26 U.S.C. § 7518 — Tax incentives relating to merchant ma-

Page 3953 TITLE 26—INTERNAL REVENUE CODE § 7518 and upon written request, to make special statistical studies and compilations from any information re- ceived by compliance with this title, such studies were authorized to be made jointly with party or parties re- questing them and transcripts to be made available to requesting party for a fee. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF REPEAL Repeal effective Jan. 1, 1977, see section 1202(i) of Pub. L. 94–455, set out as an Effective Date of 1976 Amend- ment note under section 6103 of this title. § 7516. Supplying training and training aids on request The Secretary is authorized within his discre- tion, upon written request, to admit employees and officials of any State, the Commonwealth of Puerto Rico, any possession of the United States, any political subdivision or instrumen- tality of any of the foregoing, the District of Co- lumbia, or any foreign government to training courses conducted by the Internal Revenue Service, and to supply them with texts and other training aids. The Secretary may require payment from the party or parties making the request of a reasonable fee not to exceed the cost of the training and training aids supplied pursuant to such request. (Added Pub. L. 87–870, § 3(a)(1), Oct. 23, 1962, 76 Stat. 1160; amended Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) Editorial Notes AMENDMENTS 1976—Pub. L. 94–455 struck out ‘‘or his delegate’’ after ‘‘Secretary’’ wherever appearing. § 7517. Furnishing on request of statement ex- plaining estate or gift valuation (a) General rule If the Secretary makes a determination or a proposed determination of the value of an item of property for purposes of the tax imposed under chapter 11, 12, or 13, he shall furnish, on the written request of the executor, donor, or the person required to make the return of the tax imposed by chapter 13 (as the case may be), to such executor, donor, or person a written statement containing the material required by subsection (b). Such statement shall be fur- nished not later than 45 days after the later of the date of such request or the date of such de- termination or proposed determination. (b) Contents of statement A statement required to be furnished under subsection (a) with respect to the value of an item of property shall— (1) explain the basis on which the valuation was determined or proposed, (2) set forth any computation used in arriv- ing at such value, and (3) contain a copy of any expert appraisal made by or for the Secretary. (c) Effect of statement Except to the extent otherwise provided by law, the value determined or proposed by the Secretary with respect to which a statement is furnished under this section, and the method used in arriving at such value, shall not be bind- ing on the Secretary. (Added Pub. L. 94–455, title XX, § 2008(a)(1), Oct. 4, 1976, 90 Stat. 1891.) Statutory Notes and Related Subsidiaries EFFECTIVE DATE Pub. L. 94–455, title XX, § 2008(d)(1), Oct. 4, 1976, 90 Stat. 1892, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘The amendments made by subsection (a) [enacting this section and amending sections 2031 and 2512 of this title]— ‘‘(A) insofar as they relate to the tax imposed under chapter 11 of the Internal Revenue Code of 1986 [for- merly I.R.C. 1954, section 2001 et seq. of this title], shall apply to the estates of decedents dying after De- cember 31, 1976, and ‘‘(B) insofar as they relate to the tax imposed under chapter 12 of such Code [section 2501 et seq. of this title], shall apply to gifts made after December 31, 1976.’’ § 7518. Tax incentives relating to merchant ma- rine capital construction funds (a) Ceiling on deposits (1) In general The amount deposited in a fund established under chapter 535 of title 46 of the United States Code (hereinafter in this section re- ferred to as a ‘‘capital construction fund’’) shall not exceed for any taxable year the sum of: (A) that portion of the taxable income of the owner or lessee for such year (computed as provided in chapter 1 but without regard to the carryback of any net operating loss or net capital loss and without regard to this section) which is attributable to the oper- ation of the agreement vessels in the foreign or domestic commerce of the United States or in the fisheries of the United States, (B) the amount allowable as a deduction under section 167 for such year with respect to the agreement vessels, (C) if the transaction is not taken into ac- count for purposes of subparagraph (A), the net