LONG-TERM CONTRACT PROVISIONS.

SEC. 5041. LONG-TERM CONTRACT PROVISIONS. (a) General Rule.— Subsection (a) of section 460 of the 1986 Code is amended— (1) by striking out “70 percent” each place it appears (including in the heading of paragraph (2)) and inserting in lieu thereof “90 percent”, and (2) by striking out “30 percent” in paragraph (1)(B) and inserting in lieu thereof “10 percent”. (b) Special Rules for Residential Construction Contracts.— (1) Exception for home construction contracts.— Paragraph (1) of section 460(e) of the 1986 Code is amended to read as follows: “(1) In general.— Subsections (a), (b), and (c) (1) and (2) shall not apply to— “(A) any home construction contract, or “(B) any other construction contract entered into by a taxpayer— “(i) who estimates (at the time such contract is entered into) that such contract will be completed within the 2-year period beginning on the contract commencement date of such contract, and “(ii) whose average annual gross receipts for the 3 taxable years preceding the taxable year in which such contract is entered into do not exceed $10,000,000. In the case of a home construction contract with respect to which the requirements of clauses (i) and (ii) of subparagraph (B) are not met, section 263A shall apply notwithstanding subsection (c)(4) thereof.” (2) Special treatment for other residential construction contracts.— Subsection (e) of section 460 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(5) Special rule for residential construction contracts which are not home construction contracts.— In the case of any residential construction contract which is not a home construction contract, subsection (a) shall be applied— “(A) by substituting ‘70 percent’ for ‘90 percent’ each place it appears, and “(B) by substituting ‘30 percent’ for ‘10 percent’.” (3) Definitions.— Subsection (e) of section 460 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(6) Definitions relating to residential construction contracts.— For purposes of this subsection— “(A) Home construction contract.— The term ‘home construction contract’ means any construction contract if 80 percent or more of the estimated total contract costs (as of the close of the taxable year in which the contract was102 STAT. 3674 entered into) are reasonably expected to be attributable to the building, construction, reconstruction, or rehabilitation of— “(i) dwelling units contained in buildings containing 4 or fewer dwelling units, and “(ii) improvements to real property directly related to such dwelling units and located on the site of such dwelling units. For purposes of clause (i), each townhouse or rowhouse shall be treated as a separate building. “(B) Residential construction contract.— The term ‘residential construction contract’ means any contract which would be described in subparagraph (A) if clause (i) of such subparagraph reads as follows: “ ‘(i) dwelling units (as defined in section 167(k)), and’.” (4) Certain home construction contracts not subject to minimum tax.— Paragraph (3) of section 56(a) of the 1986 Code is amended by adding at the end thereof the following new sentence: “The preceding sentence shall not apply to any home construction contract (as defined in section 460(e)(6)) with respect to which the requirements of clauses (i) and (ii) of section 460(e)(1)(B) are met.” (c) Regulatory Authority.— Section 460 of the 1986 Code is amended by adding at the end thereof the following new subsection: “(h) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations to prevent the use of related parties, pass-thru entities, intermediaries, options, or other similar arrangements to avoid the application of this section.” (d) Simplified Look-Back Method for Pass-Thru Entities.— Subsection (b) of section 460 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(5) Simplified look-back method for pass-thru entities.— “(A) In general.— In the case of a pass-thru entity— “(i) the look-back method of paragraph (3) shall be applied at the entity level, “(ii) in determining overpayments and underpayments for purposes of applying paragraph (3)(B)— “(I) any increase in the income under the con-tract for any taxable year by reason of the allocation under paragraph (3)(A) shall be treated as giving rise to an underpayment determined by applying the highest rate for such year to such increase, and “(II) any decrease in such income for any taxable year by reason of such allocation shall be treated as giving rise to an overpayment determined by applying the highest rate for such year to such decrease, and “(iii) any interest required to be paid by the taxpayer under paragraph (3) shall be paid by such entity (and any interest entitled to be received by the taxpayer under paragraph (3) shall be paid to such entity). “(B) Exceptions.— 102 STAT. 3675 “(i) Closely held pass-thru entities.— This paragraph shall not apply to any closely held pass-thru entity. “(ii) Foreign contracts.— This paragraph shall not apply to any contract unless substantially all of the income from such contract is from sources in the United States. “(C) Other definitions.— For purposes of this paragraph— “(i) Highest rate.— The term ‘highest rate’ means— “(I) the highest rate of tax specified in section 11, or “(II) if at all times during the year involved more than 50 percent of the interests in the entity are held by individuals directly or through 1 or more other pass-thru entities, the highest rate of tax specified in section 1. “(ii) Pass-thru entity.— The term ‘pass-thru entity’ means any— “(I) partnership, “(II) S corporation, or “(III) trust. “(iii) Closely held pass-thru entity.— The term ‘closely held pass-thru entity’ means any pass-thru entity if, at any time during any taxable year for which there is income under the contract, 50 percent or more (by value) of the beneficial interests in such entity are held (directly or indirectly) by or for 5 or fewer persons. For purposes of the preceding sentence, rules similar to the constructive ownership rules of section 1563(e) shall apply.” (e) Effective Dates.— (1) Subsections (a), (b), and (c).— (A) In general.— Except as otherwise provided in this paragraph, the amendments made by subsections (a), (b), and (c) shall apply to contracts entered into on or after June 21, 1988. (B) Binding bids.— The amendments made by subsections (a), (b), and (c) shall not apply to any contract resulting from the acceptance of a bid made before June 21, 1988. The preceding sentence shall apply only if the bid could not have been revoked or altered at any time on or after June 21, 1988. (C) Special rule for certain ship contracts.—The amendments made by subsections (a), (b), and (c) shall not apply in the case of a qualified ship contract (as defined in section 10203(b)(2)(B) of the Revenue Act of 1987). (2) Subsection (d).— The amendment made by subsection (d) shall apply as if included in the amendments made by section 804 of the Reform Act; except that such amendment shall not apply to any contract completed in a taxable year ending before the date of the enactment of this Act, if the due date (determined with regard to extensions) for the return for such year is before such date of enactment. (d) Study.— The Secretary of the Treasury or his delegate shall conduct a study of the revenue realization method of accounting for long-term contracts and of improvements to the percentage of102 STAT. 3676 completion method of accounting for such contracts. Not later than the date 6 months after the date of the enactment of this Act, the Secretary shall submit a report on such study to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate.