Income Tax Freeland/Outline

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(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

    (1) Compensation for services, including fees, commissions, fringe benefits, and similar items;

    (2) Gross income derived from business;

    (3) Gains derived from dealings in property;

    (4) Interest;

    (5) Rents;

    (6) Royalties;

    (7) Dividends;

    (8)  [1] Alimony and separate maintenance payments;

    (9) Annuities;

    (10) Income from life insurance and endowment contracts;

    (11) Pensions;

    (12) Income from discharge of indebtedness;

    (13) Distributive share of partnership gross income;

    (14) Income in respect of a decedent; and

    (15) Income from an interest in an estate or trust.

(b) Cross references. For items specifically included in gross income, see part II (sec. 71 and following). For items specifically excluded from gross income, see part III (sec. 101 and following).

(a) General rule. For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions:

    (1) Trade and business deductions. The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.

     (2) Certain trade and business deductions of employees

         (A) Reimbursed expenses of employees. The deductions allowed by part VI (section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer. The fact that the reimbursement may be provided by a third party shall not be determinative of whether or not the preceding sentence applies.

          (B) Certain expenses of performing artists. The deductions allowed by section 162 which consist of expenses paid or incurred by a qualified performing artist in connection with the performances by him of services in the performing arts as an employee.

          (C) Certain expenses of officials. The deductions allowed by section 162 which consist of expenses paid or incurred with respect to services performed by an official as an employee of a State or a political subdivision thereof in a position compensated in whole or in part on a fee basis.

          (D) Certain expenses of elementary and secondary school teachers. The deductions allowed by section 162 which consist of expenses, not in excess of $250, paid or incurred by an eligible educator—

              (i) by reason of the participation of the educator in professional development courses related to the curriculum in which the educator provides instruction or to the students for which the educator provides instruction, and

              (ii) in connection with books, supplies (other than non athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom.

         (E) Certain expenses of members of reserve components of the Armed Forces of the United States

The deductions allowed by section 162 which consist of expenses, determined at a rate not in excess of the rates for travel expenses (including per diem in lieu of subsistence) authorized for employees of agencies under subchapter I of chapter 57 of title 5, United States Code, paid or incurred by the taxpayer in connection with the performance of services by such taxpayer as a member of a reserve component of the Armed Forces of the United States for any period during which such individual is more than 100 miles away from home in connection with such services.

     (3) Losses from sale or exchange of property. The deductions allowed by part VI (sec. 161 and following) as losses from the sale or exchange of property.

     (4) Deductions attributable to rents and royalties. The deductions allowed by part VI (sec. 161 and following), by section 212 (relating to expenses for production of income), and by section 611 (relating to depletion) which are attributable to property held for the production of rents or royalties.

     (5) Certain deductions of life tenants and income beneficiaries of property. In the case of a life tenant of property, or an income beneficiary of property held in trust, or an heir, legatee, or devisee of an estate, the deduction for depreciation allowed by section 167 and the deduction allowed by section 611.

     (6) Pension, profit-sharing, and annuity plans of self-employed individuals. In the case of an individual who is an employee within the meaning of section 401(c)(1), the deduction allowed by section 404.

     (7) Retirement savings. The deduction allowed by section 219 (relating to deduction of certain retirement savings).

     [(8) Repealed. Pub. L. 104–188, title I, § 1401(b)(4), Aug. 20, 1996, 110 Stat. 1788]

    (9) Penalties forfeited because of premature withdrawal of funds from time savings accounts or deposits. The deductions allowed by section 165 for losses incurred in any transaction entered into for profit, though not connected with a trade or business, to the extent that such losses include amounts forfeited to a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank or homestead association as a penalty for premature withdrawal of funds from a time savings account, certificate of deposit, or similar class of deposit.

     (10) Alimony. The deduction allowed by section 215.

     (11) Reforestation expenses. The deduction allowed by section 194.

     (12) Certain required repayments of supplemental unemployment compensation benefits. The deduction allowed by section 165 for the repayment to a trust described in paragraph (9) or (17) of section 501(c) of supplemental unemployment compensation benefits received from such trust if such repayment is required because of the receipt of trade readjustment allowances under section 231 or 232 of the Trade Act of 1974 (19 U.S.C. 2291 and 2292).

     (13) Jury duty pay remitted to employer. Any deduction allowable under this chapter by reason of an individual remitting any portion of any jury pay to such individual’s employer in exchange for payment by the employer of compensation for the period such individual was performing jury duty. For purposes of the preceding sentence, the term “jury pay” means any payment received by the individual for the discharge of jury duty.

     [(14) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(34)(C), Dec. 19, 2014, 128 Stat. 4042]

    (15) Moving expenses. The deduction allowed by section 217.

     (16) Archer MSAs. The deduction allowed by section 220.

     (17) Interest on education loans. The deduction allowed by section 221.

     (18) Higher education expenses. The deduction allowed by section 222.

     (19) Health savings accounts. The deduction allowed by section 223.

     (20) Costs involving discrimination suits, etc. Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination (as defined in subsection (e)) or a claim of a violation of subchapter III of chapter 37 of title 31, United States Code [2] or a claim made under section 1862(b)(3)(A) of the Social Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding sentence shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement (whether by suit or agreement and whether as lump sum or periodic payments) resulting from such claim.

     (21) Attorneys’ fees relating to awards to whistleblowers

         (A) In general. Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any award under—

              (i) section 7623(b), or

              (ii) in the case of taxable years beginning after December 31, 2017, any action brought under—

                   (I) section 21F of the Securities Exchange Act of 1934 (15 U.S.C. 78u–6),

                   (II) a State false claims act, including a State false claims act with qui tam provisions, or

                   (III) section 23 of the Commodity Exchange Act (7 U.S.C. 26).

         (B) May not exceed award. Subparagraph (A) shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of such award.

Nothing in this section shall permit the same item to be deducted more than once. The deduction allowed by section 199A shall not be treated as a deduction described in any of the preceding paragraphs of this subsection.

(b) Qualified performing artist

    (1) In general. For purposes of subsection (a)(2)(B), the term “qualified performing artist” means, with respect to any taxable year, any individual if—

         (A) such individual performed services in the performing arts as an employee during the taxable year for at least 2 employers,

         (B) the aggregate amount allowable as a deduction under section 162 in connection with the performance of such services exceeds 10 percent of such individual’s gross income attributable to the performance of such services, and

         (C) the adjusted gross income of such individual for the taxable year (determined without regard to subsection (a)(2)(B)) does not exceed $16,000.

    (2) Nominal employer not taken into account. An individual shall not be treated as performing services in the performing arts as an employee for any employer during any taxable year unless the amount received by such individual from such employer for the performance of such services during the taxable year equals or exceeds $200.

     (3) Special rules for married couples

         (A) In general. Except in the case of a husband and wife who lived apart at all times during the taxable year, if the taxpayer is married at the close of the taxable year, subsection (a)(2)(B) shall apply only if the taxpayer and his spouse file a joint return for the taxable year.

          (B) Application of paragraph (1)In the case of a joint return—

              (i) paragraph (1) (other than subparagraph (C) thereof) shall be applied separately with respect to each spouse, but

              (ii) paragraph (1)(C) shall be applied with respect to their combined adjusted gross income.

         (C) Determination of marital status. For purposes of this subsection, marital status shall be determined under section 7703(a).

          (D) Joint return. For purposes of this subsection, the term “joint return” means the joint return of a husband and wife made under section 6013.

(c) Certain arrangements not treated as reimbursement arrangements. For purposes of subsection (a)(2)(A), an arrangement shall in no event be treated as a reimbursement or other expense allowance arrangement if—

    (1) such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement, or

    (2) such arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement.

The substantiation requirements of the preceding sentence shall not apply to any expense to the extent that substantiation is not required under section 274(d) for such expense by reason of the regulations prescribed under the 2nd sentence thereof.

(d) Definition; special rules

    (1) Eligible educator

         (A) In general. For purposes of subsection (a)(2)(D), the term “eligible educator” means, with respect to any taxable year, an individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.

          (B) School. The term “school” means any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law.

     (2) Coordination with exclusions. A deduction shall be allowed under subsection (a)(2)(D) for expenses only to the extent the amount of such expenses exceeds the amount excludable under section 135, 529(c)(1), or 530(d)(2) for the taxable year.

     (3) Inflation adjustment. In the case of any taxable year beginning after 2015, the $250 amount in subsection (a)(2)(D) shall be increased by an amount equal to—

         (A) such dollar amount, multiplied by

         (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2014” for “calendar year 2016” in subparagraph (A)(ii) thereof.

Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $50.

(e) Unlawful discrimination defined. For purposes of subsection (a)(20), the term “unlawful discrimination” means an act that is unlawful under any of the following:

    (1) Section 302 of the Civil Rights Act of 1991 (2 U.S.C. 1202).[3]

    (2) Section 201, 202, 203, 204, 205, 206, or 207 of the Congressional Accountability Act of 1995 (2 U.S.C. 1311, 1312, 1313, 1314, 1315, 1316, or 1317).

    (3) The National Labor Relations Act (29 U.S.C. 151 et seq.).

    (4) The Fair Labor Standards Act of 1938 (29 U.S.C. 201 et seq.).

    (5) Section 4 or 15 of the Age Discrimination in Employment Act of 1967 (29 U.S.C. 623 or 633a).

    (6) Section 501 or 504 of the Rehabilitation Act of 1973 (29 U.S.C. 791 or 794).

    (7) Section 510 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1140).

    (8) Title IX of the Education Amendments of 1972 (20 U.S.C. 1681 et seq.).

    (9) The Employee Polygraph Protection Act of 1988 (29 U.S.C. 2001 et seq.).

    (10) The Worker Adjustment and Retraining Notification Act (29 U.S.C. 2102 et seq.).

    (11) Section 105 of the Family and Medical Leave Act of 1993 (29 U.S.C. 2615).

    (12) Chapter 43 of title 38, United States Code (relating to employment and reemployment rights of members of the uniformed services).

    (13) Section 1977, 1979, or 1980 of the Revised Statutes (42 U.S.C. 1981, 1983, or 1985).

    (14) Section 703, 704, or 717 of the Civil Rights Act of 1964 (42 U.S.C. 2000e–2, 2000e–3, or 2000e–16).

    (15) Section 804, 805, 806, 808, or 818 of the Fair Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 3617).

    (16) Section 102, 202, 302, or 503 of the Americans with Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182, or 12203).

    (17) Any provision of Federal law (popularly known as whistleblower protection provisions) prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted under Federal law.

    (18) Any provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law—

         (i) providing for the enforcement of civil rights, or

         (ii) regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.

(a) In general. In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for any taxable year an amount equal to the sum of—

    (1) the lesser of—

         (A) the combined qualified business income amount of the taxpayer, or

         (B) an amount equal to 20 percent of the excess (if any) of—

              (i) the taxable income of the taxpayer for the taxable year, over

              (ii) the sum of any net capital gain (as defined in section 1(h)), plus the aggregate amount of the qualified cooperative dividends, of the taxpayer for the taxable year, plus

    (2) the lesser of—

         (A) 20 percent of the aggregate amount of the qualified cooperative dividends of the taxpayer for the taxable year, or

         (B) taxable income (reduced by the net capital gain (as so defined)) of the taxpayer for the taxable year.

The amount determined under the preceding sentence shall not exceed the taxable income (reduced by the net capital gain (as so defined)) of the taxpayer for the taxable year.

(b) Combined qualified business income amount. For purposes of this section—

    (1) In general. The term “combined qualified business income amount” means, with respect to any taxable year, an amount equal to—

         (A) the sum of the amounts determined under paragraph (2) for each qualified trade or business carried on by the taxpayer, plus

         (B) 20 percent of the aggregate amount of the qualified REIT dividends and qualified publicly traded partnership income of the taxpayer for the taxable year.

    (2) Determination of deductible amount for each trade or business. The amount determined under this paragraph with respect to any qualified trade or business is the lesser of—

         (A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or

         (B) the greater of—

              (i) 50 percent of the W–2 wages with respect to the qualified trade or business, or

              (ii) the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.

    (3) Modifications to limit based on taxable income

         (A) Exception from limit. In the case of any taxpayer whose taxable income for the taxable year does not exceed the threshold amount, paragraph (2) shall be applied without regard to subparagraph (B).

          (B) Phase-in of limit for certain taxpayers

              (i) In general. If—

                   (I) the taxable income of a taxpayer for any taxable year exceeds the threshold amount, but does not exceed the sum of the threshold amount plus $50,000 ($100,000 in the case of a joint return), and

                   (II) the amount determined under paragraph (2)(B) (determined without regard to this subparagraph) with respect to any qualified trade or business carried on by the taxpayer is less than the amount determined under paragraph (2)(A) with respect such trade or business, then paragraph (2) shall be applied with respect to such trade or business without regard to subparagraph (B) thereof and by reducing the amount determined under subparagraph (A) thereof by the amount determined under clause (ii).

              (ii) Amount of reduction. The amount determined under this subparagraph is the amount which bears the same ratio to the excess amount as—

                   (I) the amount by which the taxpayer’s taxable income for the taxable year exceeds the threshold amount, bears to

                   (II) $50,000 ($100,000 in the case of a joint return).

              (iii) Excess amount. For purposes of clause (ii), the excess amount is the excess of—

                   (I) the amount determined under paragraph (2)(A) (determined without regard to this paragraph), over

                   (II) the amount determined under paragraph (2)(B) (determined without regard to this paragraph).

    (4) Wages, etc

         (A) In general. The term “W–2 wages” means, with respect to any person for any taxable year of such person, the amounts described in paragraphs (3) and (8) of section 6051(a) paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year.

          (B) Limitation to wages attributable to qualified business income. Such term shall not include any amount which is not properly allocable to qualified business income for purposes of subsection (c)(1).

          (C) Return requirement. Such term shall not include any amount which is not properly included in a return filed with the Social Security Administration on or before the 60th day after the due date (including extensions) for such return.

     (5) Acquisitions, dispositions, and short taxable years. The Secretary shall provide for the application of this subsection in cases of a short taxable year or where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year.

     (6) Qualified property. For purposes of this section:

          (A) In general. The term “qualified property” means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167—

              (i) which is held by, and available for use in, the qualified trade or business at the close of the taxable year,

              (ii) which is used at any point during the taxable year in the production of qualified business income, and

              (iii) the depreciable period for which has not ended before the close of the taxable year.

         (B) Depreciable period. The term “depreciable period” means, with respect to qualified property of a taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of—

              (i) the date that is 10 years after such date, or

              (ii) the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to subsection (g) thereof).

(c) Qualified business income. For purposes of this section—

    (1) In general. The term “qualified business income” means, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Such term shall not include any qualified REIT dividends, qualified cooperative dividends, or qualified publicly traded partnership income.

     (2) Carryover of losses. If the net amount of qualified income, gain, deduction, and loss with respect to qualified trades or businesses of the taxpayer for any taxable year is less than zero, such amount shall be treated as a loss from a qualified trade or business in the succeeding taxable year.

    (3) Qualified items of income, gain, deduction, and loss. For purposes of this subsection—

        (A) In general. The term “qualified items of income, gain, deduction, and loss” means items of income, gain, deduction, and loss to the extent such items are—

              (i) effectively connected with the conduct of a trade or business within the United States (within the meaning of section 864(c), determined by substituting “qualified trade or business (within the meaning of section 199A)” for“nonresident alien individual or a foreign corporation” or for “a foreign corporation” each place it appears), and

              (ii) included or allowed in determining taxable income for the taxable year.

         (B) Exceptions. The following investment items shall not be taken into account as a qualified item of income, gain, deduction, or loss:

              (i) Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss.

              (ii) Any dividend, income equivalent to a dividend, or payment in lieu of dividends described in section 954(c)(1)(G).

              (iii) Any interest income other than interest income which is properly allocable to a trade or business.

              (iv) Any item of gain or loss described in subparagraph (C) or (D) of section 954(c)(1) (applied by substituting “qualified trade or business” for “controlled foreign corporation”).

              (v) Any item of income, gain, deduction, or loss taken into account under section 954(c)(1)(F) (determined without regard to clause (ii) thereof and other than items attributable to notional principal contracts entered into in transactions qualifying under section 1221(a)(7)).

              (vi) Any amount received from an annuity which is not received in connection with the trade or business.

              (vii) Any item of deduction or loss properly allocable to an amount described in any of the preceding clauses.

    (4) Treatment of reasonable compensation and guaranteed payments. Qualified business income shall not include—

         (A) reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business,

         (B) any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business, and

         (C) to the extent provided in regulations, any payment described in section 707(a) to a partner for services rendered with respect to the trade or business.

(d) Qualified trade or business. For purposes of this section—

    (1) In general. The term “qualified trade or business” means any trade or business other than—

         (A) a specified service trade or business, or

         (B) the trade or business of performing services as an employee.

    (2) Specified service trade or business. The term “specified service trade or business” means any trade or business—

         (A) which is described in section 1202(e)(3)(A) (applied without regard to the words “engineering, architecture,”) or which would be so described if the term “employees or owners” were substituted for “employees” therein, or

         (B) which involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).

    (3) Exception for specified service businesses based on taxpayer’s income

         (A) In generalIf, for any taxable year, the taxable income of any taxpayer is less than the sum of the threshold amount plus $50,000 ($100,000 in the case of a joint return), then—

              (i) any specified service trade or business of the taxpayer shall not fail to be treated as a qualified trade or business due to paragraph (1)(A), but

              (ii) only the applicable percentage of qualified items of income, gain, deduction, or loss, and the W–2 wages and the unadjusted basis immediately after acquisition of qualified property, of the taxpayer allocable to such specified service trade or business shall be taken into account in computing the qualified business income, W–2 wages, and the unadjusted basis immediately after acquisition of qualified property of the taxpayer for the taxable year for purposes of applying this section.

    (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means, with respect to any taxable year, 100 percent reduced (not below zero) by the percentage equal to the ratio of—

              (i) the taxable income of the taxpayer for the taxable year in excess of the threshold amount, bears to

              (ii) $50,000 ($100,000 in the case of a joint return).

(e) Other Definitions. For purposes of this section—

    (1) Taxable income. Taxable income shall be computed without regard to the deduction allowable under this section.

     (2) Threshold amount

         (A) In general. The term “threshold amount” means $157,500 (200 percent of such amount in the case of a joint return).

          (B) Inflation adjustment. In the case of any taxable year beginning after 2018, the dollar amount in subparagraph (A) 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 “calendar year 2017” for “calendar year 2016” in subparagraph (A)(ii) thereof.

The amount of any increase under the preceding sentence shall be rounded as provided in section 1(f)(7).

    (3) Qualified REIT dividend. The term “qualified REIT dividend” means any dividend from a real estate investment trust received during the taxable year which—

         (A) is not a capital gain dividend, as defined in section 857(b)(3), and

         (B) is not qualified dividend income, as defined in section 1(h)(11).

    (4) Qualified cooperative dividend. The term “qualified cooperative dividend” means any patronage dividend (as defined in section 1388(a)), any per-unit retain allocation (as defined in section 1388(f)), and any qualified written notice of allocation (as defined in section 1388(c)), or any similar amount received from an organization described in subparagraph (B)(ii), which—

         (A) is includible in gross income, and

         (B) is received from—

              (i) an organization or corporation described in section 501(c)(12) or 1381(a), or

              (ii) an organization which is governed under this title by the rules applicable to cooperatives under this title before the enactment of subchapter T.

    (5) Qualified publicly traded partnership income. The term “qualified publicly traded partnership income” means, with respect to any qualified trade or business of a taxpayer, the sum of—

         (A) the net amount of such taxpayer’s allocable share of each qualified item of income, gain, deduction, and loss (as defined in subsection (c)(3) and determined after the application of subsection (c)(4)) from a publicly traded partnership (as defined in section 7704(a)) [1] which is not treated as a corporation under section 7704(c), plus

         (B) any gain recognized by such taxpayer upon disposition of its interest in such partnership to the extent such gain is treated as an amount realized from the sale or exchange of property other than a capital asset under section 751(a).

(f) Special rules

    (1) Application to partnerships and s corporations

         (A) In general. In the case of a partnership or S corporation—

              (i) this section shall be applied at the partner or shareholder level,

              (ii) each partner or shareholder shall take into account such person’s allocable share of each qualified item of income, gain, deduction, and loss, and

              (iii) each partner or shareholder shall be treated for purposes of subsection (b) as having W–2 wages and unadjusted basis immediately after acquisition of qualified property for the taxable year in an amount equal to such person’s allocable share of the W–2 wages and the unadjusted basis immediately after acquisition of qualified property of the partnership or S corporation for the taxable year (as determined under regulations prescribed by the Secretary).

For purposes of clause (iii), a partner’s or shareholder’s allocable share of W–2 wages shall be determined in the same manner as the partner’s or shareholder’s allocable share of wage expenses. For purposes of such clause, partner’s or shareholder’s allocable share of the unadjusted basis immediately after acquisition of qualified property shall be determined in the same manner as the partner’s or shareholder’s allocable share of depreciation. For purposes of this subparagraph, in the case of an S corporation, an allocable share shall be the shareholder’s pro rata share of an item.

         (B) Application to trusts and estates. Rules similar to the rules under section 199(d)(1)(B)(i) (as in effect on December 1, 2017) for the apportionment of W–2 wages shall apply to the apportionment of W–2 wages and the apportionment of unadjusted basis immediately after acquisition of qualified property under this section.

     (C) Treatment of trades or business in Puerto Rico

              (i) In general. In the case of any taxpayer with qualified business income from sources within the commonwealth of Puerto Rico, if all such income is taxable under section 1 for such taxable year, then for purposes of determining the qualified business income of such taxpayer for such taxable year, the term “United States” shall include the Commonwealth of Puerto Rico.

               (ii) Special rule for applying limit. In the case of any taxpayer described in clause (i), the determination of W–2 wages of such taxpayer with respect to any qualified trade or business conducted in Puerto Rico shall be made without regard to any exclusion under section 3401(a)(8) for remuneration paid for services in Puerto Rico.

     (2) Coordination with minimum tax. For purposes of determining alternative minimum taxable income under section 55, qualified business income shall be determined without regard to any adjustments under sections 56 through 59.

     (3) Deduction limited to income taxes. The deduction under subsection (a) shall only be allowed for purposes of this chapter.