proceeds (as defined in joint regulations) from— (i) the sale or other disposition of any agreement vessel, or (ii) insurance or indemnity attributable to any agreement vessel, and (D) the receipts from the investment or re- investment of amounts held in such fund. (2) Limitations on deposits by lessees In the case of a lessee, the maximum amount which may be deposited with respect to an agreement vessel by reason of paragraph (1)(B) for any period shall be reduced by any amount which, under an agreement entered into under chapter 535 of title 46, United States Code, the owner is required or per- mitted to deposit for such period with respect to such vessel by reason of paragraph (1)(B). (3) Certain barges and containers included For purposes of paragraph (1), the term ‘‘agreement vessel’’ includes barges and con- Page 3954 TITLE 26—INTERNAL REVENUE CODE § 7518 tainers which are part of the complement of such vessel and which are provided for in the agreement. (b) Requirements as to investments (1) In general Amounts in any capital construction fund shall be kept in the depository or depositories specified in the agreement and shall be subject to such trustee and other fiduciary require- ments as may be specified by the Secretary. (2) Limitation on fund investments Amounts in any capital construction fund may be invested only in interest-bearing secu- rities approved by the Secretary; except that, if such Secretary consents thereto, an agreed percentage (not in excess of 60 percent) of the assets of the fund may be invested in the stock of domestic corporations. Such stock must be currently fully listed and registered on an ex- change registered with the Securities and Ex- change Commission as a national securities exchange, and must be stock which would be acquired by prudent men of discretion and in- telligence in such matters who are seeking a reasonable income and the preservation of their capital. If at any time the fair market value of the stock in the fund is more than the agreed percentage of the assets in the fund, any subsequent investment of amounts depos- ited in the fund, and any subsequent with- drawal from the fund, shall be made in such a way as to tend to restore the fund to a situa- tion in which the fair market value of the stock does not exceed such agreed percentage. (3) Investment in certain preferred stock per- mitted For purposes of this subsection, if the com- mon stock of a corporation meets the require- ments of this subsection and if the preferred stock of such corporation would meet such re- quirements but for the fact that it cannot be listed and registered as required because it is nonvoting stock, such preferred stock shall be treated as meeting the requirements of this subsection. (c) Nontaxability for deposits (1) In general For purposes of this title— (A) taxable income (determined without regard to this section and chapter 535 of title 46, United States Code) for the taxable year shall be reduced by an amount equal to the amount deposited for the taxable year out of amounts referred to in subsection (a)(1)(A), (B) gain from a transaction referred to in subsection (a)(1)(C) shall not be taken into account if an amount equal to the net pro- ceeds (as defined in joint regulations) from such transaction is deposited in the fund, (C) the earnings (including gains and losses) from the investment and reinvest- ment of amounts held in the fund shall not be taken into account, (D) the earnings and profits (within the meaning of section 316) of any corporation shall be determined without regard to this section and chapter 535 of title 46, United States Code, and (E) in applying the tax imposed by section 531 (relating to the accumulated earnings tax), amounts while held in the fund shall not be taken into account. (2) Only qualified deposits eligible for treat- ment Paragraph (1) shall apply with respect to any amount only if such amount is deposited in the fund pursuant to the agreement and not later than the time provided in joint regula- tions. (d) Establishment of accounts For purposes of this section— (1) In general Within a capital construction fund 3 ac- counts shall be maintained: (A) the capital account, (B) the capital gain account, and (C) the ordinary income account. (2) Capital account The capital account shall consist of— (A) amounts referred to in subsection (a)(1)(B), (B) amounts referred to in subsection (a)(1)(C) other than that portion thereof which represents gain not taken into ac- count by reason of subsection (c)(1)(B), (C) the percentage applicable under section 243(a)(1) of any dividend received by the fund with respect to which the person maintain- ing the fund would (but for subsection (c)(1)(C)) be allowed a deduction under sec- tion 243, and (D) interest income exempt from taxation under section 103. (3) Capital gain account The capital gain account shall consist of— (A) amounts representing capital gains on assets held for more than 6 months and re- ferred to in subsection (a)(1)(C) or (a)(1)(D), reduced by (B) amounts representing capital losses on assets held in the fund for more than 6 months. (4) Ordinary income account The ordinary income account shall consist of— (A) amounts referred to in subsection (a)(1)(A), (B)(i) amounts representing capital gains on assets held for 6 months or less and re- ferred to in subsection (a)(1)(C) or (a)(1)(D), reduced by (ii) amounts representing capital losses on assets held in the fund for 6 months or less, (C) interest (not including any tax-exempt interest referred to in paragraph (2)(D)) and other ordinary income (not including any dividend referred to in subparagraph (E)) re- ceived on assets held in the fund, (D) ordinary income from a transaction de- scribed in subsection (a)(1)(C), and (E) the portion of any dividend referred to in paragraph (2)(C) not taken into account under such paragraph. (5) Capital losses only allowed to offset certain gains Except on termination of a capital construc- tion fund, capital losses referred to in para- Page 3955 TITLE 26—INTERNAL REVENUE CODE § 7518 graph (3)(B) or in paragraph (4)(B)(ii) shall be allowed only as an offset to gains referred to in paragraph (3)(A) or (4)(B)(i), respectively. (e) Purposes of qualified withdrawals (1) In general A qualified withdrawal from the fund is one made in accordance with the terms of the agreement but only if it is for: (A) the acquisition, construction, or recon- struction of a qualified vessel, (B) the acquisition, construction, or recon- struction of barges and containers which are part of the complement of a qualified vessel, or (C) the payment of the principal on indebt- edness incurred in connection with the ac- quisition, construction, or reconstruction of a qualified vessel or a barge or container which is part of the complement of a quali- fied vessel. Except to the extent provided in regulations prescribed by the Secretary, subparagraph (B), and so much of subparagraph (C) as relates only to barges and containers, shall apply only with respect to barges and containers con- structed in the United States. (2) Penalty for failing to fulfill any substantial obligation Under joint regulations, if the Secretary de- termines that any substantial obligation under any agreement is not being fulfilled, he may, after notice and opportunity for hearing to the person maintaining the fund, treat the entire fund or any portion thereof as an amount withdrawn from the fund in a non- qualified withdrawal. (f) Tax treatment of qualified withdrawals (1) Ordering rule Any qualified withdrawal from a fund shall be treated— (A) first as made out of the capital ac- count, (B) second as made out of the capital gain account, and (C) third as made out of the ordinary in- come account. (2) Adjustment to basis of vessel, etc., where withdrawal from ordinary income account If any portion of a qualified withdrawal for a vessel, barge, or container is made out of the ordinary income account, the basis of such vessel, barge, or container shall be reduced by an amount equal to such portion. (3) Adjustment to basis of vessel, etc., where withdrawal from capital gain account If any portion of a qualified withdrawal for a vessel, barge, or container is made out of the capital gain account, the basis of such vessel, barge, or container shall be reduced by an amount equal to such portion. (4) Adjustment to basis of vessels, etc., where withdrawals pay principal on debt If any portion of a qualified withdrawal to pay the principal on any indebtedness is made out of the ordinary income account or the cap- ital gain account, then an amount equal to the aggregate reduction which would be required by paragraphs (2) and (3) if this were a quali- fied withdrawal for a purpose described in such paragraphs shall be applied, in the order pro- vided in joint regulations, to reduce the basis of vessels, barges, and containers owned by the person maintaining the fund. Any amount of a withdrawal remaining after the application of the preceding sentence shall be treated as a nonqualified withdrawal. (5) Ordinary income recapture of basis reduc- tion If any property the basis of which was re- duced under paragraph (2), (3), or (4) is dis- posed of, any gain realized on such disposition, to the extent it does not exceed the aggregate reduction in the basis of such property under such paragraphs, shall be treated as an amount referred to in subsection (g)(3)(A) which was withdrawn on the date of such dis- position. Subject to such conditions and re- quirements as may be provided in joint regula- tions, the preceding sentence shall not apply to a disposition where there is a redeposit in an amount determined under joint regulations which will, insofar as practicable, restore the fund to the position it was in before the with- drawal. (g) Tax treatment of nonqualified withdrawals (1) In general Except as provided in subsection (h), any withdrawal from a capital construction fund which is not a qualified withdrawal shall be treated as a nonqualified withdrawal. (2) Ordering rule Any nonqualified withdrawal from a fund shall be treated— (A) first as made out of the ordinary in- come account, (B) second as made out of the capital gain account, and (C) third as made out of the capital ac- count. For purposes of this section, items withdrawn from any account shall be treated as with- drawn on a first-in-first-out basis; except that (i) any nonqualified withdrawal for research, development, and design expenses incident to new and advanced ship design, machinery and equipment, and (ii) any amount treated as a nonqualified withdrawal under the second sen- tence of subsection (f)(4), shall be treated as withdrawn on a last-in-first-out basis. (3) Operating rules For purposes of this title— (A) any amount referred to in paragraph (2)(A) shall be included in income as an item of ordinary income for the taxable year in which the withdrawal is made, (B) any amount referred to in paragraph (2)(B) shall be included in income for the taxable year in which the withdrawal is made as an item of gain realized during such year from the disposition of an asset held for more than 6 months, and (C) for the period on or before the last date prescribed for payment of tax for the taxable year in which this withdrawal is made— Page 3956 TITLE 26—INTERNAL REVENUE CODE § 7518 (i) no interest shall be payable under sec- tion 6601 and no addition to the tax shall be payable under section 6651, (ii) interest on the amount of the addi- tional tax attributable to any item re- ferred to in subparagraph (A) or (B) shall be paid at the applicable rate (as defined in paragraph (4)) from the last date pre- scribed for payment of the tax for the tax- able year for which such item was depos- ited in the fund, and (iii) no interest shall be payable on amounts referred to in clauses (i) and (ii) of paragraph (2) or in the case of any non- qualified withdrawal arising from the ap- plication of the recapture provision of sec- tion 606(5) of the Merchant Marine Act, 1936, as in effect on December 31, 1969. (4) Interest rate For purposes of paragraph (3)(C)(ii), the ap- plicable rate of interest for any nonqualified withdrawal shall be determined and published jointly by the Secretary of the Treasury or his delegate and the applicable Secretary and shall bear a relationship to 8 percent which the Secretaries determine under joint regula- tions to be comparable to the relationship which the money rates and investment yields for the calendar year immediately preceding the beginning of the taxable year bear to the money rates and investment yields for the cal- endar year 1970. (5) Amount not withdrawn from fund after 25 years from deposit taxed as nonqualified withdrawal (A) In general The applicable percentage of any amount which remains in a capital construction fund at the close of the 26th, 27th, 28th, 29th, or 30th taxable year following the taxable year for which such amount was deposited shall be treated as a nonqualified withdrawal in accordance with the following table: If the amount remains in the fund at the close of the— The applicable percentage is— 26th taxable year ........................ 20 percent 27th taxable year ........................ 40 percent 28th taxable year ........................ 60 percent 29th taxable year ........................ 80 percent 30th taxable year ........................ 