
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC163]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
               Subchapter B--Computation of Taxable Income
 
      PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
 
Sec. 163. Interest


(a) General rule

    There shall be allowed as a deduction all interest paid or accrued 
within the taxable year on indebtedness.

(b) Installment purchases where interest charge is not separately stated

                          (1) General rule

        If personal property or educational services are purchased under 
    a contract--
            (A) which provides that payment of part or all of the 
        purchase price is to be made in installments, and
            (B) in which carrying charges are separately stated but the 
        interest charge cannot be ascertained,

    then the payments made during the taxable year under the contract 
    shall be treated for purposes of this section as if they included 
    interest equal to 6 percent of the average unpaid balance under the 
    contract during the taxable year. For purposes of the preceding 
    sentence, the average unpaid balance is the sum of the unpaid 
    balance outstanding on the first day of each month beginning during 
    the taxable year, divided by 12. For purposes of this paragraph, the 
    term ``educational services'' means any service (including lodging) 
    which is purchased from an educational organization described in 
    section 170(b)(1)(A)(ii) and which is provided for a student of such 
    organization.

                           (2) Limitation

        In the case of any contract to which paragraph (1) applies, the 
    amount treated as interest for any taxable year shall not exceed the 
    aggregate carrying charges which are properly attributable to such 
    taxable year.

(c) Redeemable ground rents

    For purposes of this subtitle, any annual or periodic rental under a 
redeemable ground rent (excluding amounts in redemption thereof) shall 
be treated as interest on an indebtedness secured by a mortgage.

(d) Limitation on investment interest

                           (1) In general

        In the case of a taxpayer other than a corporation, the amount 
    allowed as a deduction under this chapter for investment interest 
    for any taxable year shall not exceed the net investment income of 
    the taxpayer for the taxable year.

               (2) Carryforward of disallowed interest

        The amount not allowed as a deduction for any taxable year by 
    reason of paragraph (1) shall be treated as investment interest paid 
    or accrued by the taxpayer in the succeeding taxable year.

                       (3) Investment interest

        For purposes of this subsection--

        (A) In general

            The term ``investment interest'' means any interest 
        allowable as a deduction under this chapter (determined without 
        regard to paragraph (1)) which is paid or accrued on 
        indebtedness properly allocable to property held for investment.

        (B) Exceptions

            The term ``investment interest'' shall not include--
                (i) any qualified residence interest (as defined in 
            subsection (h)(3)), or
                (ii) any interest which is taken into account under 
            section 469 in computing income or loss from a passive 
            activity of the taxpayer.

        (C) Personal property used in short sale

            For purposes of this paragraph, the term ``interest'' 
        includes any amount allowable as a deduction in connection with 
        personal property used in a short sale.

                      (4) Net investment income

        For purposes of this subsection--

        (A) In general

            The term ``net investment income'' means the excess of--
                (i) investment income, over
                (ii) investment expenses.

        (B) Investment income

            The term ``investment income'' means the sum of--
                (i) gross income from property held for investment 
            (other than any gain taken into account under clause 
            (ii)(I)),
                (ii) the excess (if any) of--
                    (I) the net gain attributable to the disposition of 
                property held for investment, over
                    (II) the net capital gain determined by only taking 
                into account gains and losses from dispositions of 
                property held for investment, plus

                (iii) so much of the net capital gain referred to in 
            clause (ii)(II) (or, if lesser, the net gain referred to in 
            clause (ii)(I)) as the taxpayer elects to take into account 
            under this clause.

        (C) Investment expenses

            The term ``investment expenses'' means the deductions 
        allowed under this chapter (other than for interest) which are 
        directly connected with the production of investment income.

        (D) Income and expenses from passive activities

            Investment income and investment expenses shall not include 
        any income or expenses taken into account under section 469 in 
        computing income or loss from a passive activity.

        (E) Reduction in investment income during phase-in of passive 
                loss rules

            Investment income of the taxpayer for any taxable year shall 
        be reduced by the amount of the passive activity loss to which 
        section 469(a) does not apply for such taxable year by reason of 
        section 469(m). The preceding sentence shall not apply to any 
        portion of such passive activity loss which is attributable to a 
        rental real estate activity with respect to which the taxpayer 
        actively participates (within the meaning of section 469(i)(6)) 
        during such taxable year.

                  (5) Property held for investment

        For purposes of this subsection--

        (A) In general

            The term ``property held for investment'' shall include--
                (i) any property which produces income of a type 
            described in section 469(e)(1), and
                (ii) any interest held by a taxpayer in an activity 
            involving the conduct of a trade or business--
                    (I) which is not a passive activity, and
                    (II) with respect to which the taxpayer does not 
                materially participate.

        (B) Investment expenses

            In the case of property described in subparagraph (A)(i), 
        expenses shall be allocated to such property in the same manner 
        as under section 469.

        (C) Terms

            For purposes of this paragraph, the terms ``activity'', 
        ``passive activity'', and ``materially participate'' have the 
        meanings given such terms by section 469.

                    (6) Phase-in of disallowance

        In the case of any taxable year beginning in calendar years 1987 
    through 1990--

        (A) In general

            The amount of interest paid or accrued during any such 
        taxable year which is disallowed under this subsection shall not 
        exceed the sum of--
                (i) the amount which would be disallowed under this 
            subsection if--
                    (I) paragraph (1) were applied by substituting ``the 
                sum of the ceiling amount and the net investment 
                income'' for ``the net investment income'', and
                    (II) paragraphs (4)(E) and (5)(A)(ii) did not apply, 
                and

                (ii) the applicable percentage of the excess of--
                    (I) the amount which (without regard to this 
                paragraph) is not allowable as a deduction under this 
                subsection for the taxable year, over
                    (II) the amount described in clause (i).

        The preceding sentence shall not apply to any interest treated 
        as paid or accrued during the taxable year under paragraph (2).

        (B) Applicable percentage

            For purposes of this paragraph, the applicable percentage 
        shall be determined in accordance with the following table:


                                                        The applicable
      In the case of taxable        years beginning     percentage is:
                         in:
        1987........................................         35
        1988........................................         60
        1989........................................         80
        1990........................................          90.


        (C) Ceiling amount

            For purposes of this paragraph, the term ``ceiling amount'' 
        means--
                (i) $10,000 in the case of a taxpayer not described in 
            clause (ii) or (iii),
                (ii) $5,000 in the case of a married individual filing a 
            separate return, and
                (iii) zero in the case of a trust.

(e) Original issue discount

                           (1) In general

        In the case of any debt instrument issued after July 1, 1982, 
    the portion of the original issue discount with respect to such debt 
    instrument which is allowable as a deduction to the issuer for any 
    taxable year shall be equal to the aggregate daily portions of the 
    original issue discount for days during such taxable year.

                  (2) Definitions and special rules

        For purposes of this subsection--

        (A) Debt instrument

            The term ``debt instrument'' has the meaning given such term 
        by section 1275(a)(1).

        (B) Daily portions

            The daily portion of the original issue discount for any day 
        shall be determined under section 1272(a) (without regard to 
        paragraph (7) thereof and without regard to section 1273(a)(3)).

        (C) Short-term obligations

            In the case of an obligor of a short-term obligation (as 
        defined in section 1283(a)(1)(A)) who uses the cash receipts and 
        disbursements method of accounting, the original issue discount 
        (and any other interest payable) on such obligation shall be 
        deductible only when paid.

     (3) Special rule for original issue discount on obligation 
                       held by related foreign person

        (A) In general

            If any debt instrument having original issue discount is 
        held by a related foreign person, any portion of such original 
        issue discount shall not be allowable as a deduction to the 
        issuer until paid. The preceding sentence shall not apply to the 
        extent that the original issue discount is effectively connected 
        with the conduct by such foreign related person of a trade or 
        business within the United States unless such original issue 
        discount is exempt from taxation (or is subject to a reduced 
        rate of tax) pursuant to a treaty obligation of the United 
        States.

        (B) Related foreign person

            For purposes of subparagraph (A), the term ``related foreign 
        person'' means any person--
                (i) who is not a United States person, and
                (ii) who is related (within the meaning of section 
            267(b)) to the issuer.

                           (4) Exceptions

        This subsection shall not apply to any debt instrument described 
    in--
            (A) subparagraph (D) of section 1272(a)(2) (relating to 
        obligations issued by natural persons before March 2, 1984), and
            (B) subparagraph (E) of section 1272(a)(2) (relating to 
        loans between natural persons).

      (5) Special rules for original issue discount on certain 
                           high yield obligations

        (A) In general

            In the case of an applicable high yield discount obligation 
        issued by a corporation--
                (i) no deduction shall be allowed under this chapter for 
            the disqualified portion of the original issue discount on 
            such obligation, and
                (ii) the remainder of such original issue discount shall 
            not be allowable as a deduction until paid.

        For purposes of this paragraph, rules similar to the rules of 
        subsection (i)(3)(B) shall apply in determining the amount of 
        the original issue discount and when the original issue discount 
        is paid.

        (B) Disqualified portion treated as stock distribution for 
                purposes of dividend received deduction

            (i) In general

                Solely for purposes of sections 243, 245, 246, and 246A, 
            the dividend equivalent portion of any amount includible in 
            gross income of a corporation under section 1272(a) in 
            respect of an applicable high yield discount obligation 
            shall be treated as a dividend received by such corporation 
            from the corporation issuing such obligation.
            (ii) Dividend equivalent portion

                For purposes of clause (i), the dividend equivalent 
            portion of any amount includible in gross income under 
            section 1272(a) in respect of an applicable high yield 
            discount obligation is the portion of the amount so 
            includible--
                    (I) which is attributable to the disqualified 
                portion of the original issue discount on such 
                obligation, and
                    (II) which would have been treated as a dividend if 
                it had been a distribution made by the issuing 
                corporation with respect to stock in such corporation.

