H. Rept. 114-749 - EMERGENCY CITRUS DISEASE RESPONSE ACT OF 2016114th Congress (2015-2016)
Committee Report
Hide Overview| Report Type: | House Report |
|---|---|
| Accompanies: | H.R.3957 |
| Committees: |
Report text available as:
- TXT
- PDF (PDF provides a complete and accurate display of this text.) Tip ?
114th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 114-749
======================================================================
EMERGENCY CITRUS DISEASE RESPONSE ACT OF 2016
_______
September 16, 2016.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Brady of Texas, from the Committee on Ways and Means, submitted the
following
R E P O R T
[To accompany H.R. 3957]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 3957) to amend the Internal Revenue Code of 1986 to
temporarily allow expensing of certain costs of replanting
citrus plants lost by reason of casualty, having considered the
same, report favorably thereon with an amendment and recommend
that the bill as amended do pass.
CONTENTS
Page
I. SUMMARY AND BACKGROUND............................................2
A. Purpose and Summary................................... 2
B. Background and Need for Legislation................... 2
C. Legislative History................................... 3
II. EXPLANATION OF THE BILL...........................................3
A. Expensing of Certain Costs of Replanting Citrus Plants
Lost by Reason of Casualty (sec. 2 of the bill and
sec. 263A of the Code)............................... 3
III.VOTES OF THE COMMITTEE............................................5
IV. BUDGET EFFECTS OF THE BILL........................................5
A. Committee Estimate of Budgetary Effects............... 5
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority........................ 6
C. Cost Estimate Prepared by the Congressional Budget
Office............................................... 6
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE........7
A. Committee Oversight Findings and Recommendations...... 7
B. Statement of General Performance Goals and Objectives. 8
C. Information Relating to Unfunded Mandates............. 8
D. Applicability of House Rule XXI 5(b).................. 8
E. Tax Complexity Analysis............................... 8
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits.............................. 8
G. Duplication of Federal Programs....................... 9
H. Disclosure of Directed Rule Makings................... 9
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED.............9
A. Text of Existing Law Amended or Repealed by the Bill,
as Reported.......................................... 9
B. Changes in Existing Law Proposed by the Bill, as
Reported............................................. 9
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Emergency Citrus Disease Response Act
of 2016''.
SEC. 2. EXPENSING OF CERTAIN COSTS OF REPLANTING CITRUS PLANTS LOST BY
REASON OF CASUALTY.
(a) In General.--Section 263A(d)(2) of the Internal Revenue Code of
1986 is amended by adding at the end the following new subparagraph:
``(C) Special temporary rule for citrus plants lost
by reason of casualty.--
``(i) In general.--In the case of the
replanting of citrus plants, 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 not less than 50 percent in the
replanted citrus plants at all times
during the taxable year in which such
amounts were paid or incurred and such
other person holds any part of the
remaining equity interest, or
``(II) such other person acquired the
entirety of such taxpayer's equity
interest in the land on which the lost
or damaged citrus plants were located
at the time of such loss or damage, and
the replanting is on such land.
``(ii) Termination.--Clause (i) shall not
apply to any cost paid or incurred after
December 31, 2025.''.
(b) Effective Date.--The amendment made by this section shall apply
to costs paid or incurred after the date of the enactment of this Act.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
The bill, H.R. 3957, as reported by the Committee on Ways
and Means, provides that certain taxpayers who invest in citrus
groves may deduct their share of costs associated with
replacing citrus trees blighted by a bacterial plant disease
known as citrus greening.
B. Background and Need for Legislation
Citrus growers in the United States are facing a dire
situation caused by huanglongbing (HLB), a bacterial plant
disease commonly referred to as citrus greening, which
adversely affects the citrus fruit and eventually kills the
citrus tree. Because there is no known cure for HLB, the
infected trees must be destroyed and replaced with new trees.
Experts estimate that tens of millions of citrus trees in the
United States will have to be replaced over the next several
years for the citrus industry to continue in this country. The
Committee believes it is important to provide assistance to
citrus growers to recover from this disease and to enable them
to raise the capital necessary to replace blighted citrus
groves. H.R. 3957 will encourage investment in the citrus
industry by allowing new investors to expense their share of
the replacement costs of diseased trees. The bill also will
encourage investors to purchase entire groves of diseased
citrus trees that might otherwise be sold off (e.g., to use the
land for business or residential development), thereby
maintaining the property for citrus production and helping to
preserve the U.S. citrus industry. H.R. 3957 will provide for
expensing of replanting costs through 2025 in order to cover
the duration of the replanting process.
C. Legislative History
Background
H.R. 3957 was introduced on November 5, 2015 and was
referred to the Committee on Ways and Means.
Committee action
The Committee on Ways and Means marked up H.R. 3957, the
``Emergency Citrus Disease Response Act of 2016'' on September
14, 2016, and ordered the bill, as amended, favorably reported
(with a quorum being present).
Committee hearings
The need for assistance to citrus growers working to
recover from citrus greening was discussed at the Committee's
Member Day Hearing on Tax Legislation on May 12, 2016.
II. EXPLANATION OF THE BILL
A. Expensing of Certain Costs of Replanting Citrus Plants Lost by
Reason of Casualty (sec. 2 of the bill and sec. 263A of the Code)
PRESENT LAW
In general
The uniform capitalization (``UNICAP'') rules, which were
enacted as part of the Tax Reform Act of 1986,\1\ require
certain direct and indirect costs allocable to real or tangible
personal property produced by the taxpayer to be either
capitalized into the basis of such property or included in
inventory, as applicable.\2\ For real or personal property
acquired by the taxpayer for resale, section 263A generally
requires certain direct and indirect costs allocable to such
property to be either capitalized into the basis of such
property or included in inventory, as applicable.
---------------------------------------------------------------------------
\1\Sec. 803(a) of Pub. L. No. 99-514 (1986).
\2\Sec. 263A.
---------------------------------------------------------------------------
Section 263A generally requires the capitalization of the
direct and indirect costs allocable to the production of any
property in a farming business, including animals and plants
without regard to the length of their preproductive period.\3\
The costs of a plant generally required to be capitalized under
section 263(a) include preparatory costs incurred so that the
plant's growing process may begin, such as the acquisition
costs of the seed, seedling, or plant. Under section 263A, the
costs of producing a plant generally required to be capitalized
also include the preproductive period costs of planting,
cultivating, maintaining, and developing the plant during the
preproductive period.\4\ Preproductive period costs may include
management, irrigation, pruning, soil and water conservation,
fertilizing, frost protection, spraying, harvesting, storage
and handling, upkeep, electricity, tax depreciation and repairs
on buildings and equipment used in raising the plants, farm
overhead, taxes, and interest, as applicable.\5\
---------------------------------------------------------------------------
\3\Treas. Reg. sec. 1.263A-4(b)(1).
\4\Treas. Reg. sec. 1.263A-4(b)(1)(i).
\5\Ibid.
---------------------------------------------------------------------------
Special rules for plant farmers
Section 263A provides an exception to the general
capitalization requirements for taxpayers who raise, harvest,
or grow trees.\6\ Under this exception, section 263A does not
apply to trees raised, harvested, or grown by the taxpayer
(other than trees bearing fruit, nuts, or other crops, or
ornamental trees) and any real property underlying such trees.
Similarly, the UNICAP rules do not apply to any plant having a
preproductive period of two years or less, which is produced by
a taxpayer in a farming business (unless the taxpayer is
required to use an accrual method of accounting under section
447 or 448(a)(3)).\7\ Hence, in general, the UNICAP rules apply
to the production of plants that have a preproductive period of
more than two years, and to taxpayers required to use an
accrual method of accounting.
---------------------------------------------------------------------------
\6\Sec. 263A(c)(5).
\7\Sec. 263A(d).
---------------------------------------------------------------------------
Plant farmers otherwise required to capitalize
preproductive period costs may elect to deduct such costs
currently, provided the alternative depreciation system
described in section 168(g)(2) is used on all farm assets and
the preproductive period costs are recaptured upon disposition
of the product.\8\ The election is not available to taxpayers
required to use the accrual method of accounting. Moreover, the
election is not available with respect to certain costs
attributable to planting, cultivating, maintaining, or
developing citrus or almond groves.
---------------------------------------------------------------------------
\8\Sec. 263A(d)(3), (e)(1), and (e)(2).
---------------------------------------------------------------------------
Section 263A does not apply to costs incurred in replanting
edible crops for human consumption following loss or damage due
to freezing temperatures, disease, drought, pests, or
casualty.\9\ The same type of crop as the lost or damaged crop
must be replanted. However, the exception to capitalization
still applies if the replanting occurs on a parcel of land
other than the land on which the damage occurred, provided the
acreage of the new land does not exceed that of the land to
which the damage occurred and the new land is located in the
United States. This exception also may apply to costs incurred
by persons other than the taxpayer who incurred the loss or
damage, provided (1) the taxpayer who incurred the loss or
damage retains an equity interest of more than 50 percent in
the property on which the loss or damage occurred at all times
during the taxable year in which the replanting costs are paid
or incurred, and (2) the person holding a minority equity
interest and claiming the deduction materially participates in
the planting, maintenance, cultivation, or development of the
property during the taxable year in which the replanting costs
are paid or incurred.\10\
---------------------------------------------------------------------------
\9\Sec. 263A(d)(2). Such replanting costs generally include costs
attributable to the replanting, cultivating, maintaining, and
developing of the plants that were lost or damaged that are incurred
during the preproductive period. Treas. Reg. sec. 1.263A-4(e)(1). The
acquisition costs of the replacement trees or seedlings must still be
capitalized under section 263(a) (see, e.g., T.D. 8897, 65 FR 50638,
Treas. Reg. sec. 1.263A-4(e)(3), Examples 1-3, and TAM 9547002 (July
18, 1995)), potentially subject to the special bonus depreciation
deduction in the year of planting under section 168(k)(5).
\10\Sec. 263A(d)(2)(B). Material participation for this purpose is
determined in a similar manner as under section 2032A(e)(6) (relating
to qualified use valuation of farm property upon death of the
taxpayer).
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes the special rule for farmers under
the UNICAP rules should be expanded temporarily to apply to
costs incurred by persons other than the taxpayer in connection
with replanting citrus plants following a casualty. This change
will encourage investment necessary to replace diseased citrus
trees and ensure the continuity of the citrus crops in the
United States.
EXPLANATION OF PROVISION
The provision modifies the special rule for costs incurred
by persons other than the taxpayer in connection with
replanting an edible crop for human consumption following loss
or damage due to casualty. Under the provision, with respect to
replanting costs paid or incurred before January 1, 2026, for
citrus plants lost or damaged due to casualty, such costs may
also be deducted by a person other than the taxpayer if (1) the
taxpayer has an equity interest of not less than 50 percent in
the replanted citrus plants at all times during the taxable
year in which the replanting costs are paid or incurred and
such other person holds any part of the remaining equity
interest, or (2) such other person acquires all of the
taxpayer's equity interest in the land on which the lost or
damaged citrus plants were located at the time of such loss or
damage, and the replanting is on such land.
EFFECTIVE DATE
The provision is effective for costs paid or incurred after
the date of enactment.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the vote of the Committee on Ways and Means in its
consideration of H.R. 3957, the ``Emergency Citrus Disease
Response Act of 2016'' on September 14, 2016.
The Chairman's amendment in the nature of a substitute was
adopted by a voice vote (with a quorum being present).
The bill, H.R. 3957, as amended, was ordered favorably
reported to the House of Representatives by a voice vote (with
a quorum being present).
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 3957, as
reported.
The bill, as reported, is estimated to have the following
effect on Federal budget receipts for fiscal years 2017-2026:
FISCAL YEARS
[Millions of dollars]
----------------------------------------------------------------------------------------------------------------
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-21 2017-26
----------------------------------------------------------------------------------------------------------------
-2 -4 -5 -5 -4 -3 -2 -2 -2 -1 -20 -30
----------------------------------------------------------------------------------------------------------------
Pursuant to clause 8 of rule XIII of the Rules of the House
of Representatives, the following statement is made by the
Joint Committee on Taxation with respect to the provisions of
the bill amending the Internal Revenue Code of 1986: The gross
budgetary effect (before incorporating macroeconomic effects)
in any fiscal year is less than 0.25 percent of the current
projected gross domestic product of the United States for that
fiscal year; therefore, the bill is not major legislation for
purposes of requiring that the estimate include the budgetary
effects of changes in economic output, employment, capital
stock and other macroeconomic variables.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue-reducing tax
provisions involve increased tax expenditures. See amounts in
table in Part IV.A. above.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, September 16, 2016.
Hon. Kevin Brady,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3957, the
Emergency Citrus Disease Response Act of 2016.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Peter
Huether.
Sincerely,
Keith Hall.
Enclosure.
H.R. 3957--Emergency Citrus Disease Response Act of 2016
H.R. 3957 would amend the Internal Revenue Code to allow
certain investors to deduct the costs of replanting lost or
damaged citrus plants in the year in which the costs are paid
or incurred. Under current law, only the taxpayer who incurs
the casualty loss to citrus plants or an investor with a
minority interest who materially participates in the planting
and related activities can deduct the replanting costs in the
year of the activity rather than capitalizing those costs and
taking the deductions over a number of years. H.R. 3957 would
allow minority owners who do not materially participate in the
business to similarly deduct the costs of replanting. The bill
would also allow a person who purchases the entire property for
the purpose of replanting the lost or damaged citrus plants to
take the same accelerated deduction. The provisions would
expire for costs paid or incurred after December 31, 2025.
The staff of the Joint Committee on Taxation (JCT)
estimates that the legislation would reduce revenues, thus
increasing federal budget deficits, by $30 million over the
2016-2026 period.
The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting
revenues and direct spending. Enacting HR. 3957 would reduce
revenues; therefore, pay-as-you-go procedures apply. The net
changes in revenues and that are subject to those pay-as-you-go
procedures are shown in the following table. Enacting the bill
would not affect direct spending.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 3957, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON SEPTEMBER 14, 2016
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars
--------------------------------------------------------------------------------------------------
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2016-2021 2016-2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Effects...................... 0 2 4 5 5 4 3 2 2 2 1 20 30
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
JCT and CB0 estimate that enacting the bill would not
increase net direct spending in any of the four consecutive 10-
year periods beginning in 2027, and would increase on-budget
deficits after 2027 by negligible amounts.
JCT has determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Peter Huether.
The estimate was approved by John McClelland, Assistant
Director for Tax Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was as a result of the
Committee's review of the provisions of H.R. 3957 that the
Committee concluded that it is appropriate to report the bill,
as amended, favorably to the House of Representatives with the
recommendation that the bill do pass.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
D. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the bill, and states that the bill does not
involve any Federal income tax rate increases within the
meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code of 1986 and has widespread applicability
to individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, the staff of the Joint Committee on
Taxation has determined that a complexity analysis is not
required under section 4022(b) of the IRS Reform Act because
the bill contains no provisions that amend the Internal Revenue
Code of 1986 and that have ``widespread applicability'' to
individuals or small businesses, within the meaning of the
rule.
F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
G. Duplication of Federal Programs
In compliance with Sec. 3(g)(2) of H. Res. 5 (114th
Congress), the Committee states that no provision of the bill
establishes or reauthorizes: (1) a program of the Federal
Government known to be duplicative of another Federal program,
(2) a program included in any report from the Government
Accountability Office to Congress pursuant to section 21 of
Public Law 111-139, or (3) a program related to a program
identified in the most recent Catalog of Federal Domestic
Assistance, published pursuant to the Federal Program
Information Act (Public Law 95-220, as amended by Public Law
98-169).
H. Disclosure of Directed Rule Makings
In compliance with Sec. 3(i) of H. Res. 5 (114th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rule makings within the meaning of such section.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
A. Text of Existing Law Amended or Repealed by the Bill, as Reported
In compliance with clause 3(e)(1)(A) of rule XIII of the
Rules of the House of Representatives, the text of each section
proposed to be amended or repealed by the bill, as reported, is
shown below:
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e)(1)(A) of rule XIII of the
Rules of the House of Representatives, the text of each section
proposed to be amended or repealed by the bill, as reported, is
shown below:
INTERNAL REVENUE CODE OF 1986
* * * * * * *
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 167(h), 179B, 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.
(7) Coordination with section 168(k)(5).--This
section shall not apply to any amount allowed as a
deduction by reason of section 168(k)(5) (relating to
special rules for certain plants bearing fruits and
nuts).
(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).
* * * * * * *
B. Changes in Existing Law Proposed by the Bill, as Reported
In compliance with clause 3(e)(1)(B) of rule XIII of the
Rules of the House of Representatives, changes in existing law
proposed by the bill, as reported, are shown as follows
(existing law proposed to be omitted is enclosed in black
brackets, new matter is printed in italics, existing law in
which no change is proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e)(1)(B) of rule XIII of the
Rules of the House of Representatives, changes in existing law
proposed by the bill, as reported, are shown as follows (new
matter is printed in italics and existing law in which no
change is proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
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 167(h), 179B, 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.
(7) Coordination with section 168(k)(5).--This
section shall not apply to any amount allowed as a
deduction by reason of section 168(k)(5) (relating to
special rules for certain plants bearing fruits and
nuts).
(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).
(C) Special temporary rule for citrus plants
lost by reason of casualty.--
(i) In general.--In the case of the
replanting of citrus plants,
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 not less than 50
percent in the replanted citrus
plants at all times during the
taxable year in which such
amounts were paid or incurred
and such other person holds any
part of the remaining equity
interest, or
(II) such other person
acquired the entirety of such
taxpayer's equity interest in
the land on which the lost or
damaged citrus plants were
located at the time of such
loss or damage, and the
replanting is on such land.
(ii) Termination.--Clause (i) shall
not apply to any cost paid or incurred
after December 31, 2025.
(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).
* * * * * * *
[all]