26 USC 460 - Special rules for long-term contracts

Collapse to view only § 460. Special rules for long-term contracts

§ 451. General rule for taxable year of inclusion
[§ 452. Repealed.
§ 453. Installment method
§ 453A. Special rules for nondealers
§ 453B. Gain or loss on disposition of installment obligations
[§ 453C. Repealed.
§ 454. Obligations issued at discount
§ 455. Prepaid subscription income
§ 456. Prepaid dues income of certain membership organizations
§ 457. Deferred compensation plans of State and local governments and tax-exempt organizations
§ 457A. Nonqualified deferred compensation from certain tax indifferent parties
§ 458. Magazines, paperbacks, and records returned after the close of the taxable year
§ 460. Special rules for long-term contracts

§ 451. General rule for taxable year of inclusion

(a) General rule

(b) Inclusion not later than for financial accounting purposes

(1) Income taken into account in financial statement

(A) In generalIn the case of a taxpayer the taxable income of which is computed under an accrual method of accounting, the all events test with respect to any item of gross income (or portion thereof) shall not be treated as met any later than when such item (or portion thereof) is taken into account as revenue in—

(i) an applicable financial statement of the taxpayer, or

(ii) such other financial statement as the Secretary may specify for purposes of this subsection.

(B) ExceptionThis paragraph shall not apply to—

(i) a taxpayer which does not have a financial statement described in clause (i) or (ii) of subparagraph (A) for a taxable year, or

(ii) any item of gross income in connection with a mortgage servicing contract.

(2) Coordination with special methods of accounting

(3) Applicable financial statementFor purposes of this subsection, the term “applicable financial statement” means—

(A) a financial statement which is certified as being prepared in accordance with generally accepted accounting principles and which is—

(i) a 10–K (or successor form), or annual statement to shareholders, required to be filed by the taxpayer with the United States Securities and Exchange Commission,

(ii) an audited financial statement of the taxpayer which is used for—(I) credit purposes,(II) reporting to shareholders, partners, or other proprietors, or to beneficiaries, or(III) any other substantial nontax purpose,

but only if there is no statement of the taxpayer described in clause (i), or

(iii) filed by the taxpayer with any other Federal agency for purposes other than Federal tax purposes, but only if there is no statement of the taxpayer described in clause (i) or (ii),

(B) a financial statement which is made on the basis of international financial reporting standards and is filed by the taxpayer with an agency of a foreign government which is equivalent to the United States Securities and Exchange Commission and which has reporting standards not less stringent than the standards required by such Commission, but only if there is no statement of the taxpayer described in subparagraph (A), or

(C) a financial statement filed by the taxpayer with any other regulatory or governmental body specified by the Secretary, but only if there is no statement of the taxpayer described in subparagraph (A) or (B).

(4) Allocation of transaction price

(5) Group of entities

(1) In generalA taxpayer which computes taxable income under the accrual method of accounting, and receives any advance payment during the taxable year, shall—

(A) except as provided in subparagraph (B), include such advance payment in gross income for such taxable year, or

(B) if the taxpayer elects the application of this subparagraph with respect to the category of advance payments to which such advance payment belongs, the taxpayer shall—

(i) to the extent that any portion of such advance payment is required under subsection (b) to be included in gross income in the taxable year in which such payment is received, so include such portion, and

(ii) include the remaining portion of such advance payment in gross income in the taxable year following the taxable year in which such payment is received.

(2) Election

(A)

(B) Period to which election applies

(3) Taxpayers ceasing to exist

(4) Advance paymentFor purposes of this subsection—

(A) In generalThe term “advance payment” means any payment—

(i) the full inclusion of which in the gross income of the taxpayer for the taxable year of receipt is a permissible method of accounting under this section (determined without regard to this subsection),

(ii) any portion of which is included in revenue by the taxpayer in a financial statement described in clause (i) or (ii) of subsection (b)(1)(A) for a subsequent taxable year, and

(iii) which is for goods, services, or such other items as may be identified by the Secretary for purposes of this clause.

(B) ExclusionsExcept as otherwise provided by the Secretary, such term shall not include—

(i) rent,

(ii) insurance premiums governed by subchapter L,

(iii) payments with respect to financial instruments,

(iv) payments with respect to warranty or guarantee contracts under which a third party is the primary obligor,

(v) payments subject to section 871(a), 881, 1441, or 1442,

(vi) payments in property to which section 83 applies, and

(vii) any other payment identified by the Secretary for purposes of this subparagraph.

(D) Allocation of transaction price

(d) Special rule in case of death

(e) Special rule for employee tips

(f) Special rule for crop insurance proceeds or disaster payments

(g) Special rule for proceeds from livestock sold on account of drought, flood, or other weather-related conditions

(1) In general

(2) Limitation

(3) Special election rules

(h) Special rule for utility services

(1) In general

(2) Definition and special ruleFor purposes of this subsection—

(A) Utility servicesThe term “utility services” includes—

(i) the providing of electrical energy, water, or sewage disposal,

(ii) the furnishing of gas or steam through a local distribution system,

(iii) telephone or other communication services, and

(iv) the transporting of gas or steam by pipeline.

(B) Year in which services providedThe taxable year in which services are treated as provided to customers shall not, in any manner, be determined by reference to—

(i) the period in which the customers’ meters are read, or

(ii) the period in which the taxpayer bills (or may bill) the customers for such service.

(i) Treatment of interest on frozen deposits in certain financial institutions

(1) In generalIn the case of interest credited during any calendar year on a frozen deposit in a qualified financial institution, the amount of such interest includible in the gross income of a qualified individual shall not exceed the sum of—

(A) the net amount withdrawn by such individual from such deposit during such calendar year, and

(B) the amount of such deposit which is withdrawable as of the close of the taxable year (determined without regard to any penalty for premature withdrawals of a time deposit).

(2) Interest tested each year

(3) Deferral of interest deduction

(4) Frozen depositFor purposes of this subsection, the term “frozen deposit” means any deposit if, as of the close of the calendar year, any portion of such deposit may not be withdrawn because of—

(A) the bankruptcy or insolvency of the qualified financial institution (or threat thereof), or

(B) any requirement imposed by the State in which such institution is located by reason of the bankruptcy or insolvency (or threat thereof) of 1 or more financial institutions in the State.

(5) Other definitions

(j) Special rule for cash options for receipt of qualified prizes

(1) In general

(2) Qualified prize option; qualified prizeFor purposes of this subsection—

(A) In generalThe term “qualified prize option” means an option which—

(i) entitles an individual to receive a single cash payment in lieu of receiving a qualified prize (or remaining portion thereof), and

(ii) is exercisable not later than 60 days after such individual becomes entitled to the qualified prize.

(B) Qualified prizeThe term “qualified prize” means any prize or award which—

(i) is awarded as a part of a contest, lottery, jackpot, game, or other similar arrangement,

(ii) does not relate to any past services performed by the recipient and does not require the recipient to perform any substantial future service, and

(iii) is payable over a period of at least 10 years.

(3) Partnership, etc.

(k) Special rule for sales or dispositions to implement Federal Energy Regulatory Commission or State electric restructuring policy

(1) In generalIn the case of any qualifying electric transmission transaction for which the taxpayer elects the application of this section, qualified gain from such transaction shall be recognized—

(A) in the taxable year which includes the date of such transaction to the extent the amount realized from such transaction exceeds—

(i) the cost of exempt utility property which is purchased by the taxpayer during the 4-year period beginning on such date, reduced (but not below zero) by

(ii) any portion of such cost previously taken into account under this subsection, and

(B) ratably over the 8-taxable year period beginning with the taxable year which includes the date of such transaction, in the case of any such gain not recognized under subparagraph (A).

(2) Qualified gainFor purposes of this subsection, the term “qualified gain” means, with respect to any qualifying electric transmission transaction in any taxable year—

(A) any ordinary income derived from such transaction which would be required to be recognized under section 1245 or 1250 for such taxable year (determined without regard to this subsection), and

(B) any income derived from such transaction in excess of the amount described in subparagraph (A) which is required to be included in gross income for such taxable year (determined without regard to this subsection).

