DEPRECIATION UNDER INCOME FORECAST METHOD.

SEC. 1604. DEPRECIATION UNDER INCOME FORECAST METHOD. (a) General Rule.— Section 167 (relating to depreciation) is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection: “(g) Depreciation Under Income Forecast Method.— “(1) In general.— If the depreciation deduction allowable under this section to any taxpayer with respect to any property is determined under the income forecast method or any similar method— “(A) the income from the property to be taken into account in determining the depreciation deduction under such method shall be equal to the amount of income earned in connection with the property before the close of the 10th taxable year following the taxable year in which the property was placed in service, “(B) the adjusted basis of the property shall only include amounts with respect to which the requirements of section 461(h) are satisfied, “(C) the depreciation deduction under such method for the 10th taxable year beginning after the taxable year in which the property was placed in service shall be equal to the adjusted basis of such property as of the beginning of such 10th taxable year, and “(D) such taxpayer shall pay (or be entitled to receive) interest computed under the look-back method of paragraph (2) for any recomputation year. “(2) Look-back method.— The interest computed under the look-back method of this paragraph for any recomputation year shall be determined by— “(A) first determining the depreciation deductions under this section with respect to such property which would have been allowable for prior taxable years if the determination of the amounts so allowable had been made on the basis of the sum of the following (instead of the estimated income from such property)— “(i) the actual income earned in connection with such property for periods before the close of the recomputation year, and “(ii) an estimate of the future income to be earned in connection with such property for periods after the recomputation year and before the close of the 10th taxable year following the taxable year in which the property was placed in service, “(B) second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each such prior taxable year which would result solely from the application of subparagraph (A), and “(C) then using the adjusted overpayment rate (as defined in section 460(b)(7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B). For purposes of the preceding sentence, any cost incurred after the property is placed in service (which is not treated as a110 STAT. 1837 separate property under paragraph (5)) shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such cost is incurred) such cost to its value as of the date the property is placed in service. The taxpayer may elect with respect to any property to have the preceding sentence not apply to such property. “(3) Exception from look-back method.— Paragraph (1)(D) shall not apply with respect to any property which had a cost basis of $100,000 or less. “(4) Recomputation year.— For purposes of this subsection, except as provided in regulations, the term ‘recomputation year’ means, with respect to any property, the 3d and the 10th taxable years beginning after the taxable year in which the property was placed in service, unless the actual income earned in connection with the property for the period before the close of such 3d or 10th taxable year is within 10 percent of the income earned in connection with the property for such period which was taken into account under paragraph (1)(A). “(5) Special rules.— “(A) Certain costs treated as separate property.— For purposes of this subsection, the following costs shall be treated as separate properties: “(i) Any costs incurred with respect to any property after the 10th taxable year beginning after the taxable year in which the property was placed in service. “(ii) Any costs incurred after the property is placed in service and before the close of such 10th taxable year if such costs are significant and give rise to a significant increase in the income from the property which was not included in the estimated income from the property. “(B) Syndication income from television series.— In the case of property which is 1 or more episodes in a television series, income from syndicating such series shall not be required to be taken into account under this subsection before the earlier of— “(i) the 4th taxable year beginning after the date the first episode in such series is placed in service, or “(ii) the earliest taxable year in which the taxpayer has an arrangement relating to the future syndication of such series. “(C) Special rules for financial exploitation of characters, etc.— For purposes of this subsection, in the case of television and motion picture films, the income from the property shall include income from the exploitation of characters, designs, scripts, scores, and other incidental income associated with such films, but only to the extent that such income is earned in connection with the ultimate use of such items by, or the ultimate sale of merchandise to, persons who are not related persons (within the meaning of section 267(b)) to the taxpayer. “(D) Collection of interest.— For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under paragraph (1)110 STAT. 1838 for any recomputation year shall be treated as an increase in the tax imposed by this chapter for such year. “(E) Determinations.— For purposes of paragraph (2), determinations of the amount of income earned in connection with any property shall be made in the same manner as for purposes of applying the income forecast method; except that any income from the disposition of such property shall be taken into account. “(F) Treatment of pass-thru entities.— Rules similar to the rules of section 460(b)(4) shall apply for purposes of this subsection.” (b) Effective Date.— (1) In general.— The amendment made by subsection (a) shall apply to property placed in service after September 13, 1995. (2) Binding contracts.— The amendment made by subsection (a) shall not apply to any property produced or acquired by the taxpayer pursuant to a written contract which was binding on September 13, 1995, and at all times thereafter before such production or acquisition. (3) Underpayments of income tax.— No addition to tax shall be made under section 6662 of such Code as a result of the application of subsection (d) of that section (relating to substantial understatements of income tax) with respect to any underpayment of income tax for any taxable year ending before such date of enactment, to the extent such underpayment was created or increased by the amendments made by subsection (a).