100 percent. (B) Earnings treated as deposits The earnings of any capital construction fund for any taxable year (other than net gains) shall be treated for purposes of this paragraph as an amount deposited for such taxable year. (C) Amounts committed treated as with- drawn For purposes of subparagraph (A), an amount shall not be treated as remaining in a capital construction fund at the close of any taxable year to the extent there is a binding contract at the close of such year for a qualified withdrawal of such amount with respect to an identified item for which such withdrawal may be made. (D) Authority to treat excess funds as with- drawn If the Secretary determines that the bal- ance in any capital construction fund ex- ceeds the amount which is appropriate to meet the vessel construction program objec- tives of the person who established such fund, the amount of such excess shall be treated as a nonqualified withdrawal under subparagraph (A) unless such person devel- ops appropriate program objectives within 3 years to dissipate such excess. (E) Amounts in fund on January 1, 1987 For purposes of this paragraph, all amounts in a capital construction fund on January 1, 1987, shall be treated as deposited in such fund on such date. (6) Nonqualified withdrawals taxed at highest marginal rate (A) In general In the case of any taxable year for which there is a nonqualified withdrawal (includ- ing any amount so treated under paragraph (5)), the tax imposed by chapter 1 shall be determined— (i) by excluding such withdrawal from gross income, and (ii) by increasing the tax imposed by chapter 1 by the product of the amount of such withdrawal and the highest rate of tax specified in section 1 (section 11 in the case of a corporation). In the case of a taxpayer other than a cor- poration, with respect to the portion of any nonqualified withdrawal made out of the capital gain account during a taxable year to which section 1(h) applies, the rate of tax taken into account under the preceding sen- tence shall not exceed 20 percent. (B) Tax benefit rule If any portion of a nonqualified with- drawal is properly attributable to deposits (other than earnings on deposits) made by the taxpayer in any taxable year which did not reduce the taxpayer’s liability for tax under chapter 1 for any taxable year pre- ceding the taxable year in which such with- drawal occurs— (i) such portion shall not be taken into account under subparagraph (A), and (ii) an amount equal to such portion shall be treated as allowed as a deduction under section 172 for the taxable year in which such withdrawal occurs. (C) Coordination with deduction for net op- erating losses Any nonqualified withdrawal excluded from gross income under subparagraph (A) shall be excluded in determining taxable in- come under section 172(b)(2). (h) Certain corporate reorganizations and changes in partnerships Under joint regulations— (1) a transfer of a fund from one person to another person in a transaction to which sec- tion 381 applies may be treated as if such transaction did not constitute a nonqualified withdrawal, and Page 3957 TITLE 26—INTERNAL REVENUE CODE § 7518 (2) a similar rule shall be applied in the case of a continuation of a partnership. (i) Definitions For purposes of this section, any term defined in chapter 535 of title 46, United States Code, which is also used in this section (including the definition of ‘‘Secretary’’) shall have the mean- ing given such term by such chapter as in effect on the date of the enactment of this section. (Added Pub. L. 99–514, title II, § 261(b), Oct. 22, 1986, 100 Stat. 2208; amended Pub. L. 100–647, title I, §§ 1002(m)(1), 1018(u)(23), Nov. 10, 1988, 102 Stat. 3382, 3591; Pub. L. 101–508, title XI, § 11101(d)(7)(A), Nov. 5, 1990, 104 Stat. 1388–405; Pub. L. 105–34, title III, § 311(c)(2), Aug. 5, 1997, 111 Stat. 835; Pub. L. 108–27, title III, § 301(a)(2)(D), May 28, 2003, 117 Stat. 758; Pub. L. 109–304, § 17(e)(6), Oct. 6, 2006, 120 Stat. 1708; Pub. L. 112–240, title I, § 102(c)(1)(D), Jan. 2, 2013, 126 Stat. 2319; Pub. L. 113–295, div. A, title II, § 221(a)(117), Dec. 19, 2014, 128 Stat. 4054; Pub. L. 115–97, title I, § 13001(b)(2)(Q), (7), Dec. 22, 2017, 131 Stat. 2097, 2098; Pub. L. 115–141, div. U, title IV, § 401(a)(352), Mar. 23, 2018, 132 Stat. 1201.) Editorial Notes REFERENCES IN TEXT Section 606(5) of the Merchant Marine Act, 1936, as in effect on December 31, 1969, referred to in subsec. (g)(3)(C)(iii), was section 606(5) of act June 29, 1936, ch. 858, title VI, 49 Stat. 2004, as amended by acts June 23, 1938, ch. 600, § 22, 52 Stat. 960; July 17, 1952, ch. 939, § 16, 66 Stat. 764; and May 10, 1956, ch. 247, § 1, 70 Stat. 148, which was classified to section 1176(5) of former Title 46, Shipping, and was repealed by Pub. L. 91–469, § 20(4), Oct. 21, 1970, 84 Stat. 1026. Section 606 of the Merchant Marine Act, 1936 was subsequently transferred to sec- tion 1176 of the former Appendix to Title 46 and is now set out as a note under section 53101 of Title 46, Ship- ping. The date of the enactment of this section, referred to in subsec. (i), is the date of enactment of Pub. L. 99–514, which was approved Oct. 22, 1986. AMENDMENTS 2018—Subsec. (i). Pub. L. 115–141 substituted ‘‘chapter 535 of title 46, United States Code,’’ for ‘‘section 607(k) of the Merchant Marine Act, 1936’’ and ‘‘such chapter’’ for ‘‘such section 607(k)’’. 