26 USC 460 - Special rules for long-term contracts

Editorial Notes

References in Text

The date of the enactment of the Revenue Reconciliation Act of 1989, referred to in subsec. (e)(4), is the date of enactment of title VII of Puspan. L. 101–239, which was approved Dec. 19, 1989.

Amendments

2018—Subsec. (span)(2)(A). Puspan. L. 115–141 inserted comma after “first”.

2017—Subsec. (c)(6)(B)(ii). Puspan. L. 115–97, § 13201(span)(2)(A), substituted “January 1, 2027 (January 1, 2028” for “January 1, 2020 (January 1, 2021”.

Subsec. (e)(1)(B). Puspan. L. 115–97, § 13102(d)(1)(A), in introductory provisions, inserted “(other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3))” after “taxpayer”.

Subsec. (e)(1)(B)(ii). Puspan. L. 115–97, § 13102(d)(1)(B), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: “whose average annual gross receipts for the 3 taxable years preceding the taxable year in which such contract is entered into do not exceed $10,000,000.”

Subsec. (e)(2). Puspan. L. 115–97, § 13102(d)(2), added par. (2) and struck out former par. (2) which related to determination of taxpayer’s gross receipts.

Subsec. (e)(3) to (6). Puspan. L. 115–97, § 13102(d)(2), redesignated pars. (4) to (6) as (3) to (5), respectively, and struck out former par. (3) which related to controlled group of corporations.

2015—Subsec. (c)(6)(B)(ii). Puspan. L. 114–113, § 143(span)(6)(I), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: “is placed in service after December 31, 2009, and before January 1, 2011 (January 1, 2012, in the case of property described in section 168(k)(2)(B)), or after December 31, 2012, and before January 1, 2016 (January 1, 2017, in the case of property described in section 168(k)(2)(B)).”

Subsec. (c)(6)(B)(ii). Puspan. L. 114–113, § 143(a)(2), substituted “January 1, 2016 (January 1, 2017” for “January 1, 2015 (January 1, 2016”.

2014—Subsec. (c)(6)(B)(ii). Puspan. L. 113–295 substituted “January 1, 2015 (January 1, 2016” for “January 1, 2014 (January 1, 2015”.

2013—Subsec. (c)(6)(B)(ii). Puspan. L. 112–240 inserted “, or after December 31, 2012, and before January 1, 2014 (January 1, 2015, in the case of property described in section 168(k)(2)(B))” before period at end.

2010—Subsec. (c)(6). Puspan. L. 111–240 added par. (6).

1997—Subsec. (span)(2)(C). Puspan. L. 105–34, § 1211(span)(1), substituted “the adjusted overpayment rate (as defined in paragraph (7))” for “the overpayment rate established by section 6621”.

Subsec. (span)(6). Puspan. L. 105–34, § 1211(a), added par. (6).

Subsec. (span)(7). Puspan. L. 105–34, § 1211(span)(2), added par. (7).

1996—Subsec. (span)(1). Puspan. L. 104–188, § 1704(t)(28), which directed that par. (1) be amended by substituting “the look-back method of paragraph (2)” for “the look-back method of paragraph (3)”, could not be executed, because that phrase does not appear in text. See 1989 Amendment note below.

Subsec. (e)(6)(B). Puspan. L. 104–188, § 1702(h)(15), substituted “section 168(e)(2)(A)(ii)” for “section 167(k)”.

1990—Subsec. (e)(6)(A)(i). Puspan. L. 101–508 substituted “section 168(e)(2)(A)(ii)” for “section 167(k)”.

1989—Subsec. (a). Puspan. L. 101–239, § 7621(a), substituted “Requirement that percentage of completion method be used” for “Percentage of completion-capitalized cost method” in span and amended text generally. Prior to amendment, text read as follows:

“(1) In general.—In the case of any long-term contract—

“(A) 90 percent of the items with respect to such contract shall be taken into account under the percentage of completion method (as modified by subsection (span)), and

“(B) 10 percent of the items with respect to such contract shall be taken into account under the taxpayer’s normal method of accounting.

“(2) 90 percent look-back method to apply.—Upon completion of any long-term 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 determined by applying the look-back method of subsection (span)(3) to 90 percent of the items with respect to the contract.”

