subparagraph (A) does not apply.
(D) Other rules to apply
Rules similar to the rules of subsections (b)(4) and (d) shall apply to securities held by a person in any trade or business with respect to which an election under this paragraph is in effect. Subsection (d)(3) shall not apply under the preceding sentence for purposes of applying sections 1402 and 7704.
(2) Traders in commodities
In the case of a person who is engaged in a trade or business as a trader in commodities and who elects to have this paragraph apply to such trade or business, paragraph (1) shall apply to commodities held by such trader in connection with such trade or business in the same manner as paragraph (1) applies to securities held by a trader in securities.
(3) Election
The elections under paragraphs (1) and (2) may be made separately for each trade or business and without the consent of the Secretary. Such an election, once made, shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.
(g) Regulatory authority
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including rules—
(1) to prevent the use of year-end transfers, related parties, or other arrangements to avoid the provisions of this section,
(2) to provide for the application of this section to any security which is a hedge which cannot be identified with a specific security, position, right to income, or liability, and
(3) to prevent the use by taxpayers of subsection (c)(4) to avoid the application of this section to a receivable that is inventory in the hands of the taxpayer (or a person who bears a relationship to the taxpayer described in section 267(b) or 707(b)).
(Added
Editorial Notes
Amendments
2002—Subsec. (g)(3).
2000—Subsec. (g)(3).
1999—Subsec. (c)(3).
1998—Subsec. (c)(4).
Subsec. (f)(1)(D).
Subsec. (g)(3).
1997—Subsecs. (e) to (g).
Statutory Notes and Related Subsidiaries
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1998 Amendment
Amendment by section 6010(a)(3) of
"(1)
"(2)
"(A) such change shall be treated as initiated by the taxpayer;
"(B) such change shall be treated as made with the consent of the Secretary of the Treasury; and
"(C) the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 shall be taken into account ratably over the 4-taxable-year period beginning with such first taxable year."
Effective Date of 1997 Amendment
"(1)
"(2)
"(A) before June 9, 1997, the taxpayer entered into any transaction which is a constructive sale of any appreciated financial position, and
"(B) before the close of the 30-day period beginning on the date of the enactment of this Act [Aug. 5, 1997] or before such later date as may be specified by the Secretary of the Treasury, such transaction and position are clearly identified in the taxpayer's records as offsetting,
such transaction and position shall not be taken into account in determining whether any other constructive sale after June 8, 1997, has occurred. The preceding sentence shall cease to apply as of the date such transaction is closed or the taxpayer ceases to hold such position.
"(3)
"(A) there was a constructive sale on or before such date of any appreciated financial position,
"(B) the transaction resulting in such constructive sale of such position remains open (with respect to the decedent or any related person)—
"(i) for not less than 2 years after the date of such transaction (whether such period is before or after June 8, 1997), and
"(ii) at any time during the 3-year period ending on the date of the decedent's death, and
"(C) such transaction is not closed before the close of the 30th day after the date of the enactment of this Act,
then, for purposes of such Code [probably means the Internal Revenue Code of 1986], such position (and the transaction resulting in such constructive sale) shall be treated as property constituting rights to receive an item of income in respect of a decedent under section 691 of such Code. Section 1014(c) of such Code shall not apply to so much of such position's or property's value (as included in the decedent's estate for purposes of
"(4)
"(A)
"(B) 4-
"(i) any identification required under such subsection with respect to securities and commodities held on the date of the enactment of this Act shall be treated as timely made if made on or before the 30th day after such date of enactment, and
"(ii) the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of such Code shall be taken into account ratably over the 4-taxable year period beginning with such first taxable year."
Effective Date
"(1)
"(2)
"(A) such change shall be treated as initiated by the taxpayer,
"(B) such change shall be treated as made with the consent of the Secretary, and
"(C) except as provided in paragraph (3), the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 shall be taken into account ratably over the 5-taxable year period beginning with the first taxable year ending on or after December 31, 1993.
"(3)
"(A)
"(i) a taxpayer (or any predecessor) used the last-in first-out (LIFO) method of accounting with respect to any qualified securities for the 5-taxable year period ending with its last taxable year ending before December 31, 1993, and
"(ii) any portion of the net amount described in paragraph (2)(C) is attributable to the use of such method of accounting,
then paragraph (2)(C) shall be applied by taking such portion into account ratably over the 15-taxable year period beginning with the first taxable year ending on or after December 31, 1993.
"(B)
"(i) by a floor specialist (as defined in section 1236(d)(2) of the Internal Revenue Code of 1986) in connection with the specialist's duties as a specialist on an exchange, but only if the security is one in which the specialist is registered with the exchange, or
"(ii) by a taxpayer who is a market maker in connection with the taxpayer's duties as a market maker, but only if—
"(I) the security is included on the National Association of Security Dealers Automated Quotation System,
"(II) the taxpayer is registered as a market maker in such security with the National Association of Security Dealers, and
"(III) as of the last day of the taxable year preceding the taxpayer's first taxable year ending on or after December 31, 1993, the taxpayer (or any predecessor) has been actively and regularly engaged as a market maker in such security for the 2-year period ending on such date (or, if shorter, the period beginning 61 days after the security was listed in such quotation system and ending on such date)."