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the date of the enactment of this Act. 3137. Certain self-created property not treated as a capital asset (a) Patents, etc Section 1221(a)(3) is amended by inserting a patent, invention, model or design (whether or not patented), a secret formula or process, before a copyright . (b) Self-Created musical works Section 1221(b) is amended by striking paragraph (3). (c) Effective date The amendments made by this section shall apply to dispositions after December 31, 2014. 3138. Repeal of special rule for sale or exchange of patents (a) In general Part IV of subchapter P of chapter 1 is amended by striking section 1235 (and by striking the item relating to such section in the table of sections of such part). (b) Conforming amendments (1) Section 483(d) is amended by striking paragraph (4). (2) (A) Section 871(a)(1), as amended by the preceding provisions of this Act, is amended by striking subparagraph (B) and by redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively. (B) Section 871(g)(3) is amended by striking (a)(1)(C) and inserting (a)(1)(B) . (C) Subsections (h)(1) and (i)(1) of section 871 are each amended by striking (1)(C) and inserting (1)(B) . (D) Section 1441, as amended by the preceding provisions of this Act, is amended— (i) in subsections (b) and (c)(8), by striking 871(a)(1)(C) and inserting 871(a)(1)(B) , and (ii) in subsections (b) and (c)(5), by striking 871(a)(1)(D) and inserting 871(a)(1)(C) . (E) Section 1442(a), as amended by the preceding provisions of this Act, is amended— (i) by striking 871(a)(1)(C) and (D) and inserting 871(a)(1)(B) and (C) , and (ii) by striking 871(a)(1)(D) and inserting 871(a)(1)(C) . (3) Section 901(l)(5) is amended by striking without regard to section 1235 or any similar rule and inserting without regard to any provision which treats a disposition as a sale or exchange of a capital asset held for more than 1 year or any similar provision . (4) Section 1274(c)(3) is amended by striking subparagraph (E) and redesignating subparagraph (F) as subparagraph (E). (5) Subsections (b) and (c)(5) of section 1441, as amended by the preceding provisions of this Act, are each amended by striking gains subject to tax under section 871(a)(1)(C), and gains on transfers described in section 1235 made on or before October 4, 1966 and inserting and gains subject to tax under section 871(a)(1)(C) . (c) Effective date The amendments made by this section shall apply to dispositions after December 31, 2014. 3139. Depreciation recapture on gain from disposition of certain depreciable realty (a) In general Subsection (a) of section 1250 is amended to read as follows: (a) In general Except as otherwise provided in this section, if section 1250 property is disposed of after December 31, 2014, the amount of gain with respect to such property which is treated as ordinary income shall be an amount equal to the lesser of— (1) the sum of— (A) the amount of additional depreciation attributable to periods before January 1, 2015, in respect of such property, and (B) the amount of depreciation adjustments attributable to periods after December 31, 2014, in respect of such property, or (2) the excess of the amount realized (or, in the case of a disposition other than a sale, exchange, or involuntary conversion, the fair market value of such property), over the adjusted basis of such property. . (b) Conforming amendments (1) Section 267(e)(5)(D)(i) is amended to read as follows: (i) any interest in— (I) any 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), (II) dwelling units which, on the average, were held for occupancy by families or individuals eligible to receive subsidies under section 8 of the

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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), (II) 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, (III) any section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), or (IV) any section 1250 property with respect to which a loan is made or insured under title V of the Housing Act of 1949, and . (2) Section 1250(b) is amended by striking paragraph (4) and by redesignating paragraph (5) as paragraph (4). (3) Section 1250(c) is amended by striking For purposes of this section and inserting For purposes of this title (4) (A) Section 1250(d)(5)(B)(i) is amended by striking and the applicable percentage for the property had been 100 percent . (B) Section 1250(d)(5)(B)(ii) is amended to read as follows: (ii) the amount of such gain (if any) to which section 751(b) applied. . (5) Section 1250(d) is amended by striking paragraph (7). (6) Section 1250 is amended by striking subsections (e) and (f) and by redesignating subsections (g) and (h) as subsections (e) and (f), respectively. (c) Effective date The amendments made by this section shall apply to dispositions after December 31, 2014. 3140. Common deduction conforming amendments (a) In general (1) Section 1245(a)(2)(C) is amended by striking section 179, and all that follows through or 194 and inserting section 179 or (as in effect before repeal by the Tax Reform Act of 2014 ) section 179A, 179B, 179C, 179D, 179E, 181, 190, 193, or 194, (2) Section 1245(a)(3)(C) is amended by striking section 169 and all that follows through or 194 and inserting section 179, 185, 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), or (as in effect before repeal by the Tax Reform Act of 2014 ) section 169, 179A, 179B, 179C, 179D, 179E, 190, 193, or 194 . (3) Section 263(a)(1) is amended by striking subparagraphs (C), (D), (F), (H), (I), (J), (K), and (L) and by redesignating subparagraphs (E) and (G) as subparagraphs (C) and (D), respectively. (4) Section 280C, as amended by the preceding provisions of this Act, is amended by redesignating subsections (c) and (g) as subsections (b) and (c), respectively. (b) Effective date Each portion of each amendment made by this section shall take effect as if included in the provision of this subtitle to which such portion relates. C Reform of business credits 3201. Repeal of credit for alcohol, etc., used as fuel (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 40 (and by striking the item relating to such section in the table of sections for such subpart). (b) Repeal of corresponding excise tax credits (1) Credit Subchapter B of chapter 65 is amended by striking section 6426 (and by striking the item relating to such section in the table of sections for such subchapter). (2) Payment Section 6427 is amended by striking subsection (e). (c) Conforming amendments (1) Section 38(b) is amended by striking paragraph (3). (2) Section 6416(a)(4)(C) is amended— (A) by striking section 6427(i)(4) and inserting section 6427(i)(3) , and (B) by striking section 6427(i)(3)(B) and inserting subparagraph (B) thereof . (3) Section 6427(i) is amended by striking paragraph (3) and by redesignating paragraph (4) as paragraph (3). (4) Section 6427(i)(3), as redesignated by paragraph (2), is amended— (A) by striking the sentence at the end of subparagraph (A), (B) by redesignating subparagraph (B) as subparagraph (C), and (C) by inserting after subparagraph (A) the

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amended— (A) by striking section 6427(i)(4) and inserting section 6427(i)(3) , and (B) by striking section 6427(i)(3)(B) and inserting subparagraph (B) thereof . (3) Section 6427(i) is amended by striking paragraph (3) and by redesignating paragraph (4) as paragraph (3). (4) Section 6427(i)(3), as redesignated by paragraph (2), is amended— (A) by striking the sentence at the end of subparagraph (A), (B) by redesignating subparagraph (B) as subparagraph (C), and (C) by inserting after subparagraph (A) the following new subparagraph: (B) Payment of claim Notwithstanding subsection (l)(1), if the Secretary has not paid pursuant to a claim filed under subsection (b)(4), (l)(4)(C)(ii), or (l)(5) within 45 days of the date of the filing of such claim (20 days in the case of an electronic claim), the claim shall be paid with interest from such date determined by using the overpayment rate and method under section 6621. . (5) Subpart B of part III of subchapter A of chapter 32 is amended by striking section 4104 (and by striking the item relating to such section in the table of sections for such subpart). (6) Section 6501(m) is amended by striking 40(f), . (7) Section 9503(b)(1) is amended by striking the second sentence. (d) Effective date The amendments made by this section shall apply to fuels sold or used after December 31, 2013. 3202. Repeal of credit for biodiesel and renewable diesel used as fuel (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 40A (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (17). (2) Part II of subchapter B of chapter 1 is amended by striking section 87 (and by striking the item relating to such section in the table of sections for such subpart). (3) Section 4101(a)(1) is amended by striking , every person producing and all that follows through section 40(b)(6)(E)) . (c) Effective date The amendments made by this section shall apply to fuels sold or used after December 31, 2013. 3203. Research credit modified and made permanent (a) Permanent simplification of incremental research credit and elimination of credit for energy research consortium payments (1) In general Subsection (a) of section 41 is amended to read as follows: (a) In general For purposes of section 38, the research credit determined under this section for the taxable year shall be an amount equal to the sum of— (1) 15 percent of so much of the qualified research expenses for the taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined, plus (2) 15 percent of so much of the basic research payments for the taxable year as exceeds 50 percent of the average basic research payments for the 3 taxable years preceding the taxable year for which the credit is being determined. . (2) Repeal of termination Section 41 is amended by striking subsection (h). (3) Conforming amendments (A) Subsection (c) of section 41 is amended to read as follows: (c) Determination of average research expenses for prior years (1) Special rule in case of no qualified research expenditures in any of 3 preceding taxable years In any case in which the taxpayer has no qualified research expenses in any one of the 3 taxable years preceding the taxable year for which the credit is being determined, the amount determined under subsection (a)(1) for such taxable year shall be equal to 10 percent of the qualified research expenses for the taxable year. (2) Consistent treatment of expenses (A) In general Notwithstanding whether the period for filing a claim for credit or refund has expired for any taxable year taken into account in determining the average qualified research expenses, or average basic research payments, taken into account under subsection (a), the qualified research expenses and basic research payments taken into account in determining such averages shall be determined on a basis

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of the qualified research expenses for the taxable year. (2) Consistent treatment of expenses (A) In general Notwithstanding whether the period for filing a claim for credit or refund has expired for any taxable year taken into account in determining the average qualified research expenses, or average basic research payments, taken into account under subsection (a), the qualified research expenses and basic research payments taken into account in determining such averages shall be determined on a basis consistent with the determination of qualified research expenses and basic research payments, respectively, for the credit year. (B) Prevention of distortions The Secretary may prescribe regulations to prevent distortions in calculating a taxpayer’s qualified research expenses or basic research payments caused by a change in accounting methods used by such taxpayer between the current year and a year taken into account in determining the average qualified research expenses or average basic research payments taken into account under subsection (a). . (B) Section 41(e) is amended— (i) by striking all that precedes paragraph (6) and inserting the following: (e) Basic research payments For purposes of this section— (1) In general The term basic research payment means, with respect to any taxable year, any amount paid in cash during such taxable year by a corporation to any qualified organization for basic research but only if— (A) such payment is pursuant to a written agreement between such corporation and such qualified organization, and (B) such basic research is to be performed by such qualified organization. (2) Exception to requirement that research be performed by the organization In the case of a qualified organization described in subparagraph (C) or (D) of paragraph (3), subparagraph (B) of paragraph (1) shall not apply. , (ii) by redesignating paragraphs (6) and (7) as paragraphs (3) and (4), respectively, and (iii) in paragraph (4) as so redesignated, by striking subparagraphs (B) and (C) and by redesignating subparagraphs (D) and (E) as subparagraphs (B) and (C), respectively. (C) (i) Section 41(f)(1) is amended by striking , basic research payments, and amounts paid or incurred to energy research consortiums, in subparagraphs (A)(ii) and (B)(ii) and inserting and basic research payments . (ii) Section 41(f) is amended by striking paragraph (6). (4) Effective date (A) In general Except as provided in subparagraph (B), the amendments made by this subsection shall apply to taxable years beginning after December 31, 2013. (B) Paragraph (2) The amendment made by paragraph (2) shall apply to amounts paid or incurred after December 31, 2013. (b) Other reforms (1) Elimination of credit for computer software Subparagraph (E) of section 41(d)(4) is amended— (A) by striking Except to the extent provided in regulations, any research and inserting Any research , and (B) by striking which is developed by and all that follows through the end and inserting a period. (2) Elimination of increased credit for amounts paid to certain entities Paragraph (3) of section 41(b) is amended by striking subparagraphs (C) and (D). (3) Elimination of credit for supplies Subparagraph (A) of section 41(b)(2) is amended by inserting and at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii). (4) Elimination of election of reduced credit Section 280C(c) is amended by striking paragraphs (3) and (4). (5) Conforming amendments (A) The second sentence of section 41(b)(2)(A) is amended by striking Clause (iii) and inserting Clause (ii) . (B) Section 41(b)(2) is amended by striking subparagraph (C) and by redesignating subparagraph (D) as subparagraph (C). (C) Section 41(d)(2)(B) is amended by striking , computer software . (6) Effective date The amendments made by this subsection shall apply to taxable years beginning after December 31, 2013. 3204. Low-income housing tax credit (a) Reform of limitation and allocation rules (1) Allocations of eligible basis amounts rather than credit amounts

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; elimination of national reallocations Subsection (h) of section 42 is amended to read as follows: (h) Limitation on qualified basis with respect to projects located in a State (1) Qualified basis may not exceed limitation amount allocated to building (A) In general The qualified basis of any building which is taken into account under subsection (a) for any taxable year shall not exceed the limitation amount allocated to such building under this subsection. (B) Time for making allocation Except in the case of an allocation which meets the requirements of subparagraph (C), (D), (E), or (F), an allocation shall be taken into account under subparagraph (A) only if it is made not later than the close of the calendar year in which the building is placed in service. (C) Exception where binding commitment An allocation meets the requirements of this subparagraph if there is a binding commitment (not later than the close of the calendar year in which the building is placed in service) by the housing credit agency to allocate a specified limitation amount to such building beginning in a specified later taxable year. (D) Exception where increase in qualified basis (i) In general An allocation meets the requirements of this subparagraph if such allocation is made not later than the close of the calendar year in which ends the taxable year to which it will 1st apply but only to the extent the amount of such allocation does not exceed the limitation under clause (ii). (ii) Limitation The limitation under this clause is the excess of— (I) the qualified basis of such building as of the close of the 1st taxable year to which such allocation will apply, over (II) the qualified basis of such building as of the close of the 1st taxable year to which the most recent prior allocation with respect to such building applied. (iii) Housing credit basis limitation reduced by full allocation Notwithstanding clause (i), the full amount of the allocation shall be taken into account under paragraph (2). (E) Exception where 10 percent of cost incurred (i) In general An allocation meets the requirements of this subparagraph if such allocation is made with respect to a qualified building which is placed in service not later than the close of the second calendar year following the calendar year in which the allocation is made. (ii) Qualified building For purposes of clause (i), the term qualified building means any building which is part of a project if the taxpayer's basis in such project (as of the date which is 1 year after the date that the allocation was made) is more than 10 percent of the taxpayer's reasonably expected basis in such project (as of the close of the second calendar year referred to in clause (i)). Such term does not include any existing building unless a credit is allowable under subsection (e) for rehabilitation expenditures paid or incurred by the taxpayer with respect to such building for a taxable year ending during the second calendar year referred to in clause (i) or the prior taxable year. (F) Allocation of credit on a project basis (i) In general In the case of a project which includes (or will include) more than 1 building, an allocation meets the requirements of this subparagraph if— (I) the allocation is made to the project for a calendar year during the project period, (II) the allocation only applies to buildings placed in service during or after the calendar year for which the allocation is made, and (III) the portion of such allocation which is allocated to any building in such project is specified not later than the close of the calendar year in which the building is placed in service. (ii) Project period For purposes of clause (i), the term project period means the period— (I) beginning with the 1st calendar year for which an allocation may be made for the 1st building placed in service as part of such project, and (II) ending with the calendar year the last building is placed in service as part of such project. (2) Allocated limitation amount to apply to all taxable years ending during or after allocation year Any

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close of the calendar year in which the building is placed in service. (ii) Project period For purposes of clause (i), the term project period means the period— (I) beginning with the 1st calendar year for which an allocation may be made for the 1st building placed in service as part of such project, and (II) ending with the calendar year the last building is placed in service as part of such project. (2) Allocated limitation amount to apply to all taxable years ending during or after allocation year Any limitation amount allocated to any building for any calendar year— (A) shall apply to such building for all taxable years in the compliance period ending during or after such calendar year, and (B) shall reduce the aggregate limitation amount of the allocating agency only for such calendar year. (3) Limitation amount for agencies (A) In general The limitation amount which a housing credit agency may allocate for any calendar year is the portion of the State limitation allocated under this paragraph for such calendar year to such agency. (B) State limitation initially allocated to State housing credit agencies Except as provided in subparagraph (F), the State limitation for each calendar year shall be allocated to the housing credit agency of such State. If there is more than 1 housing credit agency of a State, all such agencies shall be treated as a single agency. (C) State limitation The State limitation applicable to any State for any calendar year shall be an amount equal to the sum of— (i) the unused State limitation (if any) of such State for the preceding calendar year, (ii) the greater of— (I) $31.20 multiplied by the State population, or (II) $36,300,000, plus (iii) the amount of State limitation returned in the calendar year. (D) Unused State limitation For purposes of subparagraph (C)(i), the unused State limitation for any calendar year is the excess (if any) of the sum of the amounts described in clauses (ii) and (iii) of subparagraph (C) over the aggregate limitation amount allocated for such year. (E) State limitation returned in the calendar year For purposes of subparagraph (C)(iii), the amount of State limitation returned in the calendar year equals the limitation amount previously allocated within the State to any project— (i) which fails to meet the 10 percent test under paragraph (1)(E)(ii) on a date after the close of the calendar year in which the allocation was made, (ii) which does not become a qualified low-income housing project within the period required by this section or the terms of the allocation, or (iii) with respect to which an allocation is cancelled by mutual consent of the housing credit agency and the allocation recipient. (F) State may provide for different allocation For purposes of this paragraph, a State may by law provide (or a Governor of a State may proclaim) a different formula for allocating the State limitation among the State housing credit agencies in such State. (G) Population For purposes of this paragraph, determinations of the population of any State shall be made with respect to any calendar year on the basis of the most recent census estimate of the resident population of such State released by the Bureau of Census before the beginning of such calendar year. (H) Cost-of-living adjustment (i) In general In the case of a calendar year after 2015, the dollar amounts in subparagraph (C)(ii) 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(c)(2)(A) for such calendar year, determined by substituting calendar year 2014 for calendar year 2012 in clause (ii) thereof. (ii) Rounding (I) In the case of the dollar amount in subparagraph (C)(ii)(I), any increase under clause (i) which is not a multiple of 20 cents shall be rounded to the next lowest multiple of 20 cents. (II) In the case of the dollar amount in subparagraph (C)(ii)(II), any increase under clause (i) which is not a multiple of $100,000 shall be rounded to the next lowest multiple of $100,000. (4) Portion of State

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determined by substituting calendar year 2014 for calendar year 2012 in clause (ii) thereof. (ii) Rounding (I) In the case of the dollar amount in subparagraph (C)(ii)(I), any increase under clause (i) which is not a multiple of 20 cents shall be rounded to the next lowest multiple of 20 cents. (II) In the case of the dollar amount in subparagraph (C)(ii)(II), any increase under clause (i) which is not a multiple of $100,000 shall be rounded to the next lowest multiple of $100,000. (4) Portion of State limitation set-aside for certain projects involving qualified nonprofit organizations (A) In general Not more than 90 percent of the State limitation for any State for any calendar year shall be allocated to projects other than qualified low-income housing projects described in subparagraph (B). (B) Projects involving qualified nonprofit organizations For purposes of subparagraph (A), a qualified low-income housing project is described in this subparagraph if a qualified nonprofit organization is to own an interest in the project (directly or through a partnership) and materially participate (within the meaning of section 469(h)) in the development and operation of the project throughout the credit period. (C) Qualified nonprofit organization For purposes of this paragraph, the term qualified nonprofit organization means any organization if— (i) such organization is described in paragraph (3) or (4) of section 501(c) and is exempt from tax under section 501(a), (ii) such organization is determined by the State housing credit agency not to be affiliated with or controlled by a for-profit organization

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; and (iii) 1 of the exempt purposes of such organization includes the fostering of low-income housing. (D) Treatment of certain subsidiaries (i) In general For purposes of this paragraph, a qualified nonprofit organization shall be treated as satisfying the ownership and material participation test of subparagraph (B) if any qualified corporation in which such organization holds stock satisfies such test. (ii) Qualified corporation For purposes of clause (i), the term qualified corporation means any corporation if 100 percent of the stock of such corporation is held by 1 or more qualified nonprofit organizations at all times during the period such corporation is in existence. (E) State may not override set-aside Nothing in subparagraph (F) of paragraph (3) shall be construed to permit a State not to comply with subparagraph (A) of this paragraph. (5) Buildings eligible for credit only if minimum long-term commitment to low-income housing (A) In general No credit shall be allowed by reason of this section with respect to any building for the taxable year unless an extended low-income housing commitment is in effect as of the end of such taxable year. (B) Extended low-income housing commitment For purposes of this paragraph, the term extended low-income housing commitment means any agreement between the taxpayer and the housing credit agency— (i) which requires that the applicable fraction (as defined in subsection (c)(1)) for the building for each taxable year in the extended use period will not be less than the applicable fraction specified in such agreement and which prohibits the actions described in subclauses (I) and (II) of subparagraph (E)(ii), (ii) which allows individuals who meet the income limitation applicable to the building under subsection (g) (whether prospective, present, or former occupants of the building) the right to enforce in any State court the requirement and prohibitions of clause (i), (iii) which prohibits the disposition to any person of any portion of the building to which such agreement applies unless all of the building to which such agreement applies is disposed of to such person, (iv) which prohibits the refusal to lease to a holder of a voucher or certificate of eligibility under section 8 of the United States Housing Act of 1937 because of the status of the prospective tenant as such a holder, (v) which is binding on all successors of the taxpayer, and (vi) which, with respect to the property, is recorded pursuant to State law as a restrictive covenant. (C) Allocation of limitation amount may not exceed amount necessary to support commitment The limitation amount allocated to any building may not exceed the amount necessary to support the applicable fraction specified in the extended low-income housing commitment for such building. (D) Extended use period For purposes of this paragraph, the term extended use period means the period— (i) beginning on the 1st day in the credit period on which such building is part of a qualified low-income housing project, and (ii) ending on the later of— (I) the date specified by such agency in such agreement, or (II) the date which is 15 years after the close of the credit period. (E) Exceptions if foreclosure or if no buyer willing to maintain low-income status (i) In general The extended use period for any building shall terminate— (I) on the date the building is acquired by foreclosure (or instrument in lieu of foreclosure) unless the Secretary determines that such acquisition is part of an arrangement with the taxpayer a purpose of which is to terminate such period, or (II) on the last day of the period specified in subparagraph (I) if the housing credit agency is unable to present during such period a qualified contract for the acquisition of the low-income portion of the building by any person who will continue to operate such portion as a qualified low-income building. Subclause (II) shall not apply to the extent more stringent requirements are provided in the agreement or in State law. (ii) Eviction, etc., of existing low-income tenants not

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terminate such period, or (II) on the last day of the period specified in subparagraph (I) if the housing credit agency is unable to present during such period a qualified contract for the acquisition of the low-income portion of the building by any person who will continue to operate such portion as a qualified low-income building. Subclause (II) shall not apply to the extent more stringent requirements are provided in the agreement or in State law. (ii) Eviction, etc., of existing low-income tenants not permitted The termination of an extended use period under clause (i) shall not be construed to permit before the close of the 3-year period following such termination— (I) the eviction or the termination of tenancy (other than for good cause) of an existing tenant of any low-income unit, or (II) any increase in the gross rent with respect to such unit not otherwise permitted under this section. (F) Qualified contract For purposes of subparagraph (E), the term qualified contract means a bona fide contract to acquire (within a reasonable period after the contract is entered into) the nonlow-income portion of the building for fair market value and the low-income portion of the building for an amount not less than the applicable fraction (specified in the extended low-income housing commitment) of— (i) the sum of— (I) the outstanding indebtedness secured by, or with respect to, the building, (II) the adjusted investor equity in the building, plus (III) other capital contributions not reflected in the amounts described in subclause (I) or (II), reduced by (ii) cash distributions from (or available for distribution from) the project. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this paragraph, including regulations to prevent the manipulation of the amount determined under the preceding sentence. (G) Adjusted investor equity (i) In general For purposes of subparagraph (F), the term adjusted investor equity means, with respect to any calendar year, the aggregate amount of cash taxpayers invested with respect to the project increased by the amount equal to— (I) such amount, multiplied by (II) the cost-of-living adjustment for such calendar year, determined under section 1(c)(2)(A) by substituting the base calendar year for calendar year 2012 in clause (ii) thereof. An amount shall be taken into account as an investment in the project only to the extent there was an obligation to invest such amount as of the beginning of the credit period and to the extent such amount is reflected in the adjusted basis of the project. (ii) Cost-of-living increases in excess of 5 percent not taken into account Under regulations prescribed by the Secretary, if the C-CPI-U for any calendar year (within the meaning of section 1(c)) exceeds the C-CPI-U for the preceding calendar year by more than 5 percent, the C-CPI-U for the base calendar year shall be increased such that such excess shall never be taken into account under clause (i). (iii) Base calendar year For purposes of this subparagraph, the term base calendar year means the calendar year with or within which the 1st taxable year of the credit period ends. (H) Low-income portion For purposes of this paragraph, the low-income portion of a building is the portion of such building equal to the applicable fraction specified in the extended low-income housing commitment for the building. (I) Period for finding buyer The period referred to in this subparagraph is the 1-year period beginning on the date (after the 14th year of the credit period) the taxpayer submits a written request to the housing credit agency to find a person to acquire the taxpayer’s interest in the low-income portion of the building. (J) Effect of noncompliance If, during a taxable year, there is a determination that an extended low-income housing agreement was not in effect as of the beginning of such year, such determination shall not apply to any period before such year and subparagraph (A) shall be applied without regard to such determination if the failure is corrected

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the taxpayer submits a written request to the housing credit agency to find a person to acquire the taxpayer’s interest in the low-income portion of the building. (J) Effect of noncompliance If, during a taxable year, there is a determination that an extended low-income housing agreement was not in effect as of the beginning of such year, such determination shall not apply to any period before such year and subparagraph (A) shall be applied without regard to such determination if the failure is corrected within 1 year from the date of the determination. (K) Projects which consist of more than 1 building The application of this paragraph to projects which consist of more than 1 building shall be made under regulations prescribed by the Secretary. (6) Special rules (A) Building must be located within jurisdiction of credit agency A housing credit agency may allocate its limitation amount only to buildings located in the jurisdiction of the governmental unit of which such agency is a part. (B) Agency allocations in excess of limit If the limitation amounts allocated by a housing credit agency for any calendar year exceed the portion of the State limitation allocated to such agency for such calendar year, the limitation amounts so allocated shall be reduced (to the extent of such excess) for buildings in the reverse of the order in which the allocations of such amounts were made. (C) Credit reduced if credit is less than credit which would be allowable without regard to placed in service convention, etc (i) In general The amount of the credit determined under this section with respect to any building shall not exceed the clause (ii) percentage of the amount of the credit which would (but for this subparagraph) be determined under this section with respect to such building. (ii) Determination of percentage For purposes of clause (i), the clause (ii) percentage with respect to any building is the percentage which— (I) the credit amount which would be determined under this section with respect to the building if the limitation amount allocated to such building were equal to the qualified basis of such building, bears to (II) the credit amount determined in accordance with clause (iii). (iii) Determination of credit amount The credit amount determined in accordance with this clause is the amount of the credit which would (but for this subparagraph) be determined under this section with respect to the building if this section were applied without regard to subsection (f)(2)(A). (7) Other definitions For purposes of this subsection— (A) Housing credit agency The term housing credit agency means any agency authorized to carry out this subsection. (B) Possessions treated as States The term State includes a possession of the United States. . (2) Conforming amendments (A) Section 42(f) is amended by striking paragraph (3). (B) Section 42(i)(3)(B)(iii)(II) is amended by striking subsection (h)(5) and inserting subsection (h)(4) . (C) Section 42(i)(7)(A) is amended by striking subsection (h)(5)(C) and inserting subsection (h)(4)(C) . (D) Section 42(i)(8) is amended by striking the last sentence. (E) Section 42(i) is amended by striking paragraph (9). (F) Section 42(k)(2)(A) is amended by striking subsection (h)(5) and inserting subsection (h)(4) . (G) Section 42(l)(3) is amended by striking housing credit amount both places it appears and inserting limitation amount . (H) Section 42(m)(1)(A) is amended by striking housing credit dollar amount both places it appears and inserting limitation amount . (I) Section 42(m)(1)(B)(ii) is amended by striking housing credit dollar amounts and inserting limitation amounts . (J) Section 42(m)(1) is amended by striking subparagraph (D). (K) Subparagraphs (A), (B)(iii), (C)(i)(I), and (C)(i)(II) of section 42(m)(2) are each amended by striking housing credit dollar amount and inserting limitation amount . (L) Section 42(m)(2) is amended by striking subparagraph (D). (b) 15-Year credit period (1) In general Section 42(f)(1) is amended by striking 10 taxable years and inserting 15 taxable years . (2)

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by striking housing credit dollar amounts and inserting limitation amounts . (J) Section 42(m)(1) is amended by striking subparagraph (D). (K) Subparagraphs (A), (B)(iii), (C)(i)(I), and (C)(i)(II) of section 42(m)(2) are each amended by striking housing credit dollar amount and inserting limitation amount . (L) Section 42(m)(2) is amended by striking subparagraph (D). (b) 15-Year credit period (1) In general Section 42(f)(1) is amended by striking 10 taxable years and inserting 15 taxable years . (2) Repeal of recapture Section 42 is amended by striking subsection (j). (3) Conforming amendments (A) Section 42(d)(7) is amended— (i) by striking compliance period in the heading thereof and inserting credit period , and (ii) by striking compliance period in subparagraph (B)(ii) and inserting credit period . (B) Section 42(f)(4) is amended by striking the last sentence thereof. (C) Section 42(i) is amended by striking paragraph (1). (D) Section 42(i)(6) is amended by striking and any increase in tax under subsection (j) . (E) Section 42(k)(4)(C) is amended to read as follows: (C) Special rules (i) Tax benefit rule The tax for the taxable year shall be increased under subparagraph (A) only with respect to credits allowed by reason of this section which were used to reduce tax liability. In the case of credits not so used to reduce tax liability, the carryforwards and carrybacks under section 39 shall be appropriately adjusted. (ii) No credits against tax Any increase in tax under this paragraph shall not be treated as a tax imposed by this chapter for purposes of determining the amount of any credit under this chapter. . (c) Determination of applicable percentage (1) Elimination of 30 percent credit

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; modification of discount rate Subsection (b) of section 42 is amended to read as follows: (b) Applicable percentage (1) In general For purposes of this section, the term applicable percentage means with respect to any building, the appropriate percentage prescribed by the Secretary for the earlier of— (A) the month in which such building is placed in service, or (B) at the election of the taxpayer, the month in which the taxpayer and the housing credit agency enter into an agreement with respect to such building (which is binding on such agency, the taxpayer, and all successors in interest) as to the limitation amount to be allocated to such building. A month may be elected under subparagraph (B) only if the election is made not later than the 5th day after the close of such month. Such an election, once made, shall be irrevocable. (2) Method of prescribing percentages The percentages prescribed by the Secretary for any month shall be percentages which will yield over a 15-year period amounts of credit under subsection (a) which have a present value equal to 70 percent of the qualified basis of the building. (3) Method of discounting (A) In general The present value under paragraph (2) shall be determined— (i) as of the last day of the 1st year of the 15-year period referred to in paragraph (2), (ii) by using a discount rate equal to the applicable discount percentage of the average of the annual Federal mid-term rate and the annual Federal long-term rate applicable under section 1274(d)(1) to the month applicable under subparagraph (A) or (B) of paragraph (1) and compounded annually, and (iii) by assuming that the credit allowable under this section for any year is received on the last day of such year. (B) Applicable discount percentage For purposes of this paragraph, the term applicable discount percentage means, with respect to any month referred to in subparagraph (A)(ii) the number of percentage points by which 100 percent exceeds the highest rate of tax in effect under section 11 for a taxable year which begins in such month. (4) Cross reference For treatment of certain rehabilitation expenditures as separate new buildings, see subsection (e). . (2) Existing and Federally subsidized buildings ineligible for credit Section 42(d) is amended— (A) by striking paragraphs (1), (2), and (6), and redesignating paragraphs (3), (4), (5), and (7) as paragraphs (2), (3), (4), and (5), respectively, and (B) by inserting before paragraph (2) (as so redesignated) the following new paragraph: (1) In general The eligible basis of any building is— (A) in the case a new building which is not Federally subsidized for the taxable year, its adjusted basis as of the close of the 1st taxable year of the credit period, and (B) zero in any other case. . (3) Conforming amendments (A) Section 42(e) is amended— (i) in paragraph (2)(B), by striking paragraph (3) or (4) and inserting paragraph (2) or (3) . (ii) in paragraph (3), by striking subparagraph (B) and redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively, (iii) in paragraph (4), by striking the last sentence thereof, and (iv) by striking paragraph (5) and redesignating paragraph (6) as paragraph (5). (B) Section 42(f) is amended by striking paragraph (5). (C) Section 42(i)(2)(A) is amended by striking for purposes of subsection (b)(1), . (D) Section 42(i)(3) is amended— (i) by striking (as defined in subsection (d)(2)(D)(iii)) in subparagraph (C)(ii) and inserting (within the meaning of subparagraph (F)) , and (ii) by adding at the end the following new subparagraph: (F) Related person For purposes of subparagraph (C), a person (hereinafter in this subparagraph referred to as the related person ) is related to any person if the related person bears a relationship to such person specified in section 267(b) or 707(b)(1), or the related person and such person are engaged in trades or businesses under common control (within the meaning of subsections (a) and (b) of section 52). . (E) Section 42(i) is amended by striking paragraph (5). (F) Section 42(k)(2)(B)

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subparagraph: (F) Related person For purposes of subparagraph (C), a person (hereinafter in this subparagraph referred to as the related person ) is related to any person if the related person bears a relationship to such person specified in section 267(b) or 707(b)(1), or the related person and such person are engaged in trades or businesses under common control (within the meaning of subsections (a) and (b) of section 52). . (E) Section 42(i) is amended by striking paragraph (5). (F) Section 42(k)(2)(B) is amended by striking , except that and all that follows and inserting a period. (d) Repeal of special rules for buildings in high cost and difficult development areas (1) In general Paragraph (4) of section 42(d), as redesignated by subsection (c)(2), is amended to read as follows: (4) Federal grants not taken into account in determining eligible basis The eligible basis of a building shall not include any costs financed with the proceeds of a federally funded grant. . (2) Conforming amendments (A) Paragraph (3) of section 42(d), as redesignated by subsection (c)(2), is amended— (i) by striking (as defined in paragraph (5)(C)) in subparagraph (C)(i), and (ii) by adding at the end the following new subparagraph: (E) Qualified census tract For purposes of this paragraph— (i) In general The term qualified census tract means any census tract which is designated by the Secretary of Housing and Urban Development and, for the most recent year for which census data are available on household income in such tract, either in which 50 percent or more of the households have an income which is less than 60 percent of the area median gross income for such year or which has a poverty rate of at least 25 percent. If the Secretary of Housing and Urban Development determines that sufficient data for any period are not available to apply this subparagraph on the basis of census tracts, such Secretary shall apply this subparagraph for such period on the basis of enumeration districts. (ii) Limit on MSA's designated The portion of a metropolitan statistical area which may be designated for purposes of this subparagraph shall not exceed an area having 20 percent of the population of such metropolitan statistical area. (iii) Determination of areas For purposes of this subparagraph, each metropolitan statistical area shall be treated as a separate area and all nonmetropolitan areas in a State shall be treated as 1 area. . (B) Clause (i) of section 42(d)(5)(A), as redesignated by subsection (c)(2), is amended to read as follows: (i) such building shall be treated as a new building, but . (e) Repeal of certain exceptions to rules against preferential treatment Section 42(g)(9) is amended— (1) by adding or at the end of subparagraph (A), and (2) by striking subparagraphs (B) and (C) and inserting the following new subparagraph: (B) who are veterans (as defined in section 101 of title 38, United States Code). . (f) Modification of selection criteria Section 42(m)(1)(C) is amended— (1) by adding and at the end of clause (vii), (2) by striking the comma at the end of clause (viii) and inserting a period, and (3) by striking clauses (ix) and (x). (g) Effective date (1) In general The amendments made by this section shall apply with respect to State limitation amounts determined for calendar years after 2014 (and to determinations with respect to allocations of such limitation amounts). (2) Transition rule For purposes of determining the State limitation amount for calendar year 2015 under section 42(h)(3)(C) of the Internal Revenue Code of 1986, as amended by this section, the amount described in clause (i) of such section shall be treated as being equal to the quotient of— (A) the amount which would be described in section 42(h)(3)(C)(i) of such Code (determined without regard to the amendments made by this section), divided by (B) the applicable percentage determined under section 42(b)(1)(B)(i) for December 2014 (determined without regard to the amendments made by this section). 3205. Repeal of enhanced oil recovery credit (a) In general

