1. U.S. Code
  2. title 26
  3. subtitle A
  4. chapter 1
  5. subchapter B
  6. part IX
  7. § 265

Collapse to view only § 265. Expenses and interest relating to tax-exempt income

§ 261. General rule for disallowance of deductions

In computing taxable income no deduction shall in any case be allowed in respect of the items specified in this part.

(Aug. 16, 1954, ch. 736, 68A Stat. 76.)

CITE AS: 26 USC 261

§ 262. Personal, living, and family expenses
(a) General rule
(b) Treatment of certain phone expenses
(Aug. 16, 1954, ch. 736, 68A Stat. 76; Pub. L. 100–647, title V, § 5073(a), Nov. 10, 1988, 102 Stat. 3682.)

CITE AS: 26 USC 262

§ 263. Capital expenditures
(a) General ruleNo deduction shall be allowed for—
(1) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. This paragraph shall not apply to—
(A) expenditures for the development of mines or deposits deductible under section 616,
(B) research and experimental expenditures deductible under section 174,
(C) soil and water conservation expenditures deductible under section 175,
(D) expenditures by farmers for fertilizer, etc., deductible under section 180,
(E) expenditures for removal of architectural and transportation barriers to the handicapped and elderly which the taxpayer elects to deduct under section 190,
(F) expenditures for tertiary injectants with respect to which a deduction is allowed under section 193,
(G) expenditures for which a deduction is allowed under section 179,
(H) expenditures for which a deduction is allowed under section 179B,
(I) expenditures for which a deduction is allowed under section 179C,
(J) expenditures for which a deduction is allowed under section 179D, or
(K) expenditures for which a deduction is allowed under section 179E.
(2) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.
[(b) Repealed. Pub. L. 101–508, title XI, § 11801(a)(16), Nov. 5, 1990, 104 Stat. 1388–520]
(c) Intangible drilling and development costs in the case of oil and gas wells and geothermal wells
(d) Expenditures in connection with certain railroad rolling stock
[(e) Repealed. Pub. L. 97–34, title II, § 201(c), Aug. 13, 1981, 95 Stat. 219]
(f) Railroad ties
(g) Certain interest and carrying costs in the case of straddles
(1) General rule
(2) Interest and carrying charges definedFor purposes of paragraph (1), the term “interest and carrying charges” means the excess of—
(A) the sum of—
(i) interest on indebtedness incurred or continued to purchase or carry the personal property, and
(ii) all other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property, over
(B) the sum of—
(i) the amount of interest (including original issue discount) includible in gross income for the taxable year with respect to the property described in subparagraph (A),
(ii) any amount treated as ordinary income under section 1271(a)(3)(A), 1276, or 1281(a) with respect to such property for the taxable year,
(iii) the excess of any dividends includible in gross income with respect to such property for the taxable year over the amount of any deduction allowable with respect to such dividends under section 243 or 245, and
(iv) any amount which is a payment with respect to a security loan (within the meaning of section 512(a)(5)) includible in gross income with respect to such property for the taxable year.
For purposes of subparagraph (A), the term “interest” includes any amount paid or incurred in connection with personal property used in a short sale.
(3) Exception for hedging transactions
(4) Application with other provisions
(A) Subsection (c)
(B) Section 1277 or 1282
(h) Payments in lieu of dividends in connection with short sales
(1) In generalIf—
(A) a taxpayer makes any payment with respect to any stock used by such taxpayer in a short sale and such payment is in lieu of a dividend payment on such stock, and
(B) the closing of such short sale occurs on or before the 45th day after the date of such short sale,
then no deduction shall be allowed for such payment. The basis of the stock used to close the short sale shall be increased by the amount not allowed as a deduction by reason of the preceding sentence.
(2) Longer period in case of extraordinary dividends
(3) Extraordinary dividend
(4) Special rule where risk of loss diminishedThe running of any period of time applicable under paragraph (1)(B) (as modified by paragraph (2)) shall be suspended during any period in which—
(A) the taxpayer holds, has an option to buy, or is under a contractual obligation to buy, substantially identical stock or securities, or
(B) under regulations prescribed by the Secretary, a taxpayer has diminished his risk of loss by holding 1 or more other positions with respect to substantially similar or related property.
(5) Deduction allowable to extent of ordinary income from amounts paid by lending broker for use of collateral
(A) In generalParagraph (1) shall apply only to the extent that the payments or distributions with respect to any short sale exceed the amount which—
(i) is treated as ordinary income by the taxpayer, and
(ii) is received by the taxpayer as compensation for the use of any collateral with respect to any stock used in such short sale.
(B) Exception not to apply to extraordinary dividends
(6) Application of this subsection with subsection (g)
(i) Special rules for intangible drilling and development costs incurred outside the United StatesIn the case of intangible drilling and development costs paid or incurred with respect to an oil, gas, or geothermal well located outside the United States—
(1) subsection (c) shall not apply, and
(2) such costs shall—
(A) at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (determined without regard to section 613), or
(B) if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such costs were paid or incurred.
This subsection shall not apply to costs paid or incurred with respect to a nonproductive well.
(Aug. 16, 1954, ch. 736, 68A Stat. 77; Pub. L. 86–779, § 6(c), Sept. 14, 1960, 74 Stat. 1001; Pub. L. 87–834, § 21(b), Oct. 16, 1962, 76 Stat. 1064; Pub. L. 88–563, § 4, Sept. 2, 1964, 78 Stat. 845; Pub. L. 89–243, § 4(p)(1), (2), Oct. 9, 1965, 79 Stat. 964; Pub. L. 91–172, title VII, § 706(a), Dec. 30, 1969, 83 Stat. 674; Pub. L. 92–178, title I, § 109(b), (c), Dec. 10, 1971, 85 Stat. 509; Pub. L. 94–455, title XVII, § 1701(a), title XIX, §§ 1904(b)(10)(A)(i), 1906(b)(13)(A), title XXI, § 2122(b)(2), Oct. 4, 1976, 90 Stat. 1759, 1817, 1834, 1915; Pub. L. 95–618, title IV, § 402(a), Nov. 9, 1978, 92 Stat. 3201; Pub. L. 96–223, title II, § 251(a)(2)(B), Apr. 2, 1980, 94 Stat. 287; Pub. L. 97–34, title II, §§ 201(c), 202(d)(1), title V, § 502, Aug. 13, 1981, 95 Stat. 219, 221, 327; Pub. L. 97–248, title II, § 204(c)(1), Sept. 3, 1982, 96 Stat. 426; Pub. L. 97–448, title I, § 105(b)(1), title III, § 306(a)(9)(A), Jan. 12, 1983, 96 Stat. 2385, 2403; Pub. L. 98–369, div. A, title I, §§ 56(a), 102(e)(7), (8), July 18, 1984, 98 Stat. 573, 624, 625; Pub. L. 99–514, title IV, §§ 402(b)(1), 411(b)(1), title VII, § 701(e)(4)(D), title XVIII, § 1808(b), Oct. 22, 1986, 100 Stat. 2221, 2225, 2343, 2817; Pub. L. 100–647, title I, § 1007(g)(5), Nov. 10, 1988, 102 Stat. 3435; Pub. L. 101–508, title XI, §§ 11801(a)(16), 11815(b)(3), Nov. 5, 1990, 104 Stat. 1388–520, 1388–558; Pub. L. 105–34, title XVI, § 1604(a)(1), Aug. 5, 1997, 111 Stat. 1097; Pub. L. 108–311, title IV, § 408(a)(10), Oct. 4, 2004, 118 Stat. 1191; Pub. L. 108–357, title III, § 338(b)(1), Oct. 22, 2004, 118 Stat. 1481; Pub. L. 109–58, title XIII, §§ 1323(b)(2), 1331(b)(4), Aug. 8, 2005, 119 Stat. 1015, 1024; Pub. L. 109–432, div. A, title IV, § 404(b)(1), Dec. 20, 2006, 120 Stat. 2956; Pub. L. 113–295, div. A, title II, § 221(a)(34)(D), (41)(G), Dec. 19, 2014, 128 Stat. 4042, 4044; Pub. L. 115–141, div. U, title IV, § 401(a)(60), (61), Mar. 23, 2018, 132 Stat. 1187.)

CITE AS: 26 USC 263

§ 263A. Capitalization and inclusion in inventory costs of certain expenses
(a) Nondeductibility of certain direct and indirect costs
(1) In generalIn 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 costsThe 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 appliesExcept as otherwise provided in this section, this section shall apply to—
(1) Property produced by taxpayer
(2) Property acquired for resale
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
(2) Research and experimental expenditures
(3) Certain development and other costs of oil and gas wells or other mineral property
(4) Coordination with long-term contract rules
(5) Timber and certain ornamental treesThis 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)
(7) Coordination with section 168(k)(5)
(d) Exception for farming businesses
(1) Section not to apply to certain property
(A) In generalThis 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
(2) Treatment of certain plants lost by reason of casualty
(A) In general
(B) Special rule for person with minority interest who materially participatesSubparagraph (A) shall apply to amounts paid or incurred by a person (other than the taxpayer described in subparagraph (A)) if—
(i) the taxpayer described in subparagraph (A) has an equity interest of more than 50 percent in the plants described in subparagraph (A) at all times during the taxable year in which such amounts were paid or incurred, and
(ii) such other person holds any part of the remaining equity interest and materially participates in the planting, maintenance, cultivation, or development of the plants described in subparagraph (A) during the taxable year in which such amounts were paid or incurred.
The determination of whether an individual materially participates in any activity shall be made in a manner similar to the manner in which such determination is made under section 2032A(e)(6).
(C) Special temporary rule for citrus plants lost by reason of casualty
(i) In generalIn 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
(3) Election to have this section not apply
(A) In general
(B) Certain persons not eligible
(C) Special rule for citrus and almond growers
(D) Election
(e) Definitions and special rules for purposes of subsection (d)
(1) Recapture of expensed amounts on disposition
(A) In generalIn 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
(2) Effects of election on depreciation
(A) In general
(B) Related personFor 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
(3) Preproductive period
(A) In generalFor 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
(4) Farming businessFor purposes of this section—
(A) In general
(B) Certain trades and businesses includedThe 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
(f) Special rules for allocation of interest to property produced by the taxpayer
(1) Interest capitalized only in certain casesSubsection (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 generalIn 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
(C) Special rule for flow-through entities
(3) Interest relating to property used to produce property
(4) Exemption for aging process of beer, wine, and distilled spiritsFor purposes of this subsection, the production period shall not include the aging period for—
(A) beer (as defined in section 5052(a)),
(B) wine (as described in section 5041(a)), or
(C) distilled spirits (as defined in section 5002(a)(8)), except such spirits that are unfit for use for beverage purposes.
(5) DefinitionsFor purposes of this subsection—
(A) Long useful lifeProperty 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 periodThe 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) except as provided in paragraph (4), 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
(g) ProductionFor purposes of this section—
(1) In general
(2) Treatment of property produced under contract for the taxpayer
(h) Exemption for free lance authors, photographers, and artists
(1) In general
(2) Qualified creative expenseFor 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) DefinitionsFor purposes of this subsection—
(A) Writer
(B) Photographer
(C) Artist
(i) In general
(ii) CriteriaIn 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 generalIf—(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
(i) Exemption for certain small businesses
(1) In general
(2) Application of gross receipts test to individuals, etc.
(3) Coordination with section 481
(j) RegulationsThe 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, § 803(a), Oct. 22, 1986, 100 Stat. 2350; amended Pub. L. 100–647, title I, § 1008(b)(1)–(4), title VI, § 6026(a)–(c), Nov. 10, 1988, 102 Stat. 3437, 3438, 3691–3693; Pub. L. 101–239, title VII, § 7816(d)(1), Dec. 19, 1989, 103 Stat. 2420; Pub. L. 106–170, title V, § 532(c)(2)(B), Dec. 17, 1999, 113 Stat. 1930; Pub. L. 108–357, title III, § 338(b)(2), Oct. 22, 2004, 118 Stat. 1481; Pub. L. 109–58, title XIII, § 1329(b), Aug. 8, 2005, 119 Stat. 1020; Pub. L. 114–113, div. Q, title I, § 143(b)(6)(H), Dec. 18, 2015, 129 Stat. 3064; Pub. L. 115–97, title I, §§ 13102(b), 13207(a), 13801(a), (b), Dec. 22, 2017, 131 Stat. 2103, 2113, 2169, 2170; Pub. L. 116–94, div. Q, title I, § 144(a)(1), Dec. 20, 2019, 133 Stat. 3234; Pub. L. 116–260, div. EE, title I, § 106(a)(1), Dec. 27, 2020, 134 Stat. 3041.)

CITE AS: 26 USC 263A

§ 264. Certain amounts paid in connection with insurance contracts
(a) General ruleNo deduction shall be allowed for—
(1) Premiums on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract.
(2) Any amount paid or accrued on indebtedness incurred or continued to purchase or carry a single premium life insurance, endowment, or annuity contract.
(3) Except as provided in subsection (d), any amount paid or accrued on indebtedness incurred or continued to purchase or carry a life insurance, endowment, or annuity contract (other than a single premium contract or a contract treated as a single premium contract) pursuant to a plan of purchase which contemplates the systematic direct or indirect borrowing of part or all of the increases in the cash value of such contract (either from the insurer or otherwise).
(4) Except as provided in subsection (e), any interest paid or accrued on any indebtedness with respect to 1 or more life insurance policies owned by the taxpayer covering the life of any individual, or any endowment or annuity contracts owned by the taxpayer covering any individual.
Paragraph (2) shall apply in respect of annuity contracts only as to contracts purchased after March 1, 1954. Paragraph (3) shall apply only in respect of contracts purchased after August 6, 1963. Paragraph (4) shall apply with respect to contracts purchased after June 20, 1986.
(b) Exceptions to subsection (a)(1)Subsection (a)(1) shall not apply to—
(1) any annuity contract described in section 72(s)(5), and
(2) any annuity contract to which section 72(u) applies.
(c) Contracts treated as single premium contractsFor purposes of subsection (a)(2), a contract shall be treated as a single premium contract—
(1) if substantially all the premiums on the contract are paid within a period of 4 years from the date on which the contract is purchased, or
(2) if an amount is deposited after March 1, 1954, with the insurer for payment of a substantial number of future premiums on the contract.
(d) ExceptionsSubsection (a)(3) shall not apply to any amount paid or accrued by a person during a taxable year on indebtedness incurred or continued as part of a plan referred to in subsection (a)(3)—
(1) if no part of 4 of the annual premiums due during the 7-year period (beginning with the date the first premium on the contract to which such plan relates was paid) is paid under such plan by means of indebtedness,
(2) if the total of the amounts paid or accrued by such person during such taxable year for which (without regard to this paragraph) no deduction would be allowable by reason of subsection (a)(3) does not exceed $100,
(3) if such amount was paid or accrued on indebtedness incurred because of an unforeseen substantial loss of income or unforeseen substantial increase in his financial obligations, or
(4) if such indebtedness was incurred in connection with his trade or business.
For purposes of applying paragraph (1), if there is a substantial increase in the premiums on a contract, a new 7-year period described in such paragraph with respect to such contract shall commence on the date the first such increased premium is paid.
(e) Special rules for application of subsection (a)(4)
(1) Exception for key persons
(2) Interest rate cap on key persons and pre-1986 contracts
(A) In general
(B) Applicable rate of interestFor purposes of subparagraph (A)—
(i) In general
(ii) Pre-1986 contractsIn the case of indebtedness on a contract purchased on or before June 20, 1986—(I) which is a contract providing a fixed rate of interest, the applicable rate of interest for any month shall be the Moody’s rate described in clause (i) for the month in which the contract was purchased, or(II) which is a contract providing a variable rate of interest, the applicable rate of interest for any month in an applicable period shall be such Moody’s rate for the third month preceding the first month in such period.
 For purposes of subclause (II), the term “applicable period” means the 12-month period beginning on the date the policy is issued (and each successive 12-month period thereafter) unless the taxpayer elects a number of months (not greater than 12) other than such 12-month period to be its applicable period. Such an election shall be made not later than the 90th day after the date of the enactment of this sentence and, if made, shall apply to the taxpayer’s first taxable year ending on or after October 13, 1995, and all subsequent taxable years unless revoked with the consent of the Secretary.
(3) Key personFor purposes of paragraph (1), the term “key person” means an officer or 20-percent owner, except that the number of individuals who may be treated as key persons with respect to any taxpayer shall not exceed the greater of—
(A) 5 individuals, or
(B) the lesser of 5 percent of the total officers and employees of the taxpayer or 20 individuals.
(4) 20-percent ownerFor purposes of this subsection, the term “20-percent owner” means—
(A) if the taxpayer is a corporation, any person who owns directly 20 percent or more of the outstanding stock of the corporation or stock possessing 20 percent or more of the total combined voting power of all stock of the corporation, or
(B) if the taxpayer is not a corporation, any person who owns 20 percent or more of the capital or profits interest in the taxpayer.
(5) Aggregation rules
(A) In generalFor purposes of paragraph (4)(A) and applying the $50,000 limitation in paragraph (1)—
(i) all members of a controlled group shall be treated as one taxpayer, and
(ii) such limitation shall be allocated among the members of such group in such manner as the Secretary may prescribe.
(B) Controlled group
(f) Pro rata allocation of interest expense to policy cash values
(1) In general
(2) AllocationFor purposes of paragraph (1), the portion of the taxpayer’s interest expense which is allocable to unborrowed policy cash values is an amount which bears the same ratio to such interest expense as—
(A) the taxpayer’s average unborrowed policy cash values of life insurance policies, and annuity and endowment contracts, issued after June 8, 1997, bears to
(B) the sum of—
(i) in the case of assets of the taxpayer which are life insurance policies or annuity or endowment contracts, the average unborrowed policy cash values of such policies and contracts, and
(ii) in the case of assets of the taxpayer not described in clause (i), the average adjusted bases (within the meaning of section 1016) of such assets.
(3) Unborrowed policy cash valueFor purposes of this subsection, the term “unborrowed policy cash value” means, with respect to any life insurance policy or annuity or endowment contract, the excess of—
(A) the cash surrender value of such policy or contract determined without regard to any surrender charge, over
(B) the amount of any loan with respect to such policy or contract.
If the amount described in subparagraph (A) with respect to any policy or contract does not reasonably approximate its actual value, the amount taken into account under subparagraph (A) shall be the greater of the amount of the insurance company liability or the insurance company reserve with respect to such policy or contract (as determined for purposes of the annual statement approved by the National Association of Insurance Commissioners) or shall be such other amount as is determined by the Secretary.
(4) Exception for certain policies and contracts
(A) Policies and contracts covering 20-percent owners, officers, directors, and employeesParagraph (1) shall not apply to any policy or contract owned by an entity engaged in a trade or business if such policy or contract covers only 1 individual and if such individual is (at the time first covered by the policy or contract)—
(i) a 20-percent owner of such entity, or
(ii) an individual (not described in clause (i)) who is an officer, director, or employee of such trade or business.
A policy or contract covering a 20-percent owner of such entity shall not be treated as failing to meet the requirements of the preceding sentence by reason of covering the joint lives of such owner and such owner’s spouse.
(B) Contracts subject to current income inclusion
(C) Coordination with paragraph (2)
(D) 20-percent owner
(E) Master contracts
(5) Exception for policies and contracts held by natural persons; treatment of partnerships and S corporations
(A) Policies and contracts held by natural persons
(i) In general
(ii) Exception where business is beneficiary
(iii) Special rules(I) Certain trades or businesses not taken into account(II) Limitation on unborrowed cash value
(iv) Reporting
(B) Treatment of partnerships and S corporations
(6) Special rules
(A) Coordination with subsection (a) and section 265If interest on any indebtedness is disallowed under subsection (a) or section 265—
(i) such disallowed interest shall not be taken into account for purposes of applying this subsection, and
(ii) the amount otherwise taken into account under paragraph (2)(B) shall be reduced (but not below zero) by the amount of such indebtedness.
(B) Coordination with section 263A
(7) Interest expense
(8) Aggregation rules
(A) In general
(B) Treatment of insurance companies
(Aug. 16, 1954, ch. 736, 68A Stat. 77; Pub. L. 88–272, title II, § 215(a), (b), Feb. 26, 1964, 78 Stat. 55; Pub. L. 99–514, title X, § 1003(a), (b), Oct. 22, 1986, 100 Stat. 2388; Pub. L. 104–191, title V, § 501(a), (b), Aug. 21, 1996, 110 Stat. 2090; Pub. L. 105–34, title X, § 1084(a), (b)(1), (c), title XVI, § 1602(f)(1)–(3), Aug. 5, 1997, 111 Stat. 951, 952, 1094, 1095; Pub. L. 105–206, title VI, § 6010(o)(1)–(3)(A), (4)(A), (5), July 22, 1998, 112 Stat. 816; Pub. L. 105–277, div. J, title IV, § 4003(i), Oct. 21, 1998, 112 Stat. 2681–910.)

CITE AS: 26 USC 264

§ 265. Expenses and interest relating to tax-exempt income
(a) General rule
No deduction shall be allowed for—
(1) Expenses
(2) Interest
(3) Certain regulated investment companies
(4) Interest related to exempt-interest dividends
(5) Special rules for application of paragraph (2) in the case of short sales
For purposes of paragraph (2)—
(A) In general
The term “interest” includes any amount paid or incurred—
(i) by any person making a short sale in connection with personal property used in such short sale, or
(ii) by any other person for the use of any collateral with respect to such short sale.
(B) Exception where no return on cash collateral
If—
(i) the taxpayer provides cash as collateral for any short sale, and
(ii) the taxpayer receives no material earnings on such cash during the period of the sale,
subparagraph (A)(i) shall not apply to such short sale.
(6) Section not to apply with respect to parsonage and military housing allowances
No deduction shall be denied under this section for interest on a mortgage on, or real property taxes on, the home of the taxpayer by reason of the receipt of an amount as—
(A) a military housing allowance, or
(B) a parsonage allowance excludable from gross income under section 107.
(b) Pro rata allocation of interest expense of financial institutions to tax-exempt interest
(1) In general
(2) Allocation
For purposes of paragraph (1), the portion of the taxpayer’s interest expense which is allocable to tax-exempt interest is an amount which bears the same ratio to such interest expense as—
(A) the taxpayer’s average adjusted bases (within the meaning of section 1016) of tax-exempt obligations acquired after August 7, 1986, bears to
(B) such average adjusted bases for all assets of the taxpayer.
(3) Exception for certain tax-exempt obligations
(A) In general
(B) Qualified tax-exempt obligation
(i) In general
For purposes of subparagraph (A), the term “qualified tax-exempt obligation” means a tax-exempt obligation—
(I) which is issued after August 7, 1986, by a qualified small issuer,(II) which is not a private activity bond (as defined in section 141), and(III) which is designated by the issuer for purposes of this paragraph.
(ii) Certain bonds not treated as private activity bonds
For purposes of clause (i)(II), there shall not be treated as a private activity bond—
(I) any qualified 501(c)(3) bond (as defined in section 145), or(II) any obligation issued to refund (or which is part of a series of obligations issued to refund) an obligation issued before August 8, 1986, which was not an industrial development bond (as defined in section 103(b)(2) as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) or a private loan bond (as defined in section 103(o)(2)(A), as so in effect, but without regard to any exemption from such definition other than section 103(o)(2)(A)).
(C) Qualified small issuer
(i) In general
(ii) Obligations not taken into account in determining status as qualified small issuer
For purposes of clause (i), an obligation is described in this clause if such obligation is—
(I) a private activity bond (other than a qualified 501(c)(3) bond, as defined in section 145),(II) an obligation to which section 141(a) does not apply by reason of section 1312, 1313, 1316(g), or 1317 of the Tax Reform Act of 1986 and which would (if issued on August 15, 1986) have been an industrial development bond (as defined in section 103(b)(2) as in effect on the day before the date of the enactment of such Act) or a private loan bond (as defined in section 103(o)(2)(A), as so in effect, but without regard to any exception from such definition other than section 103(o)(2)(A)), or(III) an obligation issued to refund (other than to advance refund within the meaning of section 149(d)(5)) 1
1 See References in Text note below.
any obligation to the extent the amount of the refunding obligation does not exceed the outstanding amount of the refunded obligation.
(iii) Allocation of amount of issue in certain cases
In the case of an issue under which more than 1 governmental entity receives benefits, if—
(I) all governmental entities receiving benefits from such issue irrevocably agree (before the date of issuance of the issue) on an allocation of the amount of such issue for purposes of this subparagraph, and(II) such allocation bears a reasonable relationship to the respective benefits received by such entities,
 then the amount of such issue so allocated to an entity (and only such amount with respect to such issue) shall be taken into account under clause (i) with respect to such entity.
(D) Limitation on amount of obligations which may be designated
(i) In general
(ii) Certain refundings of designated obligations deemed designated
Except as provided in clause (iii), in the case of a refunding (or series of refundings) of a qualified tax-exempt obligation, the refunding obligation shall be treated as a qualified tax-exempt obligation (and shall not be taken into account under clause (i)) if—
(I) the refunding obligation was not taken into account under subparagraph (C) by reason of clause (ii)(III) thereof,(II) the average maturity date of the refunding obligations issued as part of the issue of which such refunding obligation is a part is not later than the average maturity date of the obligations to be refunded by such issue, and(III) the refunding obligation has a maturity date which is not later than the date which is 30 years after the date the original qualified tax-exempt obligation was issued.
 Subclause (II) shall not apply if the average maturity of the issue of which the original qualified tax-exempt obligation was a part (and of the issue of which the obligations to be refunded are a part) is 3 years or less. For purposes of this clause, average maturity shall be determined in accordance with section 147(b)(2)(A).
(iii) Certain obligations may not be designated or deemed designated
No obligation issued as part of an issue may be designated under this paragraph (or may be treated as designated under clause (ii)) if—
(I) any obligation issued as part of such issue is issued to refund another obligation, and(II) the aggregate face amount of such issue exceeds $10,000,000.
(E) Aggregation of issuers
For purposes of subparagraphs (C) and (D)—
(i) an issuer and all entities which issue obligations on behalf of such issuer shall be treated as 1 issuer,
(ii) all obligations issued by a subordinate entity shall, for purposes of applying subparagraphs (C) and (D) to each other entity to which such entity is subordinate, be treated as issued by such other entity, and
(iii) an entity formed (or, to the extent provided by the Secretary, availed of) to avoid the purposes of subparagraph (C) or (D) and all entities benefiting thereby shall be treated as 1 issuer.
(F) Treatment of composite issues
In the case of an obligation which is issued as part of a direct or indirect composite issue, such obligation shall not be treated as a qualified tax-exempt obligation unless—
(i) the requirements of this paragraph are met with respect to such composite issue (determined by treating such composite issue as a single issue), and
(ii) the requirements of this paragraph are met with respect to each separate lot of obligations which are part of the issue (determined by treating each such separate lot as a separate issue).
(G) Special rules for obligations issued during 2009 and 2010
(i) Increase in limitation
(ii) Qualified 501(c)(3) bonds treated as issued by exempt organization
(iii) Special rule for qualified financings
In the case of a qualified financing issue issued during 2009 or 2010—
(I) subparagraph (F) shall not apply, and(II) any obligation issued as a part of such issue shall be treated as a qualified tax-exempt obligation if the requirements of this paragraph are met with respect to each qualified portion of the issue (determined by treating each qualified portion as a separate issue which is issued by the qualified borrower with respect to which such portion relates).
(iv) Qualified financing issue
(v) Qualified portion
(vi) Qualified borrower
(4) Definitions
For purposes of this subsection—
(A) Interest expense
(B) Tax-exempt obligation
(5) Financial institution
For purposes of this subsection, the term “financial institution” means any person who—
(A) accepts deposits from the public in the ordinary course of such person’s trade or business, and is subject to Federal or State supervision as a financial institution, or
(B) is a corporation described in section 585(a)(2).
(6) Special rules
(A) Coordination with subsection (a)
If interest on any indebtedness is disallowed under subsection (a) with respect to any tax-exempt obligation—
(i) such disallowed interest shall not be taken into account for purposes of applying this subsection, and
(ii) for purposes of applying paragraph (2), the adjusted basis of such tax-exempt obligation shall be reduced (but not below zero) by the amount of such indebtedness.
(B) Coordination with section 263A
(7) De minimis exception for bonds issued during 2009 or 2010
(A) In general
(B) Limitation
(C) Refundings
(Aug. 16, 1954, ch. 736, 68A Stat. 78; Pub. L. 88–272, title II, § 216(a), Feb. 26, 1964, 78 Stat. 56; Pub. L. 94–455, title XIX, §§ 1901(a)(37), 1906(b)(13)(A), title XXI, § 2137(e), Oct. 4, 1976, 90 Stat. 1770, 1834, 1931; Pub. L. 96–223, title IV, § 404(b)(2), Apr. 2, 1980, 94 Stat. 306; Pub. L. 97–34, title III, §§ 301(b)(2), 302(c)(2), (d)(1), Aug. 13, 1981, 95 Stat. 270, 272, 274; Pub. L. 98–369, div. A, title I, §§ 16(a), 56(c), July 18, 1984, 98 Stat. 505, 574; Pub. L. 99–514, title I, § 144, title IX, § 902(a), (b), (d), Oct. 22, 1986, 100 Stat. 2121, 2380–2382; Pub. L. 100–647, title I, § 1009(b)(3)(A), Nov. 10, 1988, 102 Stat. 3446; Pub. L. 101–508, title XI, § 11801(c)(4), Nov. 5, 1990, 104 Stat. 1388–523; Pub. L. 105–34, title X, § 1084(c), Aug. 5, 1997, 111 Stat. 955; Pub. L. 111–5, div. B, title I, §§ 1501(a), 1502(a), Feb. 17, 2009, 123 Stat. 353.)

CITE AS: 26 USC 265

§ 266. Carrying charges

No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable.

(Aug. 16, 1954, ch. 736, 68A Stat. 78; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.)

CITE AS: 26 USC 266

§ 267. Losses, expenses, and interest with respect to transactions between related taxpayers
(a) In general
(1) Deduction for losses disallowed
(2) Matching of deduction and payee income item in the case of expenses and interestIf—
(A) by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not (unless paid) includible in the gross income of such person, and
(B) at the close of the taxable year of the taxpayer for which (but for this paragraph) the amount would be deductible under this chapter, both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of subsection (b),
then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made (or, if later, as of the day on which it would be so allowable but for this paragraph). For purposes of this paragraph, in the case of a personal service corporation (within the meaning of section 441(i)(2)), such corporation and any employee-owner (within the meaning of section 269A(b)(2), as modified by section 441(i)(2)) shall be treated as persons specified in subsection (b).
(3) Payments to foreign persons
(A) In general
(B) Special rule for certain foreign entities
(i) In general
(ii) Secretarial authority
(b) RelationshipsThe persons referred to in subsection (a) are:
(1) Members of a family, as defined in subsection (c)(4);
(2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
(3) Two corporations which are members of the same controlled group (as defined in subsection (f));
(4) A grantor and a fiduciary of any trust;
(5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;
(6) A fiduciary of a trust and a beneficiary of such trust;
(7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;
(8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust;
(9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;
(10) A corporation and a partnership if the same persons own—
(A) more than 50 percent in value of the outstanding stock of the corporation, and
(B) more than 50 percent of the capital interest, or the profits interest, in the partnership;
(11) An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation;
(12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or
(13) Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.
(c) Constructive ownership of stockFor purposes of determining, in applying subsection (b), the ownership of stock—
(1) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;
(2) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;
(3) An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner;
(4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and
(5) Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.
(d) Amount of gain where loss previously disallowed
(1) In generalIf—
(A) in the case of a sale or exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection (a)(1), and
(B) the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in the taxpayer’s hands is determined directly or indirectly by reference to such property) at a gain,
then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise disposed of by the taxpayer.
(2) Exception for wash sales
(3) Exception for transfers from tax indifferent parties
(e) Special rules for pass-thru entities
(1) In generalIn the case of any amount paid or incurred by, to, or on behalf of, a pass-thru entity, for purposes of applying subsection (a)(2)—
(A) such entity,
(B) in the case of—
(i) a partnership, any person who owns (directly or indirectly) any capital interest or profits interest of such partnership, or
(ii) an S corporation, any person who owns (directly or indirectly) any of the stock of such corporation,
(C) any person who owns (directly or indirectly) any capital interest or profits interest of a partnership in which such entity owns (directly or indirectly) any capital interest or profits interest, and
(D) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to a person described in subparagraph (B) or (C),
shall be treated as persons specified in a paragraph of subsection (b). Subparagraph (C) shall apply to a transaction only if such transaction is related either to the operations of the partnership described in such subparagraph or to an interest in such partnership.
(2) Pass-thru entityFor purposes of this section, the term “pass-thru entity” means—
(A) a partnership, and
(B) an S corporation.
(3) Constructive ownership in the case of partnershipsFor purposes of determining ownership of a capital interest or profits interest of a partnership, the principles of subsection (c) shall apply, except that—
(A) paragraph (3) of subsection (c) shall not apply, and
(B) interests owned (directly or indirectly) by or for a C corporation shall be considered as owned by or for any shareholder only if such shareholder owns (directly or indirectly) 5 percent or more in value of the stock of such corporation.
(4) Subsection (a)(2) not to apply to certain guaranteed payments of partnerships
(5) Exception for certain expenses and interest of partnerships owning low-income housing
(A) In generalThis subsection shall not apply with respect to qualified expenses and interest paid or incurred by a partnership owning low-income housing to—
(i) any qualified 5-percent or less partner of such partnership, or
(ii) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to any qualified 5-percent or less partner of such partnership.
(B) Qualified 5-percent or less partnerFor purposes of this paragraph, the term “qualified 5-percent or less partner” means any partner who has (directly or indirectly) an interest of 5 percent or less in the aggregate capital and profits interests of the partnership but only if—
(i) such partner owned the low-income housing at all times during the 2-year period ending on the date such housing was transferred to the partnership, or
(ii) such partnership acquired the low-income housing pursuant to a purchase, assignment, or other transfer from the Department of Housing and Urban Development or any State or local housing authority.
For purposes of the preceding sentence, a partner shall be treated as holding any interest in the partnership which is held (directly or indirectly) by any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to such partner.
(C) Qualified expenses and interestFor purpose of this paragraph, the term “qualified expenses and interest” means any expense or interest incurred by the partnership with respect to low-income housing held by the partnership but—
(i) only if the amount of such expense or interest (as the case may be) is unconditionally required to be paid by the partnership not later than 10 years after the date such amount was incurred, and
(ii) in the case of such interest, only if such interest is incurred at an annual rate not in excess of 12 percent.
(D) Low-income housingFor purposes of this paragraph, the term “low-income housing” means—
(i) any interest in property described in clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B), and
(ii) any interest in a partnership owning such property.
(6) Cross reference
(f) Controlled group defined; special rules applicable to controlled groups
(1) Controlled group definedFor purposes of this section, the term “controlled group” has the meaning given to such term by section 1563(a), except that—
(A) “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a), and
(B) the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.
(2) Deferral (rather than denial) of loss from sale or exchange between membersIn the case of any loss from the sale or exchange of property which is between members of the same controlled group and to which subsection (a)(1) applies (determined without regard to this paragraph but with regard to paragraph (3))—
(A) subsections (a)(1) and (d) shall not apply to such loss, but
(B) such loss shall be deferred until the property is transferred outside such controlled group and there would be recognition of loss under consolidated return principles or until such other time as may be prescribed in regulations.
(3) Loss deferral rules not to apply in certain cases
(A) Transfer to DISC
(B) Certain sales of inventoryExcept to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to the sale or exchange of property between members of the same controlled group (or persons described in subsection (b)(10)) if—
(i) such property in the hands of the transferor is property described in section 1221(a)(1),
(ii) such sale or exchange is in the ordinary course of the transferor’s trade or business,
(iii) such property in the hands of the transferee is property described in section 1221(a)(1), and
(iv) the transferee or the transferor is a foreign corporation.
(C) Certain foreign currency losses
(D) Redemptions by fund-of-funds regulated investment companiesExcept to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to any distribution in redemption of stock of a regulated investment company if—
(i) such company issues only stock which is redeemable upon the demand of the stockholder, and
(ii) such redemption is upon the demand of another regulated investment company.
(4) Determination of relationship resulting in disallowance of loss, for purposes of other provisions
(g) Coordination with section 1041
(Aug. 16, 1954, ch. 736, 68A Stat. 78; Pub. L. 95–628, § 2(a), Nov. 10, 1978, 92 Stat. 3627; Pub. L. 97–354, § 3(h), Oct. 19, 1982, 96 Stat. 1689; Pub. L. 98–369, div. A, title I, § 174(a)–(b)(4), title VII, § 721(s), July 18, 1984, 98 Stat. 704–707, 970; Pub. L. 99–514, title VIII, §§ 803(b)(5), 806(c)(2), title XVIII, §§ 1812(c)(1), (2), (3)(C), (4)(A), 1842(a), Oct. 22, 1986, 100 Stat. 2356, 2364, 2834, 2835, 2852; Pub. L. 100–647, title I, §§ 1006(e)(9), 1008(e)(6), Nov. 10, 1988, 102 Stat. 3401, 3441; Pub. L. 105–34, title XIII, § 1308(a), title XVI, § 1604(e)(1), Aug. 5, 1997, 111 Stat. 1041, 1098; Pub. L. 106–170, title V, § 532(c)(2)(C), Dec. 17, 1999, 113 Stat. 1930; Pub. L. 108–357, title VIII, § 841(b), Oct. 22, 2004, 118 Stat. 1598; Pub. L. 111–325, title III, § 306(b), Dec. 22, 2010, 124 Stat. 3549; Pub. L. 113–295, div. A, title II, § 221(a)(44), Dec. 19, 2014, 128 Stat. 4044; Pub. L. 114–113, div. Q, title III, § 345(a), Dec. 18, 2015, 129 Stat. 3115.)

