Internal Revenue Code:Sec. 460. Special rules for long-term contracts

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Contents


Location in Internal Revenue Code


     TITLE 26 - INTERNAL REVENUE CODE
      Subtitle A - Income Taxes
       CHAPTER 1 - NORMAL TAXES AND SURTAXES
        Subchapter E - Accounting Periods and Methods of Accounting
         PART II - METHODS OF ACCOUNTING
          Subpart B - Taxable Year for Which Items of Gross Income Included
        

Statute

    Sec. 460. Special rules for long-term contracts
 
    (a) Requirement that percentage of completion method be used
      In the case of any long-term contract, the taxable income from
    such contract shall be determined under the percentage of
    completion method (as modified by subsection (b)).
    (b) Percentage of completion method
      (1) Requirements of percentage of completion method
        Except as provided in paragraph (3), in the case of any
      long-term contract with respect to which the percentage of
      completion method is used -
          (A) the percentage of completion shall be determined by
        comparing costs allocated to the contract under subsection (c)
        and incurred before the close of the taxable year with the
        estimated total contract costs, and
          (B) upon completion of the contract (or, with respect to any
        amount properly taken into account after completion of the
        contract, when such amount is so properly taken into account),
        the taxpayer shall pay (or shall be entitled to receive)
        interest computed under the look-back method of paragraph (2).
      In the case of any long-term contract with respect to which the
      percentage of completion method is used, except for purposes of
      applying the look-back method of paragraph (2), any income under
      the contract (to the extent not previously includible in gross
      income) shall be included in gross income for the taxable year
      following the taxable year in which the contract was completed.
      For purposes of subtitle F (other than sections 6654 and 6655),
      any interest required to be paid by the taxpayer under
      subparagraph (B) shall be treated as an increase in the tax
      imposed by this chapter for the taxable year in which the
      contract is completed (or, in the case of interest payable with
      respect to any amount properly taken into account after
      completion of the contract, for the taxable year in which the
      amount is so properly taken into account).
      (2) Look-back method
        The interest computed under the look-back method of this
      paragraph shall be determined by -
          (A) first (FOOTNOTE 1) allocating income under the contract
        among taxable years before the year in which the contract is
        completed on the basis of the actual contract price and costs
        instead of the estimated contract price and costs,
       (FOOTNOTE 1) So in original.  Probably should be followed by a
    comma.
          (B) second, determining (solely for purposes of computing
        such interest) the overpayment or underpayment of tax for each
        taxable year referred to in subparagraph (A) which would result
        solely from the application of subparagraph (A), and
          (C) then using the adjusted overpayment rate (as defined in
        paragraph (7)), compounded daily, on the overpayment or
        underpayment determined under subparagraph (B).
      For purposes of the preceding sentence, any amount properly taken
      into account after completion of the contract shall be taken into
      account by discounting (using the Federal mid-term rate
      determined under section 1274(d) as of the time such amount was
      properly taken into account) such amount to its value as of the
      completion of the contract.  The taxpayer may elect with respect
      to any contract to have the preceding sentence not apply to such
      contract.
      (3) Special rules
        (A) Simplified method of cost allocation
          In the case of any long-term contract, the Secretary may
        prescribe a simplified procedure for allocation of costs to
        such contract in lieu of the method of allocation under
        subsection (c).
        (B) Look-back method not to apply to certain contracts
          Paragraph (1)(B) shall not apply to any contract -
            (i) the gross price of which (as of the completion of the
          contract) does not exceed the lesser of -
              (I) $1,000,000, or
              (II) 1 percent of the average annual gross receipts of
            the taxpayer for the 3 taxable years preceding the taxable
            year in which the contract was completed, and
            (ii) which is completed within 2 years of the contract
          commencement date.
        For purposes of this subparagraph, rules similar to the rules
        of subsections (e)(2) and (f)(3) shall apply.
      (4) Simplified look-back method for pass-thru entities
        (A) In general
          In the case of a pass-thru entity -
            (i) the look-back method of paragraph (2) shall be applied
          at the entity level,
            (ii) in determining overpayments and underpayments for
          purposes of applying paragraph (2)(B) -
              (I) any increase in the income under the contract for any
            taxable year by reason of the allocation under paragraph
            (2)(A) shall be treated as giving rise to an underpayment
            determined by applying the highest rate for such year to
            such increase, and
              (II) any decrease in such income for any taxable year by
            reason of such allocation shall be treated as giving rise
            to an overpayment determined by applying the highest rate
            for such year to such decrease, and
            (iii) any interest required to be paid by the taxpayer
          under paragraph (2) shall be paid by such entity (and any
          interest entitled to be received by the taxpayer under
          paragraph (2) shall be paid to such entity).
        (B) Exceptions
          (i) Closely held pass-thru entities
            This paragraph shall not apply to any closely held
          pass-thru entity.
          (ii) Foreign contracts
            This paragraph shall not apply to any contract unless
          substantially all of the income from such contract is from
          sources in the United States.
        (C) Other definitions
          For purposes of this paragraph -
          (i) Highest rate
            The term ''highest rate'' means -
              (I) the highest rate of tax specified in section 11, or
              (II) if at all times during the year involved more than
            50 percent of the interests in the entity are held by
            individuals directly or through 1 or more other pass-thru
            entities, the highest rate of tax specified in section 1.
          (ii) Pass-thru entity
            The term ''pass-thru entity'' means any -
              (I) partnership,
              (II) S corporation, or
              (III) trust.
          (iii) Closely held pass-thru entity
            The term ''closely held pass-thru entity'' means any
          pass-thru entity if, at any time during any taxable year for
          which there is income under the contract, 50 percent or more
          (by value) of the beneficial interests in such entity are
          held (directly or indirectly) by or for 5 or fewer persons.
          For purposes of the preceding sentence, rules similar to the
          constructive ownership rules of section 1563(e) shall apply.
      (5) Election to use 10-percent method
        (A) General rule
          In the case of any long-term contract with respect to which
        an election under this paragraph is in effect, the 10-percent
        method shall apply in determining the taxable income from such
        contract.
        (B) 10-percent method
          For purposes of this paragraph -
          (i) In general
            The 10-percent method is the percentage of completion
          method, modified so that any item which would otherwise be
          taken into account in computing taxable income with respect
          to a contract for any taxable year before the 10-percent year
          is taken into account in the 10-percent year.
          (ii) 10-percent year
            The term ''10-percent year'' means the 1st taxable year as
          of the close of which at least 10 percent of the estimated
          total contract costs have been incurred.
        (C) Election
          An election under this paragraph shall apply to all long-term
        contracts of the taxpayer which are entered into during the
        taxable year in which the election is made or any subsequent
        taxable year.
        (D) Coordination with other provisions
          (i) Simplified method of cost allocation
            This paragraph shall not apply to any taxpayer which uses a
          simplified procedure for allocation of costs under paragraph
          (3)(A).
          (ii) Look-back method
            The 10-percent method shall be taken into account for
          purposes of applying the look-back method of paragraph (2) to
          any taxpayer making an election under this paragraph.
      (6) Election to have look-back method not apply in de minimis
          cases
        (A) Amounts taken into account after completion of contract
          Paragraph (1)(B) shall not apply with respect to any taxable
        year (beginning after the taxable year in which the contract is
        completed) if -
            (i) the cumulative taxable income (or loss) under the
          contract as of the close of such taxable year, is within
            (ii) 10 percent of the cumulative look-back taxable income
          (or loss) under the contract as of the close of the most
          recent taxable year to which paragraph (1)(B) applied (or
          would have applied but for subparagraph (B)).
        (B) De minimis discrepancies
          Paragraph (1)(B) shall not apply in any case to which it
        would otherwise apply if -
            (i) the cumulative taxable income (or loss) under the
          contract as of the close of each prior contract year, is
          within
            (ii) 10 percent of the cumulative look-back income (or
          loss) under the contract as of the close of such prior
          contract year.
        (C) Definitions
          For purposes of this paragraph -
          (i) Contract year
            The term ''contract year'' means any taxable year for which
          income is taken into account under the contract.
          (ii) Look-back income or loss
            The look-back income (or loss) is the amount which would be
          the taxable income (or loss) under the contract if the
          allocation method set forth in paragraph (2)(A) were used in
          determining taxable income.
          (iii) Discounting not applicable
            The amounts taken into account after the completion of the
          contract shall be determined without regard to any
          discounting under the 2nd sentence of paragraph (2).
        (D) Contracts to which paragraph applies
          This paragraph shall only apply if the taxpayer makes an
        election under this subparagraph.  Unless revoked with the
        consent of the Secretary, such an election shall apply to all
        long-term contracts completed during the taxable year for which
        election is made or during any subsequent taxable year.
      (7) Adjusted overpayment rate
        (A) In general
          The adjusted overpayment rate for any interest accrual period
        is the overpayment rate in effect under section 6621 for the
        calendar quarter in which such interest accrual period begins.
        (B) Interest accrual period
          For purposes of subparagraph (A), the term ''interest accrual
        period'' means the period -
            (i) beginning on the day after the return due date for any
          taxable year of the taxpayer, and
            (ii) ending on the return due date for the following
          taxable year.
        For purposes of the preceding sentence, the term ''return due
        date'' means the date prescribed for filing the return of the
        tax imposed by this chapter (determined without regard to
        extensions).
    (c) Allocation of costs to contract
      (1) Direct and certain indirect costs
        In the case of a long-term contract, all costs (including
      research and experimental costs) which directly benefit, or are
      incurred by reason of, the long-term contract activities of the
      taxpayer shall be allocated to such contract in the same manner
      as costs are allocated to extended period long-term contracts
      under section 451 and the regulations thereunder.
      (2) Costs identified under cost-plus and certain Federal
          contracts
        In the case of a cost-plus long-term contract or a Federal
      long-term contract, any cost not allocated to such contract under
      paragraph (1) shall be allocated to such contract if such cost is
      identified by the taxpayer (or a related person), pursuant to the
      contract or Federal, State, or local law or regulation, as being
      attributable to such contract.
      (3) Allocation of production period interest to contract
        (A) In general
          Except as provided in subparagraphs (B) and (C), in the case
        of a long-term contract, interest costs shall be allocated to
        the contract in the same manner as interest costs are allocated
        to property produced by the taxpayer under section 263A(f).
        (B) Production period
          In applying section 263A(f) for purposes of subparagraph (A),
        the production period shall be the period -
            (i) beginning on the later of -
              (I) the contract commencement date, or
              (II) in the case of a taxpayer who uses an accrual method
            with respect to long-term contracts, the date by which at
            least 5 percent of the total estimated costs (including
            design and planning costs) under the contract have been
            incurred, and
            (ii) ending on the contract completion date.
        (C) Application of de minimis rule
          In applying section 263A(f) for purposes of subparagraph (A),
        paragraph (1)(B)(iii) of such section shall be applied on a
        contract-by-contract basis; except that, in the case of a
        taxpayer described in subparagraph (B)(i)(II) of this
        paragraph, paragraph (1)(B)(iii) of section 263A(f) shall be
        applied on a property-by-property basis.
      (4) Certain costs not included
        This subsection shall not apply to any -
          (A) independent research and development expenses,
          (B) expenses for unsuccessful bids and proposals, and
          (C) marketing, selling, and advertising expenses.
      (5) Independent research and development expenses
        For purposes of paragraph (4), the term ''independent research
      and development expenses'' means any expenses incurred in the
      performance of research or development, except that such term
      shall not include -
          (A) any expenses which are directly attributable to a
        long-term contract in existence when such expenses are
        incurred, or
          (B) any expenses under an agreement to perform research or
        development.
    (d) Federal long-term contract
      For purposes of this section -
      (1) In general
        The term ''Federal long-term contract'' means any long-term
      contract -
          (A) to which the United States (or any agency or
        instrumentality thereof) is a party, or
          (B) which is a subcontract under a contract described in
        subparagraph (A).
      (2) Special rules for certain taxable entities
        For purposes of paragraph (1), the rules of section
      168(h)(2)(D) (relating to certain taxable entities not treated as
      instrumentalities) shall apply.
    (e) Exception for certain construction contracts
      (1) In general
        Subsections (a), (b), and (c)(1) and (2) shall not apply to -
          (A) any home construction contract, or
          (B) any other construction contract entered into by a
        taxpayer -
            (i) who estimates (at the time such contract is entered
          into) that such contract will be completed within the 2-year
          period beginning on the contract commencement date of such
          contract, and
            (ii) whose average annual gross receipts for the 3 taxable
          years preceding the taxable year in which such contract is
          entered into do not exceed $10,000,000.
      In the case of a home construction contract with respect to which
      the requirements of clauses (i) and (ii) of subparagraph (B) are
      not met, section 263A shall apply notwithstanding subsection
      (c)(4) thereof.
      (2) Determination of taxpayer's gross receipts
        For purposes of paragraph (1), the gross receipts of -
          (A) all trades or businesses (whether or not incorporated)
        which are under common control with the taxpayer (within the
        meaning of section 52(b)),
          (B) all members of any controlled group of corporations of
        which the taxpayer is a member, and
          (C) any predecessor of the taxpayer or a person described in
        subparagraph (A) or (B),
      for the 3 taxable years of such persons preceding the taxable
      year in which the contract described in paragraph (1) is entered
      into shall be included in the gross receipts of the taxpayer for
      the period described in paragraph (1)(B). The Secretary shall
      prescribe regulations which provide attribution rules that take
      into account, in addition to the persons and entities described
      in the preceding sentence, taxpayers who engage in construction
      contracts through partnerships, joint ventures, and corporations.
      (3) Controlled group of corporations
        For purposes of this subsection, the term ''controlled group of
      corporations'' 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)(1),
        and
          (B) the determination shall be made without regard to
        subsections (a)(4) and (e)(3)(C) of section 1563.
      (4) Construction contract
        For purposes of this subsection, the term ''construction
      contract'' means any contract for the building, construction,
      reconstruction, or rehabilitation of, or the installation of any
      integral component to, or improvements of, real property.
      (5) Special rule for residential construction contracts which are
          not home construction contracts
        In the case of any residential construction contract which is
      not a home construction contract, subsection (a) (as in effect on
      the day before the date of the enactment of the Revenue
      Reconciliation Act of 1989) shall apply except that such
      subsection shall be applied -
          (A) by substituting ''70 percent'' for ''90 percent'' each
        place it appears, and
          (B) by substituting ''30 percent'' for ''10 percent''.
      (6) Definitions relating to residential construction contracts
        For purposes of this subsection -
        (A) Home construction contract
          The term ''home construction contract'' means any
        construction contract if 80 percent or more of the estimated
        total contract costs (as of the close of the taxable year in
        which the contract was entered into) are reasonably expected to
        be attributable to activities referred to in paragraph (4) with
        respect to -
            (i) dwelling units (as defined in section 168(e)(2)(A)(ii))
          contained in buildings containing 4 or fewer dwelling units
          (as so defined), and
            (ii) improvements to real property directly related to such
          dwelling units and located on the site of such dwelling
          units.
        For purposes of clause (i), each townhouse or rowhouse shall be
        treated as a separate building.
        (B) Residential construction contract
          The term ''residential construction contract'' means any
        contract which would be described in subparagraph (A) if clause
        (i) of such subparagraph reads as follows:
            ''(i) dwelling units (as defined in section
          168(e)(2)(A)(ii)), and''.
    (f) Long-term contract
      For purposes of this section -
      (1) In general
        The term ''long-term contract'' means any contract for the
      manufacture, building, installation, or construction of property
      if such contract is not completed within the taxable year in
      which such contract is entered into.
      (2) Special rule for manufacturing contracts
        A contract for the manufacture of property shall not be treated
      as a long-term contract unless such contract involves the
      manufacture of -
          (A) any unique item of a type which is not normally included
        in the finished goods inventory of the taxpayer, or
          (B) any item which normally requires more than 12 calendar
        months to complete (without regard to the period of the
        contract).
      (3) Aggregation, etc.
        For purposes of this subsection, under regulations prescribed
      by the Secretary -
          (A) 2 or more contracts which are interdependent (by reason
        of pricing or otherwise) may be treated as 1 contract, and
          (B) a contract which is properly treated as an aggregation of
        separate contracts may be so treated.
    (g) Contract commencement date
      For purposes of this section, the term ''contract commencement
    date'' means, with respect to any contract, the first date on which
    any costs (other than bidding expenses or expenses incurred in
    connection with negotiating the contract) allocable to such
    contract are incurred.
    (h) Regulations
      The Secretary shall prescribe such regulations as may be
    necessary or appropriate to carry out the purposes of this section,
    including regulations to prevent the use of related parties,
    pass-thru entities, intermediaries, options, or other similar
    arrangements to avoid the application of this section.
 

Sources

    (Added Pub. L. 99-514, title VIII, Sec. 804(a), Oct. 22, 1986, 100
    Stat. 2358; amended Pub. L. 100-203, title X, Sec. 10203(a), Dec.
    22, 1987, 101 Stat. 1330-394; Pub. L. 100-647, title I, Sec.
    1008(c)(1), (2), (4), title V, Sec. 5041(a)-(b)(3), (c), (d), Nov.
    10, 1988, 102 Stat. 3438, 3439, 3673, 3674; Pub. L. 101-239, title
    VII, Sec. 7621(a)-(c), 7811(e), 7815(e)(1), Dec. 19, 1989, 103
    Stat. 2375, 2376, 2408, 2419; Pub. L. 101-508, title XI, Sec.
    11812(b)(8), Nov. 5, 1990, 104 Stat. 1388-535; (As amended Pub. L.
    104-188, title I, Sec. 1702(h)(15), 1704(t)(28), Aug. 20, 1996, 110
    Stat. 1874, 1888; Pub. L. 105-34, title XII, Sec. 1211(a), (b),
    Aug. 5, 1997, 111 Stat. 998, 999.)
 

References in Text

                             REFERENCES IN TEXT
      The date of the enactment of the Revenue Reconciliation Act of
    1989, referred to in subsec. (e)(5), is the date of enactment of
    title VII of Pub. L. 101-239, which was approved Dec. 19, 1989.
 

Miscellaneous

                                 AMENDMENTS

      2005, P.L. 109-135, Section 403 
(s) Amendments Related to Section 708 of the Act.--Section 708 of 
the <<NOTE: 26 USC 460 note.>> American Jobs Creation Act of 2004 is 
amended--
            (1) in subsection (a), by striking ``contract commencement 
        date'' and inserting ``construction commencement date'', and
            (2) by redesignating subsection (d) as subsection (e) and 
        inserting after subsection (c) the following new subsection:
``(d) Certain Adjustments Not to Apply.--Section 481 of the Internal 
Revenue Code of 1986 shall not apply with respect to any change in the 
method of accounting which is required by this section.''.
      
      2004 - Subsec.708, Pub.L.108-357, clarifies the Method of
    Accounting for Naval Shipbuilders:
      (a) In General.--In the case of a qualified naval ship contract,  
     the taxable income of such contract during the 5-taxable 
     year period beginning with the taxable year in which the construction 
     commencement date occurs shall be determined under a method 
     identical to the method used in the case of a qualified ship 
     contract (as defined in section 10203(b)(2)(B) of the 
     Revenue Act of 1987).
      (b) Recapture of Tax Benefit.--In the case of a qualified naval   
     ship contract to which subsection (a) applies, the taxpayer's 
     tax imposed by chapter 1 of the Internal Revenue Code 
     of 1986 for the first taxable year following the 5-taxable 
     year period described in subsection (a) shall be 
     increased by the excess (if any) of--
            (1) the amount of tax which would have been imposed during 
      such period if this section had not been enacted, over
            (2) the amount of tax so imposed during such period.
      (c) Qualified Naval Ship Contract.--For purposes of this section:
            (1) In general.--The term ``qualified naval ship contract'' 
      means any contract or portion thereof that is for the 
      construction in the United States of 1 ship or submarine for the 
      Federal Government if the taxpayer reasonably expects the 
      acceptance date will occur no later than 9 years after the 
      construction commencement date.
            (2) Acceptance date.--The term ``acceptance date'' means the 
      date 1 year after the date on which the Federal Government 
      issues a letter of acceptance or other similar document for the 
      ship or submarine.
            (3) Construction commencement date.--The term ``construction 
      commencement date'' means the date on which the physical 
      fabrication of any section or component of the ship or submarine 
      begins in the taxpayer's shipyard.
      (d) Certain Adjustments Not to Apply.--Section 481 of the Internal 
      Revenue Code of 1986 shall not apply with respect to any change in the 
      method of accounting which is required by this section.''.
      (e) Effective Date.--This section shall apply to contracts for   
      ships or submarines with respect to which the construction 
      commencement date occurs after the date of the enactment 
      of this Act.

      1997 - Subsec. (b)(2)(C). Pub. L. 105-34, Sec. 1211(b)(1),
    substituted ''the adjusted overpayment rate (as defined in
    paragraph (7))'' for ''the overpayment rate established by section
    6621''.
      Subsec. (b)(6). Pub. L. 105-34, Sec. 1211(a), added par. (6).
      Subsec. (b)(7). Pub. L. 105-34, Sec. 1211(b)(2), added par. (7).
      1996 - Subsec. (b)(1). Pub. L. 104-188, Sec. 1704(t)(28), which
    directed that par. (1) be amended by substituting ''the look-back
    method of paragraph (2)'' for ''the look-back method of paragraph
    (3)'', could not be executed, because that phrase does not appear
    in text.  See 1989 Amendment note below.
      Subsec. (e)(6)(B). Pub. L. 104-188, Sec. 1702(h)(15), substituted
    ''section 168(e)(2)(A)(ii)'' for ''section 167(k)''.
      1990 - Subsec. (e)(6)(A)(i). Pub. L. 101-508 substituted
    ''section 168(e)(2)(A)(ii)'' for ''section 167(k)''.
      1989 - Subsec. (a). Pub. L. 101-239, Sec. 7621(a), substituted
    ''Requirement that percentage of completion method be used'' for
    ''Percentage of completion-capitalized cost method'' in heading and
    amended text generally.  Prior to amendment, text read as follows:
      ''(1) In general. - In the case of any long-term contract -
        ''(A) 90 percent of the items with respect to such contract
      shall be taken into account under the percentage of completion
      method (as modified by subsection (b)), and
        ''(B) 10 percent of the items with respect to such contract
      shall be taken into account under the taxpayer's normal method of
      accounting.
      ''(2) 90 percent look-back method to apply. - Upon completion of
    any long-term contract (or, with respect to any amount properly
    taken into account after completion of the contract, when such
    amount is so properly taken into account), the taxpayer shall pay
    (or shall be entitled to receive) interest determined by applying
    the look-back method of subsection (b)(3) to 90 percent of the
    items with respect to the contract.''
      Subsec. (a)(2). Pub. L. 101-239, Sec. 7811(e)(1), inserted ''(or,
    with respect to any amount properly taken into account after
    completion of the contract, when such amount is so properly taken
    into account)'' after ''any long-term contract''.
      Subsec. (b)(1). Pub. L. 101-239, Sec. 7621(c)(2)(A), substituted
    ''paragraph (3)'' for ''paragraph (4)''.
      Pub. L. 101-239, Sec. 7621(c)(2)(B), which directed the amendment
    of par. (1) by substituting ''paragraph (2)'' for ''paragraph
    (3)'', was executed by making the substitution in subpar. (B) and
    concluding provisions to reflect the probable intent of Congress.
      Pub. L. 101-239, Sec. 7621(c)(1), redesignated par. (2) as (1)
    and struck out former par. (1) which read as follows: ''Subsection
    (a) not to apply where percentage of completion method used. -
    Subsection (a) shall not apply to any long-term contract with
    respect to which amounts includible in gross income are determined
    under the percentage of completion method.''
      Subsec. (b)(2). Pub. L. 101-239, Sec. 7621(c)(1), redesignated
    par. (3) as (2). Former par. (2) redesignated (1).
      Pub. L. 101-239, Sec. 7811(e)(4), (6), inserted two sentences at
    end.
      Subsec. (b)(2)(B). Pub. L. 101-239, Sec. 7811(e)(2), substituted
    ''any amount properly taken into account'' for ''any amount
    received or accrued'' and ''is so properly taken into account'' for
    ''is so received or accrued''.
      Subsec. (b)(3). Pub. L. 101-239, Sec. 7621(c)(1), redesignated
    par. (4) as (3). Former par. (3) redesignated (2).
      Pub. L. 101-239, Sec. 7811(e)(3), in concluding provisions,
    substituted ''any amount properly taken into account'' for ''any
    amount received or accrued'' and ''such amount was properly taken
    into account'' for ''such amount was received or accrued''.
      Subsec. (b)(3)(B). Pub. L. 101-239, Sec. 7621(c)(3), substituted
    ''Paragraph (1)(B)'' for ''Paragraph (2)(B) and subsection (a)(2)''
    in introductory provisions.
      Subsec. (b)(4). Pub. L. 101-239, Sec. 7621(c)(1), redesignated
    par. (5) as (4). Former par. (4) redesignated (3).
      Subsec. (b)(4)(A)(i). Pub. L. 101-239, Sec. 7621(c)(4)(A),
    substituted ''paragraph (2)'' for ''paragraph (3)''.
      Subsec. (b)(4)(A)(ii). Pub. L. 101-239, Sec. 7621(c)(4)(B),
    substituted ''paragraph (2)(B)'' for ''paragraph (3)(B)'' in
    introductory provisions.
      Subsec. (b)(4)(A)(ii)(I). Pub. L. 101-239, Sec. 7621(c)(4)(C),
    substituted ''paragraph (2)(A)'' for ''paragraph (3)(A)''.
      Subsec. (b)(4)(A)(iii). Pub. L. 101-239, Sec. 7621(c)(4)(A),
    substituted ''paragraph (2)'' for ''paragraph (3)'' in two places.
      Subsec. (b)(5). Pub. L. 101-239, Sec. 7621(b), added par. (5).
      Pub. L. 101-239, Sec. 7621(c)(1), redesignated former par. (5) as
    (4).
      Subsec. (e)(2)(C). Pub. L. 101-239, Sec. 7811(e)(5), added
    subpar. (C).
      Subsec. (e)(5). Pub. L. 101-239, Sec. 7621(c)(5), inserted
    introductory provisions and struck out former introductory
    provisions which read as follows: ''In the case of any residential
    construction contract which is not a home construction contract,
    subsection (a) shall be applied - ''.
      Subsec. (e)(6)(A). Pub. L. 101-239, Sec. 7815(e)(1)(A),
    substituted ''activities referred to in paragraph (4) with respect
    to'' for ''the building, construction, reconstruction, or
    rehabilitation of''.
      Subsec. (e)(6)(A)(i). Pub. L. 101-239, Sec. 7815(e)(1)(B), added
    cl. (i) and struck out former cl. (i) which read as follows:
    ''dwelling units contained in buildings containing 4 or fewer
    dwelling units, and''.
      1988 - Subsec. (a)(1)(A). Pub. L. 100-647, Sec. 5041(a)(1),
    substituted ''90'' for ''70''.
      Subsec. (a)(1)(B). Pub. L. 100-647, Sec. 5041(a)(2), substituted
    ''10'' for ''30''.
      Subsec. (a)(2). Pub. L. 100-647, Sec. 5041(a)(1), substituted
    ''90'' for ''70'' in heading and in text.
      Subsec. (b)(2). Pub. L. 100-647, Sec. 1008(c)(2)(B), substituted
    ''Except as provided in paragraph (4), in'' for ''In''.
      Subsec. (b)(2)(B). Pub. L. 100-647, Sec. 1008(c)(4)(B), inserted
    ''(or, with respect to any amount received or accrued after
    completion of the contract, when such amount is so received or
    accrued)'' after ''contract''.
      Subsec. (b)(3). Pub. L. 100-647, Sec. 1008(c)(4)(A), inserted at
    end ''For purposes of the preceding sentence, any amount received
    or accrued after completion of the contract shall be taken into
    account by discounting (using the Federal mid-term rate determined
    under section 1274(d) as of the time such amount was received or
    accrued) such amount to its value as of the completion of the
    contract.  The taxpayer may elect with respect to any contract to
    have the preceding sentence not apply to such contract.''
      Pub. L. 100-647, Sec. 1008(c)(1)(A), substituted ''paragraph''
    for ''subparagraph''.
      Subsec. (b)(3)(B). Pub. L. 100-647, Sec. 1008(c)(1)(B),
    substituted ''subparagraph (A)'' for ''paragraph (1)'' in two
    places.
      Subsec. (b)(3)(C). Pub. L. 100-647, Sec. 1008(c)(1)(C),
    substituted ''subparagraph (B)'' for ''paragraph (1)''.
      Subsec. (b)(4). Pub. L. 100-647, Sec. 1008(c)(2)(A), added par.
    (4).
      Subsec. (b)(5). Pub. L. 100-647, Sec. 5041(d), added par. (5).
      Subsec. (e)(1). Pub. L. 100-647, Sec. 5041(b)(1), amended par.
    (1) generally.  Prior to amendment, par. (1) read as follows:
    ''Subsections (a), (b), and (c)(1) and (2) shall not apply to any
    construction contract entered into by a taxpayer -
        ''(A) who estimates (at the time such contract is entered into)
      that such contract will be completed within the 2-year period
      beginning on the contract commencement date of such contract, and
        ''(B) whose average annual gross receipts for the 3 taxable
      years preceding the taxable year in which such contract is
      entered into do not exceed $10,000,000.''
      Subsec. (e)(5). Pub. L. 100-647, Sec. 5041(b)(2), added par. (5).
      Subsec. (e)(6). Pub. L. 100-647, Sec. 5041(b)(3), added par. (6).
      Subsec. (h). Pub. L. 100-647, Sec. 5041(c), added subsec. (h).
      1987 - Subsec. (a). Pub. L. 100-203 substituted ''70 percent''
    for ''40 percent'' in par. (1)(A) and in heading and text of par.
    (2), and ''30 percent'' for ''60 percent'' in par. (1)(B).
                      EFFECTIVE DATE OF 1997 AMENDMENT
      Section 1211(c) of Pub. L. 105-34 provided that:
      ''(1) In general. - Except as provided in paragraph (2), the
    amendments made by this section (amending this section) shall apply
    to contracts completed in taxable years ending after the date of
    the enactment of this Act (Aug. 5, 1997).
      ''(2) Subsection (b). - The amendments made by subsection (b)
    (amending this section) shall apply for purposes of section 167(g)
    of the Internal Revenue Code of 1986 to property placed in service
    after September 13, 1995.''
                      EFFECTIVE DATE OF 1996 AMENDMENT
      Amendment by section 1702(h)(15) of Pub. L. 104-188 effective,
    except as otherwise expressly provided, as if included in the
    provision of the Revenue Reconciliation Act of 1990, Pub. L.
    101-508, title XI, to which such amendment relates, see section
    1702(i) of Pub. L. 104-188, set out as a note under section 38 of
    this title.
                      EFFECTIVE DATE OF 1990 AMENDMENT
      Amendment by Pub. L. 101-508 applicable to property placed in
    service after Nov. 5, 1990, but not applicable to any property to
    which section 168 of this title does not apply by reason of subsec.
    (f)(5) of section 168, and not applicable to rehabilitation
    expenditures described in section 252(f)(5) of Pub. L. 99-514, see
    section 11812(c) of Pub. L. 101-508, set out as a note under
    section 42 of this title.
                      EFFECTIVE DATE OF 1989 AMENDMENT
      Section 7621(d) of Pub. L. 101-239 provided that:
      ''(1) In general. - Except as provided in paragraph (2), the
    amendments made by this section (amending this section) shall apply
    to contracts entered into on or after July 11, 1989.
      ''(2) Binding bids. - The amendments made by this section shall
    not apply to any contract resulting from the acceptance of a bid
    made before July 11, 1989. The preceding sentence shall apply only
    if the bid could not have been revoked or altered at any time on or
    after July 11, 1989.
      ''(3) Special rule for certain ship contracts. - The amendments
    made by this section shall not apply in the case of a qualified
    ship contract (as defined in section 10203(b)(2)(B) of the Revenue
    Act of 1987 (Pub. L. 100-203, set out below)).''
      Amendment by sections 7811(e) and 7815(e)(1) of Pub. L. 101-239
    effective, except as otherwise provided, as if included in the
    provision of the Technical and Miscellaneous Revenue Act of 1988,
    Pub. L. 100-647, to which such amendment relates, see section 7817
    of Pub. L. 101-239, set out as a note under section 1 of this
    title.
                      EFFECTIVE DATE OF 1988 AMENDMENT
      Amendment by section 1008(c)(1), (2), (4) of Pub. L. 100-647
    effective, except as otherwise provided, as if included in the
    provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which
    such amendment relates, see section 1019(a) of Pub. L. 100-647, set
    out as a note under section 1 of this title.
      Section 5041(e) of Pub. L. 100-647, as amended by Pub. L.
    101-239, title VII, Sec. 7815(e)(3), Dec. 19, 1989, 103 Stat. 2419,
    provided that:
      ''(1) Subsections (a), (b), and (c). -
        ''(A) In general. - Except as otherwise provided in this
      paragraph, the amendments made by subsections (a), (b), and (c)
      (amending this section and section 56 of this title) shall apply
      to contracts entered into on or after June 21, 1988.
        ''(B) Binding bids. - The amendments made by subsections (a),
      (b), and (c) shall not apply to any contract resulting from the
      acceptance of a bid made before June 21, 1988. The preceding
      sentence shall apply only if the bid could not have been revoked
      or altered at any time on or after June 21, 1988.
        ''(C) Special rule for certain ship contracts. - The amendments
      made by subsections (a) and (b) (amending this section and
      section 56 of this title) shall not apply in the case of a
      qualified ship contract (as defined in section 10203(b)(2)(B) of
      the Revenue Act of 1987 (Pub. L. 100-203, set out below)).
      ''(2) Subsection (d). - The amendment made by subsection (d)
    (amending this section) shall apply as if included in the
    amendments made by section 804 of the Reform Act (Pub. L. 99-514);
    except that such amendment shall not apply to any contract
    completed in a taxable year ending before the date of the enactment
    of this Act (Nov. 10, 1988), if the due date (determined with
    regard to extensions) for the return for such year is before such
    date of enactment.''
                      EFFECTIVE DATE OF 1987 AMENDMENT
      Section 10203(b) of Pub. L. 100-203 provided that:
      ''(1) In general. - Except as provided in paragraph (2), the
    amendments made by this section (amending this section) shall apply
    to contracts entered into after October 13, 1987.
      ''(2) Special rule for certain ship contracts. -
        ''(A) In general. - The amendments made by this section shall
      not apply in the case of a qualified ship contract.
        ''(B) Qualified ship contract. - For purposes of subparagraph
      (A), the term 'qualified ship contract' means any contract for
      the construction in the United States of not more than 5 ships if
      -
          ''(i) such ships will not be constructed (directly or
        indirectly) for the Federal Government, and
          ''(ii) the taxpayer reasonably expects to complete such
        contract within 5 years of the contract commencement date (as
        defined in section 460(g) of the Internal Revenue Code of
        1986).''
                      EFFECTIVE DATE OF 1986 AMENDMENT
      Section 804(d) of Pub. L. 99-514, as amended by Pub. L. 100-647,
    title I, Sec. 1008(c)(3), Nov. 10, 1988, 102 Stat. 3439, provided
    that:
      ''(1) In general. - The amendments made by this section (enacting
    this section) shall apply to any contract entered into after
    February 28, 1986.
      ''(2) Clarification of treatment of independent research and
    development expenses. -
        ''(A) In general. - For periods before, on, or after the date
      of enactment of this Act (Oct. 22, 1986) -
          ''(i) any independent research and development expenses taken
        into account in determining the total contract price shall not
        be severable from the contract, and
          ''(ii) any independent research and development expenses
        shall not be treated as amounts chargeable to capital account.
        ''(B) Independent research and development expenses. - For
      purposes of subparagraph (A), the term 'independent research and
      development expenses' has the meaning given to such term by
      section 460(c)(5) of the Internal Revenue Code of 1986, as added
      by this section.''
                                REGULATIONS
      Section 804(b) of Pub. L. 99-514 provided that: ''The Secretary
    of the Treasury or his delegate shall modify the income tax
    regulations relating to accounting for long-term contracts to carry
    out the provisions of section 460 of the Internal Revenue Code of
    1986 (as added by subsection (a)).''
                             SAVINGS PROVISION
      For provisions that nothing in amendment by Pub. L. 101-508 be
    construed to affect treatment of certain transactions occurring,
    property acquired, or items of income, loss, deduction, or credit
    taken into account prior to Nov. 5, 1990, for purposes of
    determining liability for tax for periods ending after Nov. 5,
    1990, see section 11821(b) of Pub. L. 101-508, set out as a note
    under section 29 of this title.
                 AMORTIZATION OF PAST SERVICE PENSION COSTS
      Allocable costs (within the meaning of subsec. (c) of this
    section) with respect to any property to include contributions paid
    to or under a pension or annuity plan whether or not such
    contributions represent past service costs, see section 10204 of
    Pub. L. 100-203, set out as a note under section 263A of this
    title.
 

References

                   SECTION REFERRED TO IN OTHER SECTIONS
      This section is referred to in sections 56, 167 of this title.
 

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