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1986, as amended by this section, the amount described in clause (i) of such section shall be treated as being equal to the quotient of— (A) the amount which would be described in section 42(h)(3)(C)(i) of such Code (determined without regard to the amendments made by this section), divided by (B) the applicable percentage determined under section 42(b)(1)(B)(i) for December 2014 (determined without regard to the amendments made by this section). 3205. Repeal of enhanced oil recovery credit (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 43 (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (6). (2) Section 6501(m) is amended by striking 43, . (c) Effective date The amendments made by this section shall take effect on the date of the enactment of this Act. 3206. Phaseout and repeal of credit for electricity produced from certain renewable resources (a) Reduction of credit and phaseout amounts (1) In general Section 45(b) is amended by striking paragraph (2). (2) Conforming amendments Section 45(e)(2) is amended— (A) by striking the inflation adjustment factor and in subparagraph (A), and (B) by striking subparagraph (B) and redesignating subparagraph (C) as subparagraph (B). (3) Effective date The amendments made by this subsection shall apply to electricity, and refined coal, produced and sold after December 31, 2014. (b) Special rule for determining beginning of construction (1) In general Section 45(e) is amended by adding at the end the following new paragraph: (12) Special rule for determining beginning of construction For purposes of subsection (d) and section 48(a)(5), the construction of any facility, modification, improvement, addition, or other property shall not be treated as beginning before any date unless there is a continuous program of construction which begins before such date and ends on the date that such property is placed in service. . (2) Effective date The amendment made by this subsection shall apply to taxable years beginning before, on, or after the date of the enactment of this Act. (c) Repeal of credit (1) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45 (and by striking the item relating to such section in the table of sections for such subpart). (2) Conforming amendment Section 38(b) is amended by striking paragraph (8). (3) Effective date The amendments made by this subsection shall apply to electricity, and refined coal, produced and sold after December 31, 2024. 3207. Repeal of Indian employment credit (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45A (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendment (1) Section 38(b) is amended by striking paragraph (10). (2) Section 139D(c)(1) is amended to read as follows: (1) Indian tribe The term Indian tribe means any Indian tribe, band, nation, pueblo, or other organized group or community, including any Alaska Native village or regional or village corporation, as defined in, or established pursuant to, the Alaska Native Claims Settlement Act (43 U.S.C. 1601 et seq.) which is recognized as eligible for the special programs and services provided by the United States to Indians because of their status as Indians. . (3) Section 280C(a) is amended by striking 45A, . (4) Section 5000A(e)(3) is amended by striking section 45A(c)(6) and inserting section 139D(c)(1) . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2013. 3208. Repeal of credit for portion of employer Social Security taxes paid with respect to employee cash tips (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45B (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b)

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45A(c)(6) and inserting section 139D(c)(1) . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2013. 3208. Repeal of credit for portion of employer Social Security taxes paid with respect to employee cash tips (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45B (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (11). (2) Section 6501(m) is amended by striking 45B, . (c) Effective date The amendments made by this section shall apply with respect to tips received for services performed after December 31, 2014. 3209. Repeal of credit for clinical testing expenses for certain drugs for rare diseases or conditions (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45C (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (12). (2) Section 280C is amended by striking subsection (b). (3) Section 6501(m) is amended by striking 45C(d)(4), . (c) Effective date The amendments made by this section shall apply to amounts paid or incurred in taxable years beginning after December 31, 2014. 3210. Repeal of credit for small employer pension plan startup costs (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45E (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments Section 38(b) is amended by striking paragraph (14). (c) Effective date The amendments made by this section shall apply to costs paid or incurred after December 31, 2014, with respect to qualified employer plans first effective after such date. 3211. Repeal of employer-provided child care credit (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45F (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (15). (2) Section 1016(a) is amended by striking paragraph (28). (c) Effective date (1) In general Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2014. (2) Basis adjustments The amendment made by subsection (b)(2) shall apply to credits determined for taxable years beginning after December 31, 2014. 3212. Repeal of railroad track maintenance credit (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45G (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (16). (2) Section 1016(a) is amended by striking paragraph (29). (c) Effective date (1) In general Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2013. (2) Basis adjustments The amendment made by subsection (b)(2) shall apply to credits determined for taxable years beginning after December 31, 2013. 3213. Repeal of credit for production of low sulfur diesel fuel (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45H (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (18). (2) Section 280C is amended by striking subsection (d). (3) Section 6501(m) is amended by striking 45H(g), . (4) Section 6720A is amended— (A) by striking (as defined in section 45H(c)(3)) in subsection (a), and (B) by adding at the end the following new subsection: (c) Applicable EPA regulations The term applicable EPA regulations means the Highway Diesel Fuel Sulfur Control Requirements

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table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (18). (2) Section 280C is amended by striking subsection (d). (3) Section 6501(m) is amended by striking 45H(g), . (4) Section 6720A is amended— (A) by striking (as defined in section 45H(c)(3)) in subsection (a), and (B) by adding at the end the following new subsection: (c) Applicable EPA regulations The term applicable EPA regulations means the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency. . (c) Effective date The amendments made by this section shall apply to expenses paid or incurred in taxable years beginning after December 31, 2014. 3214. Repeal of credit for producing oil and gas from marginal wells (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45I (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendment Section 38(b) is amended by striking paragraph (19). (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3215. Repeal of credit for production from advanced nuclear power facilities (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45J (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendment Section 38(b) is amended by striking paragraph (21). (c) Effective date The amendments made by this section shall apply to electricity produced and sold after December 31, 2014. 3216. Repeal of credit for producing fuel from a nonconventional source (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45K (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (22). (2) Section 45(e)(9) is amended— (A) in subparagraph (A)— (i) by inserting , as in effect before its repeal after within the meaning of section 45K , and (ii) by inserting (as in effect before its repeal) after under section 45K , and (B) in subparagraph (B), by inserting (as in effect before its repeal) after section 45K . (3) Section 4041(a)(2) is amended— (A) by striking (as defined in section 45K(c)(3)) in subparagraph (B)(ii), and (B) by adding at the end the following new subparagraph: (C) Biomass The term “biomass” means any organic material other than— (i) oil and natural gas (or any product thereof), and (ii) coal (including lignite) or any product thereof. . (c) Effective date The amendments made by this section shall apply to fuel produced and sold after December 31, 2013. 3217. Repeal of new energy efficient home credit (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45L (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (23). (2) Section 1016(a) is amended by striking paragraph (32). (c) Effective date The amendments made by this section shall apply to homes acquired after December 31, 2013. 3218. Repeal of energy efficient appliance credit (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45M (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendment Section 38(b) is amended by striking paragraph (24). (c) Effective date The amendments made by this section shall apply to appliances produced after December 31, 2013. 3219. Repeal of mine rescue team training credit (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45N (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (31). (2) Section 280C is amended by striking subsection

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paragraph (24). (c) Effective date The amendments made by this section shall apply to appliances produced after December 31, 2013. 3219. Repeal of mine rescue team training credit (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45N (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (31). (2) Section 280C is amended by striking subsection (e). (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2013. 3220. Repeal of agricultural chemicals security credit (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45O (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (32). (2) Section 280C is amended by striking subsection (f). (c) Effective date The amendments made by this section shall apply to amounts paid or incurred after December 31, 2012. 3221. Repeal of credit for carbon dioxide sequestration (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45Q (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendment Section 38(b) is amended by striking paragraph (34). (c) Effective date The amendments made by this section shall apply to credits determined for taxable years beginning after December 31, 2014. 3222. Repeal of credit for employee health insurance expenses of small employers (a) In general Subpart D of part IV of subchapter A of chapter 1 is amended by striking section 45R (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 38(b) is amended by striking paragraph (36). (2) Section 280C is amended by striking subsection (h). (3) Section 6055(b)(2) is amended by inserting and at the end of subparagraph (A), by striking , and at the end of subparagraph (B) and inserting a period, and by striking subparagraph (C). (c) Effective date The amendments made by this section shall apply to amounts paid or incurred for taxable years beginning after December 31, 2014. 3223. Repeal of rehabilitation credit (a) In general Subpart E of part IV of subchapter A of chapter 1 is amended by striking section 47 (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 170(f)(14)(A) is amended by inserting (as in effect before its repeal by the Tax Reform Act of 2014 ) after section 47 . (2) Section 170(h)(4) is amended— (A) by striking (as defined in section 47(c)(3)(B)) in subparagraph (C)(ii), and (B) by adding at the end the following new subparagraph: (D) Registered historic district The term registered historic district means— (i) any district listed in the National Register, and (ii) any district— (I) which is designated under a statute of the appropriate State or local government, if such statute is certified by the Secretary of the Interior to the Secretary as containing criteria which will substantially achieve the purpose of preserving and rehabilitating buildings of historic significance to the district, and (II) which is certified by the Secretary of the Interior to the Secretary as meeting substantially all of the requirements for the listing of districts in the National Register. . (3) Section 469(i)(3) is amended by striking subparagraph (B). (4) Section 469(i)(6)(B) is amended— (A) by striking in the case of— and all that follows and inserting in the case of any credit determined under section 42 for any taxable year. , and (B) by striking , rehabilitation credit, in the heading thereof. (5) Section 469(k)(1) is amended by striking , or any rehabilitation credit determined under section 47, . (c) Effective date (1) In general Except as provided in paragraph (2), the amendments made

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(3) Section 469(i)(3) is amended by striking subparagraph (B). (4) Section 469(i)(6)(B) is amended— (A) by striking in the case of— and all that follows and inserting in the case of any credit determined under section 42 for any taxable year. , and (B) by striking , rehabilitation credit, in the heading thereof. (5) Section 469(k)(1) is amended by striking , or any rehabilitation credit determined under section 47, . (c) Effective date (1) In general Except as provided in paragraph (2), the amendments made by this section shall apply to amounts paid after December 31, 2014. (2) Transition rule In the case of qualified rehabilitation expenditures (within the meaning of section 47 of the Internal Revenue Code of 1986 as in effect before its repeal) with respect to any building— (A) acquired by the taxpayer before January 1, 2015, and (B) with respect to which the 24-month period selected by the taxpayer under section 47(c)(1)(C) of such Code begins not later than January 1, 2015, the amendments made by this section shall apply to amounts paid after December 31, 2016. 3224. Repeal of energy credit (a) Termination Section 48 is amended by adding at the end the following new subsection: (e) Application of section This section shall not apply to any energy property placed in service after December 31, 2016. . (b) Conforming amendments (1) Paragraph (2)(A)(i)(II), and clauses (ii) and (vii) of paragraph (3)(A), of section 48(a) are each amended by striking but only with respect to periods ending before January 1, 2017 . (2) Paragraph (1) of section 48(c) is amended by striking subparagraph (D). (3) Paragraph (2) of section 48(c) is amended by striking subparagraph (D). (4) Subparagraph (A) of section 48(c)(3) is amended by inserting and at the end of clause (ii), by striking , and at the end of clause (iii) and inserting a period, and by striking clause (iv). (5) Paragraph (4) of section 48(c) is amended by striking subparagraph (C). (c) Effective date The amendments made by this section shall apply to property placed in service after December 31, 2016. 3225. Repeal of qualifying advanced coal project credit (a) In general Subpart E of part IV of subchapter A of chapter 1 is amended by striking section 48A (and by striking the item relating to such section in the table of sections for such subpart). (b) Effective date The amendments made by this section shall apply to allocations and reallocations after December 31, 2014. 3226. Repeal of qualifying gasification project credit (a) In general Subpart E of part IV of subchapter A of chapter 1 is amended by striking section 48B (and by striking the item relating to such section in the table of sections for such subpart). (b) Effective date The amendments made by this section shall apply to allocations and reallocations after December 31, 2014. 3227. Repeal of qualifying advanced energy project credit (a) In general Subpart E of part IV of subchapter A of chapter 1 is amended by striking section 48C (and by striking the item relating to such section in the table of sections for such subpart). (b) Effective date The amendments made by this section shall apply to allocations and reallocations after December 31, 2014. 3228. Repeal of qualifying therapeutic discovery project credit (a) In general Subpart E of part IV of subchapter A of chapter 1 is amended by striking section 48D (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments Section 280C is amended by striking the second subsection (g) (as added by the Patient Protection and Affordable Care Act). (c) Effective date The amendments made by this section shall apply to allocations and reallocations after December 31, 2014. 3229. Repeal of work opportunity tax credit (a) In general Subpart F of part IV of subchapter A of chapter 1 is amended by striking section 51 (and by striking the item relating to such section in the table of sections for such subpart). (b) Clerical amendment The heading of such subpart F (and the item relating to such subpart in the table of

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Protection and Affordable Care Act). (c) Effective date The amendments made by this section shall apply to allocations and reallocations after December 31, 2014. 3229. Repeal of work opportunity tax credit (a) In general Subpart F of part IV of subchapter A of chapter 1 is amended by striking section 51 (and by striking the item relating to such section in the table of sections for such subpart). (b) Clerical amendment The heading of such subpart F (and the item relating to such subpart in the table of subparts for part IV of subchapter A of chapter 1) are each amended by striking Rules for Computing Work Opportunity Credit and inserting Special Rules . (c) Effective date The amendments made by this section shall apply to amounts paid or incurred to individuals who begin work for the employer after December 31, 2013. 3230. Repeal of deduction for certain unused business credits (a) In general Part VI of subchapter B of chapter 1 is amended by striking section 196 (and by striking the item relating to such section in the table of sections for such part). (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. D Accounting methods 3301. Limitation on use of cash method of accounting (a) In general Section 448 is amended to read as follows: 448. Limitation on use of cash method of accounting (a) In general The cash receipts and disbursements method of accounting may only be used by— (1) a natural person, (2) a farming business, and (3) any other entity which meets the gross receipts test of subsection (b) for the taxable year. Such method may not be used by a tax shelter (as defined in subsection (d)). (b) Gross receipts test For purposes of this section— (1) In general An entity meets the gross receipts test of this subsection for any taxable year if the average annual gross receipts of such entity for the 3-taxable-year period ending with the taxable year which precedes such taxable year does not exceed $10,000,000. (2) Aggregation rules All persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414 shall be treated as one entity for purposes of paragraph (1). (3) Special rules For purposes of this subsection— (A) Not in existence for entire 3-year period If the entity was not in existence for the entire 3-year period referred to in paragraph (1), such paragraph shall be applied on the basis of the period during which such entity (or trade or business) was in existence. (B) Short taxable years Gross receipts for any taxable year of less than 12 months shall be annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period. (C) Gross receipts Gross receipts for any taxable year shall be reduced by returns and allowances made during such year. (D) Treatment of predecessors Any reference in this subsection to an entity shall include a reference to any predecessor of such entity. (c) Farming business For purposes of this section— (1) In general The term farming business means the trade or business of farming. (2) Certain trades and businesses included (A) In general The term farming business shall include the trade or business of— (i) operating a nursery or sod farm, or (ii) the raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees. (B) Certain evergreen trees not treated as ornamental For purposes of subparagraph (A)(ii), an evergreen tree which is more than 6 years old at the time severed from the roots shall not be treated as an ornamental tree. (d) Tax shelter defined For purposes of this section, the term tax shelter has the meaning given such term by section 461(i)(2) (determined after application of paragraph (3) thereof). An S corporation shall not be treated as a tax shelter for purposes of this section merely by reason of being required to file a notice of exemption from registration with a State agency described in section 461(i)(2)(A), but only if there is a requirement applicable to

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the roots shall not be treated as an ornamental tree. (d) Tax shelter defined For purposes of this section, the term tax shelter has the meaning given such term by section 461(i)(2) (determined after application of paragraph (3) thereof). An S corporation shall not be treated as a tax shelter for purposes of this section merely by reason of being required to file a notice of exemption from registration with a State agency described in section 461(i)(2)(A), but only if there is a requirement applicable to all corporations offering securities for sale in the State that to be exempt from such registration the corporation must file such a notice. (e) Special rules For purposes of this section— (1) Coordination with section 481 In the case of any person required by this section to change its method of accounting for any taxable year— (A) such change shall be treated as initiated by such person, and (B) such change shall be treated as made with the consent of the Secretary. (2) Use of related parties, etc The Secretary shall prescribe such regulations as may be necessary to prevent the use of related parties, pass-thru entities, or intermediaries to avoid the application of this section. . (b) Conforming amendments (1) Section 446(c)(1) is amended by inserting to the extent provided in section 448, before the cash receipts . (2) Section 451 is amended by adding at the end the following new subsection: (j) Special rule for losses of certain service providers on accrual method of accounting (1) In general In the case of any person using an accrual method of accounting with respect to amounts to be received for the performance of services by such person, such person shall not be required to accrue any portion of such amounts which (on the basis of such person’s experience) will not be collected if such services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other field identified by the Secretary for purposes of this subsection. (2) Exception Paragraph (1) shall not apply to any amount if interest is required to be paid on such amount or there is any penalty for failure to timely pay such amount. (3) Regulations The Secretary shall prescribe regulations to permit taxpayers to determine amounts referred to in paragraph (1) using computations or formulas which, based on experience, accurately reflect the amount of income that will not be collected by such person. A taxpayer may adopt, or request consent of the Secretary to change to, a computation or formula that clearly reflects the taxpayer’s experience. A request under the preceding sentence shall be approved if such computation or formula clearly reflects the taxpayer’s experience. . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. (d) Change in method of accounting (1) In general In the case of any qualified change in method of accounting for the taxpayer’s first taxable year beginning after December 31, 2014— (A) such change shall be treated as initiated by the taxpayer, (B) such change shall be treated as made with the consent of the Secretary of the Treasury, and (C) if the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 by reason of such change is positive— (i) such amount shall be taken into account during the 4-taxable year period beginning with the earlier of the taxpayer’s elected taxable year or the taxpayer’s first taxable year beginning after December 31, 2018, as follows: (I) 10 percent of such amount in the first taxable year in such period, (II) 15 percent of such amount in the second taxable year in such period, (III) 25 percent of such amount in the third taxable year in such period, and (IV) 50 percent of such amount in the fourth taxable year in such period, and (ii) for purposes of applying the regulations and other guidance issued under such section (including any provisions which require accelerated inclusion), the period

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after December 31, 2018, as follows: (I) 10 percent of such amount in the first taxable year in such period, (II) 15 percent of such amount in the second taxable year in such period, (III) 25 percent of such amount in the third taxable year in such period, and (IV) 50 percent of such amount in the fourth taxable year in such period, and (ii) for purposes of applying the regulations and other guidance issued under such section (including any provisions which require accelerated inclusion), the period beginning with the taxpayer’s first taxable year beginning after December 31 2014, and ending with the taxable year before the first taxable year referred to in clause (i) shall not fail to be taken into account as part of the period of the adjustment merely because such amount is not otherwise taken into account under clause (i) during such period. (2) Qualified change in method of accounting For purposes of this subsection, the term qualified change in method of accounting means any change in method of accounting which— (A) is required by the amendments made by this section, or (B) was prohibited under the Internal Revenue Code of 1986 prior to such amendments and is permitted under such Code after such amendments. (3) Elected taxable year For purposes of this subsection, the term elected taxable year means such taxable year as the taxpayer may elect (at such time and in such form and manner as the Secretary may provide) which begins after December 31, 2014, and is before the taxpayer’s second taxable year beginning after December 31, 2018. 3302. Rules for determining whether taxpayer has adopted a method of accounting (a) In general Section 446 is amended by adding at the end the following new subsection: (g) Rules for treating accounting method as adopted by taxpayer If the taxpayer uses a method of accounting with respect to any item on any return of tax— (1) in the case of any method of accounting which the taxpayer is permitted to use with respect to such item, such method shall be treated as having been adopted by the taxpayer with respect to such item, and (2) in the case of any method of accounting which the taxpayer is not permitted to use with respect to such item, such method shall be treated as having been adopted by the taxpayer with respect to such item if the taxpayer used the same method with respect to such item on the return of tax for the preceding taxable year. . (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3303. Certain special rules for taxable year of inclusion (a) Inclusion not later than for financial accounting purposes Section 451 is amended by redesignating subsections (b) through (j) as subsection (c) through (k), respectively, and by inserting after subsection (a) the following new subsection: (b) Inclusion not later than for financial accounting purposes (1) In general In the case of a taxpayer the taxable income of which is computed under the accrual method of accounting, the amount of any portion of any item of income shall be included in gross income not later than the taxable year with respect to which such amount is taken into account as income in— (A) an audited financial statement of the taxpayer described in section 1221(b)(3)(B), or (B) such other financial statement as the Secretary may specify for purposes of this subsection. (2) Coordination with special rules for long-term contracts Paragraph (1) shall not apply with respect to any item of income to which section 460 applies. . (b) Treatment of advance payments Section 451, as amended by subsection (a), is amended by redesignating subsections (c) through (k) as subsections (d) through (l), respectively, and by inserting after subsection (b) the following new subsection: (c) Treatment of advance payments (1) In general A taxpayer which computes taxable income under the accrual method of accounting, and receives any advance payment during the taxable year, shall— (A) except as provided in subparagraph (B), include such advance payment in gross income for such

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Section 451, as amended by subsection (a), is amended by redesignating subsections (c) through (k) as subsections (d) through (l), respectively, and by inserting after subsection (b) the following new subsection: (c) Treatment of advance payments (1) In general A taxpayer which computes taxable income under the accrual method of accounting, and receives any advance payment during the taxable year, shall— (A) except as provided in subparagraph (B), include such advance payment in gross income for such taxable year, or (B) if the taxpayer elects the application of this subparagraph with respect to the category of advance payments to which such advance payment belongs, the taxpayer shall— (i) to the extent that any portion of such advance payment is required under subsection (b) to be included in gross income in the taxable year in which such payment is received, so include such portion, and (ii) include the remaining portion of such advance payment in gross income in the taxable year following the taxable year in which such payment is received. (2) Election (A) In general Except as otherwise provided in this paragraph, the election under paragraph (1)(B) shall be made at such time, in such form and manner, and with respect to such categories of advance payments, as the Secretary may provide. (B) Period to which election applies An election under paragraph (1)(B) shall be effective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to revoke such election. For purposes of this title, the computation of taxable income under an election made under paragraph (1)(B) shall be treated as a method of accounting. (3) Advance payment For purposes of this subsection— (A) In general The term advance payment means any payment— (i) the full inclusion of which in the gross income of the taxpayer for the taxable year of receipt is a permissible method of accounting under this section (determined without regard to this subsection), and (ii) which is for goods, services, or such other items as may be identified by the Secretary for purposes of this clause. (B) Exclusions Except as otherwise provided by the Secretary, such term shall not include— (i) rent, (ii) insurance premiums, (iii) payments with respect to financial instruments, (iv) payments with respect to warranty or guarantee contracts under which a third party is the primary obligor, (v) payments subject to section 871(a), 881, 1441, or 1442, (vi) payments in property to which section 83 applies, and (vii) any other payment identified by the Secretary for purposes of this subparagraph. . (c) Crop insurance proceeds and disaster payments Section 451, as amended by subsections (a) and (b), is amended by striking subsection (f). (d) Livestock sold on account of drought, flood, and other weather-Related conditions Section 451, as amended by subsections (a) and (b), is amended by striking subsection (g). (e) Sales or dispositions To implement Federal Energy Regulatory Commission or State electric restructuring policy Section 451, as amended by subsections (a) and (b), is amended by striking subsection (k). (f) Conforming amendments Section 451, as amended by subsections (a), (b), (c), (d), and (e), is amended by redesignating subsections (h), (i), (j), and (l) as subsections (f), (g), (h), and (i), respectively. (g) Effective dates (1) In general Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2014. (2) Crop insurance proceeds and disaster payments — (A) In general Except as provided in subparagraph (B), the amendments made by subsection (c) shall apply to destruction and damage of crops occurring after December 31, 2014. (B) Inability to plant In the case of inability to plant crops because of a natural disaster, the amendments made by subsection (c) shall apply to natural disasters occurring after December 31, 2014. (3) Livestock The amendments made by subsection (d) shall apply to sales

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31, 2014. (2) Crop insurance proceeds and disaster payments — (A) In general Except as provided in subparagraph (B), the amendments made by subsection (c) shall apply to destruction and damage of crops occurring after December 31, 2014. (B) Inability to plant In the case of inability to plant crops because of a natural disaster, the amendments made by subsection (c) shall apply to natural disasters occurring after December 31, 2014. (3) Livestock The amendments made by subsection (d) shall apply to sales and exchanges after December 31, 2014. (4) Sales or dispositions to implement electric restructuring policy The amendments made by subsection (e) shall apply to sales and dispositions after December 31, 2013. (5) Change in method of accounting In the case of any taxpayer required by the amendments made by subsections (a) and (b) to change its method of accounting for its first taxable year beginning after December 31, 2014— (A) such change shall be treated as initiated by the taxpayer, and (B) such change shall be treated as made with the consent of the Secretary of the Treasury. 3304. Installment sales (a) Repeal of exceptions to treatment as dealer dispositions Section 453(l) is amended to read as follows: (l) Dealer dispositions For purposes of subsection (b)(2)(A), the term dealer disposition means any of the following dispositions: (1) Personal property Any disposition of personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan. (2) Real property Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer’s trade or business. . (b) Modification of rules for nondealers (1) Repeal of special rule for interest payments Section 453A(b)(2) is amended to read as follows: (2) Interest payment exception for obligations not outstanding at close of taxable year Subsection (a)(1) shall apply to an obligation described in paragraph (1) arising during any taxable year only if such obligation is outstanding as of the close of such taxable year. . (2) Repeal of exception for farm property Section 453A(b)(3) is amended— (A) by striking from the disposition— and all that follows and inserting from the disposition by an individual of personal use property (within the meaning of section 1275(b)(3)). , and (B) by striking and farm in the heading. (3) Repeal of special rule for timeshares and residential lots Section 453A(b) is amended by striking paragraph (4) and by redesignating paragraph (5) as paragraph (4). (4) Conforming amendment Section 453A(c) is amended— (A) by striking the applicable percentage of in paragraph (2)(A), and (B) by striking paragraph (4) and by redesignating paragraphs (5) and (6) as paragraphs (4) and (5), respectively. (c) Effective date The amendments made by this section shall apply to sales and other dispositions after December 31, 2014. 3305. Repeal of special rule for prepaid subscription income (a) In general Subpart B of part II of subchapter E of chapter 1 is amended by striking section 455 (and by striking the item relating to such section in the table of sections for such subpart). (b) Effective date The amendments made by this section shall apply to payments received after December 31, 2014. 3306. Repeal of special rule for prepaid dues income of certain membership organizations (a) In general Subpart B of part II of subchapter E of chapter 1 is amended by striking section 456 (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendment Section 277(b)(2) is amended by inserting (as in effect before its repeal) after section 456(c) . (c) Effective date The amendments made by this section shall apply to payments received after December 31, 2014. 3307. Repeal of special rule for magazines, paperbacks, and records returned after close of the taxable year (a) In general Subpart B of part II of subchapter E of chapter 1 is amended by striking section 458 (and by striking the item relating to such section in

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subpart). (b) Conforming amendment Section 277(b)(2) is amended by inserting (as in effect before its repeal) after section 456(c) . (c) Effective date The amendments made by this section shall apply to payments received after December 31, 2014. 3307. Repeal of special rule for magazines, paperbacks, and records returned after close of the taxable year (a) In general Subpart B of part II of subchapter E of chapter 1 is amended by striking section 458 (and by striking the item relating to such section in the table of sections for such subpart). (b) Effective date (1) In general The amendments made by this section shall apply to taxable years beginning after December 31, 2014. (2) Change in method of accounting In the case of any taxpayer required by the amendments made by this section to change its method of accounting for its first taxable year beginning after December 31, 2014— (A) such change shall be treated as initiated by the taxpayer, and (B) such change shall be treated as made with the consent of the Secretary of the Treasury. 3308. Modification of rules for long-term contracts (a) Repeal of exception for home construction contracts Paragraph (1) of section 460(e) is amended to read as follows: (1) Exception for certain construction contracts Subsections (a), (b), and (c)(1) and (2) shall not apply to any construction contract entered into by a taxpayer— (A) who estimates (at the time such contract is entered into) that such contract will be completed within the 2-year period beginning on the contract commencement date of such contract, and (B) whose average annual gross receipts for the 3 taxable years preceding the taxable year in which such contract is entered into do not exceed $10,000,000. For purposes of this paragraph, rules similar to the rules of paragraphs (2) and (3) of section 448(b) shall apply. . (b) Repeal of special rule for other residential construction contracts Section 460(e) is amended by striking paragraphs (5) and (6). (c) Repeal of special rules for qualified ship contracts (1) In general Section 10203(b) of the Revenue Act of 1987 is amended by striking paragraph (2). (2) Qualified naval ship contracts The American Jobs Creation Act of 2004 is amended by striking section 708. (d) Conforming amendments Section 460(e) is amended by striking paragraphs (2) and (3) and by redesignating paragraph (4) as paragraph (2). (e) Effective date The amendments made by this section shall apply to contracts entered into after December 31, 2014. 3309. Nuclear decommissioning reserve funds (a) Gross income on nuclear decommissioning reserve funds taxed at corporate rate Section 468A(e)(2) is amended by striking at the rate of 20 percent and inserting at a rate equal to the maximum rate in effect for such taxable year under section 11 . (b) Income inclusion upon disqualified distribution Section 468A(c)(1) is amended by striking and at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting , and , and by adding at the end the following new subparagraph: (C) if any distribution is made from the Fund during such taxable year which is not used as provided in subsection (e)(4), the balance of the Fund determined immediately before such distribution. . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3310. Repeal of last-in, first-out method of inventory (a) In general Section 471 is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: (c) Last-In, first-Out method not permissible The last-in, first-out method of determining inventories shall in no event be treated as clearly reflecting income. . (b) Conforming amendments (1) Subpart D of part II of subchapter E of chapter 1 is amended by striking sections 472, 473, and 474 (and by striking the items relating to such sections in the table of sections for such subpart). (2) (A) Section 312(n), as amended by the preceding provisions of this Act, is amended by striking paragraph (3)

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(c) Last-In, first-Out method not permissible The last-in, first-out method of determining inventories shall in no event be treated as clearly reflecting income. . (b) Conforming amendments (1) Subpart D of part II of subchapter E of chapter 1 is amended by striking sections 472, 473, and 474 (and by striking the items relating to such sections in the table of sections for such subpart). (2) (A) Section 312(n), as amended by the preceding provisions of this Act, is amended by striking paragraph (3) and by redesignating paragraphs (4) through (7) as paragraphs (3) through (6), respectively. (B) Section 312(n)(6), as amended by the preceding provisions of this Act, is amended— (i) by striking paragraphs (4) and (6) in subparagraph (A) and inserting paragraph (4) , and (ii) by striking paragraph (5) in subparagraph (B) and inserting paragraph (3) . (C) Section 301(e)(3), as amended by the preceding provisions of this Act, is amended— (i) by striking paragraph (6) and inserting paragraph (5) , and (ii) by striking section 312(n)(6) in the heading and inserting section 312(n)(5) . (D) Section 952(c)(3), as amended by the preceding provisions of this Act, is amended by striking paragraphs (3), (4), and (5) and inserting paragraphs (2), (3), and (4) . (E) Section 1293(e)(3), as amended by the preceding provisions of this Act, is amended by striking paragraphs (3), (4), and (5) and inserting paragraphs (2), (3), and (4) . (F) Section 1503(e)(2)(C), as amended by the preceding provisions of this Act, is amended— (i) by striking paragraph (6) and inserting paragraph (5) , and (ii) by striking section 312(n)(6) in the heading and inserting section 312(n)(5) . (3) Section 1363 is amended by striking subsection (d). (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. (d) Change in method of accounting (1) In general In the case of any taxpayer required by the amendments made by this section to change its method of accounting for its first taxable year beginning after December 31, 2014— (A) such change shall be treated as initiated by the taxpayer, (B) such change shall be treated as made with the consent of the Secretary of the Treasury, and (C) if the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 by reason of such change is positive— (i) such amount shall be taken into account during the 4-taxable year period beginning with the earlier of the taxpayer’s elected taxable year or the taxpayer’s first taxable year beginning after December 31, 2018, as follows: (I) 10 percent of such amount in the first taxable year in such period, (II) 15 percent of such amount in the second taxable year in such period, (III) 25 percent of such amount in the third taxable year in such period, and (IV) 50 percent of such amount in the fourth taxable year in such period, and (ii) for purposes of applying the regulations and other guidance issued under such section (including any provisions which require accelerated inclusion), the period beginning with the taxpayer’s first taxable year beginning after December 31 2014, and ending with the taxable year before the first taxable year referred to in clause (i) shall not fail to be taken into account as part of the period of the adjustment merely because such amount is not otherwise taken into account under clause (i) during such period. (2) Elected taxable year For purposes of this subsection, the term elected taxable year means such taxable year as the taxpayer may elect (at such time and in such form and manner as the Secretary may provide) which begins after December 31, 2014, and is before the taxpayer’s second taxable year beginning after December 31, 2018. (3) Reduction in amount of adjustment for closely-held entities (A) In general In the case of any closely-held entity, paragraph (1)(C) shall be applied by treating any reference to such amount as a reference to 20 percent (28 percent in the case of a C corporation) of such amount. (B)

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year as the taxpayer may elect (at such time and in such form and manner as the Secretary may provide) which begins after December 31, 2014, and is before the taxpayer’s second taxable year beginning after December 31, 2018. (3) Reduction in amount of adjustment for closely-held entities (A) In general In the case of any closely-held entity, paragraph (1)(C) shall be applied by treating any reference to such amount as a reference to 20 percent (28 percent in the case of a C corporation) of such amount. (B) Closely-held entity For purposes of this paragraph— (i) In general The term closely-held entity means any domestic corporation or domestic partnership which— (I) is not an ineligible entity, (II) does not have more than 100 shareholders or partners (as the case may be), and (III) does not have as a shareholder or partner a person (other than an estate, a trust described in section 1361(c)(2) of the Internal Revenue Code of 1986, or an organization described section 1361(c)(6) of such Code) who is not an individual. (ii) Certain subsidiaries An entity shall not fail to be treated as a closely-held entity by reason of clause (i)(III) if all of the interests in such entity are held by a single closely-held entity (determined without regard to this clause) and individuals taken into account under clause (i)(II) with respect to such entity. In the case of tiered entities (other than the top tier entity), the preceding sentence shall be applied— (I) by substituting (determined after application of this clause) for (determined without regard to this clause) , and (II) by substituting with respect to the top tier entity for with respect to such entity . (iii) Ineligible entity The term ineligible entity means any entity described in section 1361(b)(2) of the Internal Revenue Code of 1986 applied by substituting corporation or partnership for corporation each place it appears. (iv) Date of determination The status of any entity as a closely-held entity shall be determined as of February 26, 2014. (v) Sole proprietors An individual operating a trade or business shall be treated as a closely-held entity. (C) Certain transfers disregarded (i) In general In the case of any specified inventory transfer, the adjustments referred to in paragraph (1)(C) shall be determined— (I) with respect to the transferor, as though the property transferred continued to be held at all times by such transferor, and (II) with respect to the transferee, as though such property was never transferred to such transferee. (ii) Specified inventory transfer The term specified inventory transfer means any transfer of property described in section 1221(a)(1) if— (I) such transfer is to a closely-held entity from any person who is not a closely-held entity, (II) such transfer is on or after February 26, 2014, and before the beginning of the transferor’s first taxable year beginning after December 31, 2014, and (III) the basis of such property in the hands of the transferee immediately after such transfer is either determined by reference to the basis of such property in the hands of the transferor or is less than the fair market value of such property at the time of such transfer. 3311. Repeal of lower of cost or market method of inventory (a) In general Section 471, as amended by the preceding provisions of this Act, is amended by redesignating subsection (d) as subsection (e) and by inserting after subsection (c) the following new subsection: (d) Lower of cost or market method not permissible The lower of cost or market method of determining inventories shall in no event be treated as clearly reflecting income. For purposes of the preceding sentence, the lower of cost or market shall include the lower of cost or bona fide net selling price. . (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. (c) Change in method of accounting (1) In general In the case of any taxpayer required by the amendments made by this section to change its method of accounting for its first taxable year beginning

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shall in no event be treated as clearly reflecting income. For purposes of the preceding sentence, the lower of cost or market shall include the lower of cost or bona fide net selling price. . (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. (c) Change in method of accounting (1) In general In the case of any taxpayer required by the amendments made by this section to change its method of accounting for its first taxable year beginning after December 31, 2014— (A) such change shall be treated as initiated by the taxpayer, (B) such change shall be treated as made with the consent of the Secretary of the Treasury, and (C) if the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 by reason of such change is positive— (i) such amount shall be taken into account during the 4-taxable year period beginning with the earlier of the taxpayer’s elected taxable year or the taxpayer’s first taxable year beginning after December 31, 2018, as follows: (I) 10 percent of such amount in the first taxable year in such period, (II) 15 percent of such amount in the second taxable year in such period, (III) 25 percent of such amount in the third taxable year in such period, and (IV) 50 percent of such amount in the fourth taxable year in such period, and (ii) for purposes of applying the regulations and other guidance issued under such section (including any provisions which require accelerated inclusion), the period beginning with the taxpayer’s first taxable year beginning after December 31 2014, and ending with the taxable year before the first taxable year referred to in clause (i) shall not fail to be taken into account as part of the period of the adjustment merely because such amount is not otherwise taken into account under clause (i) during such period. (2) Elected taxable year For purposes of this subsection, the term elected taxable year means such taxable year as the taxpayer may elect (at such time and in such form and manner as the Secretary may provide) which begins after December 31, 2014, and is before the taxpayer’s second taxable year beginning after December 31, 2018. 3312. Modification of rules for capitalization and inclusion in inventory costs of certain expenses (a) $10,000,000 gross receipts exception To apply to property produced by the taxpayer Section 263A(b) is amended by striking all that follows paragraph (1) and inserting the following new paragraphs: (2) Property acquired for resale Real or personal property described in section 1221(a)(1) which is acquired by the taxpayer for resale. (3) Exception for taxpayer with gross receipts of $10,000,000 or less This section shall not apply to any property produced or acquired by the taxpayer during any taxable year 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. For purposes of this paragraph, rules similar to the rules of paragraphs (2) and (3) of section 448(b) shall apply. (4) Films, sound recordings, books, etc For purposes of this subsection, the term tangible personal property shall include a film, sound recording, video tape, book, or similar property. . (b) Repeal of exceptions for timber and certain ornamental trees Section 263A(c) is amended by striking paragraph (5). (c) Repeal of exception for qualified creative expenses Section 263A is amended by striking subsection (h). (d) Effective date (1) In general The amendments made by this section shall apply to taxable years beginning after December 31, 2014. (2) Change in method of accounting In the case of any taxpayer required by the amendments made by this section to change its method of accounting for its first taxable year beginning after December 31, 2014— (A) such change shall be treated as initiated by the taxpayer, and (B) such change shall be treated as made with the consent of the Secretary of the Treasury.