CITE AS: 26 USC 267

§ 267A. Certain related party amounts paid or accrued in hybrid transactions or with hybrid entities
(a) In general
(b) Disqualified related party amountFor purposes of this section—
(1) Disqualified related party amountThe term “disqualified related party amount” means any interest or royalty paid or accrued to a related party to the extent that—
(A) such amount is not included in the income of such related party under the tax law of the country of which such related party is a resident for tax purposes or is subject to tax, or
(B) such related party is allowed a deduction with respect to such amount under the tax law of such country.
Such term shall not include any payment to the extent such payment is included in the gross income of a United States shareholder under section 951(a).
(2) Related party
(c) Hybrid transaction
(d) Hybrid entityFor purposes of this section, the term “hybrid entity” means any entity which is either—
(1) treated as fiscally transparent for purposes of this chapter but not so treated for purposes of the tax law of the foreign country of which the entity is resident for tax purposes or is subject to tax, or
(2) treated as fiscally transparent for purposes of such tax law but not so treated for purposes of this chapter.
(e) RegulationsThe Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance providing for—
(1) rules for treating certain conduit arrangements which involve a hybrid transaction or a hybrid entity as subject to subsection (a),
(2) rules for the application of this section to branches or domestic entities,
(3) rules for treating certain structured transactions as subject to subsection (a),
(4) rules for treating a tax preference as an exclusion from income for purposes of applying subsection (b)(1) if such tax preference has the effect of reducing the generally applicable statutory rate by 25 percent or more,
(5) rules for treating the entire amount of interest or royalty paid or accrued to a related party as a disqualified related party amount if such amount is subject to a participation exemption system or other system which provides for the exclusion or deduction of a substantial portion of such amount,
(6) rules for determining the tax residence of a foreign entity if the entity is otherwise considered a resident of more than one country or of no country,
(7) exceptions from subsection (a) with respect to—
(A) cases in which the disqualified related party amount is taxed under the laws of a foreign country other than the country of which the related party is a resident for tax purposes, and
(B) other cases which the Secretary determines do not present a risk of eroding the Federal tax base,1
1 So in original. Probably should be followed by “and”.
(8) requirements for record keeping and information reporting in addition to any requirements imposed by section 6038A.
(Added Pub. L. 115–97, title I, § 14222(a), Dec. 22, 2017, 131 Stat. 2219.)

CITE AS: 26 USC 267A

§ 268. Sale of land with unharvested crop

Where an unharvested crop sold by the taxpayer is considered under the provisions of section 1231 as “property used in the trade or business”, in computing taxable income no deduction (whether or not for the taxable year of the sale and whether for expenses, depreciation, or otherwise) attributable to the production of such crop shall be allowed.

(Aug. 16, 1954, ch. 736, 68A Stat. 80.)

CITE AS: 26 USC 268

§ 269. Acquisitions made to evade or avoid income tax
(a) In general
If—
(1) any person or persons acquire, directly or indirectly, control of a corporation, or
(2) any corporation acquires, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation,
and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then the Secretary may disallow such deduction, credit, or other allowance. For purposes of paragraphs (1) and (2), control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation.
(b) Certain liquidations after qualified stock purchases
(1) In general
If—
(A) there is a qualified stock purchase by a corporation of another corporation,
(B) an election is not made under section 338 with respect to such purchase,
(C) the acquired corporation is liquidated pursuant to a plan of liquidation adopted not more than 2 years after the acquisition date, and
(D) the principal purpose for such liquidation is the evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which the acquiring corporation would not otherwise enjoy,
then the Secretary may disallow such deduction, credit, or other allowance.
(2) Meaning of terms
(c) Power of Secretary to allow deduction, etc., in part
In any case to which subsection (a) or (b) applies the Secretary is authorized—
(1) to allow as a deduction, credit, or allowance any part of any amount disallowed by such subsection, if he determines that such allowance will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or
(2) to distribute, apportion, or allocate gross income, and distribute, apportion, or allocate the deductions, credits, or allowances the benefit of which was sought to be secured, between or among the corporations, or properties, or parts thereof, involved, and to allow such deductions, credits, or allowances so distributed, apportioned, or allocated, but to give effect to such allowance only to such extent as he determines will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or
(3) to exercise his powers in part under paragraph (1) and in part under paragraph (2).
(Aug. 16, 1954, ch. 736, 68A Stat. 80; Pub. L. 88–272, title II, § 235(c)(2), Feb. 26, 1964, 78 Stat. 126; Pub. L. 94–455, title XIX, §§ 1901(a)(38), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1771, 1834; Pub. L. 98–369, div. A, title VII, § 712(k)(8)(A), (B), July 18, 1984, 98 Stat. 952; Pub. L. 113–295, div. A, title II, § 221(a)(45), Dec. 19, 2014, 128 Stat. 4045.)

CITE AS: 26 USC 269

§ 269A. Personal service corporations formed or availed of to avoid or evade income tax
(a) General rule
If—
(1) substantially all of the services of a personal service corporation are performed for (or on behalf of) 1 other corporation, partnership, or other entity, and
(2) the principal purpose for forming, or availing of, such personal service corporation is the avoidance or evasion of Federal income tax by reducing the income of, or securing the benefit of any expense, deduction, credit, exclusion, or other allowance for, any employee-owner which would not otherwise be available,
then the Secretary may allocate all income, deductions, credits, exclusions, and other allowances between such personal service corporation and its employee-owners, if such allocation is necessary to prevent avoidance or evasion of Federal income tax or clearly to reflect the income of the personal service corporation or any of its employee-owners.
(b) Definitions
For purposes of this section—
(1) Personal service corporation
(2) Employee-owner
(3) Related persons
(Added Pub. L. 97–248, title II, § 250(a), Sept. 3, 1982, 96 Stat. 528; amended Pub. L. 99–514, title XIII, § 1301(j)(4), Oct. 22, 1986, 100 Stat. 2657.)

CITE AS: 26 USC 269A

§ 269B. Stapled entities
(a) General rule
Except as otherwise provided by regulations, for purposes of this title—
(1) if a domestic corporation and a foreign corporation are stapled entities, the foreign corporation shall be treated as a domestic corporation.
(2) in applying section 1563, stock in a second corporation which constitutes a stapled interest with respect to stock of a first corporation shall be treated as owned by such first corporation, and
(3) in applying subchapter M for purposes of determining whether any stapled entity is a regulated investment company or a real estate investment trust, all entities which are stapled entities with respect to each other shall be treated as 1 entity.
(b) Secretary to prescribe regulations
(c) Definitions
For purposes of this section—
(1) Entity
(2) Stapled entities
(3) Stapled interests
(d) Special rule for treaties
(e) Subsection (a)(1) not to apply in certain cases
(1) In general
(2) Foreign owned
For purposes of paragraph (1), a corporation is foreign owned if less than 50 percent of—
(A) the total combined voting power of all classes of stock of such corporation entitled to vote, and
(B) the total value of the stock of the corporation,
is held directly (or indirectly through applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of section 318(a)) by United States persons (as defined in section 7701(a)(30)).
(Added Pub. L. 98–369, div. A, title I, § 136(a), July 18, 1984, 98 Stat. 669; amended Pub. L. 99–514, title XVIII, § 1810(j), Oct. 22, 1986, 100 Stat. 2829.)

CITE AS: 26 USC 269B

[§ 270. Repealed. Pub. L. 91–172, title II, § 213(b), Dec. 30, 1969, 83 Stat. 572]

CITE AS: 26 USC 270

§ 271. Debts owed by political parties, etc.
(a) General rule
(b) Definitions
(1) Political party
For purposes of subsection (a), the term “political party” means—
(A) a political party;
(B) a national, State, or local committee of a political party; or
(C) a committee, association, or organization which accepts contributions or makes expenditures for the purpose of influencing or attempting to influence the election of presidential or vice-presidential electors or of any individual whose name is presented for election to any Federal, State, or local elective public office, whether or not such individual is elected.
(2) Contributions
(3) Expenditures
(c) Exception
In the case of a taxpayer who uses an accrual method of accounting, subsection (a) shall not apply to a debt which accrued as a receivable on a bona fide sale of goods or services in the ordinary course of the taxpayer’s trade or business if—
(1) for the taxable year in which such receivable accrued, more than 30 percent of all receivables which accrued in the ordinary course of the trades and businesses of the taxpayer were due from political parties, and
(2) the taxpayer made substantial continuing efforts to collect on the debt.
(Aug. 16, 1954, ch. 736, 68A Stat. 82; Pub. L. 94–455, title XXI, § 2104(a), Oct. 4, 1976, 90 Stat. 1901.)

CITE AS: 26 USC 271

§ 272. Disposal of coal or domestic iron ore

Where the disposal of coal or iron ore is covered by section 631, no deduction shall be allowed for expenditures attributable to the making and administering of the contract under which such disposition occurs and to the preservation of the economic interest retained under such contract, except that if in any taxable year such expenditures plus the adjusted depletion basis of the coal or iron ore disposed of in such taxable year exceed the amount realized under such contract, such excess, to the extent not availed of as a reduction of gain under section 1231, shall be a loss deductible under section 165(a). This section shall not apply to any taxable year during which there is no income under the contract.

(Aug. 16, 1954, ch. 736, 68A Stat. 82; Pub. L. 88–272, title II, § 227(a)(3), (b)(3), Feb. 26, 1964, 78 Stat. 98.)

CITE AS: 26 USC 272

§ 273. Holders of life or terminable interest

Amounts paid under the laws of a State, the District of Columbia, a possession of the United States, or a foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time.

(Aug. 16, 1954, ch. 736, 68A Stat. 83; Pub. L. 94–455, title XIX, § 1901(c)(2), Oct. 4, 1976, 90 Stat. 1803.)

CITE AS: 26 USC 273

§ 274. Disallowance of certain entertainment, etc., expenses
(a) Entertainment, amusement, recreation, or qualified transportation fringes
(1) In generalNo deduction otherwise allowable under this chapter shall be allowed for any item—
(A) Activity
(B) Facility
(2) Special rulesFor purposes of applying paragraph (1)—
(A) Dues or fees to any social, athletic, or sporting club or organization shall be treated as items with respect to facilities.
(B) An activity described in section 212 shall be treated as a trade or business.
(3) Denial of deduction for club dues
(4) Qualified transportation fringes
(b) Gifts
(1) LimitationNo deduction shall be allowed under section 162 or section 212 for any expense for gifts made directly or indirectly to any individual to the extent that such expense, when added to prior expenses of the taxpayer for gifts made to such individual during the same taxable year, exceeds $25. For purposes of this section, the term “gift” means any item excludable from gross income of the recipient under section 102 which is not excludable from his gross income under any other provision of this chapter, but such term does not include—
(A) an item having a cost to the taxpayer not in excess of $4.00 on which the name of the taxpayer is clearly and permanently imprinted and which is one of a number of identical items distributed generally by the taxpayer, or
(B) a sign, display rack, or other promotional material to be used on the business premises of the recipient.
(2) Special rules
(A) In the case of a gift by a partnership, the limitation contained in paragraph (1) shall apply to the partnership as well as to each member thereof.
(B) For purposes of paragraph (1), a husband and wife shall be treated as one taxpayer.
(c) Certain foreign travel
(1) In general
(2) ExceptionParagraph (1) shall not apply to the expenses of any travel outside the United States away from home if—
(A) such travel does not exceed one week, or
(B) the portion of the time of travel outside the United States away from home which is not attributable to the pursuit of the taxpayer’s trade or business or an activity described in section 212 is less than 25 percent of the total time on such travel.
(3) Domestic travel excluded
(d) Substantiation requiredNo deduction or credit shall be allowed—
(1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home),
(2) for any expense for gifts, or
(3) with respect to any listed property (as defined in section 280F(d)(4)),
unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (A) the amount of such expense or other item, (B) the time and place of the travel or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of the person receiving the benefit. The Secretary may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations. This subsection shall not apply to any qualified nonpersonal use vehicle (as defined in subsection (i)).
(e) Specific exceptions to application of subsection (a)Subsection (a) shall not apply to—
(1) Food and beverages for employees
(2) Expenses treated as compensation
(A) In general
(B) Specified individuals
(i) In general
(ii) Specified individualFor purposes of clause (i), the term “specified individual” means any individual who—(I) is subject to the requirements of section 16(a) of the Securities Exchange Act of 1934 with respect to the taxpayer or a related party to the taxpayer, or(II) would be subject to such requirements if the taxpayer (or such related party) were an issuer of equity securities referred to in such section.
 For purposes of this clause, a person is a related party with respect to another person if such person bears a relationship to such other person described in section 267(b) or 707(b).
(3) Reimbursed expensesExpenses paid or incurred by the taxpayer, in connection with the performance by him of services for another person (whether or not such other person is his employer), under a reimbursement or other expense allowance arrangement with such other person, but this paragraph shall apply—
(A) where the services are performed for an employer, only if the employer has not treated such expenses in the manner provided in paragraph (2), or
(B) where the services are performed for a person other than an employer, only if the taxpayer accounts (to the extent provided by subsection (d)) to such person.
(4) Recreational, etc., expenses for employees
(5) Employees, stockholder, etc., business meetings
(6) Meetings of business leagues, etc.
(7) Items available to public
(8) Entertainment sold to customers
(9) Expenses includible in income of persons who are not employees
For purposes of this subsection, any item referred to in subsection (a) shall be treated as an expense.
(f) Interest, taxes, casualty losses, etc.
(g) Treatment of entertainment, etc., type facility
(h) Attendance at conventions, etc.
(1) In generalIn the case of any individual who attends a convention, seminar, or similar meeting which is held outside the North American area, no deduction shall be allowed under section 162 for expenses allocable to such meeting unless the taxpayer establishes that the meeting is directly related to the active conduct of his trade or business and that, after taking into account in the manner provided by regulations prescribed by the Secretary—
(A) the purpose of such meeting and the activities taking place at such meeting,
(B) the purposes and activities of the sponsoring organizations or groups,
(C) the residences of the active members of the sponsoring organization and the places at which other meetings of the sponsoring organization or groups have been held or will be held, and
(D) such other relevant factors as the taxpayer may present,
it is as reasonable for the meeting to be held outside the North American area as within the North American area.
(2) Conventions on cruise shipsIn the case of any individual who attends a convention, seminar, or other meeting which is held on any cruise ship, no deduction shall be allowed under section 162 for expenses allocable to such meeting, unless the taxpayer meets the requirements of paragraph (5) and establishes that the meeting is directly related to the active conduct of his trade or business and that—
(A) the cruise ship is a vessel registered in the United States; and
(B) all ports of call of such cruise ship are located in the United States or in possessions of the United States.
With respect to cruises beginning in any calendar year, not more than $2,000 of the expenses attributable to an individual attending one or more meetings may be taken into account under section 162 by reason of the preceding sentence.
(3) DefinitionsFor purposes of this subsection—
(A) North American area
(B) Cruise ship
(4) Subsection to apply to employer as well as to traveler
(A) Except as provided in subparagraph (B), this subsection shall apply to deductions otherwise allowable under section 162 to any person, whether or not such person is the individual attending the convention, seminar, or similar meeting.
(B) This subsection shall not deny a deduction to any person other than the individual attending the convention, seminar, or similar meeting with respect to any amount paid by such person to or on behalf of such individual if includible in the gross income of such individual. The preceding sentence shall not apply if the amount is required to be included in any information return filed by such person under part III of subchapter A of chapter 61 and is not so included.
(5) Reporting requirementsNo deduction shall be allowed under section 162 for expenses allocable to attendance at a convention, seminar, or similar meeting on any cruise ship unless the taxpayer claiming the deduction attaches to the return of tax on which the deduction is claimed—
(A) a written statement signed by the individual attending the meeting which includes—
(i) information with respect to the total days of the trip, excluding the days of transportation to and from the cruise ship port, and the number of hours of each day of the trip which such individual devoted to scheduled business activities,
(ii) a program of the scheduled business activities of the meeting, and
(iii) such other information as may be required in regulations prescribed by the Secretary; and
(B) a written statement signed by an officer of the organization or group sponsoring the meeting which includes—
(i) a schedule of the business activities of each day of the meeting,
(ii) the number of hours which the individual attending the meeting attended such scheduled business activities, and
(iii) such other information as may be required in regulations prescribed by the Secretary.
(6) Treatment of conventions in certain Caribbean countries
(A) In generalFor purposes of this subsection, the term “North American area” includes, with respect to any convention, seminar, or similar meeting, any beneficiary country if (as of the time such meeting begins)—
(i) there is in effect a bilateral or multilateral agreement described in subparagraph (C) between such country and the United States providing for the exchange of information between the United States and such country, and
(ii) there is not in effect a finding by the Secretary that the tax laws of such country discriminate against conventions held in the United States.
(B) Beneficiary country
(C) Authority to conclude exchange of information agreements
(i) In general
(ii) Nondisclosure of qualified confidential information sought for civil tax purposesAn exchange of information agreement need not provide for the exchange of qualified confidential information which is sought only for civil tax purposes if—(I) the Secretary of the Treasury, after making all reasonable efforts to negotiate an agreement which includes the exchange of such information, determines that such an agreement cannot be negotiated but that the agreement which was negotiated will significantly assist in the administration and enforcement of the tax laws of the United States, and(II) the President determines that the agreement as negotiated is in the national security interest of the United States.
(iii) Qualified confidential information defined
(iv) Civil tax purposes
(D) Coordination with other provisions
(E) Determinations published in the Federal RegisterThe following shall be published in the Federal Register—
(i) any determination by the President under subparagraph (C)(ii) (including the reasons for such determination),
(ii) any determination by the Secretary under subparagraph (C)(ii) (including the reasons for such determination), and
(iii) any finding by the Secretary under subparagraph (A)(ii) (and any termination thereof).
(7) Seminars, etc. for section 212 purposes
(i) Qualified nonpersonal use vehicle
(j) Employee achievement awards
(1) General rule
(2) Deduction limitationsThe deduction for the cost of an employee achievement award made by an employer to an employee—
(A) which is not a qualified plan award, when added to the cost to the employer for all other employee achievement awards made to such employee during the taxable year which are not qualified plan awards, shall not exceed $400, and
(B) which is a qualified plan award, when added to the cost to the employer for all other employee achievement awards made to such employee during the taxable year (including employee achievement awards which are not qualified plan awards), shall not exceed $1,600.
(3) DefinitionsFor purposes of this subsection—
(A) Employee achievement award
(i) In generalThe term “employee achievement award” means an item of tangible personal property which is—(I) transferred by an employer to an employee for length of service achievement or safety achievement,(II) awarded as part of a meaningful presentation, and(III) awarded under conditions and circumstances that do not create a significant likelihood of the payment of disguised compensation.
(ii) Tangible personal propertyFor purposes of clause (i), the term “tangible personal property” shall not include—(I) cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or(II) vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.
(B) Qualified plan award
(i) In general
(ii) Limitation
(4) Special rules
(A) Partnerships
(B) Length of service awards
(C) Safety achievement awardsAn item provided by an employer to an employee shall not be treated as having been provided for safety achievement if—
(i) during the taxable year, employee achievement awards (other than awards excludable under section 132(e)(1)) for safety achievement have previously been awarded by the employer to more than 10 percent of the employees of the employer (excluding employees described in clause (ii)), or
(ii) such item is awarded to a manager, administrator, clerical employee, or other professional employee.
(k) Business meals
(1) In generalNo deduction shall be allowed under this chapter for the expense of any food or beverages unless—
(A) such expense is not lavish or extravagant under the circumstances, and
(B) the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages.
(2) ExceptionsParagraph (1) shall not apply to—
(A) any expense described in paragraph (2), (3), (4), (7), (8), or (9) of subsection (e), and
(B) any other expense to the extent provided in regulations.
(l) Transportation and commuting benefits
(1) In general
(2) Exception
(m) Additional limitations on travel expenses
(1) Luxury water transportation
(A) In general
(B) ExceptionsSubparagraph (A) shall not apply to—
(i) any expense allocable to a convention, seminar, or other meeting which is held on any cruise ship, and
(ii) any expense described in paragraph (2), (3), (4), (7), (8), or (9) of subsection (e).
(2) Travel as form of education
(3) Travel expenses of spouse, dependent, or othersNo deduction shall be allowed under this chapter (other than section 217) for travel expenses paid or incurred with respect to a spouse, dependent, or other individual accompanying the taxpayer (or an officer or employee of the taxpayer) on business travel, unless—
(A) the spouse, dependent, or other individual is an employee of the taxpayer,
(B) the travel of the spouse, dependent, or other individual is for a bona fide business purpose, and
(C) such expenses would otherwise be deductible by the spouse, dependent, or other individual.
(n) Only 50 percent of meal expenses allowed as deduction
(1) In general
(2) ExceptionsParagraph (1) shall not apply to any expense if—
(A) such expense is described in paragraph (2), (3), (4), (7), (8), or (9) of subsection (e),
(B) in the case of an employer who pays or reimburses moving expenses of an employee, such expenses are includible in the income of the employee under section 82,
(C) such expense is for food or beverages—
(i) required by any Federal law to be provided to crew members of a commercial vessel,
(ii) provided to crew members of a commercial vessel—(I) which is operating on the Great Lakes, the Saint Lawrence Seaway, or any inland waterway of the United States, and(II) which is of a kind which would be required by Federal law to provide food and beverages to crew members if it were operated at sea,
(iii) provided on an oil or gas platform or drilling rig if the platform or rig is located offshore, or
(iv) provided on an oil or gas platform or drilling rig, or at a support camp which is in proximity and integral to such platform or rig, if the platform or rig is located in the United States north of 54 degrees north latitude, or
(D) such expense is—
(i) for food or beverages provided by a restaurant, and
(ii) paid or incurred before January 1, 2023.
Clauses (i) and (ii) of subparagraph (C) shall not apply to vessels primarily engaged in providing luxury water transportation (determined under the principles of subsection (m)). In the case of the employee, the exception of subparagraph (A) shall not apply to expenses described in subparagraph (B).
(3) Special rule for individuals subject to Federal hours of service
(o)1
1 See Amendment of Section note below.
Regulatory authority
(Added Pub. L. 87–834, § 4(a)(1), Oct. 16, 1962, 76 Stat. 974; amended Pub. L. 88–272, title II, § 217(a), Feb. 26, 1964, 78 Stat. 56; Pub. L. 94–455, title VI, § 602(a), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1572, 1834; Pub. L. 95–600, title III, § 361(a), (b), title VII, § 701(g)(1)–(3), Nov. 6, 1978, 92 Stat. 2847, 2903, 2904; Pub. L. 96–222, title I, § 103(a)(10)(A), (B) Apr. 1, 1980, 94 Stat. 212; Pub. L. 96–598, § 5(a), Dec. 24, 1980, 94 Stat. 3488; Pub. L. 96–605, title I, § 108(a), Dec. 28, 1980, 94 Stat. 3524; Pub. L. 96–608, § 4(a), Dec. 28, 1980, 94 Stat. 3552; Pub. L. 97–34, title II, § 265(a), (b), Aug. 13, 1981, 95 Stat. 265; Pub. L. 97–248, title III, §§ 307(a)(1), 308(a), Sept. 3, 1982, 96 Stat. 589, 591; Pub. L. 97–424, title V, § 543(a), Jan. 6, 1983, 96 Stat. 2195; Pub. L. 98–67, title I, § 102(a), title II, § 222(a), Aug. 5, 1983, 97 Stat. 369, 395; Pub. L. 98–369, div. A, title I, § 179(b)(1), title VIII, § 801(c), July 18, 1984, 98 Stat. 718, 995; Pub. L. 99–44, §§ 1(a), 2, 6(b), May 24, 1985, 99 Stat. 77, 79; Pub. L. 99–514, title I, §§ 122(c), (d), 142(a)–(c), title XI, § 1114(b)(6), Oct. 22, 1986, 100 Stat. 2110, 2117–2120, 2451; Pub. L. 100–647, title I, §§ 1001(g)(1)–(4)(A), (5), 1018(u)(2), title VI, § 6003(a), Nov. 10, 1988, 102 Stat. 3351, 3352, 3590, 3684; Pub. L. 101–239, title VII, §§ 7816(a), 7841(d)(18), Dec. 19, 1989, 103 Stat. 2420, 2429; Pub. L. 101–508, title XI, § 11802(b), Nov. 5, 1990, 104 Stat. 1388–529; Pub. L. 103–66, title XIII, §§ 13209(a), (b), 13210(a), (b), 13272(a), Aug. 10, 1993, 107 Stat. 469, 542; Pub. L. 105–34, title IX, § 969(a), Aug. 5, 1997, 111 Stat. 896; Pub. L. 108–357, title VIII, § 907(a), Oct. 22, 2004, 118 Stat. 1654; Pub. L. 109–135, title IV, § 403(mm), Dec. 21, 2005, 119 Stat. 2632; Pub. L. 113–295, div. A, title II, § 221(a)(46), Dec. 19, 2014, 128 Stat. 4045; Pub. L. 115–97, title I, §§ 13304(a)(1)–(2)(E), (b)–(d), 13310(a), Dec. 22, 2017, 131 Stat. 2124–2126, 2132; Pub. L. 116–260, div. EE, title II, § 210(a), Dec. 27, 2020, 134 Stat. 3066.)

CITE AS: 26 USC 274

§ 275. Certain taxes
(a) General ruleNo deduction shall be allowed for the following taxes:
(1) Federal income taxes, including—
(A) the tax imposed by section 3101 (relating to the tax on employees under the Federal Insurance Contributions Act);
(B) the taxes imposed by sections 3201 and 3211 (relating to the taxes on railroad employees and railroad employee representatives); and
(C) the tax withheld at source on wages under section 3402.
(2) Federal war profits and excess profits taxes.
(3) Estate, inheritance, legacy, succession, and gift taxes.
(4) Income, war profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States if the taxpayer chooses to take to any extent the benefits of section 901.
(5) Taxes on real property, to the extent that section 164(d) requires such taxes to be treated as imposed on another taxpayer.
(6) Taxes imposed by chapters 37, 41, 42, 43, 44, 45, 46, 50A, and 54.
Paragraph (1) shall not apply to any taxes to the extent such taxes are allowable as a deduction under section 164(f).
(b) Cross reference
(Added Pub. L. 88–272, title II, § 207(b)(3)(A), Feb. 26, 1964, 78 Stat. 42; amended Pub. L. 93–406, title II, § 1016(a)(1), Sept. 2, 1974, 88 Stat. 929; Pub. L. 94–455, title XIII, § 1307(d)(2)(A), title XVI, § 1605(b)(1), title XIX, § 1901(a)(39), Oct. 4, 1976, 90 Stat. 1727, 1754, 1771; Pub. L. 95–600, title VII, § 701(t)(3)(B), Nov. 6, 1978, 92 Stat. 2912; Pub. L. 97–248, title III, §§ 305(a), 308(a), Sept. 3, 1982, 96 Stat. 588, 591; Pub. L. 98–21, title I, § 124(c)(5), Apr. 20, 1983, 97 Stat. 91; Pub. L. 98–67, title I, § 102(a), Aug. 5, 1983, 97 Stat. 369; Pub. L. 98–369, div. A, title I, § 67(b)(2), title VIII, § 801(d)(5), July 18, 1984, 98 Stat. 587, 996; Pub. L. 99–499, title V, § 516(b)(2)(B), Oct. 17, 1986, 100 Stat. 1771; Pub. L. 100–203, title X, § 10228(b), Dec. 22, 1987, 101 Stat. 1330–418; Pub. L. 106–519, § 4(2), Nov. 15, 2000, 114 Stat. 2432; Pub. L. 108–357, title I, § 101(b)(5), title VIII, § 802(b)(1), Oct. 22, 2004, 118 Stat. 1423, 1568; Pub. L. 110–172, § 11(g)(5), Dec. 29, 2007, 121 Stat. 2490; Pub. L. 113–295, div. A, title II, § 221(a)(12)(E), Dec. 19, 2014, 128 Stat. 4038; Pub. L. 117–169, title I, §§ 10201(b), 11003(b), Aug. 16, 2022, 136 Stat. 1831, 1864.)

