Complete Home & Office Legal Guide/Complete Home and Office Legal Guide (Chestnut) (1993).ISO/stat/fed/irc25.asc

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    244.  Dividends received on certain preferred stock
    (a)  General rule. -- In the case of a corporation, there
shall be allowed as a deduction an amount computed as follows:
    (1)  First determine the amount received as dividends on the
preferred stock of a public utility which is subject to taxation
under this chapter and with respect to which the deduction
provided in section 247 for dividends paid is allowable.
    (2)  Then multiply the amount determined under paragraph (1)
by the fraction --
    (A)  the numerator of which is 14 percent, and
    (B)  the denominator of which is that percentage which
equals the highest rate of tax specified in section 11(b).
    (3)  Finally ascertain the amount which is 70 percent of the
excess of --
    (A)  the amount determined under paragraph (1), over
    (B)  the amount determined under paragraph (2).
    (b)  Exception. -- If the dividends described in subsection
(a)(1) are qualifying dividends (as defined in section 243(b)(1),
but determined without regard to section 243(d)(4)) --
    (1)  subsection (a) shall be applied separately to such

qualifying dividends, and
    (2)  for purposes of subsection (a)(3), the percentage
applicable to such qualifying dividends shall be 100 percent in
lieu of 70 percent.

    245.  Dividends from 10-percent owned foreign corporations.
--
    (1)  In general. -- In the case of dividends received by a
corporation from a qualified 10-percent owned foreign
corporation, there shall be allowed as a deduction an amount
equal to the percent (specified in section 243 for the taxable
year) of the U.S.-source portion of such dividends.
    (2)  Qualified 10-percent owned foreign corporation. -- for
purposes of this subsection, the term "qualified 10-percent owned
foreign corporation" means any foreign corporation (other than a
foreign personal holding company or passive foreign investment
company) if at least 10 percent of the stock of such corporation
(by vote and value) is owned by the taxpayer.
    (3)  U.S.-source portion. -- for purposes of this
subsection, the U.S.-source portion of any dividend is an amount
which bears the same ratio to such dividend as --
    (A)  the post-1986 undistributed U.S. earnings, bears to
    (B)  the total post-1986 undistributed earnings.
    (4)  Post-1986 undistributed earnings. - For purposes of
this subsection, the term "post-1986 undistributed earnings" has
the meaning given to such term by section 902(c)(1).
    (5)  Post-1986 undistributed U.S. earnings. -- for purposes
of this subsection, the term "post-1986 undistributed U.S.
earnings" means the portion of the post-1986 undistributed
earnings which is attributable to --
    (A)  income of the qualified 10-percent owned foreign
corporation which is effectively connected with the conduct of a
trade or business within the United States and subject to tax
under this chapter, or
    (B)  any dividend received (directly or through a wholly
owned foreign corporation) from a domestic corporation at least
80 percent of the stock of which (by vote and value) is owned
(directly or through such wholly owned foreign corporation) by
the qualified 10-percent owned foreign corporation.
    (6)  Special rule. -- If the 1st day on which the
requirements of paragraph (2) are met with respect to any foreign
corporation is in a taxable year of such corporation beginning
after December 31, 1986, the post-1986 undistributed earnings and
the post-1986 undistributed U.S. earnings of such corporation
shall be determined by only taking into account periods beginning
on and after the 1st day of the 1st taxable year in which such
requirements are met.
    (7)  Coordination with subsection (b). -- Earnings and
profits of any qualified 10-percent owned foreign corporation for
any taxable year shall not be taken into account under this
subsection if the deduction provided by subsection (b) would be
allowable with respect to dividends paid out of such earnings and
profits.
    (8)  Disallowance of foreign tax credit. -- No credit shall
be allowed under section 901 for any taxes paid or accrued (or
treated as paid or accrued) with respect to the Unite
States-source portion of any dividend received by a corporation
from a qualified 10-percent-owned foreign corporation.
    (9)  Coordination with section 904. - For purposes of
section 904, the U.S.-source portion of any dividend received by
a corporation from a qualified 10-percent owned foreign
corporation shall be treated as from sources in the United
States.
    (10)  Coordination with treaties. -- If --
    (A)  any portion of a dividend received by a corporation
from a qualified 10-percent-owned foreign corporation would be
treated as from sources in the United States under paragraph (9),
    (B)  under a treaty obligation of the United States (applied
without regard to this subsection), such portion would be treated
as arising from sources outside the United States, and
    (C)  the taxpayer chooses the benefits of this paragraph,
    this subsection shall not apply to such dividend (but
subsections (a), (b), and (c) of section 904 and sections 902,
907, and 960 shall be applied separately with respect to such
portion of such dividend).
    (11)  Coordination with section 1248. -- for purposes of
this subsection, the term "dividend" does not include any amount
treated as a dividend under section 1248.
    (b)  Certain dividends received from wholly owned foreign
subsidiaries. --
    (1)  In general. -- In the case of dividends described in
paragraph (2) received from a foreign corporation by a domestic
corporation which, for its taxable year in which such dividends
are received, owns (directly or indirectly) all of the
outstanding stock of such foreign corporation, there shall be
allowed as a deduction (in lieu of the deduction provided by
subsection (a)) an amount equal to 100 percent of such dividends.
