AMENDMENTS BELATED TO TITLE VII OF THE REFORM ACT.

SEC. 1007. AMENDMENTS BELATED TO TITLE VII OF THE REFORM ACT. (a) Amendments to Section 55 of the 1986 Code.— (1) Paragraph (1) of section 55(c) of the 1986 Code is amended by inserting before the period at the end of the first sentence the following: “and the section 936 credit allowable under section 27(b)”. (2) Paragraph (2) of section 55(b) of the 1986 Code is amended by adding at the end thereof the following new sentence: “If a taxpayer is subject to the regular tax, such taxpayer shall be subject to the tax imposed by this section (and, if the regular tax is determined by reference to an amount other than taxable income, such amount shall be treated as the taxable income of such taxpayer for purposes of the preceding sentence).” (3) Effective with respect to taxable years ending after the date of the enactment of this Act, paragraph (3) of section 55(d) of the 1986 Code is amended by adding at the end thereof the following new sentence: “In the case of a taxpayer described in paragraph (1)(C)(i), alternative minimum taxable income shall be increased by the lesser of (i) 25 percent of the excess of alternative minimum taxable income (determined without regard to this sentence) over $155,000, or (ii) $20,000.”. (b) Amendments to Section 56 of the 1986 Code.— (1) Paragraph (3) of section 56(a) of the 1986 Code is amended by adding at the end thereof the following new sentence: “For purposes of the preceding sentence, in the case of a contract described in section 460(e)(1), the percentage of the contract completed shall be determined under section 460(b)(2) by using the simplified procedures for allocation of costs prescribed under section 460(b)(4).” (2) Subparagraph (E) of section 56(b)(1) of the 1986 Code is amended to read as follows: “(E) Standard deduction and deduction for personal exemptions not allowed.—The standard deduction under section 63(c), the deduction for personal exemptions under section 151, and the deduction under section 642(b) shall not be allowed”. (3) Subparagraph (Q of section 56(b)(1) of the 1986 Code is amended by striking out “and” at the end of clause (ii), by striking out the period at the end of clause (iii) and inserting in lieu thereof a comma, and by adding at the end thereof the following new clauses: “(iv) in lieu of the exception under section 163(d)(3)(B)(i), the term ‘investment interest’ shall not include any qualified housing interest (as defined in subsection (e)), and “(v) the adjustments of this section and sections 57 and 58 shall apply in determining net investment income under section 163(d).” (4) Clause (iii) of section 56(b)(1)(C) of the 1986 Code is amended— (A) by striking out “specified activity bond” and inserting in lieu thereof “specified private activity bond”, and (B) by striking out “section 56(a)(5)(B)” and inserting m lieu thereof “section 57(a)(5)(B)”. (5) Subparagraph (A) of section 56(d)(2) of the 1986 Code is amended— 102 STAT. 3429 (A) by striking out “(other than subsection (a)(6) thereof)”, and (B) by adding at the end thereof the following new sentence: “An item of tax preference shall be taken into account under clause (ii) only to the extent such item increased the amount of the net operating loss for the taxable year under section 172(c).” (6) (A) Paragraph (1) of section 56(e) of the 1986 Code is amended— (i) by striking out “interest which is” and inserting in lieu thereof “interest which is qualified residence interest (as defined in section 163(h)(3)) and is”, and (ii) by striking out “section 163(h)(3)” in subparagraph (B) and inserting in lieu thereof “section 163(h)(4) . (B) Paragraph (3) of section 56(e) of the 1986 Code is amended by striking out “interest paid or accrued” and inserting in lieu thereof “interest which is qualified residence interest (as defined in section 163(h)(3)) and is paid or accrued”. (7) The last sentence of section 56(0(2)(6) of the 1986 Code is amended by striking out “any such taxes” and inserting in lieu thereof “any such taxes (otherwise eligible for the credit provided by section 901 without regard to section 901(j))”. (8) Clause (iii) of section 56(f)(3)(A) of the 1986 Code is amended by striking out “an income statement” and inserting in lieu thereof “an income statement for a substantial nontax purpose”. (9) Subparagraph (B) of section 56(f)(3) of the 1986 Code is amended by striking out “paragraph (3)(A)” and inserting in lieu thereof “this subsection”. (10) Subparagraph (C) of section 56(f)(3) of the 1986 Code is amended by adding at the end thereof the following new sentence: “If the taxpayer has 2 or more statements described in the clause (or subclause) with the lowest number designation, the applicable financial statement shall be the one of such statements specified in regulations.” (11) (A) Subparagraph (F) of section 56(f)(2) of the 1986 Code is amended to read as follows: “(F) Treatment of taxes on dividends from 936 corporations.