        (C) Disqualified portion

            (i) In general

                For purposes of this paragraph, the disqualified portion 
            of the original issue discount on any applicable high yield 
            discount obligation is the lesser of--
                    (I) the amount of such original issue discount, or
                    (II) the portion of the total return on such 
                obligation which bears the same ratio to such total 
                return as the disqualified yield on such obligation 
                bears to the yield to maturity on such obligation.
            (ii) Definitions

                For purposes of clause (i), the term ``disqualified 
            yield'' means the excess of the yield to maturity on the 
            obligation over the sum referred to \1\ subsection (i)(1)(B) 
            plus 1 percentage point, and the term ``total return'' is 
            the amount which would have been the original issue discount 
            on the obligation if interest described in the parenthetical 
            in section 1273(a)(2) were included in the stated redemption 
            price at maturity.
---------------------------------------------------------------------------
    \1\ So in original. Probably should be followed by ``in''.
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        (D) Exception for S corporations

            This paragraph shall not apply to any obligation issued by 
        any corporation for any period for which such corporation is an 
        S corporation.

        (E) Effect on earnings and profits

            This paragraph shall not apply for purposes of determining 
        earnings and profits; except that, for purposes of determining 
        the dividend equivalent portion of any amount includible in 
        gross income under section 1272(a) in respect of an applicable 
        high yield discount obligation, no reduction shall be made for 
        any amount attributable to the disqualified portion of any 
        original issue discount on such obligation.

        (F) Cross reference

            For definition of applicable high yield discount obligation, 
        see subsection (i).

                        (6) Cross references

            For provision relating to deduction of original issue 
        discount on tax-exempt obligation, see section 1288.
            For special rules in the case of the borrower under certain 
        loans for personal use, see section 1275(b).

(f) Denial of deduction for interest on certain obligations not in 
        registered form

                           (1) In general

        Nothing in subsection (a) or in any other provision of law shall 
    be construed to provide a deduction for interest on any 
    registration-required obligation unless such obligation is in 
    registered form.

                (2) Registration-required obligation

        For purposes of this section--

        (A) In general

            The term ``registration-required obligation'' means any 
        obligation (including any obligation issued by a governmental 
        entity) other than an obligation which--
                (i) is issued by a natural person,
                (ii) is not of a type offered to the public,
                (iii) has a maturity (at issue) of not more than 1 year, 
            or
                (iv) is described in subparagraph (B).

        (B) Certain obligations not included

            An obligation is described in this subparagraph if--
                (i) there are arrangements reasonably designed to ensure 
            that such obligation will be sold (or resold in connection 
            with the original issue) only to a person who is not a 
            United States person, and
                (ii) in the case of an obligation not in registered 
            form--
                    (I) interest on such obligation is payable only 
                outside the United States and its possessions, and
                    (II) on the face of such obligation there is a 
                statement that any United States person who holds such 
                obligation will be subject to limitations under the 
                United States income tax laws.

        (C) Authority to include other obligations

            Clauses (ii) and (iii) of subparagraph (A), and subparagraph 
        (B), shall not apply to any obligation if--
                (i) in the case of--
                    (I) subparagraph (A), such obligation is of a type 
                which the Secretary has determined by regulations to be 
                used frequently in avoiding Federal taxes, or
                    (II) subparagraph (B), such obligation is of a type 
                specified by the Secretary in regulations, and

                (ii) such obligation is issued after the date on which 
            the regulations referred to in clause (i) take effect.

                  (3) Book entries permitted, etc.

        For purposes of this subsection, rules similar to the rules of 
    section 149(a)(3) shall apply.

(g) Reduction of deduction where section 25 credit taken

    The amount of the deduction under this section for interest paid or 
accrued during any taxable year on indebtedness with respect to which a 
mortgage credit certificate has been issued under section 25 shall be 
reduced by the amount of the credit allowable with respect to such 
interest under section 25 (determined without regard to section 26).

(h) Disallowance of deduction for personal interest

                           (1) In general

        In the case of a taxpayer other than a corporation, no deduction 
    shall be allowed under this chapter for personal interest paid or 
    accrued during the taxable year.

                        (2) Personal interest

        For purposes of this subsection, the term ``personal interest'' 
    means any interest allowable as a deduction under this chapter other 
    than--
            (A) interest paid or accrued on indebtedness properly 
        allocable to a trade or business (other than the trade or 
        business of performing services as an employee),
            (B) any investment interest (within the meaning of 
        subsection (d)),
            (C) any interest which is taken into account under section 
        469 in computing income or loss from a passive activity of the 
        taxpayer,
            (D) any qualified residence interest (within the meaning of 
        paragraph (3)),
            (E) any interest payable under section 6601 on any unpaid 
        portion of the tax imposed by section 2001 for the period during 
        which an extension of time for payment of such tax is in effect 
        under section 6163, and
            (F) any interest allowable as a deduction under section 221 
        (relating to interest on educational loans).

                  (3) Qualified residence interest

        For purposes of this subsection--

        (A) In general

            The term ``qualified residence interest'' means any interest 
        which is paid or accrued during the taxable year on--
                (i) acquisition indebtedness with respect to any 
            qualified residence of the taxpayer, or
                (ii) home equity indebtedness with respect to any 
            qualified residence of the taxpayer.

        For purposes of the preceding sentence, the determination of 
        whether any property is a qualified residence of the taxpayer 
        shall be made as of the time the interest is accrued.

        (B) Acquisition indebtedness

            (i) In general

                The term ``acquisition indebtedness'' means any 
            indebtedness which--
                    (I) is incurred in acquiring, constructing, or 
                substantially improving any qualified residence of the 
                taxpayer, and
                    (II) is secured by such residence.

          Such term also includes any indebtedness secured by such 
            residence resulting from the refinancing of indebtedness 
            meeting the requirements of the preceding sentence (or this 
            sentence); but only to the extent the amount of the 
            indebtedness resulting from such refinancing does not exceed 
            the amount of the refinanced indebtedness.
            (ii) $1,000,000 limitation

                The aggregate amount treated as acquisition indebtedness 
            for any period shall not exceed $1,000,000 ($500,000 in the 
            case of a married individual filing a separate return).

        (C) Home equity indebtedness

            (i) In general

                The term ``home equity indebtedness'' means any 
            indebtedness (other than acquisition indebtedness) secured 
            by a qualified residence to the extent the aggregate amount 
            of such indebtedness does not exceed--
                    (I) the fair market value of such qualified 
                residence, reduced by
                    (II) the amount of acquisition indebtedness with 
                respect to such residence.
            (ii) Limitation

                The aggregate amount treated as home equity indebtedness 
            for any period shall not exceed $100,000 ($50,000 in the 
            case of a separate return by a married individual).

        (D) Treatment of indebtedness incurred on or before October 13, 
                1987

            (i) In general

                In the case of any pre-October 13, 1987, indebtedness--
                    (I) such indebtedness shall be treated as 
                acquisition indebtedness, and
                    (II) the limitation of subparagraph (B)(ii) shall 
                not apply.
            (ii) Reduction in $1,000,000 limitation

                The limitation of subparagraph (B)(ii) shall be reduced 
            (but not below zero) by the aggregate amount of outstanding 
            pre-October 13, 1987, indebtedness.
            (iii) Pre-October 13, 1987, indebtedness

                The term ``pre-October 13, 1987, indebtedness'' means--
                    (I) any indebtedness which was incurred on or before 
                October 13, 1987, and which was secured by a qualified 
                residence on October 13, 1987, and at all times 
                thereafter before the interest is paid or accrued, or
                    (II) any indebtedness which is secured by the 
                qualified residence and was incurred after October 13, 
                1987, to refinance indebtedness described in subclause 
                (I) (or refinanced indebtedness meeting the requirements 
                of this subclause) to the extent (immediately after the 
                refinancing) the principal amount of the indebtedness 
                resulting from the refinancing does not exceed the 
                principal amount of the refinanced indebtedness 
                (immediately before the refinancing).
            (iv) Limitation on period of refinancing

                Subclause (II) of clause (iii) shall not apply to any 
            indebtedness after--
                    (I) the expiration of the term of the indebtedness 
                described in clause (iii)(I), or
                    (II) if the principal of the indebtedness described 
                in clause (iii)(I) is not amortized over its term, the 
                expiration of the term of the 1st refinancing of such 
                indebtedness (or if earlier, the date which is 30 years 
                after the date of such 1st refinancing).

               (4) Other definitions and special rules

        For purposes of this subsection--

        (A) Qualified residence

            (i) In general

                The term ``qualified residence'' means--
                    (I) the principal residence (within the meaning of 
                section 121) of the taxpayer, and
                    (II) 1 other residence of the taxpayer which is 
                selected by the taxpayer for purposes of this subsection 
                for the taxable year and which is used by the taxpayer 
                as a residence (within the meaning of section 
                280A(d)(1)).
            (ii) Married individuals filing separate returns

                If a married couple does not file a joint return for the 
            taxable year--
                    (I) such couple shall be treated as 1 taxpayer for 
                purposes of clause (i), and
                    (II) each individual shall be entitled to take into 
                account 1 residence unless both individuals consent in 
                writing to 1 individual taking into account the 
                principal residence and 1 other residence.
            (iii) Residence not rented

                For purposes of clause (i)(II), notwithstanding section 
            280A(d)(1), if the taxpayer does not rent a dwelling unit at 
            any time during a taxable year, such unit may be treated as 
            a residence for such taxable year.

