AMENDMENTS RELATED TO TITLE VIII OF THE REFORM ACT.

SEC. 1008. AMENDMENTS RELATED TO TITLE VIII OF THE REFORM ACT. (a) Amendments Related to Section 801 of the Reform Act.— (1) (A) Subparagraph (B) of section 448(d)(2) of the 1986 Code (defining qualified personal service corporation) is amended by striking out “or indirectly” and inserting in lieu thereof “(or indirectly through 1 or more partnerships, S corporations, or qualified personal service corporations not described in paragraph (2) or (3) of subsection (a))”. (B) Section 448(d) of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(8) Use of related parties, etc.—The Secretary shall prescribe such regulations as may be necessary to prevent the use of related parties, pass-thru entities, or intermediaries to avoid the application of this section.” (2) Subparagraph (C) of section 448(d)(4) of the 1986 Code (relating to special rules for application of paragraph (2)) is amended by striking out “all such members” and inserting in lieu thereof “such group”. (3) Paragraph (2) of section 461(i) of the 1986 Code is amended to read as follows: “(2) Special rule for spudding of oil or gas wells.— “(A) In general.— In the case of a tax shelter, economic performance with respect to amounts paid during the tax-able year for drilling an oil or gas well shall be treated as having occurred within a taxable year if drilling of the well commences before the close of the 90th day after the close of the taxable year. “(B) Deduction limited to cash basis.— “(i) Tax shelter partnerships.—In the case of a tax shelter which is a partnership, in applying section 704(d) to a deduction or loss for any taxable year attributable to an item which is deductible by reason of subparagraph (A), the term ‘cash basis’ shall be substituted for the term ‘adjusted basis’. “(ii) Other tax shelters.—Under regulations prescribed by the Secretary, in the case of a tax shelter other than a partnership, the aggregate amount of the deductions allowable by reason of subparagraph (A) for any taxable year shall be limited in a manner similar to the limitation under clause (i). “(C) Cash basis defined.—For purposes of subparagraph (B), a partner’s cash basis in a partnership shall be equal to the adjusted basis of such partner’s interest in the partner-ship, determined without regard to— “(i) any liability of the partnership, and “(ii) any amount borrowed by the partner with respect to such partnership which— 102 STAT. 3437 “(I) was arranged by the partnership or by any person who participated in the organization, sale, or management of the partnership (or any person related to such person within the meaning of section 46.5(b)(3)(C)), or “(II) was secured by any asset of the partner-ship.” (4) Section 464 of the 1986 Code (relating to limitations on deductions for certain farming expenses) is amended by adding at the end thereof the following new subsection: “(g) Termination.—Except as provided in subsection (f), subsections (a) and (b) shall not apply to any taxable year beginning after December 31, 1986.” (5) Paragraph (4) of section 801(d) of the Reform Act is amended by striking out “the completed contract method” and inserting in lieu thereof “a method of accounting for long-term contracts”. (6) Section 801(d) of the Reform Act is amended by adding at the end thereof the following new paragraph: “(5) Special rule for paragraphs (21 and (3).—If any loan, lease, contract, or evidence of any transaction to which paragraph (2) or (3) applies is transferred after June 10, 1987, to a person other than a related party (within the meaning of paragraph (2)), paragraph (2) or (3) shall cease to apply on and after (7) Paragraph (3) of section 448(d) of the 1986 Code is amended by adding at the end thereof the following new sentence: “An S corporation shall not be treated as a tax shelter for purposes of this section merely by reason of being required to file a notice of exemption from registration with a State agency described in section 461(i)(3)(A), but only if there is a requirement applicable to all corporations offering securities for sale in the State that to be exempt from such registration the corporation must file such a notice.” (8) Subparagraph (C) of section 448(d)(4) of the 1986 Code is amended by striking out “substantially all of” and inserting in lieu thereof “90 percent or more of”. (9) Paragraph (3) of section 448(c) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(D) Treatment of predecessors.—Any reference in this subsection to an entity shall include a reference to any predecessor of such entity.” (b) Amendments Related to Section 803 of the Reform Act — (1) Paragraph (2) of section 263Ala) of the 1986 Code is amended by adding at the end thereof the following new sentence: “Any cost which (but for this subsection) could not be taken into account in computing taxable income for any taxable year shall not be treated as a cost described in this paragraph.” (2) Section 263A(c) of the 1986 Code (relating to general exceptions) is amended— (A) by striking out “263(c), 616(a), or 617(a)” and inserting in lieu thereof “263(c), 263(i), 291(b)(2), 616, or 617”, and (B) by adding at the end thereof the following new paragraph: “(6) Coordination with section 59(e).