    (2)  Eligible dividends. -- Paragraph (1) shall apply only
to dividends which are paid out of the earnings and profits of a
foreign corporation for a taxable year during which --
    (A)  all of its outstanding stock is owned (directly or
indirectly) by the domestic corporation to which such dividends
are paid; and
    (B)  all of its gross income from all sources is effectively
connected with the conduct of a trade or business within the
United States.
    (3)  Exception. -- Paragraph (1) shall not apply to any
dividends if an election under section 1562 is effective for
either --
    (A)  the taxable year of the domestic corporation in which
such dividends are received, or
    (B)  the taxable year of the foreign corporation out of the
earnings and profits of which such dividends are paid.
    (c)  Certain dividends received from FSC. --
    (1)  In general. -- In the case of a domestic corporation,
there shall be allowed as a deduction an amount equal to --
    (A)  100 percent of any dividend received from another
corporation which is distributed out of earnings and profits
attributable to foreign trade income for a period during which
such other corporation was a FSC, and
    (B)  70 percent (80 percent in the case of dividends from a
20-percent owned corporation as defined in section 243(c)(2)) of
any dividend received from another corporation which is
distributed out of earnings and profits attributable to
effectively connected income received or accrued by such other
corporation while such other corporation was FSC.
    (2)  Exception for certain dividends. -- Paragraph (1) shall
not apply to any dividend which is distributed out of earnings
and profits attributable to foreign trade income which --
    (A)  is section 923(a)(2) nonexempt income (within the
meaning of section 927(d)(6)), or
    (B)  Effectively connected income. -- The term "effectively
connected income" means any income which is effectively connected
(or treated as effectively connected) with the conduct of a trade
or business in the United States and is subject to tax under this
chapter.  Such term shall not include any foreign trade income.

    246.  Rules applying to deductions for dividends received
    (a)  Deduction not allowed for dividends from certain
corporations. --
    (1)  In general. -- The deductions allowed by sections 243,
244, and 245 shall not apply to any dividend from a corporation
which, for the taxable year of the corporation in which the
distribution is made, or for the next preceding taxable year of
the corporation, is a corporation exempt from tax under section
501 (relating to certain charitable, etc., organizations) or
section 521 (relating to farmers' cooperative associations).
    (2)  Subsection not to apply to certain dividends of federal
home loan banks. --
    (A)  Dividends out of current earnings and profits. -- In
the case of any dividend paid by any FHLB out of earnings and
profits of the FHLB for the taxable year in which such dividend
was paid, paragraph (1) shall not apply to that portion of such
dividend which bears the same ratio to the total dividend as --
    (i)  the dividends received by the FHLB from the FHLMC
during such taxable year, bears to
    (ii)  the total earnings and profits of the FHLB for such
taxable year.
    (B)  Dividends out of accumulated earnings and profits. --
In the case of any dividend which is paid out of any accumulated
earnings and profits of any FHLB, paragraph (1) shall not apply
to that portion of the dividend which bears the same ratio to the
total dividend as --
    (i)  the amount of dividends received by such FHLB from the
FHLMC which are out of earnings and profits of the FHLMC --
    (I)  for taxable years ending after December 31, 1984, and
    (II)  which were not previously treated as distributed under
subparagraph (A) or this subparagraph, bears to
    (ii)  the total accumulated earnings and profits of the FHLB
as of the time such dividend is paid.
    For purpose of clause (ii), the accumulated earnings and
profits of the FHLB as of January 1, 1985, shall be treated as
equal to its retained earnings as of such date.
    (C)  Coordination with section 243. -- To the extent that
paragraph (1) does not apply to any dividend by reason of
subparagraph (A) or (B) of this paragraph, the requirement
contained in section 243(a) that the corporation paying the
dividend be subject to taxation under this chapter shall not
apply.
    (D)  Definitions. -- For purposes of this paragraph --
    (i)  FHLB. -- The term "FHLB" means any Federal Home Loan
Bank.
    (ii)  FHLMC. -- The term "FHLMC" means the Federal Home Loan
Mortgage Corporation.
    (iii)  Taxable year of FHLB. -- The taxable year of an FHLB
shall, except as provided in regulations prescribed by the
Secretary, be treated as the calendar year.
    (iv)  Earnings and profits. -- The earnings and profits of
any FHLB for any taxable year shall be treated as equal to the
sum of --
    (I)  any dividends received by the FHLB from the FHLMC
during such taxable year, and
    (II)  the total earnings and profits (determined without
regard to dividends described in subclause (I)) of the FHLB as
reported in its annual financial statement prepared in accordance
with section 20 of the Federal Home Loan Bank Act (12 U.S.C.
1440).
    (b)  Limitation on aggregate amount of deductions. --
    (1)  General rule. -- Except as provided in paragraph (2),
the aggregate amount of the deductions allowed by sections
243(a)(1), 244(a), and subsection (a) or (b) of section 245 shall
not exceed the percentage determined under paragraph (3) of the
taxable income computed without regard to the deductions allowed
by sections 172, 243(a)(1), 244(a), subsection (a) or (b) of
section 245, and 247, without regard to any adjustment under
section 1059, and without regard to any capital loss carryback to
the taxable year under section 1212(a)(1).
    (2)  Effect of net operating loss. -- Paragraph (1) shall be
applied --
    (A)  first separately with respect to dividends from
20-percent owned corporations (as defined in section 243(c)(2))
and the percentage determined under this paragraph shall be 80
percent, and
    (B)  then separately with respect to dividends not from
20-percent owned corporations and the percentage determined under
this paragraph shall be 70 percent and the taxable income shall
be reduced by the aggregate amount of dividends from 20-percent
owned corporations (as so defined).
    (c)  exclusion of certain dividends. --
    (1)  In general. -- No deduction shall be allowed under
section 243, 244, or 245, in respect of any dividend on any share
of stock --
    (A)  Which is held by the taxpayer for 45 days or less, or
    (B)  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.
    (2)  90-day rule in the case of certain preference
dividends. -- In the case of any stock having preference in
dividends, the holding period specified in paragraph (1)(A) shall
be 90 days in lieu of 45 days if the taxpayer receives dividends
with respect to such stock which are attributable to a period or
periods aggregating in excess of 366 days.
    (3)  Determination of holding periods. -- For purposes of
this section, in determining the period for which the taxpayer
has held any share of stock --
    (A)  the day of disposition, but not the day of acquisition,
shall be taken into account,
    (B)  there shall not be taken into account any day which is
more than 45 days (or 90 days in the case of stock to which
paragraph (2) applies) after the date on which such share becomes
ex-dividend, and
    (C)  paragraph (4) of section 1223 shall not apply.
    (4)  Holding period reduced for periods where risk of loss
diminished. -- The holding periods determined for purposes of
this subsection shall be appropriately reduced (in the manner
provided in regulations prescribed by the Secretary) for any
period (during such periods) in which --
    (A)  the taxpayer has an option to sell, is under a
contractual
obligation to sell, or has made (and not closed) a short sale of,
substantially identical stock or securities,
    (B)  the taxpayer is the grantor of an option to buy
substantially identical stock or securities, or
    (C)  under regulations prescribed by the Secretary, a
taxpayer has diminished his risk of loss by holding 1 or more
other positions with respect to substantially similar or related
property.
    The preceding sentence shall not apply in the case of any
qualified covered call (as defined in section 1092(c)(4) but
without regard to the requirement that gain or loss with respect
to the option not be ordinary income or loss).
    (d)  Dividends from a DISC or former DISC. -- No deduction
shall be allowed under section 243 in respect of a dividend from
a corporation which is a DISC or former DISC (as defined in
section 992(a)) to the extent such dividend is paid out of the
corporations's accumulated DISC income or previously taxed
income, or is a deemed distribution pursuant to section
995(b)(1).
    (e)  Certain distributions to satisfy requirements. -- No
deduction shall be allowed under section 243(a) with respect to a
dividend received pursuant to a distribution described in section
936(h)(4).
    (f)  Cross reference. --

    246A.  Dividends received deduction reduced where portfolio
stock is debt financed
    (a)  General rule. -- In the case of any dividend on
debt-financed portfolio stock, there shall be substituted for the
percentage which (but for this subsection) would be used in
determining the amount of the deduction allowable under section
243, 244, or 245(a) a percentage equal to the product of --
    (1)  70 percent (80 percent in the case of any dividend from
a 20-percent owned corporation as defined in section 243(c)(2)),
and
    (2)  100 percent minus the average indebtedness percentage.
    (b)  Section not to apply to dividends for which 100 percent
dividends received deduction allowable. -- Subsection (a) shall
not apply to --
    (1)  qualifying dividends (as defined in section 243(b)
without regard to section 243(c)(4)), and
    (2)  dividends received by a small business investment
company operating under the Small Business Investment Act of
1958.
    (c)  Debt financed portfolio stock. -- For purposes of this
section --
    (1)  In general. -- The term "debt financed portfolio stock"
means any portfolio stock if at some time during the base period
there is portfolio indebtedness with respect to such stock.
    (2)  Portfolio stock. -- The term "portfolio stock" means
any stock of a corporation unless --
    (A)  as of the beginning of the ex-dividend date, the
taxpayer owns stock of such corporation --
    (i)  possessing at least 50 percent of the total voting
power of the stock of such corporation, and
    (ii)  having a value equal to at least 50 percent of the
total value of the stock of such corporation, or
    (B)  as of the beginning of the ex-dividend date --
    (i)  the taxpayer owns stock of such corporation which would
meet the requirements of subparagraph (A) if "20 percent" were
substituted for "50 percent" each place it appears in such
subparagraph, and
    (ii)  stock meeting the requirements of subparagraph (A) is
owned by 5 or fewer corporate shareholders.
    (3)  Special rule for stock in a bank or bank holding
company. --
    (A)  In general. -- If, as of the beginning of the
ex-dividend date, the taxpayer owns stock of any bank or bank
holding company having a value equal to at least 80 percent of
the total value of the stock of such bank or bank holding
company, for purposes of paragraph (2)(A)(i), the taxpayer shall
be treated as owning any stock of such bank or bank holding
company which the taxpayer has an option to acquire.
    (B)  Definitions. -- For purposes of subparagraph (A) --
    (i)  Bank. -- the term "bank" has the meaning given such
term by section 581.
    (ii)  Bank holding company. -- The term "bank holding
company" means a bank holding company (within the meaning of
section 2(a) of the Bank Holding Company Act of 1956).
    (4)  Treatment of certain preferred stock. -- for purposes
of determining whether the requirements of subparagraph (A) or
(B) of paragraph (2) or of subparagraph (A) of paragraph (3) are
met, stock described in section
1504(a)(4) shall not be taken into account.
    (d)  Average indebtedness percentage. -- For purposes of
this section --
    (1)  In general. -- Except as provided in paragraph (2), the
term "average indebtedness percentage" means the percentage
obtained by dividing --
    (A)  the average amount (determined under regulations
prescribed by the Secretary) of the portfolio indebtedness with
respect to the stock during the base period, by
    (B)  the average amount (determined under regulations
prescribed by the Secretary) of the adjusted basis of the stock
during the base period.
    (2)  Special rule where stock held throughout base period.
-- In the case of any stock which was not held by the taxpayer
throughout the base period, paragraph (1) shall be applied as if
the base period consisted only of that portion of the base period
during which the stock was held by the taxpayer.
    (3)  Portfolio indebtedness. --
    (A)  In general. -- The term "portfolio indebtedness" means
any indebtedness directly attributable to investment in the
portfolio stock.
    (B)  Certain amounts received from short sale treated as
indebtedness. -- for purposes of subparagraph (A), any amount
received from a short sale shall be treated as indebtedness for
the period beginning on the day on which such amount is received
and ending on the day the short sale is closed.
    (4)  Base period. -- The term "base period" means, with
respect to any dividend, the shorter of --
    (A)  the period beginning on the ex-dividend date for the
most recent previous dividend on the stock and ending on the day
before the ex-dividend date for the dividend involve, or
    (B)  the 1-year period ending on the day before the
ex-dividend date for the dividend involved.
    (e)  Reduction in dividends received deduction not to exceed
allocable interest. -- Under regulations prescribed by the
Secretary, any reduction under this section in the amount
allowable as a deduction under section 243, 244, or 245 with
respect to any dividend shall not exceed the amount of any
interest deduction (including any deductible short sale expense)
allocable to such dividend.
    (f)  Regulations. -- The regulations prescribed for purposes
of this section under section 7701(f) shall include regulations
providing for the disallowance of interest deduction or other
appropriate treatment (in lieu of reducing the dividend received
deduction) where the obligor of the indebtedness is a person
other than the person receiving the dividend.

    247.  Dividends paid on certain preferred stock of public
utilities
    (a)  Amount of deduction. -- In the case of a public
utility, there shall be allowed as a deduction an amount computed
as follows:
    (1)  First determine the amount which is the lesser of --
    (A)  the amount of dividends paid during the taxable year on
its preferred stock, or
    (B)  the taxable income for the taxable year (computed
without the deduction allowed by this section).
    (2)  Then multiply the amount determined under paragraph (1)
by the fraction --
    (A)  the numerator of which is 14 percent, and
    (B)  the denominator of which is that percentage which equal
the highest rate of tax specified in section 11(b).
    For purposes of the deduction provided in this section, the
amount of dividends paid shall not include any amount distributed
in the current taxable year with respect to dividends unpaid and
accumulated in any taxable year ending before October 1, 1942.
Amounts distributed in the current taxable year with respect to
dividends unpaid and accumulated for a prior taxable year                             shall
for purposes of this subsection be deemed to be distributed with
respect to the earliest year or years for which there are
dividends unpaid and accumulated.
    (b)  Definitions. -- For purposes of this section and
section 244 --
    (1)  Public utility. -- The term "public utility" means a
corporation engaged in the furnishing of telephone service or in
the sale of electrical energy, gas, or water, if the rates for
such furnishing or sale, as the case may be, have been
established or approved by a State or political subdivision
thereof or by an agency or instrumentality of the United States
or by a public utility or public service commission or other
similar body of the District of Columbia or of any State or
political subdivision thereof.
    (2)  Preferred stock. --
    (A)  In general. -- The term "preferred stock" means stock
issued before October 1, 1942, which during the whole of the
taxable year (or the part of the taxable year after its issue)
was stock the dividends in respect of which were cumulative,
limited to the same amount, and payable in preference to the
payment of dividends on other stock.
    (B)  Certain stock issued on or after October 1, 1942. --
Stock issued on or after October 1, 1942, shall be deemed for
purposes of this paragraph to have been issued before October 1,
1942, if it was issued to refund or replace bonds or debentures
issued before October 1, 1942, or to refund or replace other
preferred stock (including stock which is preferred stock by
reason of this subparagraph or), but only the extent that the par
or stated value of the new stock does not exceed the par, stated,
or face value of the bonds or debentures issued before October 1,
1942, or the other preferred stock, which such new stock is
issued to refund or replace.
    (C)  Determination under regulations. -- The determination
of whether stock was issued to refund or replace bonds or
debentures issued before October 1, 1942, or to refund or replace
other preferred stock, shall be made under regulations prescribed
by the Secretary.
    (D)  Issuance of stock. -- For purposes of subparagraph (B),
issuance of stock includes issuance either by the same or another
corporation in a transaction which is a reorganization (as
defined in section (368(a)), or a transaction subject to part VI
of subchapter O (relating to exchanges in SEC obedience orders),
or the respectively corresponding provisions of the Internal
Revenue Code of 1939.

    248.  Organizational expenditures
    (a)  Election to amortize. -- The organizational
expenditures of a corporation may, at the election of the
corporation (made in accordance with regulation prescribed by the
Secretary), be treated as deferred expenses.  In computing
taxable income, such deferred expenses shall be allowed as a
deduction ratably over such period of not less than 60 months as
may be selected by the corporation (beginning with the month in
which the corporation begins business).
    (b)  Organizational expenditures defined. -- The term
"organizational expenditures" means any expenditure which --
    (1)  is incident to the creation of the corporation;
    (2)  is chargeable to capital account; and
    (3)  is of a character which, if expended incident to the
creation of a corporation having a limited life, would be
amortizable over such life.
    (c)  Time for and scope of election. -- The election
provided by subsection (a) may be made for any taxable year
beginning after December 31, 1953, but only if made not later
than the time prescribed bylaw for filing the return for such
taxable year (including extensions thereof).  the period so
elected shall be adhered to in computing the taxable income of
the corporation for the taxable year for which the election is
made and all subsequent taxable years.  The election shall apply
only with respect to expenditures paid or incurred on or after
August 16, 1954.

    249.  Limitation on deduction of bond premium on repurchase
    (a)  General rule. -- No deduction shall be allowed to the
issuing corporation for any premium paid or incurred upon the
repurchase of a bond, debenture, note, or certificate or other
evidence of indebtedness which is convertible into the stock of
the issuing corporation, or a corporation in control of, or
controlled by, the issuing corporation, to the extent the
repurchase price exceeds an amount equal to the adjusted issue
price plus a normal call premium on bonds or other evidences of
indebtedness which are not convertible.  the preceding sentence
shall apply to the extent that the corporation can demonstrate to
the satisfaction of the Secretary that such excess is
attributable to the cost of borrowing and is not attributable to
the conversion feature.
    (b)  Special rules. -- For purposes of subsection (a) --
    (1)  Adjusted issued price. -- The adjusted issue price is
the issued price (as defined in sections 1273(b) and 1274)
increased by any amount of discount deducted before repurchase,
or, in the case of bonds or other evidences of indebtedness
issued after February 28, 1913, decreased by any amount of
premium included in gross income before repurchase by the issuing
corporation.
    (2)  Control. -- The term "control" has the meaning assigned
to such term by section 368(c).

    250.  Certain payments to the National Railroad Passenger
Corporation
    (a)  General rule. -- If --
    (1)  any corporation which is a rail carrier (as defined in
section 10102(20) of title 49) makes a payment in cash, rail
passenger equipment, or services to the National Railroad
Passenger Corporation (hereinafter in this section referred to as
the "Passenger Corporation") pursuant to a contract entered into
under section 401(a) of the Rail Passenger Service Act, and
    (2)  no stock in the Passenger Corporation is issued at any
time to such corporation in connection with any contract entered
into under such section 401(a).
    then the amount of such payment shall (subject to subsection
(c)) be allowed as a deduction for the taxable year in which it
is made.
    (b)  When payment is made. -- Under regulations prescribed
by the Secretary, a payment in rail passenger equipment shall be
treated as made when title to the equipment is transferred, and a
payment in services shall be treated as made when the services
are rendered.
    (c)  Effect of certain subsequent acquisitions of stock. --
    (1)  Disallowance of deductions. -- If any deduction has
been allowed under subsection (a) to a corporation and such
corporation (or a successor corporation) acquires any stock in
the Passenger Corporation (other than in a transaction described
in section 374 or 381) before the close of the 36-month period
which begins with the day on which the last payment is made to
the Passenger Corporation pursuant to the contract entered into
under such section 401(a), then such deduction shall be
disallowed (as of the close of the taxable year for which it was
allowed under subsection (a)).
    (2)  Collection of deficiency. -- If any deduction is
disallowed by reason of paragraph (1), then the periods of
limitation provided in sections 6501 and 6502 on the making of an
assessment and the collection by levy or a proceeding in court
shall, with respect to any deficiency (including interest and
additions to the tax) resulting from such a disallowance, include
one year following the date on which the person acquiring the
stock which results in the disallowance (in accordance with
regulations prescribed by the Secretary) notifies the Secretary
of such acquisition; and such assessment and collection may be
made notwithstanding any provision of law or rule of law which
otherwise would prevent such assessment and collection.