CITE AS: 26 USC 275

§ 276. Certain indirect contributions to political parties
(a) Disallowance of deduction
No deduction otherwise allowable under this chapter shall be allowed for any amount paid or incurred for—
(1) advertising in a convention program of a political party, or in any other publication if any part of the proceeds of such publication directly or indirectly inures (or is intended to inure) to or for the use of a political party or a political candidate,
(2) admission to any dinner or program, if any part of the proceeds of such dinner or program directly or indirectly inures (or is intended to inure) to or for the use of a political party or a political candidate, or
(3) admission to an inaugural ball, inaugural gala, inaugural parade, or inaugural concert, or to any similar event which is identified with a political party or a political candidate.
(b) Definitions
For purposes of this section—
(1) Political party
The term “political party” means—
(A) a political party;
(B) a National, State, or local committee of a political party; or
(C) a committee, association, or organization, whether incorporated or not, which directly or indirectly accepts contributions (as defined in section 271(b)(2)) or make expenditures (as defined in section 271(b)(3)) for the purpose of influencing or attempting to influence the selection, nomination, or election of any individual to any Federal, State, or local elective public office, or the election of presidential and vice-presidential electors, whether or not such individual or electors are selected, nominated, or elected.
(2) Proceeds inuring to or for the use of political candidates
Proceeds shall be treated as inuring to or for the use of a political candidate only if—
(A) such proceeds may be used directly or indirectly for the purpose of furthering his candidacy for selection, nomination, or election to any elective public office, and
(B) such proceeds are not received by such candidate in the ordinary course of a trade or business (other than the trade or business of holding elective public office).
(c) Cross reference
(Added Pub. L. 89–368, title III, § 301(a), Mar. 15, 1966, 80 Stat. 66; amended Pub. L. 90–364, title I, § 108(a), June 28, 1968, 82 Stat. 268; Pub. L. 93–443, title IV, § 406(d), Oct. 15, 1974, 88 Stat. 1296.)

CITE AS: 26 USC 276

§ 277. Deductions incurred by certain membership organizations in transactions with members
(a) General rule
(b) Exceptions
Subsection (a) shall not apply to any organization—
(1) which for the taxable year is subject to taxation under subchapter H or L,
(2) which has made an election before October 9, 1969, under section 456(c) or which is affiliated with such an organization,
(3) which for each day of any taxable year is a national securities exchange subject to regulation under the Securities Exchange Act of 1934 or a contract market subject to regulation under the Commodity Exchange Act, or
(4) which is engaged primarily in the gathering and distribution of news to its members for publication.
(Added Pub. L. 91–172, title I, § 121(b)(3)(A), Dec. 30, 1969, 83 Stat. 540; amended Pub. L. 94–568, § 1(c), Oct. 20, 1976, 90 Stat. 2697; Pub. L. 99–514, title XVI, § 1604(a), Oct. 22, 1986, 100 Stat. 2769; Pub. L. 113–295, div. A, title II, § 221(a)(41)(G), Dec. 19, 2014, 128 Stat. 4044.)

CITE AS: 26 USC 277

[§ 278. Repealed. Pub. L. 99–514, title VIII, § 803(b)(6), Oct. 22, 1986, 100 Stat. 2356]

CITE AS: 26 USC 278

§ 279. Interest on indebtedness incurred by corporation to acquire stock or assets of another corporation
(a) General ruleNo deduction shall be allowed for any interest paid or incurred by a corporation during the taxable year with respect to its corporate acquisition indebtedness to the extent that such interest exceeds—
(1) $5,000,000, reduced by
(2) the amount of interest paid or incurred by such corporation during such year on obligations (A) issued to provide consideration for an acquisition described in paragraph (1) of subsection (b), but (B) which are not corporate acquisition indebtedness.
(b) Corporate acquisition indebtednessFor purposes of this section, the term “corporate acquisition indebtedness” means any obligation evidenced by a bond, debenture, note, or certificate or other evidence of indebtedness issued by a corporation (hereinafter in this section referred to as “issuing corporation”) if—
(1) such obligation is issued to provide consideration for the acquisition of—
(A) stock in another corporation (hereinafter in this section referred to as “acquired corporation”), or
(B) assets of another corporation (hereinafter in this section referred to as “acquired corporation”) pursuant to a plan under which at least two-thirds (in value) of all the assets (excluding money) used in trades and businesses carried on by such corporation are acquired,
(2) such obligation is either—
(A) subordinated to the claims of trade creditors of the issuing corporation generally, or
(B) expressly subordinated in right of payment to the payment of any substantial amount of unsecured indebtedness, whether outstanding or subsequently issued, of the issuing corporation,
(3) the bond or other evidence of indebtedness is either—
(A) convertible directly or indirectly into stock of the issuing corporation, or
(B) part of an investment unit or other arrangement which includes, in addition to such bond or other evidence of indebtedness, an option to acquire, directly or indirectly, stock in the issuing corporation, and
(4) as of a day determined under subsection (c)(1), either—
(A) the ratio of debt to equity (as defined in subsection (c)(2)) of the issuing corporation exceeds 2 to 1, or
(B) the projected earnings (as defined in subsection (c)(3)) do not exceed 3 times the annual interest to be paid or incurred (determined under subsection (c)(4)).
(c) Rules for application of subsection (b)(4)For purposes of subsection (b)(4)—
(1) Time of determination
(2) Ratio of debt to equity
(3) Projected earnings
(A) The term “projected earnings” means the “average annual earnings” (as defined in subparagraph (B)) of—
(i) the issuing corporation only, if clause (ii) does not apply, or
(ii) both the issuing corporation and the acquired corporation, in any case where the issuing corporation has acquired control (as defined in section 368(c)), or has acquired substantially all of the properties, of the acquired corporation.
(B)
(i) interest paid or incurred,
(ii) depreciation or amortization allowed under this chapter,
(iii) liability for tax under this chapter, and
(iv) distributions to which section 301(c)(1) applies (other than such distributions from the acquired to the issuing corporation),
and reduced to an annual average for such 3-year period pursuant to regulations prescribed by the Secretary. Such regulations shall include rules for cases where any corporation was not in existence for all of such 3-year period or such period includes only a portion of a taxable year of any corporation.
(4) Annual interest to be paid or incurredThe term “annual interest to be paid or incurred” means—
(A) if subparagraph (B) does not apply, the annual interest to be paid or incurred by the issuing corporation only, determined by reference to its total indebtedness outstanding, or
(B) if projected earnings are determined under clause (ii) of paragraph (3)(A), the annual interest to be paid or incurred by both the issuing corporation and the acquired corporation, determined by reference to their combined total indebtedness outstanding.
(5) Special rules for banks and lending or finance companiesWith respect to any corporation which is a bank (as defined in section 581) or is primarily engaged in a lending or finance business—
(A) in determining under paragraph (2) the ratio of debt to equity of such corporation (or of the affiliated group of which such corporation is a member), the total indebtedness of such corporation (and the assets of such corporation) shall be reduced by an amount equal to the total indebtedness owed to such corporation which arises out of the banking business of such corporation, or out of the lending or finance business of such corporation, as the case may be;
(B) in determining under paragraph (4) the annual interest to be paid or incurred by such corporation (or by the issuing and acquired corporations referred to in paragraph (4)(B) or by the affiliated group of which such corporation is a member) the amount of such interest (determined without regard to this paragraph) shall be reduced by an amount which bears the same ratio to the amount of such interest as the amount of the reduction for the taxable year under subparagraph (A) bears to the total indebtedness of such corporation; and
(C) in determining under paragraph (3)(B) the average annual earnings, the amount of the earnings and profits for the 3-year period shall be reduced by the sum of the reductions under subparagraph (B) for such period.
For purposes of this paragraph, the term “lending or finance business” means a business of making loans or purchasing or discounting accounts receivable, notes, or installment obligations.
(d) Taxable years to which applicableIn applying this section—
(1) First year of disallowance
(2) General rule for succeeding years
(3) Redetermination where control, etc., is acquired
(4) Special 3-year rule
(5) 5 percent stock rule
(e) Certain nontaxable transactions
(f) Exemption for certain acquisitions of foreign corporations
(g) Affiliated groups
(h) Changes in obligationFor purposes of this section—
(1) Any extension, renewal, or refinancing of an obligation evidencing a preexisting indebtedness shall not be deemed to be the issuance of a new obligation.
(2) Any obligation which is corporate acquisition indebtedness of the issuing corporation is also corporate acquisition indebtedness of any corporation which becomes liable for such obligation as guarantor, endorser, or indemnitor or which assumes liability for such obligation in any transaction.
(i) Effect on other provisions
(Added Pub. L. 91–172, title IV, § 411(a), Dec. 30, 1969, 83 Stat. 604; amended Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 94–514, § 1(a), Oct. 15, 1976, 90 Stat. 2443; Pub. L. 113–295, div. A, title II, § 221(a)(47)(A), Dec. 19, 2014, 128 Stat. 4045.)

CITE AS: 26 USC 279

[§ 280. Repealed. Pub. L. 99–514, title VIII, § 803(b)(2)(A), Oct. 22, 1986, 100 Stat. 2355]

CITE AS: 26 USC 280

§ 280A. Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc.
(a) General rule
(b) Exception for interest, taxes, casualty losses, etc.
(c) Exceptions for certain business or rental use; limitation on deductions for such use
(1) Certain business useSubsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis—
(A) as the principal place of business for any trade or business of the taxpayer,
(B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or
(C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.
In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. For purposes of subparagraph (A), the term “principal place of business” includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.
(2) Certain storage use
(3) Rental use
(4) Use in providing day care services
(A) In general
(B) Licensing, etc., requirementSubparagraph (A) shall apply to items accruing for a period only if the owner or operator of the trade or business referred to in subparagraph (A)—
(i) has applied for (and such application has not been rejected),
(ii) has been granted (and such granting has not been revoked), or
(iii) is exempt from having,
a license, certification, registration, or approval as a day care center or as a family or group day care home under the provisions of any applicable State law. This subparagraph shall apply only to items accruing in periods beginning on or after the first day of the first month which begins more than 90 days after the date of the enactment of the Tax Reduction and Simplification Act of 1977.
(C) Allocation formula
(5) Limitation on deductionsIn the case of a use described in paragraph (1), (2), or (4), and in the case of a use described in paragraph (3) where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of—
(A) the gross income derived from such use for the taxable year, over
(B) the sum of—
(i) the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used, and
(ii) the deductions allocable to the trade or business (or rental activity) in which such use occurs (but which are not allocable to such use) for such taxable year.
Any amount not allowable as a deduction under this chapter by reason of the preceding sentence shall be taken into account as a deduction (allocable to such use) under this chapter for the succeeding taxable year. Any amount taken into account for any taxable year under the preceding sentence shall be subject to the limitation of the 1st sentence of this paragraph whether or not the dwelling unit is used as a residence during such taxable year.
(6) Treatment of rental to employer
(d) Use as residence
(1) In generalFor purposes of this section, a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of—
(A) 14 days, or
(B) 10 percent of the number of days during such year for which such unit is rented at a fair rental.
For purposes of subparagraph (B), a unit shall not be treated as rented at a fair rental for any day for which it is used for personal purposes.
(2) Personal use of unitFor purposes of this section, the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used—
(A) for personal purposes by the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c)(4)) of the taxpayer or such other person;
(B) by any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit); or
(C) by any individual (other than an employee with respect to whose use section 119 applies), unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental.
The Secretary shall prescribe regulations with respect to the circumstances under which use of the unit for repairs and annual maintenance will not constitute personal use under this paragraph, except that if the taxpayer is engaged in repair and maintenance on a substantially full time basis for any day, such authority shall not allow the Secretary to treat a dwelling unit as being used for personal use by the taxpayer on such day merely because other individuals who are on the premises on such day are not so engaged.
(3) Rental to family member, etc., for use as principal residence
(A) In general
(B) Special rules for rental to person having interest in unit
(i) Rental must be pursuant to shared equity financing agreement
(ii) Determination of fair rental
(C) Shared equity financing agreementFor purposes of this paragraph, the term “shared equity financing agreement” means an agreement under which—
(i) 2 or more persons acquire qualified ownership interests in a dwelling unit, and
(ii) the person (or persons) holding 1 or more of such interests—(I) is entitled to occupy the dwelling unit for use as a principal residence, and(II) is required to pay rent to 1 or more other persons holding qualified ownership interests in the dwelling unit.
(D) Qualified ownership interest
(4) Rental of principal residence
(A) In general
(B) Qualified rental periodFor purposes of subparagraph (A), the term “qualified rental period” means a consecutive period of—
(i) 12 or more months which begins or ends in such taxable year, or
(ii) less than 12 months which begins in such taxable year and at the end of which such dwelling unit is sold or exchanged, and
for which such unit is rented, or is held for rental, at a fair rental.
(e) Expenses attributable to rental
(1) In general
(2) Exception for deductions otherwise allowable
(f) Definitions and special rules
(1) Dwelling unit definedFor purposes of this section—
(A) In general
(B) Exception
(2) Personal use by shareholders of S corporation
(3) Coordination with section 183If subsection (a) applies with respect to any dwelling unit (or portion thereof) for the taxable year—
(A) section 183 (relating to activities not engaged in for profit) shall not apply to such unit (or portion thereof) for such year, but
(B) such year shall be taken into account as a taxable year for purposes of applying subsection (d) of section 183 (relating to 5-year presumption).
(4) Coordination with section 162(a)(2)
(g) Special rule for certain rental useNotwithstanding any other provision of this section or section 183, if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then—
(1) no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and
(2) the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61.
(Added Pub. L. 94–455, title VI, § 601(a), Oct. 4, 1976, 90 Stat. 1569; amended Pub. L. 95–30, title III, § 306(a), (b), May 23, 1977, 91 Stat. 152, 153; Pub. L. 95–600, title VII, § 701(h)(1), Nov. 6, 1978, 92 Stat. 2904; Pub. L. 97–119, title I, § 113(a)–(d), Dec. 29, 1981, 95 Stat. 1641, 1642; Pub. L. 97–216, title II, § 215(b), July 18, 1982, 96 Stat. 194; Pub. L. 97–354, § 5(a)(26), Oct. 19, 1982, 96 Stat. 1694; Pub. L. 99–514, title I, § 143(b), (c), Oct. 22, 1986, 100 Stat. 2120; Pub. L. 100–647, title I, § 1001(h)(1), (2), Nov. 10, 1988, 102 Stat. 3352; Pub. L. 104–188, title I, §§ 1113(a), 1704(t)(39), Aug. 20, 1996, 110 Stat. 1759, 1889; Pub. L. 105–34, title III, § 312(d)(1), title IX, § 932(a), Aug. 5, 1997, 111 Stat. 839, 881.)

CITE AS: 26 USC 280A

§ 280B. Demolition of structuresIn the case of the demolition of any structure—
(1) no deduction otherwise allowable under this chapter shall be allowed to the owner or lessee of such structure for—
(A) any amount expended for such demolition, or
(B) any loss sustained on account of such demolition; and
(2) amounts described in paragraph (1) shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located.
(Added Pub. L. 94–455, title XXI, § 2124(b)(1), Oct. 4, 1976, 90 Stat. 1918; amended Pub. L. 95–600, title VII, § 701(f)(5), Nov. 6, 1978, 92 Stat. 2902; Pub. L. 96–541, § 2(b), Dec. 17, 1980, 94 Stat. 3204; Pub. L. 97–34, title II, § 212(d)(2)(C), Aug. 13, 1981, 95 Stat. 239; Pub. L. 98–369, div. A, title X, § 1063(a), (b)(1), July 18, 1984, 98 Stat. 1047.)

CITE AS: 26 USC 280B

§ 280C. Certain expenses for which credits are allowable
(a) Rule for employment credits
(b) Credit for qualified clinical testing expenses for certain drugs
(1) In general
(2) Similar rule where taxpayer capitalizes rather than deducts expensesIf—
(A) the amount of the credit allowable for the taxable year under section 45C (determined without regard to section 38(c)), exceeds
(B) the amount allowable as a deduction for the taxable year for qualified clinical testing expenses (determined without regard to paragraph (1)),
the amount chargeable to capital account for the taxable year for such expenses shall be reduced by the amount of such excess.
(3) Election of reduced credit
(A) In generalIn the case of any taxable year for which an election is made under this paragraph—
(i) paragraphs (1) and (2) shall not apply, and
(ii) the amount of the credit under section 45C(a) shall be the amount determined under subparagraph (B).
(B) Amount of reduced creditThe amount of credit determined under this subparagraph for any taxable year shall be the amount equal to the excess of—
(i) the amount of credit determined under section 45C(a) without regard to this paragraph, over
(ii) the product of—(I) the amount described in clause (i), and(II) the maximum rate of tax under section 11(b).
(C) Election
(4) Controlled groups
(c) Credit for increasing research activities
(1) In generalIf—
(A) the amount of the credit determined for the taxable year under section 41(a)(1), exceeds
(B) the amount allowable as a deduction for such taxable year for qualified research expenses or basic research expenses,
the amount chargeable to capital account for the taxable year for such expenses shall be reduced by the amount of such excess.
(2) Election of reduced credit
(A) In generalIn the case of any taxable year for which an election is made under this paragraph—
(i) paragraph (1) shall not apply, and
(ii) the amount of the credit under section 41(a) shall be the amount determined under subparagraph (B).
(B) Amount of reduced creditThe amount of credit determined under this subparagraph for any taxable year shall be the amount equal to the excess of—
(i) the amount of credit determined under section 41(a) without regard to this paragraph, over
(ii) the product of—(I) the amount described in clause (i), and(II) the maximum rate of tax under section 11(b).
(C) Election
(3) Controlled groups
(d) Credit for low sulfur diesel fuel production
(e) Mine rescue team training credit
(f) Credit for security of agricultural chemicals
(g) Credit for health insurance premiums
(h) Credit for employee health insurance expenses of small employers
(Added Pub. L. 95–30, title II, § 202(c)(1), May 23, 1977, 91 Stat. 147; amended Pub. L. 95–600, title III, § 322(d)(1), Nov. 6, 1978, 92 Stat. 2838; Pub. L. 96–178, § 6(c)(4), Jan. 2, 1980, 93 Stat. 1298; Pub. L. 96–222, title I, § 103(a)(7)(D)(iv), Apr. 1, 1980, 94 Stat. 212; Pub. L. 97–414, § 4(b)(1), (2)(A), Jan. 4, 1983, 96 Stat. 2055; Pub. L. 98–369, div. A, title IV, § 474(r)(10), July 18, 1984, 98 Stat. 841; Pub. L. 99–514, title II, § 231(d)(3)(E), title XVIII, § 1847(b)(8), Oct. 22, 1986, 100 Stat. 2179, 2856; Pub. L. 100–647, title IV, § 4008(a), Nov. 10, 1988, 102 Stat. 3652; Pub. L. 101–239, title VII, §§ 7110(c)(1), 7814(e)(2)(A), Dec. 19, 1989, 103 Stat. 2325, 2413; Pub. L. 103–66, title XIII, §§ 13302(b)(1), 13322(c)(1), Aug. 10, 1993, 107 Stat. 555, 563; Pub. L. 104–188, title I, § 1205(d)(7), Aug. 20, 1996, 110 Stat. 1776; Pub. L. 106–170, title V, § 502(c)(2), Dec. 17, 1999, 113 Stat. 1919; Pub. L. 106–554, § 1(a)(7) [title III, § 311(a)(1)], Dec. 21, 2000, 114 Stat. 2763, 2763A–639; Pub. L. 108–357, title III, § 339(c), Oct. 22, 2004, 118 Stat. 1484; Pub. L. 109–135, title I, § 103(b)(2), title II, § 201(b)(2), Dec. 21, 2005, 119 Stat. 2595, 2607; Pub. L. 109–432, div. A, title IV, § 405(c), Dec. 20, 2006, 120 Stat. 2957; Pub. L. 110–172, § 7(a)(1)(B), Dec. 29, 2007, 121 Stat. 2481; Pub. L. 110–234, title XV, § 15343(c), May 22, 2008, 122 Stat. 1519; Pub. L. 110–245, title I, § 111(c), June 17, 2008, 122 Stat. 1635; Pub. L. 110–246, § 4(a), title XV, § 15343(c), June 18, 2008, 122 Stat. 1664, 2281; Pub. L. 111–148, title I, §§ 1401(b), 1421(d)(1), title IX, § 9023(c)(2), title X, § 10105(e)(3), Mar. 23, 2010, 124 Stat. 219, 242, 880, 906; Pub. L. 115–97, title I, §§ 13001(b)(1)(A), 13206(d)(2), 13401(b), 13403(d)(1), Dec. 22, 2017, 131 Stat. 2096, 2112, 2133, 2137; Pub. L. 115–141, div. U, title IV, § 401(a)(62), (d)(3)(B)(iii), (6)(B)(iv), Mar. 23, 2018, 132 Stat. 1187, 1209, 1211.)

CITE AS: 26 USC 280C

[§ 280D. Repealed. Pub. L. 100–418, title I, § 1941(b)(4)(A), Aug. 23, 1988, 102 Stat. 1324]

CITE AS: 26 USC 280D

§ 280E. Expenditures in connection with the illegal sale of drugs

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

(Added Pub. L. 97–248, title III, § 351(a), Sept. 3, 1982, 96 Stat. 640.)

CITE AS: 26 USC 280E

§ 280F. Limitation on depreciation for luxury automobiles; limitation where certain property used for personal purposes
(a) Limitation on amount of depreciation for luxury automobiles
(1) Depreciation
(A) Limitation
The amount of the depreciation deduction for any taxable year for any passenger automobile shall not exceed—
(i) $10,000 for the 1st taxable year in the recovery period,
(ii) $16,000 for the 2nd taxable year in the recovery period,
(iii) $9,600 for the 3rd taxable year in the recovery period, and
(iv) $5,760 for each succeeding taxable year in the recovery period.
(B) Disallowed deductions allowed for years after recovery period
(i) In general
(ii) $5,760 limitation
(iii) Property must be depreciable
(iv) Amount treated as depreciation deduction
(2) Coordination with reductions in amount allowable by reason of personal use, etc.
This subsection shall be applied before—
(A) the application of subsection (b), and
(B) the application of any other reduction in the amount of any depreciation deduction allowable under section 168 by reason of any use not qualifying the property for such credit or depreciation deduction.
(b) Limitation where business use of listed property not greater than 50 percent
(1) Depreciation
(2) Recapture
(A) Where business use percentage does not exceed 50 percent
If—
(i) property is predominantly used in a qualified business use in a taxable year in which it is placed in service, and
(ii) such property is not predominantly used in a qualified business use for any subsequent taxable year,
then any excess depreciation shall be included in gross income for the taxable year referred to in clause (ii), and the depreciation deduction for the taxable year referred to in clause (ii) and any subsequent taxable years shall be determined under section 168(g) (relating to alternative depreciation system).
(B) Excess depreciation
For purposes of subparagraph (A), the term “excess depreciation” means the excess (if any) of—
(i) the amount of the depreciation deductions allowable with respect to the property for taxable years before the 1st taxable year in which the property was not predominantly used in a qualified business use, over
(ii) the amount which would have been so allowable if the property had not been predominantly used in a qualified business use for the taxable year in which it was placed in service.
(3) Property predominantly used in qualified business use
(c) Treatment of leases
(1) Lessor’s deductions not affected
(2) Lessee’s deductions reduced
(3) Allowable percentage
(4) Lease term
(5) Lessee recapture
(d) Definitions and special rules
For purposes of this section—
(1) Coordination with section 179
(2) Subsequent depreciation deductions reduced for deductions allocable to personal use
(3) Deductions of employee
(A) In general
(B) Employee use
(4) Listed property
(A) In general
Except as provided in subparagraph (B), the term “listed property” means—
(i) any passenger automobile,
(ii) any other property used as a means of transportation,
(iii) any property of a type generally used for purposes of entertainment, recreation, or amusement, and
(iv) any other property of a type specified by the Secretary by regulations.
(B) Exception for property used in business of transporting persons or property
(5) Passenger automobile
(A) In general
Except as provided in subparagraph (B), the term “passenger automobile” means any 4-wheeled vehicle—
(i) which is manufactured primarily for use on public streets, roads, and highways, and
(ii) which is rated at 6,000 pounds unloaded gross vehicle weight or less.
In the case of a truck or van, clause (ii) shall be applied by substituting “gross vehicle weight” for “unloaded gross vehicle weight”.
(B) Exception for certain vehicles
The term “passenger automobile” shall not include—
(i) any ambulance, hearse, or combination ambulance-hearse used by the taxpayer directly in a trade or business,
(ii) any vehicle used by the taxpayer directly in the trade or business of transporting persons or property for compensation or hire, and
(iii) under regulations, any truck or van.
(6) Business use percentage
(A) In general
(B) Qualified business use
(C) Exception for certain use by 5-percent owners and related persons
(i) In general
The term “qualified business use” shall not include—
(I) leasing property to any 5-percent owner or related person,(II) use of property provided as compensation for the performance of services by a 5-percent owner or related person, or(III) use of property provided as compensation for the performance of services by any person not described in subclause (II) unless an amount is included in the gross income of such person with respect to such use, and, where required, there was withholding under chapter 24.
(ii) Special rule for aircraft
(D) Definitions
For purposes of this paragraph—
(i) 5-percent owner
(ii) Related person
(7) Automobile price inflation adjustment
(A) In general
(B) Automobile price inflation adjustment
For purposes of this paragraph—
(i) In general
The automobile price inflation adjustment for any calendar year is the percentage (if any) by which—
(I) the C-CPI-U automobile component for October of the preceding calendar year, exceeds(II) the automobile component of the CPI (as defined in section 1(f)(4)) for October of 2017, multiplied by the amount determined under 1(f)(3)(B).
(ii) C-CPI-U automobile component
(8) Unrecovered basis
(9) All taxpayers holding interests in passenger automobile treated as 1 taxpayer
(10) Special rule for property acquired in nonrecognition transactions
(e) Regulations
(Added Pub. L. 98–369, div. A, title I, § 179(a), July 18, 1984, 98 Stat. 713; amended Pub. L. 99–44, § 4, May 24, 1985, 99 Stat. 78; Pub. L. 99–514, title II, § 201(d)(4), title XVIII, § 1812(e)(1)(A), (C), (2)–(5), Oct. 22, 1986, 100 Stat. 2139, 2836, 2837; Pub. L. 100–647, title I, §§ 1002(a)(10), (b)(2), 1018(u)(3), Nov. 10, 1988, 102 Stat. 3354, 3357, 3590; Pub. L. 101–239, title VII, § 7643(a), Dec. 19, 1989, 103 Stat. 2381; Pub. L. 101–508, title XI, § 11813(b)(13)(A)–(E), Nov. 5, 1990, 104 Stat. 1388–554, 1388–555; Pub. L. 104–188, title I, § 1702(h)(5), Aug. 20, 1996, 110 Stat. 1874; Pub. L. 105–34, title IX, § 971(a), Aug. 5, 1997, 111 Stat. 897; Pub. L. 105–206, title VI, § 6009(c), July 22, 1998, 112 Stat. 812; Pub. L. 107–147, title VI, § 602(b)(1), Mar. 9, 2002, 116 Stat. 59; Pub. L. 111–240, title II, § 2043(a), Sept. 27, 2010, 124 Stat. 2560; Pub. L. 113–295, div. A, title II, §§ 220(j), 221(a)(34)(E), Dec. 19, 2014, 128 Stat. 4036, 4042; Pub. L. 115–97, title I, §§ 11002(d)(8), 13202(a), (b), Dec. 22, 2017, 131 Stat. 2061, 2108, 2109.)

CITE AS: 26 USC 280F

§ 280G. Golden parachute payments
(a) General rule
(b) Excess parachute paymentFor purposes of this section—
(1) In general
(2) Parachute payment defined
(A) In generalThe term “parachute payment” means any payment in the nature of compensation to (or for the benefit of) a disqualified individual if—
(i) such payment is contingent on a change—(I) in the ownership or effective control of the corporation, or(II) in the ownership of a substantial portion of the assets of the corporation, and
(ii) the aggregate present value of the payments in the nature of compensation to (or for the benefit of) such individual which are contingent on such change equals or exceeds an amount equal to 3 times the base amount.
For purposes of clause (ii), payments not treated as parachute payments under paragraph (4)(A), (5), or (6) shall not be taken into account.
(B) Agreements
(C) Treatment of certain agreements entered into within 1 year before change of ownershipFor purposes of subparagraph (A)(i), any payment pursuant to—
(i) an agreement entered into within 1 year before the change described in subparagraph (A)(i), or
(ii) an amendment made within such 1-year period of a previous agreement,
shall be presumed to be contingent on such change unless the contrary is established by clear and convincing evidence.
(3) Base amount
(A) In general
(B) AllocationThe portion of the base amount allocated to any parachute payment shall be an amount which bears the same ratio to the base amount as—
(i) the present value of such payment, bears to
(ii) the aggregate present value of all such payments.
(4) Treatment of amounts which taxpayer establishes as reasonable compensationIn the case of any payment described in paragraph (2)(A)—
(A) the amount treated as a parachute payment shall not include the portion of such payment which the taxpayer establishes by clear and convincing evidence is reasonable compensation for personal services to be rendered on or after the date of the change described in paragraph (2)(A)(i), and
(B) the amount treated as an excess parachute payment shall be reduced by the portion of such payment which the taxpayer establishes by clear and convincing evidence is reasonable compensation for personal services actually rendered before the date of the change described in paragraph (2)(A)(i).
For purposes of subparagraph (B), reasonable compensation for services actually rendered before the date of the change described in paragraph (2)(A)(i) shall be first offset against the base amount.
(5) Exemption for small business corporations, etc.
(A) In generalNotwithstanding paragraph (2), the term “parachute payment” does not include—
(i) any payment to a disqualified individual with respect to a corporation which (immediately before the change described in paragraph (2)(A)(i)) was a small business corporation (as defined in section 1361(b) but without regard to paragraph (1)(C) thereof), and
(ii) any payment to a disqualified individual with respect to a corporation (other than a corporation described in clause (i)) if—(I) immediately before the change described in paragraph (2)(A)(i), no stock in such corporation was readily tradeable on an established securities market or otherwise, and(II) the shareholder approval requirements of subparagraph (B) are met with respect to such payment.
The Secretary may, by regulations, prescribe that the requirements of subclause (I) of clause (ii) are not met where a substantial portion of the assets of any entity consists (directly or indirectly) of stock in such corporation and interests in such other entity are readily tradeable on an established securities market, or otherwise. Stock described in section 1504(a)(4) shall not be taken into account under clause (ii)(I) if the payment does not adversely affect the shareholder’s redemption and liquidation rights.
(B) Shareholder approval requirementsThe shareholder approval requirements of this subparagraph are met with respect to any payment if—
(i) such payment was approved by a vote of the persons who owned, immediately before the change described in paragraph (2)(A)(i), more than 75 percent of the voting power of all outstanding stock of the corporation, and
(ii) there was adequate disclosure to shareholders of all material facts concerning all payments which (but for this paragraph) would be parachute payments with respect to a disqualified individual.
The regulations prescribed under subsection (e) shall include regulations providing for the application of this subparagraph in the case of shareholders which are not individuals (including the treatment of nonvoting interests in an entity which is a shareholder) and where an entity holds a de minimis amount of stock in the corporation.
(6) Exemption for payments under qualified plansNotwithstanding paragraph (2), the term “parachute payment” shall not include any payment to or from—
(A) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a),
(B) an annuity plan described in section 403(a),
(C) a simplified employee pension (as defined in section 408(k)), or
(D) a simple retirement account described in section 408(p).
(c) Disqualified individualsFor purposes of this section, the term “disqualified individual” means any individual who is—
(1) an employee, independent contractor, or other person specified in regulations by the Secretary who performs personal services for any corporation, and
(2) is an officer, shareholder, or highly-compensated individual.
For purposes of this section, a personal service corporation (or similar entity) shall be treated as an individual. For purposes of paragraph (2), the term “highly-compensated individual” only includes an individual who is (or would be if the individual were an employee) a member of the group consisting of the highest paid 1 percent of the employees of the corporation or, if less, the highest paid 250 employees of the corporation.
(d) Other definitions and special rulesFor purposes of this section—
(1) Annualized includible compensation for base periodThe term “annualized includible compensation for the base period” means the average annual compensation which—
(A) was payable by the corporation with respect to which the change in ownership or control described in paragraph (2)(A) of subsection (b) occurs, and
(B) was includible in the gross income of the disqualified individual for taxable years in the base period.
(2) Base period
(3) Property transfersAny transfer of property—
(A) shall be treated as a payment, and
(B) shall be taken into account as its fair market value.
(4) Present value
(5) Treatment of affiliated groups
(e) Special rule for application to employers participating in the Troubled Assets Relief Program
(1) In generalIn the case of the severance from employment of a covered executive of an applicable employer during the period during which the authorities under section 101(a) of the Emergency Economic Stabilization Act of 2008 are in effect (determined under section 120 of such Act), this section shall be applied to payments to such executive with the following modifications:
(A) Any reference to a disqualified individual (other than in subsection (c)) shall be treated as a reference to a covered executive.
(B) Any reference to a change described in subsection (b)(2)(A)(i) shall be treated as a reference to an applicable severance from employment of a covered executive, and any reference to a payment contingent on such a change shall be treated as a reference to any payment made during an applicable taxable year of the employer on account of such applicable severance from employment.
(C) Any reference to a corporation shall be treated as a reference to an applicable employer.
(D) The provisions of subsections (b)(2)(C), (b)(4), (b)(5), and (d)(5) shall not apply.
(2) Definitions and special rulesFor purposes of this subsection:
(A) Definitions
(B) Applicable severance from employmentThe term “applicable severance from employment” means any severance from employment of a covered executive—
(i) by reason of an involuntary termination of the executive by the employer, or
(ii) in connection with any bankruptcy, liquidation, or receivership of the employer.
(C) Coordination and other rules
(i) In general
(ii) Regulatory authorityThe Secretary may prescribe such guidance, rules, or regulations as are necessary—(I) to carry out the purposes of this subsection and the Emergency Economic Stabilization Act of 2008, including the extent to which this subsection applies in the case of any acquisition, merger, or reorganization of an applicable employer,(II) to apply this section and section 4999 in cases where one or more payments with respect to any individual are treated as parachute payments by reason of this subsection, and other payments with respect to such individual are treated as parachute payments under this section without regard to this subsection, and(III) to prevent the avoidance of the application of this section through the mischaracterization of a severance from employment as other than an applicable severance from employment.
(f) Regulations
(Added Pub. L. 98–369, div. A, title I, § 67(a), July 18, 1984, 98 Stat. 585; amended Pub. L. 99–121, title I, § 102(c)(4), Oct. 11, 1985, 99 Stat. 508; Pub. L. 99–514, title XVIII, § 1804(j), Oct. 22, 1986, 100 Stat. 2807; Pub. L. 100–647, title I, § 1018(d)(6)–(8), Nov. 10, 1988, 102 Stat. 3581; Pub. L. 104–188, title I, § 1421(b)(9)(A), Aug. 20, 1996, 110 Stat. 1798; Pub. L. 110–343, div. A, title III, § 302(b), Oct. 3, 2008, 122 Stat. 3805.)

CITE AS: 26 USC 280G

§ 280H. Limitation on certain amounts paid to employee-owners by personal service corporations electing alternative taxable years
(a) General ruleIf—
(1) an election by a personal service corporation under section 444 is in effect for a taxable year, and
(2) such corporation does not meet the minimum distribution requirements of subsection (c) for such taxable year,
then the deduction otherwise allowed under this chapter for applicable amounts paid or incurred by such corporation to employee-owners shall not exceed the maximum deductible amount. The preceding sentence shall not apply for purposes of subchapter G (relating to personal holding companies).
(b) Carryover of nondeductible amounts
(c) Minimum distribution requirementFor purposes of this section—
(1) In generalA personal service corporation meets the minimum distribution requirements of this subsection if the applicable amounts paid or incurred during the deferral period of the taxable year (determined without regard to subsection (b)) equal or exceed the lesser of—
(A) the product of—
(i) the applicable amounts paid during the preceding taxable year, divided by the number of months in such taxable year, multiplied by
(ii) the number of months in the deferral period of the preceding taxable year, or
(B) the applicable percentage of the adjusted taxable income for the deferral period of the taxable year.
(2) Applicable percentageThe term “applicable percentage” means the percentage (not in excess of 95 percent) determined by dividing—
(A) the applicable amounts paid or incurred during the 3 taxable years immediately preceding the taxable year, by
(B) the adjusted taxable income of such corporation for such 3 taxable years.
(d) Maximum deductible amountFor purposes of this section, the term “maximum deductible amount” means the sum of—
(1) the applicable amounts paid during the deferral period, plus
(2) an amount equal to the product of—
(A) the amount determined under paragraph (1), divided by the number of months in the deferral period, multiplied by
(B) the number of months in the nondeferral period.
(e) Disallowance of net operating loss carrybacks
(f) Other definitions and special rulesFor purposes of this section—
(1) Applicable amountThe term “applicable amount” means any amount paid to an employee-owner which is includible in the gross income of such employee, other than—
(A) any gain from the sale or exchange of property between the owner-employee and the corporation, or
(B) any dividend paid by the corporation.
(2) Employee-owner
(3) Nondeferral and deferral periods
(A) Deferral period
(B) Nondeferral period
(4) Adjusted taxable incomeThe term “adjusted taxable income” means taxable income determined without regard to—
(A) any amount paid to an employee-owner which is includible in the gross income of such employee-owner, and
(B) any net operating loss carryover to the extent such carryover is attributable to amounts described in subparagraph (A).
(5) Personal service corporation
(Added Pub. L. 100–203, title X, § 10206(c)(1), Dec. 22, 1987, 101 Stat. 1330–401; amended Pub. L. 100–647, title II, § 2004(e)(2)(B), (3), (14)(A), (C), Nov. 10, 1988, 102 Stat. 3600, 3602.)

CITE AS: 26 USC 280H