— Paragraphs (2) and (3) shall apply to any amount allowable as a deduction under 102 STAT. 3438section 59(e) for qualified expenditures described in subparagraphs (B), (C), (D), and (E) of paragraph (2) thereof.” (3) Subparagraph (B) of section 263A(d)(2) of the 1986 Code (relating to special rule for person with minority interest who materially participates) is amended— (A) by striking out “such grove, orchard, or vineyard” in clause (i) and inserting in lieu thereof “the plants described in subparagraph (A) at all times during the taxable year in which such amounts were paid or incurred”, and (B) by striking out “such grove, orchard, or vineyard during the 4-taxable year period beginning with the taxable year in which the grove, orchard, or vineyard was lost or damaged” and inserting in lieu thereof “the plants described in subparagraph (A) during the taxable year in which such amounts were paid or incurred”. (4) Paragraph (3) of section 263A(0 of the 1986 Code (relating to interest relating to property used to produce property) is amended— (A) by striking out “incurred or continued in connection with” and inserting in lieu thereof “allocable (as determined under paragraph (2)) to”, and (B) by inserting “(as so determined)” after “allocable”. (5) Section 447(b) of the 1986 Code is amended— (A) by striking out “of” before “expenses”, and (B) by striking out “of” before “Expenses” in the heading thereof. (6) Section 447(g)(1) of the 1986 Code is amended by striking out “trade or business of farming” each place it appears and inserting in lieu thereof “qualified farming trade or business”. (7) Paragraph (4)(A)(i) of section 803(d) of the Reform Act is amended by striking out “203” each place it appears and inserting in lieu thereof “204”. (8) The allocation used in the regulations prescribed under section 263A(h)(2) of the Internal Revenue Code of 1986 for apportioning storage costs and related handling costs shall be determined by dividing the amount of such costs by the beginning inventory balances and the purchases during the year and by multiplying the resulting allocation ratio by inventory amounts determined in accordance with the provisions of the joint explanatory statement of the committee of conference of the conference report accompanying H.R. 3838 (H.R. Rept. No. 99–841, Vol. no 99th Cong., 2d Sess. 11–306–307 (1986)). (c) Amendments Related to Section 804 of the Reform Act.— (1) Paragraph (3) of section 460(b) of the 1986 Code is amended— (A) by striking out “subparagraph” and inserting in lieu thereof “paragraph”, (B) by striking out “paragraph (1)” each place it appears in subparagraph (B) and inserting in lieu thereof “subparagraph (A)”, and (C) by striking out “paragraph (1)” in subparagraph (C) and inserting in lieu thereof “subparagraph (B)”. (2) (A) Section 460(b) of the 1986 Code (relating to percentage of completion method) is amended by adding at the end thereof the following new paragraph: “(4) Special rules.— 102 STAT. 3439 “(A) Simplified method of cost allocation.—In the case of any long-term contract, the Secretary may prescribe a simplified procedure for allocation of costs to such contract in lieu of the method of allocation under subsection (c). “(B) Look-back method not to apply to certain con-tracts.— Paragraph (2)(B) and subsection (a)(2) shall not apply to any contract— “(i) the gross price of which (as of the completion of the contract) does not exceed the lesser of— “(I) $1,000,000, or “(II) 1 percent of the average annual gross receipts of the taxpayer for the 3 taxable years preceding the taxable year in which the contract was completed, and “(ii) which is completed within 2 years of the contract commencement date. For purposes of this subparagraph, rules similar to the rules of subsections (e)(2) and (f)(3) shall apply.” (B) Section 460(6)(2) of the 1986 Code is amended by striking out “In” and inserting in lieu thereof “Except as provided in paragraph (4), in”. (3) Subparagraph (B) of section 804(d)(2) of the Reform Act is amended by striking out “section 263A(c)(5)” and inserting in lieu thereof “section 460(c)(5)”. (4) (A) Paragraph (3) of section 460(b) of the 1986 Code is amended by adding at the end thereof the fol lowing new sentences: “For purposes of the preceding sentence, any amount received or accrued after completion of the contract shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such amount was received or accrued) such amount to its value as of the completion of the contract. The taxpayer may elect with respect to any contract to have the preceding sentence not apply to such contract.” (B) Subparagraph (B) of section 46()(b)(2) of the 1986 Code is amended by striking out “completion of the contract” and inserting in lieu thereof “completion of the contract (or, with respect to any amount received or accrued after completion of the contract, when such amount is so received or accrued)”, (d) Amendment Related to Section 805 of the Reform Act.