Subsec. (a)(2). Puspan. L. 101–239, § 7811(e)(1), inserted “(or, with respect to any amount properly taken into account after completion of the contract, when such amount is so properly taken into account)” after “any long-term contract”.

Subsec. (span)(1). Puspan. L. 101–239, § 7621(c)(2)(A), substituted “paragraph (3)” for “paragraph (4)”.

Puspan. L. 101–239, § 7621(c)(2)(B), which directed the amendment of par. (1) by substituting “paragraph (2)” for “paragraph (3)”, was executed by making the substitution in subpar. (B) and concluding provisions to reflect the probable intent of Congress.

Puspan. L. 101–239, § 7621(c)(1), redesignated par. (2) as (1) and struck out former par. (1) which read as follows: “Subsection (a) not to apply where percentage of completion method used.—Subsection (a) shall not apply to any long-term contract with respect to which amounts includible in gross income are determined under the percentage of completion method.”

Subsec. (span)(2). Puspan. L. 101–239, § 7621(c)(1), redesignated par. (3) as (2). Former par. (2) redesignated (1).

Puspan. L. 101–239, § 7811(e)(4), (6), inserted two sentences at end.

Subsec. (span)(2)(B). Puspan. L. 101–239, § 7811(e)(2), substituted “any amount properly taken into account” for “any amount received or accrued” and “is so properly taken into account” for “is so received or accrued”.

Subsec. (span)(3). Puspan. L. 101–239, § 7621(c)(1), redesignated par. (4) as (3). Former par. (3) redesignated (2).

Puspan. L. 101–239, § 7811(e)(3), in concluding provisions, substituted “any amount properly taken into account” for “any amount received or accrued” and “such amount was properly taken into account” for “such amount was received or accrued”.

Subsec. (span)(3)(B). Puspan. L. 101–239, § 7621(c)(3), substituted “Paragraph (1)(B)” for “Paragraph (2)(B) and subsection (a)(2)” in introductory provisions.

Subsec. (span)(4). Puspan. L. 101–239, § 7621(c)(1), redesignated par. (5) as (4). Former par. (4) redesignated (3).

Subsec. (span)(4)(A)(i). Puspan. L. 101–239, § 7621(c)(4)(A), substituted “paragraph (2)” for “paragraph (3)”.

Subsec. (span)(4)(A)(ii). Puspan. L. 101–239, § 7621(c)(4)(B), substituted “paragraph (2)(B)” for “paragraph (3)(B)” in introductory provisions.

Subsec. (span)(4)(A)(ii)(I). Puspan. L. 101–239, § 7621(c)(4)(C), substituted “paragraph (2)(A)” for “paragraph (3)(A)”.

Subsec. (span)(4)(A)(iii). Puspan. L. 101–239, § 7621(c)(4)(A), substituted “paragraph (2)” for “paragraph (3)” in two places.

Subsec. (span)(5). Puspan. L. 101–239, § 7621(span), added par. (5).

Puspan. L. 101–239, § 7621(c)(1), redesignated former par. (5) as (4).

Subsec. (e)(2)(C). Puspan. L. 101–239, § 7811(e)(5), added subpar. (C).

Subsec. (e)(5). Puspan. L. 101–239, § 7621(c)(5), inserted introductory provisions and struck out former introductory provisions which read as follows: “In the case of any residential construction contract which is not a home construction contract, subsection (a) shall be applied—”.

Subsec. (e)(6)(A). Puspan. L. 101–239, § 7815(e)(1)(A), substituted “activities referred to in paragraph (4) with respect to” for “the building, construction, reconstruction, or rehabilitation of”.

Subsec. (e)(6)(A)(i). Puspan. L. 101–239, § 7815(e)(1)(B), added cl. (i) and struck out former cl. (i) which read as follows: “dwelling units contained in buildings containing 4 or fewer dwelling units, and”.

1988—Subsec. (a)(1)(A). Puspan. L. 100–647, § 5041(a)(1), substituted “90” for “70”.

Subsec. (a)(1)(B). Puspan. L. 100–647, § 5041(a)(2), substituted “10” for “30”.

Subsec. (a)(2). Puspan. L. 100–647, § 5041(a)(1), substituted “90” for “70” in span and in text.