— “(i) In general.—For purposes of determining the alternative minimum tax foreign tax credit, 50 percent of any withholding tax or income tax paid to a possession of the United States with respect to dividends received from a corporation eligible for the credit provided by section 936 shall be treated as a tax paid to a foreign country by the corporation receiving the dividend. “(ii) Limitation.— If the aggregate amount of the dividends referred to in clause (i) for any taxable year exceeds the excess referred to in paragraph (1), the amount treated as a tax paid to a foreign country under clause (i) shall not exceed the amount which would be so treated without regard to this clause multiplied by a fraction— “(I) the numerator of which is the excess referred to in paragraph (1), and 102 STAT. 3430 “(II) the denominator of which is the aggregate amount of such dividends. “(iii) Treatment of taxes imposed on 936 corporation.—For purposes of this subparagraph, taxes paid by any corporation eligible for the credit provided by section 936 to a possession of the United States shall be treated as a withholding tax paid with respect to any dividend paid by such corporation to the extent such taxes would be treated as paid by the corporation receiving the dividend under rules similar to the rules of section 902 (and the amount of any such dividend shall be increased by the amount so treated).” (B) Clause (iii) of section 56(g)(4)(C) of the 1986 Code is amended by striking out “clause (ii)(I)” and inserting in lieu thereof “clause (i)” (12) Clause (iii) of section 56(g)(4)(B) of the 1986 Code is amended by adding at the end thereof the following new sentence: “The preceding sentence shall not apply to any annuity contract held under a plan described in section 403(a). (13) Paragraph (1) of section 56(c) of the 1986 Code is amended— (A) by striking out “adjusted earnings and profits” in the paragraph heading and inserting in lieu thereof “adjusted current earnings”, and (B) by striking out “Adjusted earnings and profits” in the heading of subparagraph (B) and inserting in lieu thereof “Adjusted current earnings”. (14) (A) Subsection (b) of section 56 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(3) Treatment of incentive stock options.— Section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an incentive stock option (as defined in section 422A). The adjusted basis of any stock so acquired shall be determined on the basis of the treatment prescribed by the preceding sentence.” (B) Paragraph (3) of section 57(a) of the 1986 Code is hereby repealed. (C) The amendments made by this paragraph shall apply with respect to options exercised after December 31, 1987. (15) Clause (i) of section 56(a)(1)(A) of the 1986 Code is amended by striking out “real” in the heading and inserting in lieu thereof “personal”. (16) The heading of paragraph (1) of section 56(b) of the 1986 Code is amended by striking out “itemized”. (17) Subparagraph (A) of section 56(g)(4) of the 1986 Code is amended by adding at the end thereof the following new clauses: “(vi) Election to have cumulative limitation.— “(I) In general.—In the case of any property placed in service during a taxable year to which an election under this clause applies, in lieu of applying clause (i), the depreciation deduction for such property for any taxable year shall be the lesser of the accumulated 168(g) depreciation or the accumulated book depreciation; reduced by the aggregate amount of the depreciation deductions 102 STAT. 3431determined under this subclause with respect to such property for prior taxable years. “(II) Accumulated 166(g) depreciation.—For purposes of this clause, the term ‘accumulated section 168(g) depreciation’ means the aggregate amount of the depreciation deductions determined under the alternative system of section 168(g) with respect to the property for all periods before the close of the taxable year. “(III) Accumulated book depreciation.