
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC263A]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
               Subchapter B--Computation of Taxable Income
 
                      PART IX--ITEMS NOT DEDUCTIBLE
 
Sec. 263A. Capitalization and inclusion in inventory costs of 
        certain expenses
        

(a) Nondeductibility of certain direct and indirect costs

                           (1) In general

        In the case of any property to which this section applies, any 
    costs described in paragraph (2)--
            (A) in the case of property which is inventory in the hands 
        of the taxpayer, shall be included in inventory costs, and
            (B) in the case of any other property, shall be capitalized.

                         (2) Allocable costs

        The costs described in this paragraph with respect to any 
    property are--
            (A) the direct costs of such property, and
            (B) such property's proper share of those indirect costs 
        (including taxes) part or all of which are allocable to such 
        property.

    Any cost which (but for this subsection) could not be taken into 
    account in computing taxable income for any taxable year shall not 
    be treated as a cost described in this paragraph.

(b) Property to which section applies

    Except as otherwise provided in this section, this section shall 
apply to--

                  (1) Property produced by taxpayer

        Real or tangible personal property produced by the taxpayer.

                  (2) Property acquired for resale

        (A) In general

            Real or personal property described in section 1221(a)(1) 
        which is acquired by the taxpayer for resale.

        (B) Exception for taxpayer with gross receipts of $10,000,000 or 
                less

            Subparagraph (A) shall not apply to any personal property 
        acquired during any taxable year by the taxpayer for resale if 
        the average annual gross receipts of the taxpayer (or any 
        predecessor) for the 3-taxable year period ending with the 
        taxable year preceding such taxable year do not exceed 
        $10,000,000.

        (C) Aggregation rules, etc.

            For purposes of subparagraph (B), rules similar to the rules 
        of paragraphs (2) and (3) of section 448(c) shall apply.

For purposes of paragraph (1), the term ``tangible personal property'' 
shall include a film, sound recording, video tape, book, or similar 
property.

(c) General exceptions

                      (1) Personal use property

        This section shall not apply to any property produced by the 
    taxpayer for use by the taxpayer other than in a trade or business 
    or an activity conducted for profit.

             (2) Research and experimental expenditures

        This section shall not apply to any amount allowable as a 
    deduction under section 174.

    (3) Certain development and other costs of oil and gas wells 
                          or other mineral property

        This section shall not apply to any cost allowable as a 
    deduction under section 263(c), 263(i), 291(b)(2), 616, or 617.

           (4) Coordination with long-term contract rules

        This section shall not apply to any property produced by the 
    taxpayer pursuant to a long-term contract.

               (5) Timber and certain ornamental trees

        This section shall not apply to--
            (A) trees raised, harvested, or grown by the taxpayer other 
        than trees described in clause (ii) of subsection (e)(4)(B) 
        (after application of the last sentence thereof), and
            (B) any real property underlying such trees.

                 (6) Coordination with section 59(e)

        Paragraphs (2) and (3) shall apply to any amount allowable as a 
    deduction under section 59(e) for qualified expenditures described 
    in subparagraphs (B), (C), (D), and (E) of paragraph (2) thereof.

(d) Exception for farming businesses

            (1) Section not to apply to certain property

        (A) In general

            This section shall not apply to any of the following which 
        is produced by the taxpayer in a farming business:
                (i) Any animal.
                (ii) Any plant which has a preproductive period of 2 
            years or less.

        (B) Exception for taxpayers required to use accrual method

            Subparagraph (A) shall not apply to any corporation, 
        partnership, or tax shelter required to use an accrual method of 
        accounting under section 447 or 448(a)(3).

     (2) Treatment of certain plants lost by reason of casualty

        (A) In general

            If plants bearing an edible crop for human consumption were 
        lost or damaged (while in the hands of the taxpayer) by reason 
        of freezing temperatures, disease, drought, pests, or casualty, 
        this section shall not apply to any costs of the taxpayer of 
        replanting plants bearing the same type of crop (whether on the 
        same parcel of land on which such lost or damaged plants were 
        located or any other parcel of land of the same acreage in the 
        United States).