     (4) Regulations. The Secretary shall prescribe such regulations as are necessary to carry out the purposes of this section, including regulations—

         (A) for requiring or restricting the allocation of items and wages under this section and such reporting requirements as the Secretary determines appropriate, and

         (B) for the application of this section in the case of tiered entities.

(g) Deduction allowed to specified agricultural or horticultural cooperatives

    (1) In general. In the case of any taxable year of a specified agricultural or horticultural cooperative beginning after December 31, 2017, there shall be allowed a deduction in an amount equal to the lesser of—

         (A) 20 percent of the excess (if any) of—

              (i) the gross income of a specified agricultural or horticultural cooperative, over

              (ii) the qualified cooperative dividends (as defined in subsection (e)(4)) paid during the taxable year for the taxable year, or

    (B) the greater of—

              (i) 50 percent of the W–2 wages of the cooperative with respect to its trade or business, or

              (ii) the sum of 25 percent of the W–2 wages of the cooperative with respect to its trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property of the cooperative.

    (2) Limitation. The amount determined under paragraph (1) shall not exceed the taxable income of the specified agricultural or horticultural for the taxable year.

     (3) Specified agricultural or horticultural cooperative. For purposes of this subsection, the term “specified agricultural or horticultural cooperative” means an organization to which part I of subchapter T applies which is engaged in—

         (A) the manufacturing, production, growth, or extraction in whole or significant part of any agricultural or horticultural product,

         (B) the marketing of agricultural or horticultural products which its patrons have so manufactured, produced, grown, or extracted, or

         (C) the provision of supplies, equipment, or services to farmers or to organizations described in subparagraph (A) or (B).

(h) Anti-abuse rules. The Secretary shall—

    (1) apply rules similar to the rules under section 179(d)(2) in order to prevent the manipulation of the depreciable period of qualified property using transactions between related parties, and

    (2) prescribe rules for determining the unadjusted basis immediately after acquisition of qualified property acquired in like-kind exchanges or involuntary conversions.

(i) Termination. This section shall not apply to taxable years beginning after December 31, 2025.

(a) In general. Except as provided in subsection (b), for purposes of this subtitle, the term “taxable income” means gross income minus the deductions allowed by this chapter (other than the standard deduction).

(b) Individuals who do not itemize their deductions. In the case of an individual who does not elect to itemize his deductions for the taxable year, for purposes of this subtitle, the term “taxable income” means adjusted gross income, minus—

    (1) the standard deduction,

    (2) the deduction for personal exemptions provided in section 151, and

    (3) the deduction provided in section 199A.

(c) Standard deduction. For purposes of this subtitle—

    (1) In general. Except as otherwise provided in this subsection, the term “standard deduction” means the sum of—

         (A) the basic standard deduction, and

         (B) the additional standard deduction.

    (2) Basic standard deduction. For purposes of paragraph (1), the basic standard deduction is—

         (A) 200 percent of the dollar amount in effect under subparagraph (C) for the taxable year in the case of—

              (i) a joint return, or

              (ii) a surviving spouse (as defined in section 2(a)),

         (B) $4,400 in the case of a head of household (as defined in section 2(b)), or

         (C) $3,000 in any other case.

    (3) Additional standard deduction for aged and blind. For purposes of paragraph (1), the additional standard deduction is the sum of each additional amount to which the taxpayer is entitled under subsection (f).

     (4) Adjustments for inflation. In the case of any taxable year beginning in a calendar year after 1988, each dollar amount contained in paragraph (2)(B), (2)(C), or (5) or subsection (f) shall be increased by an amount equal to—

         (A) such dollar amount, multiplied by

         (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting for “calendar year 2016” in subparagraph (A)(ii) thereof—

              (i) “calendar year 1987” in the case of the dollar amounts contained in paragraph (2)(B), (2)(C), or (5)(A) or subsection (f), and

              (ii) “calendar year 1997” in the case of the dollar amount contained in paragraph (5)(B).

    (5) Limitation on basic standard deduction in the case of certain dependents. In the case of an individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, the basic standard deduction applicable to such individual for such individual’s taxable year shall not exceed the greater of—

         (A) $500, or

         (B) the sum of $250 and such individual’s earned income.

    (6) Certain individuals, etc., not eligible for standard deduction. In the case of—

         (A) a married individual filing a separate return where either spouse itemizes deductions,

         (B) a nonresident alien individual,

         (C) an individual making a return under section 443(a)(1) for a period of less than 12 months on account of a change in his annual accounting period, or

         (D) an estate or trust, common trust fund, or partnership, the standard deduction shall be zero.

     (7) Special rules for taxable years 2018 through 2025. In the case of a taxable year beginning after December 31, 2017, and before January 1, 2026—

         (A) Increase in standard deduction. Paragraph (2) shall be applied—

              (i) by substituting “$18,000” for “$4,400” in subparagraph (B), and

              (ii) by substituting “$12,000” for “$3,000” in subparagraph (C).

         (B) Adjustment for inflation

              (i) In general. Paragraph (4) shall not apply to the dollar amounts contained in paragraphs (2)(B) and (2)(C).

               (ii) Adjustment of increased amounts. In the case of a taxable year beginning after 2018, the $18,000 and $12,000 amounts in subparagraph (A) shall each 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 increase under this clause is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50.

(d) Itemized deductions. For purposes of this subtitle, the term “itemized deductions” means the deductions allowable under this chapter other than—

    (1) the deductions allowable in arriving at adjusted gross income,

    (2) the deduction for personal exemptions provided by section 151, and

    (3) the deduction provided in section 199A.

(e) Election to itemize

    (1) In general. Unless an individual makes an election under this subsection for the taxable year, no itemized deduction shall be allowed for the taxable year. For purposes of this subtitle, the determination of whether a deduction is allowable under this chapter shall be made without regard to the preceding sentence.

     (2) Time and manner of election. Any election under this subsection shall be made on the taxpayer’s return, and the Secretary shall prescribe the manner of signifying such election on the return.

     (3) Change of election.Under regulations prescribed by the Secretary, a change of election with respect to itemized deductions for any taxable year may be made after the filing of the return for such year. If the spouse of the taxpayer filed a separate return for any taxable year corresponding to the taxable year of the taxpayer, the change shall not be allowed unless, in accordance with such regulations—

         (A) the spouse makes a change of election with respect to itemized deductions, for the taxable year covered in such separate return, consistent with the change of treatment sought by the taxpayer, and

         (B) the taxpayer and his spouse consent in writing to the assessment (within such period as may be agreed on with the Secretary) of any deficiency, to the extent attributable to such change of election, even though at the time of the filing of such consent the assessment of such deficiency would otherwise be prevented by the operation of any law or rule of law.

This paragraph shall not apply if the tax liability of the taxpayer’s spouse for the taxable year corresponding to the taxable year of the taxpayer has been compromised under section 7122.

(f) Aged or blind additional amounts

    (1) Additional amounts for the aged. The taxpayer shall be entitled to an additional amount of $600—

         (A) for himself if he has attained age 65 before the close of his taxable year, and

         (B) for the spouse of the taxpayer if the spouse has attained age 65 before the close of the taxable year and an additional exemption is allowable to the taxpayer for such spouse under section 151(b).

    (2) Additional amount for blind. The taxpayer shall be entitled to an additional amount of $600—

         (A) for himself if he is blind at the close of the taxable year, and

         (B) for the spouse of the taxpayer if the spouse is blind as of the close of the taxable year and an additional exemption is allowable to the taxpayer for such spouse under section 151(b).

For purposes of subparagraph (B), if the spouse dies during the taxable year the determination of whether such spouse is blind shall be made as of the time of such death.

    (3) Higher amount for certain unmarried individuals. In the case of an individual who is not married and is not a surviving spouse, paragraphs (1) and (2) shall be applied by substituting “$750” for “$600”.

     (4) Blindness defined. For purposes of this subsection, an individual is blind only if his central visual acuity does not exceed 20/200 in the better eye with correcting lenses, or if his visual acuity is greater than 20/200 but is accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees.

(g) Marital status. For purposes of this section, marital status shall be determined under section 7703.

(a) General rule. In the case of an individual, the miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income.

(b) Miscellaneous itemized deductions. For purposes of this section, the term “miscellaneous itemized deductions” means the itemized deductions other than—

    (1) the deduction under section 163 (relating to interest),

    (2) the deduction under section 164 (relating to taxes),

    (3) the deduction under section 165(a) for casualty or theft losses described in paragraph (2) or (3) of section 165(c) or for losses described in section 165(d),

    (4) the deductions under section 170 (relating to charitable, etc., contributions and gifts) and section 642(c) (relating to deduction for amounts paid or permanently set aside for a charitable purpose),

    (5) the deduction under section 213 (relating to medical, dental, etc., expenses),

    (6) any deduction allowable for impairment-related work expenses,

    (7) the deduction under section 691(c) (relating to deduction for estate tax in case of income in respect of the decedent),

    (8) any deduction allowable in connection with personal property used in a short sale,

    (9) the deduction under section 1341 (relating to computation of tax where taxpayer restores substantial amount held under claim of right),

    (10) the deduction under section 72(b)(3) (relating to deduction where annuity payments cease before investment recovered),

    (11) the deduction under section 171 (relating to deduction for amortizable bond premium), and

    (12) the deduction under section 216 (relating to deductions in connection with cooperative housing corporations).

(c) Disallowance of indirect deduction through pass-thru entity

    (1) In general. The Secretary shall prescribe regulations which prohibit the indirect deduction through pass-thru entities of amounts which are not allowable as a deduction if paid or incurred directly by an individual and which contain such reporting requirements as may be necessary to carry out the purposes of this subsection.

     (2) Treatment of publicly offered regulated investment companies

         (A) In general. Paragraph (1) shall not apply with respect to any publicly offered regulated investment company.

          (B) Publicly offered regulated investment companies. For purposes of this subsection—

              (i) In general. The term “publicly offered regulated investment company” means a regulated investment company the shares of which are—

                   (I) continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933, as amended (15 U.S.C. 77a to 77aa)),

                   (II) regularly traded on an established securities market, or

                   (III) held by or for no fewer than 500 persons at all times during the taxable year.

              (ii) Secretary may reduce 500 person requirement. The Secretary may by regulation decrease the minimum shareholder requirement of clause (i)(III) in the case of regulated investment companies which experience a loss of shareholders through net redemptions of their shares.

     (3) Treatment of certain other entities. Paragraph (1) shall not apply—

         (A) with respect to cooperatives and real estate investment trusts, and

         (B) except as provided in regulations, with respect to estates and trusts.

(d) Impairment-related work expenses. For purposes of this section, the term “impairment-related work expenses” means expenses—

    (1) of a handicapped individual (as defined in section 190(b)(3)) for attendant care services at the individual’s place of employment and other expenses in connection with such place of employment which are necessary for such individual to be able to work, and

    (2) with respect to which a deduction is allowable under section 162 (determined without regard to this section).

(e) Determination of adjusted gross income in case of estates and trusts. For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that—

    (1) the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate, and

    (2) the deductions allowable under sections 642(b), 651, and 661,

shall be treated as allowable in arriving at adjusted gross income. Under regulations, appropriate adjustments shall be made in the application of part I of subchapter J of this chapter to take into account the provisions of this section.

(f) Coordination with other limitation. This section shall be applied before the application of the dollar limitation of the second sentence of section 162(a) (relating to trade or business expenses).

(g) Suspension for taxable years 2018 through 2025. Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017, and before January 1, 2026.

If married filing jointly, 200% of $3,000 §63(c)(2)(A)-(C)

BUT look to SPECIAL RULES:

§63(c)(7)(A)(ii) → Special rules for 2018

Replace $3,000 with $12,000 above

$12,000 x 200% = TOTAL STANDARD → $24,000

Regular → on the list in §67(b)

Miscellaneous → anything not on list in §67(b)

Regular

Mortgage Interest --- §67(b)(1) → $16, 000

Charitable Contributions --- §67(b)(4) → $500

Medical Expenses --- §67(b)(5) → $2,000

Miscellaneous

Accountant/Tax Prep. Fees → $1,000

Unreimbursed Work Expenses → $1,000

*normally, you’d add up misc. and reg. to get total itemized, but due to §67(g), no misc. at this time.

2% floor on miscellaneous, but currently inactive

TOTAL ITEMIZED → $18,500

Realization is a prerequisite to recognition. If you have realization, then you have recognition.

If you are engaged in the marketplace, you likely will have a realization event.

1. ASSESSED WEALTH
2. CLEARLY REALIZED
3. COMPLETE DOMINION

(a) In general. In addition to the items enumerated in section 61(a), there are many other kinds of gross income.

For example, punitive damages such as treble damages under the antitrust laws and exemplary damages for fraud are gross income. Another person's payment of the taxpayer's income taxes constitutes gross income to the taxpayer unless excluded by law. Illegal gains constitute gross income. Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.

(b) Cross references.

     (1) Prizes and awards, see section 74 and regulations thereunder;

     (2) Damages for personal injury or sickness, see section 104 and the regulations thereunder;

     (3) Income taxes paid by lessee corporation, see section 110 and regulations thereunder;

     (4) Scholarships and fellowship grants, see section 117 and regulations thereunder;

     (5) Miscellaneous exemptions under other acts of Congress, see section 122;

     (6) Tax-free covenant bonds, see section 1451 and regulations thereunder.

     (7) Notional principal contracts, see § 1.446-3.

(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

    (1) Compensation for services, including fees, commissions, fringe benefits, and similar items;

(a) General rule. Except as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards.

(b) Exception for certain prizes and awards transferred to charities. Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if—

    (1) the recipient was selected without any action on his part to enter the contest or proceeding;

    (2) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and

    (3) the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170(c) pursuant to a designation made by the recipient.

(c) Exception for certain employee achievement awards

    (1) In general. Gross income shall not include the value of an employee achievement award (as defined in section 274(j)) received by the taxpayer if the cost to the employer of the employee achievement award does not exceed the amount allowable as a deduction to the employer for the cost of the employee achievement award.

     (2) Excess deduction award. If the cost to the employer of the employee achievement award received by the taxpayer exceeds the amount allowable as a deduction to the employer, then gross income includes the greater of—

         (A) an amount equal to the portion of the cost to the employer of the award that is not allowable as a deduction to the employer (but not in excess of the value of the award), or

         (B) the amount by which the value of the award exceeds the amount allowable as a deduction to the employer.

The remaining portion of the value of such award shall not be included in the gross income of the recipient.

(3) Treatment of tax-exempt employers

In the case of an employer exempt from taxation under this subtitle, any reference in this subsection to the amount allowable as a deduction to the employer shall be treated as a reference to the amount which would be allowable as a deduction to the employer if the employer were not exempt from taxation under this subtitle.

     (4) Cross reference. For provisions excluding certain de minimis fringes from gross income, see section 132(e).

(d) Exception for Olympic and Paralympic medals and prizes

    (1) In general. Gross income shall not include the value of any medal awarded in, or any prize money received from the United States Olympic Committee on account of, competition in the Olympic Games or Paralympic Games.

     (2) Limitation based on adjusted gross income

         (A) In general. Paragraph (1) shall not apply to any taxpayer for any taxable year if the adjusted gross income (determined without regard to this subsection) of such taxpayer for such taxable year exceeds $1,000,000 (half of such amount in the case of a married individual filing a separate return).

          (B) Coordination with other limitations. For purposes of sections 86, 135, 137, 219, 221, 222, and 469, adjusted gross income shall be determined after the application of paragraph (1) and before the application of subparagraph (A).

(a) Meals and lodging furnished to employee, his spouse, and his dependents, pursuant to employment. There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if—

    (1) in the case of meals, the meals are furnished on the business premises of the employer, or

    (2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.

(b) Special rules. For purposes of subsection (a)—

    (1) Provisions of employment contract or State statute not to be determinative

In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation.

     (2) Certain factors not taken into account with respect to meals

In determining whether meals are furnished for the convenience of the employer, the fact that a charge is made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account.

     (3) Certain fixed charges for meals

         (A) In general. If—

              (i) an employee is required to pay on a periodic basis a fixed charge for his meals, and

              (ii) such meals are furnished by the employer for the convenience of the employer,

there shall be excluded from the employee’s gross income an amount equal to such fixed charge.

         (B) Application of subparagraph (A)Subparagraph (A) shall apply—

              (i) whether the employee pays the fixed charge out of his stated compensation or out of his own funds, and

              (ii) only if the employee is required to make the payment whether he accepts or declines the meals.

    (4) Meals furnished to employees on business premises where meals of most employees are otherwise excludable. All meals furnished on the business premises of an employer to such employer’s employees shall be treated as furnished for the convenience of the employer if, without regard to this paragraph, more than half of the employees to whom such meals are furnished on such premises are furnished such meals for the convenience of the employer.

(c) Employees living in certain camps

    (1) In general. In the case of an individual who is furnished lodging in a camp located in a foreign country by or on behalf of his employer, such camp shall be considered to be part of the business premises of the employer.

     (2) Camp. For purposes of this section, a camp constitutes lodging which is—

         (A) provided by or on behalf of the employer for the convenience of the employer because the place at which such individual renders services is in a remote area where satisfactory housing is not available on the open market,

         (B) located, as near as practicable, in the vicinity of the place at which such individual renders services, and

         (C) furnished in a common area (or enclave) which is not available to the public and which normally accommodates 10 or more employees.

(d) Lodging furnished by certain educational institutions to employees

    (1) In general. In the case of an employee of an educational institution, gross income shall not include the value of qualified campus lodging furnished to such employee during the taxable year.

     (2) Exception in cases of inadequate rent. Paragraph (1) shall not apply to the extent of the excess of—

         (A) the lesser of—

              (i) 5 percent of the appraised value of the qualified campus lodging, or

              (ii) the average of the rentals paid by individuals (other than employees or students of the educational institution) during such calendar year for lodging provided by the educational institution which is comparable to the qualified campus lodging provided to the employee, over

         (B) the rent paid by the employee for the qualified campus lodging during such calendar year.

The appraised value under subparagraph (A)(i) shall be determined as of the close of the calendar year in which the taxable year begins, or, in the case of a rental period not greater than 1 year, at any time during the calendar year in which such period begins.

    (3) Qualified campus lodging. For purposes of this subsection, the term “qualified campus lodging” means lodging to which subsection (a) does not apply and which is—

         (A) located on, or in the proximity of, a campus of the educational institution, and

         (B) furnished to the employee, his spouse, and any of his dependents by or on behalf of such institution for use as a residence.

    (4) Educational institution, etc.For purposes of this subsection—

         (A) In general. The term “educational institution” means—

              (i) an institution described in section 170(b)(1)(A)(ii) (or an entity organized under State law and composed of public institutions so described), or

              (ii) an academic health center.

         (B) Academic health center. For purposes of subparagraph (A), the term “academic health center” means an entity—

              (i) which is described in section 170(b)(1)(A)(iii),

              (ii) which receives (during the calendar year in which the taxable year of the taxpayer begins) payments under subsection (d)(5)(B) or (h) of section 1886 of the Social Security Act (relating to graduate medical education), and

              (iii) which has as one of its principal purposes or functions the providing and teaching of basic and clinical medical science and research with the entity’s own faculty.

●      For convenience of employer

●      On business premises of employer

●      For convenience of employer

●      On business premises of employer

●      Employee required to accept as a condition of employment

(a) Exclusion from gross income. Gross income shall not include any fringe benefit which qualifies as a—

    (1) no-additional-cost service,

    (2) qualified employee discount,

    (3) working condition fringe,

    (4) de minimis fringe,

    (5) qualified transportation fringe,

    (6) qualified moving expense reimbursement,

    (7) qualified retirement planning services, or

    (8) qualified military base realignment and closure fringe.

(b) No-additional-cost service defined. For purposes of this section, the term “no-additional-cost service” means any service provided by an employer to an employee for use by such employee if—

    (1) such service is offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services, and

    (2) the employer incurs no substantial additional cost (including forgone revenue) in providing such service to the employee (determined without regard to any amount paid by the employee for such service).

(c) Qualified employee discount defined. For purposes of this section—

    (1) Qualified employee discount. The term “qualified employee discount” means any employee discount with respect to qualified property or services to the extent such discount does not exceed—

         (A) in the case of property, the gross profit percentage of the price at which the property is being offered by the employer to customers, or

         (B) in the case of services, 20 percent of the price at which the services are being offered by the employer to customers.

    (2) Gross profit percentage

         (A) In general. The term “gross profit percentage” means the percent which—

              (i) the excess of the aggregate sales price of property sold by the employer to customers over the aggregate cost of such property to the employer, is of

              (ii) the aggregate sale price of such property.

         (B) Determination of gross profit percentage. Gross profit percentage shall be determined on the basis of—

              (i) all property offered to customers in the ordinary course of the line of business of the employer in which the employee is performing services (or a reasonable classification of property selected by the employer), and

              (ii) the employer’s experience during a representative period.

    (3) Employee discount defined. The term “employee discount” means the amount by which—

         (A) the price at which the property or services are provided by the employer to an employee for use by such employee, is less than

         (B) the price at which such property or services are being offered by the employer to customers.

    (4) Qualified property or services. The term “qualified property or services” means any property (other than real property and other than personal property of a kind held for investment) or services which are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services.

(d) Working condition fringe defined. For purposes of this section, the term “working condition fringe” means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.

(e) De minimis fringe defined. For purposes of this section—

    (1) In general. The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.

     (2) Treatment of certain eating facilities. The operation by an employer of any eating facility for employees shall be treated as a de minimis fringe if—

         (A) such facility is located on or near the business premises of the employer, and

         (B) revenue derived from such facility normally equals or exceeds the direct operating costs of such facility.

The preceding sentence shall apply with respect to any highly compensated employee only if access to the facility is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees. For purposes of subparagraph (B), an employee entitled under section 119 to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal.

(f) Qualified transportation fringe

    (1) In general. For purposes of this section, the term “qualified transportation fringe” means any of the following provided by an employer to an employee:

         (A) Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment.

         (B) Any transit pass.

         (C) Qualified parking.

        (D) Any qualified bicycle commuting reimbursement.

    (2) Limitation on exclusion. The amount of the fringe benefits which are provided by an employer to any employee and which may be excluded from gross income under subsection (a)(5) shall not exceed—

         (A) $175 per month in the case of the aggregate of the benefits described in subparagraphs (A) and (B) of paragraph (1),

         (B) $175 per month in the case of qualified parking, and

         (C) the applicable annual limitation in the case of any qualified bicycle commuting reimbursement.

    (3) Cash reimbursements. For purposes of this subsection, the term “qualified transportation fringe” includes a cash reimbursement by an employer to an employee for a benefit described in paragraph (1). The preceding sentence shall apply to a cash reimbursement for any transit pass only if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.

     (4) No constructive receipt. No amount shall be included in the gross income of an employee solely because the employee may choose between any qualified transportation fringe (other than a qualified bicycle commuting reimbursement) and compensation which would otherwise be includible in gross income of such employee.

     (5) Definitions. For purposes of this subsection—

         (A) Transit pass. The term “transit pass” means any pass, token, farecard, voucher, or similar item entitling a person to transportation (or transportation at a reduced price) if such transportation is—

              (i) on mass transit facilities (whether or not publicly owned), or

              (ii) provided by any person in the business of transporting persons for compensation or hire if such transportation is provided in a vehicle meeting the requirements of subparagraph (B)(i).

         (B) Commuter highway vehicle. The term “commuter highway vehicle” means any highway vehicle—

              (i) the seating capacity of which is at least 6 adults (not including the driver), and

              (ii) at least 80 percent of the mileage use of which can reasonably be expected to be—

                   (I) for purposes of transporting employees in connection with travel between their residences and their place of employment, and

                   (II) on trips during which the number of employees transported for such purposes is at least ½ of the adult seating capacity of such vehicle (not including the driver).

         (C) Qualified parking. The term “qualified parking” means parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation described in subparagraph (A), in a commuter highway vehicle, or by carpool. Such term shall not include any parking on or near property used by the employee for residential purposes.

          (D) Transportation provided by employer

Transportation referred to in paragraph (1)(A) shall be considered to be provided by an employer if such transportation is furnished in a commuter highway vehicle operated by or for the employer.

          (E) Employee

For purposes of this subsection, the term “employee” does not include an individual who is an employee within the meaning of section 401(c)(1).

          (F) Definitions related to bicycle commuting reimbursement

              (i) Qualified bicycle commuting reimbursement. The term “qualified bicycle commuting reimbursement” means, with respect to any calendar year, any employer reimbursement during the 15-month period beginning with the first day of such calendar year for reasonable expenses incurred by the employee during such calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment.

               (ii) Applicable annual limitation. The term “applicable annual limitation” means, with respect to any employee for any calendar year, the product of $20 multiplied by the number of qualified bicycle commuting months during such year.

               (iii) Qualified bicycle commuting month. The term “qualified bicycle commuting month” means, with respect to any employee, any month during which such employee—

                   (I) regularly uses the bicycle for a substantial portion of the travel between the employee’s residence and place of employment, and

                   (II) does not receive any benefit described in subparagraph (A), (B), or (C) of paragraph (1).

    (6) Inflation adjustment

         (A) In general. In the case of any taxable year beginning in a calendar year after 1999, the dollar amounts contained in subparagraphs (A) and (B) of paragraph (2) 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, by substituting “calendar year 1998” for “calendar year 2016” in subparagraph (A)(ii) thereof.

In the case of any taxable year beginning in a calendar year after 2002, clause (ii) shall be applied by substituting “calendar year 2001” for “calendar year 1998” for purposes of adjusting the dollar amount contained in paragraph (2)(A).

         (B) Rounding. If any increase determined under subparagraph (A) is not a multiple of $5, such increase shall be rounded to the next lowest multiple of $5.

     (7) Coordination with other provisions. For purposes of this section, the terms “working condition fringe” and “de minimis fringe” shall not include any qualified transportation fringe (determined without regard to paragraph (2)).

     (8) Suspension of qualified bicycle commuting reimbursement exclusion. Paragraph (1)(D) shall not apply to any taxable year beginning after December 31, 2017, and before January 1, 2026.

(g) Qualified moving expense reimbursement. For purposes of this section—

    (1) In general. The term “qualified moving expense reimbursement” means any amount received (directly or indirectly) by an individual from an employer as a payment for (or a reimbursement of) expenses which would be deductible as moving expenses under section 217 if directly paid or incurred by the individual. Such term shall not include any payment for (or reimbursement of) an expense actually deducted by the individual in a prior taxable year.

     (2) Suspension for taxable years 2018 through 2025. Except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station, subsection (a)(6) shall not apply to any taxable year beginning after December 31, 2017, and before January 1, 2026.

(h) Certain individuals treated as employees for purposes of subsections (a)(1) and (2)For purposes of paragraphs (1) and (2) of subsection (a)—

    (1) Retired and disabled employees and surviving spouse of employee treated as employee. With respect to a line of business of an employer, the term “employee” includes—

         (A) any individual who was formerly employed by such employer in such line of business and who separated from service with such employer in such line of business by reason of retirement or disability, and

         (B) any widow or widower of any individual who died while employed by such employer in such line of business or while an employee within the meaning of subparagraph (A).

    (2) Spouse and dependent children

         (A) In general. Any use by the spouse or a dependent child of the employee shall be treated as use by the employee.

          (B) Dependent child. For purposes of subparagraph (A), the term “dependent child” means any child (as defined in section 152(f)(1)) of the employee—

              (i) who is a dependent of the employee, or

              (ii) both of whose parents are deceased and who has not attained age 25.

For purposes of the preceding sentence, any child to whom section 152(e) applies shall be treated as the dependent of both parents.

    (3) Special rule for parents in the case of air transportation. Any use of air transportation by a parent of an employee (determined without regard to paragraph (1)(B)) shall be treated as use by the employee.

(i) Reciprocal agreements. For purposes of paragraph (1) of subsection (a), any service provided by an employer to an employee of another employer shall be treated as provided by the employer of such employee if—

    (1) such service is provided pursuant to a written agreement between such employers, and

    (2) neither of such employers incurs any substantial additional costs (including foregone revenue) in providing such service or pursuant to such agreement.

(j) Special rules

    (1) Exclusions under subsection (a)(1) and (2) apply to highly compensated employees only if no discrimination. Paragraphs (1) and (2) of subsection (a) shall apply with respect to any fringe benefit described therein provided with respect to any highly compensated employee only if such fringe benefit is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees.

     (2) Special rule for leased sections of department stores

         (A) In general. For purposes of paragraph (2) of subsection (a), in the case of a leased section of a department store—

              (i) such section shall be treated as part of the line of business of the person operating the department store, and

              (ii) employees in the leased section shall be treated as employees of the person operating the department store.

         (B) Leased section of department store. For purposes of subparagraph (A), a leased section of a department store is any part of a department store where over-the-counter sales of property are made under a lease or similar arrangement where it appears to the general public that individuals making such sales are employed by the person operating the department store.

     (3) Auto salesmen

         (A) In general. For purposes of subsection (a)(3), qualified automobile demonstration use shall be treated as a working condition fringe.

          (B) Qualified automobile demonstration use. For purposes of subparagraph (A), the term “qualified automobile demonstration use” means any use of an automobile by a full-time automobile salesman in the sales area in which the automobile dealer’s sales office is located if—

              (i) such use is provided primarily to facilitate the salesman’s performance of services for the employer, and

              (ii) there are substantial restrictions on the personal use of such automobile by such salesman.

    (4) On-premises gyms and other athletic facilities

         (A) In general. Gross income shall not include the value of any on-premises athletic facility provided by an employer to his employees.

          (B) On-premises athletic facility. For purposes of this paragraph, the term “on-premises athletic facility” means any gym or other athletic facility—

              (i) which is located on the premises of the employer,

              (ii) which is operated by the employer, and

              (iii) substantially all the use of which is by employees of the employer, their spouses, and their dependent children (within the meaning of subsection (h)).

    (5) Special rule for affiliates of airlines

         (A) In general. If—

              (i) a qualified affiliate is a member of an affiliated group another member of which operates an airline, and

              (ii) employees of the qualified affiliate who are directly engaged in providing airline-related services are entitled to no-additional-cost service with respect to air transportation provided by such other member, then, for purposes of applying paragraph (1) of subsection (a) to such no-additional-cost service provided to such employees, such qualified affiliate shall be treated as engaged in the same line of business as such other member.

    (B) Qualified affiliate. For purposes of this paragraph, the term “qualified affiliate” means any corporation which is predominantly engaged in airline-related services.

     (C) Airline-related services. For purposes of this paragraph, the term “airline-related services” means any of the following services provided in connection with air transportation:

              (i) Catering.

              (ii) Baggage handling.

              (iii) Ticketing and reservations.

              (iv) Flight planning and weather analysis.

              (v) Restaurants and gift shops located at an airport.

              (vi) Such other similar services provided to the airline as the Secretary may prescribe.

         (D) Affiliated group. For purposes of this paragraph, the term “affiliated group” has the meaning given such term by section 1504(a).

     (6) Highly compensated employee. For purposes of this section, the term “highly compensated employee” has the meaning given such term by section 414(q).

     (7) Air cargo. For purposes of subsection (b), the transportation of cargo by air and the transportation of passengers by air shall be treated as the same service.

     (8) Application of section to otherwise taxable educational or training benefits. Amounts paid or expenses incurred by the employer for education or training provided to the employee which are not excludable from gross income under section 127 shall be excluded from gross income under this section if (and only if) such amounts or expenses are a working condition fringe.

(k) Customers not to include employees. For purposes of this section (other than subsection (c)(2)), the term “customers” shall only include customers who are not employees.

(l) Section not to apply to fringe benefits expressly provided for elsewhere. This section (other than subsections (e) and (g)) shall not apply to any fringe benefits of a type the tax treatment of which is expressly provided for in any other section of this chapter.

(m) Qualified retirement planning services

    (1) In general. For purposes of this section, the term “qualified retirement planning services” means any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan.

     (2) Nondiscrimination rule. Subsection (a)(7) shall apply in the case of highly compensated employees only if such services are available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer plan.

     (3) Qualified employer plan. For purposes of this subsection, the term “qualified employer plan” means a plan, contract, pension, or account described in section 219(g)(5).

(n) Qualified military base realignment and closure fringe. For purposes of this section—

    (1) In general. The term “qualified military base realignment and closure fringe” means 1 or more payments under the authority of section 1013 of the Demonstration Cities and Metropolitan Development Act of 1966 (42 U.S.C. 3374) (as in effect on the date of the enactment of the American Recovery and Reinvestment Tax Act of 2009).

     (2) Limitation. With respect to any property, such term shall not include any payment referred to in paragraph (1) to the extent that the sum of all of such payments related to such property exceeds the maximum amount described in subsection (c) of such section (as in effect on such date).

(o) Regulations. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

(a) General rule If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of—

    (1) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over

    (2) the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture.

(b) Election to include in gross income in year of transfer

    (1) In general. Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of—

         (A) the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over

         (B) the amount (if any) paid for such property. If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture.

    (2) Election An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary.

(c) Special rules. For purposes of this section—

    (1) Substantial risk of forfeiture. The rights of a person in property are subject to a substantial risk of forfeiture if such person’s rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual.

     (2) Transferability of property. The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture.

     (3) Sales which may give rise to suit under section 16(b) of the Securities Exchange Act of 1934. So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person’s rights in such property are—

         (A) subject to a substantial risk of forfeiture, and

         (B) not transferable.

    (4) For purposes of determining an individual’s basis in property transferred in connection with the performance of services, rules similar to the rules of section 72(w) shall apply.

(d) Certain restrictions which will never lapse

    (1) Valuation. In the case of property subject to a restriction which by its terms will never lapse, and which allows the transferee to sell such property only at a price determined under a formula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value.

     (2) Cancellation If, in the case of property subject to a restriction which by its terms will never lapse, the restriction is canceled, then, unless the taxpayer establishes—

         (A) that such cancellation was not compensatory, and

         (B) that the person, if any, who would be allowed a deduction if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as evidenced in such manner as the Secretary shall prescribe by regulations, the excess of the fair market value of the property (computed without regard to the restrictions) at the time of cancellation over the sum of—

         (C) the fair market value of such property (computed by taking the restriction into account) immediately before the cancellation, and

         (D) the amount, if any, paid for the cancellation, shall be treated as compensation for the taxable year in which such cancellation occurs.

(e) Applicability of section. This section shall not apply to—

    (1) a transaction to which section 421 applies,

    (2) a transfer to or from a trust described in section 401(a) or a transfer under an annuity plan which meets the requirements of section 404(a)(2),

    (3) the transfer of an option without a readily ascertainable fair market value,

    (4) the transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value at the date of grant, or

    (5) group-term life insurance to which section 79 applies.

(f) Holding period. In determining the period for which the taxpayer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier.

(g) Certain exchanges. If property to which subsection (a) applies is exchanged for property subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject, and if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applied to such exchange, or if such exchange was pursuant to the exercise of a conversion privilege—

    (1) such exchange shall be disregarded for purposes of subsection (a), and

    (2) the property received shall be treated as property to which subsection (a) applies.

(h) Deduction by employer. In the case of a transfer of property to which this section applies or a cancellation of a restriction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the services in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such services.

(i) Qualified equity grants

    (1) In general. For purposes of this subtitle—

         (A) Timing of inclusion. If qualified stock is transferred to a qualified employee who makes an election with respect to such stock under this subsection, subsection (a) shall be applied by including the amount determined under such subsection with respect to such stock in income of the employee in the taxable year determined under subparagraph (B) in lieu of the taxable year described in subsection (a).

          (B) Taxable year determined. The taxable year determined under this subparagraph is the taxable year of the employee which includes the earliest of—

              (i) the first date such qualified stock becomes transferable (including, solely for purposes of this clause, becoming transferable to the employer),

              (ii) the date the employee first becomes an excluded employee,

              (iii) the first date on which any stock of the corporation which issued the qualified stock becomes readily tradable on an established securities market (as determined by the Secretary, but not including any market unless such market is recognized as an established securities market by the Secretary for purposes of a provision of this title other than this subsection),

              (iv) the date that is 5 years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, or

              (v) the date on which the employee revokes (at such time and in such manner as the Secretary provides) the election under this subsection with respect to such stock.

    (2) Qualified stock

         (A) In general. For purposes of this subsection, the term “qualified stock” means, with respect to any qualified employee, any stock in a corporation which is the employer of such employee, if—

              (i) such stock is received—

                   (I) in connection with the exercise of an option, or

                   (II) in settlement of a restricted stock unit, and

              (ii) such option or restricted stock unit was granted by the corporation—

                   (I) in connection with the performance of services as an employee, and

                   (II) during a calendar year in which such corporation was an eligible corporation.

         (B) Limitation. The term “qualified stock” shall not include any stock if the employee may sell such stock to, or otherwise receive cash in lieu of stock from, the corporation at the time that the rights of the employee in such stock first become transferable or not subject to a substantial risk of forfeiture.

          (C) Eligible corporation. For purposes of subparagraph (A)(ii)(II)—

              (i) In general. The term “eligible corporation” means, with respect to any calendar year, any corporation if—

                   (I) no stock of such corporation (or any predecessor of such corporation) is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) during any preceding calendar year, and

                   (II) such corporation has a written plan under which, in such calendar year, not less than 80 percent of all employees who provide services to such corporation in the United States (or any possession of the United States) are granted stock options, or are granted restricted stock units, with the same rights and privileges to receive qualified stock.

              (ii) Same rights and privileges. For purposes of clause (i)(II)—

                   (I) except as provided in subclauses (II) and (III), the determination of rights and privileges with respect to stock shall be made in a similar manner as under section 423(b)(5),

                   (II) employees shall not fail to be treated as having the same rights and privileges to receive qualified stock solely because the number of shares available to all employees is not equal in amount, so long as the number of shares available to each employee is more than a de minimis amount, and

                   (III) rights and privileges with respect to the exercise of an option shall not be treated as the same as rights and privileges with respect to the settlement of a restricted stock unit.

         (iii) Employee. For purposes of clause (i)(II), the term “employee” shall not include any employee described in section 4980E(d)(4) or any excluded employee.

          (iv) Special rule for calendar years before 2018. In the case of any calendar year beginning before January 1, 2018, clause (i)(II) shall be applied without regard to whether the rights and privileges with respect to the qualified stock are the same.

     (3) Qualified employee; excluded employee. For purposes of this subsection—

         (A) In general. The term “qualified employee” means any individual who—

              (i) is not an excluded employee, and

              (ii) agrees in the election made under this subsection to meet such requirements as are determined by the Secretary to be necessary to ensure that the withholding requirements of the corporation under chapter 24 with respect to the qualified stock are met.

         (B) Excluded employee. The term “excluded employee” means, with respect to any corporation, any individual—

              (i) who is a 1-percent owner (within the meaning of section 416(i)(1)(B)(ii)) at any time during the calendar year or who was such a 1 percent owner at any time during the 10 preceding calendar years,

              (ii) who is or has been at any prior time—

                   (I) the chief executive officer of such corporation or an individual acting in such a capacity, or

                   (II) the chief financial officer of such corporation or an individual acting in such a capacity,

(iii) who bears a relationship described in section 318(a)(1) to any individual described in subclause (I) or (II) of clause (ii), or

              (iv) who is one of the 4 highest compensated officers of such corporation for the taxable year, or was one of the 4 highest compensated officers of such corporation for any of the 10 preceding taxable years, determined with respect to each such taxable year on the basis of the shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 (as if such rules applied to such corporation).

    (4) Election

         (A) Time for making election. An election with respect to qualified stock shall be made under this subsection no later than 30 days after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, and shall be made in a manner similar to the manner in which an election is made under subsection (b).

          (B) Limitations. No election may be made under this section with respect to any qualified stock if—

              (i) the qualified employee has made an election under subsection (b) with respect to such qualified stock,

              (ii) any stock of the corporation which issued the qualified stock is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) at any time before the election is made, or

              (iii) such corporation purchased any of its outstanding stock in the calendar year preceding the calendar year which includes the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, unless—

                   (I) not less than 25 percent of the total dollar amount of the stock so purchased is deferral stock, and

                   (II) the determination of which individuals from whom deferral stock is purchased is made on a reasonable basis.

         (C) Definitions and special rules related to limitation on stock redemptions

              (i) Deferral stock. For purposes of this paragraph, the term “deferral stock” means stock with respect to which an election is in effect under this subsection.

               (ii) Deferral stock with respect to any individual not taken into account if individual holds deferral stock with longer deferral period. Stock purchased by a corporation from any individual shall not be treated as deferral stock for purposes of subparagraph (B)(iii) if such individual (immediately after such purchase) holds any deferral stock with respect to which an election has been in effect under this subsection for a longer period than the election with respect to the stock so purchased.

               (iii) Purchase of all outstanding deferral stock. The requirements of subclauses (I) and (II) of subparagraph (B)(iii) shall be treated as met if the stock so purchased includes all of the corporation’s outstanding deferral stock.

               (iv) Reporting. Any corporation which has outstanding deferral stock as of the beginning of any calendar year and which purchases any of its outstanding stock during such calendar year shall include on its return of tax for the taxable year in which, or with which, such calendar year ends the total dollar amount of its outstanding stock so purchased during such calendar year and such other information as the Secretary requires for purposes of administering this paragraph.

     (5) Controlled groups. For purposes of this subsection, all persons treated as a single employer under section 414(b) shall be treated as 1 corporation.

     (6) Notice requirement. Any corporation which transfers qualified stock to a qualified employee shall, at the time that (or a reasonable period before) an amount attributable to such stock would (but for this subsection) first be includible in the gross income of such employee—

         (A) certify to such employee that such stock is qualified stock, and

         (B) notify such employee—

              (i) that the employee may be eligible to elect to defer income on such stock under this subsection, and

              (ii) that, if the employee makes such an election—

                   (I) the amount of income recognized at the end of the deferral period will be based on the value of the stock at the time at which the rights of the employee in such stock first become transferable or not subject to substantial risk of forfeiture, notwithstanding whether the value of the stock has declined during the deferral period,

                   (II) the amount of such income recognized at the end of the deferral period will be subject to withholding under section 3401(i) at the rate determined under section 3402(t), and

                   (III) the responsibilities of the employee (as determined by the Secretary under paragraph (3)(A)(ii)) with respect to such withholding.

    (7) Restricted stock units. This section (other than this subsection), including any election under subsection (b), shall not apply to restricted stock units.

(a) General rule. Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.

(b) Income. Subsection (a) shall not exclude from gross income—

    (1) the income from any property referred to in subsection (a); or

    (2) where the gift, bequest, devise, or inheritance is of income from property, the amount of such income.

Where, under the terms of the gift, bequest, devise, or inheritance, the payment, crediting, or distribution thereof is to be made at intervals, then, to the extent that it is paid or credited or to be distributed out of income from property, it shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property. Any amount included in the gross income of a beneficiary under subchapter J shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property.

(c) Employee gifts

    (1) In general. Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.

    (2) Cross references. For provisions excluding certain employee achievement awards from gross income, see section 74(c).

For provisions excluding certain de minimis fringes from gross income, see section 132(e).

“Detached and disinterested generosity”

●      Donors intent to gift contemplated,, but more than just an intent to give, many factors considered

●      There cannot be a legal or moral obligation for the gift

●      Gift is not taxable income to recipient but also cannot be claimed as a deduction by the giver, either

(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

    (12) Income from discharge of indebtedness;

(a) Exclusion from gross income

    (1) In general. Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—

         (A) the discharge occurs in a title 11 case,

         (B) the discharge occurs when the taxpayer is insolvent,

         (C) the indebtedness discharged is qualified farm indebtedness,

         (D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or

         (E) the indebtedness discharged is qualified principal residence indebtedness which is discharged—

              (i) before January 1, 2018, or

              (ii) subject to an arrangement that is entered into and evidenced in writing before January 1, 2018.

…..

(d) Meaning of terms; special rules relating to certain provisions

    (1) Indebtedness of taxpayer For purposes of this section, the term “indebtedness of the taxpayer” means any indebtedness—

         (A) for which the taxpayer is liable, or

         (B) subject to which the taxpayer holds property.

(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

    (3) Gains derived from dealings in property;

(a) Computation of gain or loss. The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.

(b) Amount realized. The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. In determining the amount realized—

     (1) there shall not be taken into account any amount received as reimbursement for real property taxes which are treated under section 164(d) as imposed on the purchaser, and

    (2) there shall be taken into account amounts representing real property taxes which are treated under section 164(d) as imposed on the taxpayer if such taxes are to be paid by the purchaser.

(c) Recognition of gain or loss. Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized.

(d) Installment sales. Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in installments) the taxation of that portion of any installment payment representing gain or profit in the year in which such payment is received.

(e) Certain term interests

    (1) In general. In determining gain or loss from the sale or other disposition of a term interest in property, that portion of the adjusted basis of such interest which is determined pursuant to section 1014, 1015, or 1041 (to the extent that such adjusted basis is a portion of the entire adjusted basis of the property) shall be disregarded.

     (2) Term interest in property defined. For purposes of paragraph (1), the term “term interest in property” means—

         (A) a life interest in property,

         (B) an interest in property for a term of years, or

         (C) an income interest in a trust.

    (3) Exception. Paragraph (1) shall not apply to a sale or other disposition which is a part of a transaction in which the entire interest in property is transferred to any person or persons.

(1)   A property exchange (surrender interest)

(2)   Relief of a legal obligation owed to a third party (Old Colony)

(3)   Relief of a legal obligation owed to the party receiving property (Kirby Lumber)

(4)   “other “ profit transactions (Bruun)

Gross income does not include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee.

Neither the basis nor the adjusted basis of any portion of real property shall, in the case of the lessor of such property, be increased or diminished on account of income derived by the lessor in respect of such property and excludable from gross income under section 109 (relating to improvements by lessee on lessor’s property).

(a) General rule. The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other applicable sections of this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)), adjusted as provided in section 1016.

(b) Bargain sale to a charitable organization. If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.

(a) In general. The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses).

(b) Special rule for apportioned real estate taxes. The cost of real property shall not include any amount in respect of real property taxes which are treated under section 164(d) as imposed on the taxpayer.

(c) Determinations by account

    (1) In general. In the case of the sale, exchange, or other disposition of a specified security on or after the applicable date, the conventions prescribed by regulations under this section shall be applied on an account by account basis.

     (2) Application to certain regulated investment companies

         (A) In general. Except as provided in subparagraph (B), any stock for which an average basis method is permissible under this section which is acquired before January 1, 2012, shall be treated as a separate account from any such stock acquired on or after such date.

          (B) Election for treatment as single account. If a regulated investment company described in subparagraph (A) elects to have this subparagraph apply with respect to one or more of its stockholders—

              (i) subparagraph (A) shall not apply with respect to any stock in such regulated investment company held by such stockholders, and

              (ii) all stock in such regulated investment company which is held by such stockholders shall be treated as covered securities described in section 6045(g)(3) without regard to the date of the acquisition of such stock.

A rule similar to the rule of the preceding sentence shall apply with respect to a broker holding such stock as a nominee.

    (3) Definitions. For purposes of this section, the terms “specified security” and “applicable date” shall have the meaning given such terms in section 6045(g).

(d) Average basis for stock acquired pursuant to a dividend reinvestment plan

    (1) In general. In the case of any stock acquired after December 31, 2011, in connection with a dividend reinvestment plan, the basis of such stock while held as part of such plan shall be determined using one of the methods which may be used for determining the basis of stock in a regulated investment company.

     (2) Treatment after transfer. In the case of the transfer to another account of stock to which paragraph (1) applies, such stock shall have a cost basis in such other account equal to its basis in the dividend reinvestment plan immediately before such transfer (properly adjusted for any fees or other charges taken into account in connection with such transfer).

     (3) Separate accounts; election for treatment as single account

         (A) In general. Rules similar to the rules of subsection (c)(2) shall apply for purposes of this subsection.

          (B) Average basis method. Notwithstanding paragraph (1), in the case of an election under rules similar to the rules of subsection (c)(2)(B) with respect to stock held in connection with a dividend reinvestment plan, the average basis method is permissible with respect to all such stock without regard to the date of the acquisition of such stock.

     (4) Dividend reinvestment plan. For purposes of this subsection—

         (A) In general. The term “dividend reinvestment plan” means any arrangement under which dividends on any stock are reinvested in stock identical to the stock with respect to which the dividends are paid.

          (B) Initial stock acquisition treated as acquired in connection with plan. Stock shall be treated as acquired in connection with a dividend reinvestment plan if such stock is acquired pursuant to such plan or if the dividends paid on such stock are subject to such plan.

(a) General rule. Proper adjustment in respect of the property shall in all cases be made—

    (1) for expenditures, receipts, losses, or other items, properly chargeable to capital account, but no such adjustment shall be made—

         (A) for—

              (i) taxes or other carrying charges described in section 266; or

              (ii) expenditures described in section 173 (relating to circulation expenditures),

for which deductions have been taken by the taxpayer in determining taxable income for the taxable year or prior taxable years; or

         (B) for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract;

    (2) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount—

         (A) allowed as deductions in computing taxable income under this subtitle or prior income tax laws, and

         (B) resulting (by reason of the deductions so allowed) in a reduction for any taxable year of the taxpayer’s taxes under this subtitle (other than chapter 2, relating to tax on self-employment income), or prior income, war-profits, or excess-profits tax laws, but not less than the amount allowable under this subtitle or prior income tax laws. Where no method has been adopted under section 167 (relating to depreciation deduction), the amount allowable shall be determined under the straight line method. Subparagraph (B) of this paragraph shall not apply in respect of any period since February 28, 1913, and before January 1, 1952, unless an election has been made under section 1020 (as in effect before the date of the enactment of the Tax Reform Act of 1976). Where for any taxable year before the taxable year 1932 the depletion allowance was based on discovery value or a percentage of income, then the adjustment for depletion for such year shall be based on the depletion which would have been allowable for such year if computed without reference to discovery value or a percentage of income;

    (3) in respect of any period—

         (A) before March 1, 1913,

         (B) since February 28, 1913, during which such property was held by a person or an organization not subject to income taxation under this chapter or prior income tax laws,

         (C) since February 28, 1913, and before January 1, 1958, during which such property was held by a person subject to tax under part I of subchapter L (or the corresponding provisions of prior income tax laws), to the extent that paragraph (2) does not apply, and

         (D) since February 28, 1913, during which such property was held by a person subject to tax under part II [1] of subchapter L (or the corresponding provisions of prior income tax laws), to the extent that paragraph (2) does not apply,

for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent sustained;

    (4) in the case of stock (to the extent not provided for in the foregoing paragraphs) for the amount of distributions previously made which, under the law applicable to the year in which the distribution was made, either were tax-free or were applicable in reduction of basis (not including distributions made by a corporation which was classified as a personal service corporation under the provisions of the Revenue Act of 1918 (40 Stat. 1057), or the Revenue Act of 1921 (42 Stat. 227), out of its earnings or profits which were taxable in accordance with the provisions of section 218 of the Revenue Act of 1918 or 1921);

    (5) in the case of any bond (as defined in section 171(d)) the interest on which is wholly exempt from the tax imposed by this subtitle, to the extent of the amortizable bond premium disallowable as a deduction pursuant to section 171(a)(2), and in the case of any other bond (as defined in section 171(d)) to the extent of the deductions allowable pursuant to section 171(a)(1) (or the amount applied to reduce interest payments under section 171(e)(2)) with respect thereto;

    (6) in the case of any municipal bond (as defined in section 75(b)), to the extent provided in section 75(a)(2);

    (7) in the case of a residence the acquisition of which resulted, under section 1034 (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997), in the nonrecognition of any part of the gain realized on the sale, exchange, or involuntary conversion of another residence, to the extent provided in section 1034(e) (as so in effect);

    (8) in the case of property pledged to the Commodity Credit Corporation, to the extent of the amount received as a loan from the Commodity Credit Corporation and treated by the taxpayer as income for the year in which received pursuant to section 77, and to the extent of any deficiency on such loan with respect to which the taxpayer has been relieved from liability;

    (9) for amounts allowed as deductions as deferred expenses under section 616(b) (relating to certain expenditures in the development of mines) and resulting in a reduction of the taxpayer’s taxes under this subtitle, but not less than the amounts allowable under such section for the taxable year and prior years;

    [(10) Repealed. Pub. L. 94–455, title XIX, § 1901(b)(21)(G), Oct. 4, 1976, 90 Stat. 1798]

    (11) for deductions to the extent disallowed under section 268 (relating to sale of land with unharvested crops), notwithstanding the provisions of any other paragraph of this subsection;

    [(12) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(75), Dec. 19, 2014, 128 Stat. 4049]

    [(13) Repealed. Pub. L. 108–357, title IV, § 413(c)(19), Oct. 22, 2004, 118 Stat. 1509]

    (14) for amounts allowed as deductions as deferred expenses under section 174(b)(1) 1 (relating to research and experimental expenditures) and resulting in a reduction of the taxpayers’ taxes under this subtitle, but not less than the amounts allowable under such section for the taxable year and prior years;

    (15) for deductions to the extent disallowed under section 272 (relating to disposal of coal or domestic iron ore), notwithstanding the provisions of any other paragraph of this subsection;

    (16) in the case of any evidence of indebtedness referred to in section 811(b) (relating to amortization of premium and accrual of discount in the case of life insurance companies), to the extent of the adjustments required under section 811(b) (or the corresponding provisions of prior income tax laws) for the taxable year and all prior taxable years;

    (17) to the extent provided in section 1367 in the case of stock of, and indebtedness owed to, shareholders of an S corporation;

    (18) to the extent provided in section 961 in the case of stock in controlled foreign corporations (or foreign corporations which were controlled foreign corporations) and of property by reason of which a person is considered as owning such stock;

    (19) to the extent provided in section 50(c), in the case of expenditures with respect to which a credit has been allowed under section 38;

    (20) for amounts allowed as deductions under section 59(e) (relating to optional 10-year writeoff of certain tax preferences);

    (21) to the extent provided in section 1059 (relating to reduction in basis for extraordinary dividends);

    (22) in the case of qualified replacement property the acquisition of which resulted under section 1042 in the nonrecognition of any part of the gain realized on the sale or exchange of any property, to the extent provided in section 1042(d),[2]

    (23) in the case of property the acquisition of which resulted under section 1043, 1045, or 1397B in the nonrecognition of any part of the gain realized on the sale of other property, to the extent provided in section 1043(c), 1045(b)(3), or 1397B(b)(4), as the case may be,2

    [(24) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(34)(G), Dec. 19, 2014, 128 Stat. 4042]

    [(25) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(2)(D), Dec. 19, 2014, 128 Stat. 4037]

    (26) to the extent provided in sections 23(g) and 137(e),2

    (27) in the case of a residence with respect to which a credit was allowed under section 1400C, to the extent provided in section 1400C(h),2

    (28) in the case of a facility with respect to which a credit was allowed under section 45F, to the extent provided in section 45F(f)(1),2

    (29) in the case of railroad track with respect to which a credit was allowed under section 45G, to the extent provided in section 45G(e)(3),2

    (30) to the extent provided in section 179B(c),2

    (31) to the extent provided in section 179D(e),2

    (32) to the extent provided in section 45L(e), in the case of amounts with respect to which a credit has been allowed under section 45L,2

    (33) to the extent provided in section 25C(f), in the case of amounts with respect to which a credit has been allowed under section 25C,2

    (34) to the extent provided in section 25D(f), in the case of amounts with respect to which a credit has been allowed under section 25D,2

    (35) to the extent provided in section 30B(h)(4),2

    (36) to the extent provided in section 30C(e)(1),2

    (37) to the extent provided in section 30D(f)(1),2 and

    (38) to the extent provided in subsections (b)(2) and (c) of section 1400Z–2.

(b) Substituted basis. Whenever it appears that the basis of property in the hands of the taxpayer is a substituted basis, then the adjustments provided in subsection (a) shall be made after first making in respect of such substituted basis proper adjustments of a similar nature in respect of the period during which the property was held by the transferor, donor, or grantor, or during which the other property was held by the person for whom the basis is to be determined. A similar rule shall be applied in the case of a series of substituted bases.

(c) Increase in basis of property on which additional estate tax is imposed

    (1) Tax imposed with respect to entire interest. If an additional estate tax is imposed under section 2032A(c)(1) with respect to any interest in property and the qualified heir makes an election under this subsection with respect to the imposition of such tax, the adjusted basis of such interest shall be increased by an amount equal to the excess of—

         (A) the fair market value of such interest on the date of the decedent’s death (or the alternate valuation date under section 2032, if the executor of the decedent’s estate elected the application of such section), over

         (B) the value of such interest determined under section 2032A(a).

    (2) Partial dispositions

         (A) In general. In the case of any partial disposition for which an election under this subsection is made, the increase in basis under paragraph (1) shall be an amount—

              (i) which bears the same ratio to the increase which would be determined under paragraph (1) (without regard to this paragraph) with respect to the entire interest, as

              (ii) the amount of the tax imposed under section 2032A(c)(1) with respect to such disposition bears to the adjusted tax difference attributable to the entire interest (as determined under section 2032A(c)(2)(B)).

         (B) Partial disposition. For purposes of subparagraph (A), the term “partial disposition” means any disposition or cessation to which subsection (c)(2)(D), (h)(1)(B), or (i)(1)(B) of section 2032A applies.

     (3) Time adjustment made. Any increase in basis under this subsection shall be deemed to have occurred immediately before the disposition or cessation resulting in the imposition of the tax under section 2032A(c)(1).

     (4) Special rule in the case of substituted property. If the tax under section 2032A(c)(1) is imposed with respect to qualified replacement property (as defined in section 2032A(h)(3)(B)) or qualified exchange property (as defined in section 2032A(i)(3)), the increase in basis under paragraph (1) shall be made by reference to the property involuntarily converted or exchanged (as the case may be).

     (5) Election

         (A) In general. An election under this subsection shall be made at such time and in such manner as the Secretary shall by regulations prescribe. Such an election, once made, shall be irrevocable.

          (B) Interest on recaptured amount. If an election is made under this subsection with respect to any additional estate tax imposed under section 2032A(c)(1), for purposes of section 6601 (relating to interest on underpayments), the last date prescribed for payment of such tax shall be deemed to be the last date prescribed for payment of the tax imposed by section 2001 with respect to the estate of the decedent (as determined for purposes of section 6601).

(d) Reduction in basis of automobile on which gas guzzler tax was imposed. If—

    (1) the taxpayer acquires any automobile with respect to which a tax was imposed by section 4064, and

    (2) the use of such automobile by the taxpayer begins not more than 1 year after the date of the first sale for ultimate use of such automobile, the basis of such automobile shall be reduced by the amount of the tax imposed by section 4064 with respect to such automobile. In the case of importation, if the date of entry or withdrawal from warehouse for consumption is later than the date of the first sale for ultimate use, such later date shall be substituted for the date of such first sale in the preceding sentence.

(e) Cross reference. For treatment of separate mineral interests as one property, see section 614.

(c) Recognition of gain or loss. Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized.

(a) Gifts after December 31, 1920. If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis (adjusted for the period before the date of the gift as provided in section 1016) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value. If the facts necessary to determine the basis in the hands of the donor or the last preceding owner are unknown to the donee, the Secretary shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Secretary finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the Secretary as of the date or approximate date at which, according to the best information that the Secretary is able to obtain, such property was acquired by such donor or last preceding owner.

(b) Transfer in trust after December 31, 1920. If the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by a gift, bequest, or devise), the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer under the law applicable to the year in which the transfer was made.

(c) Gift or transfer in trust before January 1, 1921. If the property was acquired by gift or transfer in trust on or before December 31, 1920, the basis shall be the fair market value of such property at the time of such acquisition.

(d) Increased basis for gift tax paid

    (1) In general. If—

         (A) the property is acquired by gift on or after September 2, 1958, the basis shall be the basis determined under subsection (a), increased (but not above the fair market value of the property at the time of the gift) by the amount of gift tax paid with respect to such gift, or

         (B) the property was acquired by gift before September 2, 1958, and has not been sold, exchanged, or otherwise disposed of before such date, the basis of the property shall be increased on such date by the amount of gift tax paid with respect to such gift, but such increase shall not exceed an amount equal to the amount by which the fair market value of the property at the time of the gift exceeded the basis of the property in the hands of the donor at the time of the gift.

    (2) Amount of tax paid with respect to gift. For purposes of paragraph (1), the amount of gift tax paid with respect to any gift is an amount which bears the same ratio to the amount of gift tax paid under chapter 12 with respect to all gifts made by the donor for the calendar year (or preceding calendar period) in which such gift is made as the amount of such gift bears to the taxable gifts (as defined in section 2503(a) but computed without the deduction allowed by section 2521) made by the donor during such calendar year or period. For purposes of the preceding sentence, the amount of any gift shall be the amount included with respect to such gift in determining (for the purposes of section 2503(a)) the total amount of gifts made during the calendar year or period, reduced by the amount of any deduction allowed with respect to such gift under section 2522 (relating to charitable deduction) or under section 2523 (relating to marital deduction).

     (3) Gifts treated as made one-half by each spouse. For purposes of paragraph (1), where the donor and his spouse elected, under section 2513 to have the gift considered as made one-half by each, the amount of gift tax paid with respect to such gift under chapter 12 shall be the sum of the amounts of tax paid with respect to each half of such gift (computed in the manner provided in paragraph (2)).

     (4) Treatment as adjustment to basis. For purposes of section 1016(b), an increase in basis under paragraph (1) shall be treated as an adjustment under section 1016(a).

     (5) Application to gifts before 1955. With respect to any property acquired by gift before 1955, references in this subsection to any provision of this title shall be deemed to refer to the corresponding provision of the Internal Revenue Code of 1939 or prior revenue laws which was effective for the year in which such gift was made.

     (6) Special rule for gifts made after December 31, 1976

         (A) In general. In the case of any gift made after December 31, 1976, the increase in basis provided by this subsection with respect to any gift for the gift tax paid under chapter 12 shall be an amount (not in excess of the amount of tax so paid) which bears the same ratio to the amount of tax so paid as—

              (i) the net appreciation in value of the gift, bears to

              (ii) the amount of the gift.

    (B) Net appreciation. For purposes of paragraph (1), the net appreciation in value of any gift is the amount by which the fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift.

(e) Gifts between spouses. In the case of any property acquired by gift in a transfer described in section 1041(a), the basis of such property in the hands of the transferee shall be determined under section 1041(b)(2) and not this section.

(a) In general. Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be—

     (1) the fair market value of the property at the date of the decedent’s death,

     (2) in the case of an election under section 2032, its value at the applicable valuation date prescribed by such section,

    (3) in the case of an election under section 2032A, its value determined under such section, or

    (4) to the extent of the applicability of the exclusion described in section 2031(c), the basis in the hands of the decedent.

(b) Property acquired from the decedent. For purposes of subsection (a), the following property shall be considered to have been acquired from or to have passed from the decedent:

    (1) Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent;

    (2) Property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent, with the right reserved to the decedent at all times before his death to revoke the trust;

    (3) In the case of decedents dying after December 31, 1951, property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent with the right reserved to the decedent at all times before his death to make any change in the enjoyment thereof through the exercise of a power to alter, amend, or terminate the trust;

    (4) Property passing without full and adequate consideration under a general power of appointment exercised by the decedent by will;

    (5) In the case of decedents dying after August 26, 1937, and before January 1, 2005, property acquired by bequest, devise, or inheritance or by the decedent’s estate from the decedent, if the property consists of stock or securities of a foreign corporation, which with respect to its taxable year next preceding the date of the decedent’s death was, under the law applicable to such year, a foreign personal holding company. In such case, the basis shall be the fair market value of such property at the date of the decedent’s death or the basis in the hands of the decedent, whichever is lower;

    (6) In the case of decedents dying after December 31, 1947, property which represents the surviving spouse’s one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, or possession of the United States or any foreign country, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross estate under chapter 11 of subtitle B (section 2001 and following, relating to estate tax) or section 811 of the Internal Revenue Code of 1939;

    [(7) , (8) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(74)(B), Dec. 19, 2014, 128 Stat. 4049]

    (9) In the case of decedents dying after December 31, 1953, property acquired from the decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate under chapter 11 of subtitle B or under the Internal Revenue Code of 1939. In such case, if the property is acquired before the death of the decedent, the basis shall be the amount determined under subsection (a) reduced by the amount allowed to the taxpayer as deductions in computing taxable income under this subtitle or prior income tax laws for exhaustion, wear and tear, obsolescence, amortization, and depletion on such property before the death of the decedent. Such basis shall be applicable to the property commencing on the death of the decedent. This paragraph shall not apply to—

         (A) annuities described in section 72;

         (B) property to which paragraph (5) would apply if the property had been acquired by bequest; and

         (C) property described in any other paragraph of this subsection.

    (10) Property includible in the gross estate of the decedent under section 2044 (relating to certain property for which marital deduction was previously allowed). In any such case, the last 3 sentences of paragraph (9) shall apply as if such property were described in the first sentence of paragraph (9).

(c) Property representing income in respect of a decedent. This section shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691.

(d) Special rule with respect to DISC stock. If stock owned by a decedent in a DISC or former DISC (as defined in section 992(a)) acquires a new basis under subsection (a), such basis (determined before the application of this subsection) shall be reduced by the amount (if any) which would have been included in gross income under section 995(c) as a dividend if the decedent had lived and sold the stock at its fair market value on the estate tax valuation date. In computing the gain the decedent would have had if he had lived and sold the stock, his basis shall be determined without regard to the last sentence of section 996(e)(2) (relating to reductions of basis of DISC stock). For purposes of this subsection, the estate tax valuation date is the date of the decedent’s death or, in the case of an election under section 2032, the applicable valuation date prescribed by that section.

(e) Appreciated property acquired by decedent by gift within 1 year of death

    (1) In general. In the case of a decedent dying after December 31, 1981, if—

         (A) appreciated property was acquired by the decedent by gift during the 1-year period ending on the date of the decedent’s death, and

         (B) such property is acquired from the decedent by (or passes from the decedent to) the donor of such property (or the spouse of such donor), the basis of such property in the hands of such donor (or spouse) shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent.

    (2) Definitions. For purposes of paragraph (1)—

         (A) Appreciated property. The term “appreciated property” means any property if the fair market value of such property on the day it was transferred to the decedent by gift exceeds its adjusted basis.

          (B) Treatment of certain property sold by estate. In the case of any appreciated property described in subparagraph (A) of paragraph (1) sold by the estate of the decedent or by a trust of which the decedent was the grantor, rules similar to the rules of paragraph (1) shall apply to the extent the donor of such property (or the spouse of such donor) is entitled to the proceeds from such sale.

