LIMITATIONS ON DEDUCTIONS FOR EXPENSES.

SEC. 204. LIMITATIONS ON DEDUCTIONS FOR EXPENSES. (a) In General.— Subpart. C of part If of subchapter E of chapter 1 (relating to taxable year for which deduction is taken) is amended by adding at the end thereof the following new section: “SEC. 465. DEDUCTIONS LIMITED TO AMOUNT AT RISK IN CASE OF CERTAIN ACTIVITIES. “(a) General Rule.— In the case of a taxpayer (other than a corporation which is neither an electing small business corporation (as defined in section 1371(b)) nor a personal holding company (as defined in section 542)) 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. Any loss from such activity 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. “(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 tax-payer 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 a mounts, 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 winch is secured by property described in paragraph (1). “(3) Certain borrowed amounts excluded.— 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— “(A) has an interest (other than an interest as a creditor) in such activity, or “(B) has a relationship to the taxpayer specified within any one of the paragraphs of section 267 (b). 90 STAT. 1532 “(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 this section 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. “(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)), or “(D) exploring for, or exploiting, oil and gas resources as a trade or business or for the production of income. “(2) Separate activities.— For purposes of this section, a tax-payer’s activity with respect to each— “(A) film or video tape, “(B) section 1245 property which is leased or held for leasing, “(C) farm, or “(D) oil and gas property (as defined under section 614), shall be treated as a separate activity. A partner’s interest in a partnership or a shareholder’s interest in an electing small business corporation shall be treated as a single activity to the extent that the partnership or an electing small business corporation is engaged in activities described in any subparagraph of this paragraph. “(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 this section) 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.” (b) Clerical Amendment.— The table of sections for subpart C of part II of subchapter E of chapter 1 is amended by adding at the end thereof the following new item: “Sec. 465. Deductions limited to amount at risk in case of certain activities.” (c) Effective Dates.— (1) In general.— Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to losses attributable to amounts paid or incurred in taxable years beginning after December 31, 1975, For purposes of this subsection, any amount allowed or allowable for depreciation or amortization for any period shall be treated as an amount paid or incurred in such period. (2) Special transitional rules for movies and video tapes.— (A) In general.— In the case of any activity described in section 465(e)(1)(A) of the Internal Revenue Code of 90 STAT. 15331954, the amendments made by this section shall not apply to— (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) Exception for certain agreements where principal photography begin before 1976.— In the case of any activity described in section 465(c)(1)(A) of the Internal Revenue Code of 1954, the amendments made by this section shall not apply to deductions attributable to the producing of a film the principal photography of which began on or before December 31, 1975, if— (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) Special transitional rules for leasing activities.— (A) Rule for leases other than operating leases.— In the case of any activity described in section 465(c)(1)(B) of the Internal Revenue Code of 1954, the amendments made by this section shall not apply with respect to— (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) Holding of interests for purposes of subparagraph (A).— Subparagraph (A) shall apply only to taxpayers who held their interests in the property on December 31, 1975. (C) Special rule for operating leases.— In the case of a lease described in section 46(e)(3)(B) of the Internal Revenue Code of 1954— (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”.