        (B) Special rule for person with minority interest who 
                materially participates

            Subparagraph (A) shall apply to amounts paid or incurred by 
        a person (other than the taxpayer described in subparagraph (A)) 
        if--
                (i) the taxpayer described in subparagraph (A) has an 
            equity interest of more than 50 percent in the plants 
            described in subparagraph (A) at all times during the 
            taxable year in which such amounts were paid or incurred, 
            and
                (ii) such other person holds any part of the remaining 
            equity interest and materially participates in the planting, 
            maintenance, cultivation, or development of such the plants 
            described in subparagraph (A) during the taxable year in 
            which such amounts were paid or incurred.

        The determination of whether an individual materially 
        participates in any activity shall be made in a manner similar 
        to the manner in which such determination is made under section 
        2032A(e)(6).

             (3) Election to have this section not apply

        (A) In general

            If a taxpayer makes an election under this paragraph, this 
        section shall not apply to any plant produced in any farming 
        business carried on by such taxpayer.

        (B) Certain persons not eligible

            No election may be made under this paragraph by a 
        corporation, partnership, or tax shelter, if such corporation, 
        partnership, or tax shelter is required to use an accrual method 
        of accounting under section 447 or 448(a)(3).

        (C) Special rule for citrus and almond growers

            An election under this paragraph shall not apply with 
        respect to any item which is attributable to the planting, 
        cultivation, maintenance, or development of any citrus or almond 
        grove (or part thereof) and which is incurred before the close 
        of the 4th taxable year beginning with the taxable year in which 
        the trees were planted. For purposes of the preceding sentence, 
        the portion of a citrus or almond grove planted in 1 taxable 
        year shall be treated separately from the portion of such grove 
        planted in another taxable year.

        (D) Election

            Unless the Secretary otherwise consents, an election under 
        this paragraph may be made only for the taxpayer's 1st taxable 
        year which begins after December 31, 1986, and during which the 
        taxpayer engages in a farming business. Any such election, once 
        made, may be revoked only with the consent of the Secretary.

(e) Definitions and special rules for purposes of subsection (d)

          (1) Recapture of expensed amounts on disposition

        (A) In general

            In the case of any plant with respect to which amounts would 
        have been capitalized under subsection (a) but for an election 
        under subsection (d)(3)--
                (i) such plant (if not otherwise section 1245 property) 
            shall be treated as section 1245 property, and
                (ii) for purposes of section 1245, the recapture amount 
            shall be treated as a deduction allowed for depreciation 
            with respect to such property.

        (B) Recapture amount

            For purposes of subparagraph (A), the term ``recapture 
        amount'' means any amount allowable as a deduction to the 
        taxpayer which, but for an election under subsection (d)(3), 
        would have been capitalized with respect to the plant.

               (2) Effects of election on depreciation

        (A) In general

            If the taxpayer (or any related person) makes an election 
        under subsection (d)(3), the provisions of section 168(g)(2) 
        (relating to alternative depreciation) shall apply to all 
        property of the taxpayer used predominantly in the farming 
        business and placed in service in any taxable year during which 
        any such election is in effect.

        (B) Related person

            For purposes of subparagraph (A), the term ``related 
        person'' means--
                (i) the taxpayer and members of the taxpayer's family,
                (ii) any corporation (including an S corporation) if 50 
            percent or more (in value) of the stock of such corporation 
            is owned (directly or through the application of section 
            318) by the taxpayer or members of the taxpayer's family,
                (iii) a corporation and any other corporation which is a 
            member of the same controlled group described in section 
            1563(a)(1), and
                (iv) any partnership if 50 percent or more (in value) of 
            the interests in such partnership is owned directly or 
            indirectly by the taxpayer or members of the taxpayer's 
            family.

        (C) Members of family

            For purposes of this paragraph, the term ``family'' means 
        the taxpayer, the spouse of the taxpayer, and any of their 
        children who have not attained age 18 before the close of the 
        taxable year.

                      (3) Preproductive period

        (A) In general

            For purposes of this section, the term ``preproductive 
        period'' means--
                (i) in the case of a plant which will have more than 1 
            crop or yield, the period before the 1st marketable crop or 
            yield from such plant, or
                (ii) in the case of any other plant, the period before 
            such plant is reasonably expected to be disposed of.

        For purposes of this subparagraph, use by the taxpayer in a 
        farming business of any supply produced in such business shall 
        be treated as a disposition.

        (B) Rule for determining period

            In the case of a plant grown in commercial quantities in the 
        United States, the preproductive period for such plant if grown 
        in the United States shall be based on the nationwide weighted 
        average preproductive period for such plant.

                        (4) Farming business

        For purposes of this section--

        (A) In general

            The term ``farming business'' means the trade or business of 
        farming.

        (B) Certain trades and businesses included

            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.

        For purposes of clause (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.

          (5) Certain inventory valuation methods permitted

        The Secretary shall by regulations permit the taxpayer to use 
    reasonable inventory valuation methods to compute the amount 
    required to be capitalized under subsection (a) in the case of any 
    plant.

(f) Special rules for allocation of interest to property produced by the 
        taxpayer

           (1) Interest capitalized only in certain cases

        Subsection (a) shall only apply to interest costs which are--
            (A) paid or incurred during the production period, and
            (B) allocable to property which is described in subsection 
        (b)(1) and which has--
                (i) a long useful life,
                (ii) an estimated production period exceeding 2 years, 
            or
                (iii) an estimated production period exceeding 1 year 
            and a cost exceeding $1,000,000.

                        (2) Allocation rules

        (A) In general

            In determining the amount of interest required to be 
        capitalized under subsection (a) with respect to any property--
                (i) interest on any indebtedness directly attributable 
            to production expenditures with respect to such property 
            shall be assigned to such property, and
                (ii) interest on any other indebtedness shall be 
            assigned to such property to the extent that the taxpayer's 
            interest costs could have been reduced if production 
            expenditures (not attributable to indebtedness described in 
            clause (i)) had not been incurred.

        (B) Exception for qualified residence interest

            Subparagraph (A) shall not apply to any qualified residence 
        interest (within the meaning of section 163(h)).

        (C) Special rule for flow-through entities

            Except as provided in regulations, in the case of any flow-
        through entity, this paragraph shall be applied first at the 
        entity level and then at the beneficiary level.

     (3) Interest relating to property used to produce property

        This subsection shall apply to any interest on indebtedness 
    allocable (as determined under paragraph (2)) to property used to 
    produce property to which this subsection applies to the extent such 
    interest is allocable (as so determined) to the produced property.

                           (4) Definitions

        For purposes of this subsection--

        (A) Long useful life

            Property has a long useful life if such property is--
                (i) real property, or
                (ii) property with a class life of 20 years or more (as 
            determined under section 168).

        (B) Production period

            The term ``production period'' means, when used with respect 
        to any property, the period--
                (i) beginning on the date on which production of the 
            property begins, and
                (ii) ending on the date on which the property is ready 
            to be placed in service or is ready to be held for sale.

        (C) Production expenditures

            The term ``production expenditures'' means the costs 
        (whether or not incurred during the production period) required 
        to be capitalized under subsection (a) with respect to the 
        property.

(g) Production

    For purposes of this section--

                           (1) In general

        The term ``produce'' includes construct, build, install, 
    manufacture, develop, or improve.

     (2) Treatment of property produced under contract for the 
                                  taxpayer

        The taxpayer shall be treated as producing any property produced 
    for the taxpayer under a contract with the taxpayer; except that 
    only costs paid or incurred by the taxpayer (whether under such 
    contract or otherwise) shall be taken into account in applying 
    subsection (a) to the taxpayer.

(h) Exemption for free lance authors, photographers, and artists

                           (1) In general

        Nothing in this section shall require the capitalization of any 
    qualified creative expense.

                   (2) Qualified creative expense

        For purposes of this subsection, the term ``qualified creative 
    expense'' means any expense--
            (A) which is paid or incurred by an individual in the trade 
        or business of such individual (other than as an employee) of 
        being a writer, photographer, or artist, and
            (B) which, without regard to this section, would be 
        allowable as a deduction for the taxable year.

    Such term does not include any expense related to printing, 
    photographic plates, motion picture films, video tapes, or similar 
    items.

                           (3) Definitions

        For purposes of this subsection--

        (A) Writer

            The term ``writer'' means any individual if the personal 
        efforts of such individual create (or may reasonably be expected 
        to create) a literary manuscript, musical composition (including 
        any accompanying words), or dance score.

        (B) Photographer

            The term ``photographer'' means any individual if the 
        personal efforts of such individual create (or may reasonably be 
        expected to create) a photograph or photographic negative or 
        transparency.

        (C) Artist

            (i) In general

                The term ``artist'' means any individual if the personal 
            efforts of such individual create (or may reasonably be 
            expected to create) a picture, painting, sculpture, statue, 
            etching, drawing, cartoon, graphic design, or original print 
            edition.
            (ii) Criteria

                In determining whether any expense is paid or incurred 
            in the trade or business of being an artist, the following 
            criteria shall be taken into account:
                    (I) The originality and uniqueness of the item 
                created (or to be created).
                    (II) The predominance of aesthetic value over 
                utilitarian value of the item created (or to be 
                created).

        (D) Treatment of certain corporations

            (i) In general

                If--
                    (I) substantially all of the stock of a corporation 
                is owned by a qualified employee-owner and members of 
                his family (as defined in section 267(c)(4)), and
                    (II) the principal activity of such corporation is 
                performance of personal services directly related to the 
                activities of the qualified employee-owner and such 
                services are substantially performed by the qualified 
                employee-owner,

          this subsection shall apply to any expense of such corporation 
            which directly relates to the activities of such employee-
            owner in the same manner as if such expense were incurred by 
            such employee-owner.
            (ii) Qualified employee-owner

                For purposes of this subparagraph, the term ``qualified 
            employee-owner'' means any individual who is an employee-
            owner of the corporation (as defined in section 269A(b)(2)) 
            and who is a writer, photographer, or artist.

(i) Regulations

    The Secretary shall prescribe such regulations as may be necessary 
or appropriate to carry out the purposes of this section, including--
        (1) regulations to prevent the use of related parties, pass-thru 
    entities, or intermediaries to avoid the application of this 
    section, and
        (2) regulations providing for simplified procedures for the 
    application of this section in the case of property described in 
    subsection (b)(2).

(Added Pub. L. 99-514, title VIII, Sec. 803(a), Oct. 22, 1986, 100 Stat. 
2350; amended Pub. L. 100-647, title I, Sec. 1008(b)(1)-(4), title VI, 
Sec. 6026(a)-(c), Nov. 10, 1988, 102 Stat. 3437, 3438, 3691-3693; Pub. 
L. 101-239, title VII, Sec. 7816(d)(1), Dec. 19, 1989, 103 Stat. 2420; 
Pub. L. 106-170, title V, Sec. 532(c)(2)(B), Dec. 17, 1999, 113 Stat. 
1930.


                               Amendments

    1999--Subsec. (b)(2)(A). Pub. L. 106-170 substituted ``1221(a)(1)'' 
for ``1221(1)''.
    1989--Subsec. (h)(3)(D). Pub. L. 101-239 substituted 
``corporations'' for ``personal service corporations'' in heading and 
amended text generally. Prior to amendment, text read as follows:
    ``(i) In general.--In the case of a personal service corporation, 
this subsection shall apply to any expense of such corporation which 
directly relates to the activities of the qualified employee-owner in 
the same manner as if such expense were incurred by such employee-owner.
    ``(ii) Qualified employee-owner.--The term `qualified employee-
owner' means any individual who is an employee-owner of the personal 
service corporation and who is a writer, photographer, or artist, but 
only if substantially all of the stock of such corporation is owned by 
such individual and members of his family (as defined in section 
267(c)(4)).
    ``(iii) Personal service corporation.--For purposes of this 
subparagraph, the term `personal service corporation' means any personal 
service corporation (as defined in section 269A(b)).''
    1988--Subsec. (a)(2). Pub. L. 100-647, Sec. 1008(b)(1), inserted at 
end ``Any cost which (but for this subsection) could not be taken into 
account in computing taxable income for any taxable year shall not be 
treated as a cost described in this paragraph.''
    Subsec. (c)(3). Pub. L. 100-647, Sec. 1008(b)(2)(A), substituted 
``section 263(c), 263(i), 291(b)(2), 616, or 617'' for ``section 263(c), 
616(a), or 617(a)''.
    Subsec. (c)(6). Pub. L. 100-647, Sec. 1008(b)(2)(B), added par. (6).
    Subsec. (d)(1). Pub. L. 100-647, Sec. 6026(b)(2)(A), substituted 
``Section not to apply to certain property'' for ``Section to apply only 
if preproductive period is more than 2 years'' in heading.
    Subsec. (d)(1)(A). Pub. L. 100-647, Sec. 6026(b)(1), amended subpar. 
(A) generally. Prior to amendment, subpar. (A) read as follows: ``This 
section shall not apply to any plant or animal which is produced by the 
taxpayer in a farming business and which has a preproductive period of 2 
years or less.''
    Subsec. (d)(2)(B)(i). Pub. L. 100-647, Sec. 1008(b)(3)(A), 
substituted ``the plants described in subparagraph (A) at all times 
during the taxable year in which such amounts were paid or incurred'' 
for ``such grove, orchard, or vineyard''.
    Subsec. (d)(2)(B)(ii). Pub. L. 100-647, Sec. 1008(b)(3)(B), 
substituted ``the plants described in subparagraph (A) during the 
taxable year in which such amounts were paid or incurred'' for ``such 
grove, orchard, or vineyard during the 4-taxable year period beginning 
with the taxable year in which the grove, orchard, or vineyard was lost 
or damaged''.
    Subsec. (d)(3)(A). Pub. L. 100-647, Sec. 6026(b)(2)(B), struck out 
``or animal'' after ``plant''.
    Subsec. (d)(3)(B). Pub. L. 100-647, Sec. 6026(c), amended subpar. 
(B) generally. Prior to amendment, subpar. (B) read as follows: ``No 
election may be made under this paragraph--
        ``(i) by a corporation, partnership, or tax shelter, if such 
    corporation, partnership, or tax shelter is required to use an 
    accrual method of accounting under section 447 or 448(a)(3), or
        ``(ii) with respect to the planting, cultivation, maintenance, 
    or development of pistachio trees.''
    Subsec. (e). Pub. L. 100-647, Sec. 6026(b)(2)(B), struck out ``or 
animal'' after ``plant'' wherever appearing in pars. (1), (3), and (5).
    Subsec. (f)(3). Pub. L. 100-647, Sec. 1008(b)(4), substituted 
``allocable (as determined under paragraph (2)) to'' for ``incurred or 
continued in connection with'' and inserted ``(as so determined)'' after 
``allocable''.
    Subsecs. (h), (i). Pub. L. 100-647, Sec. 6026(a), added subsec. (h) 
and redesignated former subsec. (h) as (i).


                    Effective Date of 1999 Amendment

    Amendment by Pub. L. 106-170 applicable to any instrument held, 
acquired, or entered into, any transaction entered into, and supplies 
held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. 
L. 106-170, set out as a note under section 170 of this title.


                    Effective Date of 1989 Amendment

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


                    Effective Date of 1988 Amendment

    Amendment by section 1008(b)(1)-(4) 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.
    Section 6026(d) of Pub. L. 100-647, as amended by Pub. L. 101-239, 
title VII, Sec. 7816(d)(2), Dec. 19, 1989, 103 Stat. 2421, provided 
that:
    ``(1) In general.--Except as otherwise provided in this paragraph, 
the amendments made by this section [amending this section] shall take 
effect as if included in the amendments made by section 803 of the Tax 
Reform Act of 1986 [section 803 of Pub. L. 99-514].
    ``(2) Subsection (b).--
        ``(A) In general.--The amendments made by subsection (b) 
    [amending this section] shall apply to costs incurred after December 
    31, 1988, in taxable years ending after such date.
        ``(B) Revocation of election.--If a taxpayer engaged in a 
    farming business involving the production of animals having a 
    preproductive period of more than 2 years made an election under 
    section 263A(d)(3) of the 1986 Code for a taxable year beginning 
    before January 1, 1989, such taxpayer may, without the consent of 
    the Secretary of the Treasury or his delegate, revoke such election 
    effective for the taxpayer's 1st taxable year beginning after 
    December 31, 1988.''


                             Effective Date

    Section 7831(d)(2) of Pub. L. 101-239 provided that: ``If any 
interest costs incurred after December 31, 1986, are attributable to 
costs incurred before January 1, 1987, the amendments made by section 
803 of the Tax Reform Act of 1986 [section 803 of Pub. L. 99-514, 
enacting this section, amending sections 48, 267, 312, 447, 464, and 471 
of this title, and repealing sections 189, 278, and 280 of this title] 
shall apply to such interest costs only to the extent such interest 
costs are attributable to costs which were required to be capitalized 
under section 263 of the Internal Revenue Code of 1954 and which would 
have been taken into account in applying section 189 of the Internal 
Revenue Code of 1954 (as in effect before its repeal by section 803 of 
the Tax Reform Act of 1986) or, if applicable, section 266 of such 
Code.''
    Section 803(d) of Pub. L. 99-514, as amended by Pub. L. 100-647, 
title I, Sec. 1008(b)(7), Nov. 10, 1988, 102 Stat. 3438; Pub. L. 101-
239, title VII, Sec. 7831(d)(1), Dec. 19, 1989, 103 Stat. 2426, provided 
that:
    ``(1) In general.--Except as provided in this subsection, the 
amendments made by this section [enacting this section, amending 
sections 48, 267, 312, 447, 464, and 471 of this title, and repealing 
sections 189, 278, and 280 of this title] shall apply to costs incurred 
after December 31, 1986, in taxable years ending after such date.
    ``(2) Special rule for inventory property.--In the case of any 
property which is inventory in the hands of the taxpayer--
        ``(A) In general.--The amendments made by this section shall 
    apply to taxable years beginning after December 31, 1986.
        ``(B) Change in method of accounting.--If the taxpayer is 
    required by the amendments made by this section to change its method 
    of accounting with respect to such property for any taxable year--
            ``(i) such change shall be treated as initiated by the 
        taxpayer,
            ``(ii) such change shall be treated as made with the consent 
        of the Secretary, and
            ``(iii) the period for taking into account the adjustments 
        under section 481 by reason of such change shall not exceed 4 
        years.
    ``(3) Special rule for self-constructed property.--The amendments 
made by this section shall not apply to any property which is produced 
by the taxpayer for use by the taxpayer if substantial construction had 
occurred before March 1, 1986.
    ``(4) Transitional rule for capitalization of interest and taxes.--
        ``(A) Transition property exempted from interest 
    capitalization.--Section 263A of the Internal Revenue Code of 1986 
    (as added by this section) and the amendment made by subsection 
    (b)(1) [repealing section 189 of this title] shall not apply to 
    interest costs which are allocable to any property--
            ``(i) to which the amendments made by section 201 [amending 
        sections 46, 167, 168, 178, 179, 280F, 291, 312, 465, 467, 514, 
        751, 1245, 4162, 6111, and 7701 of this title] do not apply by 
        reason of sections 204(a)(1)(D) and (E) and 204(a)(5)(A) [set 
        out as a note under section 168 of this title], and
            ``(ii) to which the amendments made by section 251 [amending 
        sections 46 and 48 of this title and enacting provisions set out 
        as a note under section 46 of this title] do not apply by reason 
        of section 251(d)(3)(M) [set out as a note under section 46 of 
        this title].
        ``(B) Interest and taxes.--Section 263A of such Code shall not 
    apply to property described in the matter following subparagraph (B) 
    of section 207(e)(2) of the Tax Equity and Fiscal Responsibility Act 
    of 1982 [section 207(e)(2)(B) of Pub. L. 97-248, formerly set out as 
    a note under section 189 of this title] to the extent it would 
    require the capitalization of interest and taxes paid or incurred in 
    connection with such property which are not required to be 
    capitalized under section 189 of such Code (as in effect before the 
    amendment made by subsection (b)(1)) [repealing section 189 of this 
    title].
    ``(5) Transition rule concerning capitalization of inventory 
rules.--In the case of a corporation which on the date of the enactment 
of this Act [Oct. 22, 1986] was a member of an affiliated group of 
corporations (within the meaning of section 1504(a) of the Internal 
Revenue Code of 1986), the parent of which--
        ``(A) was incorporated in California on April 15, 1925,
        ``(B) adopted LIFO accounting as of the close of the taxable 
    year ended December 31, 1950, and
        ``(C) was, on May 22, 1986, merged into a Delaware corporation 
    incorporated on March 12, 1986,
the amendments made by this section shall apply under a cut-off method 
whereby the uniform capitalization rules are applied only in costing 
layers of inventory acquired during taxable years beginning on or after 
January 1, 1987.
    ``(6) Treatment of certain rehabilitation project.--The amendments 
made by this section shall not apply to interest and taxes paid or 
incurred with respect to the rehabilitation and conversion of a 
certified historic building which was formerly a factory into an 
apartment project with 155 units, 39 units of which are for low-income 
families, if the project was approved for annual interest assistance on 
June 10, 1986, by the housing authority of the State in which the 
project is located.
    ``(7) Special rule for casualty losses.--Section 263A(d)(2) of the 
Internal Revenue Code of 1986 (as added by this section) shall apply to 
expenses incurred on or after the date of the enactment of this Act 
[Oct. 22, 1986].''


  Allocation Ratio for Apportioning Storage Costs and Related Handling 
                                  Costs

    Section 1008(b)(8) of Pub. L. 100-647 provided that: ``The 
allocation used in the regulations prescribed under section 263A(h)(2) 
of the Internal Revenue Code of 1986 for apportioning storage costs and 
related handling costs shall be determined by dividing the amount of 
such costs by the beginning inventory balances and the purchases during 
the year and by multiplying the resulting allocation ratio by inventory 
amounts determined in accordance with the provisions of the joint 
explanatory statement of the committee of conference of the conference 
report accompanying H.R. 3838 (H.R. Rept. No. 99-841, Vol. II., 99th 
Cong., 2d Sess. II-306-307 (1986)).''


               Amortization of Past Service Pension Costs

    Pub. L. 100-203, title X, Sec. 10204, Dec. 22, 1987, 101 Stat. 1330-
394, provided that:
    ``(a) In General.--For purposes of sections 263A and 460 of the 
Internal Revenue Code of 1986, the allocable costs (within the meaning 
of section 263A(a)(2) or section 460(c) of such Code, whichever is 
applicable) with respect to any property shall include contributions 
paid to or under a pension or annuity plan whether or not such 
contributions represent past service costs.
    ``(b) Effective Date.--
        ``(1) In general.--Except as provided in paragraph (2), 
    subsection (a) shall apply to costs incurred after December 31, 
    1987, in taxable years ending after such date.
        ``(2) Special rule for inventory property.--In the case of any 
    property which is inventory in the hands of the taxpayer--
            ``(A) In general.--Subsection (a) shall apply to taxable 
        years beginning after December 31, 1987.
            ``(B) Change in method of accounting.--If the taxpayer is 
        required by this section to change its method of accounting for 
        any taxable year--
                ``(i) such change shall be treated as initiated by the 
            taxpayer,
                ``(ii) such change shall be treated as made with the 
            consent of the Secretary of the Treasury or his delegate, 
            and
                ``(iii) the net amount of adjustments required by 
            section 481 of the Internal Revenue Code of 1986 shall be 
            taken into account over a period not longer than 4 taxable 
            years.''

                  Section Referred to in Other Sections

    This section is referred to in sections 168, 172, 264, 265, 312, 
447, 448, 460, 471, 475, 943, 1301 of this title.