Subsec. (span)(2). Puspan. L. 100–647, § 1008(c)(2)(B), substituted “Except as provided in paragraph (4), in” for “In”.

Subsec. (span)(2)(B). Puspan. L. 100–647, § 1008(c)(4)(B), inserted “(or, with respect to any amount received or accrued after completion of the contract, when such amount is so received or accrued)” after “contract”.

Subsec. (span)(3). Puspan. L. 100–647, § 1008(c)(4)(A), inserted at end “For purposes of the preceding sentence, any amount received or accrued after completion of the contract shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such amount was received or accrued) such amount to its value as of the completion of the contract. The taxpayer may elect with respect to any contract to have the preceding sentence not apply to such contract.”

Puspan. L. 100–647, § 1008(c)(1)(A), substituted “paragraph” for “subparagraph”.

Subsec. (span)(3)(B). Puspan. L. 100–647, § 1008(c)(1)(B), substituted “subparagraph (A)” for “paragraph (1)” in two places.

Subsec. (span)(3)(C). Puspan. L. 100–647, § 1008(c)(1)(C), substituted “subparagraph (B)” for “paragraph (1)”.

Subsec. (span)(4). Puspan. L. 100–647, § 1008(c)(2)(A), added par. (4).

Subsec. (span)(5). Puspan. L. 100–647, § 5041(d), added par. (5).

Subsec. (e)(1). Puspan. L. 100–647, § 5041(span)(1), amended par. (1) generally. Prior to amendment, par. (1) read as follows: “Subsections (a), (span), and (c)(1) and (2) shall not apply to any construction contract entered into by a taxpayer—

“(A) 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

“(B) whose average annual gross receipts for the 3 taxable years preceding the taxable year in which such contract is entered into do not exceed $10,000,000.”

Subsec. (e)(5). Puspan. L. 100–647, § 5041(span)(2), added par. (5).

Subsec. (e)(6). Puspan. L. 100–647, § 5041(span)(3), added par. (6).

Subsec. (h). Puspan. L. 100–647, § 5041(c), added subsec. (h).

1987—Subsec. (a). Puspan. L. 100–203 substituted “70 percent” for “40 percent” in par. (1)(A) and in span and text of par. (2), and “30 percent” for “60 percent” in par. (1)(B).

Statutory Notes and Related Subsidiaries

Effective Date of 2017 Amendment

Amendment by section 13102(d) of Puspan. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, with provision for exemption from percentage completion for long-term contracts, see section 13102(e) of Puspan. L. 115–97, set out as a note under section 263A of this title.

Amendment by section 13201 of Puspan. L. 115–97 applicable to property acquired and placed in service after Sept. 27, 2017, and specified plants planted or grafted after Sept. 27, 2017, see section 13201(h) of Puspan. L. 115–97, set out as a note under section 168 of this title.

Effective Date of 2015 Amendment

Amendment by section 143(a)(2) of Puspan. L. 114–113 applicable to property placed in service after Dec. 31, 2014, in taxable years ending after such date, see section 143(a)(5) of Puspan. L. 114–113, set out as a note under section 168 of this title.

Amendment by section 143(span)(6)(I) of Puspan. L. 114–113 applicable to property placed in service after Dec. 31, 2015, in taxable years ending after such date, see section 143(span)(7) of Puspan. L. 114–113, set out as a note under section 168 of this title.

Effective Date of 2014 Amendment

Amendment by Puspan. L. 113–295 applicable to property placed in service after Dec. 31, 2013, in taxable years ending after such date, see section 125(e) of Puspan. L. 113–295, set out as a note under section 168 of this title.

Effective Date of 2013 Amendment

Amendment by Puspan. L. 112–240 applicable to property placed in service after Dec. 31, 2012, in taxable years ending after such date, see section 331(f) of Puspan. L. 112–240, set out as a note under section 168 of this title.

Effective Date of 2010 Amendment

Puspan. L. 111–240, title II, § 2023(span), Sept. 27, 2010, 124 Stat. 2559, provided that: “The amendment made by this section [amending this section] shall apply to property placed in service after December 31, 2009.”

Effective Date of 1997 Amendment

Puspan. L. 105–34, title XII, § 1211(c), Aug. 5, 1997, 111 Stat. 1000, provided that:

“(1)In general.—Except as provided in paragraph (2), the amendments made by this section [amending this section] shall apply to contracts completed in taxable years ending after the date of the enactment of this Act [Aug. 5, 1997].