—For purposes of this clause, the term ‘accumulated book depreciation’ means the aggregate amount of the depreciation deductions determined under the method used for book purposes with respect to the property for all periods before the close of the taxable year. “(IV) Election.—The taxpayer may make an election under this clause for any taxable year beginning after 1989. Such an election, once made with respect to any such taxable year, shall apply to all property placed in service during such tax-able year, and shall be irrevocable. “(V) Similar rules for property described in clause (i), (iii), OR (iv).—Rules similar to the rules of the preceding provisions of this clause shall also apply in the case of property to which clause (ii), (iii), or (iv) applies. “(vii) Special rule for certain property.—In the case of any property described in paragraph (1), (2), (3), or (4) of section 168(f), the amount of depreciation allowable for purposes of the regular tax shall be treated as the amount allowable under the alternative system of section 168(g).” (18) Paragraph (4) of section 56(g) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(I) Adjusted basis.—The adjusted basis of any property with respect to which an adjustment under this paragraph applies shall be determined by applying the treatment prescribed in this paragraph.” 102 STAT. 3432 (19) Subsection (a) of section 56 of the 1986 Code is amended by adding at the end thereof the following new paragraph: (8) Section 87 not applicable.—Section 87 (relating to alcohol fuel credit) shall not apply.” (c) Amendments to Section 57 of the 1986 Code.— (1) Clause (iii) of section 57(a)(5)(C) of the 1986 Code is amended by inserting “(whether a current or advance refunding)” after “any refunding bond”. (2) Clause (i) of section 57(a)(5)(C) of the 1986 Code is amended to read as follows: “(i) In general.—For purposes of this part, the term ‘specified private activity bond’ means any private activity bond (as defined in section 141) which is issued after August 7, 1986, and the interest on which is not includible in gross income under section 103.” (3) Subparagraph (A) of section 57(a)(6) of the 1986 Code is amended by inserting “or 642(c)” after “section 170”. (d) Amendments to Section 58 of the 1986 Code.— (1) Paragraph (2) of section 58(a) of the 1986 Code is amended— (A) by striking out “(as modified by section 461(i)(4)(A))”, and (B) by striking out “section 469(d), without regard to paragraph (1)(B) thereof” and inserting in lieu thereof “section 469(c)”. (2) Paragraph (3) of section 58(a) of the 1986 Code is amended by striking out “section 469(g)(1)(C)” and inserting in lieu thereof “section 469(j)(2)”. (3) Subsection (a) of section 58 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(4) Determination of loss.—In determining the amount of the loss from any tax shelter farm activity, the adjustments of sections 56 and 57 shall apply.” (4) Subsection (b) of section 58 of the 1986 Code is amended by striking out paragraphs (1), (2), and (3), and inserting in lieu thereof the following: “(1) the adjustments of sections 56 and 57 shall apply, “(2) the provisions of section 469(m) (relating to phase-in of disallowance) shall not apply, and ”(3) in lieu of applying section 469(j)(7), the passive activity loss of a taxpayer shall be computed without regard to qualified housing interest (as defined in section 56(e)).” (e) Amendments to Section 59 of the 1986 Code.— (1) Paragraph (2) of section 59(e) of the 1986 Code is amended by striking out “would have been allowable as a deduction” and inserting in lieu thereof “would have been allowable as a deduction (determined without regard to section 291)”. (2) Subsection (h) of section 59 of the 1986 Code is amended by striking out “taxable year—” and all that follows and inserting in lieu thereof “taxable year with the adjustments of sections 56, 57, and 58.” (3) Paragraph (1) of section 59(a) of the 1986 Code is amended by striking out “and” at the end of subparagraph (B), by striking out the period at the end of subparagraph (C) and inserting in lieu thereof “, and”, and by adding at the end thereof the following new subparagraph: 102 STAT. 3433 “(D) the determination of whether any income is high-taxed income for purposes of section 9O4(d)(2) were made on the basis of the applicable rate specified in section 55(b)(1)(A) in Lieu of the highest rate of tax specified in section 1 or 11 (whichever applies).” (4) Subsection (i) of section 59 of the 1986 Code is amended— (A) by striking out “of this subtitle” and inserting in lieu thereof “of this subtitle (other than this part)”, and (B) by striking out “by this title” and inserting in lieu thereof “by this subtitle”. (f) Transitional Provisions.— (1) In the case of the taxable year of an estate or trust which begins before January 1, 1987, and ends on or after such date, the items of tax preference apportioned to any beneficiary of such estate or trust under section 58(c) of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) shall be taken into account for purposes of determining the amount of the tax imposed by section 55 of the Internal Revenue Code of 1986 (as amended by the Tax Reform Act of 1986) on such beneficiary for such beneficiary’s taxable year in which such taxable year of the estate or trust ends. (2) The last sentence of subparagraph (B) of section 701(f)(6) of the Reform Act is amended to read as follows: “The aggregate amount of investment tax credits with respect to the unit in Mississippi allowed solely by reason of being described in this subparagraph shall not exceed $141,000,000.” (3) Subsection (f) of section 701 of the Reform Act is amended by adding at the end thereof the following new paragraph: “(7) Agreement vessel depreciation adjustment.— “(A) For purposes of part VI of subchapter A of chapter 1 of the Internal Revenue Code of 1986, in the case of a qualified taxpayer, alternative minimum taxable income for the taxable year shall be reduced by an amount equal to the agreement vessel depreciation adjustment. “(B) For purposes of this paragraph, the agreement vessel depreciation adjustment shall be an amount equal to the depreciation deduction that would have been allowable for such year under section 167 of such Code with respect to agreement vessels placed in service before January 1, 1987, if the basis of such vessels had not been reduced under section 607 of the Merchant Marine Act of 1936, as amended, and if depreciation with respect to such vessel had been computed using the 25-year straight-line method. The aggregate amount by which basis of a qualified tax-payer is treated as not reduced by reason of this subparagraph shall not exceed $100,000,000. “(C) For purposes of this paragraph, the term ‘qualified taxpayer’ means a parent corporation incorporated in the State of Delaware on December 1, 1972, and engaged in water transportation, and includes any other corporation which is a member of the affiliated group of which the parent corporation is the common parent. No taxpayer shall be treated as a qualified corporation for any taxable year beginning after December 31, 1991.” (4) (A) If any property to which this paragraph applies is placed in service in a taxable year which begins before Janu-102 STAT. 3434ary 1, 1987, and ends on or after August 1, 1986, the item of tax preference determined under section 57(a) of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) with respect to such property shall be the excess of— (i) the amount allowable as a deduction for depreciation or amortization for such taxable year, over (ii) the amount which would be determined for such taxable year under the rules of paragraph (1) or (5) (which-ever is appropriate) of section 56(a) of the Internal Revenue Code of 1954 (as amended by the Tax Reform Act of 1986). (B) This paragraph shall apply to any property— (i) which is described in paragraph (4) or (12) of section 57(a) of the Internal Revenue Code of 1954 (as so in effect), and (ii) to which paragraph (1) or (5) of section 56(a) of the Internal Revenue Code of 1986 would apply if the taxable year referred to in subparagraph (A) began after December 31, 1986. (5) In determining the amount of the alternative minimum tax foreign tax credit under section 59 of the 1986 Code, there shall not be taken into account any taxes paid or accrued in a taxable year beginning after December 31, 1986, which are treated under section 904(c) of the 1986 Code as paid or accrued in a taxable year beginning on or before December 31, 1986. (g) Miscellaneous Amendments.— (1) Subparagraph (K) of section 26(b)(2) of the 1986 Code is amended by striking out the comma at the end thereof and inserting in lieu thereof “).”. (2) (A) So much of section 38(c) as precedes paragraph (4) thereof is amended to read as follows: “(c) Limitation Based on Amount of Tax.— (1) In general.