    (d)  Members of controlled group. -- Under regulations
prescribed by the Secretary, if a corporation is a member of a
controlled group of corporations (within the meaning of section
1563), subsections (a)(2) and (c) shall be applied by treating
all members of such controlled group as one corporation.

    261.  General rule for disallowance of deductions
    In computing taxable income no deduction shall in any case
be allowed in respect of the items specified in this part.

    262.  Personal, living, and family expenses
    (a)  General rule. -- Except as otherwise expressly provided
in this chapter, no deduction shall be allowed for personal,
living, or family expenses.
    (b)  Treatment of certain phone expenses. -- For purposes of
subsetion (a), in the case of an individual, any charge
(including taxes thereon) for basic local telephone service with
respect to the 1st telephone line provided to any residence of
the taxpayer shall be treated as a personal expense.

    263.  Capital expenditures
    (a)  General rule. -- No deduction shall be allowed for --
    (1)  Any amount paid out for new buildings or for permanent
improvements or betterments made to increase the value of any
property or estate.  This paragraph shall not apply to --
    (A)  expenditures for the development of mines or deposits
deductible under section 616,
    (B) research and experimental expenditures deductible under
section 174,
    (C)  soil and water conservation expenditures deductible
under section 175,
    (D)  expenditures by farmers for fertilizer, etc.,
deductible under section 180,
    (E)  expenditures for removal of architectural and
transportation barriers to the handicapped and elderly which the
taxpayer elects to deduct under section 190,
    (F)  expenditures for tertiary injectant with respect to
which a deduction is allowed under section 193 or
    (G)  expenditures for which a deduction is allowed under
section 179.
    (2)  Any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance is or has been
made.
    (b)  Repealed.
    (c)  Intangible drilling and development costs in the case
of oil and gas wells and geothermal wells. -- Notwithstanding
subsection (a), and except as provided in subsection (i),
regulations shall be prescribed by the Secretary under this
subtitle corresponding to the regulations which granted the
option to deduct as expenses intangible drilling and development
costs in the case of oil and gas wells and which were recognized
and approved by the congress in House Concurrent Resolution 50,
Seventy-ninth Congress.  such regulations shall also grant the
option to deduct as expenses intangible drilling and development
costs in the case of wells drilled for any geothermal deposit (as
defined in section 613(e)(3)) to the same extent and in the same
manner as such expenses are deductible in the case of oil and gas
wells.  This subsection shall not apply with respect to any costs
to which any deduction is allowed under section 59(d) or 291.
    (d)  Expenditures in connection with certain railroad
rolling stock. -- In the case of expenditures in connection with
rehabilitation of a unit of railroad rolling stock (except a
locomotive) used by a domestic common carrier by railroad which
would, but for this subsection, be properly chargeable to capital
account, such expenditures, if during any 12-mont period they do
not exceed an amount equal to 20 percent of the basis of such
unit in the hands of the taxpayer, shall, at the election of the
taxpayer, be treated (notwithstanding subsection (a)) as
deductible repairs under section 162 or 212.  An election under
this subsection shall be made for any taxable year at such time
and in such manner as the Secretary prescribes by regulations.
an election may not be made under this subsection for any taxable
year to which an election under subsection for any taxable year
to which an electing under  subsection (e) applies to railroad
rolling stock (other than locomotives).
    (e)  Repealed.
    (f)  Railroad ties. -- In the case of a domestic common
carrier by rail (including a railroad switching or terminal
company) which uses the retirement-replacement method of
accounting for depreciation of its railroad track, expenditures
for acquiring and installing replacement ties of any material
(and fastenings related to such ties) shall be accorded the same
tax accounting treatment as expenditures for replacement ties of
wood (and fastenings related to such ties).
    (g)  Certain interest and carrying costs in the case of
straddles.
    (1)  General rule. -- No deduction shall be allowed for
interest and carrying charges properly allocable to personal
property which is part of a straddle (as defined in section
1092(c)).  Any amount not allowed as a deduction by reason of the
preceding sentence shall be chargeable to the capital account
with respect to the personal property to which such amount
relates.
    (2)  Interest and carrying charges defined. -- for purposes
of paragraph (1), the term "interest and carrying charges" means
the excess of --
    (A)  the sum of --
    (i)  interest on indebtedness incurred or continued to
purchase or carry the personal property, and
    (ii)  all other amounts (including charges to insure, store,
or transport the personal property) paid or incurred to carry the
personal property, over
    (B)  the sum of --
    (i)  the amount of interest (including original issue
discount)
includible in gross income for the taxable year with respect to
the property described in subparagraph (A),
    (ii)  any amount treated as ordinary income under section
1271(a)(3)(A), 1278, or 1281(a) with respect to such property for
the taxable year,
    (iii)  the excess of any dividends includible in gross
income with respect to such property for the taxable year over
the amount of any deduction allowable with respect to such
dividends under section 243, 244, or 245, and
    (iv)  any amount which is a payment with respect to a
security loan (within the meaning of section 512(a)(5))
includible in gross income with respect to such property for the
taxable year.
    For purposes of subparagraph (A), the term "interest"
includes any amount paid or incurred in connection with personal
property used in a short sale.