        (B) Special rule for cooperative housing corporations

            Any indebtedness secured by stock held by the taxpayer as a 
        tenant-stockholder (as defined in section 216) in a cooperative 
        housing corporation (as so defined) shall be treated as secured 
        by the house or apartment which the taxpayer is entitled to 
        occupy as such a tenant-stockholder. If stock described in the 
        preceding sentence may not be used to secure indebtedness, 
        indebtedness shall be treated as so secured if the taxpayer 
        establishes to the satisfaction of the Secretary that such 
        indebtedness was incurred to acquire such stock.

        (C) Unenforceable security interests

            Indebtedness shall not fail to be treated as secured by any 
        property solely because, under any applicable State or local 
        homestead or other debtor protection law in effect on August 16, 
        1986, the security interest is ineffective or the enforceability 
        of the security interest is restricted.

        (D) Special rules for estates and trusts

            For purposes of determining whether any interest paid or 
        accrued by an estate or trust is qualified residence interest, 
        any residence held by such estate or trust shall be treated as a 
        qualified residence of such estate or trust if such estate or 
        trust establishes that such residence is a qualified residence 
        of a beneficiary who has a present interest in such estate or 
        trust or an interest in the residuary of such estate or trust.

                     (5) Phase-in of limitation

        In the case of any taxable year beginning in calendar years 1987 
    through 1990, the amount of interest with respect to which a 
    deduction is disallowed under this subsection shall be equal to the 
    applicable percentage (within the meaning of subsection (d)(6)(B)) 
    of the amount which (but for this paragraph) would have been so 
    disallowed.

(i) Applicable high yield discount obligation

                           (1) In general

        For purposes of this section, the term ``applicable high yield 
    discount obligation'' means any debt instrument if--
            (A) the maturity date of such instrument is more than 5 
        years from the date of issue,
            (B) the yield to maturity on such instrument equals or 
        exceeds the sum of--
                (i) the applicable Federal rate in effect under section 
            1274(d) for the calendar month in which the obligation is 
            issued, plus
                (ii) 5 percentage points, and

            (C) such instrument has significant original issue discount.

    For purposes of subparagraph (B)(i), the Secretary may by regulation 
    permit a rate to be used with respect to any debt instrument which 
    is higher than the applicable Federal rate if the taxpayer 
    establishes to the satisfaction of the Secretary that such higher 
    rate is based on the same principles as the applicable Federal rate 
    and is appropriate for the term of the instrument.

               (2) Significant original issue discount

        For purposes of paragraph (1)(C), a debt instrument shall be 
    treated as having significant original issue discount if--
            (A) the aggregate amount which would be includible in gross 
        income with respect to such instrument for periods before the 
        close of any accrual period (as defined in section 1272(a)(5)) 
        ending after the date 5 years after the date of issue, exceeds--
            (B) the sum of--
                (i) the aggregate amount of interest to be paid under 
            the instrument before the close of such accrual period, and
                (ii) the product of the issue price of such instrument 
            (as defined in sections 1273(b) and 1274(a)) and its yield 
            to maturity.

                          (3) Special rules

        For purposes of determining whether a debt instrument is an 
    applicable high yield discount obligation--
            (A) any payment under the instrument shall be assumed to be 
        made on the last day permitted under the instrument, and
            (B) any payment to be made in the form of another obligation 
        of the issuer (or a related person within the meaning of section 
        453(f)(1)) shall be assumed to be made when such obligation is 
        required to be paid in cash or in property other than such 
        obligation.

    Except for purposes of paragraph (1)(B), any reference to an 
    obligation in subparagraph (B) of this paragraph shall be treated as 
    including a reference to stock.

                         (4) Debt instrument

        For purposes of this subsection, the term ``debt instrument'' 
    means any instrument which is a debt instrument as defined in 
    section 1275(a).

                           (5) Regulations

        The Secretary shall prescribe such regulations as may be 
    appropriate to carry out the purposes of this subsection and 
    subsection (e)(5), including--
            (A) regulations providing for modifications to the 
        provisions of this subsection and subsection (e)(5) in the case 
        of varying rates of interest, put or call options, indefinite 
        maturities, contingent payments, assumptions of debt 
        instruments, conversion rights, or other circumstances where 
        such modifications are appropriate to carry out the purposes of 
        this subsection and subsection (e)(5), and
            (B) regulations to prevent avoidance of the purposes of this 
        subsection and subsection (e)(5) through the use of issuers 
        other than C corporations, agreements to borrow amounts due 
        under the debt instrument, or other arrangements.

(j) Limitation on deduction for interest on certain indebtedness

                           (1) Limitation

        (A) In general

            If this subsection applies to any corporation for any 
        taxable year, no deduction shall be allowed under this chapter 
        for disqualified interest paid or accrued by such corporation 
        during such taxable year. The amount disallowed under the 
        preceding sentence shall not exceed the corporation's excess 
        interest expense for the taxable year.

        (B) Disallowed amount carried to succeeding taxable year

            Any amount disallowed under subparagraph (A) for any taxable 
        year shall be treated as disqualified interest paid or accrued 
        in the succeeding taxable year (and clause (ii) of paragraph 
        (2)(A) shall not apply for purposes of applying this subsection 
        to the amount so treated).

            (2) Corporations to which subsection applies

        (A) In general

            This subsection shall apply to any corporation for any 
        taxable year if--
                (i) such corporation has excess interest expense for 
            such taxable year, and
                (ii) the ratio of debt to equity of such corporation as 
            of the close of such taxable year (or on any other day 
            during the taxable year as the Secretary may by regulations 
            prescribe) exceeds 1.5 to 1.

        (B) Excess interest expense

            (i) In general

                For purposes of this subsection, the term ``excess 
            interest expense'' means the excess (if any) of--
                    (I) the corporation's net interest expense, over
                    (II) the sum of 50 percent of the adjusted taxable 
                income of the corporation plus any excess limitation 
                carryforward under clause (ii).
            (ii) Excess limitation carryforward

                If a corporation has an excess limitation for any 
            taxable year, the amount of such excess limitation shall be 
            an excess limitation carryforward to the 1st succeeding 
            taxable year and to the 2nd and 3rd succeeding taxable years 
            to the extent not previously taken into account under this 
            clause. The amount of such a carryforward taken into account 
            for any such succeeding taxable year shall not exceed the 
            excess interest expense for such succeeding taxable year 
            (determined without regard to the carryforward from the 
            taxable year of such excess limitation).
            (iii) Excess limitation

                For purposes of clause (ii), the term ``excess 
            limitation'' means the excess (if any) of--
                    (I) 50 percent of the adjusted taxable income of the 
                corporation, over
                    (II) the corporation's net interest expense.

        (C) Ratio of debt to equity

            For purposes of this paragraph, the term ``ratio of debt to 
        equity'' means the ratio which the total indebtedness of the 
        corporation bears to the sum of its money and all other assets 
        reduced (but not below zero) by such total indebtedness. For 
        purposes of the preceding sentence--
                (i) the amount taken into account with respect to any 
            asset shall be the adjusted basis thereof for purposes of 
            determining gain,
                (ii) the amount taken into account with respect to any 
            indebtedness with original issue discount shall be its issue 
            price plus the portion of the original issue discount 
            previously accrued as determined under the rules of section 
            1272 (determined without regard to subsection (a)(7) or 
            (b)(4) thereof), and
                (iii) there shall be such other adjustments as the 
            Secretary may by regulations prescribe.

                      (3) Disqualified interest

        For purposes of this subsection, the term ``disqualified 
    interest'' means--
            (A) any interest paid or accrued by the taxpayer (directly 
        or indirectly) to a related person if no tax is imposed by this 
        subtitle with respect to such interest,
            (B) any interest paid or accrued by the taxpayer with 
        respect to any indebtedness to a person who is not a related 
        person if--
                (i) there is a disqualified guarantee of such 
            indebtedness, and
                (ii) no gross basis tax is imposed by this subtitle with 
            respect to such interest, and

            (C) any interest paid or accrued (directly or indirectly) by 
        a taxable REIT subsidiary (as defined in section 856(l)) of a 
        real estate investment trust to such trust.

                         (4) Related person

        For purposes of this subsection--

        (A) In general

            Except as provided in subparagraph (B), the term ``related 
        person'' means any person who is related (within the meaning of 
        section 267(b) or 707(b)(1)) to the taxpayer.

        (B) Special rule for certain partnerships

            (i) In general

                Any interest paid or accrued to a partnership which 
            (without regard to this subparagraph) is a related person 
            shall not be treated as paid or accrued to a related person 
            if less than 10 percent of the profits and capital interests 
            in such partnership are held by persons with respect to whom 
            no tax is imposed by this subtitle on such interest. The 
            preceding sentence shall not apply to any interest allocable 
            to any partner in such partnership who is a related person 
            to the taxpayer.
            (ii) Special rule where treaty reduction

                If any treaty between the United States and any foreign 
            country reduces the rate of tax imposed by this subtitle on 
            a partner's share of any interest paid or accrued to a 
            partnership, such partner's interests in such partnership 
            shall, for purposes of clause (i), be treated as held in 
            part by a tax-exempt person and in part by a taxable person 
            under rules similar to the rules of paragraph (5)(B).

       (5) Special rules for determining whether interest is 
                               subject to tax

        (A) Treatment of pass-thru entities

            In the case of any interest paid or accrued to a 
        partnership, the determination of whether any tax is imposed by 
        this subtitle on such interest shall be made at the partner 
        level. Rules similar to the rules of the preceding sentence 
        shall apply in the case of any pass-thru entity other than a 
        partnership and in the case of tiered partnerships and other 
        entities.

        (B) Interest treated as tax-exempt to extent of treaty reduction

            If any treaty between the United States and any foreign 
        country reduces the rate of tax imposed by this subtitle on any 
        interest paid or accrued by the taxpayer, such interest shall be 
        treated as interest on which no tax is imposed by this subtitle 
        to the extent of the same proportion of such interest as--
                (i) the rate of tax imposed without regard to such 
            treaty, reduced by the rate of tax imposed under the treaty, 
            bears to
                (ii) the rate of tax imposed without regard to the 
            treaty.