— The credit allowed under subsection (a) for any taxable year shall not exceed the excess (if any) of the taxpayer’s net income tax over the greater of— “(A) the tentative minimum tax for the taxable year, or “(B) 25 percent of so much of the taxpayer’s net regular tax liability as exceeds $25,000. For purposes of the preceding sentence, the term ‘net income tax’ means the sum of the regular tax liability and the tax imposed by section 55, reduced by the credits allowable under subparts A and B of this part, and the term ‘net regular tax liability’ means the regular tax liability reduced by the sum of the credits allowable under subparts A and B of this part. (2) Regular investment tax credit may offset 25 percent of minimum tax.— “(A) In general.— In the case of a C corporation, the amount determined under paragraph (1)(A) shall be reduced by the lesser of— “(i) the portion of the regular investment tax credit not used against the normal limitation, or “(ii) 25 percent of the taxpayer’s tentative minimum tax for the taxable year. “(B) Portion of regular investment tax credit not used against normal limit.— For purposes of subparagraph (A), the portion of the regular investment tax credit 102 STAT. 3435for any taxable year not used against the normal limitation is the excess (if any) of— “(i) the portion of the credit under subsection (a) which is attributable to the application of the regular percentage under section 46, over “(ii) the limitation of paragraph (1) (without regard to this paragraph) reduced by the portion of the credit under subsection (a) which is not so attributable. “(C) Limitation.—In no event shall this paragraph permit the allowance of a credit which would result in a net chapter 1 tax less than an amount equal to 10 percent of the amount determined under section 55(b)(1)(A) without regard to the alternative tax net operating loss deduction. For purposes of the preceding sentence, the term ‘net chapter 1 tax’ means the sum of the regular tax liability for the taxable year and the tax imposed by section 55 for the taxable year, reduced by the sum of the credits allowable under this part for the taxable year (other than under section 34).” (B) Subsection (c) of section 38 of the 1986 Code is amended— (i) by redesignating paragraph (4) as paragraph (3), and (ii) by striking out “subparagraphs (A) and (B) of paragraph (1)” each place it appears in such paragraph and inserting in lieu thereof “subparagraph (B) of paragraph (1)”. (3) (A) Subsection (c) of section 47 of the 1986 Code is amended by striking out “or D” and inserting in lieu thereof “D, or G”. (B) Subparagraph (D) of section 42(j)(4) of the 1986 Code is amended by striking out “or D” and inserting in lieu thereof “D, or G”. (4) The last sentence of clause (ii) of section 53(d)(1)(B) of the 1986 Code is amended by striking out “earnings and profits” and inserting in lieu thereof “current earnings”. (5) Sections 173(b), 174(e)(2), and 263(c) of the 1986 Code are each amended by striking out “section 59(d)” and inserting in lieu thereof “section 59(e)”. (6) Section 511 of the 1986 Code is amended by striking out subsection (d). (7) Sections 616(e) and 617(j) of the 1986 Code are each amended by striking out “section 58(i)” and inserting in lieu thereof “section 59(e)”. (8) Paragraph (4) of section 701(c) of the Reform Act is amended by striking out “section 631(a)” and inserting in lieu thereof ^section 221(h)**« (9) Subparagraph (B) of section 1362(e)(5) of the 1986 Code is amended by striking out “Subsection (d)(2)” and inserting in lieu thereof “Subsection (d)”. (10) Subsection (a) of section 6154 of the 1986 Code (as in effect before its repeal by the Revenue Act of 1987) is amended by striking out “11, 59A” and inserting in lieu thereof “11, 55, 59 A” (11) Paragraph (1) of section 962(a) of the 1986 Code is amended— (A) by striking out “section 1” and inserting in lieu thereof “sections 1 and 55”, and (B) by striking out “section 11” and inserting in lieu thereof “sections 11 and 55”. 102 STAT. 3436 (12) Subsection (h) of section 32 of the 1986 Code is amended by striking out “for taxpayers other than corporations”. (13) (A) Subsection (d) of section 2 of the 1986 Code is amended by striking out “the tax imposed by section 1” and inserting in lieu thereof “the taxes imposed by sections 1 and 55”. (B) Subsection (d) of section 11 of the 1986 Code is amended by striking out “the tax imposed by subsection (a)” and inserting in lieu thereof “the taxes imposed by subsection (a) and section 55”.