(f) Basis must be consistent with estate tax return. For purposes of this section—

    (1) In general. The basis of any property to which subsection (a) applies shall not exceed—

         (A) in the case of property the final value of which has been determined for purposes of the tax imposed by chapter 11 on the estate of such decedent, such value, and

         (B) in the case of property not described in subparagraph (A) and with respect to which a statement has been furnished under section 6035(a) identifying the value of such property, such value.

    (2) Exception. Paragraph (1) shall only apply to any property whose inclusion in the decedent’s estate increased the liability for the tax imposed by chapter 11 (reduced by credits allowable against such tax) on such estate.

     (3) Determination. For purposes of paragraph (1), the basis of property has been determined for purposes of the tax imposed by chapter 11 if—

         (A) the value of such property is shown on a return under section 6018 and such value is not contested by the Secretary before the expiration of the time for assessing a tax under chapter 11,

         (B) in a case not described in subparagraph (A), the value is specified by the Secretary and such value is not timely contested by the executor of the estate, or

         (C) the value is determined by a court or pursuant to a settlement agreement with the Secretary.

    (4) Regulations. The Secretary may by regulations provide exceptions to the application of this subsection.

(a) In general. For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—

    (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

    (2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;

    (3) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—

         (A) a taxpayer whose personal efforts created such property,

        (B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or

         (C) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);

    (4) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);

    (5) a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by—

         (A) a taxpayer who so received such publication, or

         (B) a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A);

    (6) any commodities derivative financial instrument held by a commodities derivatives dealer, unless—

         (A) it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and

         (B) such instrument is clearly identified in such dealer’s records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe);

    (7) any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or

    (8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.

(b) Definitions and special rules

    (1) Commodities derivative financial instruments. For purposes of subsection (a)(6)—

         (A) Commodities derivatives dealer. The term “commodities derivatives dealer” means a person which [1] regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business.

          (B) Commodities derivative financial instrument

              (i) In general. The term “commodities derivative financial instrument” means any contract or financial instrument with respect to commodities (other than a share of stock in a corporation, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract (as defined in section 1256(b))), the value or settlement price of which is calculated by or determined by reference to a specified index.

               (ii) Specified index. The term “specified index” means any one or more or any combination of—

                   (I) a fixed rate, price, or amount, or

                   (II) a variable rate, price, or amount, which is based on any current, objectively determinable financial or economic information with respect to commodities which is not within the control of any of the parties to the contract or instrument and is not unique to any of the parties’ circumstances.

    (2) Hedging transaction

         (A) In general. For purposes of this section, the term “hedging transaction” means any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily—

              (i) to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer,

              (ii) to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer, or

              (iii) to manage such other risks as the Secretary may prescribe in regulations.

         (B) Treatment of nonidentification or improper identification of hedging transactions. Notwithstanding subsection (a)(7), the Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction—

              (i) which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or

              (ii) which was so identified but is not a hedging transaction.

    (3) Sale or exchange of self-created musical works. At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3).

     (4) Regulations. The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (6) and (7) of subsection (a) in the case of transactions involving related parties.

(c) In cases wherein receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, joint-stock signees, companies or associations, or insurance companies, subject to tax imposed by this title, such receivers, trustees, or assignees shall make returns of net income as and for such corporations, joint stock companies or associations, and insurance companies, in the same manner and form as such organizations are hereinbefore required to make returns, and any income tax due on the basis of such returns made by receivers, trustees, or assingees shall be assessed and collected in the same manner as if assessed directly against the organizations of whose businesses or properties they have custody and control;

In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part, subject to the exceptions provided in part IX (sec. 261 and following, relating to items not deductible).

(those that: (1) are used to acquire an asset or some other long-lasting benefit; or (2) permanently improve or extend the useful life of that asset or benefit)

§263(a)

(taxpayer gets basis)

§263(a)

(taxpayer gets basis)

But the taxpayer may be able to recover the cost up front or over time

§§167(a); 168; 179; 197

§263(a)

(taxpayer gets basis)

But taxpayer may be able to recover the cost up front or over time

§§167(a); 168; 197

§262

[But see Chapter 9]

§162(a)

§212

§262

[But see §165(c)(3)]

§165(c)(1)

§165(c)(2)

(d) Requirement to capitalize amounts paid for improvements.

Except as provided in paragraph (h) or paragraph (n) of this section or under § 1.263(a)-1(f), a taxpayer generally must capitalize the related amounts (as defined in paragraph (g)(3) of this section) paid to improve a unit of property owned by the taxpayer. However, paragraph (f) of this section applies to the treatment of amounts paid to improve leased property. Section 263A provides the requirement to capitalize the direct and allocable indirect costs of property produced by the taxpayer and property acquired for resale. Section 1016 provides for the addition of capitalized amounts to the basis of the property, and section 168 governs the treatment of additions or improvements for depreciation purposes. For purposes of this section, a unit of property is improved if the amounts paid for activities performed after the property is placed in service by the taxpayer -

     (1) Are for a betterment to the unit of property (see paragraph (j) of this section);

     (2) Restore the unit of property (see paragraph (k) of this section); or

     (3) Adapt the unit of property to a new or different use (see paragraph (l) of this section).

(k) Capitalization of restorations -

     (1) In general. A taxpayer must capitalize as an improvement an amount paid to restore a unit of property, including an amount paid to make good the exhaustion for which an allowance is or has been made. An amount restores a unit of property only if it -

          (i) Is for the replacement of a component of a unit of property for which the taxpayer has properly deducted a loss for that component, other than a casualty loss under § 1.165-7;

          (ii) Is for the replacement of a component of a unit of property for which the taxpayer has properly taken into account the adjusted basis of the component in realizing gain or loss resulting from the sale or exchange of the component;

          (iii) Is for the restoration of damage to a unit of property for which the taxpayer is required to take a basis adjustment as a result of a casualty loss under section 165, or relating to a casualty event described in section 165, subject to the limitation in paragraph (k)(4) of this section;

          (iv) Returns the unit of property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use;

          (v) Results in the rebuilding of the unit of property to a like-new condition as determined under paragraph (k)(5) of this section after the end of its class life as defined in paragraph (i)(4) of this section; or

          (vi) Is for the replacement of a part or combination of parts that comprise a major component or a substantial structural part of a unit of property as determined under paragraph (k)(6) of this section.

(a) In general. A taxpayer may deduct amounts paid for repairs and maintenance to tangible property if the amounts paid are not otherwise required to be capitalized. Optionally, § 1.263(a)-3(n) provides an election to capitalize amounts paid for repair and maintenance consistent with the taxpayer's books and records.

(l) Capitalization of amounts to adapt property to a new or different use -

     (1) In general. A taxpayer must capitalize as an improvement an amount paid to adapt a unit of property to a new or different use. In general, an amount is paid to adapt a unit of property to a new or different use if the adaptation is not consistent with the taxpayer's ordinary use of the unit of property at the time originally placed in service by the taxpayer.

     (2) Application of adaption rule to buildings. In the case of a building, an amount is paid to improve a building if it is paid to adapt to a new or different use a property specified under paragraph (e)(2)(ii) (building), paragraph (e)(2)(iii)(B) (condominium), paragraph (e)(2)(iv)(B) (cooperative), or paragraph (e)(2)(v)(B) (leased building or leased portion of building) of this section. For example, an amount is paid to improve a building if it is paid to adapt the building structure or any one of its buildings systems to a new or different use.

     (3) Examples. The following examples illustrate the application of this paragraph (l) only and do not address whether capitalization is required under another provision of this section or under another provision of the Code (for example, section 263A). Unless otherwise stated, assume that the taxpayer has not properly deducted a loss for any unit of property, asset, or component of a unit of property that is removed and replaced.

Reg. §1.263(a)-3(j)(1)(i).

Reg. §1.263(a)-3(k)(1)(i), (ii), (iii)

Reg. §1.263(a)-3(i)

Reg. §1.263(a)-3(j)(1)(ii).

Reg. §1.263(a)-3(k)(1)(iv)

Reg. §1.263(a)-3(j)(1)(iii)

Reg. §1.263(a)-3(k)(3).

Reg. §1.263(a)-3(k)(4).

(a) In general. There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—

    (1) a reasonable allowance for salaries or other compensation for personal services actually rendered;

    (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and

    (3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

For purposes of the preceding sentence, the place of residence of a Member of Congress (including any Delegate and Resident Commissioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts expended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes. For purposes of paragraph (2), the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year. The preceding sentence shall not apply to any Federal employee during any period for which such employee is certified by the Attorney General (or the designee thereof) as traveling on behalf of the United States in temporary duty status to investigate or prosecute, or provide support services for the investigation or prosecution of, a Federal crime.

●      Cost recovery system governed by §167 and §168

●      Eligible tangible property must be described in §167(a)

●      Property must be held for use in a trade or business or for the production of income; personal-use property is not eligible for cost recovery over its useful life

●      Cost recovery system governed by §191

●      Eligible intangible property must be described in §197(c)(1) and §197(d)

●      Property must be held for use in a trade or business or for the production of income; personal-use property is not eligible for cost recovery over its useful life

(a) General rule. There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—

    (1) of property used in the trade or business, or

    (2) of property held for the production of income.

(b) Cross reference. For determination of depreciation deduction in case of property to which section 168 applies, see section 168.

(c) Basis for depreciation

    (1) In general. The basis on which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 1011, for the purpose of determining the gain on the sale or other disposition of such property.

     (2) Special rule for property subject to lease. If any property is acquired subject to a lease—

         (A) no portion of the adjusted basis shall be allocated to the leasehold interest, and

         (B) the entire adjusted basis shall be taken into account in determining the depreciation deduction (if any) with respect to the property subject to the lease.

(d) Life tenants and beneficiaries of trusts and estates. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. In the case of an estate, the allowable deduction shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each.

(e) Certain term interests not depreciable

    (1) In general. No depreciation deduction shall be allowed under this section (and no depreciation or amortization deduction shall be allowed under any other provision of this subtitle) to the taxpayer for any term interest in property for any period during which the remainder interest in such property is held (directly or indirectly) by a related person.

     (2) Coordination with other provisions

         (A) Section 273. This subsection shall not apply to any term interest to which section 273 applies.

          (B) Section 305(e). This subsection shall not apply to the holder of the dividend rights which were separated from any stripped preferred stock to which section 305(e)(1) applies.

     (3) Basis adjustments. If, but for this subsection, a depreciation or amortization deduction would be allowable to the taxpayer with respect to any term interest in property—

         (A) the taxpayer’s basis in such property shall be reduced by any depreciation or amortization deductions disallowed under this subsection, and

         (B) the basis of the remainder interest in such property shall be increased by the amount of such disallowed deductions (properly adjusted for any depreciation deductions allowable under subsection (d) to the taxpayer).

    (4) Special rules

         (A) Denial of increase in basis of remainderman. No increase in the basis of the remainder interest shall be made under paragraph (3)(B) for any disallowed deductions attributable to periods during which the term interest was held—

              (i) by an organization exempt from tax under this subtitle, or

              (ii) by a nonresident alien individual or foreign corporation but only if income from the term interest is not effectively connected with the conduct of a trade or business in the United States.

         (B) Coordination with subsection (d). If, but for this subsection, a depreciation or amortization deduction would be allowable to any person with respect to any term interest in property, the principles of subsection (d) shall apply to such person with respect to such term interest.

     (5) Definitions. For purposes of this subsection—

         (A) Term interest in property. The term “term interest in property” has the meaning given such term by section 1001(e)(2).

          (B) Related person. The term “related person” means any person bearing a relationship to the taxpayer described in subsection (b) or (e) of section 267.

     (6) Regulations. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations preventing avoidance of this subsection through cross-ownership arrangements or otherwise.

(f) Treatment of certain property excluded from section 197

    (1) Computer software

         (A) In general. If a depreciation deduction is allowable under subsection (a) with respect to any computer software, such deduction shall be computed by using the straight line method and a useful life of 36 months.

          (B) Computer software. For purposes of this section, the term “computer software” has the meaning given to such term by section 197(e)(3)(B); except that such term shall not include any such software which is an amortizable section 197 intangible.

          (C) Tax-exempt use property subject to lease. In the case of computer software which would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to computer software, the useful life under subparagraph (A) shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)).

     (2) Certain interests or rights acquired separately. If a depreciation deduction is allowable under subsection (a) with respect to any property described in subparagraph (B), (C), or (D) of section 197(e)(4), such deduction shall be computed in accordance with regulations prescribed by the Secretary. If such property would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to such property, the useful life under such regulations shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)).

     (3) Mortgage servicing rights. If a depreciation deduction is allowable under subsection (a) with respect to any right described in section 197(e)(6), such deduction shall be computed by using the straight line method and a useful life of 108 months.

(g) Depreciation under income forecast method

    (1) In general. If the depreciation deduction allowable under this section to any taxpayer with respect to any property is determined under the income forecast method or any similar method—

         (A) the income from the property to be taken into account in determining the depreciation deduction under such method shall be equal to the amount of income earned in connection with the property before the close of the 10th taxable year following the taxable year in which the property was placed in service,

         (B) the adjusted basis of the property shall only include amounts with respect to which the requirements of section 461(h) are satisfied,

         (C) the depreciation deduction under such method for the 10th taxable year beginning after the taxable year in which the property was placed in service shall be equal to the adjusted basis of such property as of the beginning of such 10th taxable year, and

         (D) such taxpayer shall pay (or be entitled to receive) interest computed under the look-back method of paragraph (2) for any recomputation year.

    (2) Look-back method. The interest computed under the look-back method of this paragraph for any recomputation year shall be determined by—

         (A) first determining the depreciation deductions under this section with respect to such property which would have been allowable for prior taxable years if the determination of the amounts so allowable had been made on the basis of the sum of the following (instead of the estimated income from such property)—

              (i) the actual income earned in connection with such property for periods before the close of the recomputation year, and

              (ii) an estimate of the future income to be earned in connection with such property for periods after the recomputation year and before the close of the 10th taxable year following the taxable year in which the property was placed in service,

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

         (C) then using the adjusted overpayment rate (as defined in section 460(b)(7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B).

For purposes of the preceding sentence, any cost incurred after the property is placed in service (which is not treated as a separate property under paragraph (5)) shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such cost is incurred) such cost to its value as of the date the property is placed in service. The taxpayer may elect with respect to any property to have the preceding sentence not apply to such property.

    (3) Exception from look-back method. Paragraph (1)(D) shall not apply with respect to any property which had a cost basis of $100,000 or less.

     (4) Recomputation year. For purposes of this subsection, except as provided in regulations, the term “recomputation year” means, with respect to any property, the 3d and the 10th taxable years beginning after the taxable year in which the property was placed in service, unless the actual income earned in connection with the property for the period before the close of such 3d or 10th taxable year is within 10 percent of the income earned in connection with the property for such period which was taken into account under paragraph (1)(A).

     (5) Special rules

         (A) Certain costs treated as separate property. For purposes of this subsection, the following costs shall be treated as separate properties:

              (i) Any costs incurred with respect to any property after the 10th taxable year beginning after the taxable year in which the property was placed in service.

              (ii) Any costs incurred after the property is placed in service and before the close of such 10th taxable year if such costs are significant and give rise to a significant increase in the income from the property which was not included in the estimated income from the property.

         (B) Syndication income from television series. In the case of property which is 1 or more episodes in a television series, income from syndicating such series shall not be required to be taken into account under this subsection before the earlier of—

              (i) the 4th taxable year beginning after the date the first episode in such series is placed in service, or

              (ii) the earliest taxable year in which the taxpayer has an arrangement relating to the future syndication of such series.

         (C) Special rules for financial exploitation of characters, etc. For purposes of this subsection, in the case of television and motion picture films, the income from the property shall include income from the exploitation of characters, designs, scripts, scores, and other incidental income associated with such films, but only to the extent that such income is earned in connection with the ultimate use of such items by, or the ultimate sale of merchandise to, persons who are not related persons (within the meaning of section 267(b)) to the taxpayer.

          (D) Collection of interest. For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under paragraph (1) for any recomputation year shall be treated as an increase in the tax imposed by this chapter for such year.

          (E) Treatment of distribution costs. For purposes of this subsection, the income with respect to any property shall be the taxpayer’s gross income from such property.

          (F) Determinations. For purposes of paragraph (2), determinations of the amount of income earned in connection with any property shall be made in the same manner as for purposes of applying the income forecast method; except that any income from the disposition of such property shall be taken into account.

          (G) Treatment of pass-thru entities. Rules similar to the rules of section 460(b)(4) shall apply for purposes of this subsection.

     (6) Limitation on property for which income forecast method may be used. The depreciation deduction allowable under this section may be determined under the income forecast method or any similar method only with respect to—

         (A) property described in paragraph (3) or (4) of section 168(f),

         (B) copyrights,

         (C) books,

         (D) patents, and

         (E) other property specified in regulations. Such methods may not be used with respect to any amortizable section 197 intangible (as defined in section 197(c)).

    (7) Treatment of participations and residuals

         (A) In general. For purposes of determining the depreciation deduction allowable with respect to a property under this subsection, the taxpayer may include participations and residuals with respect to such property in the adjusted basis of such property for the taxable year in which the property is placed in service, but only to the extent that such participations and residuals relate to income estimated (for purposes of this subsection) to be earned in connection with the property before the close of the 10th taxable year referred to in paragraph (1)(A).

          (B) Participations and residuals. For purposes of this paragraph, the term “participations and residuals” means, with respect to any property, costs the amount of which by contract varies with the amount of income earned in connection with such property.

          (C) Special rules relating to recomputation years. If the adjusted basis of any property is determined under this paragraph, paragraph (4) shall be applied by substituting “for each taxable year in such period” for “for such period”.

          (D) Other special rules

              (i) Participations and residuals. Notwithstanding subparagraph (A), the taxpayer may exclude participations and residuals from the adjusted basis of such property and deduct such participations and residuals in the taxable year that such participations and residuals are paid.

               (ii) Coordination with other rules. Deductions computed in accordance with this paragraph shall be allowable notwithstanding paragraph (1)(B), section 263, 263A, 404, 419, or 461(h).

          (E) Authority to make adjustments. The Secretary shall prescribe appropriate adjustments to the basis of property and to the look-back method for the additional amounts allowable as a deduction solely by reason of this paragraph.

     (8) Special rules for certain musical works and copyrights

         (A) In general. If an election is in effect under this paragraph for any taxable year, then, notwithstanding paragraph (1), any expense which—

              (i) is paid or incurred by the taxpayer in creating or acquiring any applicable musical property placed in service during the taxable year, and

              (ii) is otherwise properly chargeable to capital account,

shall be amortized ratably over the 5-year period beginning with the month in which the property was placed in service. The preceding sentence shall not apply to any expense which, without regard to this paragraph, would not be allowable as a deduction.

         (B) Exclusive method. Except as provided in this paragraph, no depreciation or amortization deduction shall be allowed with respect to any expense to which subparagraph (A) applies.

          (C) Applicable musical property. For purposes of this paragraph—

              (i) In general. The term “applicable musical property” means any musical composition (including any accompanying words), or any copyright with respect to a musical composition, which is property to which this subsection applies without regard to this paragraph.

               (ii) Exceptions. Such term shall not include any property—

                   (I) with respect to which expenses are treated as qualified creative expenses to which section 263A(h) applies,

                   (II) to which a simplified procedure established under section 263A(i)(2) [1] applies, or

                   (III) which is an amortizable section 197 intangible (as defined in section 197(c)).

         (D) Election. An election under this paragraph shall be made at such time and in such form as the Secretary may prescribe and shall apply to all applicable musical property placed in service during the taxable year for which the election applies.

          (E) Termination. An election may not be made under this paragraph for any taxable year beginning after December 31, 2010.

(h) Amortization of geological and geophysical expenditures

    (1) In general. Any geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas within the United States (as defined in section 638) shall be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred.

     (2) Half-year convention. For purposes of paragraph (1), any payment paid or incurred during the taxable year shall be treated as paid or incurred on the mid-point of such taxable year.

     (3) Exclusive method. Except as provided in this subsection, no depreciation or amortization deduction shall be allowed with respect to such payments.

     (4) Treatment upon abandonment. If any property with respect to which geological and geophysical expenses are paid or incurred is retired or abandoned during the 24-month period described in paragraph (1), no deduction shall be allowed on account of such retirement or abandonment and the amortization deduction under this subsection shall continue with respect to such payment.

     (5) Special rule for major integrated oil companies

         (A) In general. In the case of a major integrated oil company, paragraphs (1) and (4) shall be applied by substituting “7-year” for “24 month”.

          (B) Major integrated oil company. For purposes of this paragraph, the term “major integrated oil company” means, with respect to any taxable year, a producer of crude oil—

              (i) which has an average daily worldwide production of crude oil of at least 500,000 barrels for the taxable year,

              (ii) which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during calendar year 2005, and

              (iii) to which subsection (c) of section 613A does not apply by reason of paragraph (4) of section 613A(d), determined—

                   (I) by substituting “15 percent” for “5 percent” each place it occurs in paragraph (3) of section 613A(d), and

                   (II) without regard to whether subsection (c) of section 613A does not apply by reason of paragraph (2) of section 613A(d).

For purposes of clauses (i) and (ii), all persons treated as a single employer under subsections (a) and (b) of section 52 shall be treated as 1 person and, in case of a short taxable year, the rule under section 448(c)(3)(B) shall apply.

(i) Cross references

    (1) For additional rule applicable to depreciation of improvements in the case of mines, oil and gas wells, other natural deposits, and timber, see section 611.

    (2) For amortization of goodwill and certain other intangibles, see section 197.

(a) General rule. Except as otherwise provided in this section, the depreciation deduction provided by section 167(a) for any tangible property shall be determined by using—

    (1) the applicable depreciation method,

    (2) the applicable recovery period, and

    (3) the applicable convention.

(b) Applicable depreciation method. For purposes of this section—

    (1) In general. Except as provided in paragraphs (2) and (3), the applicable depreciation method is—

         (A) the 200 percent declining balance method,

         (B) switching to the straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of such year will yield a larger allowance.

    (2) 150 percent declining balance method in certain cases. Paragraph (1) shall be applied by substituting “150 percent” for “200 percent” in the case of—

         (A) any 15-year or 20-year property not referred to in paragraph (3),

         (B) any property (other than property described in paragraph (3)) which is a qualified smart electric meter or qualified smart electric grid system, or

         (C) any property (other than property described in paragraph (3)) with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply.

    (3) Property to which straight line method applies. The applicable depreciation method shall be the straight line method in the case of the following property:

         (A) Nonresidential real property.

         (B) Residential rental property.

         (C) Any railroad grading or tunnel bore.

         (D) Property with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply.

         (E) Property described in subsection (e)(3)(D)(ii).

         (F) Water utility property described in subsection (e)(5).

         (G) Qualified improvement property described in subsection (e)(6).

    (4) Salvage value treated as zero. Salvage value shall be treated as zero.

     (5) Election. An election under paragraph (2)(D) or (3)(D) may be made with respect to 1 or more classes of property for any taxable year and once made with respect to any class shall apply to all property in such class placed in service during such taxable year. Such an election, once made, shall be irrevocable.

(c) Applicable recovery period. For purposes of this section, the applicable recovery period shall be determined in accordance with the following table: In the case of _____ the applicable recovery period is:

3-year property -- 3 years  

5-year property -- 5 years  

7-year property -- 7 years  

10-year property -- 10 years  

15-year property -- 15 years  

20-year property -- 20 years  

Water utility property -- 25 years  

Residential rental property -- 27.5 years  

Nonresidential real property -- 39 years.

Any railroad grading or tunnel bore -- 50 years.

(d) Applicable convention. For purposes of this section—

    (1) In general. Except as otherwise provided in this subsection, the applicable convention is the half-year convention.

     (2) Real property. In the case of—

         (A) nonresidential real property,

         (B) residential rental property, and

         (C) any railroad grading or tunnel bore, the applicable convention is the mid-month convention.

    (3) Special rule where substantial property placed in service during last 3 months of taxable year

         (A) In general. Except as provided in regulations, if during any taxable year—

              (i) the aggregate bases of property to which this section applies placed in service during the last 3 months of the taxable year, exceed

              (ii) 40 percent of the aggregate bases of property to which this section applies placed in service during such taxable year, the applicable convention for all property to which this section applies placed in service during such taxable year shall be the mid-quarter convention.

         (B) Certain property not taken into account. For purposes of subparagraph (A), there shall not be taken into account—

              (i) any nonresidential real property [1] residential rental property, and railroad grading or tunnel bore, and

              (ii) any other property placed in service and disposed of during the same taxable year.

    (4) Definitions

         (A) Half-year convention. The half-year convention is a convention which treats all property placed in service during any taxable year (or disposed of during any taxable year) as placed in service (or disposed of) on the mid-point of such taxable year.

          (B) Mid-month convention. The mid-month convention is a convention which treats all property placed in service during any month (or disposed of during any month) as placed in service (or disposed of) on the mid-point of such month.

          (C) Mid-quarter convention. The mid-quarter convention is a convention which treats all property placed in service during any quarter of a taxable year (or disposed of during any quarter of a taxable year) as placed in service (or disposed of) on the mid-point of such quarter.

(e) Classification of property. For purposes of this section—

    (1) In general. Except as otherwise provided in this subsection, property shall be classified under the following table: Property shall be treated as _____ if such property has a class life (in years) of ____

3-year property -- 4 or less

5-year property -- More than 4 but less than 10

7-year property -- 10 or more but less than 16

10-year property -- 16 or more but less than 20

15-year property -- 20 or more but less than 25

20-year property -- 25 or more.

     (2) Residential rental or nonresidential real property

         (A) Residential rental property

              (i) Residential rental property. The term “residential rental property” means any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units.

               (ii) Definitions. For purposes of clause (i)—

                   (I) the term “dwelling unit” means a house or apartment used to provide living accommodations in a building or structure, but does not include a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis, and

                   (II) if any portion of the building or structure is occupied by the taxpayer, the gross rental income from such building or structure shall include the rental value of the portion so occupied.

         (B) Nonresidential real property. The term “nonresidential real property” means section 1250 property which is not—

              (i) residential rental property, or

              (ii) property with a class life of less than 27.5 years.

    (3) Classification of certain property

         (A) 3-year property. The term “3-year property” includes—

              (i) any race horse—

                   (I) which is placed in service before January 1, 2018, and

                   (II) which is placed in service after December 31, 2017, and which is more than 2 years old at the time such horse is placed in service by such purchaser,

              (ii) any horse other than a race horse which is more than 12 years old at the time it is placed in service, and

              (iii) any qualified rent-to-own property.

         (B) 5-year property. The term “5-year property” includes—

              (i) any automobile or light general purpose truck,

              (ii) any semiconductor manufacturing equipment,

              (iii) any computer-based telephone central office switching equipment,

              (iv) any qualified technological equipment,

              (v) any section 1245 property used in connection with research and experimentation,

              (vi) any property which—

                   (I) is described in subparagraph (A) of section 48(a)(3) (or would be so described if “solar or wind energy” were substituted for “solar energy” in clause (i) thereof and the last sentence of such section did not apply to such subparagraph),

                   (II) is described in paragraph (15) of section 48(l) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) and is a qualifying small power production facility within the meaning of section 3(17)(C) of the Federal Power Act (16 U.S.C. 796(17)(C)), as in effect on September 1, 1986, or

                   (III) is described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), and

              (vii) any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) which is used in a farming business (as defined in section 263A(e)(4)), the original use of which commences with the taxpayer after December 31, 2017.

Nothing in any provision of law shall be construed to treat property as not being described in clause (vi)(I) (or the corresponding provisions of prior law) by reason of being public utility property (within the meaning of section 48(a)(3)).

         (C) 7-year property. The term “7-year property” includes—

              (i) any railroad track, and 

              (ii) any motorsports entertainment complex,

              (iii) any Alaska natural gas pipeline,

              (iv) any natural gas gathering line the original use of which commences with the taxpayer after April 11, 2005, and

              (v) any property which—

                   (I) does not have a class life, and

                   (II) is not otherwise classified under paragraph (2) or this paragraph.

         (D) 10-year property. The term “10-year property” includes—

              (i) any single purpose agricultural or horticultural structure (within the meaning of subsection (i)(13)),

              (ii) any tree or vine bearing fruit or nuts,

              (iii) any qualified smart electric meter, and

              (iv) any qualified smart electric grid system.

         (E) 15-year property. The term “15-year property” includes—

              (i) any municipal wastewater treatment plant,

              (ii) any telephone distribution plant and comparable equipment used for 2-way exchange of voice and data communications,

              (iii) any section 1250 property which is a retail motor fuels outlet (whether or not food or other convenience items are sold at the outlet),

              (iv) initial clearing and grading land improvements with respect to gas utility property,

              (v) any section 1245 property (as defined in section 1245(a)(3)) used in the transmission at 69 or more kilovolts of electricity for sale and the original use of which commences with the taxpayer after April 11, 2005, and

              (vi) any natural gas distribution line the original use of which commences with the taxpayer after April 11, 2005, and which is placed in service before January 1, 2011.

         (F) 20-year property. The term “20-year property” means initial clearing and grading land improvements with respect to any electric utility transmission and distribution plant.

     (4) Railroad grading or tunnel bore. The term “railroad grading or tunnel bore” means all improvements resulting from excavations (including tunneling), construction of embankments, clearings, diversions of roads and streams, sodding of slopes, and from similar work necessary to provide, construct, reconstruct, alter, protect, improve, replace, or restore a roadbed or right-of-way for railroad track.

     (5) Water utility property. The term “water utility property” means property—

         (A) which is an integral part of the gathering, treatment, or commercial distribution of water, and which, without regard to this paragraph, would be 20-year property, and

         (B) any municipal sewer.

    (6) Qualified improvement property

         (A) In general. The term “qualified improvement property” means any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.

         (B) Certain improvements not included. Such term shall not include any improvement for which the expenditure is attributable to—

              (i) the enlargement of the building,

              (ii) any elevator or escalator, or

              (iii) the internal structural framework of the building.

(f) Property to which section does not apply [EXCLUDED]

(g) Alternative depreciation system for certain property

    (1) In general. In the case of—

         (A) any tangible property which during the taxable year is used predominantly outside the United States,

         (B) any tax-exempt use property,

         (C) any tax-exempt bond financed property,

         (D) any imported property covered by an Executive order under paragraph (6),

         (E) any property to which an election under paragraph (7) applies,

         (F) any property described in paragraph (8), and

         (G) any property with a recovery period of 10 years or more which is held by an electing farming business (as defined in section 163(j)(7)(C)), the depreciation deduction provided by section 167(a) shall be determined under the alternative depreciation system.

    (2) Alternative depreciation system. For purposes of paragraph (1), the alternative depreciation system is depreciation determined by using—

         (A) the straight line method (without regard to salvage value),

         (B) the applicable convention determined under subsection (d), and

         (C) a recovery period determined under the following table: In the case of __________ the recovery period shall be ______

               (i) Property not described in clause (ii) or (iii) -- The class life.

               (ii) Personal property with no class life -- 12 years.

               (iii) Residential rental property -- 30 years

               (iv) Nonresidential real property -- 40 years

               (v) Any railroad grading or tunnel bore or water utility property -- 50 years

     (3) Special rules for determining class life

         (A) Tax-exempt use property subject to lease. In the case of any tax-exempt use property subject to a lease, the recovery period used for purposes of paragraph (2) shall (notwithstanding any other subparagraph of this paragraph) in no event be less than 125 percent of the lease term.

          (B) Special rule for certain property assigned to classes. For purposes of paragraph (2), in the case of property described in any of the following subparagraphs of subsection (e)(3), the class life shall be determined as follows:If property is described in subparagraph _____, the class life is ____

(A)(iii), 4   

(B)(ii), 5   

(B)(iii), 9.5

(B)(vii), 10   

(C)(i), 10   

(C)(iii), 22   

(C)(iv), 14   

(D)(i), 15   

(D)(ii), 20   

(D)(v), 20   

(E)(i), 24   

(E)(ii), 24   

(E)(iii), 20   

(E)(iv), 20   

(E)(v), 30   

(E)(vi), 35   

(F), 25   

          (C) Qualified technological equipment. In the case of any qualified technological equipment, the recovery period used for purposes of paragraph (2) shall be 5 years.

          (D) Automobiles, etc. In the case of any automobile or light general purpose truck, the recovery period used for purposes of paragraph (2) shall be 5 years.

          (E) Certain real property. In the case of any section 1245 property which is real property with no class life, the recovery period used for purposes of paragraph (2) shall be 40 years.

     (4) Exception for certain property used outside United States. Subparagraph (A) of paragraph (1) shall not apply to—

         (A) any aircraft which is registered by the Administrator of the Federal Aviation Agency and which is operated to and from the United States or is operated under contract with the United States;

         (B) rolling stock which is used within and without the United States and which is—

              (i) of a rail carrier subject to part A of subtitle IV of title 49, or

              (ii) of a United States person (other than a corporation described in clause (i)) but only if the rolling stock is not leased to one or more foreign persons for periods aggregating more than 12 months in any 24-month period;

         (C) any vessel documented under the laws of the United States which is operated in the foreign or domestic commerce of the United States;

         (D) any motor vehicle of a United States person (as defined in section 7701(a)(30)) which is operated to and from the United States;

         (E) any container of a United States person which is used in the transportation of property to and from the United States;

         (F) any property (other than a vessel or an aircraft) of a United States person which is used for the purpose of exploring for, developing, removing, or transporting resources from the outer Continental Shelf (within the meaning of section 2 of the Outer Continental Shelf Lands Act, as amended and supplemented; (43 U.S.C. 1331));

         (G) any property which is owned by a domestic corporation (other than a corporation which has an election in effect under section 936) or by a United States citizen (other than a citizen entitled to the benefits of section 931 or 933) and which is used predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States;

         (H) any communications satellite (as defined in section 103(3) of the Communications Satellite Act of 1962, 47 U.S.C. 702(3)), or any interest therein, of a United States person;

         (I) any cable, or any interest therein, of a domestic corporation engaged in furnishing telephone service to which section 168(i)(10)(C) applies (or of a wholly owned domestic subsidiary of such a corporation), if such cable is part of a submarine cable system which constitutes part of a communication link exclusively between the United States and one or more foreign countries;

         (J) any property (other than a vessel or an aircraft) of a United States person which is used in international or territorial waters within the northern portion of the Western Hemisphere for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or deposits under such waters;

         (K) any property described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) which is owned by a United States person and which is used in international or territorial waters to generate energy for use in the United States; and

         (L) any satellite (not described in subparagraph (H)) or other spacecraft (or any interest therein) held by a United States person if such satellite or other spacecraft was launched from within the United States.

For purposes of subparagraph (J), the term “northern portion of the Western Hemisphere” means the area lying west of the 30th meridian west of Greenwich, east of the international dateline, and north of the Equator, but not including any foreign country which is a country of South America.

    (5) Tax-exempt bond financed property. For purposes of this subsection—

         (A) In general. Except as otherwise provided in this paragraph, the term “tax-exempt bond financed property” means any property to the extent such property is financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a).

          (B) Allocation of bond proceeds. For purposes of subparagraph (A), the proceeds of any obligation shall be treated as used to finance property acquired in connection with the issuance of such obligation in the order in which such property is placed in service.

          (C) Qualified residential rental projects. The term “tax-exempt bond financed property” shall not include any qualified residential rental project (within the meaning of section 142(a)(7)).

     (6) Imported property

         (A) Countries maintaining trade restrictions or engaging in discriminatory acts. If the President determines that a foreign country—

              (i) maintains nontariff trade restrictions, including variable import fees, which substantially burden United States commerce in a manner inconsistent with provisions of trade agreements, or

              (ii) engages in discriminatory or other acts (including tolerance of international cartels) or policies unjustifiably restricting United States commerce, the President may by Executive order provide for the application of paragraph (1)(D) to any article or class of articles manufactured or produced in such foreign country for such period as may be provided by such Executive order. Any period specified in the preceding sentence shall not apply to any property ordered before (or the construction, reconstruction, or erection of which began before) the date of the Executive order unless the President determines an earlier date to be in the public interest and specifies such date in the Executive order.

         (B) Imported property. For purposes of this subsection, the term “imported property” means any property if—

              (i) such property was completed outside the United States, or

              (ii) less than 50 percent of the basis of such property is attributable to value added within the United States. For purposes of this subparagraph, the term “United States” includes the Commonwealth of Puerto Rico and the possessions of the United States.

    (7) Election to use alternative depreciation system

         (A) In general. If the taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, the alternative depreciation system under this subsection shall apply to all property in such class placed in service during such taxable year. Notwithstanding the preceding sentence, in the case of nonresidential real property or residential rental property, such election may be made separately with respect to each property.

          (B) Election irrevocable. An election under subparagraph (A), once made, shall be irrevocable.

     (8) Electing real property trade or business. The property described in this paragraph shall consist of any nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business (as defined in 163(j)(7)(B)).

(h) Tax-exempt use property [EXCLUDED]

(i) Definitions and special rules [EXCLUDED]

(j) Property on Indian reservations [EXCLUDED]

(k) Special allowance for certain property [EXCLUDED]

(l) Special allowance for second generation biofuel plant property [EXCLUDED]

(m) Special allowance for certain reuse and recycling property [EXCLUDED]

(n) Special allowance for qualified disaster assistance property [EXCLUDED]

The depreciation allowance in the case of tangible property applies only to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence. The allowance does not apply to inventories or stock in trade, or to land apart from the improvements or physical development added to it. The allowance does not apply to natural resources which are subject to the allowance for depletion provided in section 611. No deduction for depreciation shall be allowed on automobiles or other vehicles used solely for pleasure, on a building used by the taxpayer solely as his residence, or on furniture or furnishings therein, personal effects, or clothing; but properties and costumes used exclusively in a business, such as a theatrical business, may be depreciated.

SECTION 1. PURPOSE

The purpose of this revenue procedure is to set forth the class lives of property that are necessary to compute the depreciation allowances available under section 168 of the Internal Revenue Code, as amended by section 201(a) of the Tax Reform Act of 1986 (Act), 1986-3 (Vol. 1) C.B. 38. Rev. Proc. 87-57, page 17, this Bulletin, describes the applicable depreciation methods, applicable recovery periods, and applicable conventions that must be used in computing depreciation allowances under section 168.

SEC. 2. GENERAL RULES OF APPLICATION

01 IN GENERAL. This revenue procedure specifies class lives and recovery periods for property subject to depreciation under the general depreciation system provided in section 168(a) of the Code or the alternative depreciation system provided in section 168(g).

SEC. 5. TABLES OF CLASS LIVES AND RECOVERY PERIODS

.01 Except for property described in section 5.02, below, the class lives (if any) and recovery periods for property subject to depreciation under section 168 of the Code appear in the tables below. These tables are based on the definition of class life in section 2.02 of this revenue procedure and the assigned items described in section 3 of this revenue procedure.

.02 For purposes of depreciation under the general depreciation system, residential rental property has a recovery period of 27.5 years and nonresidential real property has a recovery period of 31.5 years. For purposes of the alternative depreciation system, residential rental and nonresidential real property each has a recovery period of 40 years.

[TABLE EXCLUDED]

(a) Deduction allowed. There shall be allowed as a deduction for the taxable year an amount equal to the lesser of—

    (1) the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, or

    (2) 80 percent of taxable income computed without regard to the deduction allowable under this section. For purposes of this subtitle, the term “net operating loss deduction” means the deduction allowed by this subsection.

(b) Net operating loss carrybacks and carryovers

    (1) Years to which loss may be carried

         (A) General rule. Except as otherwise provided in this paragraph, a net operating loss for any taxable year—

              (i) except as otherwise provided in this paragraph, shall not be a net operating loss carryback to any taxable year preceding the taxable year of such loss, and

              (ii) shall be a net operating loss carryover to each taxable year following the taxable year of the loss.

         (B) Farming losses

              (i) In general. In the case of any portion of a net operating loss for the taxable year which is a farming loss with respect to the taxpayer, such loss shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss.

               (ii) Farming loss. For purposes of this section, the term “farming loss” means the lesser of—

                   (I) the amount which would be the net operating loss for the taxable year if only income and deductions attributable to farming businesses (as defined in section 263A(e)(4)) are taken into account, or

                   (II) the amount of the net operating loss for such taxable year.

              (iii) Coordination with paragraph (2). For purposes of applying paragraph (2), a farming loss for any taxable year shall be treated as a separate net operating loss for such taxable year to be taken into account after the remaining portion of the net operating loss for such taxable year.

               (iv) Election. Any taxpayer entitled to a 2-year carryback under clause (i) from any loss year may elect not to have such clause apply to such loss year. Such election shall be made in such manner as prescribed by the Secretary and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss. Such election, once made for any taxable year, shall be irrevocable for such taxable year.

          (C) Insurance companies. In the case of an insurance company (as defined in section 816(a)) other than a life insurance company, the net operating loss for any taxable year—

              (i) shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss, and

              (ii) shall be a net operating loss carryover to each of the 20 taxable years following the taxable year of the loss.

    (2) Amount of carrybacks and carryovers. The entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the “loss year”) shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable year shall—

         (A) be computed with the modifications specified in subsection (d) other than paragraphs (1), (4), and (5) thereof, and by determining the amount of the net operating loss deduction without regard to the net operating loss for the loss year or for any taxable year thereafter,

         (B) not be considered to be less than zero, and

         (C) not exceed the amount determined under subsection (a)(2) for such prior taxable year.

    (3) Election to waive carryback. Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for such taxable year.

(c) Net operating loss defined. For purposes of this section, the term “net operating loss” means the excess of the deductions allowed by this chapter over the gross income. Such excess shall be computed with the modifications specified in subsection (d).

(d) Modifications. The modifications referred to in this section are as follows:

    (1) Net operating loss deduction. No net operating loss deduction shall be allowed.

    (2) Capital gains and losses of taxpayers other than corporations. In the case of a taxpayer other than a corporation—

         (A) the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includable on account of gains from sales or exchanges of capital assets; and

         (B) the exclusion provided by section 1202 shall not be allowed.

    (3) Deduction for personal exemptions. No deduction shall be allowed under section 151 (relating to personal exemptions). No deduction in lieu of any such deduction shall be allowed.

    (4) Nonbusiness deductions of taxpayers other than corporations. In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer’s trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence—

         (A) any gain or loss from the sale or other disposition of—

              (i) property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or

              (ii) real property used in the trade or business, shall be treated as attributable to the trade or business;

         (B) the modifications specified in paragraphs (1), (2)(B), and (3) shall be taken into account;

         (C) any deduction for casualty or theft losses allowable under paragraph (2) or (3) of section 165(c) shall be treated as attributable to the trade or business; and

         (D) any deduction allowed under section 404 to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall not be treated as attributable to the trade or business of such individual.

    (5) Computation of deduction for dividends received. The deductions allowed by section [1] 243 (relating to dividends received by corporations) and 245 (relating to dividends received from certain foreign corporations) shall be computed without regard to section 246(b) (relating to limitation on aggregate amount of deductions).

    (6) Modifications related to real estate investment trusts. In the case of any taxable year for which part II of subchapter M (relating to real estate investment trusts) applies to the taxpayer—

         (A) the net operating loss for such taxable year shall be computed by taking into account the adjustments described in section 857(b)(2) (other than the deduction for dividends paid described in section 857(b)(2)(B));

         (B) where such taxable year is a “prior taxable year” referred to in paragraph (2) of subsection (b), the term “taxable income” in such paragraph shall mean “real estate investment trust taxable income” (as defined in section 857(b)(2)); and

         (C) subsection (a)(2) shall be applied by substituting “real estate investment trust taxable income (as defined in section 857(b)(2) but without regard to the deduction for dividends paid (as defined in section 561))” for “taxable income”.

    [(7) Repealed. Pub. L. 115–97, title I, § 13305(b)(3), Dec. 22, 2017, 131 Stat. 2126.]

    (8) Qualified business income deduction. The deduction under section 199A shall not be allowed.

     (9) Deduction for foreign-derived intangible income. The deduction under section 250 shall not be allowed.

(e) Law applicable to computations. In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year.

(f) Special rule for insurance companies. In the case of an insurance company (as defined in section 816(a)) other than a life insurance company—

    (1) the amount of the deduction allowed under subsection (a) shall be the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, and

    (2) subparagraph (C) of subsection (b)(2) shall not apply.

(g) Cross references

    (1) For treatment of net operating loss carryovers in certain corporate acquisitions, see section 381.

    (2) For special limitation on net operating loss carryovers in case of a corporate change of ownership, see section 382.

(a) In general

    (1) Deduction for losses disallowed. No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b). The preceding sentence shall not apply to any loss of the distributing corporation (or the distributee) in the case of a distribution in complete liquidation.

     (2) Matching of deduction and payee income item in the case of expenses and interest. If—

         (A) by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not (unless paid) includible in the gross income of such person, and

         (B) at the close of the taxable year of the taxpayer for which (but for this paragraph) the amount would be deductible under this chapter, both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of subsection (b), then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made (or, if later, as of the day on which it would be so allowable but for this paragraph). For purposes of this paragraph, in the case of a personal service corporation (within the meaning of section 441(i)(2)), such corporation and any employee-owner (within the meaning of section 269A(b)(2), as modified by section 441(i)(2)) shall be treated as persons specified in subsection (b).

    (3) Payments to foreign persons

         (A) In general. The Secretary shall by regulations apply the matching principle of paragraph (2) in cases in which the person to whom the payment is to be made is not a United States person.

          (B) Special rule for certain foreign entities

              (i) In general. Notwithstanding subparagraph (A), in the case of any item payable to a controlled foreign corporation (as defined in section 957) or a passive foreign investment company (as defined in section 1297), a deduction shall be allowable to the payor with respect to such amount for any taxable year before the taxable year in which paid only to the extent that an amount attributable to such item is includible (determined without regard to properly allocable deductions and qualified deficits under section 952(c)(1)(B)) during such prior taxable year in the gross income of a United States person who owns (within the meaning of section 958(a)) stock in such corporation.

               (ii) Secretarial authority. The Secretary may by regulation exempt transactions from the application of clause (i), including any transaction which is entered into by a payor in the ordinary course of a trade or business in which the payor is predominantly engaged and in which the payment of the accrued amounts occurs within 8½ months after accrual or within such other period as the Secretary may prescribe.

(b) Relationships. The persons referred to in subsection (a) are:

    (1) Members of a family, as defined in subsection (c)(4);

    (2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;

    (3) Two corporations which are members of the same controlled group (as defined in subsection (f));

    (4) A grantor and a fiduciary of any trust;

    (5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;

    (6) A fiduciary of a trust and a beneficiary of such trust;

    (7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;

    (8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust;

    (9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;

    (10) A corporation and a partnership if the same persons own—

         (A) more than 50 percent in value of the outstanding stock of the corporation, and

         (B) more than 50 percent of the capital interest, or the profits interest, in the partnership;

    (11) An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation;

    (12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or

    (13) Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.

(c) Constructive ownership of stock. For purposes of determining, in applying subsection (b), the ownership of stock—

    (1) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;

    (2) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;

    (3) An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner;

    (4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and

    (5) Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.

(d) Amount of gain where loss previously disallowed

    (1) In general. If—

         (A) in the case of a sale or exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection (a)(1), and

         (B) the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in the taxpayer’s hands is determined directly or indirectly by reference to such property) at a gain,

then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise disposed of by the taxpayer.

    (2) Exception for wash sales. Paragraph (1) shall not apply if the loss sustained by the transferor is not allowable to the transferor as a deduction by reason of section 1091 (relating to wash sales).

     (3) Exception for transfers from tax indifferent parties. Paragraph (1) shall not apply to the extent any loss sustained by the transferor (if allowed) would not be taken into account in determining a tax imposed under section 1 or 11 or a tax computed as provided by either of such sections.

(e) Special rules for pass-thru entities

    (1) In general. In the case of any amount paid or incurred by, to, or on behalf of, a pass-thru entity, for purposes of applying subsection (a)(2)—

         (A) such entity,

         (B) in the case of—

              (i) a partnership, any person who owns (directly or indirectly) any capital interest or profits interest of such partnership, or

              (ii) an S corporation, any person who owns (directly or indirectly) any of the stock of such corporation,

         (C) any person who owns (directly or indirectly) any capital interest or profits interest of a partnership in which such entity owns (directly or indirectly) any capital interest or profits interest, and

         (D) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to a person described in subparagraph (B) or (C), shall be treated as persons specified in a paragraph of subsection (b). Subparagraph (C) shall apply to a transaction only if such transaction is related either to the operations of the partnership described in such subparagraph or to an interest in such partnership.

    (2) Pass-thru entity. For purposes of this section, the term “pass-thru entity” means—

         (A) a partnership, and

         (B) an S corporation.

    (3) Constructive ownership in the case of partnerships. For purposes of determining ownership of a capital interest or profits interest of a partnership, the principles of subsection (c) shall apply, except that—

         (A) paragraph (3) of subsection (c) shall not apply, and

         (B) interests owned (directly or indirectly) by or for a C corporation shall be considered as owned by or for any shareholder only if such shareholder owns (directly or indirectly) 5 percent or more in value of the stock of such corporation.

    (4) Subsection (a)(2) not to apply to certain guaranteed payments of partnerships. In the case of any amount paid or incurred by a partnership, subsection (a)(2) shall not apply to the extent that section 707(c) applies to such amount.

     (5) Exception for certain expenses and interest of partnerships owning low-income housing

         (A) In general. This subsection shall not apply with respect to qualified expenses and interest paid or incurred by a partnership owning low-income housing to—

              (i) any qualified 5-percent or less partner of such partnership, or

              (ii) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to any qualified 5-percent or less partner of such partnership.

         (B) Qualified 5-percent or less partner. For purposes of this paragraph, the term “qualified 5-percent or less partner” means any partner who has (directly or indirectly) an interest of 5 percent or less in the aggregate capital and profits interests of the partnership but only if—

              (i) such partner owned the low-income housing at all times during the 2-year period ending on the date such housing was transferred to the partnership, or

              (ii) such partnership acquired the low-income housing pursuant to a purchase, assignment, or other transfer from the Department of Housing and Urban Development or any State or local housing authority. For purposes of the preceding sentence, a partner shall be treated as holding any interest in the partnership which is held (directly or indirectly) by any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to such partner.

         (C) Qualified expenses and interest. For purpose of this paragraph, the term “qualified expenses and interest” means any expense or interest incurred by the partnership with respect to low-income housing held by the partnership but—

              (i) only if the amount of such expense or interest (as the case may be) is unconditionally required to be paid by the partnership not later than 10 years after the date such amount was incurred, and

              (ii) in the case of such interest, only if such interest is incurred at an annual rate not in excess of 12 percent.

         (D) Low-income housing. For purposes of this paragraph, the term “low-income housing” means—

              (i) any interest in property described in clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B), and

              (ii) any interest in a partnership owning such property.

    (6) Cross reference. For additional rules relating to partnerships, see section 707(b).

(f) Controlled group defined; special rules applicable to controlled groups

    (1) Controlled group defined. For purposes of this section, the term “controlled group” has the meaning given to such term by section 1563(a), except that—

         (A) “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a), and

         (B) the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.

    (2) Deferral (rather than denial) of loss from sale or exchange between membersIn the case of any loss from the sale or exchange of property which is between members of the same controlled group and to which subsection (a)(1) applies (determined without regard to this paragraph but with regard to paragraph (3))—

         (A) subsections (a)(1) and (d) shall not apply to such loss, but

         (B) such loss shall be deferred until the property is transferred outside such controlled group and there would be recognition of loss under consolidated return principles or until such other time as may be prescribed in regulations.

    (3) Loss deferral rules not to apply in certain cases

         (A) Transfer to DISC. For purposes of applying subsection (a)(1), the term “controlled group” shall not include a DISC.

          (B) Certain sales of inventory, Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to the sale or exchange of property between members of the same controlled group (or persons described in subsection (b)(10)) if—

              (i) such property in the hands of the transferor is property described in section 1221(a)(1),

              (ii) such sale or exchange is in the ordinary course of the transferor’s trade or business,

              (iii) such property in the hands of the transferee is property described in section 1221(a)(1), and

              (iv) the transferee or the transferor is a foreigncorporation.

         (C) Certain foreign currency losses. To the extent provided in regulations, subsection (a)(1) shall not apply to any loss sustained by a member of a controlled group on the repayment of a loan made to another member of such group if such loan is payable in a foreign currency or is denominated in such a currency and such loss is attributable to a reduction in value of such foreign currency.

          (D) Redemptions by fund-of-funds regulated investment companies. Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to any distribution in redemption of stock of a regulated investment company if—

              (i) such company issues only stock which is redeemable upon the demand of the stockholder, and

              (ii) such redemption is upon the demand of another regulated investment company.

    (4) Determination of relationship resulting in disallowance of loss, for purposes of other provisions. For purposes of any other section of this title which refers to a relationship which would result in a disallowance of losses under this section, deferral under paragraph (2) shall be treated as disallowance.

(g) Coordination with section 1041. Subsection (a)(1) shall not apply to any transfer described in section 1041(a) (relating to transfers of property between spouses or incident to divorce).

(a) Corporations. In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges.

(b) Other taxpayers. In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of—

    (1) $3,000 ($1,500 in the case of a married individual filing a separate return), or

    (2) the excess of such losses over such gains.

(a) Corporations

    (1) In general. If a corporation has a net capital loss for any taxable year (hereinafter in this paragraph referred to as the “loss year”), the amount thereof shall be—

         (A) a capital loss carryback to each of the 3 taxable years preceding the loss year, but only to the extent—

              (i) such loss is not attributable to a foreign expropriation capital loss, and

              (ii) the carryback of such loss does not increase or produce a net operating loss (as defined in section 172(c)) for the taxable year to which it is being carried back;

         (B) except as provided in subparagraph (C), a capital loss carryover to each of the 5 taxable years succeeding the loss year; and

         (C) a capital loss carryover to each of the 10 taxable years succeeding the loss year, but only to the extent such loss is attributable to a foreign expropriation loss, and shall be treated as a short-term capital loss in each such taxable year. The entire amount of the net capital loss for any taxable year shall be carried to the earliest of the taxable years to which such loss may be carried, and the portion of such loss which shall be carried to each of the other taxable years to which such loss may be carried shall be the excess, if any, of such loss over the total of the capital gain net income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the capital gain net income for any such prior taxable year shall be computed without regard to the net capital loss for the loss year or for any taxable year thereafter. In the case of any net capital loss which cannot be carried back in full to a preceding taxable year by reason of clause (ii) of subparagraph (A), the capital gain net income for such prior taxable year shall in no case be treated as greater than the amount of such loss which can be carried back to such preceding taxable year upon the application of such clause (ii).

    (2) Definitions and special rules

         (A) Foreign expropriation capital loss defined. For purposes of this subsection, the term “foreign expropriation capital loss” means, for any taxable year, the sum of the losses taken into account in computing the net capital loss for such year which are—

              (i) losses sustained directly by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing, or

              (ii) losses (treated under section 165(g)(1) as losses from the sale or exchange of capital assets) from securities which become worthless by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing.

         (B) Portion of loss attributable to foreign expropriation capital loss. For purposes of paragraph (1), the portion of any net capital loss for any taxable year attributable to a foreign expropriation capital loss is the amount of the foreign expropriation capital loss for such year (but not in excess of the net capital loss for such year).

          (C) Priority of application. For purposes of paragraph (1), if a portion of a net capital loss for any taxable year is attributable to a foreign expropriation capital loss, such portion shall be considered to be a separate net capital loss for such year to be applied after the other portion of such net capital loss.

     (3) Regulated investment companies

         (A) In general. If a regulated investment company has a net capital loss for any taxable year—

              (i) paragraph (1) shall not apply to such loss,

              (ii) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss arising on the first day of the next taxable year, and

              (iii) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss arising on the first day of the next taxable year.

         (B) Coordination with general rule. If a net capital loss to which paragraph (1) applies is carried over to a taxable year of a regulated investment company—

              (i) Losses to which this paragraph applies. Clauses (ii) and (iii) of subparagraph (A) shall be applied without regard to any amount treated as a short-term capital loss under paragraph (1).

               (ii) Losses to which general rule applies. Paragraph (1) shall be applied by substituting “net capital loss for the loss year or any taxable year thereafter (other than a net capital loss to which paragraph (3)(A) applies)” for “net capital loss for the loss year or any taxable year thereafter”.

     (4) Special rules on carrybacks. A net capital loss of a corporation shall not be carried back under paragraph (1)(A) to a taxable year—

         (A) for which it is a regulated investment company (as defined in section 851), or

         (B) for which it is a real estate investment trust (as defined in section 856).

(b) Other taxpayers

    (1) In general. If a taxpayer other than a corporation has a net capital loss for any taxable year—

         (A) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss in the succeeding taxable year, and

         (B) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss in the succeeding taxable year.

    (2) Treatment of amounts allowed under section 1211(b)(1) or (2)

         (A) In general. For purposes of determining the excess referred to in subparagraph (A) or (B) of paragraph (1), there shall be treated as a short-term capital gain in the taxable year an amount equal to the lesser of—

              (i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), or

              (ii) the adjusted taxable income for such taxable year.

         (B) Adjusted taxable income. For purposes of subparagraph (A), the term “adjusted taxable income” means taxable income increased by the sum of—

              (i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), and

              (ii) the deduction allowed for such year under section 151 or any deduction in lieu thereof.

For purposes of the preceding sentence, any excess of the deductions allowed for the taxable year over the gross income for such year shall be taken into account as negative taxable income.

(c) Carryback of losses from section 1256 contracts to offset prior gains from such contracts

    (1) In general. If a taxpayer (other than a corporation) has a net section 1256 contracts loss for the taxable year and elects to have this subsection apply to such taxable year, the amount of such net section 1256 contracts loss—

         (A) shall be a carryback to each of the 3 taxable years preceding the loss year, and

         (B) to the extent that, after the application of paragraphs (2) and (3), such loss is allowed as a carryback to any such preceding taxable year—

              (i) 40 percent of the amount so allowed shall be treated as a short-term capital loss from section 1256 contracts, and

              (ii) 60 percent of the amount so allowed shall be treated as a long-term capital loss from section 1256 contracts.

    (2) Amount carried to each taxable year. The entire amount of the net section 1256 contracts loss for any taxable year shall be carried to the earliest of the taxable years to which such loss may be carried back under paragraph (1). The portion of such loss which shall be carried to each of the 2 other taxable years to which such loss may be carried back shall be the excess (if any) of such loss over the portion of such loss which, after the application of paragraph (3), was allowed as a carryback for any prior taxable year.

     (3) Amount which may be used in any prior taxable year. An amount shall be allowed as a carryback under paragraph (1) to any prior taxable year only to the extent—

         (A) such amount does not exceed the net section 1256 contract gain for such year, and

         (B) the allowance of such carryback does not increase or produce a net operating loss (as defined in section 172(c)) for such year.

    (4) Net section 1256 contracts loss. For purposes of paragraph (1), the term “net section 1256 contracts loss” means the lesser of—

         (A) the net capital loss for the taxable year determined by taking into account only gains and losses from section 1256 contracts, or

         (B) the sum of the amounts which, but for paragraph (6)(A), would be treated as capital losses in the succeeding taxable year under subparagraphs (A) and (B) of subsection (b)(1).

    (5) Net section 1256 contract gain. For purposes of paragraph (1)—

         (A) In general. The term “net section 1256 contract gain” means the lesser of—

              (i) the capital gain net income for the taxable year determined by taking into account only gains and losses from section 1256 contracts, or

              (ii) the capital gain net income for the taxable year.

         (B) Special rule. The net section 1256 contract gain for any taxable year before the loss year shall be computed without regard to the net section 1256 contracts loss for the loss year or for any taxable year thereafter.

     (6) Coordination with carryforward provisions of subsection (b)(1)

         (A) Carryforward amount reduced by amount used as carryback. For purposes of applying subsection (b)(1), if any portion of the net section 1256 contracts loss for any taxable year is allowed as a carryback under paragraph (1) to any preceding taxable year—

              (i) 40 percent of the amount allowed as a carryback shall be treated as a short-term capital gain for the loss year, and

              (ii) 60 percent of the amount allowed as a carryback shall be treated as a long-term capital gain for the loss year.

         (B) Carryover loss retains character as attributable to section 1256 contract. Any amount carried forward as a short-term or long-term capital loss to any taxable year under subsection (b)(1) (after the application of subparagraph (A)) shall, to the extent attributable to losses from section 1256 contracts, be treated as loss from section 1256 contracts for such taxable year.

     (7) Other definitions and special rules. For purposes of this subsection—

         (A)Section 1256 contract. The term “section 1256 contract” means any section 1256 contract (as defined in section 1256(b)) to which section 1256 applies.

          (B) Exclusion for estates and trusts. This subsection shall not apply to any estate or trust.

- Adjusted Basis (AB)

Realized Gain (RG)

- Amount Realized (AR)

Realized Loss (RL)

(1)   The nature and purpose of the acquisition of the property and the duration of the ownership;

(2)   The extent and nature of the TP’s efforts to sell the property;

(3)   The number, extent, continuity and substantiality of the sales; (IMPORTANT)

(4)   The extent of subdividing, developing, and advertising to increase sales;

(5)   The use of a business office for the sale of the property;

(6)   The character and degree of supervision or control exercised by the TP over any representative selling the property; and

(7)   The time and effort the TP habitually devoted to the sales.

For purposes of this subtitle—

(1) Short-term capital gain. The term “short-term capital gain” means gain from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent such gain is taken into account in computing gross income.

(2) Short-term capital loss. The term “short-term capital loss” means loss from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.

(3) Long-term capital gain. The term “long-term capital gain” means gain from the sale or exchange of a capital asset held for more than 1 year, if and to the extent such gain is taken into account in computing gross income.

(4) Long-term capital loss. The term “long-term capital loss” means loss from the sale or exchange of a capital asset held for more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.

(5) Net short-term capital gain. The term “net short-term capital gain” means the excess of short-term capital gains for the taxable year over the short-term capital losses for such year.

(6) Net short-term capital loss. The term “net short-term capital loss” means the excess of short-term capital losses for the taxable year over the short-term capital gains for such year.

(7) Net long-term capital gain. The term “net long-term capital gain” means the excess of long-term capital gains for the taxable year over the long-term capital losses for such year.

(8) Net long-term capital loss. The term “net long-term capital loss” means the excess of long-term capital losses for the taxable year over the long-term capital gains for such year.

(9) Capital gain net income. The term “capital gain net income” means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.

(10) Net capital loss. The term “net capital loss” means the excess of the losses from sales or exchanges of capital assets over the sum allowed under section 1211. In the case of a corporation, for the purpose of determining losses under this paragraph, amounts which are short-term capital losses under section 1212(a)(1) shall be excluded.

(11) Net capital gain. The term “net capital gain” means the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for such year.

For purposes of this subtitle—

(1) In determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if, under this chapter, the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and, in the case of such exchanges the property exchanged at the time of such exchange was a capital asset as defined in section 1221 or property described in section 1231. For purposes of this paragraph—

    (A) an involuntary conversion described in section 1033 shall be considered an exchange of the property converted for the property acquired, and

    (B) a distribution to which section 355 (or so much of section 356 as relates to section 355) applies shall be treated as an exchange.

(2) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.

(3) In determining the period for which the taxpayer has held stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under section 1091 relating to wash sales) of the loss from the sale or other disposition of substantially identical stock or securities, there shall be included the period for which he held the stock or securities the loss from the sale or other disposition of which was not deductible.

(4) In determining the period for which the taxpayer has held stock or rights to acquire stock received on a distribution, if the basis of such stock or rights is determined under section 307, there shall (under regulations prescribed by the Secretary) be included the period for which he held the stock in the distributing corporation before the receipt of such stock or rights upon such distribution.

(5) In determining the period for which the taxpayer has held stock or securities acquired from a corporation by the exercise of rights to acquire such stock or securities, there shall be included only the period beginning with the date on which the right to acquire was exercised.

[(6) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(80)(C), Dec. 19, 2014, 128 Stat. 4049.]

(7) In determining the period for which the taxpayer has held a commodity acquired in satisfaction of a commodity futures contract (other than a commodity futures contract to which section 1256 applies) there shall be included the period for which he held the commodity futures contract if such commodity futures contract was a capital asset in his hands.

[(8) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(80)(C), Dec. 19, 2014, 128 Stat. 4049.]

(9) In the case of a person acquiring property from a decedent or to whom property passed from a decedent (within the meaning of section 1014(b)), if—

    (A) the basis of such property in the hands of such person is determined under section 1014, and

    (B) such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death,

then such person shall be considered to have held such property for more than 1 year.

(10) If—

    (A) property is acquired by any person in a transfer to which section 1040 applies,

    (B) such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death, and

    (C) such sale or disposition is to a person who is a qualified heir (as defined in section 2032A(e)(1)) with respect to the decedent,

then the person making such sale or other disposition shall be considered to have held such property for more than 1 year.

(11) In determining the period for which the taxpayer has held qualified replacement property (within the meaning of section 1042(b)) the acquisition of which resulted under section 1042 in the nonrecognition of any part of the gain realized on the sale of qualified securities (within the meaning of section 1042(b)), there shall be included the period for which such qualified securities had been held by the taxpayer.

(12) In determining the period for which the taxpayer has held property the acquisition of which resulted under section 1043 in the nonrecognition of any part of the gain realized on the sale of other property, there shall be included the period for which such other property had been held as of the date of such sale.

(13) Except for purposes of sections 1202(a)(2), 1202(c)(2)(A), 1400B(b), and 1400F(b), in determining the period for which the taxpayer has held property the acquisition of which resulted under section 1045 or 1397B in the nonrecognition of any part of the gain realized on the sale of other property, there shall be included the period for which such other property has been held as of the date of such sale.

(14) If the security to which a securities futures contract (as defined in section 1234B) relates (other than a contract to which section 1256 applies) is acquired in satisfaction of such contract, in determining the period for which the taxpayer has held such security, there shall be included the period for which the taxpayer held such contract if such contract was a capital asset in the hands of the taxpayer.

(15) Cross reference.— For special holding period provision relating to certain partnership distributions, see section 735(b).

(a) General rule

    (1) Ordinary income. Except as otherwise provided in this section, if section 1245 property is disposed of the amount by which the lower of—

         (A) the recomputed basis of the property, or

         (B)

              (i) in the case of a sale, exchange, or involuntary conversion, the amount realized, or

              (ii) in the case of any other disposition, the fair market value of such property,

exceeds the adjusted basis of such property shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.

    (2) Recomputed basis. For purposes of this section—

         (A) In general. The term “recomputed basis” means, with respect to any property, its adjusted basis recomputed by adding thereto all adjustments reflected in such adjusted basis on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for depreciation or amortization.

          (B) Taxpayer may establish amount allowed. For purposes of subparagraph (A), if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed for depreciation or amortization for any period was less than the amount allowable, the amount added for such period shall be the amount allowed.

          (C) Certain deductions treated as amortization. Any deduction allowable under section 179, 179B, 179C, 179D, 179E, 181, 190, 193, or 194 shall be treated as if it were a deduction allowable for amortization.

     (3) Section 1245 property. For purposes of this section, the term “section 1245 property” means any property which is or has been property of a character subject to the allowance for depreciation provided in section 167 and is either—

         (A) personal property,

         (B) other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property)—

              (i) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services,

              (ii) constituted a research facility used in connection with any of the activities referred to in clause (i), or

              (iii) constituted a facility used in connection with any of the activities referred to in clause (i) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state),

         (C) so much of any real property (other than any property described in subparagraph (B)) which has an adjusted basis in which there are reflected adjustments for amortization under section 169, 179, 179B, 179C, 179D, 179E, 185,[1] 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194,[2]

         (D) a single purpose agricultural or horticultural structure (as defined in section 168(i)(13)),

        (E) a storage facility (not including a building or its structural components) used in connection with the distribution of petroleum or any primary product of petroleum, or

         (F) any railroad grading or tunnel bore (as defined in section 168(e)(4)).

(b) Exceptions and limitations

    (1) Gifts. Subsection (a) shall not apply to a disposition by gift.

     (2) Transfers at death. Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.

     (3) Certain tax-free transactions. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (6), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.

     (4) Like kind exchanges; involuntary conversions, etc.If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the sum of—

        (A) the amount of gain recognized on such disposition (determined without regard to this section), plus

         (B) the fair market value of property acquired which is not section 1245 property and which is not taken into account under subparagraph (A).

    (5) Property distributed by a partnership to a partner

         (A) In general. For purposes of this section, the basis of section 1245 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.

          (B) Adjustments added back. In the case of any property described in subparagraph (A), for purposes of computing the recomputed basis of such property the amount of the adjustments added back for periods before the distribution by the partnership shall be—

              (i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time, reduced by

              (ii) the amount of such gain to which section 751(b) applied.

    (6) Transfers to tax-exempt organization where property will be used in unrelated business

         (A) In general. The second sentence of paragraph (3) shall not apply to a disposition of section 1245 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513).

          (B) Later change in use. If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.

     (7) Timber property. In determining, under subsection (a)(2), the recomputed basis of property with respect to which a deduction under section 194 was allowed for any taxable year, the taxpayer shall not take into account adjustments under section 194 to the extent such adjustments are attributable to the amortizable basis of the taxpayer acquired before the 10th taxable year preceding the taxable year in which gain with respect to the property is recognized.

     (8) Disposition of amortizable section 197 intangibles

         (A) In general. If a taxpayer disposes of more than 1 amortizable section 197 intangible (as defined in section 197(c)) in a transaction or a series of related transactions, all such amortizable 197 intangibles shall be treated as 1 section 1245 property for purposes of this section.

          (B) Exception. Subparagraph (A) shall not apply to any amortizable section 197 intangible (as so defined) with respect to which the adjusted basis exceeds the fair market value.

(c) Adjustments to basis. The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).

(d) Application of section. This section shall apply notwithstanding any other provision of this subtitle.

(a) General rule. Except as otherwise provided in this section—

    (1) Additional depreciation after December 31, 1975

         (A) In general. If section 1250 property is disposed of after December 31, 1975, then the applicable percentage of the lower of—

               (i) that portion of the additional depreciation (as defined in subsection (b)(1) or (4)) attributable to periods after December 31, 1975, in respect of the property, or

              (ii) the excess of the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over the adjusted basis of such property,

shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.

         (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means—

              (i) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;

              (ii) in the case of dwelling units which, on the average, were held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of State or local law authorizing similar levels of subsidy for lower-income families, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;

              (iii) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service;

              (iv) in the case of section 1250 property with respect to which a loan is made or insured under title V of the Housing Act of 1949, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; and

              (v) in the case of all other section 1250 property, 100 percent. In the case of a building (or a portion of a building devoted to dwelling units), if, on the average, 85 percent or more of the dwelling units contained in such building (or portion thereof) are units described in clause (ii), such building (or portion thereof) shall be treated as property described in clause (ii). Clauses (i), (ii), and (iv) shall not apply with respect to the additional depreciation described in subsection (b)(4) which was allowed under section 167(k).

    (2) Additional depreciation after December 31, 1969, and before January 1, 1976

         (A) In general. If section 1250 property is disposed of after December 31, 1969, and the amount determined under paragraph (1)(A)(ii) exceeds the amount determined under paragraph (1)(A)(i), then the applicable percentage of the lower of—

              (i) that portion of the additional depreciation attributable to periods after December 31, 1969, and before January 1, 1976, in respect of the property, or

              (ii) the excess of the amount determined under paragraph (1)(A)(ii) over the amount determined under paragraph (1)(A)(i), shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.

          (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means—

              (i) in the case of section 1250 property disposed of pursuant to a written contract which was, on July 24, 1969, and at all times thereafter, binding on the owner of the property, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;

              (ii) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws, and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;

              (iii) in the case of residential rental property (as defined in section 167(j)(2)(B)) other than that covered by clauses (i) and (ii), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;

              (iv) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service; and

              (v) in the case of all other section 1250 property, 100 percent. Clauses (i), (ii), and (iii) shall not apply with respect to the additional depreciation described in subsection (b)(4).

    (3) Additional depreciation before January 1, 1970

         (A) In general. If section 1250 property is disposed of after December 31, 1963, and the amount determined under paragraph (1)(A)(ii) exceeds the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), then the applicable percentage of the lower of—

              (i) that portion of the additional depreciation attributable to periods before January 1, 1970, in respect of the property, or

              (ii) the excess of the amount determined under paragraph (1)(A)(ii) over the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.

         (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means 100 percent minus 1 percentage point for each full month the property was held after the date on which the property was held for 20 full months.

     (4) Special rule. For purposes of this subsection, any reference to section 167(k) or 167(j)(2)(B) shall be treated as a reference to such section as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990.

     (5) Cross reference. For reduction in the case of corporations on capital gain treatment under this section, see section 291(a)(1).

(b) Additional depreciation defined. For purposes of this section—

    (1) In general. The term “additional depreciation” means, in the case of any property, the depreciation adjustments in respect of such property; except that, in the case of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment.

     (2) Property held by lessee. In the case of a lessee, in determining the depreciation adjustments which would have resulted in respect of any building erected (or other improvement made) on the leased property, or in respect of any cost of acquiring the lease, the lease period shall be treated as including all renewal periods. For purposes of the preceding sentence—

         (A) the term “renewal period” means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but

         (B) the inclusion of renewal periods shall not extend the period taken into account by more than ⅔ of the period on the basis of which the depreciation adjustments were allowed.

    (3) Depreciation adjustments. The term “depreciation adjustments” means, in respect of any property, all adjustments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168 (as in effect before its repeal by the Tax Reform Act of 1976), 169, 185 (as in effect before its repeal by the Tax Reform Act of 1986), 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, or 193). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed.

     (4) Additional depreciation attributable to rehabilitation expenditures. The term “additional depreciation” also means, in the case of section 1250 property with respect to which a depreciation or amortization deduction for rehabilitation expenditures was allowed under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981), the depreciation or amortization adjustments allowed under such section to the extent attributable to such property, except that, in the case of such property held for more than one year after the rehabilitation expenditures so allowed were incurred, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined under the straight line method of adjustment without regard to the useful life permitted under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981).

     (5) Method of computing straight line adjustments. For purposes of paragraph (1), the depreciation adjustments which would have resulted for any taxable year under the straight line method shall be determined—

         (A) in the case of property to which section 168 applies, by determining the adjustments which would have resulted for such year if the taxpayer had elected the straight line method for such year using the recovery period applicable to such property, and

         (B) in the case any property to which section 168 does not apply, if a useful life (or salvage value) was used in determining the amount allowable as a deduction for any taxable year, by using such life (or value).

(c) Section 1250 property. For purposes of this section, the term “section 1250 property” means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167.

(d) Exceptions and limitations

    (1) Gifts. Subsection (a) shall not apply to a disposition by gift.

     (2) Transfers at death. Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.

    (3) Certain tax-free transactions. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (9), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.

     (4) Like kind exchanges; involuntary conversions, etc.

         (A) Recognition limit. If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the greater of the following:

              (i) the amount of gain recognized on the disposition (determined without regard to this section), increased as provided in subparagraph (B), or

              (ii) the amount determined under subparagraph (C).

         (B) Increase for certain stock. With respect to any transaction, the increase provided by this subparagraph is the amount equal to the fair market value of any stock purchased in a corporation which (but for this paragraph) would result in nonrecognition of gain under section 1033(a)(2)(A).

         (C) Adjustment where insufficient section 1250 property is acquired. With respect to any transaction, the amount determined under this subparagraph shall be the excess of—

              (i) the amount of gain which would (but for this paragraph) be taken into account under subsection (a), over

              (ii) the fair market value (or cost in the case of a transaction described in section 1033(a)(2)) of the section 1250 property acquired in the transaction.

         (D) Basis of property acquired. In the case of property purchased by the taxpayer in a transaction described in section 1033(a)(2), in applying section 1033(b)(2), such sentence [1] shall be applied—

              (i) first solely to section 1250 properties and to the amount of gain not taken into account under subsection (a) by reason of this paragraph, and

              (ii) then to all purchased properties to which such sentence applies and to the remaining gain not recognized on the transaction as if the cost of the section 1250 properties were the basis of such properties computed under clause (i). In the case of property acquired in any other transaction to which this paragraph applies, rules consistent with the preceding sentence shall be applied under regulations prescribed by the Secretary.

         (E) Additional depreciation with respect to property disposed of. In the case of any transaction described in section 1031 or 1033, the additional depreciation in respect of the section 1250 property acquired which is attributable to the section 1250 property disposed of shall be an amount equal to the amount of the gain which was not taken into account under subsection (a) by reason of the application of this paragraph.

     (5) Property distributed by a partnership to a partner

         (A) In general. For purposes of this section, the basis of section 1250 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.

          (B) Additional depreciation. In respect of any property described in subparagraph (A), the additional depreciation attributable to periods before the distribution by the partnership shall be—

              (i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time and the applicable percentage for the property had been 100 percent, reduced by

              (ii) if section 751(b) applied to any part of such gain, the amount of such gain to which section 751(b) would have applied if the applicable percentage for the property had been 100 percent.

    (6) Transfers to tax-exempt organization where property will be used in unrelated business

         (A) In general. The second sentence of paragraph (3) shall not apply to a disposition of section 1250 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513).

          (B) Later change in use. If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.

     (7) Foreclosure dispositions. If any section 1250 property is disposed of by the taxpayer pursuant to a bid for such property at foreclosure or by operation of an agreement or of process of law after there was a default on indebtedness which such property secured, the applicable percentage referred to in paragraph (1)(B), (2)(B), or (3)(B) of subsection (a), as the case may be, shall be determined as if the taxpayer ceased to hold such property on the date of the beginning of the proceedings pursuant to which the disposition occurred, or, in the event there are no proceedings, such percentage shall be determined as if the taxpayer ceased to hold such property on the date, determined under regulations prescribed by the Secretary, on which such operation of an agreement or process of law, pursuant to which the disposition occurred, began.

(e) Holding period. For purposes of determining the applicable percentage under this section, the provisions of section 1223 shall not apply, and the holding period of section 1250 property shall be determined under the following rules:

    (1) Beginning of holding period. The holding period of section 1250 property shall be deemed to begin—

         (A) in the case of property acquired by the taxpayer, on the day after the date of acquisition, or

         (B) in the case of property constructed, reconstructed, or erected by the taxpayer, on the first day of the month during which the property is placed in service.

    (2) Property with transferred basis. If the basis of property acquired in a transaction described in paragraph (1), (2), or (3) of subsection (d) is determined by reference to its basis in the hands of the transferor, then the holding period of the property in the hands of the transferee shall include the holding period of the property in the hands of the transferor.

(f) Special rules for property which is substantially improved

    (1) Amount treated as ordinary income. If, in the case of a disposition of section 1250 property, the property is treated as consisting of more than one element by reason of paragraph (3), then the amount taken into account under subsection (a) in respect of such section 1250 property as ordinary income shall be the sum of the amounts determined under paragraph (2).

    (2) Ordinary income attributable to an element. For purposes of paragraph (1), the amount taken into account for any element shall be the sum of a series of amounts determined for the periods set forth in subsection (a), with the amount for any such period being determined by multiplying—

         (A) the amount which bears the same ratio to the lower of the amounts specified in clause (i) or (ii) of subsection (a)(1)(A), in clause (i) or (ii) of subsection (a)(2)(A), or in clause (i) or (ii) of subsection (a)(3)(A), as the case may be, for the section 1250 property as the additional depreciation for such element attributable to such period bears to the sum of the additional depreciation for all elements attributable to such period, by

         (B) the applicable percentage for such element for such period.

For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property.

    (3) Property consisting of more than one element. In applying this subsection in the case of any section 1250 property, there shall be treated as a separate element—

         (A) each separate improvement,

         (B) if, before completion of section 1250 property, units thereof (as distinguished from improvements) were placed in service, each such unit of section 1250 property, and

         (C) the remaining property which is not taken into account under subparagraphs (A) and (B).

    (4) Property which is substantially improved. For purposes of this subsection—

         (A) In general. The term “separate improvement” means each improvement added during the 36–month period ending on the last day of any taxable year to the capital account for the property, but only if the sum of the amounts added to such account during such period exceeds the greatest of—

              (i) 25 percent of the adjusted basis of the property,

              (ii) 10 percent of the adjusted basis of the property, determined without regard to the adjustments provided in paragraphs (2) and (3) of section 1016(a), or

              (iii) $5,000. For purposes of clauses (i) and (ii), the adjusted basis of the property shall be determined as of the beginning of the first day of such 36–month period, or of the holding period of the property (within the meaning of subsection (e)), whichever is the later.

         (B) Exception. Improvements in any taxable year shall be taken into account for purposes of subparagraph (A) only if the sum of the amounts added to the capital account for the property for such taxable year exceeds the greater of—

              (i) $2,000, or

              (ii) one percent of the adjusted basis referred to in subparagraph (A)(ii), determined, however, as of the beginning of such taxable year. For purposes of this section, if the amount added to the capital account for any separate improvement does not exceed the greater of clause (i) or (ii), such improvement shall be treated as placed in service on the first day, of a calendar month, which is closest to the middle of the taxable year.

    (C) Improvement. The term “improvement” means, in the case of any section 1250 property, any addition to capital account for such property after the initial acquisition or after completion of the property.

(g) Adjustments to basis. The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).

(h) Application of section. This section shall apply notwithstanding any other provision of this subtitle.

(h) Maximum capital gains rate

    (1) In general. If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of—

         (A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of—

              (i) taxable income reduced by the net capital gain; or

              (ii) the lesser of—

                   (I) the amount of taxable income taxed at a rate below 25 percent; or

                   (II) taxable income reduced by the adjusted net capital gain;

         (B) 0 percent of so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of—

              (i) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 25 percent, over

              (ii) the taxable income reduced by the adjusted net capital gain;

         (C) 15 percent of the lesser of—

              (i) so much of the adjusted net capital gain (or, if less, taxable income) as exceeds the amount on which a tax is determined under subparagraph (B), or

              (ii) the excess of—

                   (I) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 39.6 percent, over

                   (II) the sum of the amounts on which a tax is determined under subparagraphs (A) and (B),

         (D) 20 percent of the adjusted net capital gain (or, if less, taxable income) in excess of the sum of the amounts on which tax is determined under subparagraphs (B) and (C),

         (E) 25 percent of the excess (if any) of—

              (i) the unrecaptured section 1250 gain (or, if less, the net capital gain (determined without regard to paragraph (11))), over

              (ii) the excess (if any) of—

                   (I) the sum of the amount on which tax is determined under subparagraph (A) plus the net capital gain, over

                   (II) taxable income; and

         (F) 28 percent of the amount of taxable income in excess of the sum of the amounts on which tax is determined under the preceding subparagraphs of this paragraph.

    (2) Net capital gain taken into account as investment income

For purposes of this subsection, the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii).

     (3) Adjusted net capital gain. For purposes of this subsection, the term “adjusted net capital gain” means the sum of—

         (A) net capital gain (determined without regard to paragraph (11)) reduced (but not below zero) by the sum of—

              (i) unrecaptured section 1250 gain, and

              (ii) 28-percent rate gain, plus

         (B) qualified dividend income (as defined in paragraph (11)).

    (4) 28-percent rate gain. For purposes of this subsection, the term “28-percent rate gain” means the excess (if any) of—

         (A) the sum of—

              (i) collectibles gain; and

              (ii) section 1202 gain, over

         (B) the sum of—

              (i) collectibles loss;

              (ii) the net short-term capital loss; and

              (iii) the amount of long-term capital loss carried under section 1212(b)(1)(B) to the taxable year.

    (5) Collectibles gain and loss. For purposes of this subsection—

         (A) In general. The terms “collectibles gain” and “collectibles loss” mean gain or loss (respectively) from the sale or exchange of a collectible (as defined in section 408(m) without regard to paragraph (3) thereof) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing gross income and such loss is taken into account in computing taxable income.

          (B) Partnerships, etc. For purposes of subparagraph (A), any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of the preceding sentence.

     (6) Unrecaptured section 1250 gain. For purposes of this subsection—

         (A) In general. The term “unrecaptured section 1250 gain” means the excess (if any) of—

              (i) the amount of long-term capital gain (not otherwise treated as ordinary income) which would be treated as ordinary income if section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent, over

              (ii) the excess (if any) of—

                   (I) the amount described in paragraph (4)(B); over

                   (II) the amount described in paragraph (4)(A).

         (B) Limitation with respect to section 1231 property. The amount described in subparagraph (A)(i) from sales, exchanges, and conversions described in section 1231(a)(3)(A) for any taxable year shall not exceed the net section 1231 gain (as defined in section 1231(c)(3)) for such year.

    (7)Section 1202 gain. For purposes of this subsection, the term “section 1202 gain” means the excess of—

         (A) the gain which would be excluded from gross income under section 1202 but for the percentage limitation in section 1202(a), over

         (B) the gain excluded from gross income under section 1202.

    (8) Coordination with recapture of net ordinary losses under section 1231. If any amount is treated as ordinary income under section 1231(c), such amount shall be allocated among the separate categories of net section 1231 gain (as defined in section 1231(c)(3)) in such manner as the Secretary may by forms or regulations prescribe.

     (9) Regulations. The Secretary may prescribe such regulations as are appropriate (including regulations requiring reporting) to apply this subsection in the case of sales and exchanges by pass-thru entities and of interests in such entities.

     (10) Pass-thru entity defined. For purposes of this subsection, the term “pass-thru entity” means—

         (A) a regulated investment company;

         (B) a real estate investment trust;

         (C) an S corporation;

         (D) a partnership;

         (E) an estate or trust;

         (F) a common trust fund; and

         (G) a qualified electing fund (as defined in section 1295).

    (11) Dividends taxed as net capital gain

         (A) In general. For purposes of this subsection, the term “net capital gain” means net capital gain (determined without regard to this paragraph) increased by qualified dividend income.

          (B) Qualified dividend income. For purposes of this paragraph—

              (i) In general. The term “qualified dividend income” means dividends received during the taxable year from—

                   (I) domestic corporations, and

                   (II) qualified foreign corporations.

              (ii) Certain dividends excluded. Such term shall not include—

                   (I) any dividend from a corporation which for the taxable year of the corporation in which the distribution is made, or the preceding taxable year, is a corporation exempt from tax under section 501 or 521,

                   (II) any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.), and

                   (III) any dividend described in section 404(k).

              (iii) Coordination with section 246(c)Such term shall not include any dividend on any share of stock—

                   (I) with respect to which the holding period requirements of section 246(c) are not met (determined by substituting in section 246(c) “60 days” for “45 days” each place it appears and by substituting “121-day period” for “91-day period”), or

                   (II) to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.

         (C) Qualified foreign corporations

              (i) In general. Except as otherwise provided in this paragraph, the term “qualified foreign corporation” means any foreign corporation if—

                   (I) such corporation is incorporated in a possession of the United States, or

                   (II) such corporation is eligible for benefits of a comprehensive income tax treaty with the United States which the Secretary determines is satisfactory for purposes of this paragraph and which includes an exchange of information program.

              (ii) Dividends on stock readily tradable on United States securities market. A foreign corporation not otherwise treated as a qualified foreign corporation under clause (i) shall be so treated with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States.

               (iii) Exclusion of dividends of certain foreign corporations. Such term shall not include—

                   (I) any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a passive foreign investment company (as defined in section 1297), and

                   (II) any corporation which first becomes a surrogate foreign corporation (as defined in section 7874(a)(2)(B)) after the date of the enactment of this subclause, other than a foreign corporation which is treated as a domestic corporation under section 7874(b).

              (iv) Coordination with foreign tax credit limitation. Rules similar to the rules of section 904(b)(2)(B) shall apply with respect to the dividend rate differential under this paragraph.

          (D) Special rules

              (i) Amounts taken into account as investment income. Qualified dividend income shall not include any amount which the taxpayer takes into account as investment income under section 163(d)(4)(B).

               (ii) Extraordinary dividends. If a taxpayer to whom this section applies receives, with respect to any share of stock, qualified dividend income from 1 or more dividends which are extraordinary dividends (within the meaning of section 1059(c)), any loss on the sale or exchange of such share shall, to the extent of such dividends, be treated as long-term capital loss.

               (iii) Treatment of dividends from regulated investment companies and real estate investment trusts. A dividend received from a regulated investment company or a real estate investment trust shall be subject to the limitations prescribed in sections 854 and 857