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(h). (d) Effective date (1) In general The amendments made by this section shall apply to taxable years beginning after December 31, 2014. (2) Change in method of accounting In the case of any taxpayer required by the amendments made by this section to change its method of accounting for its first taxable year beginning after December 31, 2014— (A) such change shall be treated as initiated by the taxpayer, and (B) such change shall be treated as made with the consent of the Secretary of the Treasury. 3313. Modification of income forecast method (a) Extension of forecast period (1) In general Paragraph (1) of section 167(g) is amended by striking 10th each place it appears and inserting 20th . (2) Modification of recomputation years Paragraph (4) of section 167(g) is amended by striking the 3d and the 10th and inserting the 5th, 10th, 15th, and 20th . (b) Modification of rules for treatment of participations and residuals Paragraph (7) of section 167(g) is amended to read as follows: (7) Treatment of participations and residuals (A) In general In the case of any participation or residual with respect to any property to which this subsection applies (including any property to which section 168 applies by reason of paragraph (8)), the taxpayer— (i) shall exclude such participation or residual from the adjusted basis of such property, and (ii) shall be allowed a deduction for such participation or residual in the taxable year in which such participation or residual is paid. (B) Participations and residuals For purposes of this paragraph, the term participation or residual means, with respect to any property, any cost the amount of which by contract varies with the amount of income earned in connection with such property. . (c) Election To utilize 20-Year straight line recovery Subsection (g) of section 167 is amended by redesignating (8) as paragraph (9) and by inserting after paragraph (7) the following new paragraph: (8) Election to utilize 20-year straight line recovery If the taxpayer elects the application of this paragraph for any taxable year, the depreciation deduction allowable with respect to any property placed in service by the taxpayer during such taxable year which would otherwise be determined under paragraph (1) shall be determined under section 168— (A) by treating the straight line method as the applicable depreciation method, and (B) by treating 20 years as the applicable recovery period. . (d) Repeal of special rules for certain musical works and copyrights Subsection (g) of section 167, as amended by subsection (c), is amended by striking paragraph (9). (e) Safe harbor amortization of certain intangible assets Effective for property placed in service after December 31, 2014, the Secretary of the Treasury, or the Secretary’s designee, shall revise Treasury Regulation section 1.167(a)–3(b) (and such regulation shall be applied) such that the safe harbor amortization for certain intangible assets to which such regulation applies shall allow the taxpayer to treat such asset as having a useful life equal to 20 years (and not 15 years). (f) Effective date The amendments made by this section shall apply to property placed in service after December 31, 2014. 3314. Repeal of averaging of farm income (a) In general Subchapter Q of chapter 1 is amended by striking part I (and by striking the item relating to such part in the table of parts for such subchapter). (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3315. Treatment of patent or trademark infringement awards (a) In general Part II of subchapter B of chapter 1 is amended by adding at the end the following new section: 91. Patent or trademark infringement awards (a) In general Except as provided in subsection (b), any payment received for infringement of any patent or trademark (whether by reason of judgment or settlement) shall be included in gross income as ordinary income. (b) Impairment of capital If the taxpayer demonstrates to the satisfaction of the Secretary that a payment

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trademark infringement awards (a) In general Part II of subchapter B of chapter 1 is amended by adding at the end the following new section: 91. Patent or trademark infringement awards (a) In general Except as provided in subsection (b), any payment received for infringement of any patent or trademark (whether by reason of judgment or settlement) shall be included in gross income as ordinary income. (b) Impairment of capital If the taxpayer demonstrates to the satisfaction of the Secretary that a payment described in subsection (a) constitutes damages received by reason of the reduction in value of property of the taxpayer caused by the infringement referred to in subsection (a)— (1) the taxpayer’s basis in such property shall be reduced (but not below zero) by the amount of such payment, and (2) subsection (a) shall apply to so much of such payment as exceeds the amount of the reduction under paragraph (1). . (b) Conforming amendments (1) Section 1016(a) is amended by adding at the end the following new paragraph: (38) to the extent provided in section 91(b)(1), . (2) The table of sections for part II of subchapter B of chapter 1 is amended by adding at the end the following new item: Sec. 91. Patent or trademark infringement awards. . (c) Effective date The amendments made by this section shall apply to payments received pursuant to judgments and settlements after December 31, 2014. 3316. Repeal of redundant rules with respect to carrying charges (a) In general Part IX of subchapter B of chapter 1 is amended by striking section 266 (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendments (1) Section 163(n) is amended by striking paragraph (3) and by redesignating paragraphs (4) and (5) as paragraphs (3) and (4), respectively. (2) Section 1016(a)(1)(A)(i), as amended by section 3514, is amended by striking described in section 266 . (c) Effective date The amendments made by this section shall apply to amounts paid or incurred after December 31, 2014. 3317. Repeal of recurring item exception for spudding of oil or gas wells (a) In general Section 461(i) is amended by striking paragraph (2) and by redesignating paragraphs (3), (4), and (5) as paragraphs (2), (3), and (4), respectively. (b) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2014. E Financial Instruments 1 Derivatives and hedges 3401. Treatment of certain derivatives (a) In General Subchapter E of chapter 1 is amended by adding at the end the following new part: IV Derivatives Sec. 485. Treatment of certain derivatives. Sec. 486. Derivative defined. 485. Treatment of certain derivatives (a) In general For purposes of this subtitle— (1) any derivative held by a taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year), and (2) proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of paragraph (1). (b) Treatment as ordinary income or loss

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; allowance as net operating loss All items of income, gain, loss, and deduction with respect to any derivative— (1) shall be treated as ordinary income or loss, and (2) shall be treated for purposes of section 172(d)(4) as attributable to a trade or business of the taxpayer. (c) Mark to market of certain offsetting positions (1) In general In the case of any straddle which includes any derivative, subsections (a) and (b) shall apply to all positions comprising such straddle in the same manner as such subsections apply to such derivative. (2) Application to built-in gain positions (A) In general In the case of any built-in gain position to which subsection (a) applies by reason of paragraph (1)— (i) in addition to any other time at which such position is treated as sold under subsection (a)(1), such position shall be treated as sold for its fair market value at the time that the straddle is established with respect to such position, (ii) proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain taken into account by reason of clause (i), and (iii) subsection (b) shall not apply to any gain taken into account by reason of clause (i). (B) Built-in gain position For purposes of this subsection, the term built-in gain position means any position (other than a derivative to which subsection (a) applies) with respect to which a gain would be realized if such position were sold for its fair market value at the time that the straddle is established with respect to such position. (C) Exception for straight debt Subparagraph (A) shall not apply to any position with respect to debt if— (i) the interest payments (or other similar amounts) with respect to such position meet the requirements of section 860G(a)(1)(B)(i), and (ii) such position is not convertible (directly or indirectly) into stock of the issuer or any related person. (D) Exception for straddles consisting of qualified covered call options and the optioned stock Subparagraph (A) shall not apply to any position which is part of a straddle if— (i) all the offsetting positions which are part of such straddle consist of 1 or more qualified covered call options (as defined in paragraph (6)) and the stock to be purchased from the taxpayer under such options, and (ii) such straddle is not part of a larger straddle. (3) Application to built-in loss positions (A) In general In the case of any built-in loss position to which subsection (a) applies by reason of paragraph (1), any gain or loss realized under subsection (a)(1) shall be properly adjusted so as not to take into account the loss referred to in subparagraph (B) with respect to such position. (B) Built-in loss position For purposes of subparagraph (A), the term built-in loss position means any position (other than a derivative to which subsection (a) applies) with respect to which a loss would be realized if such position were sold for its fair market value at the time that the straddle is established with respect to such position. (4) Holding period of non-derivatives For purposes of section 1222, in the case of any position to which subsection (a) applies by reason of paragraph (1), the holding period of such position shall not include— (A) the period during which subsection (a) applies to such position, and (B) in the case of a built-in gain position, the period before such position is treated as sold under paragraph (2)(A). (5) Straddle For purposes of this section— (A) the term straddle has the meaning given such term by section 1092(c) applied by treating all offsetting positions as being with respect to personal property, and (B) the term position includes any derivative. (6) Qualified covered call options (A) In general For purposes of paragraph (2)(D), the term qualified covered call option means any option granted by the taxpayer to purchase stock held by the taxpayer (or stock acquired by the taxpayer in connection with the granting of the option) but only if— (i) such option is traded on a national securities exchange which is registered with the Securities and Exchange

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as being with respect to personal property, and (B) the term position includes any derivative. (6) Qualified covered call options (A) In general For purposes of paragraph (2)(D), the term qualified covered call option means any option granted by the taxpayer to purchase stock held by the taxpayer (or stock acquired by the taxpayer in connection with the granting of the option) but only if— (i) such option is traded on a national securities exchange which is registered with the Securities and Exchange Commission or other market which the Secretary determines has rules adequate to carry out the purposes of this paragraph, (ii) such option is granted— (I) more than 30 days before the day on which the option expires, and (II) not more than 90 days before the day on which the option expires, (iii) such option is not granted by an options dealer (as defined in subparagraph (B)) in connection with such dealer’s activity of dealing in options, and (iv) gain or loss with respect to such option would not be ordinary income or loss if determined without regard to this section. (B) Options dealer For purposes of subparagraph (A), the term options dealer means— (i) any person registered with an appropriate national securities exchange as a market maker or specialist in listed options, and (ii) to the extent provided by the Secretary consistent with the purposes of this paragraph, any person whom the Secretary determines performs functions similar to the persons described in clause (i). (C) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph and paragraph (2)(D). Such regulations may include modifications to the provisions of this paragraph and paragraph (2)(D) which are appropriate to take account of changes in the practices of option exchanges or to prevent the use of options for tax avoidance purposes. (d) Terminations, etc (1) In general The rules of subsections (a) and (b) shall also apply to the termination (or transfer) during the taxable year of the taxpayer’s obligation (or rights) with respect to a derivative by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse, by expiration, by settlement, or otherwise. (2) Mark to market of all positions in straddle if any position terminated or transferred If paragraph (1) applies with respect to any position which is part of a straddle, the rules of subsections (a) and (b) shall apply to every position which is part of such straddle. (e) Determination of fair market value For purposes of this section— (1) Terminations, etc For purposes of subsection (d), fair market value shall be determined at the time of the termination (or transfer). (2) Blockage factor not taken into account To the extent provided in regulations prescribed by the Secretary, fair market value shall be determined without regard to any premium or discount based on the proportion of the total available trading units which are held. (f) Coordination with certain rules The rules of sections 263(g) and 263A shall not apply to any derivative or other position to which subsection (a) applies, and section 1091 shall not apply (and section 1092 shall apply) to any loss recognized under subsection (a). 486. Derivative defined (a) In general For purposes of this part, except as otherwise provided in this section, the term derivative means any contract (including any option, forward contract, futures contract, short position, swap, or similar contract) the value of which, or any payment or other transfer with respect to which, is (directly or indirectly) determined by reference to one or more of the following: (1) Any share of stock in a corporation. (2) Any partnership or beneficial ownership interest in a partnership or trust. (3) Any evidence of indebtedness. (4) Except as provided in subsection (d), any real property. (5) Any commodity which is actively traded (within the meaning of section 1092(d)(1)). (6) Any currency. (7) Any rate, price, amount, index, formula, or

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or any payment or other transfer with respect to which, is (directly or indirectly) determined by reference to one or more of the following: (1) Any share of stock in a corporation. (2) Any partnership or beneficial ownership interest in a partnership or trust. (3) Any evidence of indebtedness. (4) Except as provided in subsection (d), any real property. (5) Any commodity which is actively traded (within the meaning of section 1092(d)(1)). (6) Any currency. (7) Any rate, price, amount, index, formula, or algorithm. (8) Any other item as the Secretary may prescribe. Such term shall not include any item described in paragraphs (1) through (8). (b) Exceptions (1) Certain real property (A) In general For purposes of subsection (a)(4), the term real property shall not include— (i) a tract of real property (as defined in section 1237(c)), or (ii) any real property which would be property described in section 1221(a)(1) with respect to the taxpayer if held directly by the taxpayer. (B) Regulations The Secretary shall prescribe regulations or other guidance under which multiple tracts of real property may be treated as a single tract of real property for purposes of subparagraph (A)(i) if the contract referred to in subsection (a) is of a type which is designed to facilitate the acquisition or disposition of such real property. (2) Hedging transactions (A) In general For purposes of this part, the term derivative shall not include any contract which is part of a hedging transaction (as defined in section 1221(b)). (B) Section 988 hedging transactions For exception for section 988 hedging transactions, see section 988(d)(1). (3) Securities lending, sale-repurchase, and similar financing transactions To the extent provided by the Secretary, for purposes of this part, the term derivative shall not include the right to the return of the same or substantially identical securities transferred in a securities lending transaction, sale-repurchase transaction, or similar financing transaction. (4) Options received in connection with the performance of services For purposes of this part, the term derivative shall not include any option described in section 83(e)(3) received in connection with the performance of services. (5) Insurance contracts, annuities, and endowments For purposes of this part, the term derivative shall not include any insurance, annuity, or endowment contract issued by an insurance company to which subchapter L applies (or issued by any foreign corporation to which such subchapter would apply if such foreign corporation were a domestic corporation). (6) Derivatives with respect to stock of members of same worldwide affiliated group For purposes of this part, the term derivative shall not include, and subsections (c) and (d)(2) of section 485 shall not apply to, any derivative (determined without regard to this subsection) with respect to stock issued by any member of the same worldwide affiliated group (as defined in section 864(f)) in which the taxpayer is a member. (7) Commodities used in normal course of trade or business For purposes of this part, the term derivative shall not include any contract with respect to any commodity if— (A) such contract requires physical delivery with the option of cash settlement only in unusual and exceptional circumstances, and (B) such commodity is used (and is used in quantities with respect to which such derivative relates) in the normal course of the taxpayer’s trade or business (or, in the case of an individual, for personal consumption). (c) Contracts with embedded derivative components (1) In general If a contract has derivative and nonderivative components, then each derivative component shall be treated as a derivative for purposes of this part. If the derivative component cannot be separately valued, then the entire contract shall be treated as a derivative for purposes of this part. (2) Exception for certain embedded derivative components of debt instruments A debt instrument shall not be treated as having a derivative component merely because— (A) such debt instrument

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components (1) In general If a contract has derivative and nonderivative components, then each derivative component shall be treated as a derivative for purposes of this part. If the derivative component cannot be separately valued, then the entire contract shall be treated as a derivative for purposes of this part. (2) Exception for certain embedded derivative components of debt instruments A debt instrument shall not be treated as having a derivative component merely because— (A) such debt instrument is denominated in a nonfunctional currency (as defined in section 988(c)(1)(C)(ii)), (B) payments with respect to such debt instrument are determined by reference to the value of a nonfunctional currency (as so defined), or (C) such debt instrument is a convertible debt instrument, contingent payment debt instrument, a variable rate debt instrument, an integrated debt instrument, an investment unit, a debt instrument with alternative payment schedules, or other debt instrument with respect to which the regulations under section 1275(d) apply. (d) Treatment of American Depository Receipts and similar instruments Except as otherwise provided by the Secretary, for purposes of this part, American depository receipts (and similar instruments) with respect to shares of stock in foreign corporations shall be treated as shares of stock in such foreign corporations. . (b) Coordination with rules for dealers and traders (1) Derivatives not treated as securities Section 475(c)(2) is amended— (A) by adding and at the end of subparagraph (C), (B) by striking subparagraphs (D) and (E) and by redesignating subparagraph (F) as subparagraph (D), (C) by striking subparagraph (A), (B), (C), (D), or (E) in subparagraph (D)(i), as so redesignated, and inserting subparagraph (A), (B), or (C) , and (D) by amending the last sentence to read as follows: Such term shall not include any position to which section 485(a) applies. (2) Derivatives not treated as commodities Section 475(e)(2) is amended— (A) by adding and at the end of subparagraph (A), (B) by striking subparagraphs (B) and (C) and by redesignating subparagraph (D) as subparagraph (B), and (C) by striking subparagraph (A), (B) or (C) in subparagraph (B)(i), as so redesignated, and inserting subparagraph (A) . (3) Conforming amendments (A) Section 475(b) is amended by striking paragraph (4). (B) Section 475(d)(2)(B) is amended— (i) by striking subsection (c)(2)(F)(iii) and inserting subsection (c)(2)(D)(iii) , and (ii) by striking subsection (c)(2)(F) and inserting subsection (c)(2)(D) . (C) Section 475(f)(1)(D) is amended by striking subsections (b)(4) and (d) and inserting subsection (d) . (c) Coordination with straddle rules (1) In general Section 1092(e) is amended to read as follows: (e) Exception for hedging transactions and straddles with derivatives This section shall not apply in the case of— (1) any hedging transaction (as defined in section 1221(b)), and (2) any straddle (as defined in section 485) which includes any derivative (as defined in section 486). . (2) Conforming amendments (A) Section 263(g)(3) is amended to read as follows: (3) Exception for hedging transactions and straddles with derivatives This subsection shall not apply in the case of— (A) any hedging transaction (as defined in section 1221(b)), and (B) any straddle (as defined in section 485) which includes any derivative (as defined in section 486). . (B) Section 1092(b) is amended— (i) by striking paragraph (2), and (ii) by striking all that precedes The Secretary shall and inserting the following: (b) Regulations The Secretary shall . (C) Section 1092(c) is amended by striking paragraph (4). (D) Section 1092 is amended by striking subsection (f) and by redesignating subsection (g) as subsection (f). (d) Treatment of convertible debt instruments The Secretary of the Treasury, or the Secretary’s designee, shall modify the regulations issued under section 1275(d) of the Internal Revenue Code of 1986 to provide that convertible debt instruments are treated in a manner similar to contingent payment debt

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(b) Regulations The Secretary shall . (C) Section 1092(c) is amended by striking paragraph (4). (D) Section 1092 is amended by striking subsection (f) and by redesignating subsection (g) as subsection (f). (d) Treatment of convertible debt instruments The Secretary of the Treasury, or the Secretary’s designee, shall modify the regulations issued under section 1275(d) of the Internal Revenue Code of 1986 to provide that convertible debt instruments are treated in a manner similar to contingent payment debt instruments. (e) Repeal of certain other superceded rules for determining capital gains and losses (1) In general Part IV of subchapter P of chapter 1 is amended by striking sections 1233, 1234, 1234A, 1234B, 1236, 1256, 1258, 1259, and 1260 (and by striking the items relating to such sections in the table of sections for such part). (2) Conforming amendments related to repeal of section 1233 Section 1092(b) is amended by inserting (as in effect before their repeal) after section 1233 . (3) Conforming amendments related to repeal of section 1234 Section 6045(h)(2) is amended— (A) by striking (as defined in section 1234(b)(2)(A) , and (B) by adding at the end the following: For purposes of the preceding sentence, the term closing transaction means any termination of the taxpayer’s obligation under an option in property other than through the exercise or lapse of the option. . (4) Conforming amendments related to repeal of section 1236 (A) Section 475(d)(3)(A) is amended by striking or section 1236(b) . (B) Section 512(b)(5) is amended by striking section 1236(c) and inserting section 1058(c) . (C) Section 1058 is amended— (i) by striking (as defined in section 1236(c)) in subsection (a), and (ii) by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: (c) Securities For purposes of this section, the term security means any share of stock in any corporation, certificate of stock or interest in any corporation, note, bond, debenture, or evidence of indebtedness, or any evidence of an interest in or right to subscribe to or purchase any of the foregoing. . (5) Conforming amendments related to repeal of section 1256 (A) Section 461(i)(2)(B), as amended by the preceding provisions of this Act, is amended to read as follows: (B) any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs (within the meaning of section 461(j)(4)), and . (B) Section 475(d)(1) is amended by striking sections 263(g), 263A, and 1256(a) and inserting sections 263(g) and 263A . (C) Section 988(c)(1) is amended by striking subparagraphs (D) and (E). (D) Section 1092(a)(3)(C)(ii)(II) is amended by striking section 1256(e) and inserting section 1221(b) . (E) Section 1092(d) is amended by striking paragraphs (5) and (6) and by redesignating paragraphs (7) and (8) as paragraphs (5) and (6), respectively. (F) Section 1212 is amended by striking subsection (c). (G) Section 1223 is amended by striking paragraphs (7) and (14). (H) Section 1281(b)(1)(E) is amended to read as follows: (E) is a hedging transaction (as defined in section 1221(b)), or . (I) Section 1402 is amended by striking subsection (i). (J) Section 4982(e)(6)(B) is amended by striking sections 1256 and 1296 and inserting sections 485 and 1296 . (6) Conforming amendments related to repeal of section 1259 Section 475(f)(1) is amended by striking subparagraph (C) and by redesignating subparagraph (D) as subparagraph (C). (f) Other conforming amendments (1) Section 355(g)(2)(B)(i)(V) is amended to read as follows: (V) any derivative (as defined in section 486), . (2) Section 856(n)(4) is amended by inserting or derivatives (as defined in section 486) after securities (as defined in section 475(c)(2)) . (3) Section 857(e)(2)(B)(i), as amended by the preceding provisions of this Act, is amended by striking section 860E or 1272 and inserting section 485, 860E, or 1272 . (4)

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redesignating subparagraph (D) as subparagraph (C). (f) Other conforming amendments (1) Section 355(g)(2)(B)(i)(V) is amended to read as follows: (V) any derivative (as defined in section 486), . (2) Section 856(n)(4) is amended by inserting or derivatives (as defined in section 486) after securities (as defined in section 475(c)(2)) . (3) Section 857(e)(2)(B)(i), as amended by the preceding provisions of this Act, is amended by striking section 860E or 1272 and inserting section 485, 860E, or 1272 . (4) Section 988(d)(1) is amended— (A) by striking or 1256 and inserting or 485 , and (B) by striking 1092, and 1256 and inserting 485, and 1092 . (5) Section 1091(e) is amended to read as follows: (e) Coordination with mark to market of derivatives Notwithstanding any other provision of this section, a derivative (as defined in section 486) shall not be treated as a security for purposes of this section. . (6) (A) Section 1221(a)(6) is amended to read as follows: (6) any derivative (as defined in section 486), . (B) Section 1221(b) is amended by striking paragraph (1). (7) Section 4975(f)(11)(D) is amended by striking clauses (i) and (ii) and inserting the following: (i) Security The term security means any security described in section 475(c)(2) (without regard to subparagraph (D)(iii) thereof) and any derivative with respect to such a security (within the meaning of section 486). (ii) Commodity The term commodity means any commodity described in section 475(e)(2) (without regard to subparagraph (B)(iii) thereof) and any derivative with respect to such a commodity (within the meaning of section 486). . (8) The table of parts for subchapter E of chapter 1 is amended by adding at the end the following new item: Part IV. Derivatives . (g) Effective dates The amendments made by this section shall apply to— (1) taxable years ending after December 31, 2014, in the case of property acquired and positions established after December 31, 2014, and (2) taxable years ending after December 31, 2019, in the case of any other property or position. For purposes of this subsection, any property acquired on or before December 31, 2014, which becomes part of a straddle (as defined in section 485, as added by this section) after such date shall be treated as a position established after such date. 3402. Modification of certain rules related to hedges (a) Treatment of hedges identified for financial accounting purposes (1) In general Section 1221(b), as amended by the preceding provisions of this Act, is amended to read as follows: (b) Hedging transaction For purposes of this section— (1) In general The term hedging transaction means any transaction described in paragraph (2) and identified under paragraph (3). (2) Transaction described A transaction is described in this paragraph if such transaction is entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily— (A) to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer, (B) 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 (C) to manage such other risks as the Secretary may prescribe in regulations. (3) Identification A transaction is identified under this paragraph if— (A) such transaction is clearly identified as a hedging transaction for purposes of this paragraph 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 (B) such transaction is treated as a hedging transaction (within the meaning of generally accepted accounting principles) for purposes of an audited financial statement of the taxpayer which— (i) is certified as being prepared in accordance with generally accepted accounting principles, and (ii) is used for the purposes of a statement or report— (I) to shareholders, partners, or other proprietors, or to beneficiaries, or

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or entered into (or such other time as the Secretary may by regulations prescribe), or (B) such transaction is treated as a hedging transaction (within the meaning of generally accepted accounting principles) for purposes of an audited financial statement of the taxpayer which— (i) is certified as being prepared in accordance with generally accepted accounting principles, and (ii) is used for the purposes of a statement or report— (I) to shareholders, partners, or other proprietors, or to beneficiaries, or (II) for credit purposes. (4) Treatment of nonidentification or improper identification of hedging transactions The Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction— (A) which would be a hedging transaction if identified under paragraph (3), or (B) which is identified under paragraph (3) but is not a transaction described in paragraph (2). In the case of a transaction identified under paragraph (3) solely by reason of paragraph (3)(B), subparagraph (B) of this paragraph shall not apply with respect to such transaction unless the taxpayer treats such transaction as a hedging transaction for purposes of any provision of this title. (5) Bonds held by an insurance company For purposes of paragraph (2)(A), in the case of an insurance company to which subchapter L applies, any bond, debenture, note, certificate, or other evidence of indebtedness held by the taxpayer shall be treated as ordinary property. (6) Regulations The Secretary shall prescribe such regulations as are appropriate to carryout the purposes of this subsection and subsection (a)(7) in the case of transactions involving related parties. . (2) Conforming amendments (A) Section 856(c)(5)(G)(i) is amended by striking (as defined in clause (ii) or (iii) of section 1221(b)(2)(A)) which is clearly identified pursuant to section 1221(a)(7) and inserting (as defined in section 1221(b) (determined without regard to paragraph (2)(A) thereof) . (B) Section 954(c)(5)(A) is amended to read as follows: (A) Commodity hedging transactions (i) In general For purposes of paragraph (1)(C)(i), the term commodity hedging transaction means any transaction with respect to a commodity if such transaction would be a hedging transaction under section 1221(b) if— (I) the only transactions described in paragraph (2) thereof were transactions described in clause (ii), and (II) paragraphs (3) and (4) thereof were applied by substituting controlled foreign corporation for taxpayer each place it appears. (ii) Transaction described A transaction is described in this clause if such transaction is entered into by the controlled foreign corporation in the normal course of the controlled foreign corporation’s trade or business primarily— (I) to manage risk of price changes or currency fluctuations with respect to ordinary property or property described in section 1231(b) which is held or to be held by the controlled foreign corporation, or (II) to manage such other risks as the Secretary may prescribe in regulations. . (C) Section 1221(a)(7) is amended by striking which is clearly and all that follows through regulations prescribe) . (b) Special rule for commodity hedging transactions involving related controlled foreign corporations Section 954(c)(5)(A), as amended by subsection (a), is amended by adding at the end the following new clause: (iii) Application to related controlled foreign corporations (I) In general In the case of qualified property, clause (ii)(I) shall be applied by substituting the controlled foreign corporation or another controlled foreign corporation which is a related person (within the meaning of subsection (d)(3)) for the controlled foreign corporation . (II) Qualified property For purposes of this clause, the term qualified property means ordinary property or property described in section 1231(b) (if disposed of at a gain) the income from the disposition of which would be neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United

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corporation or another controlled foreign corporation which is a related person (within the meaning of subsection (d)(3)) for the controlled foreign corporation . (II) Qualified property For purposes of this clause, the term qualified property means ordinary property or property described in section 1231(b) (if disposed of at a gain) the income from the disposition of which would be neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States. . (c) Effective date The amendments made by this section shall apply to transactions entered into after December 31, 2014. 2 Treatment of debt instruments 3411. Current inclusion in income of market discount (a) In general Subpart B of part V of subchapter P of chapter 1 is amended by redesignating section 1278 as section 1279 and by inserting after section 1277 the following new section: 1278. Current inclusion in income of market discount on bonds acquired after 2014 (a) In general There shall be included in the gross income of the holder of any market discount bond acquired after December 31, 2014, an amount equal to the sum of the daily portions of the market discount for each day during the taxable year on which such holder held such bond. (b) Determination of daily portions (1) In general For purposes of subsection (a), the daily portion of the market discount on any market discount bond shall be an amount equal to the daily portion of original issue discount which would be includible in gross income under section 1272(a) (determined without regard to paragraph (2) thereof) if such bond had been— (A) originally issued on the date on which such bond was acquired by the taxpayer, (B) for an issue price equal to the basis of such bond immediately after such acquisition. (2) Coordination where bond has original issue discount In the case of any bond having original issue discount, the daily portion determined under paragraph (1) shall be reduced by the daily portion of original issue discount includible in gross income under section 1272(a) (determined without regard to paragraph (2) thereof) with respect to such bond. (3) Special rule where partial principal payments In the case of a bond the principal of which may be paid in 2 or more payments, the daily portions of market discount shall be determined under regulations prescribed by the Secretary. (c) Limitation (1) In general The amount of market discount allocable to any accrual period for purposes of determining the sum of the daily portions under subsection (a) shall not exceed the excess (if any) of— (A) the product of— (i) the maximum accrual rate determined under paragraph (2), properly adjusted for the length of the accrual period, multiplied by (ii) the adjusted basis of such bond at the beginning of such accrual period, over (B) the sum of the qualified stated interest and original issue discount allocable to such accrual period. (2) Maximum accrual rate The maximum accrual rate determined under this paragraph with respect to any bond is the greater of— (A) such bonds’s yield to maturity (determined as of the date of the issuance of such bond) plus 5 percentage points, or (B) the applicable Federal rate for such bond (determined under section 1274(d) as of the date of the acquisition of such bond and on the basis of the remaining term of such bond as of such date) plus 10 percentage points. (3) Application to pools In the case of debt instruments to which section 1272(a)(6) applies, rules similar to the rules of such section shall apply for purposes of determining the daily portions of market discount. (4) Accrual period For purposes of this subsection, the term accrual period has the meaning given such term in section 1272(a)(5). (d) Special rules (1) Accruals treated as interest Except for purposes of sections 103, 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount included in gross income under this section shall be treated as interest for purposes of this title. (2) Basis adjustment The

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of determining the daily portions of market discount. (4) Accrual period For purposes of this subsection, the term accrual period has the meaning given such term in section 1272(a)(5). (d) Special rules (1) Accruals treated as interest Except for purposes of sections 103, 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount included in gross income under this section shall be treated as interest for purposes of this title. (2) Basis adjustment The basis of any market discount bond in the hands of the taxpayer shall be increased by the amount included in gross income pursuant to this section. (3) Treatment of loss on disposition So much of any loss recognized by the taxpayer on the disposition of a market discount bond as does not exceed the aggregate amounts included in the taxpayer’s gross income under subsection (a) with respect to such bond shall be treated for purposes of this title as an ordinary loss. . (b) Treatment of market discount on short-Term nongovernmental bonds (1) Accrual basis taxpayers, etc Section 1283 is amended by striking subsection (c) and redesignating subsection (d) as subsection (c). (2) Other taxpayers (A) Section 1271(a)(3) is amended— (i) by striking all that precedes subparagraph (C) and inserting the following: (3) Certain short-term obligations (A) In general On the sale or exchange of any short-term obligation (as defined in section 1283(a)(1)), any gain realized which does not exceed an amount equal to the ratable share of the acquisition discount shall be treated as ordinary income. , and (ii) by redesignating subparagraphs (C), (D), and (E) as subparagraphs (B), (C), and (D), respectively. (B) Section 1271(a) is amended by striking paragraph (4). (C) Section 1283(c)(3), as redesignated by paragraph (1), is amended by striking paragraphs (3) and (4) of section 1271(a) and inserting section 1271(a)(3) . (c) Coordination with rules related To treating market discount as ordinary income upon disposition (1) In general Section 1276 is amended by adding at the end the following new subsection: (e) Coordination with rules for current inclusion of market discount This section shall not apply to any market discount bond to which section 1278 applies. . (2) Coordination with deferral of interest deduction Section 1277 is amended by adding at the end the following new subsection: (d) Coordination with rules for current inclusion of market discount This section shall not apply to any market discount bond to which section 1278 applies. . (3) Coordination with election to include market discount currently Section 1279(b), as redesignated by subsection (a), is amended by adding at the end the following new paragraph: (5) Coordination with rules for current inclusion of market discount This subsection shall not apply to any market discount bond to which section 1278 applies. . (d) Treatment of certain bonds held by partnerships (1) Transfers of partnership interests Section 1279(a), as redesignated by subsection (a), is amended by adding at the end the following new paragraph: (6) Transfers of partnership interests In the case of a transfer described in section 743 of an interest in a partnership holding a bond, the partnership shall be treated as acquiring the transferee partner’s proportionate share of such bond at the time of such transfer. . (2) Distribution of bonds by partnerships Section 1279(a)(2), as redesignated by subsection (a), is amended by adding at the end the following new subparagraph: (D) Distribution by partnership If the basis of the taxpayer in a bond is determined under section 734(a)(2) or (b), for purposes of subparagraph (A)(ii), the basis of such bond shall not be less than its fair market value immediately after its acquisition by the taxpayer. . (e) Modernization of certain definitions (1) Repeal of superceded exception for market discount bonds acquired at issue Section 1279(a)(1), as redesignated by subsection (a), is amended by striking subparagraph (D) (2) Revised issue price Section 1279(a)(4), as redesignated

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basis of the taxpayer in a bond is determined under section 734(a)(2) or (b), for purposes of subparagraph (A)(ii), the basis of such bond shall not be less than its fair market value immediately after its acquisition by the taxpayer. . (e) Modernization of certain definitions (1) Repeal of superceded exception for market discount bonds acquired at issue Section 1279(a)(1), as redesignated by subsection (a), is amended by striking subparagraph (D) (2) Revised issue price Section 1279(a)(4), as redesignated by subsection (a), is amended— (A) by redesignating subparagraphs (A) and (B) as clauses (i) and (ii) and by indenting such clauses appropriately, (B) by striking means the sum of— and inserting means the excess of— (A) the sum of— , (C) by striking the period at the end and inserting , over , and (D) by adding at the end the following new subparagraph: (B) the sum of— (i) any payments other than qualified stated interest made under the bond during periods before the acquisition of the bond by the taxpayer, and (ii) any premium which has accrued during such periods (determined as if owned at all times by the original holder). . (3) Redemption price (A) In general Section 1273(a)(2) is amended to read as follows: (2) Redemption price (A) In general The term redemption price means the sum of all payments provided by the debt instrument other than qualified stated interest. (B) Qualified stated interest The term qualified stated interest means stated interest that is unconditionally payable in money and other property (other than a debt instrument of the issuer) at least annually at a fixed rate (or to the extent provided by regulations, at a variable rate). (C) Basis adjustment The basis of any debt instrument shall be reduced by the amount of any payment received other than qualified stated interest. . (B) Conforming amendments (i) Each of the following provisions is amended by striking stated redemption price at maturity and inserting redemption price : (I) Section 1271(a)(3)(B) (as redesignated by subsection (b)). (II) Section 1273(a)(1)(A). (III) Section 1273(a)(3). (IV) Section 1273(b)(4). (V) Section 1274(c)(1)(A). (VI) Section 1279(a)(5) (as redesignated by subsection (a)). (VII) Section 1283(a)(2)(A). (VIII) Section 1286(a)(1). (IX) The heading and text of section 1286(e)(4). (ii) Section 108(e)(10)(B) is amended by striking stated both places it appears. (iii) Section 1272(a)(6)(A)(i) is amended by striking stated . (iv) Subparagraphs (A)(i) and (C) of section 1279(a)(2) (as redesignated by subsection (a)) are each amended by striking the stated redemption price of the bond at maturity and inserting the redemption price of the bond . (v) Section 1279(a)(2)(B) (as redesignated by subsection (a)) is amended by striking the stated redemption price of such bond at maturity and inserting the redemption price of such bond . (4) Adjusted issue price Section 1275(a) is amended by adding at the end the following new paragraph: (5) Adjusted issue price (A) In general For purposes of this part, the adjusted issue price of any debt instrument is its issue price— (i) increased by the aggregate of the original issue discount includible in the gross income of all holders for prior periods (determined without regard to paragraph (7) of section 1272(a)), or, in the case of a tax-exempt obligation, the aggregate amount which accrued in the manner provided by this subsection (determined without regard to such paragraph (7)) for all prior periods, and (ii) reduced by the sum of— (I) any payments other than qualified stated interest previously made on the debt instrument, and (II) in the case of a debt instrument which was issued with amortizable bond premium (as defined in section 171(b)), the aggregate amount by which the basis of such instrument would have been reduced under section 1016(a)(5) for prior periods if the instrument had been held by the original holder at all times. (B) De minimis rule The adjusted issue price of the issuer shall be properly adjusted to take into account that section 1273(a)(3) does not apply to the

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previously made on the debt instrument, and (II) in the case of a debt instrument which was issued with amortizable bond premium (as defined in section 171(b)), the aggregate amount by which the basis of such instrument would have been reduced under section 1016(a)(5) for prior periods if the instrument had been held by the original holder at all times. (B) De minimis rule The adjusted issue price of the issuer shall be properly adjusted to take into account that section 1273(a)(3) does not apply to the deduction under section 163 for original issue discount. . (5) Certain other terms Paragraphs (3), (4), and (5) of section 1272(a) are amended to read as follows: (3) Determination of daily portions For purposes of paragraph (1), the daily portion of the original issue discount on any debt instrument shall be determined by allocating to each day in any accrual period its ratable share of the original issue discount allocable to such accrual period. For purposes of the preceding sentence, the original issue discount allocable to any accrual period is the excess (if any) of— (A) the product of— (i) the adjusted issue price of the debt instrument at the beginning of such accrual period, multiplied by (ii) the yield to maturity of the debt instrument properly adjusted for the length of the accrual period, over (B) the amount of any qualified stated interest allocable to such accrual period. (4) Yield to maturity For purposes of this subsection, the term yield to maturity means the discount rate that, when used in computing the present value of all principal and interest payments to be made under the debt instrument produces an amount equal to the issue price of the debt instrument. (5) Accrual period For purposes of this subsection, the term accrual period shall be determined under regulations prescribed by the Secretary, provided that an accrual period shall in no event be longer than one year. . (f) Broker reporting of includible discount on bonds (1) In general Section 6045 is amended by adding at the end the following new subsection: (i) Discount on bonds (1) In general If any customer of a broker holds a covered bond in an account with such broker at any time during a calendar year— (A) such broker shall file a return under subsection (a) for such calendar year, and (B) such return shall include with respect to each such covered bond— (i) the amount (if any) includible in the gross income of such customer as original issue discount with respect to such bond under section 1272 for periods during such calendar year, and. (ii) the amount (if any) includible in the gross income of such customer as market discount with respect to such bond under section 1278(a) for periods during such calendar year. (2) Covered bond For purposes of this subsection, the term covered bond means any obligation to which section 1272 or 1278(a) applies if such obligation— (A) was acquired after December 31, 2014, through a transaction in the account in which such obligation is held, or (B) was transferred to such account from an account in which such obligation was a covered bond, but only if the broker received a statement under section 6045A with respect to the transfer. (3) Statements to customers The requirements of subsections (b) shall apply with respect to any return filed under subsection (a) by reason of this subsection. . (2) Information required in connection with transfers of covered bonds to brokers Subsection (a) of section 6045A is amended— (A) by inserting or a covered bond (as defined in section 6045(i)(2)) after covered security (as defined in section 6045(g)(3)) , and (B) by striking section 6045(g) and inserting subsections (g) and (i) of section 6045 . (3) Coordination with reporting by issuer of original issue discount Paragraph (6) of section 6049(d) is amended by adding at the end the following new subparagraph: (C) Prevention of double reporting Except as otherwise provided by the Secretary, original issue discount with respect to any obligation shall not be required to be reported under this section if such original

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(as defined in section 6045(g)(3)) , and (B) by striking section 6045(g) and inserting subsections (g) and (i) of section 6045 . (3) Coordination with reporting by issuer of original issue discount Paragraph (6) of section 6049(d) is amended by adding at the end the following new subparagraph: (C) Prevention of double reporting Except as otherwise provided by the Secretary, original issue discount with respect to any obligation shall not be required to be reported under this section if such original issue discount is required to be reported with respect to such obligation under section 6045(i). . (g) Conforming amendments (1) Section 857(e)(2)(B)(i), as amended by the preceding provisions of this Act, is amended by striking or 1272 and inserting 1272, or 1278 . (2) Section 1042(d) is amended by striking section 1278(a)(2)(A)(ii) in the matter following paragraph (2) and inserting section 1279(a)(2)(A)(ii) . (3) Section 1016(a), as amended by the preceding provisions of this Act, is amended by adding at the end the following new paragraph: (39) in the case of any debt instrument, to extend provided in sections 1272(d)(1), 1273(a)(2)(C), and 1278(d)(2). . (4) Section 1276 is amended by inserting on bonds not subject to current inclusion after accrued market discount in the heading thereof. (5) Section 1277 is amended by inserting on bonds not subject to current inclusion after accrued market discount in the heading thereof. (6) Section 1281 is amended by striking subsection (c). (7) Section 1282 is amended by striking subsection (d). (8) The table of sections for subpart B of part V of subchapter P of chapter 1 is amended to read as follows: Sec. 1276. Disposition gain representing accrued market discount on bonds not subject to current inclusion treated as ordinary income. Sec. 1277. Deferral of interest deduction allocable to accrued market discount on bonds not subject to current inclusion. Sec. 1278. Current inclusion in income of market discount on bonds acquired after 2014. Sec. 1279. Definitions and special rules. . (h) Effective date (1) In general Except as provided in paragraph (2), the amendments made by this section shall apply to obligations acquired after December 31, 2014. (2) Modernization of terms The amendments made by subsection (e) shall take effect on January 1, 2015. 3412. Treatment of certain exchanges of debt instruments (a) Determination of issue price (1) In general Subpart A of part V of subchapter P is amended by inserting after section 1274A the following new section: 1274B. Determination of issue price in the case of an exchange of debt instruments (a) In general In the case of an exchange (including by significant modification) by an issuer of a new debt instrument for an existing debt instrument issued by the same issuer, the issue price of the new debt instrument shall be the least of— (1) the adjusted issue price of the existing debt instrument, (2) the stated principal amount of the new debt instrument, or (3) the imputed principal amount of the new debt instrument. (b) Applicable rate The discount rate used to determine the imputed principal amount of the new debt instrument under subsection (a)(3) shall be the lesser of— (1) the applicable Federal rate determined under section 1274(d) with respect to the new debt instrument, or (2) the greater of— (A) the rate of qualified stated interest with respect to the existing debt instrument, or (B) the applicable Federal rate determined under section 1274(d) with respect to the existing debt instrument. (c) Treatment of investment units Rules similar to the rules of section 1273(c)(2) shall apply for purposes of this section. . (2) Conforming amendments (A) Section 108(e)(10)(B) is amended by striking and 1274 and inserting , 1274, and 1274B . (B) Section 1274(c)(3), as amended by the preceding provisions of this Act, is amended by adding at the end the following new subparagraph: (F) Certain modified debt Any debt instrument the issue price of which is determined under section 1274B. . (C) The table of sections for subpart A of part V of

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Rules similar to the rules of section 1273(c)(2) shall apply for purposes of this section. . (2) Conforming amendments (A) Section 108(e)(10)(B) is amended by striking and 1274 and inserting , 1274, and 1274B . (B) Section 1274(c)(3), as amended by the preceding provisions of this Act, is amended by adding at the end the following new subparagraph: (F) Certain modified debt Any debt instrument the issue price of which is determined under section 1274B. . (C) The table of sections for subpart A of part V of subchapter P is amended by inserting after the item relating to section 1274A the following new item: Sec. 1274B. Determination of issue price in the case of an exchange of debt instruments. . (b) Nonrecognition of gain or loss by holder (1) In general Section 1037 is amended to read as follows: 1037. Certain exchanges of debt instruments (a) Nonrecognition of gain or loss No gain or loss shall be recognized to the holder of a debt instrument if such existing debt instrument is exchanged solely for a new debt instrument (whether by exchange or significant modification) issued by the same issuer. (b) Property attributable to accrued interest Subsection (a) shall not apply to the extent that any property received is attributable to interest which accrued on the existing debt instrument on or after the beginning of the holder’s holding period of such instrument. (c) Limitation on gain recognition in case of exchange not solely for a new debt instrument In the case of an exchange of a debt instrument to which section 1035(d) applies, the amount of gain recognized shall not exceed the amount of gain which would have been recognized if section 1274B did not apply. (d) Cross references (1) For rules relating to securities exchanged or distributed in a reorganization, etc., see sections 354, 355, and 356. (2) For rules relating to recognition of gain or loss where exchange was not made solely for another debt instrument of the issuer, see subsections (d) and (e) of section 1035. (3) For rules relating to basis of obligations acquired in an exchange described in subsection (a), see subsection (f) of section 1035. . (2) Clerical amendment The table of sections for part III of subchapter O of chapter 1 is amended by striking the item relating to section 1037 and inserting the following new item: Sec. 1037. Certain exchanges of debt instruments. . (c) Application to excess principal rules for corporate reorganizations (1) Exchanges of securities in reorganizations (A) In general Section 354(a)(2)(A)(i) is amended to read as follows: (i) the issue price of any such securities received exceeds the adjusted issue price of any such securities surrendered, or . (B) Definitions Section 354(a)(2) is amended by inserting after subparagraph (C) the following new subparagraph: (D) Definitions For purposes of this paragraph— (i) Issue price The issue price of any security shall be determined under sections 1273, 1274, and 1274B. (ii) Adjusted issue price The adjusted issue price of any security shall be determined under section 1275(a)(5). . (2) Section 355 transactions Section 355(a)(3)(A)(i) is amended to read as follows: (i) the issue price (as defined in section 354(a)(2)(D)) of the securities in the controlled corporation which are received exceeds the adjusted issue price (as so defined) of the securities which are surrendered in connection with such distribution, or . (3) Section 356 transactions (A) In general Section 356(d)(2)(B)(ii) is amended to read as follows: (ii) the issue price (as defined in section 354(a)(2)(D)) of such securities received exceeds the adjusted issue price (as so defined) of such securities surrendered, . (B) Conforming amendments (i) Section 356(d)(2)(B) is amended in the matter following clause (ii)— (I) by striking “the fair market value of such excess” and inserting “the amount of such excess”, and (II) by striking “the entire principal amount” and inserting “the entire issue price (as so defined)”. (ii) Section 356(d)(2)(C) is amended to read as follows: (C) Greater principal amount in section 355

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securities received exceeds the adjusted issue price (as so defined) of such securities surrendered, . (B) Conforming amendments (i) Section 356(d)(2)(B) is amended in the matter following clause (ii)— (I) by striking “the fair market value of such excess” and inserting “the amount of such excess”, and (II) by striking “the entire principal amount” and inserting “the entire issue price (as so defined)”. (ii) Section 356(d)(2)(C) is amended to read as follows: (C) Greater principal amount in section 355 transaction If, in an exchange or distribution described in section 355, the issue price (as defined in section 354(a)(2)(D)) of the securities in the controlled corporation which are received exceeds the adjusted issue price (as so defined) of the securities in the distributing corporation which are surrendered, then, with respect to such securities received, the term other property means only the amount of such excess. . (d) Effective date The amendments made by this section shall apply to transactions after December 31, 2014. 3413. Coordination with rules for inclusion not later than for financial accounting purposes (a) In general Section 451(b), as amended by the preceding provisions of this Act, is amended by inserting immediately after the heading thereof (and before paragraph (1) thereof) the following: Notwithstanding any other provision of law (including part V of subchapter P)— . (b) Effective date

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; change in method of accounting The amendment made by subsection (a) shall be treated for purposes of section 3303(g) as though such amendment were made by section 3303(a). 3414. Rules regarding certain government debt (a) Repeal of certain superceded rules Subpart B of part II of subchapter E of chapter 1 is amended by striking section 454 (and by striking the item relating to such section in the table of sections for such subpart). (b) Preservation of rules related to United States savings bonds Subpart A of part V of subchapter P of chapter 1 is amended by inserting after section 1272 the following new section: 1272A. United States savings bonds (a) Election To include increase in redemption price in income A taxpayer holding a United States savings bond may elect (on the taxpayer’s return for the taxable year) to treat any increase in the redemption price as income received in the taxable year. If any such election is made with respect to any such obligation, it shall apply also to all such obligations owned by the taxpayer at the beginning of the first taxable year to which it applies and to all such obligations thereafter acquired by the taxpayer and shall be binding for all subsequent taxable years, unless revoked with the consent of the Secretary. In the case of any such obligations owned by the taxpayer at the beginning of the first taxable year to which the taxpayer’s election applies, the increase in the redemption price of such obligations occurring between the date of acquisition and the first day of such taxable year shall also be treated as income received in such taxable year. (b) Treatment upon redemption or final maturity The increase in redemption value of a United States savings bond (to the extent not previously included in gross income) in excess of the adjusted basis of such bond shall be included in gross income in the earlier of the taxable year in which the bond is redeemed or in the taxable year of final maturity. (c) Cross references (1) For exception from current inclusion of original issue discount, see section 1272(a)(2)(B). (2) For exception from market discount rules, see section 1279(a)(1)(B)(iii). . (c) Conforming amendments (1) Section 852(b)(2), as amended by the preceding provisions of this Act, is amended by striking subparagraph (E) and redesignating subparagraphs (F) and (G) as subparagraphs (E) and (F), respectively. (2) Section 1283(c)(3), as amended by the preceding provisions of this Act, is amended by striking all that precedes shall not apply and inserting the following: (3) Coordination with section 1271 Section 1271(a)(3) . (3) Section 7871(a)(6) is amended by adding and at the end of subparagraph (A) and by striking subparagraph (C). (4) The table of sections for subpart A of part V of subchapter P of chapter 1 is amended by inserting after the item relating to section 1272 the following new item: Sec. 1272A. United States savings bonds. . (d) Effective date The amendments made by this section shall take effect on the date of the enactment of this Act. 3 Certain rules for determining gain and loss 3421. Cost basis of specified securities determined without regard to identification (a) In general Section 1012 is amended by adding at the end the following new subsection: (e) Cost basis of specified securities determined without regard to identification Except to the extent otherwise provided in this section or in regulations thereunder permitting the use of an average basis method for determining cost, in the case of the sale, exchange, or other disposition of a specified security (within the meaning of section 6045(g)(3)(B)), the basis (and holding period) of such security shall be determined on a first-in first-out basis. . (b) Conforming amendments (1) Section 1012(c)(1) is amended by striking the conventions prescribed by regulations under this section and inserting the method applicable for determining the cost of such security . (2) Section 1012(c)(2)(A) is amended by striking section 1012 and inserting this section (as in effect prior to the enactment of the Tax

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security (within the meaning of section 6045(g)(3)(B)), the basis (and holding period) of such security shall be determined on a first-in first-out basis. . (b) Conforming amendments (1) Section 1012(c)(1) is amended by striking the conventions prescribed by regulations under this section and inserting the method applicable for determining the cost of such security . (2) Section 1012(c)(2)(A) is amended by striking section 1012 and inserting this section (as in effect prior to the enactment of the Tax Reform Act of 2014 ) . (3) Section 6045(g)(2)(B)(i)(I) is amended by striking unless the customer notifies the broker by means of making an adequate identification of the stock sold or transferred . (c) Effective date The amendments made by this section shall apply to sales, exchanges, and other dispositions after December 31, 2014. 3422. Wash sales by related parties (a) Application of wash sale rules to related parties Subsection (a) of section 1091 is amended by striking the taxpayer has acquired and inserting the taxpayer (or a related party) has acquired . (b) Modification of basis adjustment rule To prevent transfer of losses to related parties Subsection (d) of section 1091 is amended to read as follows: (d) Adjustment to basis in case of wash sale If the taxpayer (or the taxpayer’s spouse) acquires substantially identical stock or securities during the period which— (1) begins 30 days before the disposition with respect to which a deduction was disallowed under subsection (a), and (2) ends with the close of the taxpayer’s first taxable year which begins after such disposition, the basis of such stock or securities shall be increased by the amount of the deduction so disallowed (reduced by any amount of such deduction taken into account under this subsection to increase the basis of stock or securities previously acquired). . (c) Related party Section 1091 is amended by adding at the end the following new subsection: (g) Related party For purposes of this section— (1) In general The term related party means— (A) the taxpayer’s spouse, (B) any dependent of the taxpayer and any other taxpayer with respect to whom the taxpayer is a dependent, (C) any individual, corporation, partnership, trust, or estate which controls, or is controlled by, (within the meaning of section 954(d)(3)) the taxpayer or any individual described in subparagraph (A) or (B) with respect to the taxpayer (or any combination thereof), (D) any individual retirement plan, Archer MSA (as defined in section 220(d)), or health savings account (as defined in section 223(d)), of the taxpayer or of any individual described in subparagraph (A) or (B) with respect to the taxpayer, (E) any account under a qualified tuition program described in section 529 or a Coverdell education savings account (as defined in section 530(b)) if the taxpayer, or any individual described in subparagraph (A) or (B) with respect to the taxpayer, is the designated beneficiary of such account or has the right to make any decision with respect to the investment of any amount in such account, and (F) any account under— (i) a plan described in section 401(a), (ii) an annuity plan described in section 403(a), (iii) an annuity contract described in section 403(b), or (iv) an eligible deferred compensation plan described in section 457(b) and maintained by an employer described in section 457(e)(1)(A), if the taxpayer or any individual described in subparagraph (A) or (B) with respect to the taxpayer has the right to make any decision with respect to the investment of any amount in such account. (2) Rules for determining status (A) Relationships determined at time of acquisition Determinations under paragraph (1) shall be made as of the time of the purchase or exchange referred to in subsection (a) except that determinations under subparagraphs (A) and (B) of paragraph (1) shall be made for the taxable year which includes such purchase or exchange. (B) Determination of marital status (i) In general Except as provided in clause (ii), marital status shall be determined under section

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in such account. (2) Rules for determining status (A) Relationships determined at time of acquisition Determinations under paragraph (1) shall be made as of the time of the purchase or exchange referred to in subsection (a) except that determinations under subparagraphs (A) and (B) of paragraph (1) shall be made for the taxable year which includes such purchase or exchange. (B) Determination of marital status (i) In general Except as provided in clause (ii), marital status shall be determined under section 7703. (ii) Special rule for married individuals filing separately and living apart A husband and wife who— (I) file separate returns for any taxable year, and (II) live apart at all times during such taxable year, shall not be treated as married individuals. (3) Regulations The Secretary shall issue such regulations or other guidance as may be necessary to prevent the avoidance of the purposes of this subsection, including regulations which treat persons as related parties if such persons are formed or availed of to avoid the purposes of this subsection. . (d) Effective date The amendments made by this section shall apply to sales and other dispositions after December 31, 2014. 3423. Nonrecognition for derivative transactions by a corporation with respect to its stock (a) In general Section 1032 is amended to read as follows: 1032. Derivative transactions by a corporation with respect to its stock (a) In general Except as otherwise provided in this section or section 76, section 1032 derivative items of a corporation shall not be taken into account in determining such corporation’s liability for tax under this subtitle. (b) Income recognition on certain forward contracts (1) In general If— (A) a corporation acquires its stock, and (B) such acquisition is part of a plan (or series of related transactions) pursuant to which the corporation enters into a forward contract with respect to its stock, such corporation shall include amounts in income as if the excess of the amount to be received under the forward contract over the fair market value of the stock as of the date the corporation entered into the forward contract were original issue discount on a debt instrument acquired on such date. The preceding sentence shall apply only to the extent that the amount of stock involved in the forward contract does not exceed the amount acquired as described in subparagraph (A). (2) Plan presumed to exist If a corporation enters into a forward contract with respect to its stock within the 60-day period beginning on the date which is 30 days before the date that the corporation acquires its stock, such acquisition shall be treated as pursuant to a plan described in paragraph (1)(B) unless it is established that entering into such contract and such acquisition are not pursuant to a plan or series of related transactions. (c) Section 1032 derivative items For purposes of this section, the term section 1032 derivative item means any item of income, gain, loss, or deduction if— (1) such item arises out of the rights or obligations under any derivative (as defined in section 486) to the extent such derivative relates to the corporation’s stock (or is attributable to any transfer or extinguishment of any such right or obligation), or (2) such item arises under any other contract or position but only to the extent that such item reflects (or is determined by reference to) changes in the value of such stock or distributions thereon. Such term shall not include any deduction with respect to which section 83(h) applies and shall not include any deduction for any item which is in the nature of compensation for services rendered. For purposes of this subparagraph, de minimis relationships, as determined by the Secretary, shall be disregarded. (d) Treasury stock treated as stock Any reference in this section to stock shall be treated as including a reference to treasury stock. (e) Regulations The Secretary shall prescribe such regulations or other guidance as may be appropriate to carry out the purposes of this section, including regulations

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any deduction for any item which is in the nature of compensation for services rendered. For purposes of this subparagraph, de minimis relationships, as determined by the Secretary, shall be disregarded. (d) Treasury stock treated as stock Any reference in this section to stock shall be treated as including a reference to treasury stock. (e) Regulations The Secretary shall prescribe such regulations or other guidance as may be appropriate to carry out the purposes of this section, including regulations or other guidance which— (1) treat the portion of an instrument which is described in subsection (c)(1) separately from the portion of such instrument which is not so described, and (2) treat section 1032 derivative items as contributions to the capital of the corporation to the extent that the application of this section would be inconsistent with the purposes of section 76(b). . (b) Clerical amendment The item relating to section 1032 in the table of sections for part III of subchapter O of chapter 1 is amended to read as follows: Sec. 1032. Derivative transactions by a corporation with respect to its stock. . (c) Effective date The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act. 4 Tax favored bonds 3431. Termination of private activity bonds (a) In general Paragraph (1) of section 103(b) is amended— (1) by striking which is not a qualified bond (within the meaning of section 141) , and (2) by striking which is not a qualified bond in the heading thereof. (b) Conforming amendments (1) Section 141 is amended by striking subsection (e). (2) Subpart A of part IV of subchapter B of chapter 1 is amended by striking sections 142, 143, 144, 145, 146, and 147 (and by striking each of the items relating to such sections in the table of sections for such subpart). (3) Section 25 is amended by adding at the end the following new subsection: (j) Coordination with repeal of private activity bonds Any reference to section 143, 144, or 146 shall be treated as a reference to such section as in effect before its repeal by the Tax Reform Act of 2014 . . (4) Section 26(b)(2) is amended by striking subparagraph (D). (5) Section 141(b) is amended by striking paragraphs (5) and (9) and by redesignating paragraphs (6), (7), and (8) as paragraphs (5), (6), and (7), respectively. (6) Section 141(d) is amended by striking paragraph (5) and by redesignating paragraphs (6) and (7) as paragraphs (5) and (6). (7) Section 148(b)(2)(E) is amended by striking in the case of a bond other than a private activity bond, . (8) Section 148(b)(3) is amended to read as follows: (3) Tax-exempt bonds not treated as investment property The term investment property does not include any tax-exempt bond. . (9) Section 148(f)(3) is amended by striking or is a private activity bond in the fourth sentence. (10) Section 148(f)(4) is amended— (A) by striking (determined in accordance with section 147(b)(2)(A)) in the flush matter following subparagraph (A)(ii), (B) by striking the last sentence of subparagraph (D)(v), and (C) by adding at the end the following new subparagraph: (E) Average maturity For purposes of this paragraph, the average maturity of any issue shall be determined by taking into account the respective issue prices of the bonds issued as part of such issue. . (11) Section 148(f)(4)(A) is amended in the flush matter after clause (ii) by striking In the case of an issue no bond of which is a private activity bond, clause and inserting Clause . (12) Section 148(f)(4)(B)(ii) is amended— (A) by striking subclause (II), and (B) by striking certain bonds.— and all that follows through issue described in subclause (II) and inserting certain bonds.— In the case of an issue no bond of which is a tax or revenue anticipation bond . (13) (A) Section 148(f)(4)(C)(iv) is amended to read as follows: (iv) Construction issue For purposes of this subparagraph, the term construction issue means any issue if at least 75 percent of the available construction proceeds of such issue are to be used for

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(A) by striking subclause (II), and (B) by striking certain bonds.— and all that follows through issue described in subclause (II) and inserting certain bonds.— In the case of an issue no bond of which is a tax or revenue anticipation bond . (13) (A) Section 148(f)(4)(C)(iv) is amended to read as follows: (iv) Construction issue For purposes of this subparagraph, the term construction issue means any issue if at least 75 percent of the available construction proceeds of such issue are to be used for construction expenditures with respect to property which is to be owned by a governmental unit. . (B) Section 148(f)(4)(C) is amended by redesignating clauses (v) through (xvii) as clauses (viii) through (xx), respectively, and by inserting after clause (iv) the following new clauses: (v) Construction For purposes of this subparagraph, the term construction includes reconstruction and rehabilitation. (vi) Safe harbor for leases and management contracts For purposes of this subparagraph, property leased by a governmental unit shall be treated as owned by such governmental unit if— (I) the lessee makes an irrevocable election (binding on the lessee and all successors in interest under the lease) not to claim depreciation or an investment credit with respect to such property, (II) the lease term (as defined in section 168(h)(1)) is not more than 80 percent of the reasonably expected economic life of the property, and (III) the lessee has no option to purchase the property other than at fair market value (as of the time such option is exercised). (vii) Determination of economic life For purposes of clause (vi), the reasonably expected economic life of any facility shall be determined as of the later of— (I) the date on which the bonds are issued, or (II) the date on which the facility is placed in service (or expected to be placed in service). . (C) Section 148(f)(4)(D) is amended by striking subparagraph (C)(iv) each place it appears and inserting subparagraph (C)(v) . (14) Section 148(f)(4)(D)(i) is amended— (A) by striking subclause (II), (B) by striking (other than private activity bonds) in subclause (IV), and (C) by redesignating subclauses (III) and (IV) (as amended by subparagraph (B)) as subclauses (II) and (III). (15) Section 148(f)(4)(D)(ii) is amended by striking subclause (IV) both places it appears and inserting subclause (III) . (16) Section 148(f)(4)(D)(iii) is amended by striking subclause (IV) and inserting subclause (III) . (17) Section 148(f)(4)(D)(iv)(II) is amended by striking clause (i)(IV) and inserting clause (i)(III) . (18) Section 148(f)(4)(D)(vi) is amended by striking the last sentence. (19) Section 148(f)(7) is amended by striking subparagraph (A) and by redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B). (20) Section 149(b)(3) is amended— (A) by striking subparagraph (C) and by redesignating subparagraphs (D) and (E) as subparagraphs (C) and (D), and (B) by striking subparagraph (E) in subparagraph (A)(iv) and inserting subparagraph (D) . (21) Section 149(e)(2) is amended— (A) by striking subparagraphs (C), (D), and (F) and by redesignating subparagraphs (E) and (G) as subparagraphs (C) and (D), respectively, and (B) by striking the second sentence. (22) Section 149(f)(6) is amended— (A) by striking subparagraph (B), and (B) by striking For purposes of this subsection and all that follows through The term and inserting the following: For purposes of this subsection, the term . (23) Section 150 is amended by striking subsections (b) and (c) and by redesignating subsections (d) and (e) as subsections (b) and (c), respectively. (24) Section 150(e)(3) is amended to read as follows: (3) Public approval requirement A bond shall not be treated as part of an issue which meets the requirements of paragraph (1) unless such bond satisfies the requirements of section 147(f)(2) (as in effect before its repeal by the Tax Reform Act of 2014 ). . (25) Section 269A(b)(3) is amended by striking 144(a)(3) and inserting 414(n)(6)(A) . (26) Section 414(m)(5) is amended by striking section 144(a)(3)

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and (e) as subsections (b) and (c), respectively. (24) Section 150(e)(3) is amended to read as follows: (3) Public approval requirement A bond shall not be treated as part of an issue which meets the requirements of paragraph (1) unless such bond satisfies the requirements of section 147(f)(2) (as in effect before its repeal by the Tax Reform Act of 2014 ). . (25) Section 269A(b)(3) is amended by striking 144(a)(3) and inserting 414(n)(6)(A) . (26) Section 414(m)(5) is amended by striking section 144(a)(3) and inserting subsection (n)(6)(A) . (27) Section 414(n)(6)(A) is amended to read as follows: (A) Related persons A person is a related person to another person if— (i) the relationship between such persons would result in a disallowance of losses under section 267 or 707(b), or (ii) such persons are members of the same controlled group of corporations (as defined in section 1563(a), except that more than 50 percent shall be substituted for at least 80 percent each place it appears therein). . (28) Section 6045(e)(4)(B) is amended by inserting (as in effect before its repeal by the Tax Reform Act of 2014 ) after section 143(m)(3) . (29) Section 6654(f)(1) is amended by inserting (as in effect before its repeal by the Tax Reform Act of 2014 ) after section 143(m) . (30) Section 7871(c) is amended— (A) by striking paragraphs (2) and (3), and (B) by striking tax-exempt bonds.— and all that follows through Subsection (a) of section 103 and inserting the following: tax-exempt bonds.— Subsection (a) of section 103 . (c) Effective date The amendments made by this section shall apply to bonds issued after December 31, 2014. 3432. Termination of credit for interest on certain home mortgages (a) In general Section 25, as amended by the preceding provisions of this Act, is amended by adding at the end the following new subsection: (k) Termination No credit shall be allowed under this section with respect to any mortgage credit certificate issued after December 31, 2014. . (b) Effective date The amendments made by this section shall apply to taxable years ending after December 31, 2014. 3433. Repeal of advance refunding bonds (a) In general Paragraph (1) of section 149(d) is amended by striking as part of an issue described in paragraph (2), (3), or (4). and inserting to advance refund a bond. . (b) Conforming amendments (1) Section 149(d) is amended by striking paragraphs (2), (3), (4), and (6) and by redesignating paragraphs (5) and (7) as paragraphs (2) and (3). (2) Section 148(f)(4)(C), as amended by the preceding provisions of this Act, is amended by striking clause (xvii) and by redesignating clauses (xviii), (xix), and (xx) as clauses (xvii), (xviii), and (xix), respectively. (c) Effective date The amendments made by this section shall apply to advance refunding bonds issued after December 31, 2014. 3434. Repeal of tax credit bond rules (a) In general Part IV of subchapter A of chapter 1 is amended by striking subparts H, I, and J (and by striking the items relating to such subparts in the table of subparts for such part). (b) Payments to issuers Subchapter B of chapter 65 is amended by striking section 6431 (and by striking the item relating to such section in the table of sections for such subchapter). (c) Conforming amendments (1) Section 6211(b)(4)(A) is amended by striking and 6431 . (2) Section 6401(b)(1) is amended by striking G, H, I, and J and inserting and G . (d) Effective date The amendments made by this section shall apply to bonds issued after the date of the enactment of this Act. F Insurance reforms 3501. Exception to pro rata interest expense disallowance for corporate-owned life insurance restricted to 20-percent owners (a) In general Subparagraph (A) of section 264(f)(4) is amended— (1) by striking policy or contract)— and all that follows through A policy or contract and inserting policy or contract) a 20-percent owner of such entity. A policy or contract , and (2) by striking , officers, directors, and employees in the heading. (b) Conforming amendment Section 264(f)(4) is amended by striking

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3501. Exception to pro rata interest expense disallowance for corporate-owned life insurance restricted to 20-percent owners (a) In general Subparagraph (A) of section 264(f)(4) is amended— (1) by striking policy or contract)— and all that follows through A policy or contract and inserting policy or contract) a 20-percent owner of such entity. A policy or contract , and (2) by striking , officers, directors, and employees in the heading. (b) Conforming amendment Section 264(f)(4) is amended by striking subparagraph (E). (c) Effective date The amendment made by this section shall apply to contracts issued after December 31, 2014. For purposes of the preceding sentence, any material increase in the death benefit or other material change in the contract shall be treated as a new contract. 3502. Net operating losses of life insurance companies (a) In general Paragraph (5) of section 805(a) is amended to read as follows: (5) Net operating loss deduction The deduction allowed under section 172, determined— (A) by treating the net operating loss for any taxable year as equal to the excess (if any) of— (i) the life insurance deductions for such taxable year, over (ii) the life insurance gross income for such taxable year, and (B) by applying subsection (d)(5) thereof with the modifications described in paragraph (4) of this subsection. . (b) Conforming amendments (1) Part I of subchapter L of chapter 1 is amended by striking section 810 (and by striking the item relating to such section in the table of sections for such part). (2) Part III of subchapter L of chapter 1 is amended by striking section 844 (and by striking the item relating to such section in the table of sections for such part). (3) Section 381 is amended by striking subsection (d). (4) Section 805(a)(4)(B)(i), as redesignated by the preceding provisions of this Act, is amended to read as follows: (ii) the net operating loss deduction provided by paragraph (5), . (5) Section 805(b)(2)(A)(iii), as redesignated by the preceding provisions of this Act, is amended to read as follows: (iv) any net operating loss carryback to the taxable year under section 172 (as applied pursuant to subsection (a)(5)), and . (6) Section 805(b) is amended by striking paragraph (4) and redesignating paragraph (5) as paragraph (4). (7) Section 953(b)(1)(A), as redesignated by the preceding provisions of this Act, is amended by striking operations and inserting net operating . (8) Section 1351(i)(3) is amended by striking or the operations loss deduction under section 810, . (c) Effective date The amendments made by this section shall apply to losses arising in taxable years beginning after December 31, 2014. 3503. Repeal of small life insurance company deduction (a) In general Part I of subchapter L of chapter 1 is amended by striking section 806 (and by striking the item relating to such section in the table of sections for such part). (b) Conforming amendments (1) Section 453B(e) is amended— (A) by striking (as defined in section 806(b)(3)) in paragraph (2)(B), and (B) by adding at the end the following new paragraph: (3) Noninsurance business (A) In general For purposes of this subsection, the term noninsurance business means any activity which is not an insurance business. (B) Certain activities treated as insurance businesses For purposes of subparagraph (A), any activity which is not an insurance business shall be treated as an insurance business if— (i) it is of a type traditionally carried on by life insurance companies for investment purposes, but only if the carrying on of such activity (other than in the case of real estate) does not constitute the active conduct of a trade or business, or (ii) it involves the performance of administrative services in connection with plans providing life insurance, pension, or accident and health benefits. . (2) Section 465(c)(7)(D)(v)(II) is amended by striking section 806(b)(3) and inserting section 453B(e)(3) . (3) Section 801(a)(2) is amended by striking subparagraph (C). (4) Section 804 is amended by striking means— and all that follows

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activity (other than in the case of real estate) does not constitute the active conduct of a trade or business, or (ii) it involves the performance of administrative services in connection with plans providing life insurance, pension, or accident and health benefits. . (2) Section 465(c)(7)(D)(v)(II) is amended by striking section 806(b)(3) and inserting section 453B(e)(3) . (3) Section 801(a)(2) is amended by striking subparagraph (C). (4) Section 804 is amended by striking means— and all that follows and inserting means the general deductions provided in section 805. . (5) Section 805(a)(4)(B) is amended by striking clause (i) and by redesignating clauses (ii), (iii), and (iv) as clauses (i), (ii), and (iii), respectively. (6) Section 805(b)(2)(A) is amended by striking clause (iii) and by redesignating clauses (iv) and (v) as clauses (iii) and (iv), respectively. (7) Section 815(c)(2)(A) is amended by inserting and at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii). (8) Section 842(c) is amended by striking paragraph (1) and by redesignating paragraphs (2) and (3) as paragraphs (1) and (2), respectively. (9) Section 953(b)(1) is amended by striking subparagraph (A) and by redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B), respectively. (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3504. Computation of life insurance tax reserves (a) In general Subparagraph (B) of section 807(d)(2) is amended to read as follows: (B) an interest rate equal to the sum of— (i) the applicable Federal interest rate, plus (ii) 3.5 percentage points, and . (b) Conforming amendments (1) Paragraph (4) of section 807(d) is amended to read as follows: (4) Applicable Federal interest rate (A) In general Except as provided in subparagraph (B), the term applicable Federal interest rate means the annual rate determined by the Secretary under subparagraph (C) for the calendar year in which the contract was issued. (B) Election to recompute Federal interest rate every 5 years For purposes of this subsection— (i) In general In computing the amount of the reserve with respect to any contract to which an election under this subparagraph applies for periods during any recomputation period, the applicable Federal interest rate shall be the annual rate determined by the Secretary under subparagraph (C) for the 1st year of such period. No change in the applicable Federal interest rate shall be made under the preceding sentence unless such change would equal or exceed 1/2 of 1 percentage point. (ii) Recomputation period For purposes of clause (i), the term recomputation period means, with respect to any contract, the 5 calendar year period beginning with the 5th calendar year beginning after the calendar year in which the contract was issued (and each subsequent 5 calendar year period). (iii) Election An election under this subparagraph shall apply to all contracts issued during the calendar year for which the election was made or during any subsequent calendar year unless such election is revoked with the consent of the Secretary. (iv) Spread not available Subsection (f) shall not apply to any adjustment required under this paragraph. (C) Rate of interest (i) In general For purposes of this paragraph, the rate of interest determined under this subparagraph shall be the annual rate determined by the Secretary under clause (ii). (ii) Determination of annual rate (I) In general The annual rate determined by the Secretary under this clause for any calendar year shall be a rate equal to the average of the applicable Federal mid-term rates (as defined in section 1274(d) but based on annual compounding) effective as of the beginning of each of the calendar months in the test period. (II) Test period For purposes of subclause (I), the test period is the most recent 60-calendar-month period ending before the beginning of the calendar year for which the determination is made. . (2) The first sentence following paragraph (6) in

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under this clause for any calendar year shall be a rate equal to the average of the applicable Federal mid-term rates (as defined in section 1274(d) but based on annual compounding) effective as of the beginning of each of the calendar months in the test period. (II) Test period For purposes of subclause (I), the test period is the most recent 60-calendar-month period ending before the beginning of the calendar year for which the determination is made. . (2) The first sentence following paragraph (6) in section 807(c) is amended by striking the applicable Federal interest rate under subsection (d)(2)(B)(i), the prevailing State assumed interest rate under subsection (d)(2)(B)(ii), and inserting the interest rate determined under subsection (d)(2)(B) . (3) Section 808 is amended by adding at the end the following new subsection: (g) Prevailing State assumed interest rate For purposes of this subchapter— (1) In general The term prevailing State assumed interest rate means, with respect to any contract, the highest assumed interest rate permitted to be used in computing life insurance reserves for insurance contracts or annuity contracts (as the case may be) under the insurance laws of at least 26 States. For purposes of the preceding sentence, the effect of nonforfeiture laws of a State on interest rates for reserves shall not be taken into account. (2) When rate determined The prevailing State assumed interest rate with respect to any contract shall be determined as of the beginning of the calendar year in which the contract was issued. . (4) Paragraph (1) of section 811(d) is amended by striking the greater of the prevailing State assumed interest rate or applicable Federal interest rate in effect under section 807 and inserting the interest rate in effect under section 807(d)(2)(B) . (5) Subparagraph (A) of section 846(f)(6) is amended by striking except that and all that follows and inserting except that the limitation of subsection (a)(3) shall apply in lieu of the limitation of the last sentence of section 807(d)(1), and . (6) Subparagraph (B) of section 954(i)(5) is amended by striking shall be substituted for the prevailing State assumed interest rate and inserting shall, if higher, be substituted for the interest rate in effect under section 807(d)(2)(B) . (c) Effective date (1) In general The amendments made by this section shall apply to taxable years beginning after December 31, 2014. (2) Transition rule For the first taxable year beginning after December 31, 2014, the reserve with respect to any contract (as determined under section 807(d)(2) of the Internal Revenue Code of 1986) at the end of the preceding taxable year shall be determined as if the amendments made by this section had applied to such reserve in such preceding taxable year and by using the interest rate applicable to such reserves under section 807(d)(2) of the Internal Revenue Code of 1986 for calendar year 2015. For subsequent taxable years, such amendments shall be applied with respect to such reserve by using the interest rate applicable under such section for calendar year 2015. (3) Transition relief (A) In general If— (i) the reserve determined under section 807(d)(2) of the Internal Revenue Code of 1986 with respect to any contract as of the close of the year preceding the first taxable year beginning after December 31, 2014, differs from (ii) the reserve which would have been determined with respect to such contract as of the close of such taxable year under such section determined without regard to paragraph (2), then the difference between the amount of the reserve described in clause (i) and the amount of the reserve described in clause (ii) shall be taken into account under the method provided in subparagraph (B). (B) Method The method provided in this subparagraph is as follows: (i) if the amount determined under subparagraph (A)(i) exceeds the amount determined under subparagraph (A)(ii), 1/8 of such excess shall be taken into account, for each of the 8 succeeding taxable years, as a deduction under section 805(a)(2) of such

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between the amount of the reserve described in clause (i) and the amount of the reserve described in clause (ii) shall be taken into account under the method provided in subparagraph (B). (B) Method The method provided in this subparagraph is as follows: (i) if the amount determined under subparagraph (A)(i) exceeds the amount determined under subparagraph (A)(ii), 1/8 of such excess shall be taken into account, for each of the 8 succeeding taxable years, as a deduction under section 805(a)(2) of such Code, or (ii) if the amount determined under subparagraph (A)(ii) exceeds the amount determined under subparagraph (A)(i), 1/8 of such excess shall be included in gross income, for each of the 8 succeeding taxable years, under section 803(a)(2) of such Code. 3505. Adjustment for change in computing reserves (a) In general Paragraph (1) of section 807(f) is amended to read as follows: (1) Treatment as change in method of accounting If the basis for determining any item referred to in subsection (c) as of the close of any taxable year differs from the basis for such determination as of the close of the preceding taxable year, then so much of the difference between— (A) the amount of the item at the close of the taxable year, computed on the new basis, and (B) the amount of the item at the close of the taxable year, computed on the old basis, as is attributable to contracts issued before the taxable year shall be taken into account under section 481 as adjustments attributable to a change in method of accounting initiated by the taxpayer and made with the consent of the Secretary. . (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3506. Modification of rules for life insurance proration for purposes of determining the dividends received deduction (a) In general Section 812 is amended to read as follows: 812. Determination of company’s and policyholder’s share on account by account basis (a) Determination on account by account basis Sections 805(a)(4) and 807 shall be applied on an account by account basis. (b) Company’s share For purposes of section 805(a)(4), the term company’s share means, with respect to any account for any taxable year, the ratio (expressed as a percentage) of— (1) the excess of— (A) the mean assets of such account for such taxable year, over (B) the mean reserves with respect to such account for such taxable year, divided by (2) the mean assets of such account for such taxable year. (c) Policyholder’s share For purposes of section 807, the term policyholder’s share means, with respect to any account for any taxable year, the excess of 100 percent over the percentage determined under paragraph (2). (d) Mean assets and mean reserves defined For purposes of this subsection— (1) Mean assets The term mean assets means, with respect to any account for any taxable year, 50 percent of the sum of— (A) the fair market value of the assets of such account determined as of the beginning of such taxable year, and (B) the fair market value of the assets of such account determined as of the close of such taxable year. (2) Mean reserves The term mean reserves means, with respect to any account for any taxable year, 50 percent of the sum of— (A) the reserves with respect to such account as determined under section 807 as of the beginning of such taxable year, and (B) the reserves with respect to such account as determined under section 807 as of the close of such taxable year. (3) Certain dividends not taken into account Dividends described in section 246(c) shall not be taken into account for purposes of determining mean assets or mean reserves. (4) Fees and expenses not taken into account Fees and expenses shall not be taken into account for purposes of determining mean assets or mean reserves. . (b) Conforming amendment Section 817A(e)(2) is amended by striking , 807(d)(2)(B), and 812 and inserting and 807(d)(2)(B) (c) Clerical amendment The table of sections for subpart D of part I of subchapter L of chapter 1 is amended by striking the item

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section 246(c) shall not be taken into account for purposes of determining mean assets or mean reserves. (4) Fees and expenses not taken into account Fees and expenses shall not be taken into account for purposes of determining mean assets or mean reserves. . (b) Conforming amendment Section 817A(e)(2) is amended by striking , 807(d)(2)(B), and 812 and inserting and 807(d)(2)(B) (c) Clerical amendment The table of sections for subpart D of part I of subchapter L of chapter 1 is amended by striking the item relating to section 812 and inserting the following: Sec. 812. Determination of company’s and policyholder’s share on account by account basis. . (d) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3507. Repeal of special rule for distributions to shareholders from pre-1984 policyholders surplus account (a) In general Subpart D of part I of subchapter L is amended by striking section 815 (and by striking the item relating to such section in the table of sections for such subpart). (b) Conforming amendment Section 801 is amended by striking subsection (c). (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. (d) Phased inclusion of remaining balance of policyholders surplus accounts In the case of any stock life insurance company which has a balance (determined as of the close of such company’s last taxable year beginning before January 1, 2015) in an existing policyholders surplus account (as defined in section 815 of the Internal Revenue Code of 1986, as in effect before its repeal), the tax imposed by section 801 of such Code for the first 8 taxable years beginning after December 31, 2014, shall be the amount which would be imposed by such section for such year on the sum of— (1) life insurance company taxable income for such year (within the meaning of such section 801 but not less than zero), plus (2) 1/8 of such balance. 3508. Modification of proration rules for property and casualty insurance companies (a) In general Section 832(b)(5)(B) is amended by striking 15 percent and inserting the percentage determined under subparagraph (F)) . (b) Determination of percentage Section 832(b)(5) is amended by adding at the end the following new subparagraph: (F) Determination of percentage (i) In general For purposes of subparagraph (B), the percentage determined under this subparagraph is the ratio (expressed as a percentage) of— (I) the average adjusted bases (within the meaning of section 1016) of tax-exempt assets of the company, to (II) such average adjusted bases of all assets of the company. (ii) Tax-exempt assets For purposes of clause (i)(I), the term tax-exempt assets means assets of the type which give rise to income described in subparagraph (B). . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3509. Repeal of special treatment of Blue Cross and Blue Shield organizations, etc (a) Transitional repeal of special rules (1) In general Section 833 is amended by striking subsection (b), by redesignating subsection (c) as subsection (b), and by amending subsection (a) to read as follows: (a) In general An organization to which this section applies shall be taxable under this part in the same manner as if it were a stock insurance company. . (2) Tax status not dependent on medical loss ratio Subsection (b) of section 833, as redesignated by subsection (a), is amended by striking paragraph (5). (3) Effective date The amendments made by this subsection shall apply to taxable years beginning after December 31, 2014. (b) Repeal of statutory treatment as a stock insurance company (1) In general Part II of subchapter L of chapter is amended by striking section 833 (and by striking the item relating to such section in the table of sections for such part). (2) Effective date The amendments made by this subsection shall apply to taxable years beginning after December 31, 2016. 3510. Modification of discounting rules for

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The amendments made by this subsection shall apply to taxable years beginning after December 31, 2014. (b) Repeal of statutory treatment as a stock insurance company (1) In general Part II of subchapter L of chapter is amended by striking section 833 (and by striking the item relating to such section in the table of sections for such part). (2) Effective date The amendments made by this subsection shall apply to taxable years beginning after December 31, 2016. 3510. Modification of discounting rules for property and casualty insurance companies (a) Modification of rate of interest used To discount unpaid losses Paragraph (2) of section 846(c) is amended to read as follows: (2) Determination of annual rate The annual rate determined by the Secretary under this paragraph for any calendar year shall be a rate determined on the basis of the corporate bond yield curve (as defined in section 430(h)(2)(D)(i)). . (b) Modification of computational rules for loss payment patterns Section 846(d)(3) is amended by striking subparagraphs (B) through (G) and inserting the following new subparagraphs: (B) Treatment of certain losses Losses which would have been treated as paid in the last year of the period applicable under subparagraph (A)(i) or (A)(ii) shall be treated as paid in the following manner: (i) 3-year loss payment pattern (I) In general The period taken into account under subparagraph (A)(i) shall be extended to the extent required under subclause (II). (II) Computation of extension The amount of losses which would have been treated as paid in the 3d year after the accident year shall be treated as paid in such 3d year and each subsequent year in an amount equal to the amount of the losses treated as paid in the 2d year after the accident year (or, if lesser, the portion of the unpaid losses not theretofore taken into account). (ii) 10-year loss payment pattern (I) In general The period taken into account under subparagraph (A)(ii) shall be extended to the extent required under subclause (II). (II) Computation of extension The amount of losses which would have been treated as paid in the 10th year after the accident year shall be treated as paid in such 10th year and each subsequent year in an amount equal to the amount of the losses treated as paid in the 9th year after the accident year (or, if lesser, the portion of the unpaid losses not theretofore taken into account). (C) Special rule for international and reinsurance lines of business Except as otherwise provided by regulations, any determination made under subsection (a) with respect to unpaid losses relating to the international or reinsurance lines of business shall be made using, in lieu of the loss payment pattern applicable to the respective lines of business, a pattern determined by the Secretary under paragraphs (1) and (2) based on the combined losses for all lines of business described in subparagraph (A)(ii). (D) Special rule for 2d or 9th year if negative or zero (i) 3-year loss payment pattern If the amount of the losses treated as paid in the 2d year after the accident year is zero or a negative amount, subparagraph (B)(i)(II) shall be applied by substituting the average of the losses treated as paid in the 1st and 2d years after the accident year for the losses treated as paid in the 2d year after the accident year. (ii) 10-year loss payment pattern If the amount of the losses treated as paid in the 9th year after the accident year is zero or a negative amount, subparagraph (B)(ii)(II) shall be applied by substituting the average of the losses treated as paid in the 7th, 8th, and 9th years after the accident year for the losses treated as paid in the 9th year after the accident year. . (c) Repeal of historical payment pattern election Section 846 is amended by striking subsection (e) and by redesignating subsections (f) and (g) as subsections (e) and (f), respectively. (d) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. (e) Transitional rule For the first taxable year beginning after

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as paid in the 7th, 8th, and 9th years after the accident year for the losses treated as paid in the 9th year after the accident year. . (c) Repeal of historical payment pattern election Section 846 is amended by striking subsection (e) and by redesignating subsections (f) and (g) as subsections (e) and (f), respectively. (d) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. (e) Transitional rule For the first taxable year beginning after December 31, 2014— (1) the unpaid losses and the expenses unpaid (as defined in paragraphs (5)(B) and (6) of section 832(b) of the Internal Revenue Code of 1986) at the end of the preceding taxable year, and (2) the unpaid losses as defined in sections 807(c)(2) and 805(a)(1) of such Code at the end of the preceding taxable year, shall be determined as if the amendments made by this section had applied to such unpaid losses and expenses unpaid in the preceding taxable year and by using the interest rate and loss payment patterns applicable to accident years ending with calendar year 2015, and any adjustment shall be taken into account ratably in such first taxable year and the 7 succeeding taxable years. For subsequent taxable years, such amendments shall be applied with respect to such unpaid losses and expenses unpaid by using the interest rate and loss payment patterns applicable to accident years ending with calendar year 2015. 3511. Repeal of special estimated tax payments (a) In general Part III of subchapter L of chapter 1 is amended by striking section 847 (and by striking the item relating to such section in the table of sections for such part). (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3512. Capitalization of certain policy acquisition expenses (a) In general Paragraph (1) of section 848(c) is amended by striking subparagraphs (A), (B), and (C) and inserting the following new subparagraphs: (A) 5 percent of the net premiums for such taxable year on specified insurance contracts which are group contracts, and (B) 12 percent of the net premiums for such taxable year on specified insurance contracts not described in subparagraph (A). . (b) Group contracts So much of paragraph (2) of section 848(e) as precedes subparagraph (A) thereof is amended to read as follows: (2) Group contract The term group contract means any specified insurance contract— . (c) Conforming amendments Section 848(e) is amended by striking paragraphs (3) and (6) and by redesignating paragraphs (4) and (5) as paragraphs (3) and (4), respectively. (d) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3513. Tax reporting for life settlement transactions (a) In general Subpart B of part III of subchapter A of chapter 61 is amended by adding at the end the following new section: 6050X. Returns relating to certain life insurance contract transactions (a) Requirement of reporting of certain payments (1) In general Every person who acquires a life insurance contract or any interest in a life insurance contract in a reportable policy sale during any taxable year shall make a return for such taxable year (at such time and in such manner as the Secretary shall prescribe) setting forth— (A) the name, address, and TIN of such person, (B) the name, address, and TIN of each recipient of payment in the reportable policy sale, (C) the date of such sale, (D) the name of the issuer of the life insurance contract sold and the policy number of such contract, and (E) the amount of each payment. (2) Statement to be furnished to persons with respect to whom information is required Every person required to make a return under this subsection shall furnish to each person whose name is required to be set forth in such return a written statement showing— (A) the name, address, and phone number of the information contact of the person required to make such return, and (B) the information required to be shown on such return with

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and the policy number of such contract, and (E) the amount of each payment. (2) Statement to be furnished to persons with respect to whom information is required Every person required to make a return under this subsection shall furnish to each person whose name is required to be set forth in such return a written statement showing— (A) the name, address, and phone number of the information contact of the person required to make such return, and (B) the information required to be shown on such return with respect to such person, except that in the case of an issuer of a life insurance contract, such statement is not required to include the information specified in paragraph (1)(E). (b) Requirement of reporting of seller's basis in life insurance contracts (1) In general Upon receipt of the statement required under subsection (a)(2) or upon notice of a transfer of a life insurance contract to a foreign person, each issuer of a life insurance contract shall make a return (at such time and in such manner as the Secretary shall prescribe) setting forth— (A) the name, address, and TIN of the seller who transfers any interest in such contract in such sale, (B) the investment in the contract (as defined in section 72(e)(6)) with respect to such seller, and (C) the policy number of such contract. (2) Statement to be furnished to persons with respect to whom information is required Every person required to make a return under this subsection shall furnish to each person whose name is required to be set forth in such return a written statement showing— (A) the name, address, and phone number of the information contact of the person required to make such return, and (B) the information required to be shown on such return with respect to each seller whose name is required to be set forth in such return. (c) Requirement of reporting with respect to reportable death benefits (1) In general Every person who makes a payment of reportable death benefits during any taxable year shall make a return for such taxable year (at such time and in such manner as the Secretary shall prescribe) setting forth— (A) the name, address, and TIN of the person making such payment, (B) the name, address, and TIN of each recipient of such payment, (C) the date of each such payment, and (D) the amount of each such payment. (2) Statement to be furnished to persons with respect to whom information is required Every person required to make a return under this subsection shall furnish to each person whose name is required to be set forth in such return a written statement showing— (A) the name, address, and phone number of the information contact of the person required to make such return, and (B) the information required to be shown on such return with respect to each recipient of payment whose name is required to be set forth in such return. (d) Definitions For purposes of this section: (1) Payment The term payment means the amount of cash and the fair market value of any consideration transferred in a reportable policy sale. (2) Reportable policy sale The term reportable policy sale has the meaning given such term in section 101(a)(3)(B). (3) Issuer The term issuer means any life insurance company that bears the risk with respect to a life insurance contract on the date any return or statement is required to be made under this section. (4) Reportable death benefits The term reportable death benefits means amounts paid by reason of the death of the insured under a life insurance contract that has been transferred in a reportable policy sale. . (b) Clerical amendment The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by inserting after the item relating to section 6050W the following new item: Sec. 6050X. Returns relating to certain life insurance contract transactions. . (c) Conforming amendments (1) Subsection (d) of section 6724 is amended— (A) by striking or at the end of clause (xxiv) of paragraph (1)(B), by striking and at the end of clause (xxv) of such paragraph and inserting or , and by inserting after such clause

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The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by inserting after the item relating to section 6050W the following new item: Sec. 6050X. Returns relating to certain life insurance contract transactions. . (c) Conforming amendments (1) Subsection (d) of section 6724 is amended— (A) by striking or at the end of clause (xxiv) of paragraph (1)(B), by striking and at the end of clause (xxv) of such paragraph and inserting or , and by inserting after such clause (xxv) the following new clause: (xxvi) section 6050X (relating to returns relating to certain life insurance contract transactions), and , and (B) by striking or at the end of subparagraph (GG) of paragraph (2), by striking the period at the end of subparagraph (HH) of such paragraph and inserting , or , and by inserting after such subparagraph (HH) the following new subparagraph: (II) subsection (a)(2), (b)(2), or (c)(2) of section 6050X (relating to returns relating to certain life insurance contract transactions). . (2) Section 6047 is amended— (A) by redesignating subsection (g) as subsection (h), (B) by inserting after subsection (f) the following new subsection: (g) Information relating to life insurance contract transactions This section shall not apply to any information which is required to be reported under section 6050X. , and (C) by adding at the end of subsection (h), as so redesignated, the following new paragraph: (4) For provisions requiring reporting of information relating to certain life insurance contract transactions, see section 6050X. . (d) Effective date The amendments made by this section shall apply to— (1) reportable policy sales (as defined in section 6050X(d)(2) of the Internal Revenue Code of 1986 (as added by subsection (a)) after December 31, 2014, and (2) reportable death benefits (as defined in section 6050X(d)(4) of such Code (as added by subsection (a)) paid after December 31, 2014. 3514. Clarification of tax basis of life insurance contracts (a) Clarification with respect to adjustments Paragraph (1) of section 1016(a) is amended by striking subparagraph (A) and all that follows and inserting the following: (A) for— (i) taxes or other carrying charges described in section 266

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; 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

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; . (b) Effective date The amendment made by this section shall apply to transactions entered into after August 25, 2009. 3515. Exception to transfer for valuable consideration rules (a) In general Subsection (a) of section 101 is amended by inserting after paragraph (2) the following new paragraph: (3) Exception to valuable consideration rules for commercial transfers (A) In general The second sentence of paragraph (2) shall not apply in the case of a transfer of a life insurance contract, or any interest therein, which is a reportable policy sale. (B) Reportable policy sale For purposes of this paragraph, the term reportable policy sale means the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer's interest in such life insurance contract. For purposes of the preceding sentence, the term indirectly applies to the acquisition of an interest in a partnership, trust, or other entity that holds an interest in the life insurance contract. . (b) Conforming amendment Paragraph (1) of section 101(a) is amended by striking paragraph (2) and inserting paragraphs (2) and (3) . (c) Effective date The amendments made by this section shall apply to transfers after December 31, 2014. G Pass-Thru and certain other entities 1 S Corporations 3601. Reduced recognition period for built-in gains made permanent (a) In general Paragraph (7) of section 1374(d) (relating to definitions and special rules) is amended to read as follows: (7) Recognition period (A) In general The term recognition period means the 5-year period beginning with the 1st day of the 1st taxable year for which the corporation was an S corporation. For purposes of applying this section to any amount includible in income by reason of distributions to shareholders pursuant to section 593(e), the preceding sentence shall be applied without regard to the phrase 5-year . (B) Installment sales If an S corporation sells an asset and reports the income from the sale using the installment method under section 453, the treatment of all payments received shall be governed by the provisions of this paragraph applicable to the taxable year in which such sale was made. . (b) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2013. 3602. Modifications to S corporation passive investment income rules (a) Increased percentage limit Paragraph (2) of section 1375(a) is amended by striking 25 percent and inserting 60 percent . (b) Repeal of excessive passive income as a termination event Section 1362(d) is amended by striking paragraph (3). (c) Conforming amendments (1) Subsection (b) of section 1375 is amended by striking paragraphs (3) and (4) and inserting the following new paragraph: (3) Passive investment income defined (A) In general Except as otherwise provided in this paragraph, the term passive investment income means gross receipts derived from royalties, rents, dividends, interest, and annuities. (B) Exception for interest on notes from sales of inventory The term passive investment income shall not include interest on any obligation acquired in the ordinary course of the corporation’s trade or business from its sale of property described in section 1221(a)(1). (C) Treatment of certain lending or finance companies If the S corporation meets the requirements of section 542(c)(6) for the taxable year, the term passive investment income shall not include gross receipts for the taxable year which are derived directly from the active and regular conduct of a lending or finance business (as defined in section 542(d)(1)). (D) Treatment of certain dividends If an S corporation holds stock in a C corporation meeting the requirements of section 1504(a)(2), the term passive investment income shall not include dividends from such C corporation to the extent such dividends are attributable to the earnings and profits of such C corporation derived from the active conduct of a trade or

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the taxable year which are derived directly from the active and regular conduct of a lending or finance business (as defined in section 542(d)(1)). (D) Treatment of certain dividends If an S corporation holds stock in a C corporation meeting the requirements of section 1504(a)(2), the term passive investment income shall not include dividends from such C corporation to the extent such dividends are attributable to the earnings and profits of such C corporation derived from the active conduct of a trade or business. (E) Exception for banks, etc In the case of a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), the term passive investment income shall not include— (i) interest income earned by such bank or company, or (ii) dividends on assets required to be held by such bank or company, including stock in the Federal Reserve Bank, the Federal Home Loan Bank, or the Federal Agricultural Mortgage Bank or participation certificates issued by a Federal Intermediate Credit Bank. (F) Gross receipts from the sales of certain assets For purposes of this paragraph— (i) Capital assets other than stock and securities In the case of dispositions of capital assets (other than stock and securities), gross receipts from such dispositions shall be taken into account only to the extent of capital gain net income therefrom. (ii) Stock and securities In the case of sales or exchanges of stock or securities, gross receipts shall be taken into account only to the extent of the gain therefrom. (G) Coordination with section 1374 The amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meanings as when used in section 1374. . (2) (A) Subparagraph (J) of section 26(b)(2) is amended by striking 25 percent and inserting 60 percent . (B) Clause (i) of section 1375(b)(1)(A) is amended by striking 25 percent and inserting 60 percent . (C) The heading for section 1375 is amended by striking 25 percent and inserting 60 percent . (D) The item relating to section 1375 in the table of sections for part III of subchapter S of chapter 1 is amended by striking 25 percent and inserting 60 percent . (3) Subparagraph (B) of section 1362(f)(1) is amended by striking paragraph (2) or (3) of subsection (d) and inserting subsection (d)(2) . (d) Effective Date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3603. Expansion of qualifying beneficiaries of an electing small business trust (a) No look-Through for eligibility purposes Subparagraph (C) of section 1361(b)(1) is amended by inserting (determined without regard to subsection (c)(2)(B)(v)) after shareholder . (b) Effective date The amendment made by this section shall take effect on January 1, 2015. 3604. Charitable contribution deduction for electing small business trusts (a) In general Paragraph (2) of section 641(c), as amended by the preceding provisions of this Act, is amended by inserting after subparagraph (C) the following new subparagraph: (D) (i) Section 642(c) shall not apply. (ii) For purposes of section 170(b)(1)(E), adjusted gross income shall be computed in the same manner as in the case of an individual, except that the deductions for costs which are paid or incurred in connection with the administration of the trust and which would not have been incurred if the property were not held in such trust shall be treated as allowable in arriving at adjusted gross income. . (b) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2014. 3605. Permanent rule regarding basis adjustment to stock of S corporations making charitable contributions of property (a) In general Section 1367(a)(2) (relating to decreases in basis) is amended by striking the last sentence. (b) Effective date

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would not have been incurred if the property were not held in such trust shall be treated as allowable in arriving at adjusted gross income. . (b) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2014. 3605. Permanent rule regarding basis adjustment to stock of S corporations making charitable contributions of property (a) In general Section 1367(a)(2) (relating to decreases in basis) is amended by striking the last sentence. (b) Effective date The amendment made by this section shall apply to contributions made in taxable years beginning after December 31, 2013. 3606. Extension of time for making S corporation elections (a) In general Subsection (b) of section 1362 is amended to read as follows: (b) When made (1) In general An election under subsection (a) may be made by a small business corporation for any taxable year not later than the due date for filing the return of the S corporation for such taxable year (including extensions). (2) Certain elections treated as made for next taxable year If— (A) an election under subsection (a) is made for any taxable year within the period described in paragraph (1), but (B) either— (i) on 1 or more days in such taxable year and before the day on which the election was made the corporation did not meet the requirements of subsection (b) of section 1361, or (ii) 1 or more of the persons who held stock in the corporation during such taxable year and before the election was made did not consent to the election, then such election shall be treated as made for the following taxable year. (3) Authority to treat late elections, etc., as timely If— (A) an election under subsection (a) is made for any taxable year after the date prescribed by this subsection for making such election for such taxable year or no such election is made for any taxable year, and (B) the Secretary determines that there was reasonable cause for the failure to timely make such election, the Secretary may treat such an election as timely made for such taxable year. (4) Election on timely filed returns Except as otherwise provided by the Secretary, an election under subsection (a) for any taxable year may be made on a timely filed return of the S corporation for such taxable year. (5) Secretarial authority The Secretary may prescribe such regulations, rules, or other guidance as may be necessary or appropriate for purposes of applying this subsection. . (b) Coordination with certain other provisions (1) Qualified subchapter S subsidiaries Section 1361(b)(3)(B) is amended by adding at the end the following flush sentence: Rules similar to the rules of section 1362(b) shall apply with respect to any election under clause (ii). . (2) Qualified subchapter S trusts Section 1361(d)(2) is amended by striking subparagraph (D). (c) Revocations Paragraph (1) of section 1362(d) is amended— (1) by striking subparagraph (D) in subparagraph (C) and inserting subparagraphs (D) and (E) , and (2) by adding at the end the following new subparagraph: (E) Authority to treat late revocations as timely If— (i) a revocation under subparagraph (A) is made for any taxable year after the date prescribed by this paragraph for making such revocation for such taxable year or no such revocation is made for any taxable year, and (ii) the Secretary determines that there was reasonable cause for the failure to timely make such revocation, the Secretary may treat such a revocation as timely made for such taxable year. . (d) Effective date (1) In general Except as otherwise provided in this subsection, the amendments made by this section shall apply to elections for taxable years beginning after December 31, 2014. (2) Revocations The amendments made by subsection (c) shall apply to revocations after December 31, 2014. 3607. Relocation of C corporation definition (a) In general Subsection (a) of section 1361 is amended— (1) by striking paragraph (2), and (2) by striking S corporation defined. — and all that follows through For purposes of this title, the term S corporation means and

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in this subsection, the amendments made by this section shall apply to elections for taxable years beginning after December 31, 2014. (2) Revocations The amendments made by subsection (c) shall apply to revocations after December 31, 2014. 3607. Relocation of C corporation definition (a) In general Subsection (a) of section 1361 is amended— (1) by striking paragraph (2), and (2) by striking S corporation defined. — and all that follows through For purposes of this title, the term S corporation means and inserting the following: In general. —For purposes of this title, the term S corporation means . (b) Conforming amendment Section 7701(a)(3) is amended— (1) by striking Corporation. —The term corporation means and inserting the following: Corporations.— (1) In general The term corporation means , and (2) by adding at the end the following new paragraph: (2) C corporations The term C corporation means, with respect to any taxable year, a corporation which is not an S corporation for such year. . (c) Effective date The amendments made by this section shall take effect on the date of the enactment of this Act. 2 Partnerships 3611. Repeal of rules relating to guaranteed payments and liquidating distributions (a) Payment to partner for services or use of capital (1) In general Section 707 is amended by striking subsection (c). (2) Conforming amendments (A) Section 267(e) is amended by striking paragraph (4). (B) Section 706(a) is amended by striking and 707(c) . (C) Section 1402(a) is amended, in the matter following paragraph (17)— (i) by striking (after such gross income has been reduced by the sum of all payments to which section 707(c) applies) in clauses (iii) and (iv), and (ii) by striking (after such gross income has been so reduced) in clause (iv). (D) Section 2701(c)(1)(B) is amended by inserting or at the end of clause (i), by striking , or at the end of clause (ii) and inserting a period, and by striking clause (iii). (E) Section 7519(d) is amended by striking paragraph (5). (3) Effective dates (A) In general Except as otherwise provided in this paragraph, the amendments made by this subsection shall apply to partnership taxable years beginning after December 31, 2014. (B) Transfers The amendment made by paragraph (2)(E) shall apply to transfers after December 31, 2014. (b) Payments made in liquidation of retiring or deceased partner (1) In general Subpart B of part II of subchapter K of chapter 1 is amended by striking section 736 (and by striking the item relating to such section in the table of sections for such subpart). (2) Retired partners and successors in interest of deceased partners treated as partners until liquidation Section 761(d) is amended by adding at the end the following: For purposes of this subchapter, any retired partner or a deceased partner’s successor in interest shall be treated as a partner until the complete liquidation of such interest. (3) Conforming amendment (A) Section 357(c)(3)(A) is amended by striking payment of which either— and all that follows through then, for purposes of and inserting payment of which would give rise to a deduction, then, for purposes of . (B) Section 731(d) is amended— (i) by striking section 736 (relating to payments to a retiring partner or a deceased partner’s successor in interest), , and (ii) by striking items), and and inserting items) and . (C) Section 751(b)(2) is amended— (i) by striking subparagraph (B), and (ii) by striking shall not apply to— and all that follows through a distribution of property and inserting the following: shall not apply to a distribution of property . (D) (i) Section 753 is amended by striking The amount includible and all that follows and inserting For treatment of income in respect of a decedent, see section 691. (ii) Section 691 is amended by striking subsection (e). (4) Effective date The amendments made by this subsection shall apply to partners retiring or dying after December 31, 2014. 3612. Mandatory adjustments to basis of partnership property in case of transfer of partnership interests (a) In general Section 743

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a distribution of property . (D) (i) Section 753 is amended by striking The amount includible and all that follows and inserting For treatment of income in respect of a decedent, see section 691. (ii) Section 691 is amended by striking subsection (e). (4) Effective date The amendments made by this subsection shall apply to partners retiring or dying after December 31, 2014. 3612. Mandatory adjustments to basis of partnership property in case of transfer of partnership interests (a) In general Section 743 is amended— (1) by striking subsections (a), (c), (d), (e), and (f) and by redesignating subsection (b) as subsection (a), (2) in subsection (a) (as so redesignated) by striking with respect to which the election provided in section 754 is in effect or which has a substantial built-in loss immediately after such transfer , and (3) by adding at the end the following new subsection: (b) Allocation of basis (1) General rule Any increase or decrease in the adjusted basis of partnership property under subsection (a) shall, except as provided in paragraph (2), be allocated— (A) in a manner which has the effect of reducing the difference between the fair market value and the adjusted basis of partnership properties, or (B) in any other manner permitted by regulations prescribed by the Secretary. (2) Special rule In applying the allocation rules provided in paragraph (1), increases or decreases in the adjusted basis of partnership property arising from a transfer of an interest attributable to property consisting of— (A) capital assets and property described in section 1231(b), or (B) any other property of the partnership, shall be allocated to partnership property of a like character except that the basis of any such partnership property shall not be reduced below zero. . (b) Conforming amendments (1) Section 704(c)(1) is amended— (A) by adding and at the end of subparagraph (A), (B) by striking , and at the end of subparagraph (B) and inserting a period, and (C) by striking all that follows subparagraph (B). (2) Section 732 is amended by striking subsection (d) and by redesignating subsections (e) and (f) as subsections (d) and (e), respectively. (3) Section 761(e)(2) is amended by striking optional . (4) Section 6031 is amended by striking subsection (f). (5) The heading for section 743 is amended to read as follows: Adjustment to basis of partnership property. (6) The heading for subsection (a) (as redesignated by the preceding provisions of this Act) of section 743 is amended by striking Adjustment to basis of partnership property and inserting In general . (c) Effective date The amendments made by this section shall apply to transfers after December 31, 2014. 3613. Mandatory adjustments to basis of undistributed partnership property (a) In general Section 734 is amended to read as follows: 734. Adjustment to basis of undistributed partnership property (a) In general In the case of any distribution to a partner, the partnership shall adjust the basis of partnership property such that each remaining partner’s net liquidation amount immediately after such distribution is equal to such partner’s net liquidation amount immediately before such distribution. (b) Distributions other than in liquidation of a partner’s interest In the case of any distribution to a partner other than in liquidation of such partner’s interest, proper adjustment shall be made under subsection (a) with respect to such partner to take into account— (1) the amount of any gain recognized by such partner with respect to such distribution under section 731(a), and (2) the amount of any gain or loss which would be recognized by such partner if such partner sold the property distributed at fair market value immediately after such distribution. (c) Net liquidation amount For purposes of this section, the term net liquidation amount means, with respect to any partner, the net amount of gain or loss (if any) which would be taken into account by the partner under section 702 if the partnership sold all of its assets at fair market value (and no other amounts were

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and (2) the amount of any gain or loss which would be recognized by such partner if such partner sold the property distributed at fair market value immediately after such distribution. (c) Net liquidation amount For purposes of this section, the term net liquidation amount means, with respect to any partner, the net amount of gain or loss (if any) which would be taken into account by the partner under section 702 if the partnership sold all of its assets at fair market value (and no other amounts were taken into account under such section). (d) Allocation of basis (1) Decreases in basis Any decrease in the adjusted basis of partnership property which is required under this section— (A) shall be made in accordance with paragraph (3) of section 732(c), and (B) shall be made first with respect to property other than unrealized receivables (as defined in section 751(c)) and inventory (as defined in section 751(d)) to the extent thereof. If any such decrease is prevented by the absence of sufficient adjusted basis of partnership property, each partner shall recognize gain in the amount of such partner’s distributive share of such prevented decrease. Such gain shall be treated as gain from the sale of the partner’s partnership interest. (2) Increases in basis Any increase in the adjusted basis of partnership property which is required under this section— (A) shall be made in accordance with paragraph (2) of section 732(c), and (B) shall be made only with respect to property other than unrealized receivables (as defined in section 751(c)) and inventory (as defined in section 751(d)). If any such increase is prevented by the absence of property described in subparagraph (B), each partners shall recognize a loss in the amount of such partner’s distributive share of such prevented increase. Such loss shall be treated as a loss from the sale of the partner’s partnership interest. (e) No allocation of basis decrease to stock of corporate partner In making an allocation under subsection (d) of any decrease in the adjusted basis of partnership property required under subsection (a)— (1) no allocation may be made to stock in a corporation (or any person related (within the meaning of section 267(b) or 707(b)(1)) to such corporation) which is a partner in the partnership, and (2) any amount not allocable to stock by reason of paragraph (1) shall be allocated under subsection (d) to other partnership property. Gain shall be recognized by the partnership to the extent that the amount required to be allocated to other partnership property under subsection (e)(2) exceeds the aggregate adjusted basis of such other property immediately before the allocation required by subsection (a). . (b) Conforming amendments (1) (A) Subpart D of part II of subchapter K of chapter 1 is amended by striking sections 754 and 755 (and by striking items relating to such sections in the table of sections of such subpart). (B) Clause (ii) of section 706(d)(2)(D) is amended by striking section 755 and inserting section 743(b) . (2) Subsection (d) of section 1060 is amended— (A) by striking section 755 in paragraph (1) and inserting sections 734 and 743 , and (B) by striking section 755 in paragraph (2) and inserting section 734 or 743 . (c) Effective date The amendments made by this section shall apply to distributions after December 31, 2014. 3614. Corresponding adjustments to basis of properties held by partnership where partnership basis adjusted (a) In general Subpart B of part II of subchapter K of chapter 1, as amended by the preceding provisions of this Act, is amended by inserting after section 735 the following new section: 736. Corresponding adjustment to basis of properties held by lower-tier partnership in case of upper-tier partnership basis adjustments (a) Distributions by upper-Tier partnership In the case of any distribution of property to a partner by an upper-tier partnership, if such distribution results in an adjustment in the upper-tier partnership’s adjusted basis in an interest in a lower-tier partnership under section 734, then such

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this Act, is amended by inserting after section 735 the following new section: 736. Corresponding adjustment to basis of properties held by lower-tier partnership in case of upper-tier partnership basis adjustments (a) Distributions by upper-Tier partnership In the case of any distribution of property to a partner by an upper-tier partnership, if such distribution results in an adjustment in the upper-tier partnership’s adjusted basis in an interest in a lower-tier partnership under section 734, then such lower-tier partnership shall make a corresponding adjustment to the adjusted basis of its partnership property. (b) Distributions of interests in lower-Tier partnership In the case of any distribution of an interest in a lower-tier partnership by an upper-tier partnership— (1) if the adjusted basis of such interest in the hands of the upper-tier partnership (determined immediately before such distribution) exceeds the adjusted basis of such interest in the hands of the distributee partner (determined immediately after such distribution), then such lower-tier partnership shall decrease the adjusted basis of its partnership property by the amount of such excess, or (2) if the adjusted basis of such interest in the hands of the distributee partner (determined immediately after such distribution) exceeds the adjusted basis of such interest in the hands of the upper-tier partnership (determined immediately before such distribution), then such lower-tier partnership shall increase the adjusted basis of its partnership property by the amount of such excess. (c) Dispositions of interests in upper-Tier partnership In the case of a disposition of an interest in an upper-tier partnership which holds an interest in a lower-tier partnership, if there is an adjustment to the adjusted basis of the lower-tier partnership under section 743, then such lower-tier partnership shall make a corresponding adjustment to the adjusted basis of its partnership property. (d) Multi-Tiered partnerships In the case of any adjustment under subsection (a), (b), or (c) in the adjusted basis of an interest in another partnership, such other partnership shall make a corresponding adjustment in the adjusted basis of its partnership property. (e) Allocation of basis

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; recognition of gain In the case of any adjustment in the adjusted basis of partnership property— (1) under subsection (a), (b), (c), or (d), such adjustment shall be made only with respect to the upper-tier partnership’s proportionate share (as determined under section 743(a)) of the adjusted basis of the lower-tier partnership’s property, (2) under subsection (a) or (b) (or so much of subsection (d) as relates to either such subsection), rules similar to the rules of section 734(d) shall apply, and (3) under subsection (c) (or so much of subsection (d) as relates to such subsection), rules similar to the rules of section 743(b) shall apply. (f) Reporting In the case of any adjustment in the adjusted basis of partnership property by a lower-tier partnership under this section by reason of a distribution by, or a disposition of an interest in, an upper-tier partnership, such upper-tier partnership shall furnish (in such manner as the Secretary shall prescribe) to such lower-tier partnership such information as is necessary to enable such lower-tier partnership to make such adjustment. (g) Upper- and lower-Tier partnerships For purposes of this section— (1) Upper-tier partnership The term upper-tier partnership means a partnership owning an interest in another partnership. (2) Lower-tier partnership The term lower-tier partnership means the partnership referred to in paragraph (1) an interest in which is owned by the upper-tier partnership. . (b) Effective dates The amendments made by this section shall apply to distributions and transfers after December 31, 2014. 3615. Charitable contributions and foreign taxes taken into account in determining limitation on allowance of partner’s share of loss (a) In general Subsection (d) of section 704 is amended— (1) by striking A partner’s distributive share and inserting the following: (1) In general A partner’s distributive share , (2) by striking Any excess of such loss and inserting the following: (2) Carryover Any excess of such loss , and (3) by adding at the end the following new paragraph: (3) Special rules In determining the amount of any loss under paragraph (1), there shall be taken into account as a deduction the partner’s distributive share of— (A) the adjusted basis of charitable contributions described in paragraph (4) of section 702(a), and (B) the amount of taxes described in paragraph (6) of such section. . (b) Effective date The amendments made by this section shall apply to partnership taxable years beginning after December 31, 2014. 3616. Revisions related to unrealized receivables and inventory items (a) Repeal of requirement that inventory be substantially appreciated in certain partnership distributions treated as sale or exchange (1) In general Clause (ii) of section 751(b)(1)(A) is amended by striking which have appreciated substantially in value . (2) Conforming amendment Section 751(b) is amended by striking paragraph (3). (3) Effective date The amendments made by this subsection shall apply to distributions after December 31, 2014. (b) Revision of regulations relating to treatment of unrealized receivables and inventory items The Secretary of the Treasury shall revise regulations issued under section 751(b) of the Internal Revenue Code of 1986 to take into account the partner’s share of income and gain rather than the partner’s share of partnership assets. (c) Simplification of definition of unrealized receivables (1) In general Section 751(c) is amended by striking all that follows paragraph (2) and inserting the following: For purposes of this section and sections 731, 732, 734, and 741, such term also includes any property other than inventory items, but only to the extent of the amount which would be treated as ordinary income if (at the time of the transaction described in the applicable section) such property had been sold by the partnership for its fair market value. . (2) Effective date The amendment made by this subsection shall apply to partnership taxable years beginning after December 31, 2014. 3617. Repeal of time limitation on taxing

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section and sections 731, 732, 734, and 741, such term also includes any property other than inventory items, but only to the extent of the amount which would be treated as ordinary income if (at the time of the transaction described in the applicable section) such property had been sold by the partnership for its fair market value. . (2) Effective date The amendment made by this subsection shall apply to partnership taxable years beginning after December 31, 2014. 3617. Repeal of time limitation on taxing precontribution gain (a) In general Subparagraph (B) of section 704(c)(1) is amended by striking within 7 years of being contributed . (b) Conforming amendment Paragraph (1) of section 737(b) is amended by striking within 7 years of the distribution . (c) Effective date The amendments made by this section shall apply to property contributed to a partnership after December 31, 2014. 3618. Partnership interests created by gift (a) In general Section 761(b) is amended by adding at the end the following: In the case of a capital interest in a partnership in which capital is a material income-producing factor, whether a person is a partner with respect to such interest shall be determined without regard to whether such interest was derived by gift from any other person. . (b) Conforming amendments Section 704(e) is amended— (1) by striking paragraph (1) and by redesignating paragraphs (2) and (3) as paragraphs (1) and (2), respectively, (2) by striking this section in paragraph (2) (as so redesignated) and inserting this subsection , and (3) by striking Family partnerships in the heading and inserting Partnership interests created by gift . (c) Effective date The amendments made by this section shall apply to partnership taxable years beginning after December 31, 2014. 3619. Repeal of technical termination (a) In general Paragraph (1) of section 708(b) is amended— (1) by striking , or and all that follows and inserting a period, and (2) by striking only if— and all that follows through no part of any business and inserting the following: only if no part of any business . (b) Effective date The amendments made by this section shall apply to partnership taxable years beginning after December 31, 2014. 3620. Publicly traded partnership exception restricted to mining and natural resources partnerships (a) In general Subsection (d) of section 7704 is amended to read as follows: (d) Qualifying income For purposes of this section, the term qualifying income means— (1) income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource (including geothermal energy and excluding fertilizer and timber) or industrial source carbon dioxide, and (2) any gain from the sale or disposition of a capital asset (or property described in section 1231(b)) held for the production of income described in paragraph (1). For purposes of this subsection, the term mineral or natural resource means any product of a character with respect to which a deduction for depletion is allowable under section 611 (other than minerals from sea water or the air (or similar inexhaustible sources), soil, sod, dirt, turf, water, or mosses). . (b) Conforming amendments Section 988(c)(1)(E) is amended— (1) by striking income or gains described in subparagraph (A), (B), or (G) of section 7704(d)(1) in clause (iii)(III) and inserting qualifying income or gains , (2) by striking subclause (III) of clause (vi) and by redesignating subclause (IV) as subclause (III), (3) by redesignating clause (vi) (as amended by this subparagraph) as clause (viii), and (4) by inserting after clause (v) the following new clauses: (vi) Qualifying income or gains The term qualifying income or gains means— (I) interest, (II) dividends, and (III) in the case of a partnership described in the second sentence of section 7704(c)(3), income and gains from commodities (not described in section 1221(a)(1)) or futures, forwards, and

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(vi) and by redesignating subclause (IV) as subclause (III), (3) by redesignating clause (vi) (as amended by this subparagraph) as clause (viii), and (4) by inserting after clause (v) the following new clauses: (vi) Qualifying income or gains The term qualifying income or gains means— (I) interest, (II) dividends, and (III) in the case of a partnership described in the second sentence of section 7704(c)(3), income and gains from commodities (not described in section 1221(a)(1)) or futures, forwards, and options with respect to commodities. (vii) Inadvertent terminations If— (I) A partnership fails to meet the gross income requirements of this subparagraph, (II) the Secretary determines that such failure was inadvertent, (III) no later than a reasonable time after the discovery of such failure, steps are taken so that such partnership once more meets such gross income requirements, and (IV) such partnership agrees to make such adjustments (including adjustments with respect to the partners) or to pay such amounts as may be required by the Secretary with respect to such period, then, notwithstanding such failure, such entity shall be treated as continuing to meet such gross income requirements for such period. . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2016. 3621. Ordinary income treatment in the case of partnership interests held in connection with performance of services (a) In general Part IV of subchapter O of chapter 1 is amended— (1) by redesignating section 1061 as section 1062, and (2) by inserting after section 1060 the following new section: 1061. Partnership interests held in connection with performance of services (a) In general If one or more applicable partnership interests are held by a taxpayer at any time during the taxable year, so much of— (1) the taxpayer’s net capital gain with respect to such interests for such taxable year, as does not exceed (2) the taxpayer’s recharacterization account balance for such taxable year, shall be treated as ordinary income. (b) Net capital gain (1) In general For purposes of subsection (a)(1), net capital gain shall be determined under section 1222, except that such section shall be applied— (A) without regard to the recharacterization of any item as ordinary income under this section, (B) by only taking into account items of gain and loss— (i) taken into account by the taxpayer under section 702 with respect to any applicable partnership interest, (ii) recognized by the taxpayer on the disposition of any such interest, or (iii) recognized by the taxpayer under paragraph (4) on a distribution of property with respect to such interest, and (C) in the case of a taxable year for which section 1231 gains (as defined in section 1231(a)(3)(A)) exceed section 1231 losses (as defined in section 1231(a)(3)(B)), by treating property which is taken into account in determining such gains and losses as capital assets held for more than 1 year. (2) Allocation to items of gain The amount treated as ordinary income under subsection (a) shall be allocated ratably among the items of long-term capital gain taken into account in determining net capital gain under paragraph (1). (3) Recognition of gain on disposition of applicable partnership interests Any gain on the disposition of any applicable partnership interest shall be recognized notwithstanding any other provision of this title. (4) Recognition of gain on distributions of partnership property (A) In general In the case of any distribution of property by a partnership with respect to any applicable partnership interest, the partner receiving such property shall recognize gain equal to the excess (if any) of— (i) the fair market value of such property at the time of such distribution, over (ii) the adjusted basis of such property in the hands of such partner (determined without regard to subparagraph (B)). (B) Adjustment of basis In the case of a distribution to which subparagraph (A) applies, the basis of the distributed property in the hands of the distributee

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with respect to any applicable partnership interest, the partner receiving such property shall recognize gain equal to the excess (if any) of— (i) the fair market value of such property at the time of such distribution, over (ii) the adjusted basis of such property in the hands of such partner (determined without regard to subparagraph (B)). (B) Adjustment of basis In the case of a distribution to which subparagraph (A) applies, the basis of the distributed property in the hands of the distributee partner shall be the amount determined under subparagraph (A)(i). (c) Recharacterization account balance (1) In general For purposes of this section, the term recharacterization account balance means, with respect to any taxpayer for any taxable year, the excess (if any) of— (A) the sum of— (i) the taxpayer’s aggregate annual recharacterization amounts with respect to applicable partnership interests for such taxable year, plus (ii) the taxpayer’s recharacterization account balance for the taxable year preceding such taxable year, over (B) the sum of— (i) the taxpayer’s net ordinary income with respect to applicable partnership interests for such taxable year (determined without regard to this section), plus (ii) the amount treated as ordinary income of the taxpayer under this section for the taxable year preceding such taxable year. (2) Annual recharacterization amount For purposes of this subsection— (A) In general The term annual recharacterization amount means, with respect to any applicable partnership interest for any partnership taxable year, an amount equal to the product of— (i) the specified rate determined under subparagraph (B) for the calendar year in which such taxable year begins, multiplied by (ii) the excess (if any) of— (I) an amount equal to the applicable percentage of the partnership’s aggregate invested capital for such taxable year, over (II) the specified capital contribution of the partner with respect to the applicable partnership interest for such taxable year. If a taxpayer holds an applicable partnership interest for less than the entire taxable year, the amount determined under the preceding sentence shall be ratably reduced. (B) Specified rate For purposes of subparagraph (A), the term specified rate means, with respect to any calendar year, a percentage equal to— (i) the Federal long-term rate determined under section 1274(d)(1) for the last month of the calendar year, plus (ii) 10 percentage points. (C) Applicable percentage (i) In general The term applicable percentage means, with respect to any applicable partnership interest, the highest percentage of profits of the partnership that could be allocated with respect to such interest for the taxable year (consistent with the partnership agreement and assuming such facts and circumstances with respect to such taxable year as would result in such highest percentage). (ii) Secretarial authority The Secretary shall prescribe rules for the determination of the applicable percentage in cases in which the percentage of profits of a partnership that are to be allocated with respect to an applicable partnership interest varies on the basis of the aggregate amount of such profits. Such rules may provide a percentage which may be used in lieu of the highest percentage determined under clause (i) in cases where such other percentage is consistent with the purposes of this section. (D) Aggregate invested capital (i) In general The term aggregate invested capital means, with respect to any taxable year, the average daily amount of invested capital of the partnership for such taxable year. (ii) Invested capital The term invested capital means, with respect to any partnership as of any day, the total cumulative value, determined at the time of contribution, of all money or other property contributed to the partnership on or before such day. (iii) Reduction for liquidation of partnership interests The invested capital of a partnership shall be reduced by the aggregate amount distributed in liquidation of interests in the partnership. (iv) Treatment of certain

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partnership for such taxable year. (ii) Invested capital The term invested capital means, with respect to any partnership as of any day, the total cumulative value, determined at the time of contribution, of all money or other property contributed to the partnership on or before such day. (iii) Reduction for liquidation of partnership interests The invested capital of a partnership shall be reduced by the aggregate amount distributed in liquidation of interests in the partnership. (iv) Treatment of certain indebtedness as invested capital The following amounts shall be treated as invested capital: (I) Partner loans The aggregate value (determined as of the time of the loan) of money or other property which a partner loans to the partnership. (II) Indebtedness eligible to share in equity of the partnership The face amount of any convertible debt of the partnership or any debt obligation providing equity participation in the partnership. (E) Specified capital contribution (i) In general The term specified capital contribution means, with respect to any applicable partnership interest for any taxable year, the average daily amount of contributed capital with respect to such interest for such year. (ii) Contributed capital The term contributed capital means, with respect to applicable partnership interest as of any day, the excess (if any) of— (I) the total cumulative value, determined at the time of contribution, of all money or other property contributed by the partner to the partnership with respect to such interest as of such day, over (II) the total cumulative value, determined at the time of distribution, of all money or other property distributed by the partnership to the partner with respect to such interest as of such day. (iii) Treatment of related party borrowings Any amount borrowed directly or indirectly from the partnership or any other partner of the partnership or any person related to such other partner or such partnership shall not be taken into account under this subparagraph. For purposes of the preceding sentence, a person shall be treated as related to another person if the relationship between such persons would be described in section 267(b) or 707(b) if such sections and section 267(f) were applied by substituting 10 percent for 50 percent each place it appears. (F) Multiple interests If at any time during a taxable year a taxpayer holds directly or indirectly more than 1 applicable partnership interest in a single partnership, such interests shall be treated as 1 applicable partnership interest for purposes of applying this paragraph. (3) Net ordinary income For purposes of this subsection, the net ordinary income with respect to applicable partnership interests for any taxable year is the excess (if any) of— (A) the taxpayer’s distributive share of items of income and gain under section 702 with respect to applicable partnership interests for such taxable year (determined without regard to any items of gain taken into account in determining net capital gain under subsection (b)(1)), over (B) the taxpayer’s distributive share of items of deduction and loss under section 702 with respect to such interests for such taxable year (determined without regard to any items of loss taken into account in determining net capital gain under subsection (b)(1)). (d) Applicable partnership interest For purposes of this section— (1) In general The term applicable partnership interest means any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of services by the taxpayer, or any other person, in any applicable trade or business. (2) Applicable trade or business (A) In general The term applicable trade or business means any trade or business conducted on a regular, continuous, and substantial basis which, regardless of whether the activities are conducted in one or more entities, consists, in whole or in part, of— (i) raising or returning capital, (ii) investing in (or disposing of) trades or businesses (or identifying trades or

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the performance of services by the taxpayer, or any other person, in any applicable trade or business. (2) Applicable trade or business (A) In general The term applicable trade or business means any trade or business conducted on a regular, continuous, and substantial basis which, regardless of whether the activities are conducted in one or more entities, consists, in whole or in part, of— (i) raising or returning capital, (ii) investing in (or disposing of) trades or businesses (or identifying trades or businesses for such investing or disposition), and (iii) developing such trades or businesses. (B) Treatment of research and experimentation activities Any activity involving research or experimentation (within the meaning of section 469(c)(4)) shall be treated as a trade or business for purposes of clauses (ii) and (iii) of subparagraph (A). (e) Transfer of applicable partnership interest to related person (1) In general If a taxpayer transfers any applicable partnership interest, directly or indirectly, to a person related to the taxpayer, the taxpayer shall include in gross income (as ordinary income) so much of the taxpayer’s recharacterization account balance for such taxable year as is allocable to such interest (determined in such manner as the Secretary may provide and reduced by any amount treated as ordinary income under subsection (a) with respect to the transfer of such interest). (2) Related person For purposes of this paragraph, a person is related to the taxpayer if— (A) the person is a member of the taxpayer’s family within the meaning of section 318(a)(1), or (B) the person performed a service within the current calendar year or the preceding three calendar years in any applicable trade or business in which or for which the taxpayer performed a service. (f) Reporting by entity of taxpayer’s annual recharacterization amount A partnership shall report to the Secretary, and include with the information required to be furnished under section 6031(b) to each partner, the amount of the partner’s annual recharacterization amount for the taxable year, if any. A similar rule applies to any entity that receives a report of an annual recharacterization amount for the taxable year. (g) Regulations The Secretary shall issue such regulations or other guidance as necessary to carry out this section, including regulations— (1) to prevent the abuse of the purposes of this section, including through— (A) the allocation of income to tax indifferent parties, or (B) a reduction in the invested capital of the partnership (including attempts to undervalue contributed or loaned property), (2) which provide that partnership interests shall not fail to be treated as transferred or held in connection with the performance of services merely because the taxpayer also made contributions to the partnership, (3) which provide for the application of this section in cases where the taxpayer has more than 1 applicable interest in a partnership, and (4) which provide for the application of this section in cases of tiered structures of entities. . (b) Coordination with section 83 Subsection (e) of section 83 is amended by striking or at the end of paragraph (4), by striking the period at the end of paragraph (5) and inserting , or , and by adding at the end the following new paragraph: (6) a transfer of a partnership interest to which section 1061 applies. . (c) Clerical amendment The table of sections for part IV of subchapter O of chapter 1 is amended by striking the item relating to 1061 and inserting the following new items: Sec. 1061. Partnership interests held in connection with performance of services. Sec. 1062. Cross references. . (d) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3622. Partnership audits and adjustments (a) Repeal of TEFRA partnership audit rules Chapter 63 is amended by striking subchapter C (and by striking the item relating to such subchapter in the table of subchapters for such chapter). (b) Repeal of electing large partnership rules (1) In

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interests held in connection with performance of services. Sec. 1062. Cross references. . (d) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3622. Partnership audits and adjustments (a) Repeal of TEFRA partnership audit rules Chapter 63 is amended by striking subchapter C (and by striking the item relating to such subchapter in the table of subchapters for such chapter). (b) Repeal of electing large partnership rules (1) In general Subchapter K of chapter 1 is amended by striking part IV (and by striking the item relating to such part in the table of parts for such subchapter). (2) Assessment rules relating to electing large partnerships Chapter 63 is amended by striking subchapter D (and by striking the item relating to such subchapter in the table of subchapters for such chapter). (3) Effective date The amendments made by this section shall apply to returns filed after December 31, 2014. (c) Partnership audit reform (1) In general Chapter 63, as amended by the preceding provisions of this Act, is amended by inserting after subchapter B the following new subchapter: C Treatment of partnerships Part I—In general Part II—Partnership adjustments Part III—Procedure Part IV—Definitions and special rules I In general Sec. 6221. Determination at partnership level. Sec. 6222. Partner’s return must be consistent with partnership return. Sec. 6223. Designation of partnership representative. 6221. Determination at partnership level (a) In general Items of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year (and any partner’s distributive share thereof) shall be audited, any tax attributable thereto shall be assessed and collected, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item or share shall be determined, at the partnership level pursuant to this subchapter. (b) Election out for certain partnerships with 100 or fewer partners This subchapter shall not apply with respect to any partnership for any taxable year if— (1) the partnership elects the application of this subsection for such taxable year, (2) the partnership has 100 or fewer partners on the last day of such taxable year, (3) each of the partners of such partnership is an individual, a C corporation (other than a real estate investment trust or a regulated investment company), any foreign entity that would be treated as a C corporation were it domestic, or an estate of a deceased partner, (4) the election— (A) is made with a timely filed return for such taxable year, and (B) includes (in the manner prescribed by the Secretary) a disclosure of the name and taxpayer identification number of each partner of such partnership, and (5) the partnership notifies each such partner of such election in the manner prescribed by the Secretary. For purposes of paragraph (4)(B), the Secretary may provide for alternative identification of any foreign partners. 6222. Partner’s return must be consistent with partnership return (a) In general A partner of any partnership shall, on the partner’s return, treat each item of income, gain, loss, deduction, or credit attributable to such partnership in a manner which is consistent with the treatment of such income, gain, loss, deduction, or credit on the partnership return. (b) Underpayment due to inconsistent treatment assessed as math error Any underpayment of tax by a partner by reason of failing to comply with the requirements of subsection (a) shall be assessed and collected in the same manner as if such underpayment were on account of a mathematical or clerical error appearing on the partner’s return. Paragraph (2) of section 6213(b) shall not apply to any assessment of an underpayment referred to in the preceding sentence. (c) Addition to tax for failure To comply with section For addition to tax in the case of partner’s disregard of the requirements of this section, see part II of subchapter A of chapter 68. 6223. Partners bound by actions of partnership (a)

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and collected in the same manner as if such underpayment were on account of a mathematical or clerical error appearing on the partner’s return. Paragraph (2) of section 6213(b) shall not apply to any assessment of an underpayment referred to in the preceding sentence. (c) Addition to tax for failure To comply with section For addition to tax in the case of partner’s disregard of the requirements of this section, see part II of subchapter A of chapter 68. 6223. Partners bound by actions of partnership (a) Designation of partner Each partnership shall designate (in the manner prescribed by the Secretary) a partner (or other person) as the partnership representative who shall have the sole authority to act on behalf of the partnership under this subchapter. In any case in which such a designation is not in effect, the Secretary may select any partner as the partnership representative. (b) Binding effect A partnership and all partners of such partnership shall be bound— (1) by actions taken under this subchapter by the partnership, and (2) by any decision in a proceeding brought under this subchapter. II Partnership adjustments Sec. 6225. Partnership adjustment by Secretary. Sec. 6226. Administrative adjustment request by partnership. 6225. Partnership adjustment by Secretary (a) In general In the case of any adjustment by the Secretary in the amount of any item of income, gain, loss, deduction, or credit of a partnership, or any partner’s distributive share thereof— (1) the partnership shall pay any imputed underpayment with respect to such adjustment in the adjustment year as provided in section 6232, and (2) any imputed overpayment shall be taken into account by the partnership in the adjustment year as a reduction in non-separately stated income or an increase in non-separately stated loss (whichever is appropriate) under section 702(a)(8). (b) Determination of imputed underpayments and overpayments For purposes of this subchapter— (1) In general Except as provided in subsection (c), any imputed underpayment or imputed overpayment with respect to any partnership adjustment for any reviewed year shall be determined— (A) by netting all adjustments of items of income, gain, loss, or deduction and multiplying such net amount by the highest rate of tax in effect for the reviewed year under section 1 or 11, (B) by treating any net increase or decrease in loss under subparagraph (A) as a decrease or increase, respectively, in income, and (C) by taking into account any adjustments to items of credit as an increase or decrease, as the case may be, in the amount determined under subparagraph (A). (2) Adjustments to distributive shares of partners not netted In the case of any adjustment which reallocates the distributive share of any item from one partner to another, such adjustment shall be taken into account under paragraph (1) by disregarding— (A) any decrease in any item of income or gain, and (B) any increase in any item of deduction, loss, or credit. (c) Modification of imputed underpayments (1) Method in general The Secretary shall establish procedures under which the imputed underpayment amount may be modified consistent with the requirements of this subsection. (2) Amended returns of partners Such procedures shall provide that if— (A) one or more partners file returns for the taxable year of the partners which includes the end of the reviewed year of the partnership, (B) such returns take into account all adjustments under subsection (a) properly allocable to such partners (and for any other taxable year with respect to which any tax attribute is affected by reason of such adjustments), and (C) payment of any tax due is included with such return, then the imputed underpayment amount shall be determined without regard to the portion of the adjustments so taken into account. (3) Reallocation of distributive share In the case of any adjustment which reallocates the distributive share of any item from one partner to another, paragraph (2) shall apply only if returns are filed by all partners affected by such adjustment. (4)

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which any tax attribute is affected by reason of such adjustments), and (C) payment of any tax due is included with such return, then the imputed underpayment amount shall be determined without regard to the portion of the adjustments so taken into account. (3) Reallocation of distributive share In the case of any adjustment which reallocates the distributive share of any item from one partner to another, paragraph (2) shall apply only if returns are filed by all partners affected by such adjustment. (4) Year and day for submission to Secretary Anything required to be submitted pursuant to paragraph (1) shall be submitted to the Secretary not later than the close the 180-day period beginning on the date on which the notice of a proposed partnership adjustment is mailed under section 6231 unless such period is extended with the consent of the Secretary. (5) Decision of Secretary Any modification of the imputed underpayment amount under this subsection shall be made only upon approval of such modification by the Secretary. (d) Definitions and special rule For purposes of this subchapter— (1) Reviewed year The term reviewed year means the partnership taxable year to which the item being adjusted relates. (2) Adjustment year The term adjustment year means the partnership taxable year in which— (A) in the case of an adjustment pursuant to the decision of a court in a proceeding brought under section 6234, such decision becomes final, (B) in the case of an administrative adjustment request under section 6226, such administrative adjustment request is made, or (C) in any other case, notice of the final partnership adjustment is mailed under section 6231. 6226. Administrative adjustment request by partnership (a) In general A partnership may file a request for an administrative adjustment in the amount of any item of income, gain, loss, deduction, or credit of the partnership for any partnership taxable year, but only to the extent such adjustment results in an imputed underpayment. (b) Adjustment Any adjustment under subsection (a) shall be determined and taken into account by the partnership under rules similar to the rules of section 6225 (other than subsection (c) thereof) for the partnership taxable year in which the administrative adjustment request is made. (c) Period of limitations A partnership may not file such a request— (1) more than 3 years after the later of— (A) the date on which the partnership return for such year is filed, or (B) the last day for filing the partnership return for such year (determined without regard to extensions), and (2) after any notice of an administrative proceeding with respect to the taxable year is mailed under section 6231. III Procedure Sec. 6231. Notice of proceedings and adjustment. Sec. 6232. Assessment, collection, and payment. Sec. 6233. Penalties and interest. Sec. 6234. Judicial review of partnership adjustment. Sec. 6235. Period of limitations on making adjustments. 6231. Notice of proceedings and adjustment (a) In general The Secretary shall mail to the partnership and the partnership representative— (1) notice of any administrative proceeding initiated at the partnership level with respect to an adjustment of any item of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year, or any partner’s distributive share thereof, (2) notice of any proposed partnership adjustment resulting from such proceeding, and (3) notice of any final partnership adjustment resulting from such proceeding. Any notice of a final partnership adjustment shall not be mailed earlier than 180 days after the date on which the notice of the proposed partnership adjustment is mailed. Such notices shall be sufficient if mailed to the last known address of the partnership representative or the partnership (even if the partnership has terminated its existence). The first sentence shall apply to any proceeding with respect to an administrative adjustment request filed by a partnership under section 6226. (b) Further notices restricted If the Secretary mails a notice of a final

