DISALLOWANCE OF DEPRECIATION FOR CERTAIN TERM INTERESTS.

SEC. 7645. DISALLOWANCE OF DEPRECIATION FOR CERTAIN TERM INTERESTS. (a) General Rule.—Section 167 (as amended by section 7622) is amended by inserting after subsection (q) the following new subsection: “(r) Certain Term Interests Not Depreciable.— “(1) In general.—No depreciation deduction shall be allowed under this section (and no depreciation or amortization deduction shall be allowed under any other provision of this subtitle) to the taxpayer for any term interest in property for any period during which the remainder interest in such property is held (directly or indirectly) by a related person. “(2) Coordination with section 273.—This subsection shall not apply to any term interest to which section 273 applies. “(3) Basis adjustments.— If, but for this subsection, a depreciation or amortization deduction would be allowable to the taxpayer with respect to any term interest in property— “(A) the taxpayer’s basis in such property shall be reduced by any depreciation or amortization deductions disallowed under this subsection, and “(B) the basis of the remainder interest in such property shall be increased by the amount of such disallowed deductions (properly adjusted for any depreciation deductions allowable under subsection (h) to the taxpayer). “(4) Special rules.— “(A) Denial of increase in basis of remainderman.—No increase in the basis of the remainder interest shall be made under paragraph (3)(B) for any disallowed deductions 103 STAT. 2382attributable to periods during which the term interest was held— “(i) by an organization exempt from tax under this subtitle, or “(ii) by a nonresident alien individual or foreign corporation but only if income from the term interest is not effectively connected with the conduct of a trade or business in the United States. “(B) Coordination with subsection (h).—If, but for this subsection, a depreciation or amortization deduction would be allowable to any person with respect to any term interest in property, the principles of subsection (h) shall apply to such person with respect to such term interest. “(5) Definitions.— For purposes of this subsection— “(A) Term interest in property.—The term ‘term interest in property’ has the meaning given such term by section 1001(e)(2). “(B) Related person.—The term ‘related person’ means any person bearing a relationship to the taxpayer described in subsection (b) or (e) of section 267. “(6) Regulations.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations preventing avoidance of this subsection through cross-ownership arrangements or otherwise.” (b) Effective Date.—The amendment made by subsection (a) shall apply to interests created or acquired after July 27, 1989, in taxable years ending after such date.