(3) Qualifying electric transmission transactionFor purposes of this subsection, the term “qualifying electric transmission transaction” means any sale or other disposition before January 1, 2008 (before January 1, 2021, in the case of a qualified electric utility), of—

(A) property used in the trade or business of providing electric transmission services, or

(B) any stock or partnership interest in a corporation or partnership, as the case may be, whose principal trade or business consists of providing electric transmission services,

but only if such sale or disposition is to an independent transmission company.

(4) Independent transmission companyFor purposes of this subsection, the term “independent transmission company” means—

(A) an independent transmission provider approved by the Federal Energy Regulatory Commission,

(B) a person—

(i) who the Federal Energy Regulatory Commission determines in its authorization of the transaction under section 203 of the Federal Power Act (16 U.S.C. 824b) or by declaratory order is not a market participant within the meaning of such Commission’s rules applicable to independent transmission providers, and

(ii) whose transmission facilities to which the election under this subsection applies are under the operational control of a Federal Energy Regulatory Commission-approved independent transmission provider before the close of the period specified in such authorization, but not later than the date which is 4 years after the close of the taxable year in which the transaction occurs, or

(i) a person which is approved by that Commission as consistent with Texas State law regarding an independent transmission provider, or

(ii) a political subdivision or affiliate thereof whose transmission facilities are under the operational control of a person described in clause (i).

(5) Exempt utility propertyFor purposes of this subsection:

(A) In generalThe term “exempt utility property” means property used in the trade or business of—

(i) generating, transmitting, distributing, or selling electricity, or

(ii) producing, transmitting, distributing, or selling natural gas.

(B) Nonrecognition of gain by reason of acquisition of stock

(6) Qualified electric utility

(A) a transmitting utility (as defined in section 3(23) of the Federal Power Act (16 U.S.C. 796(23))) with respect to the transmission facilities to which the election under this subsection applies, and

(B) an electric utility (as defined in section 3(22) of the Federal Power Act (16 U.S.C. 796(22))).

(7) Special rule for consolidated groups

(8) Time for assessment of deficienciesIf the taxpayer has made the election under paragraph (1) and any gain is recognized by such taxpayer as provided in paragraph (1)(B), then—

(A) the statutory period for the assessment of any deficiency, for any taxable year in which any part of the gain on the transaction is realized, attributable to such gain shall not expire prior to the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of the purchase of exempt utility property or of an intention not to purchase such property, and

(B) such deficiency may be assessed before the expiration of such 3-year period notwithstanding any law or rule of law which would otherwise prevent such assessment.

(9) Purchase

(10) Election

(11) Nonapplication of installment sales treatment

(Aug. 16, 1954, ch. 736, 68A Stat. 152; Pub. L. 89–97, title III, § 313(b), July 30, 1965, 79 Stat. 382; Pub. L. 91–172, title II, § 215(a), Dec. 30, 1969, 83 Stat. 573; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), title XXI, §§ 2102(a), (b), 2141(a), Oct. 4, 1976, 90 Stat. 1834, 1900, 1933; Pub. L. 99–514, title VIII, § 821(a), title IX, § 905(b), Oct. 22, 1986, 100 Stat. 2372, 2386; Pub. L. 100–647, title I, § 1009(d)(3), title VI, §§ 6030(a), 6033(a), Nov. 10, 1988, 102 Stat. 3450, 3694, 3695; Pub. L. 105–34, title IX, § 913(a), Aug. 5, 1997, 111 Stat. 878; Pub. L. 105–277, div. J, title V, § 5301(a), Oct. 21, 1998, 112 Stat. 2681–918; Pub. L. 108–357, title III, § 311(c), title VIII, § 909(a), Oct. 22, 2004, 118 Stat. 1467, 1657; Pub. L. 109–58, title XIII, § 1305(a), (b), Aug. 8, 2005, 119 Stat. 997; Pub. L. 110–343, div. B, title I, § 109(a)–(c), Oct. 3, 2008, 122 Stat. 3821; Pub. L. 111–312, title VII, § 705(a), Dec. 17, 2010, 124 Stat. 3311; Pub. L. 112–240, title IV, § 411(a), Jan. 2, 2013, 126 Stat. 2343; Pub. L. 113–295, div. A, title I, § 159(a), Dec. 19, 2014, 128 Stat. 4022; Pub. L. 114–113, div. Q, title I, § 191(a), Dec. 18, 2015, 129 Stat. 3075; Pub. L. 115–97, title I, § 13221(a), (b), Dec. 22, 2017, 131 Stat. 2113, 2115; Pub. L. 115–123, div. D, title I, § 40414(a), Feb. 9, 2018, 132 Stat. 152; Pub. L. 116–94, div. Q, title I, § 132(a), Dec. 20, 2019, 133 Stat. 3233.)

[§ 452. Repealed. June 15, 1955, ch. 143, § 1(a), 69 Stat. 134]

§ 453. Installment method

(a) General rule

(b) Installment sale definedFor purposes of this section—

(1) In general

(2) ExceptionsThe term “installment sale” does not include—

(A) Dealer dispositions

(B) Inventories of personal property

(d) Election out

(1) In general

(2) Time and manner for making election

(3) Election revocable only with consent

(e) Second dispositions by related persons

(1) In generalIf—

(A) any person disposes of property to a related person (hereinafter in this subsection referred to as the “first disposition”), and

(B) before the person making the first disposition receives all payments with respect to such disposition, the related person disposes of the property (hereinafter in this subsection referred to as the “second disposition”),

then, for purposes of this section, the amount realized with respect to such second disposition shall be treated as received at the time of the second disposition by the person making the first disposition.

(2) 2-year cutoff for property other than marketable securities

(A) In general

(B) Substantial diminishing of risk of ownershipThe running of the 2-year period set forth in subparagraph (A) shall be suspended with respect to any property for any period during which the related person’s risk of loss with respect to the property is substantially diminished by—

(i) the holding of a put with respect to such property (or similar property),

(ii) the holding by another person of a right to acquire the property, or

(iii) a short sale or any other transaction.

(3) Limitation on amount treated as receivedThe amount treated for any taxable year as received by the person making the first disposition by reason of paragraph (1) shall not exceed the excess of—

(A) the lesser of—

(i) the total amount realized with respect to any second disposition of the property occurring before the close of the taxable year, or

(ii) the total contract price for the first disposition, over

(B) the sum of—

(i) the aggregate amount of payments received with respect to the first disposition before the close of such year, plus

(ii) the aggregate amount treated as received with respect to the first disposition for prior taxable years by reason of this subsection.

(4) Fair market value where disposition is not sale or exchange

(5) Later payments treated as receipt of tax paid amounts

(6) Exception for certain dispositionsFor purposes of this subsection—

(A) Reacquisitions of stock by issuing corporation not treated as first dispositions

(B) Involuntary conversions not treated as second dispositions

(i) the death of the person making the first disposition, or

(ii) the death of the person acquiring the property in the first disposition,

and any transfer thereafter shall not be treated as a second disposition.

(7) Exception where tax avoidance not a principal purpose

(8) Extension of statute of limitations

(f) Definitions and special rulesFor purposes of this section—

(1) Related personExcept for purposes of subsections (g) and (h), the term “related person” means—

(A) a person whose stock would be attributed under section 318(a) (other than paragraph (4) thereof) to the person first disposing of the property, or

(B) a person who bears a relationship described in section 267(b) to the person first disposing of the property.

(2) Marketable securities

(3) Payment

(4) Purchaser evidences of indebtedness payable on demand or readily tradableReceipt of a bond or other evidence of indebtedness which—

(A) is payable on demand, or

(B) is readily tradable,

shall be treated as receipt of payment.

(5) Readily tradable definedFor purposes of paragraph (4), the term “readily tradable” means a bond or other evidence of indebtedness which is issued—

(A) with interest coupons attached or in registered form (other than one in registered form which the taxpayer establishes will not be readily tradable in an established securities market), or

(B) in any other form designed to render such bond or other evidence of indebtedness readily tradable in an established securities market.

(6) Like-kind exchangesIn the case of any exchange described in section 1031(b)—

(A) the total contract price shall be reduced to take into account the amount of any property permitted to be received in such exchange without recognition of gain,

(B) the gross profit from such exchange shall be reduced to take into account any amount not recognized by reason of section 1031(b), and

(C) the term “payment”, when used in any provision of this section other than subsection (b)(1), shall not include any property permitted to be received in such exchange without recognition of gain.

Similar rules shall apply in the case of an exchange which is described in section 356(a) and is not treated as a dividend.

(7) Depreciable property

(8) Payments to be received definedThe term “payments to be received” includes—

(A) the aggregate amount of all payments which are not contingent as to amount, and

(B) the fair market value of any payments which are contingent as to amount.

(g) Sale of depreciable property to controlled entity

(1) In generalIn the case of an installment sale of depreciable property between related persons—

(A) subsection (a) shall not apply,

(B) for purposes of this title—

(i) except as provided in clause (ii), all payments to be received shall be treated as received in the year of the disposition, and

(ii) in the case of any payments which are contingent as to the amount but with respect to which the fair market value may not be reasonably ascertained, the basis shall be recovered ratably, and

(C) the purchaser may not increase the basis of any property acquired in such sale by any amount before the time such amount is includible in the gross income of the seller.

(2) Exception where tax avoidance not a principal purpose

(3) Related persons

(h) Use of installment method by shareholders in certain liquidations

(1) Receipt of obligations not treated as receipt of payment

(A) In general

(B) Obligations attributable to sale of inventory must result from bulk saleSubparagraph (A) shall not apply to an installment obligation acquired in respect of a sale or exchange of—

(i) stock in trade of the corporation,

(ii) other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, and

(iii) property held by the corporation primarily for sale to customers in the ordinary course of its trade or business,

unless such sale or exchange is to 1 person in 1 transaction and involves substantially all of such property attributable to a trade or business of the corporation.

(C) Special rule where obligor and shareholder are related personsIf the obligor of any installment obligation and the shareholder are married to each other or are related persons (within the meaning of section 1239(b)), to the extent such installment obligation is attributable to the disposition by the corporation of depreciable property—

(i) subparagraph (A) shall not apply to such obligation, and

(ii) for purposes of this title, all payments to be received by the shareholder shall be deemed received in the year the shareholder receives the obligation.

(D) Coordination with subsection (e)(1)(A)

(E) Sales by liquidating subsidiaries

(2) Distributions received in more than 1 taxable year of shareholderIf—

(A) paragraph (1) applies with respect to any installment obligation received by a shareholder from a corporation, and

(B) by reason of the liquidation such shareholder receives property in more than 1 taxable year,

then, on completion of the liquidation, basis previously allocated to property so received shall be reallocated for all such taxable years so that the shareholder’s basis in the stock of the corporation is properly allocated among all property received by such shareholder in such liquidation.

(i) Recognition of recapture income in year of disposition

(1) In generalIn the case of any installment sale of property to which subsection (a) applies—

(A) notwithstanding subsection (a), any recapture income shall be recognized in the year of the disposition, and

(B) any gain in excess of the recapture income shall be taken into account under the installment method.

(2) Recapture income

(j) Regulations

(1) In general

(2) Selling price not readily ascertainable

(k) Current inclusion in case of revolving credit plans, etc.In the case of—

(1) any disposition of personal property under a revolving credit plan, or

(2) any installment obligation arising out of a sale of—

(A) stock or securities which are traded on an established securities market, or

(B) to the extent provided in regulations, property (other than stock or securities) of a kind regularly traded on an established market,

subsection (a) shall not apply, and, for purposes of this title, all payments to be received shall be treated as received in the year of disposition. The Secretary may provide for the application of this subsection in whole or in part for transactions in which the rules of this subsection otherwise would be avoided through the use of related parties, pass-thru entities, or intermediaries.

(l) Dealer dispositionsFor purposes of subsection (b)(2)(A)—

(1) In generalThe term “dealer disposition” means any of the following dispositions:

(A) Personal property

(B) Real property

(2) ExceptionsThe term “dealer disposition” does not include—

(A) Farm property

(B) Timeshares and residential lots

(i) In general

(ii) Dispositions to which subparagraph appliesA disposition is described in this clause if it is a disposition in the ordinary course of the taxpayer’s trade or business to an individual of—(I) a timeshare right to use or a timeshare ownership interest in residential real property for not more than 6 weeks per year, or a right to use specified campgrounds for recreational purposes, or(II) any residential lot, but only if the taxpayer (or any related person) is not to make any improvements with respect to such lot.

For purposes of subclause (I), a timeshare right to use (or timeshare ownership interest in) property held by the spouse, children, grandchildren, or parents of an individual shall be treated as held by such individual.

(3) Payment of interest on timeshares and residential lots

(A) In general

(B) Computation of interest

(i) In generalThe amount of interest referred to in subparagraph (A) for any taxable year shall be determined—(I) on the amount of the tax for such taxable year which is attributable to the payments received during such taxable year on installment obligations to which this subsection applies,(II) for the period beginning on the date of sale, and ending on the date such payment is received, and(III) by using the applicable Federal rate under section 1274 (without regard to subsection (d)(2) thereof) in effect at the time of the sale compounded semiannually.

(ii) Interest not taken into account

(iii) Taxable year of sale

(Added Pub. L. 96–471, § 2(a), Oct. 19, 1980, 94 Stat. 2247; amended Pub. L. 97–34, title II, § 202(c), Aug. 13, 1981, 95 Stat. 221; Pub. L. 97–448, title III, § 303, Jan. 12, 1983, 96 Stat. 2398; Pub. L. 98–369, div. A, title I, § 112(a), title IV, § 421(b)(6)(B), (C), July 18, 1984, 98 Stat. 635, 794; Pub. L. 99–514, title VI, §§ 631(e)(8), 642(a)(1)(D), (3), (b), title VIII, § 812(a), title XVIII, § 1809(c), Oct. 22, 1986, 100 Stat. 2274, 2284, 2371, 2821; Pub. L. 100–203, title X, § 10202(b), Dec. 22, 1987, 101 Stat. 1330–388; Pub. L. 100–647, title I, §§ 1006(e)(7), (i)(1), (2), 1008(g)(1), 1018(u)(25), (26), title II, § 2004(d)(1), (5), Nov. 10, 1988, 102 Stat. 3401, 3410, 3442, 3591, 3599; Pub. L. 106–170, title V, § 536(a), Dec. 17, 1999, 113 Stat. 1936; Pub. L. 106–573, § 2(a), Dec. 28, 2000, 114 Stat. 3061; Pub. L. 108–357, title VIII, § 897(a), Oct. 22, 2004, 118 Stat. 1649.)

§ 453A. Special rules for nondealers

(a) General rule

In the case of an installment obligation to which this section applies—

(1) interest shall be paid on the deferred tax liability with respect to such obligation in the manner provided under subsection (c), and

(2) the pledging rules under subsection (d) shall apply.

(b) Installment obligations to which section applies

(1) In general

(2) Special rule for interest payments

For purposes of subsection (a)(1), this section shall apply to an obligation described in paragraph (1) arising during a taxable year only if—

(A) such obligation is outstanding as of the close of such taxable year, and

(B) the face amount of all such obligations held by the taxpayer which arose during, and are outstanding as of the close of, such taxable year exceeds $5,000,000.

Except as provided in regulations, all persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as one person for purposes of this paragraph and subsection (c)(4).

(3) Exception for personal use and farm property

An installment obligation shall not be treated as described in paragraph (1) if it arises from the disposition—

(A) by an individual of personal use property (within the meaning of section 1275(b)(3)), or

(B) of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e)(4) or (5)).

(4) Special rule for timeshares and residential lots

(5) Sales price

(1) In general

(2) Computation of interest

For purposes of paragraph (1), the interest for any taxable year shall be an amount equal to the product of—

(A) the applicable percentage of the deferred tax liability with respect to such obligation, multiplied by

(B) the underpayment rate in effect under section 6621(a)(2) for the month with or within which the taxable year ends.

(3) Deferred tax liability

For purposes of this section, the term “deferred tax liability” means, with respect to any taxable year, the product of—

(A) the amount of gain with respect to an obligation which has not been recognized as of the close of such taxable year, multiplied by

(B) the maximum rate of tax in effect under section 1 or 11, whichever is appropriate, for such taxable year.

For purposes of applying the preceding sentence with respect to so much of the gain which, when recognized, will be treated as long-term capital gain, the maximum rate on net capital gain under section 1(h) shall be taken into account.

(4) Applicable percentage

For purposes of this subsection, the term “applicable percentage” means, with respect to obligations arising in any taxable year, the percentage determined by dividing—

(A) the portion of the aggregate face amount of such obligations outstanding as of the close of such taxable year in excess of $5,000,000, by

(B) the aggregate face amount of such obligations outstanding as of the close of such taxable year.

(5) Treatment as interest

(6) Regulations

(d) Pledges, etc., of installment obligations

(1) In general

For purposes of section 453, if any indebtedness (hereinafter in this subsection referred to as “secured indebtedness”) is secured by an installment obligation to which this section applies, the net proceeds of the secured indebtedness shall be treated as a payment received on such installment obligation as of the later of—

(A) the time the indebtedness becomes secured indebtedness, or

(B) the time the proceeds of such indebtedness are received by the taxpayer.

(2) Limitation based on total contract price

The amount treated as received under paragraph (1) by reason of any secured indebtedness shall not exceed the excess (if any) of—

(A) the total contract price, over

(B) any portion of the total contract price received under the contract before the later of the times referred to in subparagraph (A) or (B) of paragraph (1) (including amounts previously treated as received under paragraph (1) but not including amounts not taken into account by reason of paragraph (3)).

(3) Later payments treated as receipt of tax paid amounts

(4) Secured indebtedness

(e) Regulations

The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations—

(1) disallowing the use of the installment method in whole or in part for transactions in which the rules of this section otherwise would be avoided through the use of related persons, pass-thru entities, or intermediaries, and

(2) providing that the sale of an interest in a partnership or other pass-thru entity will be treated as a sale of the proportionate share of the assets of the partnership or other entity.

(Added Pub. L. 96–471, § 2(a), Oct. 19, 1980, 94 Stat. 2251; amended Pub. L. 99–514, title VIII, § 812(b), Oct. 22, 1986, 100 Stat. 2371; Pub. L. 100–203, title X, § 10202(c)[(1)], Dec. 22, 1987, 101 Stat. 1330–390; Pub. L. 100–647, title I, § 1008(g)(2), title II, § 2004(d)(2), (7), (8), title V, § 5076(a), (b)(1), Nov. 10, 1988, 102 Stat. 3442, 3599, 3600, 3682; Pub. L. 101–239, title VII, §§ 7812(c)(2), 7815(g), 7821(a)(1)–(3), (4)(B), Dec. 19, 1989, 103 Stat. 2412, 2420, 2423, 2424; Pub. L. 103–66, title XIII, § 13201(b)(4), Aug. 10, 1993, 107 Stat. 459; Pub. L. 106–170, title V, § 536(b), Dec. 17, 1999, 113 Stat. 1936; Pub. L. 115–97, title I, § 13001(b)(2)(C), Dec. 22, 2017, 131 Stat. 2096.)

§ 453B. Gain or loss on disposition of installment obligations

(a) General rule

If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and—

(1) the amount realized, in the case of satisfaction at other than face value or a sale or exchange, or

(2) the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange.

any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received.

(b) Basis of obligation

(d) Exception for distributions to which section 337(a) applies

(e) Life insurance companies

(1) In general

(2) Special rule where life insurance company elects to treat income as not related to insurance business

Paragraph (1) shall not apply to any transfer or deemed transfer of an installment obligation if the life insurance company elects (at such time and in such manner as the Secretary may by regulations prescribe) to determine its life insurance company taxable income—

(A) by returning the income on such installment obligation under the installment method prescribed in section 453, and

(B) as if such income were an item attributable to a noninsurance business.

(3) Noninsurance business

(A) In general

(B) Certain activities treated as insurance businesses

For purposes of subparagraph (A), any activity which is not an insurance business shall be treated as an insurance business if—

(i) it is of a type traditionally carried on by life insurance companies for investment purposes, but only if the carrying on of such activity (other than in the case of real estate) does not constitute the active conduct of a trade or business, or

(ii) it involves the performance of administrative services in connection with plans providing life insurance, pension, or accident and health benefits.

(f) Obligation becomes unenforceable

For purposes of this section, if any installment obligation is canceled or otherwise becomes unenforceable—

(1) the obligation shall be treated as if it were disposed of in a transaction other than a sale or exchange, and

(2) if the obligor and obligee are related persons (within the meaning of section 453(f)(1)), the fair market value of the obligation shall be treated as not less than its face amount.

(g) Transfers between spouses or incident to divorce

In the case of any transfer described in subsection (a) of section 1041 (other than a transfer in trust)—

(1) subsection (a) of this section shall not apply, and

(2) the same tax treatment with respect to the transferred installment obligation shall apply to the transferee as would have applied to the transferor.

(h) Certain liquidating distributions by S corporations

If—

(1) an installment obligation is distributed by an S corporation in a complete liquidation, and

(2) receipt of the obligation is not treated as payment for the stock by reason of section 453(h)(1),

then, except for purposes of any tax imposed by subchapter S, no gain or loss with respect to the distribution of the obligation shall be recognized by the distributing corporation. Under regulations prescribed by the Secretary, the character of the gain or loss to the shareholder shall be determined in accordance with the principles of section 1366(b).

(Added Pub. L. 96–471, § 2(a), Oct. 19, 1980, 94 Stat. 2252; amended Pub. L. 96–471, § 2(c)(3), Oct. 19, 1980, 94 Stat. 2254; Pub. L. 97–448, title III, § 302, Jan. 12, 1983, 96 Stat. 2398; Pub. L. 98–369, div. A, title I, § 43(c)(2), title II, § 211(b)(6), title IV, §§ 421(b)(3), 492(b)(3), July 18, 1984, 98 Stat. 558, 754, 794, 854; Pub. L. 99–514, title VI, § 631(e)(9), title X, § 1011(b)(1), title XVIII, § 1842(c), Oct. 22, 1986, 100 Stat. 2274, 2389, 2853; Pub. L. 100–647, title I, § 1006(e)(22), Nov. 10, 1988, 102 Stat. 3403; Pub. L. 101–508, title XI, § 11702(a)(2), Nov. 5, 1990, 104 Stat. 1388–514; Pub. L. 115–97, title I, § 13512(b)(1), Dec. 22, 2017, 131 Stat. 2142; Pub. L. 115–141, div. U, title IV, § 401(a)(111), Mar. 23, 2018, 132 Stat. 1189.)

[§ 453C. Repealed. Pub. L. 100–203, title X, § 10202(a)(1), Dec. 22, 1987, 101 Stat. 1330–388]

§ 454. Obligations issued at discount

(a) Non-interest-bearing obligations issued at a discount

(b) Short-term obligations issued on discount basis

In the case of any obligation—

(1) of the United States; or

(2) of a State or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia,

which is issued on a discount basis and payable without interest at a fixed maturity date not exceeding 1 year from the date of issue, the amount of discount at which such obligation is originally sold shall not be considered to accrue until the date on which such obligation is paid at maturity, sold, or otherwise disposed of.

In the case of a taxpayer who—

(1) holds a series E United States savings bond at the date of maturity, and

(2) pursuant to regulations prescribed under chapter 31 of title 31 (A) retains his investment in such series E bond in an obligation of the United States, other than a current income obligation, or (B) exchanges such series E bond for another nontransferable obligation of the United States in an exchange upon which gain or loss is not recognized because of section 1037 (or so much of section 1031 as relates to section 1037),

the increase in redemption value (to the extent not previously includible in gross income) in excess of the amount paid for such series E bond shall be includible in gross income in the taxable year in which the obligation is finally redeemed or in the taxable year of final maturity, whichever is earlier. This subsection shall not apply to a corporation, and shall not apply in the case of any taxable year for which the taxpayer’s taxable income is computed under an accrual method of accounting or for which an election made by the taxpayer under subsection (a) applies.

(Aug. 16, 1954, ch. 736, 68A Stat. 156; Pub. L. 86–346, title I, § 102, Sept. 22, 1959, 73 Stat. 621; Pub. L. 94–455, title XIX, §§ 1901(c)(2), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1803, 1834; Pub. L. 97–452, § 2(c)(2), Jan. 12, 1983, 96 Stat. 2478.)

§ 455. Prepaid subscription income

(a) Year in which included

(b) Where taxpayer’s liability ceases

In the case of any prepaid subscription income to which this section applies—

(1) If the liability described in subsection (d)(2) ends, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which the liability ends.

(2) If the taxpayer dies or ceases to exist, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which such death, or such cessation of existence, occurs.

(1) Election of benefits

(2) Scope of election

(3) When election may be made

(A) With consent

(B) Without consent

(4) Period to which election applies

(d) Definitions

For purposes of this section—

(1) Prepaid subscription income

(2) Liability

(3) Receipt of prepaid subscription income

(e) Deferral of income under established accounting procedures

(Added Pub. L. 85–866, title I, § 28(a), Sept. 2, 1958, 72 Stat. 1625; amended Pub. L. 94–455, title XIX, §§ 1901(a)(67), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1775, 1834.)

§ 456. Prepaid dues income of certain membership organizations

(a) Year in which included

(b) Where taxpayer’s liability ceases

In the case of any prepaid dues income to which this section applies—

(1) If the liability described in subsection (e)(2) ends, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which the liability ends.

(2) If the taxpayer ceases to exist, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which such cessation of existence occurs.

(1) Election of benefits

(2) Scope of election

(3) When election may be made

(A) With consent

(B) Without consent

(4) Period to which election applies

(d) Transitional rule

(1) Amount includible in gross income for election years

(2) Deductions of amounts included in income more than once

(e) Definitions

For purposes of this section—

(1) Prepaid dues income

(2) Liability

(3) Membership organization

The term “membership organization” means a corporation, association, federation, or other organization—

(A) organized without capital stock of any kind, and

(B) no part of the net earnings of which is distributable to any member.

(4) Receipt of prepaid dues income

(Added Pub. L. 87–109, § 1(a), July 26, 1961, 75 Stat. 222; amended Pub. L. 94–455, title XIX, §§ 1901(a)(68), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1775, 1834.)

§ 457. Deferred compensation plans of State and local governments and tax-exempt organizations

(a) Year of inclusion in gross income

(1) In generalAny amount of compensation deferred under an eligible deferred compensation plan, and any income attributable to the amounts so deferred, shall be includible in gross income only for the taxable year in which such compensation or other income—

(A) is paid to the participant or other beneficiary, in the case of a plan of an eligible employer described in subsection (e)(1)(A), and

(B) is paid or otherwise made available to the participant or other beneficiary, in the case of a plan of an eligible employer described in subsection (e)(1)(B).

(2) Special rule for rollover amounts

(3) Special rule for health and long-term care insurance

(b) Eligible deferred compensation plan definedFor purposes of this section, the term “eligible deferred compensation plan” means a plan established and maintained by an eligible employer—

(1) in which only individuals who perform service for the employer may be participants,

(2) which provides that (except as provided in paragraph (3)) the maximum amount which may be deferred under the plan for the taxable year (other than rollover amounts) shall not exceed the lesser of—

(A) the applicable dollar amount, or

(B) 100 percent of the participant’s includible compensation,

(3) which may provide that, for 1 or more of the participant’s last 3 taxable years ending before he attains normal retirement age under the plan, the ceiling set forth in paragraph (2) shall be the lesser of—

(A) twice the dollar amount in effect under subsection (b)(2)(A), or

(B) the sum of—

(i) the plan ceiling established for purposes of paragraph (2) for the taxable year (determined without regard to this paragraph), plus

(ii) so much of the plan ceiling established for purposes of paragraph (2) for taxable years before the taxable year as has not previously been used under paragraph (2) or this paragraph,

(4) which provides that compensation—

(A) in the case of an eligible employer described in subsection (e)(1)(A), will be deferred only if an agreement providing for such deferral has been entered into before the compensation is currently available to the individual, and

(B) in any other case, will be deferred for any calendar month only if an agreement providing for such deferral has been entered into before the beginning of such month,

(5) which meets the distribution requirements of subsection (d), and

(6) except as provided in subsection (g), which provides that—

(A) all amounts of compensation deferred under the plan,

(B) all property and rights purchased with such amounts, and

shall remain (until made available to the participant or other beneficiary) solely the property and rights of the employer (without being restricted to the provision of benefits under the plan), subject only to the claims of the employer’s general creditors.

A plan which is established and maintained by an employer which is described in subsection (e)(1)(A) and which is administered in a manner which is inconsistent with the requirements of any of the preceding paragraphs shall be treated as not meeting the requirements of such paragraph as of the 1st plan year beginning more than 180 days after the date of notification by the Secretary of the inconsistency unless the employer corrects the inconsistency before the 1st day of such plan year. A plan which is established and maintained by an employer which is described in subsection (e)(1)(A) shall not be treated as failing to meet the requirements of this subsection solely because the plan, or another plan maintained by the employer which meets the requirements of section 401(a) or 403(b), provides for matching contributions on account of qualified student loan payments as described in section 401(m)(13).

(d) Distribution requirements

(1) In generalFor purposes of subsection (b)(5), a plan meets the distribution requirements of this subsection if—

(A) under the plan amounts will not be made available to participants or beneficiaries earlier than—

(i) the calendar year in which the participant attains age 70½ (in the case of a plan maintained by an employer described in subsection (e)(1)(A), age 59½),

(ii) when the participant has a severance from employment with the employer,

(iii) when the participant is faced with an unforeseeable emergency (determined in the manner prescribed by the Secretary in regulations), or

(iv) except as may be otherwise provided by regulations, in the case of a plan maintained by an employer described in subsection (e)(1)(A), with respect to amounts invested in a lifetime income investment (as defined in section 401(a)(38)(B)(ii)), the date that is 90 days prior to the date that such lifetime income investment may no longer be held as an investment option under the plan,

(B) the plan meets the minimum distribution requirements of paragraph (2),

(C) in the case of a plan maintained by an employer described in subsection (e)(1)(A), the plan meets requirements similar to the requirements of section 401(a)(31), and

(D) except as may be otherwise provided by regulations, in the case of amounts described in subparagraph (A)(iv), such amounts will be distributed only in the form of a qualified distribution (as defined in section 401(a)(38)(B)(i)) or a qualified plan distribution annuity contract (as defined in section 401(a)(38)(B)(iv)).

Any amount transferred in a direct trustee-to-trustee transfer in accordance with section 401(a)(31) shall not be includible in gross income for the taxable year of transfer.

(2) Minimum distribution requirements

(3) Special rule for government plan

(4) Participant certificationIn determining whether a distribution to a participant is made when the participant is faced with an unforeseeable emergency, the administrator of a plan maintained by an eligible employer described in subsection (e)(1)(A) may rely on a written certification by the participant that the distribution is—

(A) made when the participant is faced with an unforeseeable emergency of a type which is described in regulations prescribed by the Secretary as an unforeseeable emergency, and

(B) not in excess of the amount required to satisfy the emergency need, and

that the participant has no alternative means reasonably available to satisfy such emergency need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the participant’s certification, and for procedures for addressing cases of participant misrepresentation.

(e) Other definitions and special rulesFor purposes of this section—

(1) Eligible employerThe term “eligible employer” means—

(A) a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State, and

(B) any other organization (other than a governmental unit) exempt from tax under this subtitle.

(2) Performance of service

(3) Participant

(4) Beneficiary

(5) Includible compensation

(6) Compensation taken into account at present value

(7) Community property laws

(8) Income attributable

(9) Benefits of tax exempt organization plans not treated as made available by reason of certain elections, etc.In the case of an eligible deferred compensation plan of an employer described in subsection (e)(1)(B)—

(A) Total amount payable is dollar limit or lessThe total amount payable to a participant under the plan shall not be treated as made available merely because the participant may elect to receive such amount (or the plan may distribute such amount without the participant’s consent) if—

(i) the portion of such amount which is not attributable to rollover contributions (as defined in section 411(a)(11)(D)) does not exceed the dollar limit under section 411(a)(11)(A), and

(ii) such amount may be distributed only if—(I) no amount has been deferred under the plan with respect to such participant during the 2-year period ending on the date of the distribution, and(II) there has been no prior distribution under the plan to such participant to which this subparagraph applied.

A plan shall not be treated as failing to meet the distribution requirements of subsection (d) by reason of a distribution to which this subparagraph applies.

(B) Election to defer commencement of distributionsThe total amount payable to a participant under the plan shall not be treated as made available merely because the participant may elect to defer commencement of distributions under the plan if—

(i) such election is made after amounts may be available under the plan in accordance with subsection (d)(1)(A) and before commencement of such distributions, and

(ii) the participant may make only 1 such election.

(10) Transfers between plans

(11) Certain plans excluded

(A) In generalThe following plans shall be treated as not providing for the deferral of compensation:

(i) Any bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plan.

(ii) Any plan paying solely length of service awards to bona fide volunteers (or their beneficiaries) on account of qualified services performed by such volunteers.

(B) Special rules applicable to length of service award plans

(i) Bona fide volunteerAn individual shall be treated as a bona fide volunteer for purposes of subparagraph (A)(ii) if the only compensation received by such individual for performing qualified services is in the form of—(I) reimbursement for (or a reasonable allowance for) reasonable expenses incurred in the performance of such services, or(II) reasonable benefits (including length of service awards), and nominal fees for such services, customarily paid by eligible employers in connection with the performance of such services by volunteers.

(ii) Limitation on accruals

(iii) Cost of living adjustment

(iv) Special rule for application of limitation on accruals for certain plans

(D) Certain voluntary early retirement incentive plans

(i) In generalIf an applicable voluntary early retirement incentive plan—(I) makes payments or supplements as an early retirement benefit, a retirement-type subsidy, or a benefit described in the last sentence of section 411(a)(9), and(II) such payments or supplements are made in coordination with a defined benefit plan which is described in section 401(a) and includes a trust exempt from tax under section 501(a) and which is maintained by an eligible employer described in paragraph (1)(A) or by an education association described in clause (ii)(II),

such applicable plan shall be treated for purposes of subparagraph (A)(i) as a bona fide severance pay plan with respect to such payments or supplements to the extent such payments or supplements could otherwise have been provided under such defined benefit plan (determined as if section 411 applied to such defined benefit plan).

(ii) Applicable voluntary early retirement incentive planFor purposes of this subparagraph, the term “applicable voluntary early retirement incentive plan” means a voluntary early retirement incentive plan maintained by—(I) a local educational agency (as defined in section 8101 of the Elementary and Secondary Education Act of 1965), or(II) an education association which principally represents employees of 1 or more agencies described in subclause (I) and which is described in section 501(c)(5) or (6) and exempt from tax under section 501(a).

(12) Exception for nonelective deferred compensation of nonemployees

(A) In general

(B) Nonelective deferred compensation

(13) Special rule for churches

(14) Treatment of qualified governmental excess benefit arrangements

(15) Applicable dollar amount

(A) In general

(B) Cost-of-living adjustments

(16) Rollover amounts

(A) General ruleIn the case of an eligible deferred compensation plan established and maintained by an employer described in subsection (e)(1)(A), if—

(i) any portion of the balance to the credit of an employee in such plan is paid to such employee in an eligible rollover distribution (within the meaning of section 402(c)(4)),

(ii) the employee transfers any portion of the property such employee receives in such distribution to an eligible retirement plan described in section 402(c)(8)(B), and

(iii) in the case of a distribution of property other than money, the amount so transferred consists of the property distributed,

then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid.

(B) Certain rules made applicable

(17) Trustee-to-trustee transfers to purchase permissive service creditNo amount shall be includible in gross income by reason of a direct trustee-to-trustee transfer to a defined benefit governmental plan (as defined in section 414(d)) if such transfer is—

(A) for the purchase of permissive service credit (as defined in section 415(n)(3)(A)) under such plan, or

(B) a repayment to which section 415 does not apply by reason of subsection (k)(3) thereof.

(18) Coordination with catch-up contributions for individuals age 50 or olderIn the case of an individual who is an eligible participant (as defined by section 414(v)) and who is a participant in an eligible deferred compensation plan of an employer described in paragraph (1)(A), subsections (b)(3) and (c) shall be applied by substituting for the amount otherwise determined under the applicable subsection the greater of—

(A) the sum of—

(i) the plan ceiling established for purposes of subsection (b)(2) (without regard to subsection (b)(3)), plus

(ii) the lesser of any designated Roth contributions made by the participant to the plan or the applicable dollar amount for the taxable year determined under section 414(v)(2)(B)(i), or

(B) the amount determined under the applicable subsection (without regard to this paragraph).

(f) Tax treatment of participants where plan or arrangement of employer is not eligible

(1) In generalIn the case of a plan of an eligible employer providing for a deferral of compensation, if such plan is not an eligible deferred compensation plan, then—

(A) the compensation shall be included in the gross income of the participant or beneficiary for the 1st taxable year in which there is no substantial risk of forfeiture of the rights to such compensation, and

(B) the tax treatment of any amount made available under the plan to a participant or beneficiary shall be determined under section 72 (relating to annuities, etc.).

(2) ExceptionsParagraph (1) shall not apply to—

(A) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a),

(B) an annuity plan or contract described in section 403,

(D) that portion of any plan which consists of a trust to which section 402(b) applies,

(E) a qualified governmental excess benefit arrangement described in section 415(m), and

(F) that portion of any applicable employment retention plan described in paragraph (4) with respect to any participant.

(3) DefinitionsFor purposes of this subsection—

(A) Plan includes arrangements, etc.

(B) Substantial risk of forfeiture

(4) Employment retention plansFor purposes of paragraph (2)(F)—

(A) In general

(B) Other rules

(i) Limitation

(ii) Treatment

(C) Applicable employment retention planThe term “applicable employment retention plan” means an employment retention plan maintained by—

(i) a local educational agency (as defined in section 8101 of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 7801)), or

(ii) an education association which principally represents employees of 1 or more agencies described in clause (i) and which is described in section 501(c)(5) or (6) and exempt from taxation under section 501(a).

(D) Employment retention plan

(i) retaining the services of the employee, or

(ii) rewarding such employee for the employee’s service with 1 or more such agencies or associations.

(g) Governmental plans must maintain set-asides for exclusive benefit of participants

(1) In general

(2) Taxability of trusts and participantsFor purposes of this title—

(A) a trust described in paragraph (1) shall be treated as an organization exempt from taxation under section 501(a), and

(B) notwithstanding any other provision of this title, amounts in the trust shall be includible in the gross income of participants and beneficiaries only to the extent, and at the time, provided in this section.

(3) Custodial accounts and contracts

(4) Death benefits under USERRA-qualified active military service

(Added Pub. L. 95–600, title I, § 131(a), Nov. 6, 1978, 92 Stat. 2779; amended Pub. L. 96–222, title I, § 101(a)(4), Apr. 1, 1980, 94 Stat. 196; Pub. L. 98–369, div. A, title IV, § 491(d)(33), July 18, 1984, 98 Stat. 851; Pub. L. 99–514, title XI, § 1107(a), Oct. 22, 1986, 100 Stat. 2426; Pub. L. 100–647, title I, § 1011(e)(1), (2), (9), (10), title VI, §§ 6064(a)–(c), 6071(c), Nov. 10, 1988, 102 Stat. 3460, 3461, 3700, 3701, 3705; Pub. L. 101–239, title VII, §§ 7811(g)(4), (5), 7816(j), Dec. 19, 1989, 103 Stat. 2409, 2421; Pub. L. 102–318, title V, § 521(b)(26), July 3, 1992, 106 Stat. 312; Pub. L. 104–188, title I, §§ 1421(b)(3)(C), 1444(b)(2), (3), 1447(a), (b), 1448(a), (b), 1458(a), Aug. 20, 1996, 110 Stat. 1796, 1810, 1812, 1813, 1819; Pub. L. 105–34, title X, § 1071(a)(2), Aug. 5, 1997, 111 Stat. 948; Pub. L. 107–16, title VI, §§ 611(d)(3)(B), (e), 615(a), 632(c)(1), 641(a)(1)(A)–(C), 646(a)(3), 647(b), 648(b), 649(a), (b), June 7, 2001, 115 Stat. 98, 102, 115, 118, 119, 126–128; Pub. L. 107–147, title IV, § 411(o)(9), (p)(5), Mar. 9, 2002, 116 Stat. 49, 51; Pub. L. 109–280, title VIII, §§ 829(a)(4), 845(b)(3), title XI, § 1104(a)(1), (b), Aug. 17, 2006, 120 Stat. 1002, 1015, 1058, 1059; Pub. L. 110–245, title I, § 104(c)(3), June 17, 2008, 122 Stat. 1627; Pub. L. 113–295, div. A, title II, § 221(a)(57)(H), Dec. 19, 2014, 128 Stat. 4047; Pub. L. 114–95, title IX, § 9215(uu)(2), Dec. 10, 2015, 129 Stat. 2183; Pub. L. 115–97, title I, § 13612(a)–(c), Dec. 22, 2017, 131 Stat. 2165; Pub. L. 115–141, div. U, title IV, § 401(a)(112), Mar. 23, 2018, 132 Stat. 1189; Pub. L. 116–94, div. M, § 104(b), div. O, title I, § 109(d), Dec. 20, 2019, 133 Stat. 3095, 3151; Pub. L. 117–328, div. T, title I, § 110(f), title III, §§ 306(a), 312(c), 334(b)(5), title VI, § 603(b)(2), Dec. 29, 2022, 136 Stat. 5293, 5343, 5348, 5370, 5392.)

§ 457A. Nonqualified deferred compensation from certain tax indifferent parties

(a) In general

(b) Nonqualified entityFor purposes of this section, the term “nonqualified entity” means—

(1) any foreign corporation unless substantially all of its income is—

(A) effectively connected with the conduct of a trade or business in the United States, or

(B) subject to a comprehensive foreign income tax, and

(2) any partnership unless substantially all of its income is allocated to persons other than—

(A) foreign persons with respect to whom such income is not subject to a comprehensive foreign income tax, and

(B) organizations which are exempt from tax under this title.

(1) In generalIf the amount of any compensation is not determinable at the time that such compensation is otherwise includible in gross income under subsection (a)—

(A) such amount shall be so includible in gross income when determinable, and

(B) the tax imposed under this chapter for the taxable year in which such compensation is includible in gross income shall be increased by the sum of—

(i) the amount of interest determined under paragraph (2), and

(ii) an amount equal to 20 percent of the amount of such compensation.

(2) Interest

(d) Other definitions and special rulesFor purposes of this section—

(1) Substantial risk of forfeiture

(A) In general

(B) Exception for compensation based on gain recognized on an investment asset

(i) In general

(ii) Investment assetFor purposes of clause (i), the term “investment asset” means any single asset (other than an investment fund or similar entity)—(I) acquired directly by an investment fund or similar entity,(II) with respect to which such entity does not (nor does any person related to such entity) participate in the active management of such asset (or if such asset is an interest in an entity, in the active management of the activities of such entity), and(III) substantially all of any gain on the disposition of which (other than such deferred compensation) is allocated to investors in such entity.

(iii) Coordination with special rule

(2) Comprehensive foreign income taxThe term “comprehensive foreign income tax” means, with respect to any foreign person, the income tax of a foreign country if—

(A) such person is eligible for the benefits of a comprehensive income tax treaty between such foreign country and the United States, or

(B) such person demonstrates to the satisfaction of the Secretary that such foreign country has a comprehensive income tax.

(3) Nonqualified deferred compensation plan

(A) In general

(B) Exception

(4) Exception for certain compensation with respect to effectively connected income

(5) Application of rules

(e) Regulations

(Added Pub. L. 110–343, div. C, title VIII, § 801(a), Oct. 3, 2008, 122 Stat. 3929; amended Pub. L. 115–141, div. U, title IV, § 401(a)(113), Mar. 23, 2018, 132 Stat. 1189.)

§ 458. Magazines, paperbacks, and records returned after the close of the taxable year

(a) Exclusion from gross income

(b) Definitions and special rulesFor purposes of this section—

(1) Magazine

(2) Paperback

(3) Record

(4) Separate application with respect to magazines, paperbacks, and records

(5) Qualified saleA sale of a magazine, paperback, or record is a qualified sale if—

(A) at the time of sale, the taxpayer has a legal obligation to adjust the sales price of such magazine, paperback, or record if it is not resold, and

(B) the sales price of such magazine, paperback, or record is adjusted by the taxpayer because of a failure to resell it.

(6) Amount excludedThe amount excluded under this section with respect to any qualified sale shall be the lesser of—

(A) the amount covered by the legal obligation described in paragraph (5)(A), or

(B) the amount of the adjustment agreed to by the taxpayer before the close of the merchandise return period.

(7) Merchandise return period

(A) Except as provided in subparagraph (B), the term “merchandise return period” means, with respect to any taxable year—

(i) in the case of magazines, the period of 2 months and 15 days first occurring after the close of taxable year, or

(ii) in the case of paperbacks and records, the period of 4 months and 15 days first occurring after the close of the taxable year.

(B) The taxpayer may select a shorter period than the applicable period set forth in subparagraph (A).

(8) Certain evidence may be substituted for physical return of merchandise

(A) is in the possession of the taxpayer at the close of the merchandise return period, and

(B) is satisfactory to the Secretary.

(9) Repurchase by the taxpayer not treated as resale

(1) Election of benefits

(2) Scope of election

(3) Period to which election applies

(4) Treatment as method of accounting

(d) 5-year spread of transitional adjustments for magazines

(e) Suspense account for paperbacks and records

(1) In general

(2) Initial opening balance

(3) Adjustments in suspense accountAt the close of each taxable year the suspense account shall be—

(A) reduced the excess (if any) of—

(i) the opening balance of the suspense account for the taxable year, over

(ii) the amount excluded from gross income for the taxable year under subsection (a), or

(B) increased (but not in excess of the initial opening balance) by the excess (if any) of—

(i) the amount excluded from gross income for the taxable year under subsection (a), over

(ii) the opening balance of the account for the taxable year.

(4) Gross income adjustments

(A) Reductions excluded from gross income

(B) Increases added to gross income

If the initial opening balance exceeds the dollar amount of returned merchandise which would have been taken into account under subsection (a) for the taxable year preceding the first taxable year for which the election is effective if this section had applied to such preceding taxable year, then an amount equal to the amount of such excess shall be included in gross income for such first taxable year.

(5) Subchapter C transactions

(Added Pub. L. 95–600, title III, § 372(a), Nov. 6, 1978, 92 Stat. 2860; amended Pub. L. 115–141, div. U, title IV, § 401(a)(114), (115), Mar. 23, 2018, 132 Stat. 1189.)

§ 460. Special rules for long-term contracts

(a) Requirement that percentage of completion method be used

(b) Percentage of completion method

(1) Requirements of percentage of completion methodExcept as provided in paragraph (3), in the case of any long-term contract with respect to which the percentage of completion method is used—

(A) the percentage of completion shall be determined by comparing costs allocated to the contract under subsection (c) and incurred before the close of the taxable year with the estimated total contract costs, and

(B) upon completion of the contract (or, with respect to any amount properly taken into account after completion of the contract, when such amount is so properly taken into account), the taxpayer shall pay (or shall be entitled to receive) interest computed under the look-back method of paragraph (2).

In the case of any long-term contract with respect to which the percentage of completion method is used, except for purposes of applying the look-back method of paragraph (2), any income under the contract (to the extent not previously includible in gross income) shall be included in gross income for the taxable year following the taxable year in which the contract was completed. For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under subparagraph (B) shall be treated as an increase in the tax imposed by this chapter for the taxable year in which the contract is completed (or, in the case of interest payable with respect to any amount properly taken into account after completion of the contract, for the taxable year in which the amount is so properly taken into account).

(2) Look-back methodThe interest computed under the look-back method of this paragraph shall be determined by—

(A) first, allocating income under the contract among taxable years before the year in which the contract is completed on the basis of the actual contract price and costs instead of the estimated contract price and costs,

(B) second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each taxable year referred to in subparagraph (A) which would result solely from the application of subparagraph (A), and

(C) then using the adjusted overpayment rate (as defined in paragraph (7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B).

For purposes of the preceding sentence, any amount properly taken into account 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 properly taken into account) 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.

(3) Special rules

(A) Simplified method of cost allocation

(B) Look-back method not to apply to certain contractsParagraph (1)(B) 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.

(4) Simplified look-back method for pass-thru entities

(A) In generalIn the case of a pass-thru entity—

(i) the look-back method of paragraph (2) shall be applied at the entity level,

(ii) in determining overpayments and underpayments for purposes of applying paragraph (2)(B)—(I) any increase in the income under the contract for any taxable year by reason of the allocation under paragraph (2)(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 (2) shall be paid by such entity (and any interest entitled to be received by the taxpayer under paragraph (2) shall be paid to such entity).

(B) Exceptions

(i) Closely held pass-thru entities

(ii) Foreign contracts

(i) Highest rateThe 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 entityThe term “pass-thru entity” means any—(I) partnership,(II) S corporation, or(III) trust.

(iii) Closely held pass-thru entity

(5) Election to use 10-percent method

(A) General rule

(B) 10-percent methodFor purposes of this paragraph—

(i) In general

(ii) 10-percent year

(D) Coordination with other provisions

(i) Simplified method of cost allocation

(ii) Look-back method

(6) Election to have look-back method not apply in de minimis cases

(A) Amounts taken into account after completion of contractParagraph (1)(B) shall not apply with respect to any taxable year (beginning after the taxable year in which the contract is completed) if—

(i) the cumulative taxable income (or loss) under the contract as of the close of such taxable year, is within

(ii) 10 percent of the cumulative look-back taxable income (or loss) under the contract as of the close of the most recent taxable year to which paragraph (1)(B) applied (or would have applied but for subparagraph (B)).

(B) De minimis discrepanciesParagraph (1)(B) shall not apply in any case to which it would otherwise apply if—

(i) the cumulative taxable income (or loss) under the contract as of the close of each prior contract year, is within

(ii) 10 percent of the cumulative look-back income (or loss) under the contract as of the close of such prior contract year.

(i) Contract year

(ii) Look-back income or loss

(iii) Discounting not applicable

(D) Contracts to which paragraph applies

(7) Adjusted overpayment rate

(A) In general

(B) Interest accrual periodFor purposes of subparagraph (A), the term “interest accrual period” means the period—

(i) beginning on the day after the return due date for any taxable year of the taxpayer, and

(ii) ending on the return due date for the following taxable year.

For purposes of the preceding sentence, the term “return due date” means the date prescribed for filing the return of the tax imposed by this chapter (determined without regard to extensions).

(1) Direct and certain indirect costs

(2) Costs identified under cost-plus and certain Federal contracts

(3) Allocation of production period interest to contract

(A) In general

(B) Production periodIn applying section 263A(f) for purposes of subparagraph (A), the production period shall be the period—

(i) beginning on the later of—(I) the contract commencement date, or(II) in the case of a taxpayer who uses an accrual method with respect to long-term contracts, the date by which at least 5 percent of the total estimated costs (including design and planning costs) under the contract have been incurred, and

(ii) ending on the contract completion date.

(4) Certain costs not includedThis subsection shall not apply to any—

(A) independent research and development expenses,

(B) expenses for unsuccessful bids and proposals, and

(5) Independent research and development expensesFor purposes of paragraph (4), the term “independent research and development expenses” means any expenses incurred in the performance of research or development, except that such term shall not include—

(A) any expenses which are directly attributable to a long-term contract in existence when such expenses are incurred, or

(B) any expenses under an agreement to perform research or development.

(6) Special rule for allocation of bonus depreciation with respect to certain property

(A) In general

(B) Qualified propertyFor purposes of this paragraph, the term “qualified property” means property described in section 168(k)(2) which—

(i) has a recovery period of 7 years or less, and

(ii) is placed in service before January 1, 2027 (January 1, 2028 in the case of property described in section 168(k)(2)(B)).

(d) Federal long-term contractFor purposes of this section—

(1) In generalThe term “Federal long-term contract” means any long-term contract—

(A) to which the United States (or any agency or instrumentality thereof) is a party, or

(B) which is a subcontract under a contract described in subparagraph (A).

(2) Special rules for certain taxable entities

(e) Exception for certain construction contracts

(1) In generalSubsections (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 (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3))—

(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) who meets the gross receipts test of section 448(c) for the taxable year in which such contract is entered into.

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) Rules related to gross receipts test

(A) Application of gross receipts test to individuals, etc.

(B) Coordination with section 481

(3) Construction contract

(4) Special rule for residential construction contracts which are not home construction contractsIn the case of any residential construction contract which is not a home construction contract, subsection (a) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1989) shall apply except that such subsection shall be applied—

(A) by substituting “70 percent” for “90 percent” each place it appears, and

(B) by substituting “30 percent” for “10 percent”.

(5) Definitions relating to residential construction contractsFor purposes of this subsection—

(A) Home construction contractThe 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 was entered into) are reasonably expected to be attributable to activities referred to in paragraph (4) with respect to—

(i) dwelling units (as defined in section 168(e)(2)(A)(ii)) contained in buildings containing 4 or fewer dwelling units (as so defined), 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 contractThe 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 168(e)(2)(A)(ii)), and”.

(f) Long-term contractFor purposes of this section—

(1) In general

(2) Special rule for manufacturing contractsA contract for the manufacture of property shall not be treated as a long-term contract unless such contract involves the manufacture of—

(A) any unique item of a type which is not normally included in the finished goods inventory of the taxpayer, or

(B) any item which normally requires more than 12 calendar months to complete (without regard to the period of the contract).

(3) Aggregation, etc.For purposes of this subsection, under regulations prescribed by the Secretary—

(A) 2 or more contracts which are interdependent (by reason of pricing or otherwise) may be treated as 1 contract, and

(B) a contract which is properly treated as an aggregation of separate contracts may be so treated.

(g) Contract commencement date

(h) Regulations

(Added Pub. L. 99–514, title VIII, § 804(a), Oct. 22, 1986, 100 Stat. 2358; amended Pub. L. 100–203, title X, § 10203(a), Dec. 22, 1987, 101 Stat. 1330–394; Pub. L. 100–647, title I, § 1008(c)(1), (2), (4), title V, § 5041(a)–(b)(3), (c), (d), Nov. 10, 1988, 102 Stat. 3438, 3439, 3673, 3674; Pub. L. 101–239, title VII, §§ 7621(a)–(c), 7811(e), 7815(e)(1), Dec. 19, 1989, 103 Stat. 2375, 2376, 2408, 2419; Pub. L. 101–508, title XI, § 11812(b)(8), Nov. 5, 1990, 104 Stat. 1388–535; Pub. L. 104–188, title I, §§ 1702(h)(15), 1704(t)(28), Aug. 20, 1996, 110 Stat. 1874, 1888; Pub. L. 105–34, title XII, § 1211(a), (b), Aug. 5, 1997, 111 Stat. 998, 999; Pub. L. 111–240, title II, § 2023(a), Sept. 27, 2010, 124 Stat. 2559; Pub. L. 112–240, title III, § 331(b), Jan. 2, 2013, 126 Stat. 2336; Pub. L. 113–295, div. A, title I, § 125(b), Dec. 19, 2014, 128 Stat. 4016; Pub. L. 114–113, div. Q, title I, § 143(a)(2), (b)(6)(I), Dec. 18, 2015, 129 Stat. 3056, 3064; Pub. L. 115–97, title I, §§ 13102(d), 13201(b)(2)(A), Dec. 22, 2017, 131 Stat. 2104, 2107; Pub. L. 115–141, div. U, title IV, § 401(a)(116), Mar. 23, 2018, 132 Stat. 1189.)