2017—Subsec. (g)(6)(A). Pub. L. 115–97, § 13001(b)(7), in concluding provisions, substituted ‘‘In the case of a taxpayer other than a corporation, with respect to the portion’’ for ‘‘With respect to the portion’’ and struck out ‘‘(34 percent in the case of a corporation)’’ after ‘‘shall not exceed 20 percent’’. Pub. L. 115–97, § 13001(b)(2)(Q), struck out ‘‘or 1201(a)’’ after ‘‘section 1(h)’’ in concluding provisions. 2014—Subsec. (g)(4). Pub. L. 113–295, which directed substitution of ‘‘any nonqualified withdrawal shall be determined’’ for ‘‘any nonqualified withdrawal’’ and all that followed through ‘‘ ‘shall be determined’’, was exe- cuted by substituting ‘‘any nonqualified withdrawal shall be determined’’ for ‘‘any nonqualified with- drawal— ‘‘(A) made in a taxable year beginning in 1970 or 1971 is 8 percent, or ‘‘(B) made in a taxable year beginning after 1971, shall be determined’’ to reflect the probable intent of Congress. 2013—Subsec. (g)(6)(A). Pub. L. 112–240 substituted ‘‘20 percent’’ for ‘‘15 percent’’ in concluding provisions. 2006—Subsec. (a)(1). Pub. L. 109–304, § 17(e)(6)(A), sub- stituted ‘‘chapter 535 of title 46 of the United States Code’’ for ‘‘section 607 of the Merchant Marine Act, 1936’’. Subsecs. (a)(2), (c)(1)(A), (D). Pub. L. 109–304, § 17(e)(6)(B), substituted ‘‘chapter 535 of title 46, United States Code’’ for ‘‘section 607 of the Merchant Marine Act, 1936’’. Subsec. (g)(3)(C)(iii). Pub. L. 109–304, § 17(e)(6)(C), sub- stituted ‘‘Merchant Marine Act, 1936,’’ for ‘‘Merchant Marine Act of 1936’’. 2003—Subsec. (g)(6)(A). Pub. L. 108–27 substituted ‘‘15 percent’’ for ‘‘20 percent’’ in concluding provisions. 1997—Subsec. (g)(6)(A). Pub. L. 105–34 substituted ‘‘20 percent’’ for ‘‘28 percent’’ in concluding provisions. 1990—Subsec. (g)(6)(A). Pub. L. 101–508 substituted ‘‘section 1(h)’’ for ‘‘section 1(j)’’ in last sentence. 1988—Subsec. (g)(1). Pub. L. 100–647, § 1018(u)(23), sub- stituted ‘‘not a qualified withdrawal’’ for ‘‘not qualified withdrawal’’. Subsec. (g)(6)(A). Pub. L. 100–647, § 1002(m)(1), sub- stituted ‘‘section 1(j)’’ for ‘‘section 1(i)’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Amendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 13001(c)(1) of Pub. L. 115–97, set out as a note under sec- tion 11 of this title. EFFECTIVE DATE OF 2014 AMENDMENT Amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title. EFFECTIVE DATE OF 2013 AMENDMENT Amendment by Pub. L. 112–240 applicable to taxable years beginning after Dec. 31, 2012, see section 102(d)(1) of Pub. L. 112–240, set out as a note under section 1 of this title. EFFECTIVE DATE OF 2003 AMENDMENT Amendment by Pub. L. 108–27 applicable to taxable years ending on or after May 6, 2003, see section 301(d) of Pub. L. 108–27, set out as an Effective and Termi- nation Dates of 2003 Amendment note under section 1 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 applicable to taxable years ending after May 6, 1997, see section 311(d) of Pub. L. 105–34, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1990 AMENDMENT Amendment by Pub. L. 101–508 applicable to taxable years beginning after Dec. 31, 1990, see section 11101(e) of Pub. L. 101–508, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by 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. EFFECTIVE DATE Pub. L. 99–514, title II, § 261(g), Oct. 22, 1986, 100 Stat. 2216, provided that: ‘‘The amendments made by this section [enacting this section and amending section 26 of this title and section 1177 of Title 46, Appendix, Ship- ping] shall apply to taxable years beginning after De- cember 31, 1986.’’ MERCHANT MARINE CAPITAL CONSTRUCTION FUNDS Pub. L. 99–514, title II, § 261(a), Oct. 22, 1986, 100 Stat. 2208, provided that: ‘‘The purpose of this section [enact- ing this section, amending section 26 of this title and section 1177 of Title 46, Appendix, and enacting provi- sions set out as a note above] is to coordinate the appli- Page 3958 TITLE 26—INTERNAL REVENUE CODE § 7519 cation of the Internal Revenue Code of 1986 with the capital construction program under the Merchant Ma- rine Act, 1936 [see 46 U.S.C. 53501 et seq.].’’ § 7519. Required payments for entities electing not to have required taxable year (a) General rule This section applies to a partnership or S cor- poration for any taxable year, if— (1) an election under section 444 is in effect for the taxable year, and (2) the required payment determined under subsection (b) for such taxable year (or any preceding taxable year) exceeds $500. (b) Required payment For purposes of this section, the term ‘‘re- quired payment’’ means, with respect to any ap- plicable election year of a partnership or S cor- poration, an amount equal to— (1) the excess of the product of— (A) the applicable percentage of the ad- justed highest section 1 rate, multiplied by (B) the net base year income of the entity, over (2) the net required payment balance. For purposes of paragraph (1)(A), the term ‘‘ad- justed highest section 1 rate’’ means the highest rate of tax in effect under section 1 as of the end of the base year plus 1 percentage point (or, in the case of applicable election years beginning in 1987, 36 percent). (c) Refund of payments (1) In general If, for any applicable election year, the amount determined under subsection (b)(2) ex- ceeds the amount determined under subsection (b)(1), the entity shall be entitled to a refund of such excess for such year. (2) Termination of elections, etc. If— (A) an election under section 444 is termi- nated effective with respect to any year, or (B) the entity is liquidated during any year, the entity shall be entitled to a refund of the net required payment balance. (3) Date on which refund payable Any refund under this subsection shall be payable on the later of— (A) April 15 of the calendar year fol- lowing— (i) in the case of the year referred to in paragraph (1), the calendar year in which it begins, (ii) in the case of the year referred to in paragraph (2), the calendar year in which it ends, or (B) the day 90 days after the day on which claim therefor is filed with the Secretary. (d) Net base year income For purposes of this section— (1) In general An entity’s net base year income shall be equal to the sum of— (A) the deferral ratio multiplied by the en- tity’s net income for the base year, plus (B) the excess (if any) of— (i) the deferral ratio multiplied by the aggregate amount of applicable payments made by the entity during the base year, over (ii) the aggregate amount of such appli- cable payments made during the deferral period of the base year. For purposes of this paragraph, the term ‘‘de- ferral ratio’’ means the ratio which the num- ber of months in the deferral period of the base year bears to the number of months in the partnership’s or S corporation’s taxable year. (2) Net income Net income is determined by taking into ac- count the aggregate amount of the following items— (A) Partnerships In the case of a partnership, net income shall be the amount (not below zero) deter- mined by taking into account the aggregate amount of the partnership’s items described in section 702(a) (other than credits and tax- exempt income). (B) S corporations In the case of an S corporation, net income shall be the amount (not below zero) deter- mined by taking into account the aggregate amount of the S corporation’s items de- scribed in section 1366(a) (other than credits and tax-exempt income). If the S corpora- tion was a C corporation for the base year, its taxable income for such year shall be treated as its net income for such year (and such corporation shall be treated as an S corporation for such taxable year for pur- poses of paragraph (3)). (C) Certain limitations disregarded For purposes of subparagraph (A) or (B), any limitation on the amount of any item described in either such paragraph which may be taken into account for purposes of computing the taxable income of a partner or shareholder shall be disregarded. (3) Applicable payments (A) In general The term ‘‘applicable payment’’ means amounts paid by a partnership or S corpora- tion which are includible in gross income of a partner or shareholder. (B) Exceptions The term ‘‘applicable payment’’ shall not include any— (i) gain from the sale or exchange of property between the partner or share- holder and the partnership or S corpora- tion, and (ii) dividend paid by the S corporation. (4) Applicable percentage The applicable percentage is the percentage determined in accordance with the following table: If the applicable election year of the partnership or S corporation begins during: The applicable percentage is: 1987 ............................................. 25