“(2)Subsection (span).—The amendments made by subsection (span) [amending this section] shall apply for purposes of section 167(g) of the Internal Revenue Code of 1986 to property placed in service after September 13, 1995.”

Effective Date of 1996 Amendment

Amendment by section 1702(h)(15) of Puspan. L. 104–188 effective, except as otherwise expressly provided, as if included in the provision of the Revenue Reconciliation Act of 1990, Puspan. L. 101–508, title XI, to which such amendment relates, see section 1702(i) of Puspan. L. 104–188, set out as a note under section 38 of this title.

Effective Date of 1990 Amendment

Amendment by Puspan. L. 101–508 applicable to property placed in service after Nov. 5, 1990, but not applicable to any property to which section 168 of this title does not apply by reason of subsec. (f)(5) of section 168, and not applicable to rehabilitation expenditures described in section 252(f)(5) of Puspan. L. 99–514, see section 11812(c) of Puspan. L. 101–508, set out as a note under section 42 of this title.

Effective Date of 1989 Amendment

Puspan. L. 101–239, title VII, § 7621(d), Dec. 19, 1989, 103 Stat. 2376, provided that:

“(1)In general.—Except as provided in paragraph (2), the amendments made by this section [amending this section] shall apply to contracts entered into on or after July 11, 1989.

“(2)Binding bids.—The amendments made by this section shall not apply to any contract resulting from the acceptance of a bid made before July 11, 1989. The preceding sentence shall apply only if the bid could not have been revoked or altered at any time on or after July 11, 1989.

“(3)Special rule for certain ship contracts.—The amendments made by this section shall not apply in the case of a qualified ship contract (as defined in section 10203(span)(2)(B) of the Revenue Act of 1987 [Puspan. L. 100–203, set out below]).”

Amendment by sections 7811(e) and 7815(e)(1) of Puspan. L. 101–239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Puspan. L. 100–647, to which such amendment relates, see section 7817 of Puspan. L. 101–239, set out as a note under section 1 of this title.

Effective Date of 1988 Amendment

Amendment by section 1008(c)(1), (2), (4) of Puspan. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Puspan. L. 99–514, to which such amendment relates, see section 1019(a) of Puspan. L. 100–647, set out as a note under section 1 of this title.

Puspan. L. 100–647, title V, § 5041(e), Nov. 10, 1988, 102 Stat. 3675, as amended by Puspan. L. 101–239, title VII, § 7815(e)(3), Dec. 19, 1989, 103 Stat. 2419, provided that:

“(1)Subsections (a), (span), and (c).—

“(A)In general.—Except as otherwise provided in this paragraph, the amendments made by subsections (a), (span), and (c) [amending this section and section 56 of this title] shall apply to contracts entered into on or after June 21, 1988.

“(B)Binding bids.—The amendments made by subsections (a), (span), and (c) shall not apply to any contract resulting from the acceptance of a bid made before June 21, 1988. The preceding sentence shall apply only if the bid could not have been revoked or altered at any time on or after June 21, 1988.

“(C)Special rule for certain ship contracts.—The amendments made by subsections (a) and (span) [amending this section and section 56 of this title] shall not apply in the case of a qualified ship contract (as defined in section 10203(span)(2)(B) of the Revenue Act of 1987 [Puspan. L. 100–203, set out below]).

“(2)Subsection (d).—The amendment made by subsection (d) [amending this section] shall apply as if included in the amendments made by section 804 of the Reform Act [Puspan. L. 99–514]; except that such amendment shall not apply to any contract completed in a taxable year ending before the date of the enactment of this Act [Nov. 10, 1988], if the due date (determined with regard to extensions) for the return for such year is before such date of enactment.”

Effective Date of 1987 Amendment

Puspan. L. 100–203, title X, § 10203(span), Dec. 22, 1987, 101 Stat. 1330–394, provided that:

“(1)In general.—Except as provided in paragraph (2), the amendments made by this section [amending this section] shall apply to contracts entered into after October 13, 1987.

“(2)Special rule for certain ship contracts.—

“(A)In general.—The amendments made by this section shall not apply in the case of a qualified ship contract.

“(B)Qualified ship contract.—For purposes of subparagraph (A), the term ‘qualified ship contract’ means any contract for the construction in the United States of not more than 5 ships if—

“(i) such ships will not be constructed (directly or indirectly) for the Federal Government, and

“(ii) the taxpayer reasonably expects to complete such contract within 5 years of the contract commencement date (as defined in section 460(g) of the Internal Revenue Code of 1986).”

Effective Date of 1986 Amendment

Puspan. L. 99–514, title VIII, § 804(d), Oct. 22, 1986, 100 Stat. 2361, as amended by Puspan. L. 100–647, title I, § 1008(c)(3), Nov. 10, 1988, 102 Stat. 3439, provided that:

“(1)In general.—The amendments made by this section [enacting this section] shall apply to any contract entered into after February 28, 1986.

“(2)Clarification of treatment of independent research and development expenses.—

“(A)In general.—For periods before, on, or after the date of enactment of this Act [Oct. 22, 1986]—

“(i) any independent research and development expenses taken into account in determining the total contract price shall not be severable from the contract, and

“(ii) any independent research and development expenses shall not be treated as amounts chargeable to capital account.

“(B)Independent research and development expenses.—For purposes of subparagraph (A), the term ‘independent research and development expenses’ has the meaning given to such term by section 460(c)(5) of the Internal Revenue Code of 1986, as added by this section.”

Regulations

Puspan. L. 99–514, title VIII, § 804(span), Oct. 22, 1986, 100 Stat. 2361, provided that: “The Secretary of the Treasury or his delegate shall modify the income tax regulations relating to accounting for long-term contracts to carry out the provisions of section 460 of the Internal Revenue Code of 1986 (as added by subsection (a)).”

Savings Provision

For provisions that nothing in amendment by Puspan. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(span) of Puspan. L. 101–508, set out as a note under section 45K of this title.

Method of Accounting for Naval Shipbuilders

Puspan. L. 108–357, title VII, § 708, Oct. 22, 2004, 118 Stat. 1550, as amended by Puspan. L. 109–135, title IV, § 403(s), Dec. 21, 2005, 119 Stat. 2628, provided that:

“(a)In General.—In the case of a qualified naval ship contract, the taxable income of such contract during the 5-taxable year period beginning with the taxable year in which the construction commencement date occurs shall be determined under a method identical to the method used in the case of a qualified ship contract (as defined in section 10203(span)(2)(B) of the Revenue Act of 1987 [Puspan. L. 100–203, set out as an Effective Date of 1987 Amendment note above]).

“(span)Recapture of Tax Benefit.—In the case of a qualified naval ship contract to which subsection (a) applies, the taxpayer’s tax imposed by chapter 1 of the Internal Revenue Code of 1986 for the first taxable year following the 5-taxable year period described in subsection (a) shall be increased by the excess (if any) of—

“(1) the amount of tax which would have been imposed during such period if this section had not been enacted, over

“(2) the amount of tax so imposed during such period.

“(c)Qualified Naval Ship Contract.—For purposes of this section:

“(1)In general.—The term ‘qualified naval ship contract’ means any contract or portion thereof that is for the construction in the United States of 1 ship or submarine for the Federal Government if the taxpayer reasonably expects the acceptance date will occur no later than 9 years after the construction commencement date.

“(2)Acceptance date.—The term ‘acceptance date’ means the date 1 year after the date on which the Federal Government issues a letter of acceptance or other similar document for the ship or submarine.

“(3)Construction commencement date.—The term ‘construction commencement date’ means the date on which the physical fabrication of any section or component of the ship or submarine begins in the taxpayer’s shipyard.

“(d)Certain Adjustments Not to Apply.—Section 481 of the Internal Revenue Code of 1986 shall not apply with respect to any change in the method of accounting which is required by this section.

“(e)Effective Date.—This section shall apply to contracts for ships or submarines with respect to which the construction commencement date occurs after the date of the enactment of this Act [Oct. 22, 2004].”

Amortization of Past Service Pension Costs

Allocable costs (within the meaning of subsec. (c) of this section) with respect to any property to include contributions paid to or under a pension or annuity plan whether or not such contributions represent past service costs, see section 10204 of Puspan. L. 100–203, set out as a note under section 263A of this title.