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mailed earlier than 180 days after the date on which the notice of the proposed partnership adjustment is mailed. Such notices shall be sufficient if mailed to the last known address of the partnership representative or the partnership (even if the partnership has terminated its existence). The first sentence shall apply to any proceeding with respect to an administrative adjustment request filed by a partnership under section 6226. (b) Further notices restricted If the Secretary mails a notice of a final partnership adjustment to any partnership for any partnership taxable year and the partnership files a petition under section 6234 with respect to such notice, in the absence of a showing of fraud, malfeasance, or misrepresentation of a material fact, the Secretary shall not mail another such notice to such partnership with respect to such taxable year. (c) Authority To rescind notice with partnership consent The Secretary may, with the consent of the partnership, rescind any notice of a partnership adjustment mailed to such partnership. Any notice so rescinded shall not be treated as a notice of a partnership adjustment for purposes of this subchapter, and the taxpayer shall have no right to bring a proceeding under section 6234 with respect to such notice. 6232. Assessment, collection, and payment (a) In general Any imputed underpayment— (1) shall be assessed and collected in the same manner as if it were a tax imposed for the adjustment year by subtitle A, and (2) shall be paid on or before the return due date for the adjustment year. (b) Limitation on assessment Except as otherwise provided in this chapter, no assessment of a deficiency may be made (and no levy or proceeding in any court for the collection of any amount resulting from such adjustment may be made, begun or prosecuted) before— (1) the close of the 90th day after the day on which a notice of a final partnership adjustment was mailed, and (2) if a petition is filed under section 6234 with respect to such notice, the decision of the court has become final. (c) Premature action may be enjoined Notwithstanding section 7421(a), any action which violates subsection (b) may be enjoined in the proper court, including the Tax Court. The Tax Court shall have no jurisdiction to enjoin any action under this subsection unless a timely petition has been filed under section 6234 and then only in respect of the adjustments that are the subject of such petition. (d) Exceptions to restrictions on adjustments (1) Adjustments arising out of math or clerical errors (A) In general If the partnership is notified that, on account of a mathematical or clerical error appearing on the partnership return, an adjustment to a partnership item is required, rules similar to the rules of paragraphs (1) and (2) of section 6213(b) shall apply to such adjustment. (B) Special rule If a partnership is a partner in another partnership, any adjustment on account of such partnership’s failure to comply with the requirements of section 6222(a) with respect to its interest in such other partnership shall be treated as an adjustment referred to in subparagraph (A), except that paragraph (2) of section 6213(b) shall not apply to such adjustment. (2) Partnership may waive restrictions The partnership may at any time (whether or not any notice of partnership adjustment has been issued), by a signed notice in writing filed with the Secretary, waive the restrictions provided in subsection (b) on the making of any partnership adjustment. (e) Limit where no proceeding begun If no proceeding under section 6234 is begun with respect to any notice of a final partnership adjustment during the 90-day period described in subsection (b) thereof, the amount for which the partnership is liable under section 6225 shall not exceed the amount determined in accordance with such notice. 6233. Penalties and interest (a) Penalties and interest determined from reviewed year (1) In general In the case of an imputed underpayment with respect to a partnership adjustment for a reviewed year, the partnership— (A) shall pay

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6234 is begun with respect to any notice of a final partnership adjustment during the 90-day period described in subsection (b) thereof, the amount for which the partnership is liable under section 6225 shall not exceed the amount determined in accordance with such notice. 6233. Penalties and interest (a) Penalties and interest determined from reviewed year (1) In general In the case of an imputed underpayment with respect to a partnership adjustment for a reviewed year, the partnership— (A) shall pay to the Secretary interest computed under paragraph (2), and (B) shall be liable for any penalty, addition to tax, or additional amount as provided in paragraph (3). (2) Determination of amount of interest The interest computed under this paragraph with respect to any partnership adjustment is the interest which would be determined under chapter 67— (A) on the imputed underpayment determined with respect to such adjustment, (B) for the period beginning on the day after the return due date for the reviewed year and ending on the return due date for the adjustment year (or, if earlier, the date payment of the imputed underpayment is made). Proper adjustments in the amount determined under the preceding sentence shall be made for adjustments required for partnership taxable years after the reviewed year and before the adjustment year by reason of such partnership adjustment. (3) Penalties A partnership shall be liable for any penalty, addition to tax, or additional amount for which it would have been liable if such partnership had been an individual subject to tax under chapter 1 for the reviewed year and the imputed underpayment were an actual underpayment (or understatement) for such year. (b) Interest and penalties with respect to adjustment year return (1) In general In the case of any failure to pay an imputed underpayment on the date prescribed therefor, the partnership shall be liable— (A) for interest as determined under paragraph (2), and (B) for any penalty, addition to tax, or additional amount as determined under paragraph (3). (2) Interest Interest determined under this paragraph is the interest that would be determined by treating the imputed underpayment as an underpayment of tax imposed in the adjustment year. (3) Penalties Penalties, additions to tax, or additional amounts determined under this paragraph are the penalties, additions to tax, or additional amounts that would be determined— (A) by applying section 6651(a)(2) to such failure to pay. (B) by treating the imputed underpayment as an underpayment of tax for purposes of part II of subchapter A of chapter 68. 6234. Judicial review of partnership adjustment (a) In general Within 90 days after the date on which a notice of a final partnership adjustment is mailed under section 6231 with respect to any partnership taxable year, the partnership may file a petition for a readjustment for such taxable year with— (1) the Tax Court, (2) the district court of the United States for the district in which the partnership’s principal place of business is located, or (3) the Claims Court. (b) Jurisdictional requirement for bringing action in district court or Claims Court (1) In general A readjustment petition under this section may be filed in a district court of the United States or the Claims Court only if the partnership filing the petition deposits with the Secretary, on or before the date the petition is filed, the amount of the imputed underpayment (as of the date of the filing of the petition) if the partnership adjustment was made as provided by the notice of final partnership adjustment. The court may by order provide that the jurisdictional requirements of this paragraph are satisfied where there has been a good faith attempt to satisfy such requirement and any shortfall of the amount required to be deposited is timely corrected. (2) Interest payable Any amount deposited under paragraph (1), while deposited, shall not be treated as a payment of tax for purposes of this title (other than chapter 67). (c) Scope of judicial review A court with which a petition

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final partnership adjustment. The court may by order provide that the jurisdictional requirements of this paragraph are satisfied where there has been a good faith attempt to satisfy such requirement and any shortfall of the amount required to be deposited is timely corrected. (2) Interest payable Any amount deposited under paragraph (1), while deposited, shall not be treated as a payment of tax for purposes of this title (other than chapter 67). (c) Scope of judicial review A court with which a petition is filed in accordance with this section shall have jurisdiction to determine all items of income, gain, loss, deduction, or credit of the partnership for the partnership taxable year to which the notice of final partnership adjustment relates, the proper allocation of such items among the partners, and the applicability of any penalty, addition to tax, or additional amount for which the partnership may be liable under this subchapter. (d) Determination of court reviewable Any determination by a court under this section shall have the force and effect of a decision of the Tax Court or a final judgment or decree of the district court or the Claims Court, as the case may be, and shall be reviewable as such. The date of any such determination shall be treated as being the date of the court’s order entering the decision. (e) Effect of decision dismissing action If an action brought under this section is dismissed other than by reason of a rescission under section 6231(c), the decision of the court dismissing the action shall be considered as its decision that the notice of final partnership adjustment is correct, and an appropriate order shall be entered in the records of the court. 6235. Period of limitations on making adjustments (a) In general Except as otherwise provided in this section, no adjustment under this subpart for any partnership taxable year may be made after the date which is 3 years after the latest of— (1) the date on which the partnership return for such taxable year was filed, (2) the return due date for the taxable year, or (3) the date on which the partnership filed an administrative adjustment request with respect to such year under section 6226. (b) Extension by agreement The period described in subsection (a) (including an extension period under this subsection) may be extended by an agreement entered into by the Secretary and the partnership before the expiration of such period. (c) Special rule in case of fraud, etc (1) False return In the case of a false or fraudulent partnership return with intent to evade tax, the adjustment may be made at any time. (2) Substantial omission of income If any partnership omits from gross income an amount properly includible therein and such amount is described in section 6501(e)(1)(A), subsection (a) shall be applied by substituting 6 years for 3 years . (3) No return In the case of a failure by a partnership to file a return for any taxable year, the adjustment may be made at any time. (4) Return filed by Secretary For purposes of this section, a return executed by the Secretary under subsection (b) of section 6020 on behalf of the partnership shall not be treated as a return of the partnership. (d) Suspension when Secretary mails notice of adjustment If notice of a final partnership adjustment with respect to any taxable year is mailed under section 6231, the running of the period specified in subsection (a) (as modified by the other provisions of this section) shall be suspended— (1) for the period during which an action may be brought under section 6234 (and, if a petition is filed under such section with respect to such notice, until the decision of the court becomes final), and (2) for 1 year thereafter. IV Definitions and special rules Sec. 6241. Definitions and special rules. 6241. Definitions and special rules (a) Definitions and special rules For purposes of this subchapter— (1) Partnership The term partnership means any partnership required to file a return under section 6031(a). (2) Partner The term partner means— (A) a partner in the partnership, and

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if a petition is filed under such section with respect to such notice, until the decision of the court becomes final), and (2) for 1 year thereafter. IV Definitions and special rules Sec. 6241. Definitions and special rules. 6241. Definitions and special rules (a) Definitions and special rules For purposes of this subchapter— (1) Partnership The term partnership means any partnership required to file a return under section 6031(a). (2) Partner The term partner means— (A) a partner in the partnership, and (B) any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly income, gain, deduction, or loss of the partnership. (b) Partnership adjustment The term partnership adjustment means any adjustment in the amount of any item of income, gain, loss, deduction, or credit of a partnership, or any partner’s distributive share thereof. (c) Return due date The term return due date means, with respect to the taxable year, the date prescribed for filing the partnership return for such taxable year (determined without regard to extensions). (d) Joint and several liability (1) In general The partnership and any partner of the partnership shall be jointly and severally liable for any imputed underpayment and any penalty, addition to tax, or additional amount attributable thereto. (2) Period for assessment of partners The period for assessment of an imputed underpayment with respect to a partner of a partnership shall not expire earlier than 3 years after the date on which an assessment of such imputed underpayment was made with respect to the partnership. (3) Determining partners A person shall be treated as partner of the partnership if such person is a partner of such partnership at any time during the reviewed or adjustment year. (e) Payments nondeductible No deduction shall be allowed under subtitle A for any payment required to be made by a partnership under this subchapter. (f) Special rule for deductions, losses, and credits of foreign partnerships Except to the extent otherwise provided in regulations, in the case of any partnership the partnership representative of which resides outside the United States or the books of which are maintained outside the United States, no deduction, loss, or credit shall be allowable to any partner unless section 6031 is complied with for the partnership’s taxable year in which such deduction, loss, or credit arose at such time as the Secretary prescribes by regulations. (g) Partnerships having principal place of business outside United States For purposes of sections 6234, a principal place of business located outside the United States shall be treated as located in the District of Columbia. (h) Partnerships in cases under title 11 of United States Code (1) Suspension of period of limitations on making adjustment, assessment, or collection The running of any period of limitations provided in this subchapter on making a partnership adjustment (or provided by section 6501 or 6502 on the assessment or collection of any imputed underpayment determined under this subchapter) shall, in a case under title 11 of the United States Code, be suspended during the period during which the Secretary is prohibited by reason of such case from making the adjustment (or assessment or collection) and— (A) for adjustment or assessment, 60 days thereafter, and (B) for collection, 6 months thereafter. A rule similar to the rule of section 6213(f)(2) shall apply for purposes of section 6232(b). (2) Suspension of period of limitation for filing for judicial review The running of the period specified in section 6234 shall, in a case under title 11 of the United States Code, be suspended during the period during which the partnership is prohibited by reason of such case from filing a petition under section 6234 and for 60 days thereafter. . (2) Clerical amendment The table of subchapters for chapter 63 is amended by inserting after the item relating to subchapter B the following new items: Subchapter C. Treatment of partnerships. . (d)

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for filing for judicial review The running of the period specified in section 6234 shall, in a case under title 11 of the United States Code, be suspended during the period during which the partnership is prohibited by reason of such case from filing a petition under section 6234 and for 60 days thereafter. . (2) Clerical amendment The table of subchapters for chapter 63 is amended by inserting after the item relating to subchapter B the following new items: Subchapter C. Treatment of partnerships. . (d) Conforming amendments (1) Section 6422 is amended by striking paragraph (12). (2) Section 6501(n) is amended by striking paragraphs (2) and (3) and by striking Cross references and all that follows through For period of limitations and inserting Cross reference.— For period of limitations . (3) Section 6503(a)(1) is amended by striking (or section 6229 and all that follows through of section 6230(a)) . (4) Section 6504 is amended by striking paragraph (11). (5) Section 6511 is amended by striking subsection (g). (6) Section 6512(b)(3) is amended by striking the second sentence. (7) Section 6515 is amended by striking paragraph (6). (8) Section 6601(c) is amended by striking the last sentence. (9) Section 7421(a) is amended by striking 6225(b), 6246(b) and inserting 6232(c) . (10) Section 7422 is amended by striking subsection (h). (11) Section 7459(c) is amended by striking section 6226 and all that follows through or 6252 and inserting section 6234 . (12) Section 7482(b)(1) is amended— (A) in subparagraph (E), by striking section 6226, 6228, 6247, or 6252 and inserting section 6234 , (B) by striking subparagraph (F), by striking or at the end of subparagraph (E) and inserting a period, and by inserting or at the end of subparagraph (D), and (C) in the last sentence, by striking section 6226, 6228(a), or 6234(c) and inserting section 6234 . (13) Section 7485(b) is amended by striking section 6226, 6228(a), 6247, or 6252 and inserting section 6234 . (e) Effective date The amendments made by this section shall apply to returns filed for partnership taxable years ending after December 31, 2014, except that a partnership may elect (at such time and in such form and manner as the Secretary of the Treasury may prescribe) for such amendments to apply to any return of the partnership filed for partnership taxable years ending after the date of the enactment of this Act and before January 1, 2015. 3 REITs and RICs 3631. Prevention of tax-free spinoffs involving REITs (a) In general Section 355 is amended by adding at the end the following new subsection: (h) Section not To apply to distributions involving real estate investment trusts This section (and so much of section 356 as relates to this section) shall not apply to any distribution if either the distributing corporation or controlled corporation is a real estate investment trust. . (b) Prevention of REIT election following tax-Free spin off Section 856(c) is amended by redesignating paragraph (8) as paragraph (9) and by inserting after paragraph (7) the following new paragraph: (8) Election after tax-free reorganization If a corporation was a distributing corporation or a controlled corporation with respect to any distribution to which section 355 applied, such corporation (and any successor corporation) shall not be eligible to make any election under subsection (c)(1) for any taxable year prior to the 10th taxable year which begins after the taxable year in which such distribution was made. . (c) Effective date (1) In general Except as otherwise provided in this subsection, the amendments made by this section shall apply to distributions on or after February 26, 2014. (2) Transition rule The amendments made by this section shall not apply to any distribution made pursuant to an agreement which was binding on February 26, 2014, and at all times thereafter. 3632. Extension of period for prevention of REIT election following revocation or termination (a) In general Section 856(g)(3) is amended by striking fifth and inserting 10th . (b) Effective date The amendments made by

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the amendments made by this section shall apply to distributions on or after February 26, 2014. (2) Transition rule The amendments made by this section shall not apply to any distribution made pursuant to an agreement which was binding on February 26, 2014, and at all times thereafter. 3632. Extension of period for prevention of REIT election following revocation or termination (a) In general Section 856(g)(3) is amended by striking fifth and inserting 10th . (b) Effective date The amendments made by this section shall apply to terminations and revocations after December 31, 2014. 3633. Certain short-life property not treated as real property for purposes of REIT provisions (a) In general Section 856(c)(5) is amended by adding at the end the following new subparagraph: (L) Real property The term real property shall not include any tangible property with a class life of less than 27.5 years. For purposes of the preceding sentence, class life of tangible property for any taxable year shall be the greater of— (i) the class life of such property in the hands of the real estate investment trust, or (ii) the class life which would be applicable to such property if such property was placed in service in the taxable year. . (b) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2016. 3634. Repeal of special rules for timber held by REITs (a) In general Section 856(c)(5)(L), as added by this Act, is amended by inserting timber or after shall not include . (b) Conforming amendments (1) Section 856(c)(2) is amended by inserting and at the end of subparagraph (G), by striking and at the end of subparagraph (H), and by striking subparagraph (I). (2) Section 856(c)(5), as amended by the preceding provisions of this Act, is amended by striking subparagraphs (H) and (I) and by redesignating subparagraphs (J), (K), and (L) as subparagraphs (H), (I) and (J), respectively. (3) Section 856(c), as amended by the preceding provisions of this Act, is amended by striking paragraph (9). (4) Section 857(b)(6) is amended by striking subparagraphs (D), (G), and (H), and by redesignating subparagraphs (E) and (F) as subparagraphs (D) and (E), respectively. (5) Section 857(b)(6)(D), as redesignated by paragraph (4), is amended by striking subparagraphs (C) and (D) and inserting subparagraph (C) . (6) Section 857(b)(6)(E), as redesignated by paragraph (4), is amended— (A) by striking subparagraph (C) or (D) and inserting subparagraph (C) , and (B) by striking subparagraphs (C), (D), and (E) and inserting subparagraphs (C) and (D) . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2016. 3635. Limitation on fixed percentage rent and interest exceptions for REIT income tests (a) In general Section 856 is amended by adding at the end the following new subsection: (o) Limitation on fixed percentage rent and interest exceptions (1) In general If the fixed percentage rent and interest income received or accrued by a real estate investment trust from a single C corporation (other than a taxable REIT subsidiary of such real estate investment trust) for any taxable year exceeds either— (A) 25 percent of the fixed percentage rent income received or accrued by such real estate investment trust for such taxable year, or (B) 25 percent of the fixed percentage interest income received or accrued by such real estate investment trust for such taxable year, then, notwithstanding subsection (d)(2), none of the fixed percentage rent income received or accrued from such corporation which is attributable to leases entered into after December 31, 2014, shall be treated as rents from real property and, notwithstanding subsection (f), none of the fixed percentage interest income received or accrued from such corporation which is attributable to debt instruments acquired after December 31, 2014, shall be treated as interest. (2) Fixed percentage rent and interest income For purposes of this subsection— (A) Fixed percentage rent and interest income The term

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or accrued from such corporation which is attributable to leases entered into after December 31, 2014, shall be treated as rents from real property and, notwithstanding subsection (f), none of the fixed percentage interest income received or accrued from such corporation which is attributable to debt instruments acquired after December 31, 2014, shall be treated as interest. (2) Fixed percentage rent and interest income For purposes of this subsection— (A) Fixed percentage rent and interest income The term fixed percentage rent and interest income means the sum of the fixed percentage rent income plus the fixed percentage interest income. (B) Fixed percentage rent income The term fixed percentage rent income means amounts described in subsection (d)(2)(A) which are based on a fixed percentage or percentages of receipts or sales. (C) Fixed percentage interest income The term fixed percentage interest income means amounts described in subsection (f)(1) which are based on a fixed percentage or percentages of receipts or sales. (3) Aggregation rule Members of the same affiliated group (as defined in section 1504, applied by substituting 50 percent for 80 percent each place it appears therein) shall be treated as 1 corporation for purposes of paragraph (1). (4) Treatment of modifications For purposes of paragraph (1), any material modification (including any extension of the term) of a lease or debt instrument shall be treated as a new lease or debt instrument, as the case may be, entered into on the date of such modification. . (b) Effective date The amendment made by this section shall apply to taxable years ending after December 31, 2014. 3636. Repeal of preferential dividend rule for publicly offered REITs (a) In general Paragraph (1) of section 562(c), as amended by the preceding provisions of this Act, is amended by inserting or a publicly offered REIT after a publicly offered regulated investment company . (b) Publicly offered REIT Subsection (c) of section 562, as so amended, is amended by adding at the end the following new paragraph: (3) Publicly offered REIT For purposes of this subsection, the term publicly offered REIT means a real estate investment trust which is required to file annual and periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934. . (c) Effective date The amendment made by this section shall apply to distributions in taxable years beginning after December 31, 2014. 3637. Authority for alternative remedies to address certain REIT distribution failures (a) In general Subsection (e) of section 562 is amended— (1) by striking In the case of a real estate investment trust and inserting the following: (1) Determination of earnings and profits for purposes of dividends paid deduction In the case of a real estate investment trust , and (2) by adding at the end the following new paragraph: (2) Authority to provide alternative remedies for certain failures In the case of a failure of a distribution by a real estate investment trust to comply with the requirements of subsection (c), the Secretary may provide an appropriate remedy to cure such failure in lieu of not considering the distribution to be a dividend for purposes of computing the dividends paid deduction if— (A) the Secretary determines that such failure is inadvertent or is due to reasonable cause and not due to willful neglect, or (B) such failure is of a type of failure which the Secretary has identified for purposes of this paragraph as being described in subparagraph (A). . (b) Effective date The amendments made by this section shall apply to distributions in taxable years beginning after December 31, 2014. 3638. Limitations on designation of dividends by REITs (a) In general Section 857 is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection: (g) Limitations on designation of dividends (1) Overall limitation The aggregate amount of dividends designated by a real estate investment trust under subsections (b)(3)(C) and

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date The amendments made by this section shall apply to distributions in taxable years beginning after December 31, 2014. 3638. Limitations on designation of dividends by REITs (a) In general Section 857 is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection: (g) Limitations on designation of dividends (1) Overall limitation The aggregate amount of dividends designated by a real estate investment trust under subsections (b)(3)(C) and (c)(2)(A) with respect to any taxable year may not exceed the dividends paid by such trust with respect to such year. For purposes of the preceding sentence, dividends paid after the close of the taxable year described in section 858 shall be treated as paid with respect to such year. (2) Proportionality The Secretary may prescribe regulations or other guidance requiring the proportionality of the designation of particular types of dividends among shares or beneficial interests of a real estate investment trust. . (b) Effective date The amendments made by this section shall apply to distributions in taxable years beginning after December 31, 2014. 3639. Non-REIT earnings and profits required to be distributed by REIT in cash (a) In general Section 857, as amended by the preceding provisions of this Act, is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following new subsection: (h) Determination of earnings and profits accumulated in non-REIT years (1) In general For purposes of subsection (a)(2)(B), distributions during the transition period shall be taken into account in determining accumulated earning and profits only if such distributions are made in cash. (2) Transition period For purposes of this subsection, the term transition period means the period of taxable years beginning with the last taxable year (other than a short taxable year) which was a non-REIT year (as defined in subsection (a)) and ending with the first taxable year to which the provisions of this part apply. . (b) Conforming amendment Section 857(a)(2)(B) is amended by inserting (determined as provided in subsection (h)) before the period at the end. (c) Effective date The amendments made by this section shall apply to distributions made on or after February 26, 2014. 3640. Debt instruments of publicly offered REITs and mortgages treated as real estate assets (a) Debt instruments of publicly offered REITs treated as real estate assets (1) In general Subparagraph (B) of section 856(c)(5) is amended— (A) by striking and shares and inserting , shares , and (B) by inserting , and debt instruments issued by publicly offered REITs before the period at the end of the first sentence. (2) Income from nonqualified debt instruments of publicly offered REITs not qualified for purposes of satisfying the 75 percent gross income test Subparagraph (H) of section 856(c)(3) is amended by inserting (other than a nonqualified publicly offered REIT debt instrument) after real estate asset . (3) 25 percent asset limitation on holding of nonqualified debt instruments of publicly offered REITs Subparagraph (B) of section 856(c)(4) is amended by redesignating clause (iii) as clause (iv) and by inserting after clause (ii) the following new clause: (iii) not more than 25 percent of the value of its total assets is represented by nonqualified publicly offered REIT debt instruments, and . (4) Definitions related to debt instruments of publicly offered REITs Paragraph (5) of section 856(c), as amended by the preceding provisions of this Act, is amended by adding at the end the following new subparagraph: (K) Definitions related to debt instruments of publicly offered REITs (i) Publicly offered REIT The term publicly offered REIT has the meaning given such term by section 562(c)(3). (ii) Nonqualified publicly offered REIT debt instrument The term nonqualified publicly offered REIT debt instrument means any real estate asset which would cease to be a real estate asset if subparagraph (B) were applied without regard to the

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provisions of this Act, is amended by adding at the end the following new subparagraph: (K) Definitions related to debt instruments of publicly offered REITs (i) Publicly offered REIT The term publicly offered REIT has the meaning given such term by section 562(c)(3). (ii) Nonqualified publicly offered REIT debt instrument The term nonqualified publicly offered REIT debt instrument means any real estate asset which would cease to be a real estate asset if subparagraph (B) were applied without regard to the reference to debt instruments issued by publicly offered REITs . . (b) Interests in mortgages on interests in real property treated as real estate assets Subparagraph (B) of section 856(c)(5) is amended by inserting or on interests in real property after interests in mortgages on real property . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3641. Asset and income test clarification regarding ancillary personal property (a) In general Subsection (c) of section 856 is amended by adding at the end the following new paragraph: (9) Special rules for certain personal property which is ancillary to real property (A) Certain personal property leased in connection with real property Personal property shall be treated as a real estate asset for purposes of paragraph (4)(A) to the extent that rents attributable to such personal property are treated as rents from real property under subsection (d)(1)(C). (B) Certain personal property mortgaged in connection with real property In the case of an obligation secured by a mortgage on both real property and personal property, if the fair market value of such personal property does not exceed 15 percent of the total fair market value of all such property, such personal property shall be treated as real property for purposes of applying paragraphs (3)(B) and (4)(A). For purposes of the preceding sentence, the fair market value of all such property shall be determined in the same manner as the fair market value of real property is determined for purposes of apportioning interest income between real property and personal property under paragraph (3)(B). . (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3642. Hedging provisions (a) Modification To permit the termination of a hedging transaction using an additional hedging instrument Subparagraph (G) of section 856(c)(5) is amended by striking and at the end of clause (i), by striking the period at the end of clause (ii) and inserting , and , and by adding at the end the following new clause: (iii) if— (I) a real estate investment trust enters into one or more positions described in clause (i) with respect to indebtedness described in clause (i) or one or more positions described in clause (ii) with respect to property which generates income or gain described in paragraph (2) or (3), (II) any portion of such indebtedness is extinguished or any portion of such property is disposed of, and (III) in connection with such extinguishment or disposition, such trust enters into one or more transactions which would be hedging transactions described in subparagraph (B) or (C) of section 1221(b)(2) with respect to any position referred to in subclause (I) if such position were ordinary property, any income of such trust from any position referred to in subclause (I) and from any transaction referred to in subclause (III) (including gain from the termination of any such position or transaction) shall not constitute gross income under paragraphs (2) and (3) to the extent that such transaction hedges such position. . (b) Identification requirements (1) In general Subparagraph (G) of section 856(c)(5), as amended by subsection (a), is amended by striking and at the end of clause (ii), by striking the period at the end of clause (iii) and inserting , and , and by adding at the end the following new clause: (iv) clauses (i), (ii), and (iii) shall not apply with respect to any transaction unless such transaction

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constitute gross income under paragraphs (2) and (3) to the extent that such transaction hedges such position. . (b) Identification requirements (1) In general Subparagraph (G) of section 856(c)(5), as amended by subsection (a), is amended by striking and at the end of clause (ii), by striking the period at the end of clause (iii) and inserting , and , and by adding at the end the following new clause: (iv) clauses (i), (ii), and (iii) shall not apply with respect to any transaction unless such transaction satisfies the identification requirement described in section 1221(b)(3)(A) (determined after taking into account any curative provisions provided under the regulations referred to therein). . (2) Conforming amendments Subparagraph (G) of section 856(c)(5) is amended— (A) by striking which is clearly identified pursuant to section 1221(a)(7) in clause (i), and (B) by striking , but only if such transaction 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 prescribe) in clause (ii). (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3643. Modification of REIT earnings and profits calculation to avoid duplicate taxation (a) Earnings and profits not increased by amounts allowed in computing taxable income in prior years (1) In general Paragraph (1) of section 857(d) is amended to read as follows: (1) In general The earnings and profits of a real estate investment trust for any taxable year (but not its accumulated earnings) shall not be reduced by any amount which— (A) is not allowable in computing its taxable income for such taxable year, and (B) was not allowable in computing its taxable income for any prior taxable year. . (2) Exception for purposes of determining dividends paid deduction Paragraph (1) of section 562(e), as amended by the preceding provisions of this Act, is amended— (A) by striking deduction, the earnings and inserting the following: deduction— (A) the earnings , (B) by striking the period at the end and inserting , and , and (C) by adding at the end the following new subparagraph: (B) section 857(d)(1) shall be applied without regard to subparagraph (B) thereof. . (3) Conforming amendments Subsection (d) of section 857 is amended by adding at the end the following new paragraphs: (4) Real estate investment trust For purposes of this subsection, the term real estate investment trust includes a domestic corporation, trust, or association which is a real estate investment trust determined without regard to the requirements of subsection (a). (5) Special rules for determining earnings and profits for purposes of the deduction for dividends paid For special rules for determining the earnings and profits of a real estate investment trust for purposes of the deduction for dividends paid, see section 562(e)(1). . (b) Treatment of gain on sales of real property Subparagraph (A) of section 562(e)(1), as amended by the preceding provisions of this Act, is amended to read as follows: (A) the earnings and profits of such trust for any taxable year (but not its accumulated earnings) shall be increased by the amount of gain (if any) on the sale or exchange of real property which is taken into account in determining the taxable income of such trust for such taxable year (and not otherwise taken into account in determining such earnings and profits), and . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3644. Reduction in percentage limitation on assets of REIT which may be taxable REIT subsidiaries (a) In general Section 856(c)(4)(B)(ii) is amended by striking 25 percent and inserting 20 percent . (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2016. 3645. Treatment of certain services provided by taxable REIT subsidiaries (a) Taxable REIT subsidiaries treated in same manner as independent contractors for certain

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after December 31, 2014. 3644. Reduction in percentage limitation on assets of REIT which may be taxable REIT subsidiaries (a) In general Section 856(c)(4)(B)(ii) is amended by striking 25 percent and inserting 20 percent . (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2016. 3645. Treatment of certain services provided by taxable REIT subsidiaries (a) Taxable REIT subsidiaries treated in same manner as independent contractors for certain purposes (1) Marketing and development expenses under rental property safe harbor Clause (v) of section 857(b)(6)(C) is amended by inserting or by a taxable REIT subsidiary before the period at the end. (2) Foreclosure property grace period Subparagraph (C) of section 856(e)(4) is amended by inserting or through a taxable REIT subsidiary after receive any income . (b) Tax on redetermined TRS service income (1) In general Subparagraph (A) of section 857(b)(7) is amended by striking and excess interest and inserting excess interest, and redetermined TRS service income . (2) Redetermined TRS service income Paragraph (7) of section 857(b) is amended by redesignating subparagraphs (E) and (F) as subparagraphs (F) and (G), respectively, and inserting after subparagraph (D) the following new subparagraph: (E) Redetermined TRS service income (i) In general The term redetermined TRS service income means gross income of a taxable REIT subsidiary of a real estate investment trust attributable to services provided to, or on behalf of, such trust (less deductions properly allocable thereto) to the extent the amount of such income (less such deductions) would (but for subparagraph (F)) be increased on distribution, apportionment, or allocation under section 482. (ii) Coordination with redetermined rents Clause (i) shall not apply with respect to gross income attributable to services furnished or rendered to a tenant of the real estate investment trust (or to deductions properly allocable thereto). . (3) Conforming amendments Subparagraphs (B)(i) and (C) of section 857(b)(7) are each amended by striking subparagraph (E) and inserting subparagraph (F) . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3646. Study relating to taxable REIT subsidiaries The Secretary of the Treasury (or the Secretary’s designee) shall, biannually— (1) conduct a study to determine— (A) how many taxable REIT subsidiaries are in existence and the aggregate amount of taxes paid by such subsidiaries, and (B) the amount by which transactions between a REIT and a taxable REIT subsidiary reduce taxable income of the taxable REIT subsidiary (whether or not such transactions are conducted at arms length), and (2) submit a report to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate describing the results of such study. 3647. C corporation election to become, or transfer assets to, a RIC or REIT (a) In general Part IV of subchapter O of chapter 1, as amended by the preceding provisions of this Act, is amended by redesignating section 1062 as section 1063 and by inserting after section 1061 the following new section: 1062. Recognition of gain or loss upon C corporation election to become, or transfer assets to, a regulated investment company or a real estate investment trust (a) In general If a C corporation elects to become a regulated investment company or a real estate investment trust for a taxable year, such corporation shall recognize gain or loss as if all its assets were sold by such corporation at their fair market value immediately before the close of the last taxable year before such corporation becomes a regulated investment company or real estate investment trust (as the case may be). (b) Application to transfers of assets In the case of a C corporation which transfers to a regulated investment company or a real estate investment trust one or more assets the basis of which is determined (in whole or in part) by reference to the

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gain or loss as if all its assets were sold by such corporation at their fair market value immediately before the close of the last taxable year before such corporation becomes a regulated investment company or real estate investment trust (as the case may be). (b) Application to transfers of assets In the case of a C corporation which transfers to a regulated investment company or a real estate investment trust one or more assets the basis of which is determined (in whole or in part) by reference to the basis of such asset or assets in the hands of the C corporation, such corporation shall recognize gain or loss as if such assets were sold by such corporation at their fair market value as of the end of the day before the day of the transfer. (c) Nonapplication to net loss Subsections (a) and (b) shall not apply if their application would result in the recognition of a net loss. For purposes of the preceding sentence, the term net loss means the excess of aggregate losses over aggregate gains (including items of income) without regard to character. (d) Basis adjustment If any asset is treated as sold under subsection (a) or (b), the basis of such asset immediately after such deemed sale shall be equal to the fair market value of such asset as determined under such subsection. (e) C corporation For purposes of this section, the term C corporation does not include a regulated investment company or a real estate investment trust. . (b) Clerical amendment The table of sections for part IV of subchapter O of chapter 1 is amended by redesignating the item relating to section 1062 as an item relating to section 1063 and by inserting after the item relating to section 1061 the following new item: Sec. 1062. Recognition of gain or loss upon C corporation election to become, or transfer assets to, a regulated investment company or a real estate investment trust. . (c) Effective date The amendment made by this section shall apply to elections and transfers on or after February 26, 2014. 3648. Interests in RICs and REITs not excluded from definition of United States real property interests (a) In general Section 897(c)(1)(B) is amended by striking and at the end of clause (i), by striking the period at the end of clause (ii)(II) and inserting , and , and by adding at the end the following new clause: (iii) neither such corporation nor any predecessor of such corporation was a regulated investment company or a real estate investment company at any time during the period described in subparagraph (A)(ii). . (b) Effective date The amendment made by this section shall apply to dispositions after December 31, 2014. 3649. Dividends derived from RICs and REITs ineligible for deduction for United States source portion of dividends from certain foreign corporations (a) In general Section 245(a) is amended by adding at the end the following new paragraph: (12) Dividends derived from RICs and REITs ineligible for deduction Regulated investment companies and real estate investment trusts shall not be treated as domestic corporations for purposes of paragraph (5)(B). . (b) Effective date The amendment made by this section shall apply to dividends received from regulated investment companies and real estate investment trusts on or after February 26, 2014. 4 Personal holding companies 3661. Exclusion of dividends from controlled foreign corporations from the definition of personal holding company income for purposes of the personal holding company rules (a) In general Paragraph (1) of section 543(a) is amended— (1) by redesignating subparagraphs (C) and (D) as subparagraphs (D) and (E), respectively, and (2) by inserting after subparagraph (B) the following: (C) dividends received by a United States shareholder (as defined in section 951(b)) from a controlled foreign corporation (as defined in section 957(a)), . (b) Effective date The amendments made by this Act shall apply to taxable years beginning after December 31, 2014. H Taxation of foreign persons 3701. Prevention of avoidance of tax through reinsurance with non-taxed affiliates (a) In

