26 U.S.C. § 470 — Limitation on deductions allocable to prop-

Page 1643 TITLE 26—INTERNAL REVENUE CODE § 470 ternal Revenue Code of 1986] as of the date placed in service and for each taxable year thereafter which be- gins after 1986 and for which a passive loss may be al- lowable with respect to such project, ‘‘(2) the operator certifies to the Secretary of the Treasury or his delegate that such project met the re- quirements of paragraph (1) on the date of the enact- ment of this Act [Oct. 22, 1986] (or, if later, when placed in service) and annually thereafter, ‘‘(3) such project is constructed or acquired pursu- ant to a binding written contract entered into on or before August 16, 1986, and ‘‘(4) such project is placed in service before January 1, 1989. ‘‘(d) QUALIFIED INVESTOR.—For purposes of this sec- tion— ‘‘(1) IN GENERAL.—The term ‘qualified investor’ means any natural person who holds (directly or through 1 or more entities) an interest in a qualified low-income housing project— ‘‘(A) if— ‘‘(i) in the case of a project placed in service on or before August 16, 1986, such person held an in- terest in such project on August 16, 1986, and such person made his initial investment after Decem- ber 31, 1983, or ‘‘(ii) in the case of a project placed in service after August 16, 1986, such person made his initial investment after December 31, 1983, and such per- son held an interest in such project on December 31, 1986, and ‘‘(B) if such investor is required to make pay- ments after December 31, 1986, of 50 percent or more of the total original obligated investment for such interest. For purposes of subparagraph (A), a person shall be treated as holding an interest on August 16, 1986, or December 31, 1986, if on such date such person had a binding contract to acquire such interest. ‘‘(2) TREATMENT OF ESTATES.—The estate of a dece- dent shall succeed to the treatment under this sec- tion of the decedent but only with respect to the 1st 2 taxable years of such estate ending after the date of the decedent’s death. ‘‘(3) SPECIAL RULE FOR CERTAIN PARTNERSHIPS.—In the case of any property which is held by a partner- ship— ‘‘(A) which placed such property in service on or after December 31, 1985, and before August 17, 1986, and continuously held such property through the close of the taxable year for which the determina- tion is being made, and ‘‘(B) which was not treated as a new partnership or as terminated at any time on or after the date on which such property was placed in service and through the close of the taxable year for which the determination is being made, paragraph (1)(A)(i) shall be applied by substituting ‘December 31, 1988’ for ‘August 16, 1986’ the 2nd place it appears. ‘‘(4) SPECIAL RULE FOR CERTAIN RURAL HOUSING.—In the case of any interest in a qualified low-income housing project which— ‘‘(A) is assisted under section 515 of the Housing Act of 1949 [42 U.S.C. 1485] (relating to the Farmers’ Home Administration Program), and ‘‘(B) is located in a town with a population of less than 10,000 and which is not part of a metropolitan statistical area, paragraph (1)(B) shall be applied by substituting ‘35 percent’ for ‘50 percent’ and subsection (b)(1) shall be applied by substituting ‘5th taxable year’ for ‘6th tax- able year’. The preceding sentence shall not apply to any interest unless, on December 31, 1986, at least one-half of the number of payments required with re- spect to such interest remain to be paid. ‘‘(e) SPECIAL RULES.— ‘‘(1) WHERE MORE THAN 1 BUILDING IN PROJECT.—If there is more than 1 building in any project, the de- termination of when such project is placed in service shall be based on when the 1st building in such project is placed in service. ‘‘(2) ONLY CASH AND OTHER PROPERTY TAKEN INTO AC- COUNT.—In determining the amount any person in- vests in (or is obligated to invest in) any interest, only cash and other property shall be taken into ac- count. ‘‘(3) COORDINATION WITH CREDIT.—No low-income housing credit shall be determined under section 42 of the Internal Revenue Code of 1986 with respect to any project with respect to which any person has been al- lowed any benefit under this section.’’ [Pub. L. 99–509, title VIII, § 8073(b), Oct. 21, 1986, 100 Stat. 1965, provided that: ‘‘The amendment made by subsection (a) [amending section 502 of Pub. L. 99–514, set out above] shall take effect as if included in section 502 of the Tax Reform Act of 1986 on the date of its en- actment [Oct. 22, 1986].’’] § 470. Limitation on deductions allocable to prop- erty used by governments or other tax-ex- empt entities (a) Limitation on losses Except as otherwise provided in this section, a tax-exempt use loss for any taxable year shall not be allowed. (b) Disallowed loss carried to next year Any tax-exempt use loss with respect to any tax-exempt use property which is disallowed under subsection (a) for any taxable year shall be treated as a deduction with respect to such property in the next taxable year. (c) Definitions For purposes of this section— (1) Tax-exempt use loss The term ‘‘tax-exempt use loss’’ means, with respect to any taxable year, the amount (if any) by which— (A) the sum of— (i) the aggregate deductions (other than interest) directly allocable to a tax-ex- empt use property, plus (ii) the aggregate deductions for interest properly allocable to such property, exceed (B) the aggregate income from such prop- erty. (2) Tax-exempt use property (A) In general The term ‘‘tax-exempt use property’’ has the meaning given to such term by section 168(h), except that such section shall be ap- plied— (i) without regard to paragraphs (1)(C) and (3) thereof, and (ii) as if section 197 intangible property (as defined in section 197), and property de- scribed in paragraph (1)(B) or (2) of section 167(f), were tangible property. (B) Exception for partnerships Such term shall not include any property which would (but for this subparagraph) be tax-exempt use property solely by reason of section 168(h)(6). (C) Cross reference For treatment of partnerships as leases to which section 168(h) applies, see section 7701(e). (d) Exception for certain leases This section shall not apply to any lease of property which meets the requirements of all of the following paragraphs: Page 1644 TITLE 26—INTERNAL REVENUE CODE § 470 (1) Availability of funds (A) In general A lease of property meets the require- ments of this paragraph if (at all times dur- ing the lease term) not more than an allow- able amount of funds are— (i) subject to any arrangement referred to in subparagraph (B), or (ii) set aside or expected to be set aside, to or for the benefit of the lessor or any lender, or to or for the benefit of the lessee to satisfy the lessee’s obligations or options under the lease. For purposes of clause (ii), funds shall be treated as set aside or ex- pected to be set aside only if a reasonable person would conclude, based on the facts and circumstances, that such funds are set aside or expected to be set aside. (B) Arrangements The arrangements referred to in this sub- paragraph include a defeasance arrange- ment, a loan by the lessee to the lessor or any lender, a deposit arrangement, a letter of credit collateralized with cash or cash equivalents, a payment undertaking agree- ment, prepaid rent (within the meaning of the regulations under section 467), a sinking fund arrangement, a guaranteed investment contract, financial guaranty insurance, and any similar arrangement (whether or not such arrangement provides credit support). (C) Allowable amount (i) In general Except as otherwise provided in this sub- paragraph, the term ‘‘allowable amount’’ means an amount equal to 20 percent of the lessor’s adjusted basis in the property at the time the lease is entered into. (ii) Higher amount permitted in certain cases To the extent provided in regulations, a higher percentage shall be permitted under clause (i) where necessary because of the credit-worthiness of the lessee. In no event may such regulations permit a percentage of more than 50 percent. (iii) Option to purchase If under the lease the lessee has the op- tion to purchase the property for a fixed price or for other than the fair market value of the property (determined at the time of exercise), the allowable amount at the time such option may be exercised may not exceed 50 percent of the price at which such option may be exercised. (iv) No allowable amount for certain ar- rangements The allowable amount shall be zero with respect to any arrangement which in- volves— (I) a loan from the lessee to the lessor or a lender, (II) any deposit received, letter of cred- it issued, or payment undertaking agree- ment entered into by a lender otherwise involved in the transaction, or (III) in the case of a transaction which involves a lender, any credit support made available to the lessor in which any such lender does not have a claim that is senior to the lessor. For purposes of subclause (I), the term ‘‘loan’’ shall not include any amount treated as a loan under section 467 with re- spect to a section 467 rental agreement. (2) Lessor must make substantial equity invest- ment (A) In general A lease of property meets the require- ments of this paragraph if— (i) the lessor— (I) has at the time the lease is entered into an unconditional at-risk equity in- vestment (as determined by the Sec- retary) in the property of at least 20 per- cent of the lessor’s adjusted basis in the property as of that time, and (II) maintains such investment throughout the term of the lease, and (ii) the fair market value of the property at the end of the lease term is reasonably expected to be equal to at least 20 percent of such basis. (B) Risk of loss For purposes of subparagraph (A)(ii), the fair market value at the end of the lease term shall be reduced to the extent that a person other than the lessor bears a risk of loss in the value of the property. (C) Paragraph not to apply to short-term leases This paragraph shall not apply to any lease with a lease term of 5 years or less. (3) Lessee may not bear more than minimal risk of loss (A) In general A lease of property meets the require- ments of this paragraph if there is no ar- rangement under which the lessee bears— (i) any portion of the loss that would occur if the fair market value of the leased property were 25 percent less than its rea- sonably expected fair market value at the time the lease is terminated, or (ii) more than 50 percent of the loss that would occur if the fair market value of the leased property at the time the lease is terminated were zero. (B) Exception The Secretary may by regulations provide that the requirements of this paragraph are not met where the lessee bears more than a minimal risk of loss. (C) Paragraph not to apply to short-term leases This paragraph shall not apply to any lease with a lease term of 5 years or less. (4) Property with more than 7-year class life In the case of a lease— (A) of property with a class life (as defined in section 168(i)(1)) of more than 7 years, Page 1645 TITLE 26—INTERNAL REVENUE CODE § 470 other than fixed-wing aircraft and vessels, and (B) under which the lessee has the option to purchase the property, the lease meets the requirements of this para- graph only if the purchase price under the op- tion equals the fair market value of the prop- erty (determined at the time of exercise). (e) Special rules (1) Treatment of former tax-exempt use prop- erty (A) In general In the case of any former tax-exempt use property— (i) any deduction allowable under sub- section (b) with respect to such property for any taxable year shall be allowed only to the extent of any net income (without regard to such deduction) from such prop- erty for such taxable year, and (ii) any portion of such unused deduction remaining after application of clause (i) shall be treated as a deduction allowable under subsection (b) with respect to such property in the next taxable year. (B) Former tax-exempt use property For purposes of this subsection, the term ‘‘former tax-exempt use property’’ means any property which— (i) is not tax-exempt use property for the taxable year, but (ii) was tax-exempt use property for any prior taxable year. (2) Disposition of entire interest in property If during the taxable year a taxpayer dis- poses of the taxpayer’s entire interest in tax- exempt use property (or former tax-exempt use property), rules similar to the rules of sec- tion 469(g) shall apply for purposes of this sec- tion. (3) Coordination with section 469 This section shall be applied before the ap- plication of section 469. (4) Coordination with sections 1031 and 1033 (A) In general Sections 1031(a) and 1033(a) shall not apply if— (i) the exchanged or converted property is tax-exempt use property subject to a lease which was entered into before March 13, 2004, and which would not have met the requirements of subsection (d) had such re- quirements been in effect when the lease was entered into, or (ii) the replacement property is tax-ex- empt use property subject to a lease which does not meet the requirements of sub- section (d). (B) Adjusted basis In the case of property acquired by the les- sor in a transaction to which section 1031 or 1033 applies, the adjusted basis of such prop- erty for purposes of this section shall be equal to the lesser of— (i) the fair market value of the property as of the beginning of the lease term, or (ii) the amount which would be the les- sor’s adjusted basis if such sections did not apply to such transaction. (f) Other definitions For purposes of this section— (1) Related parties The terms ‘‘lessor’’, ‘‘lessee’’, and ‘‘lender’’ each include any related party (within the meaning of section 197(f)(9)(C)(i)). (2) Lease term The term ‘‘lease term’’ has the meaning given to such term by section 168(i)(3). (3) Lender The term ‘‘lender’’ means, with respect to any lease, a person that makes a loan to the lessor which is secured (or economically simi- lar to being secured) by the lease or the leased property. (4) