Collapse to view only [§ 463. Repealed.
- § 461. General rule for taxable year of deduction
- [§ 462. Repealed.
- [§ 463. Repealed.
- § 464. Limitations on deductions for certain farming expenses
- § 465. Deductions limited to amount at risk
- [§ 466. Repealed.
- § 467. Certain payments for the use of property or services
- § 468. Special rules for mining and solid waste reclamation and closing costs
- § 468A. Special rules for nuclear decommissioning costs
- § 468B. Special rules for designated settlement funds
- § 469. Passive activity losses and credits limited
- § 470. Limitation on deductions allocable to property used by governments or other tax-exempt entities
§ 461. General rule for taxable year of deduction
(a) General rule
(b) Special rule in case of death
(c) Accrual of real property taxes
(1) In general
(2) When election may be made
(A) Without consent
(B) With consent
(d) Limitation on acceleration of accrual of taxes
(1) General rule
(2) Limitation
(e) Dividends or interest paid on certain deposits or withdrawable accounts
(f) Contested liabilitiesIf—
(1) the taxpayer contests an asserted liability,
(2) the taxpayer transfers money or other property to provide for the satisfaction of the asserted liability,
(3) the contest with respect to the asserted liability exists after the time of the transfer, and
(4) but for the fact that the asserted liability is contested, a deduction would be allowed for the taxable year of the transfer (or for an earlier taxable year) determined after application of subsection (h),
then the deduction shall be allowed for the taxable year of the transfer. This subsection shall not apply in respect of the deduction for income, war profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States.
(g) Prepaid interest
(1) In generalIf the taxable income of the taxpayer is computed under the cash receipts and disbursements method of accounting, interest paid by the taxpayer which, under regulations prescribed by the Secretary, is properly allocable to any period—
(A) with respect to which the interest represents a charge for the use or forbearance of money, and
(B) which is after the close of the taxable year in which paid,
shall be charged to capital account and shall be treated as paid in the period to which so allocable.
(2) Exception
(h) Certain liabilities not incurred before economic performance
(1) In general
(2) Time when economic performance occursExcept as provided in regulations prescribed by the Secretary, the time when economic performance occurs shall be determined under the following principles:
(A) Services and property provided to the taxpayerIf the liability of the taxpayer arises out of—
(i) the providing of services to the taxpayer by another person, economic performance occurs as such person provides such services,
(ii) the providing of property to the taxpayer by another person, economic performance occurs as the person provides such property, or
(iii) the use of property by the taxpayer, economic performance occurs as the taxpayer uses such property.
(B) Services and property provided by the taxpayer
(C) Workers compensation and tort liabilities of the taxpayerIf the liability of the taxpayer requires a payment to another person and—
(i) arises under any workers compensation act, or
(ii) arises out of any tort,
economic performance occurs as the payments to such person are made. Subparagraphs (A) and (B) shall not apply to any liability described in the preceding sentence.
(D) Other items
(3) Exception for certain recurring items
(A) In generalNotwithstanding paragraph (1) an item shall be treated as incurred during any taxable year if—
(i) the all events test with respect to such item is met during such taxable year (determined without regard to paragraph (1)),
(ii) economic performance with respect to such item occurs within the shorter of—(I) a reasonable period after the close of such taxable year, or(II) 8½ months after the close of such taxable year,
(iii) such item is recurring in nature and the taxpayer consistently treats items of such kind as incurred in the taxable year in which the requirements of clause (i) are met, and
(iv) either—(I) such item is not a material item, or(II) the accrual of such item in the taxable year in which the requirements of clause (i) are met results in a more proper match against income than accruing such item in the taxable year in which economic performance occurs.
(B) Financial statements considered under subparagraph (A)(iv)
(C) Paragraph not to apply to workers compensation and tort liabilities
(4) All events test
(5) Subsection not to apply to certain items
(i) Special rules for tax shelters
(1) Recurring item exception not to apply
(2) Special rule for spudding of oil or gas wells
(A) In general
Deduction limited to cash basis
(i) Tax shelter partnerships
(ii) Other tax shelters
(C) Cash basis definedFor 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 partnership, determined without regard to—
(i) any liability of the partnership, and
(ii) any amount borrowed by the partner with respect to such partnership which—(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 465(b)(3)(C)), or(II) was secured by any asset of the partnership.
(3) Tax shelter definedFor purposes of this subsection, the term “tax shelter” means—
(A) any enterprise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having the authority to regulate the offering of securities for sale,
(B) any syndicate (within the meaning of section 1256(e)(3)(B)), and
(C) any tax shelter (as defined in section 6662(d)(2)(C)(ii)).
(4) Special rules for farming
(5) Economic performance
(j) Limitation on excess farm losses of certain taxpayers
(1) Limitation
(2) Disallowed loss carried to next taxable year
(3) Applicable subsidyFor purposes of this subsection, the term “applicable subsidy” means—
(A) any direct or counter-cyclical payment under title I of the Food, Conservation, and Energy Act of 2008, or any payment elected to be received in lieu of any such payment, or
(B) any Commodity Credit Corporation loan.
(4) Excess farm lossFor purposes of this subsection—
(A) In generalThe term “excess farm loss” means the excess of—
(i) the aggregate deductions of the taxpayer for the taxable year which are attributable to farming businesses of such taxpayer (determined without regard to whether or not such deductions are disallowed for such taxable year under paragraph (1)), over
(ii) the sum of—(I) the aggregate gross income or gain of such taxpayer for the taxable year which is attributable to such farming businesses, plus(II) the threshold amount for the taxable year.
(B) Threshold amount
(i) In generalThe term “threshold amount” means, with respect to any taxable year, the greater of—(I) $300,000 ($150,000 in the case of married individuals filing separately), or(II) the excess (if any) of the aggregate amounts described in subparagraph (A)(ii)(I) for the 5-consecutive taxable year period preceding the taxable year over the aggregate amounts described in subparagraph (A)(i) for such period.
(ii) Special rules for determining aggregate amountsFor purposes of clause (i)(II)—(I) notwithstanding the disregard in subparagraph (A)(i) of any disallowance under paragraph (1), in the case of any loss which is carried forward under paragraph (2) from any taxable year, such loss (or any portion thereof) shall be taken into account for the first taxable year in which a deduction for such loss (or portion) is not disallowed by reason of this subsection, and(II) the Secretary shall prescribe rules for the computation of the aggregate amounts described in such clause in cases where the filing status of the taxpayer is not the same for the taxable year and each of the taxable years in the period described in such clause.
(C) Farming business
(i) In general
(ii) Certain trades and businesses includedIf, without regard to this clause, a taxpayer is engaged in a farming business with respect to any agricultural or horticultural commodity—(I) the term “farming business” shall include any trade or business of the taxpayer of the processing of such commodity (without regard to whether the processing is incidental to the growing, raising, or harvesting of such commodity), and(II) if the taxpayer is a member of a cooperative to which subchapter T applies, any trade or business of the cooperative described in subclause (I) shall be treated as the trade or business of the taxpayer.
(D) Certain losses disregarded
(5) Application of subsection in case of partnerships and S corporationsIn the case of a partnership or S corporation—
(A) this subsection shall be applied at the partner or shareholder level, and
(B) each partner’s or shareholder’s proportionate share of the items of income, gain, or deduction of the partnership or S corporation for any taxable year from farming businesses attributable to the partnership or S corporation, and of any applicable subsidies received by the partnership or S corporation during the taxable year, shall be taken into account by the partner or shareholder in applying this subsection to the taxable year of such partner or shareholder with or within which the taxable year of the partnership or S corporation ends.
The Secretary may provide rules for the application of this paragraph to any other pass-thru entity to the extent necessary to carry out the provisions of this subsection.
(6) Additional reporting
(7) Coordination with section 469
(k) Farming syndicate defined
(1) In generalFor purposes of subsection (i)(4), the term “farming syndicate” means—
(A) a partnership or any other enterprise other than a corporation which is not an S corporation engaged in the trade or business of farming, if at any time interests in such partnership or enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having authority to regulate the offering of securities for sale, or
(B) a partnership or any other enterprise other than a corporation which is not an S corporation engaged in the trade or business of farming, if more than 35 percent of the losses during any period are allocable to limited partners or limited entrepreneurs.
(2) Holdings attributable to active managementFor purposes of paragraph (1)(B), the following shall be treated as an interest which is not held by a limited partner or a limited entrepreneur:
(A) in the case of any individual who has actively participated (for a period of not less than 5 years) in the management of any trade or business of farming, any interest in a partnership or other enterprise which is attributable to such active participation,
(B) in the case of any individual whose principal residence is on a farm, any partnership or other enterprise engaged in the trade or business of farming such farm,
(C) in the case of any individual who is actively participating in the management of any trade or business of farming or who is an individual who is described in subparagraph (A) or (B), any participation in the further processing of livestock which was raised in such trade or business (or in the trade or business referred to in subparagraph (A) or (B)),
(D) in the case of an individual whose principal business activity involves active participation in the management of a trade or business of farming, any interest in any other trade or business of farming, and,
(E) any interest held by a member of the family (or a spouse of any such member) of a grandparent of an individual described in subparagraph (A), (B), (C), or (D) if the interest in the partnership or the enterprise is attributable to the active participation of the individual described in subparagraph (A), (B), (C), or (D).
For purposes of subparagraph (A), where one farm is substituted for or added to another farm, both farms shall be treated as one farm. For purposes of subparagraph (E), the term “family” has the meaning given to such term by section 267(c)(4).
(3) Farming
(4) Limited entrepreneurFor purposes of this subsection, the term “limited entrepreneur” means a person who—
(A) has an interest in an enterprise other than as a limited partner, and
(B) does not actively participate in the management of such enterprise.
(l) Limitation on excess business losses of noncorporate taxpayers
(1) LimitationIn the case of a taxpayer other than a corporation—
(A) for any taxable year beginning after December 31, 2017, and before January 1, 2026, subsection (j) (relating to limitation on excess farm losses of certain taxpayers) shall not apply, and
(B) for any taxable year beginning after December 31, 2020, and before January 1, 2026, any excess business loss of the taxpayer for the taxable year shall not be allowed.
(2) Disallowed loss carryover
(3) Excess business lossFor purposes of this subsection—
(A) In generalThe term “excess business loss” means the excess (if any) of—
(i) the aggregate deductions of the taxpayer for the taxable year which are attributable to trades or businesses of such taxpayer (determined without regard to whether or not such deductions are disallowed for such taxable year under paragraph (1) and without regard to any deduction allowable under section 172 or 199A), over
(ii) the sum of—(I) the aggregate gross income or gain of such taxpayer for the taxable year which is attributable to such trades or businesses, plus(II) $250,000 (200 percent of such amount in the case of a joint return).
Such excess shall be determined without regard to any deductions, gross income, or gains attributable to any trade or business of performing services as an employee.
(B) Treatment of capital gains and losses
(i) Losses
(ii) GainsThe amount of gains from sales or exchanges of capital assets taken into account under subparagraph (A)(ii) shall not exceed the lesser of—(I) the capital gain net income determined by taking into account only gains and losses attributable to a trade or business, or(II) the capital gain net income.
(C) Adjustment for inflationIn the case of any taxable year beginning after December 31, 2018, the $250,000 amount in subparagraph (A)(ii)(II) shall be increased by an amount equal to—
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2017” for “2016” in subparagraph (A)(ii) thereof.
If any amount as increased under the preceding sentence is not a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000.
(4) Application of subsection in case of partnerships and S corporationsIn the case of a partnership or S corporation—
(A) this subsection shall be applied at the partner or shareholder level, and
(B) each partner’s or shareholder’s allocable share of the items of income, gain, deduction, or loss of the partnership or S corporation for any taxable year from trades or businesses attributable to the partnership or S corporation shall be taken into account by the partner or shareholder in applying this subsection to the taxable year of such partner or shareholder with or within which the taxable year of the partnership or S corporation ends.
For purposes of this paragraph, in the case of an S corporation, an allocable share shall be the shareholder’s pro rata share of an item.
(5) Additional reporting
(6) Coordination with section 469
(Aug. 16, 1954, ch. 736, 68A Stat. 157; Pub. L. 86–781, § 6(a),
[§ 462. Repealed. June 15, 1955, ch. 143, § 1(b), 69 Stat. 134]
[§ 463. Repealed. Pub. L. 100–203, title X, § 10201(a), Dec. 22, 1987, 101 Stat. 1330–387]
§ 464. Limitations on deductions for certain farming expenses
(a) General rule
(b) Certain poultry expenses
In the case of any taxpayer to whom subsection (d) applies—
(1) the cost of poultry (including egg-laying hens and baby chicks) purchased for use in a trade or business (or both for use in a trade or business and for sale) shall be capitalized and deducted ratably over the lesser of 12 months or their useful life in the trade or business, and
(2) the cost of poultry purchased for sale shall be deducted for the taxable year in which the poultry is sold or otherwise disposed of.
(c) Exception
(d) Certain persons prepaying 50 percent or more of certain farming expenses
(1) Taxpayer to whom subsection applies
This subsection applies to any taxpayer for any taxable year if such taxpayer—
(A) does not use an accrual method of accounting,
(B) has excess prepaid farm supplies for the taxable year, and
(C) is not a qualified farm-related taxpayer.
(2) Qualified farm-related taxpayer
(A) In general
For purposes of this subsection, the term “qualified farm-related taxpayer” means any farm-related taxpayer if—
(i)(I) the aggregate prepaid farm supplies for the 3 taxable years preceding the taxable year are less than 50 percent of,(II) the aggregate deductible farming expenses (other than prepaid farm supplies) for such 3 taxable years, or
(ii) the taxpayer has excess prepaid farm supplies for the taxable year by reason of any change in business operation directly attributable to extraordinary circumstances.
(B) Farm-related taxpayer
For purposes of this paragraph, the term “farm-related taxpayer” means any taxpayer—
(i) whose principal residence (within the meaning of section 121) is on a farm,
(ii) who has a principal occupation of farming, or
(iii) who is a member of the family (within the meaning of section 461(k)(2)(E)) of a taxpayer described in clause (i) or (ii).
(3) Definitions
For purposes of this subsection—
(A) Excess prepaid farm supplies
(B) Prepaid farm supplies
(C) Deductible farming expenses
(e) Farming
(Added Pub. L. 94–455, title II, § 207(a)(1), Oct. 4, 1976, 90 Stat. 1536; amended Pub. L. 95–600, title VII, § 701(l)(3), Nov. 6, 1978, 92 Stat. 2907; Pub. L. 97–354, § 5(a)(30), Oct. 19, 1982, 96 Stat. 1695; Pub. L. 99–514, title IV, § 404(a), (b)(1), title VIII, § 803(b)(8), Oct. 22, 1986, 100 Stat. 2223, 2224, 2356; Pub. L. 100–647, title I, § 1008(a)(4), Nov. 10, 1988, 102 Stat. 3437; Pub. L. 105–34, title III, § 312(d)(1), Aug. 5, 1997, 111 Stat. 839; Pub. L. 113–295, div. A, title II, § 221(a)(58)(A), (B)(i), (C), (D), Dec. 19, 2014, 128 Stat. 4047; Pub. L. 115–141, div. U, title IV, § 401(a)(118), (119), Mar. 23, 2018, 132 Stat. 1190.)
§ 465. Deductions limited to amount at risk
(a) Limitation to amount at risk
(1) In general
In the case of—
(A) an individual, and
(B) a C corporation with respect to which the stock ownership requirement of paragraph (2) of section 542(a) is met,
engaged in an activity to which this section applies, any loss from such activity for the taxable year shall be allowed only to the extent of the aggregate amount with respect to which the taxpayer is at risk (within the meaning of subsection (b)) for such activity at the close of the taxable year.
(2) Deduction in succeeding year
(3) Special rules for applying paragraph (1)(B)
For purposes of paragraph (1)(B)—
(A) section 544(a)(2) shall be applied as if such section did not contain the phrase “or by or for his partner”; and
(B) sections 544(a)(4)(A) and 544(b)(1) shall be applied by substituting “the corporation meet the stock ownership requirements of section 542(a)(2)” for “the corporation a personal holding company”.
(b) Amounts considered at risk
(1) In general
For purposes of this section, a taxpayer shall be considered at risk for an activity with respect to amounts including—
(A) the amount of money and the adjusted basis of other property contributed by the taxpayer to the activity, and
(B) amounts borrowed with respect to such activity (as determined under paragraph (2)).
(2) Borrowed amounts
For purposes of this section, a taxpayer shall be considered at risk with respect to amounts borrowed for use in an activity to the extent that he—
(A) is personally liable for the repayment of such amounts, or
(B) has pledged property, other than property used in such activity, as security for such borrowed amount (to the extent of the net fair market value of the taxpayer’s interest in such property).
No property shall be taken into account as security if such property is directly or indirectly financed by indebtedness which is secured by property described in paragraph (1).
(3) Certain borrowed amounts excluded
(A) In general
(B) Exceptions
(i) Interest as creditor
(ii) Interest as shareholder with respect to amounts borrowed by corporation
(C) Related person
For purposes of this subsection, a person (hereinafter in this paragraph referred to as the “related person”) is related to any person if—
(i) the related person bears a relationship to such person specified in section 267(b) or section 707(b)(1), or
(ii) the related person and such person are engaged in trades or business under common control (within the meaning of subsections (a) and (b) of section 52).
For purposes of clause (i), in applying section 267(b) or 707(b)(1), “10 percent” shall be substituted for “50 percent”.
(4) Exception
(5) Amounts at risk in subsequent years
(6) Qualified nonrecourse financing treated as amount at risk
For purposes of this section—
(A) In general
(B) Qualified nonrecourse financing
For purposes of this paragraph, the term “qualified nonrecourse financing” means any financing—
(i) which is borrowed by the taxpayer with respect to the activity of holding real property,
(ii) which is borrowed by the taxpayer from a qualified person or represents a loan from any Federal, State, or local government or instrumentality thereof, or is guaranteed by any Federal, State, or local government,
(iii) except to the extent provided in regulations, with respect to which no person is personally liable for repayment, and
(iv) which is not convertible debt.
(C) Special rule for partnerships
(D) Qualified person defined
For purposes of this paragraph—
(i) In general
(ii) Certain commercially reasonable financing from related persons
(E) Activity of holding real property
For purposes of this paragraph—
(i) Incidental personal property and services
(ii) Mineral property
(c) Activities to which section applies
(1) Types of activities
This section applies to any taxpayer engaged in the activity of—
(A) holding, producing, or distributing motion picture films or video tapes,
(B) farming (as defined in section 464(e)),
(C) leasing any section 1245 property (as defined in section 1245(a)(3)),
(D) exploring for, or exploiting, oil and gas resources, or
(E) exploring for, or exploiting, geothermal deposits (as defined in section 613(e)(2)) 1
1 So in original. Probably should be followed by a comma.
as a trade or business or for the production of income.
(2) Separate activities
For purposes of this section—
(A) In general
Except as provided in subparagraph (B), a taxpayer’s activity with respect to each—
(i) film or video tape,
(ii) section 1245 property which is leased or held for leasing,
(iii) farm,
(iv) oil and gas property (as defined under section 614), or
(v) geothermal property (as defined under section 614),
shall be treated as a separate activity.
(B) Aggregation rules
(i) Special rule for leases of section 1245 property by partnerships or S corporations
In the case of any partnership or S corporation, all activities with respect to section 1245 properties which—
(I) are leased or held for lease, and(II) are placed in service in any taxable year of the partnership or S corporation, shall be treated as a single activity.
(ii) Other aggregation rules
(3) Extension to other activities
(A) In general
This section also applies to each activity—
(i) engaged in by the taxpayer in carrying on a trade or business or for the production of income, and
(ii) which is not described in paragraph (1).
(B) Aggregation of activities where taxpayer actively participates in management of trade or business
Except as provided in subparagraph (C), for purposes of this section, activities described in subparagraph (A) which constitute a trade or business shall be treated as one activity if—
(i) the taxpayer actively participates in the management of such trade or business, or
(ii) such trade or business is carried on by a partnership or an S corporation and 65 percent or more of the losses for the taxable year is allocable to persons who actively participate in the management of the trade or business.
(C) Aggregation or separation of activities under regulations
(D) Application of subsection (b)(3)
(4) Exclusion for certain equipment leasing by closely-held corporations
(A) In general
In the case of a corporation described in subsection (a)(1)(B) actively engaged in equipment leasing—
(i) the activity of equipment leasing shall be treated as a separate activity, and
(ii) subsection (a) shall not apply to losses from such activity.
(B) 50-percent gross receipts test
(C) Component members of controlled group treated as a single corporation
(5) Waiver of controlled group rule where there is substantial leasing activity
(A) In general
In the case of the component members of a qualified leasing group, paragraph (4) shall be applied—
(i) by substituting “80 percent” for “50 percent” in subparagraph (B) thereof, and
(ii) as if paragraph (4) did not include subparagraph (C) thereof.
(B) Qualified leasing group
For purposes of this paragraph, the term “qualified leasing group” means a controlled group of corporations which, for the taxable year and each of the 2 immediately preceding taxable years, satisfied each of the following 3 requirements:
(i) At least 3 employees
(ii) At least 5 separate leasing transactions
(iii) At least $1,000,000 equipment leasing receipts
The term “qualified leasing group” does not include any controlled group of corporations to which, without regard to this paragraph, paragraph (4) applies.
(C) Qualified leasing member
For purposes of this paragraph, a corporation shall be treated as a qualified leasing member for the taxable year only if for each of the taxable years referred to in subparagraph (B)—
(i) it is a component member of the controlled group of corporations, and
(ii) it meets the requirements of paragraph (4)(B) (as modified by subparagraph (A)(i) of this paragraph).
(6) Definitions relating to paragraphs (4) and (5)
For purposes of paragraphs (4) and (5)—
(A) Equipment leasing
The term “equipment leasing” means—
(i) the leasing of equipment which is section 1245 property, and
(ii) the purchasing, servicing, and selling of such equipment.
(B) Leasing of master sound recordings, etc., excluded
(C) Controlled group of corporations; component member
(7) Exclusion of active businesses of qualified C corporations
(A) In general
In the case of a taxpayer which is a qualified C corporation—
(i) each qualifying business carried on by such taxpayer shall be treated as a separate activity, and
(ii) subsection (a) shall not apply to losses from such business.
(B) Qualified C corporation
For purposes of subparagraph (A), the term “qualified C corporation” means any corporation described in subparagraph (B) of subsection (a)(1) which is not—
(i) a personal holding company (as defined in section 542(a)), or
(ii) a personal service corporation (as defined in section 269A(b) but determined by substituting “5 percent” for “10 percent” in section 269A(b)(2)).
(C) Qualifying business
For purposes of this paragraph, the term “qualifying business” means any active business if—
(i) during the entire 12-month period ending on the last day of the taxable year, such corporation had at least 1 full-time employee substantially all the services of whom were in the active management of such business,
(ii) during the entire 12-month period ending on the last day of the taxable year, such corporation had at least 3 full-time, nonowner employees substantially all of the services of whom were services directly related to such business,
(iii) the amount of the deductions attributable to such business which are allowable to the taxpayer solely by reason of sections 162 and 404 for the taxable year exceeds 15 percent of the gross income from such business for such year, and
(iv) such business is not an excluded business.
(D) Special rules for application of subparagraph (C)
(i) Partnerships in which taxpayer is a qualified corporate partner
In the case of an active business of a partnership, if—
(I) the taxpayer is a qualified corporate partner in the partnership, and(II) during the entire 12-month period ending on the last day of the partnership’s taxable year, there was at least 1 full-time employee of the partnership (or of a qualified corporate partner) substantially all the services of whom were in the active management of such business, then the taxpayer’s proportionate share (determined on the basis of its profits interest) of the activities of the partnership in such business shall be treated as activities of the taxpayer (and clause (i) of subparagraph (C) shall not apply in determining whether such business is a qualifying business of the taxpayer).
(ii) Qualified corporate partner
For purposes of clause (i), the term “qualified corporate partner” means any corporation if—
(I) such corporation is a general partner in the partnership,(II) such corporation has an interest of 10 percent or more in the profits and losses of the partnership, and(III) such corporation has contributed property to the partnership in an amount not less than the lesser of $500,000 or 10 percent of the net worth of the corporation. For purposes of subclause (III), any contribution of property other than money shall be taken into account at its fair market value.
(iii) Deduction for owner employee compensation not taken into account
(iv) Special rule for banks
For purposes of clause (iii) of subparagraph (C), in the case of a bank (as defined in section 581) or a financial institution to which section 591 applies—
(I) gross income shall be determined without regard to the exclusion of interest from gross income under section 103, and(II) in addition to the deductions described in such clause, there shall also be taken into account the amount of the deductions which are allowable for amounts paid or credited to the accounts of depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts under section 163 or 591.(v) Special rule for life insurance companies(I) In general(II) Insurance business(III) Qualified life insurance company
(E) Definitions
For purposes of this paragraph—
(i) Non-owner employee
(ii) Excluded business
The term “excluded business” means—
(I) equipment leasing (as defined in paragraph (6)), and(II) any business involving the use, exploitation, sale, lease, or other disposition of master sound recordings, motion picture films, video tapes, or tangible or intangible assets associated with literary, artistic, musical, or similar properties.(iii) Special rules relating to communications industry, etc.(I) Business not excluded where taxpayer not completely at risk(II) Certain licensed businesses not excluded
(F) Affiliated group treated as 1 taxpayer
For purposes of this paragraph—
(i) In general
(ii) Affiliated group of corporations
(iii) Component member
(G) Loss of 1 member of affiliated group may not offset income of personal holding company or personal service corporation
(d) Definition of loss
(e) Recapture of losses where amount at risk is less than zero
(1) In general
If zero exceeds the amount for which the taxpayer is at risk in any activity at the close of any taxable year—
(A) the taxpayer shall include in his gross income for such taxable year (as income from such activity) an amount equal to such excess, and
(B) an amount equal to the amount so included in gross income shall be treated as a deduction allocable to such activity for the first succeeding taxable year.
(2) Limitation
The excess referred to in paragraph (1) shall not exceed—
(A) the aggregate amount of the reductions required by subsection (b)(5) with respect to the activity by reason of losses for all prior taxable years beginning after December 31, 1978, reduced by
(B) the amounts previously included in gross income with respect to such activity under this subsection.
(Added Pub. L. 94–455, title II, § 204(a), Oct. 4, 1976, 90 Stat. 1531; amended Pub. L. 95–600, title II, §§ 201(a), (c)(1), 202, 203, title VII, § 701(k)(2), Nov. 6, 1978, 92 Stat. 2814, 2816, 2906; Pub. L. 95–618, title IV, § 402(d), Nov. 9, 1978, 92 Stat. 3202; Pub. L. 96–222, title I, § 102(a)(1)(A)–(D), Apr. 1, 1980, 94 Stat. 206; Pub. L. 97–354, § 5(a)(31), Oct. 19, 1982, 96 Stat. 1695; Pub. L. 98–369, div. A, title IV, § 432(a)–(c), title VII, § 721(x)(2), July 18, 1984, 98 Stat. 811–814, 971; Pub. L. 99–514, title II, § 201(d)(7)(A), title V, § 503(a), (b), title X, § 1011(b)(1), Oct. 22, 1986, 100 Stat. 2141, 2243, 2389; Pub. L. 101–508, title XI, §§ 11813(b)(15), 11815(b)(3), Nov. 5, 1990, 104 Stat. 1388–555, 1388–558; Pub. L. 108–357, title IV, § 413(c)(7), Oct. 22, 2004, 118 Stat. 1507; Pub. L. 113–295, div. A, title II, § 221(a)(59), Dec. 19, 2014, 128 Stat. 4047; Pub. L. 115–97, title I, § 13512(b)(2), Dec. 22, 2017, 131 Stat. 2143.)
[§ 466. Repealed. Pub. L. 99–514, title VIII, § 823(a), Oct. 22, 1986, 100 Stat. 2373]
§ 467. Certain payments for the use of property or services
(a) Accrual method on present value basis
In the case of the lessor or lessee under any section 467 rental agreement, there shall be taken into account for purposes of this title for any taxable year the sum of—
(1) the amount of the rent which accrues during such taxable year as determined under subsection (b), and
(2) interest for the year on the amounts which were taken into account under this subsection for prior taxable years and which are unpaid.
(b) Accrual of rental payments
(1) Allocation follows agreement
Except as provided in paragraph (2), the determination of the amount of the rent under any section 467 rental agreement which accrues during any taxable year shall be made—
(A) by allocating rents in accordance with the agreement, and
(B) by taking into account any rent to be paid after the close of the period in an amount determined under regulations which shall be based on present value concepts.
(2) Constant rental accrual in case of certain tax avoidance transactions, etc.
(3) Agreements to which paragraph (2) applies
Paragraph (2) applies to any rental payment agreement if—
(A) such agreement is a disqualified leaseback or long-term agreement, or
(B) such agreement does not provide for the allocation referred to in paragraph (1)(A).
(4) Disqualified leaseback or long-term agreement
For purposes of this subsection, the term “disqualified leaseback or long-term agreement” means any section 467 rental agreement if—
(A) such agreement is part of a leaseback transaction or such agreement is for a term in excess of 75 percent of the statutory recovery period for the property, and
(B) a principal purpose for providing increasing rents under the agreement is the avoidance of tax imposed by this subtitle.
(5) Exceptions to disqualification in certain cases
The Secretary shall prescribe regulations setting forth circumstances under which agreements will not be treated as disqualified leaseback or long-term agreements, including circumstances relating to—
(A) changes in amounts paid determined by reference to price indices,
(B) rents based on a fixed percentage of lessee receipts or similar amounts,
(C) reasonable rent holidays, or
(D) changes in amounts paid to unrelated 3rd parties.
(c) Recapture of prior understated inclusions under leaseback or long-term agreements
(1) In general
If—
(A) the lessor under any section 467 rental agreement disposes of any property subject to such agreement during the term of such agreement, and
(B) such agreement is a leaseback or long-term agreement to which paragraph (2) of subsection (b) did not apply,
the recapture amount shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Recapture amount
For purposes of paragraph (1), the term “recapture amount” means the lesser of—
(A) the prior understated inclusions, or
(B) the excess of the amount realized (or in the case of a disposition other than a sale, exchange, or involuntary conversion, the fair market value of the property) over the adjusted basis of such property.
The amount determined under subparagraph (B) shall be reduced by the amount of any gain treated as ordinary income on the disposition under any other provision of this subtitle.
(3) Prior understated inclusions
For purposes of this subsection, the term “prior understated inclusion” means the excess (if any) of—
(A) the amount which would have been taken into account by the lessor under subsection (a) for periods before the disposition if subsection (b)(2) had applied to the agreement, over
(B) the amount taken into account under subsection (a) by the lessor for periods before the disposition.
(4) Leaseback or long-term agreement
(5) Special rules
Under regulations prescribed by the Secretary—
(A) exceptions similar to the exceptions applicable under section 1245 or 1250 (whichever is appropriate) shall apply for purposes of this subsection,
(B) any transferee in a disposition excepted by reason of subparagraph (A) who has a transferred basis in the property shall be treated in the same manner as the transferor, and
(C) for purposes of sections 170(e) and 751(c), amounts treated as ordinary income under this section shall be treated in the same manner as amounts treated as ordinary income under section 1245 or 1250.
(d) Section 467 rental agreements
(1) In general
Except as otherwise provided in this subsection, the term “section 467 rental agreements” means any rental agreement for the use of tangible property under which—
(A) there is at least one amount allocable to the use of property during a calendar year which is to be paid after the close of the calendar year following the calendar year in which such use occurs, or
(B) there are increases in the amount to be paid as rent under the agreement.
(2) Section not to apply to agreements involving payments of $250,000 or less
This section shall not apply to any amount to be paid for the use of property if the sum of the following amounts does not exceed $250,000—
(A) the aggregate amount of payments received as consideration for such use of property, and
(B) the aggregate value of any other consideration to be received for such use of property.
For purposes of the preceding sentence, rules similar to the rules of clauses (ii) and (iii) of section 1274(c)(4)(C) shall apply.
(e) Definitions
For purposes of this section—
(1) Constant rental amount
(2) Leaseback transaction
(3) Statutory recovery period
(A) In general
(B) Special rule for property not depreciable under section 168
(4) Discount and interest rate
(5) Related person
(6) Certain options of lessee to renew not taken into account
(f) Comparable rules where agreement for decreasing payments
(g) Comparable rules for services
(h) Regulations
(Added Pub. L. 98–369, div. A, title I, § 92(a), July 18, 1984, 98 Stat. 609; amended Pub. L. 99–514, title II, § 201(d)(8), title V, § 511(d)(2)(A), title VI, § 631(e)(10), title XVIII, §§ 1807(b), 1879(f)(1), Oct. 22, 1986, 100 Stat. 2141, 2248, 2274, 2816, 2906; Pub. L. 100–647, title I, §§ 1002(i)(2)(H), 1005(c)(10), Nov. 10, 1988, 102 Stat. 3371, 3392; Pub. L. 108–27, title III, § 302(e)(4)(B)(ii), May 28, 2003, 117 Stat. 764.)
§ 468. Special rules for mining and solid waste reclamation and closing costs
(a) Establishment of reserves for reclamation and closing costs
(1) Allowance of deductionIf a taxpayer elects the application of this section with respect to any mining or solid waste disposal property, the amount of any deduction for qualified reclamation or closing costs for any taxable year to which such election applies shall be equal to the current reclamation or closing costs allocable to—
(A) in the case of qualified reclamation costs, the portion of the reserve property which was disturbed during such taxable year, and
(B) in the case of qualified closing costs, the production from the reserve property during such taxable year.
(2) Opening balance and adjustments to reserve
(A) Opening balance
(B) Increase for interestA reserve shall be increased each taxable year by an amount equal to the amount of interest which would have been earned during such taxable year on the opening balance of such reserve for such taxable year if such interest were computed—
(i) at the Federal short-term rate or rates (determined under section 1274) in effect, and
(ii) by compounding semiannually.
(C) Reserve to be charged for amounts paid
(D) Reserve increased by amount deducted
(3) Allowance of deduction for excess amounts paidThere shall be allowed as a deduction for any taxable year the excess of—
(A) the amounts described in paragraph (2)(C) paid during such taxable year, over
(B) the closing balance of the reserve for such taxable year (determined without regard to paragraph (2)(C)).
(4) Limitation on balance as of the close of any taxable year
(A) Reclamation reservesIn the case of any reserve for qualified reclamation costs, there shall be included in gross income for any taxable year an amount equal to the excess of—
(i) the closing balance of the reserve for such taxable year, over
(ii) the current reclamation costs of the taxpayer for all portions of the reserve property disturbed during any taxable year to which the election under paragraph (1) applies.
(B) Closing costs reservesIn the case of any reserve for qualified closing costs, there shall be included in gross income for any taxable year an amount equal to the excess of—
(i) the closing balance of the reserve for such taxable year, over
(ii) the current closing cost of the taxpayer with respect to the reserve property, determined as if all production with respect to the reserve property for any taxable year to which the election under paragraph (1) applies had occurred in such taxable year.
(C) Order of application
(5) Income inclusions on completion or dispositionProper inclusion in income shall be made upon—
(A) the revocation of an election under paragraph (1), or
(B) completion of the closing, or disposition of any portion, of a reserve property.
(b) Allocation for property where election not in effect for all taxable years
(c) Revocation of election; separate reserves
(1) Revocation of election
(A) In general
(B) Time and manner of revocation
(2) Separate reserves requiredIf a taxpayer makes an election under subsection (a)(1), the taxpayer shall establish with respect to the property for which the election was made—
(A) a separate reserve for qualified reclamation costs, and
(B) a separate reserve for qualified closing costs.
(d) Definitions and special rules relating to reclamation and closing costsFor purposes of this section—
(1) Current reclamation and closing costs
(A) Current reclamation costs
(B) Current closing costs
(i) In general
(ii) Costs computed on unit-of-production or capacity methodEstimated closing costs shall—(I) in the case of the closing of any mine site, be computed on the unit-of-production method of accounting, and(II) in the case of the closing of any solid waste disposal site, be computed on the unit-of-capacity method.
(2) Qualified reclamation or closing costsThe term “qualified reclamation or closing costs” means any of the following expenses:
(A) Mining reclamation and closing costsAny expenses incurred for any land reclamation or closing activity which is conducted in accordance with a reclamation plan (including an amendment or modification thereof)—
(i) which—(I) is submitted pursuant to the provisions of section 511 or 528 of the Surface Mining Control and Reclamation Act of 1977 (as in effect on January 1, 1984), and(II) is part of a surface mining and reclamation permit granted under the provisions of title V of such Act (as so in effect), or
(ii) which is submitted pursuant to any other Federal or State law which imposes surface mining reclamation and permit requirements substantially similar to the requirements imposed by title V of such Act (as so in effect).
(B) Solid waste disposal and closing costs
(i) In generalAny expenses incurred for any land reclamation or closing activity in connection with any solid waste disposal site which is conducted in accordance with any permit issued pursuant to—(I) any provision of the Solid Waste Disposal Act (as in effect on January 1, 1984) requiring such activity, or(II) any other Federal, State, or local law which imposes requirements substantially similar to the requirements imposed by the Solid Waste Disposal Act (as so in effect).
(ii) Exception for certain hazardous waste sites
(3) Property
(4) Reserve property
(Added Pub. L. 98–369, div. A, title I, § 91(b)(1), July 18, 1984, 98 Stat. 601; amended Pub. L. 99–514, title XVIII, §§ 1807(a)(3)(A), (C), 1899A(14), Oct. 22, 1986, 100 Stat. 2811, 2959; Pub. L. 101–508, title XI, § 11802(c), Nov. 5, 1990, 104 Stat. 1388–529.)
§ 468A. Special rules for nuclear decommissioning costs
(a) In general
(b) Limitation on amounts paid into Fund
(c) Income and deductions of the taxpayer
(1) Inclusion of amounts distributed
There shall be includible in the gross income of the taxpayer for any taxable year—
(A) any amount distributed from the Fund during such taxable year, other than any amount distributed to pay costs described in subsection (e)(4)(B), and
(B) except to the extent provided in regulations, amounts properly includible in gross income in the case of any deemed distribution under subsection (e)(6), any termination under subsection (e)(7), or the disposition of any interest in the nuclear powerplant.
(2) Deduction when economic performance occurs
(d) Ruling amount
For purposes of this section—
(1) Request required
(2) Ruling amount
The term “ruling amount” means, with respect to any taxable year, the amount which the Secretary determines under paragraph (1) to be necessary to—
(A) fund the total nuclear decommissioning costs with respect to such power plant over the estimated useful life of such power plant, and
(B) prevent any excessive funding of such costs or the funding of such costs at a rate more rapid than level funding, taking into account such discount rates as the Secretary deems appropriate.
(3) Review of amount
(e) Nuclear Decommissioning Reserve Fund
(1) In general
(2) Taxation of Fund
(A) In general
There is hereby imposed on the gross income of the Fund for any taxable year a tax at the rate of 20 percent, except that—
(i) there shall not be included in the gross income of the Fund any payment to the Fund with respect to which a deduction is allowable under subsection (a), and
(ii) there shall be allowed as a deduction to the Fund any amount paid by the Fund which is described in paragraph (4)(B) (other than an amount paid to the taxpayer) and which would be deductible under this chapter for purposes of determining the taxable income of a corporation.
(B) Tax in lieu of other taxation
(C) Fund treated as corporation
For purposes of subtitle F—
(i) the Fund shall be treated as if it were a corporation, and
(ii) any tax imposed by this paragraph shall be treated as a tax imposed by section 11.
(3) Contributions to Fund
(4) Use of Fund
The Fund shall be used exclusively for—
(A) satisfying, in whole or in part, any liability of any person contributing to the Fund for the decommissioning of a nuclear powerplant (or unit thereof),
(B) to pay administrative costs (including taxes) and other incidental expenses of the Fund (including legal, accounting, actuarial, and trustee expenses) in connection with the operation of the Fund, and
(C) to the extent that a portion of the Fund is not currently needed for purposes described in subparagraph (A) or (B), making investments.
(5) Prohibitions against self-dealing
(6) Disqualification of Fund
(7) Termination upon completion
(f) Transfers into qualified funds
(1) In general
(2) Deduction for amounts transferred
(A) In general
(B) Denial of deduction for previously deducted amounts
(C) Transfers of qualified funds
If—
(i) any transfer permitted by this subsection is made to any Fund to which this section applies, and
(ii) such Fund is transferred thereafter,
any deduction under this subsection for taxable years ending after the date that such Fund is transferred shall be allowed to the transferor for the taxable year which includes such date.
(D) Special rules
(i) Gain or loss not recognized on transfers to Fund
(ii) Transfers of appreciated property to Fund
(3) New ruling amount required
(4) No basis in qualified funds
(g) Nuclear powerplant
(h) Time when payments deemed made
(Added Pub. L. 98–369, div. A, title I, § 91(c)(1), July 18, 1984, 98 Stat. 604; amended Pub. L. 99–514, title XVIII, § 1807(a)(4)(A)(i), (B)–(E)(vi), Oct. 22, 1986, 100 Stat. 2812, 2813; Pub. L. 102–486, title XIX, § 1917(a), (b), Oct. 24, 1992, 106 Stat. 3024, 3025; Pub. L. 104–188, title I, § 1704(j)(6), Aug. 20, 1996, 110 Stat. 1882; Pub. L. 109–58, title XIII, § 1310(a)–(e), Aug. 8, 2005, 119 Stat. 1007–1009.)
§ 468B. Special rules for designated settlement funds
(a) In general
(b) Taxation of designated settlement fund
(1) In general
(2) Certain expenses allowed
For purposes of paragraph (1), gross income for any taxable year shall be reduced by the amount of any administrative costs (including State and local taxes) and other incidental expenses of the designated settlement fund (including legal, accounting, and actuarial expenses)—
(A) which are incurred in connection with the operation of the fund, and
(B) which would be deductible under this chapter for purposes of determining the taxable income of a corporation.
No other deduction shall be allowed to the fund.
(3) Transfers to the fund
In the case of any qualified payment made to the fund—
(A) the amount of such payment shall not be treated as income of the designated settlement fund,
(B) the basis of the fund in any property which constitutes a qualified payment shall be equal to the fair market value of such property at the time of payment, and
(C) the fund shall be treated as the owner of the property in the fund (and any earnings thereon).
(4) Tax in lieu of other taxation
(5) Coordination with subtitle F
For purposes of subtitle F—
(A) a designated settlement fund shall be treated as a corporation, and
(B) any tax imposed by this subsection shall be treated as a tax imposed by section 11.
(c) Deductions not allowed for transfer of insurance amounts
(d) Definitions
For purposes of this section—
(1) Qualified payment
The term “qualified payment” means any money or property which is transferred to any designated settlement fund pursuant to a court order, other than—
(A) any amount which may be transferred from the fund to the taxpayer (or any related person), or
(B) the transfer of any stock or indebtedness of the taxpayer (or any related person).
(2) Designated settlement fund
The term “designated settlement fund” means any fund—
(A) which is established pursuant to a court order and which extinguishes completely the taxpayer’s tort liability with respect to claims described in subparagraph (D),
(B) with respect to which no amounts may be transferred other than in the form of qualified payments,
(C) which is administered by persons a majority of whom are independent of the taxpayer,
(D) which is established for the principal purpose of resolving and satisfying present and future claims against the taxpayer (or any related person or formerly related person) arising out of personal injury, death, or property damage,
(E) under the terms of which the taxpayer (or any related person) may not hold any beneficial interest in the income or corpus of the fund, and
(F) with respect to which an election is made under this section by the taxpayer.
An election under this section shall be made at such time and in such manner as the Secretary shall by regulation prescribe. Such an election, once made, may be revoked only with the consent of the Secretary.
(3) Related person
(e) Nonapplicability of section
(f) Other funds
(g) Clarification of taxation of certain funds
(1) In general
(2) Exemption from tax for certain settlement funds
An escrow account, settlement fund, or similar fund shall be treated as beneficially owned by the United States and shall be exempt from taxation under this subtitle if—
(A) it is established pursuant to a consent decree entered by a judge of a United States District Court,
(B) it is created for the receipt of settlement payments as directed by a government entity for the sole purpose of resolving or satisfying one or more claims asserting liability under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
(C) the authority and control over the expenditure of funds therein (including the expenditure of contributions thereto and any net earnings thereon) is with such government entity, and
(D) upon termination, any remaining funds will be disbursed to such government entity for use in accordance with applicable law.
For purposes of this paragraph, the term “government entity” means the United States, any State or political subdivision thereof, the District of Columbia, any possession of the United States, and any agency or instrumentality of any of the foregoing.
(Added Pub. L. 99–514, title XVIII, § 1807(a)(7)(A), Oct. 22, 1986, 100 Stat. 2814; amended Pub. L. 100–647, title I, § 1018(f)(1), (2), (4), (5)(A), Nov. 10, 1988, 102 Stat. 3582; Pub. L. 101–508, title XI, § 11702(e)(1), Nov. 5, 1990, 104 Stat. 1388–515; Pub. L. 109–222, title II, § 201(a), May 17, 2006, 120 Stat. 347; Pub. L. 109–432, div. A, title IV, § 409(a), Dec. 20, 2006, 120 Stat. 2963.)
§ 469. Passive activity losses and credits limited
(a) Disallowance
(1) In generalIf for any taxable year the taxpayer is described in paragraph (2), neither—
(A) the passive activity loss, nor
(B) the passive activity credit,
for the taxable year shall be allowed.
(2) Persons describedThe following are described in this paragraph:
(A) any individual, estate, or trust,
(B) any closely held C corporation, and
(C) any personal service corporation.
(b) Disallowed loss or credit carried to next year
(c) Passive activity definedFor purposes of this section—
(1) In generalThe term “passive activity” means any activity—
(A) which involves the conduct of any trade or business, and
(B) in which the taxpayer does not materially participate.
(2) Passive activity includes any rental activity
(3) Working interests in oil and gas property
(A) In general
(B) Income in subsequent years
(4) Material participation not required for paragraphs (2) and (3)
(5) Trade or business includes research and experimentation activity
(6) Activity in connection with trade or business or production of incomeTo the extent provided in regulations, for purposes of paragraph (1)(A), the term “trade or business” includes—
(A) any activity in connection with a trade or business, or
(B) any activity with respect to which expenses are allowable as a deduction under section 212.
(7) Special rules for taxpayers in real property business
(A) In generalIf this paragraph applies to any taxpayer for a taxable year—
(i) paragraph (2) shall not apply to any rental real estate activity of such taxpayer for such taxable year, and
(ii) this section shall be applied as if each interest of the taxpayer in rental real estate were a separate activity.
Notwithstanding clause (ii), a taxpayer may elect to treat all interests in rental real estate as one activity. Nothing in the preceding provisions of this subparagraph shall be construed as affecting the determination of whether the taxpayer materially participates with respect to any interest in a limited partnership as a limited partner.
(B) Taxpayers to whom paragraph appliesThis paragraph shall apply to a taxpayer for a taxable year if—
(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and
(ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.
In the case of a joint return, the requirements of the preceding sentence are satisfied if and only if either spouse separately satisfies such requirements. For purposes of the preceding sentence, activities in which a spouse materially participates shall be determined under subsection (h).
(C) Real property trade or business
(D) Special rules for subparagraph (B)
(i) Closely held C corporations
(ii) Personal services as an employee
(d) Passive activity loss and credit definedFor purposes of this section—
(1) Passive activity lossThe term “passive activity loss” means the amount (if any) by which—
(A) the aggregate losses from all passive activities for the taxable year, exceed
(B) the aggregate income from all passive activities for such year.
(2) Passive activity creditThe term “passive activity credit” means the amount (if any) by which—
(A) the sum of the credits from all passive activities allowable for the taxable year under—
(i) subpart D of part IV of subchapter A, or
(ii) subpart B (other than section 27) of such part IV, exceeds
(B) the regular tax liability of the taxpayer for the taxable year allocable to all passive activities.
(e) Special rules for determining income or loss from a passive activityFor purposes of this section—
(1) Certain income not treated as income from passive activityIn determining the income or loss from any activity—
(A) In generalThere shall not be taken into account—
(i) any—(I) gross income from interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business,(II) expenses (other than interest) which are clearly and directly allocable to such gross income, and(III) interest expense properly allocable to such gross income, and
(ii) gain or loss not derived in the ordinary course of a trade or business which is attributable to the disposition of property—(I) producing income of a type described in clause (i), or(II) held for investment.
For purposes of clause (ii), any interest in a passive activity shall not be treated as property held for investment.
(B) Return on working capital
(2) Passive losses of certain closely held corporations may offset active income
(A) In generalIf a closely held C corporation (other than a personal service corporation) has net active income for any taxable year, the passive activity loss of such taxpayer for such taxable year (determined without regard to this paragraph)—
(i) shall be allowable as a deduction against net active income, and
(ii) shall not be taken into account under subsection (a) to the extent so allowable as a deduction.
A similar rule shall apply in the case of any passive activity credit of the taxpayer.
(B) Net active incomeFor purposes of this paragraph, the term “net active income” means the taxable income of the taxpayer for the taxable year determined without regard to—
(i) any income or loss from a passive activity, and
(ii) any item of gross income, expense, gain, or loss described in paragraph (1)(A).
(3) Compensation for personal services
(4) Dividends reduced by dividends received deduction
(f) Treatment of former passive activitiesFor purposes of this section—
(1) In generalIf an activity is a former passive activity for any taxable year—
(A) any unused deduction allocable to such activity under subsection (b) shall be offset against the income from such activity for the taxable year,
(B) any unused credit allocable to such activity under subsection (b) shall be offset against the regular tax liability (computed after the application of paragraph (1)) allocable to such activity for the taxable year, and
(C) any such deduction or credit remaining after the application of subparagraphs (A) and (B) shall continue to be treated as arising from a passive activity.
(2) Change in status of closely held C corporation or personal service corporation
(3) Former passive activityThe term “former passive activity” means any activity which, with respect to the taxpayer—
(A) is not a passive activity for the taxable year, but
(B) was a passive activity for any prior taxable year.
(g) Dispositions of entire interest in passive activityIf during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply:
(1) Fully taxable transaction
(A) In generalIf all gain or loss realized on such disposition is recognized, the excess of—
(i) any loss from such activity for such taxable year (determined after the application of subsection (b)), over
(ii) any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)),
shall be treated as a loss which is not from a passive activity.
(B) Subparagraph (A) not to apply to disposition involving related party
(C) Income from prior years
(2) Disposition by deathIf an interest in the activity is transferred by reason of the death of the taxpayer—
(A) paragraph (1)(A) shall apply to losses described in paragraph (1)(A) to the extent such losses are greater than the excess (if any) of—
(i) the basis of such property in the hands of the transferee, over
(ii) the adjusted basis of such property immediately before the death of the taxpayer, and
(B) any losses to the extent of the excess described in subparagraph (A) shall not be allowed as a deduction for any taxable year.
(3) Installment sale of entire interest
(h) Material participation definedFor purposes of this section—
(1) In generalA taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is—
(A) regular,
(B) continuous, and
(C) substantial.
(2) Interests in limited partnerships
(3) Treatment of certain retired individuals and surviving spouses
(4) Certain closely held C corporations and personal service corporationsA closely held C corporation or personal service corporation shall be treated as materially participating in an activity only if—
(A) 1 or more shareholders holding stock representing more than 50 percent (by value) of the outstanding stock of such corporation materially participate in such activity, or
(B) in the case of a closely held C corporation (other than a personal service corporation), the requirements of section 465(c)(7)(C) (without regard to clause (iv)) are met with respect to such activity.
(5) Participation by spouse
(i) $25,000 offset for rental real estate activities
(1) In general
(2) Dollar limitation
(3) Phase-out of exemption
(A) In general
(B) Special phase-out of rehabilitation credit
(C) Exception for low-income housing credit
(D) Ordering ruleParagraph (1) shall be applied for any taxable year—
(i) first, to the passive activity loss,
(ii) second, to the portion of the passive activity credit to which subparagraph (B) and 1
1 So in original. Probably should be “or”.
(C) does not apply,(iii) third, to the portion of such credit to which subparagraph (B) applies, and
(iv) then, to the portion of such credit to which subparagraph (C) applies.
(E) Adjusted gross incomeFor purposes of this paragraph, adjusted gross income shall be determined without regard to—
(i) any amount includible in gross income under section 86,
(ii) the amounts excludable from gross income under sections 85(c), 135, and 137,
(iii) the amounts allowable as a deduction under sections 219, 221, and 250, and
(iv) any passive activity loss or any loss allowable by reason of subsection (c)(7).
(4) Special rule for estates
(A) In general
(B) Reduction for surviving spouse’s exemption
(5) Married individuals filing separately
(A) In generalExcept as provided in subparagraph (B), in the case of any married individual filing a separate return, this subsection shall be applied by substituting—
(i) “$12,500” for “$25,000” each place it appears,
(ii) “$50,000” for “$100,000” in paragraph (3)(A), and
(iii) “$100,000” for “$200,000” in paragraph (3)(B).
(B) Taxpayers not living apartThis subsection shall not apply to a taxpayer who—
(i) is a married individual filing a separate return for any taxable year, and
(ii) does not live apart from his spouse at all times during such taxable year.
(6) Active participation
(A) In general
(B) No participation requirement for low-income housing or rehabilitation creditParagraphs (1) and (4)(A) shall be applied without regard to the active participation requirement in the case of—
(i) any credit determined under section 42 for any taxable year, or
(ii) any rehabilitation credit determined under section 47,2
2
(C) Interest as a limited partner
(D) Participation by spouse
(j) Other definitions and special rulesFor purposes of this section—
(1) Closely held C corporation
(2) Personal service corporationThe term “personal service corporation” has the meaning given such term by section 269A(b)(1), except that section 269A(b)(2) shall be applied—
(A) by substituting “any” for “more than 10 percent”, and
(B) by substituting “any” for “50 percent or more in value” in section 318(a)(2)(C).
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).
(3) Regular tax liability
(4) Allocation of passive activity loss and credit
(5) Deduction equivalent
(6) Special rule for giftsIn the case of a disposition of any interest in a passive activity by gift—
(A) the basis of such interest immediately before the transfer shall be increased by the amount of any passive activity losses allocable to such interest with respect to which a deduction has not been allowed by reason of subsection (a), and
(B) such losses shall not be allowable as a deduction for any taxable year.
(7) Qualified residence interest
(8) Rental activity
(9) Election to increase basis of property by amount of disallowed credit
(10) Coordination with section 280A
(11) Aggregation of members of affiliated groups
(12) Special rule for distributions by estates or trustsIf any interest in a passive activity is distributed by an estate or trust—
(A) the basis of such interest immediately before such distribution shall be increased by the amount of any passive activity losses allocable to such interest, and
(B) such losses shall not be allowable as a deduction for any taxable year.
(k) Separate application of section in case of publicly traded partnerships
(1) In general
(2) Publicly traded partnershipFor purposes of this section, the term “publicly traded partnership” means any partnership if—
(A) interests in such partnership are traded on an established securities market, or
(B) interests in such partnership are readily tradable on a secondary market (or the substantial equivalent thereof).
(3) Coordination with subsection (g)
(4) Application to regulated investment companies
(l) RegulationsThe Secretary shall prescribe such regulations as may be necessary or appropriate to carry out provisions of this section, including regulations—
(1) which specify what constitutes an activity, material participation, or active participation for purposes of this section,
(2) which provide that certain items of gross income will not be taken into account in determining income or loss from any activity (and the treatment of expenses allocable to such income),
(3) requiring net income or gain from a limited partnership or other passive activity to be treated as not from a passive activity,
(4) which provide for the determination of the allocation of interest expense for purposes of this section, and
(5) which deal with changes in marital status and changes between joint returns and separate returns.
(Added Pub. L. 99–514, title V, § 501(a), Oct. 22, 1986, 100 Stat. 2233; amended Pub. L. 100–203, title X, § 10212(a), Dec. 22, 1987, 101 Stat. 1330–405; Pub. L. 100–647, title I, § 1005(a)(1)–(9), (11), (12), title II, § 2004(g), title VI, § 6009(c)(3), Nov. 10, 1988, 102 Stat. 3387–3389, 3603, 3690; Pub. L. 101–239, title VII, § 7109(a), Dec. 19, 1989, 103 Stat. 2322; Pub. L. 101–508, title XI, §§ 11704(a)(6), 11813(b)(16), Nov. 5, 1990, 104 Stat. 1388–518, 1388–555; Pub. L. 103–66, title XIII, § 13143(a), (b), Aug. 10, 1993, 107 Stat. 440, 441; Pub. L. 104–188, title I, §§ 1704(d)(1), (e)(1), 1807(c)(4), Aug. 20, 1996, 110 Stat. 1878, 1902; Pub. L. 105–277, div. J, title IV, § 4003(a)(2)(D), Oct. 21, 1998, 112 Stat. 2681–908; Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)], Dec. 21, 2000, 114 Stat. 2763, 2763A–599; Pub. L. 107–16, title IV, § 431(c)(3), June 7, 2001, 115 Stat. 68; Pub. L. 107–147, title IV, § 412(a), Mar. 9, 2002, 116 Stat. 53; Pub. L. 108–357, title I, § 102(d)(5), title III, § 331(g), Oct. 22, 2004, 118 Stat. 1429, 1477; Pub. L. 113–295, div. A, title II, § 221(a)(41)(G), (60)(A), Dec. 19, 2014, 128 Stat. 4044, 4047; Pub. L. 115–97, title I, §§ 13305(b)(1), 14202(b)(3), Dec. 22, 2017, 131 Stat. 2126, 2216; Pub. L. 115–141, div. U, title IV, § 401(d)(1)(D)(ii), (5)(B)(i)–(iii), Mar. 23, 2018, 132 Stat. 1206, 1210; Pub. L. 116–260, div. EE, title I, § 104(b)(2)(H), Dec. 27, 2020, 134 Stat. 3041; Pub. L. 117–2, title IX, § 9042(b)(8), Mar. 11, 2021, 135 Stat. 122.)
§ 470. Limitation on deductions allocable to property used by governments or other tax-exempt entities
(a) Limitation on losses
(b) Disallowed loss carried to next year
(c) DefinitionsFor purposes of this section—
(1) Tax-exempt use lossThe term “tax-exempt use loss” means, with respect to any taxable year, the amount (if any) by which—
(A) the sum of—
(i) the aggregate deductions (other than interest) directly allocable to a tax-exempt use property, plus
(ii) the aggregate deductions for interest properly allocable to such property, exceed
(B) the aggregate income from such property.
(2) Tax-exempt use property
(A) In generalThe term “tax-exempt use property” has the meaning given to such term by section 168(h), except that such section shall be applied—
(i) without regard to paragraphs (1)(C) and (3) thereof, and
(ii) as if section 197 intangible property (as defined in section 197), and property described in paragraph (1)(B) or (2) of section 167(f), were tangible property.
(B) Exception for partnerships
(C) Cross reference
(d) Exception for certain leasesThis section shall not apply to any lease of property which meets the requirements of all of the following paragraphs:
(1) Availability of funds
(A) In generalA lease of property meets the requirements of this paragraph if (at all times during the lease term) not more than an allowable amount of funds are—
(i) subject to any arrangement referred to in subparagraph (B), or
(ii) set aside or expected to be set aside,
to or for the benefit of the lessor or any lender, or to or for the benefit of the lessee to satisfy the lessee’s obligations or options under the lease. For purposes of clause (ii), funds shall be treated as set aside or expected to be set aside only if a reasonable person would conclude, based on the facts and circumstances, that such funds are set aside or expected to be set aside.
(B) Arrangements
(C) Allowable amount
(i) In general
(ii) Higher amount permitted in certain cases
(iii) Option to purchase
(iv) No allowable amount for certain arrangementsThe allowable amount shall be zero with respect to any arrangement which involves—(I) a loan from the lessee to the lessor or a lender,(II) any deposit received, letter of credit issued, or payment undertaking agreement entered into by a lender otherwise involved in the transaction, or(III) in the case of a transaction which involves a lender, any credit support made available to the lessor in which any such lender does not have a claim that is senior to the lessor.
For purposes of subclause (I), the term “loan” shall not include any amount treated as a loan under section 467 with respect to a section 467 rental agreement.
(2) Lessor must make substantial equity investment
(A) In generalA lease of property meets the requirements of this paragraph if—
(i) the lessor—(I) has at the time the lease is entered into an unconditional at-risk equity investment (as determined by the Secretary) in the property of at least 20 percent of the lessor’s adjusted basis in the property as of that time, and(II) maintains such investment throughout the term of the lease, and
(ii) the fair market value of the property at the end of the lease term is reasonably expected to be equal to at least 20 percent of such basis.
(B) Risk of loss
(C) Paragraph not to apply to short-term leases
(3) Lessee may not bear more than minimal risk of loss
(A) In generalA lease of property meets the requirements of this paragraph if there is no arrangement under which the lessee bears—
(i) any portion of the loss that would occur if the fair market value of the leased property were 25 percent less than its reasonably expected fair market value at the time the lease is terminated, or
(ii) more than 50 percent of the loss that would occur if the fair market value of the leased property at the time the lease is terminated were zero.
(B) Exception
(C) Paragraph not to apply to short-term leases
(4) Property with more than 7-year class lifeIn the case of a lease—
(A) of property with a class life (as defined in section 168(i)(1)) of more than 7 years, other than fixed-wing aircraft and vessels, and
(B) under which the lessee has the option to purchase the property,
the lease meets the requirements of this paragraph only if the purchase price under the option equals the fair market value of the property (determined at the time of exercise).
(e) Special rules
(1) Treatment of former tax-exempt use property
(A) In generalIn the case of any former tax-exempt use property—
(i) any deduction allowable under subsection (b) with respect to such property for any taxable year shall be allowed only to the extent of any net income (without regard to such deduction) from such property for such taxable year, and
(ii) any portion of such unused deduction remaining after application of clause (i) shall be treated as a deduction allowable under subsection (b) with respect to such property in the next taxable year.
(B) Former tax-exempt use propertyFor purposes of this subsection, the term “former tax-exempt use property” means any property which—
(i) is not tax-exempt use property for the taxable year, but
(ii) was tax-exempt use property for any prior taxable year.
(2) Disposition of entire interest in property
(3) Coordination with section 469
(4) Coordination with sections 1031 and 1033
(A) In generalSections 1031(a) and 1033(a) shall not apply if—
(i) the exchanged or converted property is tax-exempt use property subject to a lease which was entered into before March 13, 2004, and which would not have met the requirements of subsection (d) had such requirements been in effect when the lease was entered into, or
(ii) the replacement property is tax-exempt use property subject to a lease which does not meet the requirements of subsection (d).
(B) Adjusted basisIn the case of property acquired by the lessor in a transaction to which section 1031 or 1033 applies, the adjusted basis of such property for purposes of this section shall be equal to the lesser of—
(i) the fair market value of the property as of the beginning of the lease term, or
(ii) the amount which would be the lessor’s adjusted basis if such sections did not apply to such transaction.
(f) Other definitionsFor purposes of this section—
(1) Related parties
(2) Lease term
(3) Lender
(4) Loan
(g) RegulationsThe Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations which—
(1) allow in appropriate cases the aggregation of property subject to the same lease, and
(2) provide for the determination of the allocation of interest expense for purposes of this section.
(Added Pub. L. 108–357, title VIII, § 848(a), Oct. 22, 2004, 118 Stat. 1602; amended Pub. L. 110–172, § 7(c), Dec. 29, 2007, 121 Stat. 2482; Pub. L. 115–141, div. U, title IV, § 401(a)(120), Mar. 23, 2018, 132 Stat. 1190.)