— (1) Section 166(d)(1)(A) of the 1986 Code is amended by striking out “subsections (a) and (c)” and inserting in lieu thereof “subsection (a)”. (2) Subsection (b) of section 805 of the Reform Act is amended by inserting “, as amended by section 901(d)(4),” after “Section 166”. (3) Subsection (a) of section 582 of the 1986 Code is amended by striking out “subsections (a), (b), and (c) of section 166” and inserting in lieu thereof “subsections (a) and (b) of section 166”. (e) Amendments Related to Section 806 of the Reform Act.— (1) (A) Clause (i) of section 706(b)(1)(B) of the 1986 Code is amended to read as follows: “(i) the majority interest taxable year (as defined in paragraph (4)),”. (B) Paragraph (4) of section 706(b) of the 1986 Code is amended to read as follows: 102 STAT. 3440 “(4) Majority interest taxable year; limitation on required changes.— “(A) Majority interest taxable year defined.— For purposes of paragraph (I)(B)(i)— “(i) In general.—The term ‘majority interest tax-able year’ means the taxable year (if any) which, on each testing day, constituted the taxable year of 1 or more partners having (on such day) an aggregate interest in partnership profits and capital of more than 50 percent. “(ii) Testing days.— The testing days shall be— “(I) the 1st day of the partnership taxable year (determined without regard to clause (i)), or “(II) the days during such representative period as the Secretary may prescribe. “(B) Further change not required for 3 years.—Except as provided in regulations necessary to prevent the avoidance of this section, if, by reason of paragraph (I)(B)(i), the taxable year of a partnership is changed, such partner-ship shall not be required to change to another taxable year for either of the 2 taxable years following the year of change.” (2) Clause (iii) of section 706(b)(1)(B) of the 1986 Code is amended by striking out “or such other period as the Secretary may prescribe in regulations” and inserting in lieu thereof “unless the Secretary by regulations prescribes another period”. (3) Section 706(b) of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(5) Application with other sections.—Except as provided in regulations, for purposes of determining the taxable year to which a partnership is required to change by reason of this subsection, changes in taxable years of other persons required by this subsection, section 441(i), section 584(h), section 645, or section 1378(a) shall be taken into account.” (4) Paragraph (2) of section 441(i) of the 1986 Code (defining personal service corporation) is amended by adding at the end thereof the following: “A corporation shall not be treated as a personal service corporation unless more than 10 percent of the stock (by value) in such corporation is held by employee-owners (within the meaning of section 269A(b)(2), as modified by the preceding sentence). If a corporation is a member of an affiliated group filing a consolidated return, all members of such group shall be taken into account in determining whether such corporation is a personal service corporation.” (5) (A) Section 584 of the 1986 Code (relating to common trust funds) is amended by adding at the end thereof the following new subsection: “(h) Taxable Year of Common Trust Fund.—For purposes of this subtitle, the taxable year of any common trust fund shall be the calendar year.” (B) The amendment made by subparagraph (A) shall take effect as if included in the amendments made by section 806 of the Reform Act, except that section 806(e)(1) shall be applied by substituting “December 31, 1987” for “December 31, 1986”. For purposes of section 806(e)(2) of the Reform Act— 102 STAT. 3441 (i) a participant in a common trust fund shall be treated in the same manner as a partner, and (ii) subparagraph (C) thereof shall be applied by substituting “December 31, 1987” for “December 31, 1986” and as if it did not contain the election to include all income in the short taxable year. (6) Section 806(c)(2) of the Reform Act is amended by striking out “Section 267(a)” and inserting in lieu thereof “Section 267(a)(2)”. (7) Subparagraph (O of section 806(e)(2) of the Reform Act is amended— (A) by striking out “(including such short taxable year)”, and (B) by striking out “short taxable year” the second place it appears and inserting in lieu thereof “the partner’s or shareholder’s taxable year with or within which the partnership’s or S corporation’s short taxable year ends”. (8) Section 806(e)(2) of the Reform Act is amended— (A) by striking out “any taxable year” and inserting in lieu thereof “the taxpayer’s first taxable year beginning after December 31, 1986”, and (B) by striking out “taxpayer” each place it appears and inserting in lieu thereof “partnership, S corporation, or personal service corporation”. (9) Nothing in section 806 of the Reform Act or in any legislative history relating thereto shall be construed as requiring the Secretary of the Treasury or his delegate to permit an automatic change of a taxable year. (10) Subsection (e) of section 806 of the Reform Act is amended by adding at the end thereof the following new paragraph: (11) Basis, etc. rules.— “(A) Basis rule.—The adjusted basis of any partner’s interest in a partnership or shareholder’s stock in an S corporation shall be determined as if all of the income to be taken into account ratably in the 4 taxable years referred to in paragraph (2)(C) were included in gross income for the 1st of such taxable years. “(B) Treatment of dispositions.—If any interest in a partnership or stock in an S corporation is disposed of before the last taxable year in the spread period, all amounts which would be included in the gross income of the partner or shareholder for subsequent taxable years in the spread period under paragraph (2)(C) and attributable to the interest or stock disposed of shall be included in gross income for the taxable year in which the disposition occurs. For purposes of the preceding sentence, the term ‘spread period’ means the period consisting of the 4 taxable years referred to in paragraph (2)(C).” (f) Amendments Related to Section 811 of the Reform Act.— (1) Paragraph (4) of section 453C(b) of the 1986 Code is amended— (A) by striking out “at any time during” and inserting in lieu thereof “as of the close of”, and (B) by striking out “as of the close of such taxable year in lieu” and inserting in lieu thereof “as of the close of such taxable year (determined by not taking into account any indebtedness described in paragraph (3)(B)) in lieu” 102 STAT. 3442 (2) So much of paragraph (2) of section 4530(d) of the 1986 Code as precedes subparagraph (A) is amended to read as follows: “(2) Excess allocable installment indebtedness.—If the allocable installment indebtedness for any taxable year exceeds the amount which may be allocated under paragraph (1) to applicable installment obligations arising in (and outstanding as of the close of) such taxable year, such excess shall—”. (3) Subparagraph (A) of section 453C(e)(1) of the 1986 Code is amended by adding at the end thereof the following new sentence: “Such term also includes any obligation held by any person if the basis of such obligation in the hands of such person is determined (in whole or in part) by reference to the basis of such obligation in the hands of another person and such obligation was an applicable installment obligation in the hands of such other person.” (4) Paragraph (2) of section 453C(e) of the 1986 Code (relating to aggregation rules) is amended by striking out “For” and inserting in lieu thereof “Except as provided in regulations, for”. (5) Subparagraph (B) of section 453C(e)(4) of the 1986 Code is amended by striking out “or (3)”. (6) Paragraph (4) of section 811(c) of the Reform Act is amended by striking out the second subparagraphs (D) and (E). (7) Paragraph (5) of section 811(c) of the Reform Act is amended by striking out “October 23, 1985” each place it appears and inserting in lieu thereof “October 23, 1984”. (8) Section 811(c) of the Reform Act is amended by adding at the end thereof the following new paragraph: “(9) Special rules.— For purposes of section 453C of the 1986 Code (as added by subsection (a))— “(A) Revolving credit plans, etc.—The term ‘applicable installment obligation’ shall not include any obligation arising out of any disposition or sale described in paragraph (1) or (2) of section 453(k) of such Code (as added by section 812(a)). “(B) Certain dispositions deemed made on first day of taxable year.—In the case of a taxpayer’s 1st taxable year ending after December 31, 1986, dispositions after February 28, 1986, and before the 1st day of such taxable year shall be treated as made on such 1st day.” (9) For purposes of applying the amendments made by this subsection and the amendments made by section 10202 of the Revenue Act of 1987, the provisions of this subsection shall be treated as having been enacted immediately before the enactment of the Revenue Act of 1987. (g) Amendments Related to Section 812 of the Reform Act.— (1) Section 453 of the 1986 Code is amended by redesignating the subsection (j) added by section 812 of the Reform Act as subsection (k). (2) Subsection (c) of section 453A of the 1986 Code (as in effect on the date before the date of the enactment of the Revenue Act of 1987) is amended by striking out “453(j)” and inserting in lieu thereof “453(k)”. 102 STAT. 3443 (3) Paragraph (1) of section 812(c) of the Reform Act is amended by striking out “paragraph (2)” and inserting in lieu thereof “paragraphs (2) and (3)”. (4) Subsection (c) of section 812 of the Reform Act is amended by redesignating paragraph (2) as paragraph (3) and inserting after paragraph (1) the following new paragraph: “(2) Sales of stock, etc.—Section 453(k)(2) of the Internal Revenue Code of 1986, as added by subsection (a), shall apply to sales after December 31, 1986, in taxable years ending after such date.” (5) Paragraph (3) of section 812(c) of the Reform Act (as so redesignated) is amended by striking out subparagraphs (B) and (C) and inserting in lieu thereof the following: “(B) such change shall be treated as having been made with the consent of the Secretary, “(C) the period for taking into account adjustments under section 481 of such Code by reason of such change shall be equal to 4 years, and “(D) except as provided in paragraph (4), the amount taken into account in each of such 4 years shall be the applicable percentage (determined in accordance with the following table) of the net adjustment: “In the case of the: The applicable percentage is: 1st taxable year 15 2nd taxable year 25 3rd taxable year 30 4th taxable year 30 If the taxpayer’s last taxable year beginning before January 1, 1987, was the taxpayer’s 1st taxable year in which sales were made under a revolving credit plan, all adjustments under section 481 of such Code shall be taken into account in the taxpayer’s 1st taxable year beginning after December 31, 1986.” (6) Subsection (c) of section 812 of the Reform Act is amended by adding at the end thereof the following new paragraphs: “(4) Acceleration of adjustments where contraction in amount of installment obligations.— “(A) In general.— If the percentage determined under subparagraph (B) for any taxable year in the adjustment period exceeds the percentage which would otherwise apply under paragraph (3)(D) for such taxable year (determined after the application of this paragraph for prior taxable years in the adjustment period)— “(i) the percentage determined under subparagraph (B) shall be substituted for the applicable percentage which would otherwise apply under paragraph (3)(D), and “(ii) any increase in the applicable percentage by reason of clause (i) shall be applied to reduce the applicable percentage determined under paragraph (3)(D) for subsequent taxable years in the adjustment period (beginning with the 1st of such subsequent tax-able years). “(B) Determination of percentage.— For purposes of subparagraph (A), the percentage determined under this subparagraph for any taxable year in the adjustment period is the excess (if any) of— 102 STAT. 3444 “(i) the percentage determined by dividing the aggregate contraction in revolving installment obligations by the aggregate face amount of such obligations outstanding as of the close of the taxpayer’s last taxable year beginning before January 1, 1987, over “(ii) the sum of the applicable percentages under paragraph (3)(D) (as modified by this paragraph) for prior taxable years in the adjustment period. “(C) Aggregate contraction in revolving installment obligations.— For purposes of subparagraph (B), the aggregate contraction in revolving installment obligations is the amount by which— “(i) the aggregate face amount of the revolving installment obligations outstanding as of the close of the taxpayer’s last taxable year beginning before January 1, 1987, exceeds “(ii) the aggregate face amount of the revolving installment obligations outstanding as of the close of the taxable year involved. “(D) Revolving installment obligations.—For purposes of this paragraph, the term ‘revolving installment obligations’ means installment obligations arising under a revolving credit plan. “(E) Treatment of certain obligations disposed of on or before October 26, 1987.— For purposes of subparagraphs (B)(i) and (C)(i), in determining the aggregate face amount of revolving installment obligations outstanding as of the close of the taxpayer’s last taxable year beginning before January 1, 1987, there shall not be taken into ac-count any obligation— “(i) which was disposed of to an unrelated person on or before October 26, 1987, or “(ii) was disposed of to an unrelated person on or after such date pursuant to a binding written contract in effect on October 26, 1987, and at all times thereafter before such disposition. For purposes of the preceding sentence, the term ‘unrelated person’ means any person who is not a related person (as defined in section 453(g) of the Internal Revenue Code of 1986). “(5) Limitation on losses from sales of obligations under revolving credit plans.— If 1 or more obligations arising under a revolving credit plan and taken into account under paragraph (3) are disposed of during the adjustment period, then, notwithstanding any other provision of law— “(A) no losses from such dispositions shall be recognized, and “(B) the aggregate amount of the adjustment for taxable years in the adjustment period (in reverse order of time) shall be reduced by the amount of such losses. “(6) Adjustment period.—For purposes of paragraphs (4) and (5), the adjustment period is the 4-year period under paragraph (3).”. (h) Amendment Related to Section 821 of the Reform Act.—Section 821(b)(3) of the Reform Act is amended by adding at the end thereof the following new sentence: “The preceding sentence shall also apply to any taxable year beginning after August 16, 1986, and 102 STAT. 3445before January 1, 1987, if the taxpayer treated such income in the same manner for the taxable year preceding such taxable year.” (i) Amendment Related to Section 822 of the Reform Act.—Paragraph (1) of section 703(b) of the 1986 Code is amended by striking out “or (d)(4)”. (j) Amendments Related to Section 824 of the Reform Act.— (1) Section 6501(o) of the 1986 Code which relates to cross references is amended by striking out paragraph (3). (2) Paragraph (4) of section 824(c) of the Reform Act is amended by striking out “an indemnity agreement” and inserting in lieu thereof “an underwriting agreement”.