               (6) Other definitions and special rules

        For purposes of this subsection--

        (A) Adjusted taxable income

            The term ``adjusted taxable income'' means the taxable 
        income of the taxpayer--
                (i) computed without regard to--
                    (I) any deduction allowable under this chapter for 
                the net interest expense,
                    (II) the amount of any net operating loss deduction 
                under section 172, and
                    (III) any deduction allowable for depreciation, 
                amortization, or depletion, and

                (ii) computed with such other adjustments as the 
            Secretary may by regulations prescribe.

        (B) Net interest expense

            The term ``net interest expense'' means the excess (if any) 
        of--
                (i) the interest paid or accrued by the taxpayer during 
            the taxable year, over
                (ii) the amount of interest includible in the gross 
            income of such taxpayer for such taxable year.

        The Secretary may by regulations provide for adjustments in 
        determining the amount of net interest expense.

        (C) Treatment of affiliated group

            All members of the same affiliated group (within the meaning 
        of section 1504(a)) shall be treated as 1 taxpayer.

        (D) Disqualified guarantee

            (i) In general

                Except as provided in clause (ii), the term 
            ``disqualified guarantee'' means any guarantee by a related 
            person which is--
                    (I) an organization exempt from taxation under this 
                subtitle, or
                    (II) a foreign person.
            (ii) Exceptions

                The term ``disqualified guarantee'' shall not include a 
            guarantee--
                    (I) in any circumstances identified by the Secretary 
                by regulation, where the interest on the indebtedness 
                would have been subject to a net basis tax if the 
                interest had been paid to the guarantor, or
                    (II) if the taxpayer owns a controlling interest in 
                the guarantor.

          For purposes of subclause (II), except as provided in 
            regulations, the term ``a controlling interest'' means 
            direct or indirect ownership of at least 80 percent of the 
            total voting power and value of all classes of stock of a 
            corporation, or 80 percent of the profit and capital 
            interests in any other entity. For purposes of the preceding 
            sentence, the rules of paragraphs (1) and (5) of section 
            267(c) shall apply; except that such rules shall also apply 
            to interest in entities other than corporations.
            (iii) Guarantee

                Except as provided in regulations, the term 
            ``guarantee'' includes any arrangement under which a person 
            (directly or indirectly through an entity or otherwise) 
            assures, on a conditional or unconditional basis, the 
            payment of another person's obligation under any 
            indebtedness.

        (E) Gross basis and net basis taxation

            (i) Gross basis tax

                The term ``gross basis tax'' means any tax imposed by 
            this subtitle which is determined by reference to the gross 
            amount of any item of income without any reduction for any 
            deduction allowed by this subtitle.
            (ii) Net basis tax

                The term ``net basis tax'' means any tax imposed by this 
            subtitle which is not a gross basis tax.

           (7) Coordination with passive loss rules, etc.

        This subsection shall be applied before sections 465 and 469.

                           (8) Regulations

        The Secretary shall prescribe such regulations as may be 
    appropriate to carry out the purposes of this subsection, 
    including--
            (A) such regulations as may be appropriate to prevent the 
        avoidance of the purposes of this subsection,
            (B) regulations providing such adjustments in the case of 
        corporations which are members of an affiliated group as may be 
        appropriate to carry out the purposes of this subsection, and
            (C) regulations for the coordination of this subsection with 
        section 884.

(k) Section 6166 interest

    No deduction shall be allowed under this section for any interest 
payable under section 6601 on any unpaid portion of the tax imposed by 
section 2001 for the period during which an extension of time for 
payment of such tax is in effect under section 6166.

(l) Disallowance of deduction on certain debt instruments of 
        corporations

                           (1) In general

        No deduction shall be allowed under this chapter for any 
    interest paid or accrued on a disqualified debt instrument.

                  (2) Disqualified debt instrument

        For purposes of this subsection, the term ``disqualified debt 
    instrument'' means any indebtedness of a corporation which is 
    payable in equity of the issuer or a related party.

           (3) Special rules for amounts payable in equity

        For purposes of paragraph (2), indebtedness shall be treated as 
    payable in equity of the issuer or a related party only if--
            (A) a substantial amount of the principal or interest is 
        required to be paid or converted, or at the option of the issuer 
        or a related party is payable in, or convertible into, such 
        equity,
            (B) a substantial amount of the principal or interest is 
        required to be determined, or at the option of the issuer or a 
        related party is determined, by reference to the value of such 
        equity, or
            (C) the indebtedness is part of an arrangement which is 
        reasonably expected to result in a transaction described in 
        subparagraph (A) or (B).

    For purposes of this paragraph, principal or interest shall be 
    treated as required to be so paid, converted, or determined if it 
    may be required at the option of the holder or a related party and 
    there is a substantial certainty the option will be exercised.

                          (4) Related party

        For purposes of this subsection, a person is a related party 
    with respect to another person if such person bears a relationship 
    to such other person described in section 267(b) or 707(b).

                           (5) Regulations

        The Secretary shall prescribe such regulations as may be 
    necessary or appropriate to carry out the purposes of this 
    subsection, including regulations preventing avoidance of this 
    subsection through the use of an issuer other than a corporation.

(m) Cross references

            (1) For disallowance of certain amounts paid in connection 
        with insurance, endowment, or annuity contracts, see section 
        264.
            (2) For disallowance of deduction for interest relating to 
        tax-exempt income, see section 265(a)(2).
            (3) For disallowance of deduction for carrying charges 
        chargeable to capital account, see section 266.
            (4) For disallowance of interest with respect to 
        transactions between related taxpayers, see section 267.
            (5) For treatment of redeemable ground rents and real 
        property held subject to liabilities under redeemable ground 
        rents, see section 1055.

(Aug. 16, 1954, ch. 736, 68A Stat. 46; Pub. L. 88-9, Sec. 1(a), (c), 
Apr. 10, 1963, 77 Stat. 6, 7; Pub. L. 88-272, title II, Sec. 224(c), 
Feb. 26, 1964, 78 Stat. 79; Pub. L. 91-172, title II, Sec. 221(a), Dec. 
30, 1969, 83 Stat. 574; Pub. L. 92-178, title III, Sec. 304(a)(2), 
(b)(2), (d), Dec. 10, 1971, 85 Stat. 523, 524; Pub. L. 94-455, title II, 
Secs. 205(c)(3), 209(a), title XIX, Secs. 1901(b)(3)(K), (8)(C), 
1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1535, 1542, 1793, 1794, 1834; 
Pub. L. 97-248, title II, Sec. 231(b), title III, Sec. 310(b)(2), Sept. 
3, 1982, 96 Stat. 498, 596; Pub. L. 97-354, Sec. 5(a)(18), Oct. 19, 
1982, 96 Stat. 1693; Pub. L. 98-369, div. A, title I, Secs. 42(a)(3), 
56(b), 127(f), 128(c), title VI, Sec. 612(c), July 18, 1984, 98 Stat. 
556, 574, 652, 654, 911; Pub. L. 99-514, title V, Sec. 511(a), (b), 
title IX, Sec. 902(e)(1), title XIII, Sec. 1301(j)(3), title XVIII, 
Secs. 1803(a)(4), 1810(e)(1), Oct. 22, 1986, 100 Stat. 2244, 2246, 2382, 
2657, 2793, 2825; Pub. L. 100-203, title X, Secs. 10102(a), (b), 
10212(b), Dec. 22, 1987, 101 Stat. 1330-384, 1330-386, 1330-406; Pub. L. 
100-647, title I, Secs. 1005(c)(1)-(9), (12), 1006(u)(1), 1009(b)(6), 
title II, Sec. 2004(b)(1), Nov. 10, 1988, 102 Stat. 3390-3392, 3427, 
3449, 3598; Pub. L. 101-239, title VII, Secs. 7202(a), (b), 7210(a), 
Dec. 19, 1989, 103 Stat. 2330, 2331, 2339; Pub. L. 101-508, title XI, 
Sec. 11701(b), (c), Nov. 5, 1990, 104 Stat. 1388-507; Pub. L. 103-66, 
title XIII, Secs. 13206(d)(1), 13228(a)-(c), Aug. 10, 1993, 107 Stat. 
467, 494, 495; Pub. L. 104-188, title I, Secs. 1703(n)(4), 
1704(f)(2)(A), (B), Aug. 20, 1996, 110 Stat. 1877, 1879; Pub. L. 105-34, 
title III, Sec. 312(d)(1), title V, Sec. 503(b)(2), title X, 
Sec. 1005(a), title XVI, Sec. 1604(g)(1), Aug. 5, 1997, 111 Stat. 839, 
853, 911, 1099; Pub. L. 105-277, div. J, title IV, Sec. 4003(a)(1), Oct. 
21, 1998, 112 Stat. 2681-908; Pub. L. 106-170, title V, Sec. 544, Dec. 
17, 1999, 113 Stat. 1944.)


                               Amendments

    1999--Subsec. (j)(3)(C). Pub. L. 106-170 added subpar. (C).
    1998--Subsec. (h)(2)(F). Pub. L. 105-277 added subpar. (F).
    1997--Subsec. (h)(2)(E). Pub. L. 105-34, Sec. 503(b)(2)(B), struck 
out ``or 6166 or under section 6166A (as in effect before its repeal by 
the Economic Recovery Tax Act of 1981)'' after ``section 6163''.
    Subsec. (h)(4)(A)(i)(I). Pub. L. 105-34, Sec. 312(d)(1), substituted 
``section 121'' for ``section 1034''.
    Subsec. (j)(2)(B)(iii). Pub. L. 105-34, Sec. 1604(g)(1), substituted 
``clause (ii)'' for ``clause (i)'' in introductory provisions.
    Subsec. (k). Pub. L. 105-34, Sec. 503(b)(2)(A), added subsec. (k). 
Former subsec. (k) redesignated (l).
    Subsec. (l). Pub. L. 105-34, Sec. 1005(a), added subsec. (l). Former 
subsec. (l) redesignated (m).
    Pub. L. 105-34, Sec. 503(b)(2)(A), redesignated subsec. (k) as (l).
    Subsec. (m). Pub. L. 105-34, Sec. 1005(a), redesignated subsec. (l) 
as (m).
    1996--Subsec. (j)(1)(B). Pub. L. 104-188, Sec. 1704(f)(2)(A), 
inserted before period at end ``(and clause (ii) of paragraph (2)(A) 
shall not apply for purposes of applying this subsection to the amount 
so treated)''.
    Subsec. (j)(6)(E)(ii). Pub. L. 104-188, Sec. 1703(n)(4), which 
directed that cl. (ii) be amended by substituting ``which is'' for 
``which is a'', could not be executed, because ``which is a'' does not 
appear.
    Subsec. (j)(7), (8). Pub. L. 104-188, Sec. 1704(f)(2)(B), added par. 
(7) and redesignated former par. (7) as (8).
    1993--Subsec. (d)(4)(B). Pub. L. 103-66, Sec. 13206(d)(1), amended 
heading and text of subpar. (B) generally. Prior to amendment, text read 
as follows: ``The term `investment income' means the sum of--
        ``(i) gross income (other than gain taken into account under 
    clause (ii)) from property held for investment, and
        ``(ii) any net gain attributable to the disposition of property 
    held for investment.''
    Subsec. (j). Pub. L. 103-66, Sec. 13228(c)(2), substituted ``for 
interest on certain indebtedness'' for ``for certain interest paid by 
corporation to related person'' in heading.
    Subsec. (j)(3). Pub. L. 103-66, Sec. 13228(a), amended heading and 
text of par. (3) generally. Prior to amendment, text read as follows: 
``For purposes of this subsection--
        ``(A) In general.--Except as provided in subparagraph (B), the 
    term `disqualified interest' means any interest paid or accrued by 
    the taxpayer (directly or indirectly) to a related person if no tax 
    is imposed by this subtitle with respect to such interest.
        ``(B) Exception for certain existing indebtedness.--The term 
    `disqualified interest' does not include any interest paid or 
    accrued under indebtedness with a fixed term--
            ``(i) which was issued on or before July 10, 1989, or
            ``(ii) which was issued after such date pursuant to a 
        written binding contract in effect on such date and all times 
        thereafter before such indebtedness was issued.''
    Subsec. (j)(5)(B). Pub. L. 103-66, Sec. 13228(c)(1), struck out ``to 
a related person'' after ``by the taxpayer'' in introductory provisions.
    Subsec. (j)(6)(D), (E). Pub. L. 103-66, Sec. 13228(b), added 
subpars. (D) and (E).
    1990--Subsec. (e)(5)(A). Pub. L. 101-508, Sec. 11701(b)(1), amended 
last sentence generally. Prior to amendment, last sentence read as 
follows: ``For purposes of clause (ii), rules similar to the rules of 
subsection (i)(3)(B) shall apply in determining the time when the 
original issue discount is paid.''
    Subsec. (i)(3). Pub. L. 101-508, Sec. 11701(b)(2)(B), inserted 
sentence at end.
    Subsec. (i)(3)(B). Pub. L. 101-508, Sec. 11701(b)(2)(A), struck out 
``(or stock)'' after ``obligation'' wherever appearing.
    Subsec. (j)(2)(A)(ii). Pub. L. 101-508, Sec. 11701(c)(2), 
substituted ``or on any other day'' for ``and on such other days''.
    Subsec. (j)(2)(C). Pub. L. 101-508, Sec. 11701(c)(1), substituted 
``reduced (but not below zero) by such'' for ``less such'' in 
introductory provisions.
    1989--Subsec. (e)(5), (6). Pub. L. 101-239, Sec. 7202(a), added par. 
(5) and redesignated former par. (5) as (6).
    Subsec. (i). Pub. L. 101-239, Sec. 7202(b), added subsec. (i). 
Former subsec. (i) redesignated (j).
    Subsec. (j). Pub. L. 101-239, Sec. 7210(a), added subsec. (j). 
Former subsec. (j) redesignated (k).
    Pub. L. 101-239, Sec. 7202(b), redesignated subsec. (i) as (j).
    Subsec. (k). Pub. L. 101-239, Sec. 7210(a), redesignated subsec. (j) 
as (k).
    1988--Subsec. (d)(3)(A). Pub. L. 100-647, Sec. 1005(c)(1), 
substituted ``properly allocable to'' for ``incurred or continued to 
purchase or carry''.
    Subsec. (d)(4)(B). Pub. L. 100-647, Sec. 1005(c)(2), amended subpar. 
(B) generally. Prior to amendment, subpar. (B) read as follows: ``The 
term `investment income' means the sum of--
        ``(i) gross income (other than gain described in clause (ii)) 
    from property held for investment, and
        ``(ii) any net gain attributable to the disposition of property 
    held for investment,
but only to the extent such amounts are not derived from the conduct of 
a trade or business.''
    Subsec. (d)(6)(A). Pub. L. 100-647, Sec. 1005(c)(3), amended subpar. 
(A) generally. Prior to amendment, subpar. (A) read as follows: ``The 
amount of interest disallowed under this subsection for any such taxable 
year shall be equal to the sum of--
        ``(i) the applicable percentage of the amount which (without 
    regard to this paragraph) is not allowed as a deduction under this 
    subsection for the taxable year to the extent such amount does not 
    exceed the ceiling amount,
        ``(ii) the amount which (without regard to this paragraph) is 
    not allowed as a deduction under this subsection in excess of the 
    ceiling amount, plus
        ``(iii) the amount of any carryforward to such taxable year 
    under paragraph (2) with respect to which a deduction was disallowed 
    under this subsection for a preceding taxable year.
For purposes of this subparagraph, the amount under clause (i) or (ii) 
shall be computed without regard to the amount described in clause 
(iii).''
    Subsec. (e)(2)(B). Pub. L. 100-647, Sec. 1006(u)(1), substituted 
``paragraph (7)'' for ``paragraph (6)''.
    Subsec. (h)(2)(A). Pub. L. 100-647, Sec. 1005(c)(4), substituted 
``properly allocable to'' for ``incurred or continued in connection with 
the conduct of''.
    Subsec. (h)(2)(E). Pub. L. 100-647, Sec. 1005(c)(12), inserted ``or 
under section 6166A (as in effect before its repeal by the Economic 
Recovery Tax Act of 1981)'' before period at end.
    Subsec. (h)(3)(C). Pub. L. 100-647, Sec. 1005(c)(5), effective as if 
enacted immediately before enactment of Pub. L. 100-203 (see 1987 
Amendment note below), amended subpar. (C) generally. Prior to 
amendment, subpar. (C) read as follows: ``The amount under subparagraph 
(B)(ii)(I) at any time after August 16, 1986, shall not be less than the 
outstanding aggregate principal amount (as of such time) of indebtedness 
which was incurred on or before August 16, 1986, and which was secured 
by the qualified residence on August 16, 1986.''
    Subsec. (h)(4). Pub. L. 100-647, Sec. 1005(c)(6)(A), effective as if 
enacted immediately before enactment of Pub. L. 100-203 (redesignating 
par. (5) as (4), see 1987 Amendment note below), amended heading by 
substituting ``Other definitions and special rules--For purposes of this 
subsection--'' for ``Other definitions and special rules''.
    Subsec. (h)(4)(A). Pub. L. 100-647, Sec. 1005(c)(6)(B)(i), (7), 
effective as if enacted immediately before enactment of Pub. L. 100-203 
(redesignating par. (5) as (4), see 1987 Amendment note below), amended 
subpar. (A) by striking out ``For purposes of this subsection--'' after 
``Qualified residence'' in introductory provisions, ``used or'' after 
``Residence not'' in cl. (iii) heading, and ``or use'' after ``does not 
rent'' in cl. (iii) text.
    Subsec. (h)(4)(B). Pub. L. 100-647, Sec. 1005(c)(6)(B)(ii), 
effective as if enacted immediately before enactment of Pub. L. 100-203 
(redesignating par. (5) as (4), see 1987 Amendment note below), amended 
subpar. (B) by substituting ``Any'' for ``For purposes of this 
paragraph, any''.
    Subsec. (h)(4)(C), (D). Pub. L. 100-647, Sec. 1005(c)(8), effective 
as if enacted immediately before enactment of Pub. L. 100-203 
(redesignating par. (5) as (4), see 1987 Amendment note below), par. (4) 
added subpars. (C) and (D).
    Subsec. (h)(5). Pub. L. 100-647, Sec. 2004(b)(1), redesignated par. 
(6) as (5).
    Subsec. (h)(6). Pub. L. 100-647, Sec. 2004(b)(1), redesignated par. 
(6) as (5).
    Pub. L. 100-647, Sec. 1005(c)(9), substituted ``but for this 
paragraph'' for ``but for this subsection''.
    Subsec. (i)(2). Pub. L. 100-647, Sec. 1009(b)(6), made technical 
correction to directory language of Pub. L. 99-514, Sec. 902(e)(1), see 
1986 Amendment note below.
    1987--Subsec. (d)(4)(E). Pub. L. 100-203, Sec. 10212(b), substituted 
``section 469(m)'' for ``section 469(l)''.
    Subsec. (h)(3). Pub. L. 100-203, Sec. 10102(a), amended par. (3) 
generally. Prior to amendment (see 1988 Amendment note above), par. (3) 
read as follows: ``For purposes of this subsection--
        ``(A) In general.--The term `qualified residence interest' means 
    interest which is paid or accrued during the taxable year on 
    indebtedness which is secured by any property which (at the time 
    such interest is paid or accrued) is a qualified residence of the 
    taxpayer.
        ``(B) Limitation on amount of interest.--The term `qualified 
    residence interest' shall not include any interest paid or accrued 
    on indebtedness secured by any qualified residence which is 
    allocable to that portion of the principal amount of such 
    indebtedness which, when added to the outstanding aggregate 
    principal amount of all other indebtedness previously incurred and 
    secured by such qualified residence, exceeds the lesser of--
            ``(i) the fair market value of such qualified residence, or
            ``(ii) the sum of--
                ``(I) the taxpayer's basis in such qualified residence 
            (adjusted only by the cost of any improvements to such 
            residence), plus
                ``(II) the aggregate amount of qualified indebtedness of 
            the taxpayer with respect to such qualified residence.
        ``(C) Cost not less than balance of indebtedness incurred on or 
    before august 16, 1986.--
            ``(i) In general.--The amount under subparagraph (B)(ii)(I) 
        at any time after August 16, 1986, shall not be less than the 
        outstanding principal amount (as of such time) of indebtedness--
                ``(I) which was incurred on or before August 16, 1986, 
            and which was secured by the qualified residence on August 
            16, 1986, or
                ``(II) which is secured by the qualified residence and 
            was incurred after August 16, 1986, to refinance 
            indebtedness described in subclause (I) (or refinanced 
            indebtedness meeting the requirements of this subclause) to 
            the extent (immediately after the refinancing) the principal 
            amount of the indebtedness resulting from the refinancing 
            does not exceed the principal amount of the refinanced 
            indebtedness (immediately before the refinancing).
            ``(ii) Limitation on period of refinancing.--Subclause (II) 
        of clause (i) shall not apply to any indebtedness after--
                ``(I) the expiration of the term of the indebtedness 
            described in clause (i)(I), or
                ``(II) if the principal of the indebtedness described in 
            clause (i)(I) is not amortized over its term, the expiration 
            of the term of the 1st refinancing of such indebtedness (or 
            if earlier, the date which is 30 years after the date of 
            such refinancing).
        ``(D) Time for determination.--Except as provided in 
    regulations, any determination under subparagraph (B) shall be made 
    as of the time the indebtedness is incurred.''
    Subsec. (h)(4), (5). Pub. L. 100-203, Sec. 10102(b), redesignated 
par. (5) as (4) and struck out former par. (4) which defined ``qualified 
indebtedness'' for purposes of this subsection.
    1986--Subsec. (d). Pub. L. 99-514, Sec. 511(a), substituted 
``Limitation on investment interest'' for ``Limitation on interest on 
investment indebtedness'' in heading, and amended text generally, 
revising and restating as pars. (1) to (6) provisions of former pars. 
(1) to (7).
    Subsec. (e)(2)(C). Pub. L. 99-514, Sec. 1803(a)(4), added subpar. 
(C).
    Subsec. (e)(3)(A). Pub. L. 99-514, Sec. 1810(e)(1)(A), inserted 
``The preceding sentence shall not apply to the extent that the original 
issue discount is effectively connected with the conduct by such foreign 
related person of a trade or business within the United States unless 
such original issue discount is exempt from taxation (or is subject to a 
reduced rate of tax) pursuant to a treaty obligation of the United 
States.''
    Subsec. (e)(5). Pub. L. 99-514, Sec. 1810(e)(1)(B), redesignated 
par. (4), relating to cross references, as (5).
    Subsec. (f)(3). Pub. L. 99-514, Sec. 1301(j)(3), substituted 
``section 149(a)(3)'' for ``section 103(j)(3)''.
    Subsec. (h). Pub. L. 99-514, Sec. 511(b), added subsec. (h). Former 
subsec. (h) redesignated (i).
    Subsec. (i)(2). Pub. L. 99-514, Sec. 902(e)(1), as amended by Pub. 
L. 100-647, Sec. 1009(b)(6), substituted ``section 265(a)(2)'' for 
``section 265(2)''.
    Pub. L. 99-514, Sec. 511(b), redesignated former subsec. (h) as (i).
    1984--Subsec. (d)(3)(D). Pub. L. 98-369, Sec. 56(b), designated 
existing provisions as cl. (i) and added cl. (ii).
    Subsec. (e)(1). Pub. L. 98-369, Sec. 42(a)(3), substituted ``debt 
instrument'' for ``bond'' in two places and struck out ``by an issuer 
(other than a natural person)'' before ``, the portion of the original 
issue''.
    Subsec. (e)(2). Pub. L. 98-369, Sec. 42(a)(3), substituted 
provisions relating to debt instruments for provisions relating to 
bonds.
    Subsec. (e)(3). Pub. L. 98-369, Sec. 128(c), added par. (3) relating 
to special rule for original issue discount on obligation held by 
related foreign person. Former par. (3), relating to exceptions, 
redesignated (4).
    Pub. L. 98-369, Sec. 42(a)(3), added par. (3) relating to 
exceptions.
    Subsec. (e)(4). Pub. L. 98-369, Sec. 128(c), redesignated par. (3), 
relating to exceptions, as (4).
    Pub. L. 98-369, Sec. 42(a)(3), added par. (4) relating to cross 
references.
    Subsec. (f)(2)(C)(i). Pub. L. 98-369, Sec. 127(f), redesignated 
existing provision as subcl. (I), and in subcl. (I) as so redesignated, 
inserted reference to subpar. (A) and substituted ``or'' for ``and'', 
and added subcl. (II).
    Subsecs. (g), (h). Pub. L. 98-369, Sec. 612(c), added subsec. (g) 
and redesignated former subsec. (g) as (h).
    1982--Subsec. (d)(4). Pub. L. 97-354 redesignated subpar. (D) as 
(B). Former subpars. (B) and (C), relating to partnerships and 
shareholders of electing small business corporations, respectively, were 
struck out.
    Subsec. (e). Pub. L. 97-248, Sec. 231(b), added subsec. (e) relating 
to original issue discount. Former subsec. (e), setting forth cross 
references, redesignated (f).
    Pub. L. 97-248, Sec. 231(b), redesignated former subsec. (e), 
setting forth cross references, as (f).
    Subsec. (f). Pub. L. 97-248, Sec. 310(b)(2), added subsec. (f) 
relating to the requirement that obligations be in registered form to be 
tax-exempt. Former subsec. (f), setting forth cross references, 
redesignated (g).
    Subsec. (g). Pub. L. 97-248, Sec. 310(b)(2), redesignated former 
subsec. (f), setting forth cross references, as (g).
    1976--Subsec. (b)(1). Pub. L. 94-455, Sec. 1901(b)(8)(C), 
substituted ``organization described in section 170(b)(1)(A)(ii) and 
which is provided for a student of such organization'' for ``institution 
(as defined in section 151(e)(4)) and which is provided for a student of 
such institution''.
    Subsec. (d)(1). Pub. L. 94-455, Sec. 209(a)(1), among other changes, 
substituted in subpar. (A) ``$10,000'' for ``$25,000'' and ``$5,000'' 
for ``$12,500'', struck out subpar. (C) relating to the excess of net 
long-term capital gain over short-term capital loss and subpar. (D) 
relating to the excess of investment interest over amounts in subpar. 
(A), and in provisions following lettered paragraphs substituted 
``$10,000'' for ``$25,000'' and struck out provisions relating to the 
determination of the amount referred to in subpar. (C).
    Subsec. (d)(2). Pub. L. 94-455, Sec. 209(a)(1), among other changes, 
struck out provisions relating to the limitation on the amount of 
interest allowable by this par. and to reduction of disallowed 
investment interest for capital gain deduction purposes.
    Subsec. (d)(3)(A). Pub. L. 94-455, Sec. 209(a)(2), inserted 
provision relating to determination of the amount of net investment 
income where taxpayer has investment interest for taxable year to which 
this subsection applies.
    Subsec. (d)(3)(B)(iii). Pub. L. 94-455, Secs. 205(c)(3), 
1901(b)(3)(K), substituted ``1250, and 1254'' for ``and 1250'', and 
``ordinary income'' for ``gain from the sale or exchange of property 
which is neither a capital asset nor property described in section 
1231''. Section 205(c)(3) of Pub. L. 94-455, which directed the 
amendment of subsec. (d)(3)(A)(iii), was executed by amending subsec. 
(d)(3)(B)(iii) to reflect the probable intent of Congress.
    Subsec. (d)(3)(E). Pub. L. 94-455, Sec. 209(a)(3), substituted 
``limitation in paragraph (1)'' for ``limitations in paragraphs (1) and 
(2)(A)''.
    Subsec. (d)(4)(B), (C). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck 
out ``or his delegate'' after ``Secretary''.
    Subsec. (d)(5). Pub. L. 94-455, Sec. 209(a)(4), (5), redesignated 
par. (6) as (5) and inserted provision relating to the application of 
this paragraph after Dec. 31, 1975, on an allocation basis rather than a 
specific item basis. Former par. (5), relating to capital gains 
treatment of investment interest, was struck out.
    Pub. L. 94-455, Sec. 1901(b)(3)(K), directed the amendment of par. 
(5) by substituting ``ordinary income'' for ``gain from the sale or 
exchange of property which is neither a capital asset nor property 
described in section 1231'', such par. (5) having been struck out by 
Pub. L. 94-455, Sec. 209(a)(4).
    Subsec. (d)(6). Pub. L. 94-455, Secs. 209(a)(4), 1906(b)(13)(A), 
redesignated par. (7) as (6) and struck out in provision following 
subpar. (B) ``or his delegate'' after ``Secretary''. Former par. (6) 
redesignated (5).
    Subsec. (d)(7). Pub. L. 94-455, Sec. 209(a)(6), added par. (7). 
Former par. (7) redesignated (6).
    1971--Subsec. (d)(1)(B). Pub. L. 92-178, Sec. 304(b)(2), inserted 
``the amount (if any) by which the deductions allowable under this 
section (determined without regard to this subsection) and sections 162, 
164(a)(1) or (2), or 212 attributable to property of the taxpayer 
subject to a net lease exceeds the rental income produced by such 
property for the property year, plus'' after ``plus''.
    Subsec. (d)(3)(C). Pub. L. 92-178, Sec. 304(d), inserted reference 
to section 162.
    Subsec. (d)(4)(A)(i). Pub. L. 92-178, Sec. 304(a)(2)(A), inserted 
``of the lessor'' after ``deductions'' and ``(other than rents and 
reimbursed amounts with respect to such property)'' after ``section 
162''.
    Subsec. (d)(7). Pub. L. 92-178, Sec. 304(a)(2)(B), added par. (7).
    1969--Subsecs. (d), (e). Pub. L. 91-172 added subsec. (d). Former 
subsec. (d) redesignated (e).
    1964--Subsec. (b)(1). Pub. L. 88-272 included the purchase of 
educational services, and defined ``educational services''.
    1963--Subsecs. (c), (d). Pub. L. 88-9, Sec. 1(a), (c), added subsec. 
(c), redesignated former subsec. (c) as (d) and added par. (5).


                    Effective Date of 1999 Amendment

    Amendment by Pub. L. 106-170 applicable to taxable years beginning 
after Dec. 31, 2000, see section 546(a) of Pub. L. 106-170, set out as a 
note under section 856 of this title.


                    Effective Date of 1998 Amendment

    Amendment by Pub. L. 105-277 effective as if included in the 
provision of the Taxpayer Relief Act of 1997, Pub. L. 105-34, to which 
such amendment relates, see section 4003(l) of Pub. L. 105-277, set out 
as a note under section 86 of this title.


                    Effective Date of 1997 Amendment

    Amendment by section 312(d)(1) of Pub. L. 105-34 applicable to sales 
and exchanges after May 6, 1997, with certain exceptions, see section 
312(d) of Pub. L. 105-34, set out as a note under section 121 of this 
title.
    Section 503(d) of Pub. L. 105-34 provided that:
    ``(1) In general.--The amendments made by this section [amending 
this section and sections 2053, 6166, and 6601 of this title] shall 
apply to estates of decedents dying after December 31, 1997.
    ``(2) Election.--In the case of the estate of any decedent dying 
before January 1, 1998, with respect to which there is an election under 
section 6166 of the Internal Revenue Code of 1986, the executor of the 
estate may elect to have the amendments made by this section apply with 
respect to installments due after the effective date of the election; 
except that the 2-percent portion of such installments shall be equal to 
the amount which would be the 4-percent portion of such installments 
without regard to such election. Such an election shall be made before 
January 1, 1999 in the manner prescribed by the Secretary of the 
Treasury and, once made, is irrevocable.''
    Section 1005(b) of Pub. L. 105-34 provided that:
    ``(1) In general.--The amendment made by this section [amending this 
section] shall apply to disqualified debt instruments issued after June 
8, 1997.
    ``(2) Transition rule.--The amendment made by this section shall not 
apply to any instrument issued after June 8, 1997, if such instrument 
is--
        ``(A) issued pursuant to a written agreement which was binding 
    on such date and at all times thereafter,
        ``(B) described in a ruling request submitted to the Internal 
    Revenue Service on or before such date, or
        ``(C) described on or before such date in a public announcement 
    or in a filing with the Securities and Exchange Commission required 
    solely by reason of the issuance.''


                    Effective Date of 1996 Amendment

    Amendment by section 1703(n)(4) of Pub. L. 104-188 effective as if 
included in the provision of the Revenue Reconciliation Act of 1993, 
Pub. L. 103-66, Secs. 13001-13444, to which such amendment relates, see 
section 1703(o) of Pub. L. 104-188, set out as a note under section 39 
of this title.
    Section 1704(f)(2)(C) of Pub. L. 104-188 provided that: ``The 
amendments made by this paragraph [amending this section] shall apply as 
if included in the amendments made by section 7210(a) of the Revenue 
Reconciliation Act of 1989 [Pub. L. 101-239].''


                    Effective Date of 1993 Amendment

    Amendment by section 13206(d)(1) of Pub. L. 103-66 applicable to 
taxable years beginning after Dec. 31, 1992, see section 13206(d)(3) of 
Pub. L. 103-66 set out as a note under section 1 of this title.
    Section 13228(d) of Pub. L. 103-66 provided that: ``The amendments 
made by this section [amending this section] shall apply to interest 
paid or accrued in taxable years beginning after December 31, 1993.''


                    Effective Date of 1990 Amendment

    Amendment by Pub. L. 101-508 effective, except as otherwise 
provided, as if included in the provision of the Revenue Reconciliation 
Act of 1989, Pub. L. 101-239, title VII, to which such amendment 
relates, see section 11701(n) of Pub. L. 101-508, set out as a note 
under section 42 of this title.


                    Effective Date of 1989 Amendment

    Section 7202(c) of Pub. L. 101-239 provided that:
    ``(1) In general.--Except as provided in paragraph (2), the 
amendments made by this section [amending this section] shall apply to 
instruments issued after July 10, 1989.
    ``(2) Exceptions.--
        ``(A) The amendments made by this section shall not apply to any 
    instrument if--
            ``(i) such instrument is issued in connection with an 
        acquisition--
                ``(I) which is made on or before July 10, 1989,
                ``(II) for which there was a written binding contract in 
            effect on July 10, 1989, and at all times thereafter before 
            such acquisition, or
                ``(III) for which a tender offer was filed with the 
            Securities and Exchange Commission on or before July 10, 
            1989,
            ``(ii) the term of such instrument is not greater than--
                ``(I) the term specified in the written documents 
            described in clause (iii), or
                ``(II) if no term is determined under subclause (I), 10 
            years, and
            ``(iii) the use of such instrument in connection with such 
        acquisition (and the maximum amount of proceeds from such 
        instrument) was determined on or before July 10, 1989, and such 
        determination is evidenced by written documents--
                ``(I) which were transmitted on or before July 10, 1989, 
            between the issuer and any governmental regulatory bodies or 
            prospective parties to the issuance or acquisition, and
                ``(II) which are customarily used for the type of 
            acquisition or financing involved.
        ``(B) The amendments made by this section shall not apply to any 
    instrument issued pursuant to the terms of a debt instrument issued 
    on or before July 10, 1989, or described in subparagraph (A) or (D).
        ``(C) The amendments made by this section shall not apply to any 
    instrument issued to refinance an original issue discount debt 
    instrument to which the amendments made by this section do not apply 
    if--
            ``(i) the maturity date of the refinancing instrument is not 
        later than the maturity date of the refinanced instrument,
            ``(ii) the issue price of the refinancing instrument does 
        not exceed the adjusted issue price of the refinanced 
        instrument,
            ``(iii) the stated redemption price at maturity of the 
        refinancing instrument is not greater than the stated redemption 
        price at maturity of the refinanced instrument, and
            ``(iv) the interest payments required under the refinancing 
        instrument before maturity are not less than (and are paid not 
        later than) the interest payments required under the refinanced 
        instrument.
        ``(D) The amendments made by this section shall not apply to 
    instruments issued after July 10, 1989, pursuant to a reorganization 
    plan in a title 11 or similar case (as defined in section 368(a)(3) 
    of the Internal Revenue Code of 1986) if the amount of proceeds of 
    such instruments, and the maturities of such instruments, do not 
    exceed the amount or maturities specified in the last reorganization 
    plan filed in such case on or before July 10, 1989.''
    Section 7210(b) of Pub. L. 101-239 provided that:
    ``(1) In general.--The amendment made by this section [amending this 
section] shall apply to interest paid or accrued in taxable years 
beginning after July 10, 1989.
    ``(2) Special rule for demand loans, etc.--In the case of any demand 
loan (or other loan without a fixed term) which was outstanding on July 
10, 1989, interest on such loan to the extent attributable to periods 
before September 1, 1989, shall not be treated as disqualified interest 
for purposes of section 163(j) of the Internal Revenue Code of 1986 (as 
added by subsection (a)).''


                    Effective Date of 1988 Amendment

    Section 1005(c)(13) of Pub. L. 100-647 provided that: ``For purposes 
of applying the amendments made by this subsection [amending this 
section and sections 467, 1255, and 7872 of this title] and the 
amendments made by section 10102 of the Revenue Act of 1987 [section 
10102 of Pub. L. 100-203, amending this section], the provisions of this 
subsection shall be treated as having been enacted immediately before 
the enactment of the Revenue Act of 1987.''
    Amendment by sections 1006(u)(1) and 1009(b)(6) of Pub. L. 100-647 
effective, except as otherwise provided, as if included in the provision 
of the Tax Reform Act of 1986, Pub. L. 99-514, to which such amendment 
relates, see section 1019(a) of Pub. L. 100-647, set out as a note under 
section 1 of this title.
    Amendment by section 2004(b)(1) of Pub. L. 100-647 effective, except 
as otherwise provided, as if included in the provisions of the Revenue 
Act of 1987, Pub. L. 100-203, title X, to which such amendment relates, 
see section 2004(u) of Pub. L. 100-647, set out as a note under section 
56 of this title.


