LIMITATION ON INTEREST DEDUCTION.

SEC. 209. LIMITATION ON INTEREST DEDUCTION. (a) In General.— Subsection (d) of section 163 (relating to limitation on interest on investment indebtedness) is amended— (1) by striking out paragraphs (1) and (2) and inserting in lieu thereof the following: “(1) In general.— In the case of a taxpayer other than a corporation, the amount of investment interest (as defined in paragraph (3)(D)) otherwise allowable as a deduction under this chapter shall be limited, in the following order, to— “(A) $10,000 ($5,000, in the case of a separate return by a married individual), plus “(B) the amount of the net investment income (as defined in paragraph (3)(A)), plus the amount (if any) by which the deductions allowable under this section (determined without regard to this subsection) and sections 162,164 (a)(1) or (2), or 212 attributable to property of the taxpayer subject to a net lease exceeds the rental income produced by such property for the taxable year. In the ease of a trust, the $10,000 amount specified in subparagraph (A) shall be zero. “(2) Carryover of disallowed investment interest.— The amount of disallowed investment interest for any taxable year shall be treated as investment interest paid or accrued in the succeeding taxable year.”; (2) by adding at the end of paragraph (3)(A) the following new sentence: “If the taxpayer has investment interest for the 90 STAT. 1543taxable year to which this subsection (as in effect before the Tax Reform Act of 1976) applies, the amount of the net investment income taken into account under this subsection shall be the amount of such income (determined without regard to this sentence) multiplied by a fraction the numerator of which is the excess of the investment interest for the taxable year over the investment interest to which such prior provision applies, and the denominator of which is the investment interest for the taxable year.”; (3) by striking out “limitations in paragraphs (1) and (2)(A)” in paragraph (3)(E) and inserting in lieu thereof “limitation in paragraph (1)”; (4) by striking out paragraph (5) and redesignating paragraphs (6) and (7) as paragraphs (5) and (6), respectively; (5) by adding at the end of paragraph (S)(as so redesignated) the following: “For taxable years beginning after December 31, 1975, this paragraph shall be applied on an allocation basis rather than a specific item basis.”; and (6) by adding at the end thereof the following new paragraph: “(7) Special rule where taxpayer owns so percent or more of enterprise.— “(A) General rule.— In the case of any 50 percent owned corporation or partnership, the $10,000 figure specified in paragraph (1) shall be increased by the lesser of— “(i) $15,000, or “(ii) the interest paid or accrued during the taxable year on investment indebtedness incurred or continued in connection with the acquisition of the interest in such corporation or partnership. In the case of a separate return by a married individual, $7,500 shall be substituted for the $15,000 figure in clause (1). “(B) Ownership requirements.— This paragraph shall apply with respect, to indebtedness only if the taxpayer, his spouse, and his children own 50 percent or more of the total value of all classes of stock of the corporation or 50 percent or more of all capital interests in the partnership, as the case may be.” (b) Effective Date.— (1) In general.— Except as provided in paragraph (2), the amendments made by subsection (a) shall apply to taxable years beginning after December 31, 1975. (2) Indebtedness incurred before September 11, 1975.— In the case of indebtedness attributable to a specific item of property which— (A) is for a specified term, and (B) was incurred before September 11, 1975, or is incurred after September 10, 1975, pursuant to a written contract or commitment which on September II, 1975, and at all times thereafter before the incurring of such indebtedness, is binding on the taxpayer, the amendments made by this section shall not apply, but. section 163(d) of the Internal Revenue Code of 1954 (as in effect before the enactment of this Act) shall apply. For purposes of the preceding sentence, so much of the net investment income (as defined in section 163(d)(3)(A) of such Code) for any taxable year as 90 STAT. 1544is not taken into account under section 163(d) of such Code, as amended by this Act, by reason of the, last sentence of section 163(d)(3)(A) of such Code, shall be taken into account for purposes of applying such section as in effect before the, date of enactment of this Act with respect to interest on indebtedness referred to in the preceding sentence.