    (3)  Exception for hedging transactions. -- this subsection
shall not apply in the case of any hedging transaction (as
defined in section 1256(e)).
    (4)  Application with other provisions. --
    (A)  Subsection (c). -- In the case of any shortsale, this
subsection shall be applied after subsection (h).
    (B)  Section 1277 or 1282. -- In the case of any obligation
to which section 1277 or 1282 applies, this subsection shall be
applied after section 1277 or 1282.
    (h)  Payments in lieu of dividends in connection with short
sales. --
    (1)  In general. -- If --
    (A)  a taxpayer makes any payment with respect to any stock
used by such taxpayer in short sale and such payment is in lieu
of a dividend payment on such stock, and
    (B)  the closing of such short sale occurs on or before the
45th day after the date of such short sale.
    then no deduction shall be allowed for such payment.  The
basis of the stock used to close the short sale shall be
increased by the amount not allowed as a deduction by reason of
the preceding sentence.
    (2)  Longer period in case of extraordinary dividends. -- If
the payment described in paragraph (1)(A) is in respect of an
extraordinary dividend, paragraph (1)(B) shall be applied by
substituting "the day 1 year after the date of such short sale"
for "the 45th day after the date of such short sale".
    (3)  Extraordinary dividend. -- for purposes of this
subsection, the term "extraordinary dividend" has the meaning
given to such term by section 1059(c); except that such section
shall be applied by treating the amount realized by the taxpayer
in the short sale as his adjusted basis in the stock.
    (4)  Special rule where risk of loss diminished. -- The
running of any period of time applicable under paragraph (1)(B)
(as modified by paragraph (2)) shall be suspended during any
period in which --
    (A)  the taxpayer holds, has an option to buy, or is under a
contractual obligation to buy, substantially identical stock or
securities, or
    (B) under regulations prescribed by the Secretary, a
taxpayer has diminished his risk of loss by holding 1 or more
other positions with respect to substantially similar or related
property.
    (5)  Deduction allowable to extent of ordinary income from
amounts paid by lending broker for use of collateral. --
    (A)  In general. -- Paragraph (1) shall apply only to the
extent that the payments or distributions with respect to any
short sale exceed the amount which --
    (i)  is treated as ordinary income by the taxpayer, and
    (ii)  is received by the taxpayer as compensation for the
use of any collateral with respect to any stock used in such
short sale.
    (B)  Exception not to apply to extraordinary dividends. --
Subparagraph (A) shall not apply if one or more payments or
distributions is in respect of an ordinary dividend.
    (6)  Application of this subsection with subsection (g). --
In the case of any short sale, this subsection shall be applied
before subsection (g).
    (i)  Special rules for intangible drilling and development
costs incurred outside the United States. -- In the case of
intangible drilling and development costs paid or incurred with
respect to an oil, gas, or geothermal well located outside the
United States --
    (1)  subsection (c) shall not apply, and
    (2)  such costs shall --
    (A)  at the election of the taxpayer, be included in
adjusted basis for purposes of computing the amount of any
deduction allowable under section 611 (determined without regard
to section 613), or
    (B)  if subparagraph (A) does not apply, be allowed as a
deduction ratably over the 10-taxable year period beginning with
the taxable year in which such costs were paid or incurred.
    This subsection shall not apply to costs paid or incurred
with respect to a nonproductive well.

    263A.  Capitalization and inclusion in inventory costs of
certain expenses
    (a)  Nondeductibility of certain direct and indirect costs.
--
    (1)  In general. -- In the case of any property to which
this section applies, any costs described in paragraph (2) --
    (A)  in the case of property which is inventory in the hands
of the taxpayer, shall be included in inventory costs, and
    (B)  in the case of any other property, shall be
capitalized.
    (2)  Allocable costs. -- The costs described in this
paragraph with respect to any property are --
    (A)  the direct costs of such property, and
    (B)  such property's proper share of those indirect costs
(including taxes) part or all of which are allocable to such
property.
    Any cost which (but for this subsection) could not be taken
into account in computing taxable income for any taxable year
shall not be treated as a cost described in this paragraph.
    (b)  Property to which section applies. -- Except as
otherwise provided in this section, this section shall apply to
--
    (1)  Property produced by taxpayer. -- Real or tangible
personal property produced by the taxpayer.
    (2)  Property acquired for resale. --
    (A)  In general. -- Real or personal property described in
section 1221(1) which is acquired by the taxpayer for resale.
    (B)  Exception for taxpayer with gross receipts of
$10,000,000 or less. -- Subparagraph (A) shall not apply to any
personal property acquired during any taxable year by the
taxpayer for resale if the average annual gross receipts of the
taxpayer (or any predecessor) for the 3-taxable year period
ending with the taxable year preceding such taxable year do not
exceed $10,000,000.
    (C)  Aggregation rules, etc. -- For purposes of subparagraph
(B), rules similar to the rules of paragraphs (2) and (3) of
section 448(c) shall apply.
    For purposes of paragraph (1), the term "tangible personal
property" shall include a film, sound recording, video tape,
book, or similar property.
    (c)  General exceptions. --
    (1)  Personal use property. -- This section shall not apply
to any property produced by the taxpayer for use by the taxpayer
other than in a trade or business or an activity conducted for
profit.
    (2)  Research and experimental expenditures. -- This section
shall not apply to any amount allowable as a deduction under
section 174.
    (3)  Certain development and other costs of oil and gas
wells or other mineral property. -- This section shall not apply
to any cost allowable as a deduction under section 263(c),
263(i), 291(b)(2), 616, or 617.
    (4)  Coordination with long-term contract rules. -- This
section shall not apply to any property produced by the taxpayer
pursuant to a long-term contract.
    (5)  Timer and certain ornamental trees. -- This scion shall
not apply to --
    (A)  trees raised, harvested, or grown by the taxpayer other
than trees described in clause (ii) of subsection (e)(4)(B)
(after application of the last sentence thereof), and
    (B)  any real property underlying such trees.
    (6)  Coordination with section 59(e). -- Paragraphs (2) and
(3) shall apply to any amount allowable as a deduction under
section 59(e) for qualified expenditures described in
subparagraphs (B), (C), (D), and (E) of paragraph (2) thereof.
    (d)  Exception for farming businesses. --
    (1)  Section not to apply to certain property. --
    (A)  In general. -- This section shall not apply to any of
the following which is produced by the taxpayer in a farming
business:
    (i)  Any animal.
    (ii)  Any plant which has a reproductive period of 2 years
or less.
    (B)  Exception for taxpayers required to use accrual method.
-- Subparagraph (A) shall not apply to any corporation,
partnership, or tax shelter required to use an accrual method of
accounting under section 447 or
448(a)(3).
    (2)  Treatment of certain plants lost by reason of casualty.
--
    (A)  In general. -- If plants bearing an edible crop for
human consumption were lost or damaged (while in the hands of the
taxpayer) by reason of freezing temperatures, disease, drought,
pests, or casualty, this section shall not apply to any costs of
the taxpayer of replanting plants bearing the same type of crop
(whether on the same parcel of land on which such lost or damaged
plants were located or any other parcel of land of the same
acreage in the United States).
    (B)  Special rules for person with minority interest who
materially participates. -- Subparagraph (A) shall apply to
amounts paid or incurred by a person (other than the taxpayer
described in subparagraph (A)) if-
    (i)  the taxpayer described in subparagraph (A) has an
equity interest of more than 50 percent in the plants described
in subparagraph (A) at all times during the taxable year in which
such amounts were paid or incurred, and
    (ii)  such other person holds any part of the remaining
equity interest and materially participates in the planting,
maintenance, cultivation, or development of the plants described
in subparagraph (A) during the taxable year in which such amounts
were paid or incurred.
    The determination of whether an individual materially
participates in any activity shall be made in a manner similar to
the manner in which such determination is made under section
2032A(d)(6).
    (3)  Election to have this section not apply. --
    (A)  In general. -- If a taxpayer makes an election under
this paragraph, this section shall not apply to any plant
produced in any farming business carried on by such taxpayer.
    (B)  Certain persons not eligible. -- No election may be
made under this paragraph by a corporation, partnership, or tax
shelter, if such corporation, partnership, or tax shelter is
required to use an accrual method of accounting under section 447
or 448(a)(3).
    (C)  Special rule for citrus and almond growers. -- An
election under this paragraph shall not apply with respect to any
item which is attributable to the planting, cultivation,
maintenance, or development of any citrus or almond grove (or
part thereof) and which is incurred before the close of the 4th
taxable year beginning with the taxable year in which the trees
were planted.  for purposes of the preceding sentence, the
portion of a citrus or almond grove planted in 1 taxable year
shall be treated separately from the portion of such grove
planted in another taxable year.
    (D)  Election. -- Unless the Secretary otherwise consents,
an election under this paragraph may be made only for the
taxpayer's 1st taxable year which begins after December 31, 1986,
and during which the taxpayer engages in a farming business.  any
such election, once made, may be revoked only with the consent of
the Secretary.
    (e)  Definitions and special rules for purposes of
subsection (d). --
    (1)  Recapture of expense amounts on disposition. --
    (A)  In general. -- In the case of any plant with respect to
which amounts would have been capitalized under subsection (a)
but for an election under subsection (d)(3) --
    (i)  such plant (if not otherwise section 1245 property)
shall be treated as section 1245 property, and
    (ii)  for purposes of section 1245, the recapture amount
shall be treated as a deduction allowed for depreciation with
respect to such property.
    (B)  Recapture amount. -- For purposes of subparagraph (A),
the term "recapture amount" means any amount allowable as a
deduction to the taxpayer which, but for an election under
subsection (d)(3), would have been capitalized with respect to
the plant.
    (2)  Effects of election on depreciation. --
    (A)  In general. -- If the taxpayer (or any related person)
makes an election under subsection (d)(3), the provisions of
section 168(g)(2) (relating to alternative depreciation) shall
apply to all property of the taxpayer used predominantly in the
farming business and placed in service in any taxable year during
which any such election is in effect.
    (B)  Related person. -- For purposes of subparagraph (A),
the term "related person" means --