                    Effective Date of 1987 Amendment

    Section 10102(c) of Pub. L. 100-203 provided that: ``The amendments 
made by this section [amending this section] shall apply to taxable 
years beginning after December 31, 1987.''
    Amendment by section 10212(b) of Pub. L. 100-203 effective as if 
included in the amendments made by section 501 of the Tax Reform Act of 
1986, Pub. L. 99-514, see section 10212(c) of Pub. L. 100-203, set out 
as a note under section 58 of this title.


                    Effective Date of 1986 Amendment

    Section 511(e) of Pub. L. 99-514 provided that: ``The amendments 
made by this section [amending this section and sections 467, 703, 1255, 
1363, and 7872 of this title] shall apply to taxable years beginning 
after December 31, 1986.''
    Amendment by section 902(e)(1) of Pub. L. 99-514 applicable to 
taxable years ending after Dec. 31, 1986, with certain exceptions and 
qualifications, see section 902(f) of Pub. L. 99-514, set out as a note 
under section 265 of this title.
    Amendment by section 1301(j)(3) of Pub. L. 99-514 applicable to 
bonds issued after Aug. 15, 1986, except as otherwise provided, see 
sections 1311 to 1318 of Pub. L. 99-514, set out as an Effective Date; 
Transitional Rules note under section 141 of this title.
    Amendment by sections 1803(a)(4) and 1810(e)(1) of Pub. L. 99-514 
effective, except as otherwise provided, as if included in the 
provisions of the Tax Reform Act of 1984, Pub. L. 98-369, div. A, to 
which such amendment relates, see section 1881 of Pub. L. 99-514, set 
out as a note under section 48 of this title.


                    Effective Date of 1984 Amendment

    Amendment by section 42(a)(3) of Pub. L. 98-369 applicable to 
taxable years ending after July 18, 1984, see section 44 of Pub. L. 98-
369, set out as an Effective Date note under section 1271 of this title.
    Section 56(d) of Pub. L. 98-369 provided that: ``The amendments made 
by this section [amending this section and sections 263 and 265 of this 
title] shall apply to short sales after the date of enactment of this 
Act [July 18, 1984] in taxable years ending after such date.''
    Amendment by section 127(f) of Pub. L. 98-369 applicable to interest 
received after July 18, 1984, with respect to obligations issued after 
such date, in taxable years ending after such date, see section 
127(g)(1) of Pub. L. 98-369, set out as a note under section 871 of this 
title.
    Amendment by section 128(c) of Pub. L. 98-369 applicable to 
obligations issued after June 9, 1984, see section 128(d)(2) of Pub. L. 
98-369, set out as a note under section 871 of this title.
    Amendment by section 612(c) of Pub. L. 98-369 applicable to interest 
paid or accrued after Dec. 31, 1984, on indebtedness incurred after Dec. 
31, 1984, see section 612(g) of Pub. L. 98-369, set out as an Effective 
Date note under section 25 of this title.


                    Effective Date of 1982 Amendments

    Amendment by Pub. L. 97-354 applicable to taxable years beginning 
after Dec. 31, 1982, see section 6(a) of Pub. L. 97-354, set out as an 
Effective Date note under section 1361 of this title.
    Amendment by Pub. L. 97-248 applicable to obligations issued after 
Dec. 31, 1982, with exceptions for certain warrants, see section 310(d) 
of Pub. L. 97-248, set out as a note under section 103 of this title.


                    Effective Date of 1976 Amendment

    Amendment by section 205(c)(3) of Pub. L. 94-455 applicable with 
respect to taxable years ending after Dec. 31, 1975, see section 205(e) 
of Pub. L. 94-455, set out as an Effective Date note under section 1254 
of this title.
    Section 209(b) of Pub. L. 94-455, as amended by Pub. L. 99-514, 
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
    ``(1) In general.--Except as provided in paragraph (2), the 
amendments made by subsection (a) [amending this section] shall apply to 
taxable years beginning after December 31, 1975.
    ``(2) Indebtedness incurred before september 11, 1975.--In the case 
of indebtedness attributable to a specific item of property which--
        ``(A) is for a specified term, and
        ``(B) was incurred before September 11, 1975, or is incurred 
    after September 10, 1975, pursuant to a written contract or 
    commitment which on September 11, 1975, and at all times thereafter 
    before the incurring of such indebtedness, is binding on the 
    taxpayer,
the amendments made by this section shall not apply, but section 163(d) 
of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as in 
effect before the enactment of this Act [Oct. 4, 1976]) shall apply. For 
purposes of the preceding sentence, so much of the net investment income 
(as defined in section 163(d)(3)(A) of such Code) for any taxable year 
as is not taken into account under section 163(d) of such Code, as 
amended by this Act, by reason of the last sentence of section 
163(d)(3)(A) of such Code, shall be taken into account for purposes of 
applying such section as in effect before the date of enactment of this 
Act [Oct. 4, 1976] with respect to interest on indebtedness referred to 
in the preceding sentence.''
    Amendment by section 1901(b)(8)(C), (3)(K) of Pub. L. 94-455 
applicable with respect to taxable years beginning after Dec. 31, 1976, 
see section 1901(d) of Pub. L. 94-455, set out as a note under section 2 
of this title.


                    Effective Date of 1971 Amendment

    Section 304(e) of Pub. L. 92-178 provided that: ``The amendments 
made by this section to section 57 of the Internal Revenue Code of 1954 
shall apply to taxable years beginning after December 31, 1969. The 
amendments made by this section to section 163 of such Code shall apply 
to taxable years beginning after December 31, 1971.''


                    Effective Date of 1969 Amendment

    Section 221(b) of Pub. L. 91-172 provided that: ``The amendments 
made by this section [amending this section] shall apply to taxable 
years beginning after December 31, 1971.''


                    Effective Date of 1964 Amendment

    Section 224(d) of Pub. L. 88-272 provided that: ``The amendments 
made by subsections (a) [enacting section 483 of this title] and (b) 
[amending the analysis preceding section 481 of this title] shall apply 
to payments made after December 31, 1963, on account of sales or 
exchanges of property occurring after June 30, 1963, other than any sale 
or exchange made pursuant to a binding written contract (including an 
irrevocable written option) entered into before July 1, 1963. The 
amendments made by subsection (c) [amending this section] shall apply to 
payments made during taxable years beginning after December 31, 1963.''


                    Effective Date of 1963 Amendment

    Subsec. (c) effective as of Jan. 1, 1962, and applicable with 
respect to taxable years ending on or after such date, see section 2 of 
Pub. L. 88-9, set out as an Effective Date note under section 1055 of 
this title.


    Application of Subsection (h) to Taxable Years Beginning in 1987

    Section 1005(c)(14) of Pub. L. 100-647 provided that:
    ``(A) For purposes of applying section 163(h) of the 1986 Code to 
any taxable year beginning during 1987, if, incident to a divorce or 
legal separation--
        ``(i) an individual acquires the interest of a spouse or former 
    spouse in a qualified residence in a transfer to which section 1041 
    of the 1986 Code applies, and
        ``(ii) such individual incurs indebtedness which is secured by 
    such qualified residence,
the amount determined under paragraph (3)(B)(ii)(I) of section 163(h) of 
the 1986 Code (as in effect before the amendments made by the Revenue 
Act of 1987 [Pub. L. 100-203, title X]) with respect to such qualified 
residence shall be increased by the amount determined under subparagraph 
(B).
    ``(B) The amount determined under this subparagraph shall be equal 
to the excess (if any) of--
        ``(i) the lesser of the amount of the indebtedness described in 
    subparagraph (A)(ii), or the fair market value of the spouse's or 
    former spouse's interest in the qualified residence as of the time 
    of the transfer, over
        ``(ii) the basis of the spouse or former spouse in such interest 
    in such residence (adjusted only by the cost of any improvements to 
    such residence).''


           Plan Amendments Not Required Until January 1, 1989

    For provisions directing that if any amendments made by subtitle A 
or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or title XVIII 
[Secs. 1800-1899A] of Pub. L. 99-514 require an amendment to any plan, 
such plan amendment shall not be required to be made before the first 
plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. 
L. 99-514, as amended, set out as a note under section 401 of this 
title.


  Transitional Rule for Treatment of Certain Income From S Corporations

    Section 1066 of Pub. L. 98-369, as amended by Pub. L. 99-514, 
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
    ``(a) In General.--If--
        ``(1) a corporation had an election in effect under subchapter S 
    of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] for the 
    taxable years of such corporation beginning in 1982, 1983, and 1984, 
    and
        ``(2) a shareholder of such corporation makes an election to 
    have this section apply,
then any qualified income which such shareholder takes into account by 
reason of holding stock in such corporation for any taxable year of such 
corporation beginning in 1983 or 1984 shall be treated for purposes of 
section 163(d) of the Internal Revenue Code of 1986 as such income would 
have been treated but for the enactment of the Subchapter S Revision Act 
of 1982 [Pub. L. 97-354, see Tables for classification].
    ``(b) Qualified Income.--For purposes of subsection (a), the term 
`qualified income' means any income other than income which is 
attributable to personal services performed by the shareholder for the 
corporation.
    ``(c) Election.--The election under subsection (a)(2) shall be made 
at such time and in such manner as the Secretary of the Treasury or his 
delegate may by regulations prescribe.''


                            Transitional Rule

    For provision that, for purposes of amendments by section 231(b) of 
Pub. L. 97-248, any evidence of indebtedness issued pursuant to a 
written commitment which was binding on July 1, 1982, and at all times 
thereafter be treated as issued on July 1, 1982, see section 231(e) of 
Pub. L. 97-248, set out as a note under section 1232A of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 1, 56, 67, 68, 149, 162, 
165, 195, 216, 263A, 312, 465, 469, 483, 691, 805, 832, 860H, 860K, 
860L, 871, 881, 911, 1275, 1287, 1288, 2057, 4701, 6109, 7872 of this 
title.