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(C) and (D) as subparagraphs (D) and (E), respectively, and (2) by inserting after subparagraph (B) the following: (C) dividends received by a United States shareholder (as defined in section 951(b)) from a controlled foreign corporation (as defined in section 957(a)), . (b) Effective date The amendments made by this Act shall apply to taxable years beginning after December 31, 2014. H Taxation of foreign persons 3701. Prevention of avoidance of tax through reinsurance with non-taxed affiliates (a) In general Part III of subchapter L of chapter 1 is amended by adding at the end the following new section: 849. Special rules for reinsurance of non-life contracts with non-taxed affiliates (a) In general The taxable income under section 831(a) or the life insurance company taxable income under section 801(b) (as the case may be) of an insurance company shall be determined by not taking into account— (1) any non-taxed reinsurance premium, (2) any additional amount paid by such insurance company with respect to the reinsurance for which such non-taxed reinsurance premium is paid, to the extent such additional amount is properly allocable to such non-taxed reinsurance premium, and (3) any return premium, ceding commission, reinsurance recovered, or other amount received by such insurance company with respect to the reinsurance for which such non-taxed reinsurance premium is paid, to the extent such return premium, ceding commission, reinsurance recovered, or other amount is properly allocable to such non-taxed reinsurance premium. (b) Non-Taxed reinsurance premiums For purposes of this section— (1) In general The term non-taxed reinsurance premium means any reinsurance premium paid directly or indirectly to an affiliated corporation with respect to reinsurance of risks (other than excepted risks), to the extent that the income attributable to the premium is not subject to tax under this subtitle (either as the income of the affiliated corporation or as amounts included in gross income by a United States shareholder under section 951). (2) Excepted risks The term excepted risks means any risk with respect to which reserves described in section 816(b)(1) are established. (c) Affiliated corporations For purposes of this section, a corporation shall be treated as affiliated with an insurance company if both corporations would be members of the same controlled group of corporations (as defined in section 1563(a)) if section 1563 were applied— (1) by substituting at least 50 percent for at least 80 percent each place it appears in subsection (a)(1), and (2) without regard to subsections (a)(4), (b)(2)(C), (b)(2)(D), and (e)(3)(C). (d) Election To treat reinsurance income as effectively connected (1) In general A specified affiliated corporation may elect for any taxable year to treat specified reinsurance income as— (A) income effectively connected with the conduct of a trade or business in the United States, and (B) for purposes of any treaty between the United States and any foreign country, income attributable to a permanent establishment in the United States. (2) Effect of election In the case of any specified reinsurance income with respect to which the election under this subsection applies— (A) Deduction allowed for reinsurance premiums For exemption from subsection (a), see definition of non-taxed reinsurance premiums in subsection (b). (B) Exception from excise tax The tax imposed by section 4371 shall not apply with respect to any income treated as effectively connected with the conduct of a trade or business in the United States under paragraph (1). (C) Taxation under this subchapter Such income shall be subject to tax under this subchapter to the same extent and in the same manner as if such income were the income of a domestic insurance company. (D) Coordination with foreign tax credit provisions For purposes of subpart A of part III of subchapter N and sections 78 and 960— (i) such specified reinsurance income shall be treated as derived from sources without the United States, and (ii) subsections (a), (b), and (c) of

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States under paragraph (1). (C) Taxation under this subchapter Such income shall be subject to tax under this subchapter to the same extent and in the same manner as if such income were the income of a domestic insurance company. (D) Coordination with foreign tax credit provisions For purposes of subpart A of part III of subchapter N and sections 78 and 960— (i) such specified reinsurance income shall be treated as derived from sources without the United States, and (ii) subsections (a), (b), and (c) of section 904, and section 960, shall be applied separately with respect to each item of such income. The Secretary may issue regulations or other guidance which provide that related items of specified reinsurance income may be aggregated for purposes of applying clause (ii). (3) Specified affiliated corporation For purposes of this subsection, the term specified affiliated corporation means any affiliated corporation which is a foreign corporation and which meets such requirements as the Secretary shall prescribe to ensure that tax on the specified reinsurance income of such corporation is properly determined and paid. (4) Specified reinsurance income For purposes of this paragraph, the term specified reinsurance income means all income of a specified affiliated corporation which is attributable to reinsurance with respect to which subsection (a) would (but for the election under this subsection) apply. (5) Rules related to election Any election under paragraph (1) shall— (A) be made at such time and in such form and manner as the Secretary may provide, and (B) apply for the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary. (e) Exception for amounts subject to foreign tax An amount shall not be treated as described in paragraph (1), (2), or (3) of subsection (a) if the taxpayer demonstrates to the satisfaction of the Secretary that such amount was subject to an effective rate of income tax imposed by a foreign country which is not less than 100 percent of the maximum rate of tax specified in section 11. (f) Regulations The Secretary shall prescribe such regulations or other guidance as may be appropriate to carry out, or to prevent the avoidance of the purposes of, this section, including regulations or other guidance which provide for the application of this section to alternative reinsurance transactions, fronting transactions, conduit and reciprocal transactions, and any economically equivalent transactions. . (b) Clerical amendment The table of sections for part III of subchapter L of chapter 1 is amended by adding at the end the following new item: Sec. 849. Special rules for reinsurance of non-life contracts with non-taxed affiliates. . (c) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2014. 3702. Taxation of passenger cruise gross income of foreign corporations and nonresident alien individuals (a) In general Section 882 is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection: (f) Treatment of passenger cruise gross income (1) In general For purposes of this title, the effectively connected passenger cruise gross income of a foreign corporation shall be treated as gross income which is effectively connected with the conduct of a trade or business in the United States. (2) Effectively connected passenger cruise gross income For purposes of this subsection, the term effectively connected passenger cruise gross income means, with respect to the operation of any ship in a covered voyage, the United States territorial waters percentage of the gross income (determined without regard to section 883(a)(1)) derived from such operation, including any amount received with respect to the provision of any on- or off-board activities, services, or sales, with respect to passengers incidental to such operation (or with respect to any agreement with any person with respect to the provision of any such activities, services, or sales). (3)

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with respect to the operation of any ship in a covered voyage, the United States territorial waters percentage of the gross income (determined without regard to section 883(a)(1)) derived from such operation, including any amount received with respect to the provision of any on- or off-board activities, services, or sales, with respect to passengers incidental to such operation (or with respect to any agreement with any person with respect to the provision of any such activities, services, or sales). (3) United States territorial waters percentage For purposes of this subsection— (A) In general The term United States territorial waters percentage means, with respect to the operation of any ship in any covered voyage, the ratio (expressed as a percentage) of— (i) the number of days during such voyage such ship was operated in the territorial waters of the United States, divided by (ii) the total number of days of such voyage. (B) Calendar day rule If a ship— (i) is operated in a covered voyage, or (ii) is operated in the territorial waters of the United States during a covered voyage, for any portion of a calendar day, such ship shall be treated as having operated in a covered voyage, or as having operated in such territorial waters, respectively, for the entirety of such day. (C) Territorial waters The territorial waters of the United States shall be treated as consisting of those waters which are— (i) within the international boundary line between the United States and any contiguous foreign country, or (ii) within 12 nautical miles from low tide on the coastline of the United States. (4) Covered voyage For purposes of this subsection— (A) In general The term covered voyage has the meaning given such term by section 4472(1). (B) Anti-abuse rule Except as otherwise provided by the Secretary, if passengers embark a ship in the United States and more than 10 percent of such passengers disembark in the United States, the operation of such ship at all times between such events shall be treated as a covered voyage. Nothing in the preceding sentence shall preclude any operation of a ship (including any operation of a ship before or after such events) which would otherwise be treated as part of a covered voyage from being so treated. (5) Treatment of otherwise effectively connected income Gross income which would, without regard to this subsection, be gross income which is effectively connected with the conduct of a trade or business in the United States— (A) shall be so treated, and (B) shall not be taken into account as gross income under paragraph (2). . (b) Application to nonresident alien individuals Section 871 is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection: (n) Treatment of passenger cruise gross income (1) In general For purposes of this title, the effectively connected passenger cruise gross income of a nonresident alien individual shall be treated as gross income which is effectively connected with the conduct of a trade or business in the United States. (2) Definitions and special rules For purposes of this subsection— (A) Definitions Terms used in this subsection which are also used in section 882(f) shall have the same meaning as when used in such section, except that section 882(f)(2) shall be applied by substituting section 872(b)(1) for section 883(a)(1) . (B) Treatment of otherwise effectively connected income Rules similar to the rules of section 882(f)(5) shall apply for purposes of this subsection. . (c) Coordination with reciprocal exemptions for shipping income (1) In general Section 883(a)(1) is amended by striking Gross income and inserting Except as provided in section 882(f), gross income . (2) Nonresident alien individuals Section 872(b)(1) is amended by striking Gross income and inserting Except as provided in section 871(n), gross income . (d) Coordination with tax on gross transportation income Section 887(b)(4) is amended by adding at the end the following new flush text: The preceding sentence shall not apply to any

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exemptions for shipping income (1) In general Section 883(a)(1) is amended by striking Gross income and inserting Except as provided in section 882(f), gross income . (2) Nonresident alien individuals Section 872(b)(1) is amended by striking Gross income and inserting Except as provided in section 871(n), gross income . (d) Coordination with tax on gross transportation income Section 887(b)(4) is amended by adding at the end the following new flush text: The preceding sentence shall not apply to any United States source gross transportation income which is effectively connected passenger cruise gross income (within the meaning of section 871(n) or 882(f)). . (e) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3703. Restriction on insurance business exception to passive foreign investment company rules (a) In general Section 1297(b)(2)(B) is amended to read as follows: (B) derived in the active conduct of an insurance business by a corporation if— (i) such corporation would be subject to tax under subchapter L if such corporation were a domestic corporation, (ii) more than 50 percent of such corporation’s gross receipts for the taxable year consist of premiums, and (iii) the applicable insurance liabilities of such corporation constitute more than 35 percent of its total assets as reported on the corporation’s applicable financial statement for the year with which or in which the taxable year ends, . (b) Applicable insurance liabilities

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; applicable financial statement (1) In general Section 1297(b) is amended by adding at the end the following new paragraph: (3) Definitions For purposes of this subsection— (A) Applicable insurance liabilities The term applicable insurance liabilities means, with respect to any life or property and casualty insurance business— (i) loss and loss adjustment expenses, (ii) unearned premiums, and (iii) reserves (other than deficiency or contingency reserves) for life and health insurance risks and life and health insurance claims with respect to contracts providing coverage for mortality or morbidity risks (not to exceed the amount of such reserve that is required to be reported to the home country insurance regulatory body). (B) Applicable financial statement The term applicable financial statement means a statement for financial reporting purposes which— (i) is made on the basis of generally accepted accounting principles, (ii) is made on the basis of international financial reporting standards, but only if there is no statement that meets the requirement of clause (i), or (iii) except as otherwise provided by the Secretary in regulations, is the annual statement which is required to be filed with the home country insurance regulatory body, but only if there is no statement which meets the requirements of clause (i) or (ii). . (2) Conforming amendment Section 1297(b) is amended— (A) by striking the last sentence in paragraph (2) thereof, and (B) by adding at the end of paragraph (3) thereof (as added by paragraph (1)), the following new subparagraph: (C) Related person The term related person has the meaning given such term by section 954(d)(3) determined by substituting foreign corporation for controlled foreign corporation each place it appears therein. . (c) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2014. 3704. Modification of limitation on earnings stripping (a) In general Section 163(j)(2)(B)(i)(II) is amended by striking 50 percent and inserting 40 percent . (b) No new excess limitation carryforwards Section 163(j)(2)(B)(ii) is amended by striking for any taxable year and inserting for any taxable year beginning before January 1, 2015 . (c) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2014. 3705. Limitation on treaty benefits for certain deductible payments (a) In general Section 894 of the Internal Revenue Code of 1986 (relating to income affected by treaty) is amended by adding at the end the following new subsection: (d) Limitation on treaty benefits for certain deductible payments (1) In general In the case of any deductible related-party payment, any withholding tax imposed under chapter 3 (and any tax imposed under subpart A or B of this part) with respect to such payment may not be reduced under any treaty of the United States unless any such withholding tax would be reduced under a treaty of the United States if such payment were made directly to the foreign parent corporation. (2) Deductible related-party payment For purposes of this subsection, the term deductible related-party payment means any payment made, directly or indirectly, by any person to any other person if the payment is allowable as a deduction under this chapter and both persons are members of the same foreign controlled group of entities. (3) Foreign controlled group of entities For purposes of this subsection— (A) In general The term foreign controlled group of entities means a controlled group of entities the common parent of which is a foreign corporation. (B) Controlled group of entities The term controlled group of entities means a controlled group of corporations as defined in section 1563(a)(1), except that— (i) more than 50 percent shall be substituted for at least 80 percent each place it appears therein, and (ii) the determination shall be made without regard to subsections (a)(4) and (b)(2) of section 1563. A partnership or any other entity (other than a corporation) shall be treated as a member of a

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common parent of which is a foreign corporation. (B) Controlled group of entities The term controlled group of entities means a controlled group of corporations as defined in section 1563(a)(1), except that— (i) more than 50 percent shall be substituted for at least 80 percent each place it appears therein, and (ii) the determination shall be made without regard to subsections (a)(4) and (b)(2) of section 1563. A partnership or any other entity (other than a corporation) shall be treated as a member of a controlled group of entities if such entity is controlled (within the meaning of section 954(d)(3)) by members of such group (including any entity treated as a member of such group by reason of this sentence). (4) Foreign parent corporation For purposes of this subsection, the term foreign parent corporation means, with respect to any deductible related-party payment, the common parent of the foreign controlled group of entities referred to in paragraph (3)(A). (5) Regulations The Secretary may prescribe such regulations or other guidance as are necessary or appropriate to carry out the purposes of this subsection, including regulations or other guidance which provide for— (A) the treatment of two or more persons as members of a foreign controlled group of entities if such persons would be the common parent of such group if treated as one corporation, and (B) the treatment of any member of a foreign controlled group of entities as the common parent of such group if such treatment is appropriate taking into account the economic relationships among such entities. . (b) Effective date The amendment made by this section shall apply to payments made after the date of the enactment of this Act. I Provisions related to compensation 1 Executive compensation 3801. Nonqualified deferred compensation (a) In general Subpart A of part I of subchapter D of chapter 1 is amended by adding at the end the following new section: 409B. Nonqualified deferred compensation (a) In general Any compensation which is deferred under a nonqualified deferred compensation plan shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation. (b) Definitions For purposes of this section— (1) Substantial risk of forfeiture The rights of a person to compensation shall be treated as subject to a substantial risk of forfeiture only if such person’s rights to such compensation are conditioned upon the future performance of substantial services by any individual. (2) Nonqualified deferred compensation plan For purposes of this section: (A) Nonqualified deferred compensation plan The term nonqualified deferred compensation plan means any plan that provides for the deferral of compensation, other than— (i) a qualified employer plan, (ii) any bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefit plan, and (iii) any other plan or arrangement designated by the Secretary consistent with the purposes of this section. (B) Equity-based compensation The term nonqualified deferred compensation plan shall include any plan that provides a right to compensation based on the appreciation in value of a specified number of equity units of the service recipient or stock options. (3) Qualified employer plan The term qualified employer plan means any plan, contract, pension, account, or trust described in 408(p)(2)(D)(ii). (4) Plan includes arrangements, etc The term plan includes any agreement or arrangement, including an agreement or arrangement that includes one person. (5) Exception Compensation shall not be treated as deferred for purposes of this section if the service provider receives payment of such compensation not later than 6 months after the end of the taxable year of the service recipient during which the right to the payment of such compensation is no longer subject to a substantial risk of forfeiture. (6) Treatment of earnings References to deferred compensation shall be treated as including references to income (whether actual or notional) attributable to such

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Exception Compensation shall not be treated as deferred for purposes of this section if the service provider receives payment of such compensation not later than 6 months after the end of the taxable year of the service recipient during which the right to the payment of such compensation is no longer subject to a substantial risk of forfeiture. (6) Treatment of earnings References to deferred compensation shall be treated as including references to income (whether actual or notional) attributable to such compensation or such income. (7) Aggregation rules Except as provided by the Secretary, rules similar to the rules of subsections (b) and (c) of section 414 shall apply. (c) No inference on earlier income inclusion or requirement of later inclusion Nothing in this section shall be construed to prevent the inclusion of amounts in gross income under any other provision of this chapter or any other rule of law earlier than the time provided in this section. Any amount included in gross income under this section shall not be required to be included in gross income under any other provision of this chapter or any other rule of law later than the time provided in this section. (d) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations disregarding a substantial risk of forfeiture in cases where necessary to carry out the purposes of this section. . (b) Termination of certain other nonqualified deferred compensation rules (1) Nonqualified deferred compensation (A) In general Subpart A of part I of subchapter D of chapter 1 is amended by striking section 409A (and by striking the item relating to such section in the table of sections for such subpart). (B) Conforming amendments (i) Section 26(b)(2) is amended by striking subparagraph (V). (ii) Section 3401(a) is amended by striking the flush sentence at the end. (iii) Section 6041 is amended by striking subsection (g). (iv) Section 6051(a), as amended by the preceding provisions of this Act, is amended by striking paragraph (12), by inserting and at the end of paragraph (11), and by redesignating paragraph (13) as paragraph (12). (2) 457(b) plans of tax exempt organizations Section 457 is amended by adding at the end the following new subsection: (h) Termination of certain plans (1) Tax-exempt organization plans This section shall not apply to amounts deferred which are attributable to services performed after December 31, 2014, under a plan maintained by an employer described in subsection (e)(1)(B). (2) Ineligible deferred compensation plans Subsection (f) shall not apply to amounts deferred which are attributable to services performed after December 31, 2014. . (3) Nonqualified deferred compensation from certain tax indifferent parties (A) In general Subpart B of part II of subchapter E of chapter 1 is amended by striking section 457A (and by striking the item relating to such section in the table of sections for such subpart). (B) Conforming amendment Section 26(b)(2) is amended by striking subparagraph (X). (c) Clerical amendment The table of sections for part I of subchapter D of chapter 1 is amended by adding at the end the following new item: Sec. 409B. Nonqualified deferred compensation. . (d) Effective date (1) In general Except as otherwise provided in this subsection, the amendments made by this section shall apply to amounts which are attributable to services performed after December 31, 2014. (2) Application to existing deferrals In the case of any amount deferred to which the amendments made by this section do no apply solely by reason of the fact that the amount is attributable to services performed before January 1, 2015, to the extent such amount is not includible in gross income in a taxable year beginning before 2023, such amounts shall be includible in gross income in the later of— (A) the last taxable year beginning before 2023, or (B) the taxable year in which there is no substantial risk of forfeiture of the rights to such compensation (determined in

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to which the amendments made by this section do no apply solely by reason of the fact that the amount is attributable to services performed before January 1, 2015, to the extent such amount is not includible in gross income in a taxable year beginning before 2023, such amounts shall be includible in gross income in the later of— (A) the last taxable year beginning before 2023, or (B) the taxable year in which there is no substantial risk of forfeiture of the rights to such compensation (determined in the same manner as determined for purposes of section 409B of the Internal Revenue Code of 1986, as added by this section). (3) Accelerated payments No later than 120 days after the date of the enactment of this Act, the Secretary shall issue guidance providing a limited period of time during which a nonqualified deferred compensation arrangement attributable to services performed on or before December 31, 2014, may, without violating the requirements of section 409A of the Internal Revenue Code of 1986, be amended to conform the date of distribution to the date the amounts are required to be included in income. (4) Certain back-to-back arrangements If the taxpayer is also a service recipient and maintains one or more nonqualified deferred compensation arrangements for its service providers under which any amount is attributable to services performed on or before December 31, 2014, the guidance issued under paragraph (3) shall permit such arrangements to be amended to conform the dates of distribution under such arrangement to the date amounts are required to be included in the income of such taxpayer under this subsection. (5) Accelerated payment not treated as material modification Any amendment to a nonqualified deferred compensation arrangement made pursuant to paragraph (3) or (4) shall not be treated as a material modification of the arrangement for purposes of section 409A of the Internal Revenue Code of 1986. 3802. Modification of limitation on excessive employee remuneration (a) Repeal of performance-Based compensation and commission exceptions for limitation on excessive employee remuneration (1) In general Paragraph (4) of section 162(m) is amended by striking subparagraphs (B) and (C) and by redesignating subparagraphs (D), (E), (F), and (G) as subparagraphs (B), (C), (D), and (E), respectively. (2) Conforming amendments (A) Paragraphs (5)(E) and (6)(D) of section 162(m) are each amended by striking subparagraphs (B), (C), and (D) and inserting subparagraph (B) . (B) Paragraphs (5)(G) and (6)(G) of section 162(m) are each amended by striking (F) and (G) and inserting (D) and (E) . (b) Modification of definition of covered employees Paragraph (3) of section 162(m) is amended— (1) in subparagraph (A), by striking as of the close of the taxable year, such employee is the chief executive officer of the taxpayer or is and inserting such employee is the chief executive officer or the chief financial officer of the taxpayer at any time during the taxable year, or was , (2) in subparagraph (B)— (A) by striking 4 and inserting 3 , and (B) by striking (other than the chief executive officer) and inserting (other than any individual described in subparagraph (A)) , and (3) by striking or at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting , or , and by adding at the end the following: (C) was a covered employee of the taxpayer (or any predecessor) for any preceding taxable year beginning after December 31, 2013. . (c) Special rule for remuneration paid to beneficiaries, etc Paragraph (4) of section 162(m), as amended by subsection (a), is amended by adding at the end the following new subparagraph: (F) Special rule for remuneration paid to beneficiaries, etc Remuneration shall not fail to be applicable employee remuneration merely because it is includible in the income of, or paid to, a person other than the covered employee, including after the death of the covered employee. . (d) Effective date The amendments made by this section shall apply to taxable years beginning after

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Paragraph (4) of section 162(m), as amended by subsection (a), is amended by adding at the end the following new subparagraph: (F) Special rule for remuneration paid to beneficiaries, etc Remuneration shall not fail to be applicable employee remuneration merely because it is includible in the income of, or paid to, a person other than the covered employee, including after the death of the covered employee. . (d) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3803. Excise tax on excess tax-exempt organization executive compensation (a) In general Subchapter D of chapter 42 is amended by adding at the end the following new section: 4960. Tax on excess tax-exempt organization executive compensation (a) Tax imposed There is hereby imposed a tax equal to 25 percent of the sum of— (1) so much of the remuneration paid (other than any excess parachute payment) by an applicable tax-exempt organization for the taxable year with respect to employment of any covered employee in excess of $1,000,000, plus (2) any excess parachute payment paid by such an organization to any covered employee. (b) Liability for tax The employer shall be liable for the tax imposed under subsection (a). (c) Definitions and special rules For purposes of this section— (1) Applicable tax-exempt organization The term applicable tax-exempt organization means any organization that for the taxable year— (A) is exempt from taxation under section 501(a), (B) is a farmers’ cooperative organization described in section 521(b)(1), or (C) has income excluded from taxation under section 115(1). (2) Covered employee For purposes of this section, the term covered employee means any employee (including any former employee) of an applicable tax-exempt organization if the employee— (A) is one of the 5 highest compensated employees of the organization for the taxable year, or (B) was a covered employee of the organization (or any predecessor) for any preceding taxable year beginning after December 31, 2013. (3) Remuneration For purposes of this section, the term remuneration means wages (as defined in section 3401(a)), except that such term shall not include any designated Roth contribution (as defined in section 402A(c)). (4) Remuneration from related organizations (A) In general Remuneration of a covered employee by an applicable tax-exempt organization shall include any remuneration paid with respect to employment of such employee by any related person or governmental entity. (B) Related organizations A person or governmental entity shall be treated as related to an applicable tax-exempt organization if such person or governmental entity— (i) controls, or is controlled by, the organization, (ii) is controlled by one or more persons that control the organization, (iii) is a supported organization (as defined in section 509(f)(2)) during the taxable year with respect to the organization, (iv) is a supporting organization described in section 509(a)(3) during the taxable year with respect to the organization, or (v) in the case of an organization that is a voluntary employees’ beneficiary association described in section 501(a)(9), establishes, maintains, or makes contributions to such voluntary employees’ beneficiary association. (C) Liability for tax In any case in which remuneration from more than one employer is taken into account under this paragraph in determining the tax imposed by subsection (a), each such employer shall be liable for such tax in an amount which bears the same ratio to the total tax determined under subsection (a) with respect to such remuneration as— (i) the amount of remuneration paid by such employer with respect to such employee, bears to (ii) the amount of remuneration paid by all such employers to such employee. (5) Excess parachute payment For purposes determining the tax imposed by subsection (a)(2)— (A) In general The term excess parachute payment means an amount equal to the excess of any parachute payment over the portion of the base amount allocated to such payment. (B)

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determined under subsection (a) with respect to such remuneration as— (i) the amount of remuneration paid by such employer with respect to such employee, bears to (ii) the amount of remuneration paid by all such employers to such employee. (5) Excess parachute payment For purposes determining the tax imposed by subsection (a)(2)— (A) In general The term excess parachute payment means an amount equal to the excess of any parachute payment over the portion of the base amount allocated to such payment. (B) Parachute payment The term parachute payment means any payment in the nature of compensation to (or for the benefit of) a covered employee if— (i) such payment is contingent on such employee’s separation from employment with the employer, and (ii) the aggregate present value of the payments in the nature of compensation to (or for the benefit of) such individual which are contingent on such separation equals or exceeds an amount equal to 3 times the base amount. Such term does not include any payment described in section 280G(b)(6) (relating to exemption for payments under qualified plans) or any payment made under or to an annuity contract described in section 403(b) or a plan described in section 457(b). (C) Base amount Rules similar to the rules of 280G(b)(3) shall apply for purposes of determining the base amount. (D) Property transfers

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; present value Rules similar to the rules of paragraphs (3) and (4) of section 280G(d) shall apply. (6) Coordination with deduction limitation Remuneration the deduction for which is not allowed by reason of section 162(m) shall not be taken into account for purposes of this section. . (b) Clerical amendment The table of sections for subchapter D of chapter 42 is amended by adding at the end the following new item: Sec. 4960. Tax on excess exempt organization executive compensation. . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2014. 3804. Denial of deduction as research expenditure for stock transferred pursuant to an incentive stock option (a) In general Paragraph (2) of section 421(a) is amended by striking under section 162 (relating to trade or business expenses) . (b) Effective date The amendment made by this section shall apply to stock transferred on or after February 26, 2014. 2 Worker classification 3811. Determination of worker classification (a) In general Chapter 79, as amended by the preceding provisions of this Act, is amended by adding at the end the following new section: 7707. Determination of worker classification (a) In general For purposes of this title (and notwithstanding any provision of this title not contained in this section to the contrary), if the requirements of subsections (b), (c), and (d) are met with respect to any service performed by a service provider, then with respect to such service— (1) the service provider shall not be treated as an employee, (2) the service recipient shall not be treated as an employer, (3) any payor shall not be treated as an employer, and (4) the compensation paid or received for such service shall not be treated as paid or received with respect to employment. (b) General service provider requirements (1) In general The requirements of this subsection are met with respect to any service if the service provider either— (A) meets the requirements of paragraph (2) with respect to such service, or (B) in the case a service provider engaged in the trade or business of selling (or soliciting the sale of) goods or services, meets the requirements of paragraph (3) with respect to such service. (2) General requirements The requirements of this paragraph are met with respect to any service if the service provider, in connection with performing the service— (A) incurs significant unreimbursed expenses, (B) agrees to perform the service for a particular amount of time, to achieve a specific result, or to complete a specific task, (C) is primarily compensated on a basis not tied to the number of hours worked, and (D) at least one of the following: (i) has a significant investment in assets or training, (ii) is not required to perform services exclusively for the service recipient, or (iii) has not performed services for the service recipient as an employee during the 1-year period ending with the date of the commencement of services under the contract described in subsection (d). (3) Alternative requirements with respect to sales persons In the case of a service provider engaged in the trade or business of selling (or soliciting the sale of) goods or services, the requirements of this paragraph are met with respect to any service provided in the ordinary course of such trade or business if— (A) the service provider is compensated primarily on a commission basis, and (B) substantially all the compensation for such service is directly related to sales of goods or services rather than to the number of hours worked. (c) Place of business or own equipment requirement The requirement of this subsection is met with respect to any service if the service provider— (1) has a principal place of business, (2) does not primarily provide the service in the service recipient’s place of business, (3) pays a fair market rent for use of the service recipient’s place of business, or (4) provides the service primarily using equipment supplied by the service provider. (d) Written contract requirement The requirements of this

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worked. (c) Place of business or own equipment requirement The requirement of this subsection is met with respect to any service if the service provider— (1) has a principal place of business, (2) does not primarily provide the service in the service recipient’s place of business, (3) pays a fair market rent for use of the service recipient’s place of business, or (4) provides the service primarily using equipment supplied by the service provider. (d) Written contract requirement The requirements of this subsection are met with respect to any service if such service is performed pursuant to a written contract between the service provider and the service recipient (or payor) which meets the following requirements: (1) The contract includes each of the following: (A) The service provider’s name, taxpayer identification number, and address. (B) A statement that the service provider will not be treated as an employee with respect to the services provided pursuant to the contract for purposes of this title. (C) A statement that the service recipient (or the payor) will withhold upon and report to the Internal Revenue Service the compensation payable pursuant to the contract consistent with the requirements of this title. (D) A statement that the service provider is responsible for payment of Federal, State, and local taxes, including self-employment taxes, on compensation payable pursuant to the contract. (E) A statement that the contract is intended to be considered a contract described in this subsection. (2) The term of the contract does not exceed 1 year. The preceding sentence shall not prevent one or more subsequent written renewals of the contract from satisfying the requirements of this subsection if the term of each such renewal does not exceed 1 year and if the information required under paragraph (1)(A) is updated in connection with each such renewal. (3) The contract (or renewal) is signed by both the service recipient (or payor) and the service provider not later than the date on which the aggregate payments made by the service recipient to the service provider exceeds $600 for the year covered by the contract (or renewal). (e) Reporting requirements If any service recipient or payor fails to meet the applicable reporting requirements of section 6041(a) or 6041A(a) for any taxable year with respect to any service provider, this section shall not apply for purposes of making any determination with respect to the liability of such service recipient or payor for any tax with respect to such service provider for such period. For purposes of the preceding sentence, such reporting requirements shall be treated as met if the failure to satisfy such requirements is due to reasonable cause and not willful neglect. (f) Exception for services provided by owner This section shall not apply with respect to any service provided by a service provider to a service recipient if the service provider owns any interest in the service recipient or any payor with respect to the service provided. The preceding sentence shall not apply in the case of a service recipient the stock of which is regularly traded on an established securities market. (g) Exception for services not received in course of a trade or business This section shall not apply with respect to any service unless such service is performed in the ordinary course of a trade or business of the service recipient. (h) Limitation on reclassification by Secretary For purposes of this title— (1) Effect of reclassification on recipients and payors A determination by the Secretary that a service recipient or a payor should have treated a service provider as an employee shall be effective with respect to the service recipient or payor no earlier than the notice date if— (A) the service recipient or the payor entered into a written contract with the service provider which meets the requirements of subsection (d), (B) the service recipient or the payor satisfied the applicable reporting requirements of section 6041(a) or 6041A(a) for all relevant taxable years with respect to the

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that a service recipient or a payor should have treated a service provider as an employee shall be effective with respect to the service recipient or payor no earlier than the notice date if— (A) the service recipient or the payor entered into a written contract with the service provider which meets the requirements of subsection (d), (B) the service recipient or the payor satisfied the applicable reporting requirements of section 6041(a) or 6041A(a) for all relevant taxable years with respect to the service provider, (C) the service recipient or the payor collected and paid over all applicable taxes imposed under subtitle C for all relevant taxable years with respect to the service provider, (D) the service recipient or the payor demonstrates a reasonable basis for having determined that the service provider should not be treated as an employee under this section and that such determination was made in good faith. (2) Effect of reclassification on service providers A determination by the Secretary that a service provider should have been treated as an employee shall be effective with respect to the service provider no earlier than the notice date if— (A) the service provider entered into a written contract with the service recipient or payor which meets the requirements of subsection (d), (B) the service provider satisfied the applicable reporting requirements of sections 6012(a) and 6017 for all relevant taxable years with respect to the service recipient or payor, and (C) the service provider demonstrates a reasonable basis for determining that the service provider is not an employee under this section and that such determination was made in good faith. (3) Notice date For purposes of this subsection, the term notice date means the 30th day after the earliest of— (A) the date on which the first letter of proposed deficiency which allows the service provider, the service recipient, or the payor an opportunity for administrative review in the Internal Revenue Service Office of Appeals is sent, (B) the date on which a deficiency notice under section 6212 is sent, or (C) the date on which a notice of determination under section 7436(b)(2) is sent. (4) Reasonable cause exception The requirements of paragraphs (1)(B) and (2)(B) shall be treated as met if the failure to satisfy such requirements is due to reasonable cause and not willful neglect. (5) No restriction on administrative or judicial review Nothing in this subsection shall be construed as limiting any provision of law which provides an opportunity for administrative or judicial review of a determination by the Secretary. (i) Definitions For purposes of this section— (1) Service provider (A) In general The term service provider means any qualified person who performs service for another person. (B) Qualified person The term qualified person means— (i) any natural person, and (ii) any entity if any of the services referred to in subparagraph (A) are performed by one or more natural persons who directly own interests in such entity. (2) Service recipient The term service recipient means the person for whom the service provider performs such service. (3) Payor The term payor means any person who pays the service provider for performing such service. (j) Regulations Notwithstanding section 530(d) of the Revenue Act of 1978, the Secretary shall issue such regulations as the Secretary determines are necessary to carry out the purposes of this section. . (b) Withholding by payor in case of certain persons classified as not employees Section 3402 is amended by redesignating subsection (s) as subsection (t) and inserting after subsection (r) the following new subsection: (s) Extension of withholding to payments to certain persons classified as not employees (1) In general For purposes of this chapter and so much of subtitle F as relates to this chapter, compensation paid pursuant to a contract described in section 7707(d) shall be treated as if it were a payment of wages by an employer to an employee. (2) Amount withheld Except as otherwise provided under subsection (i),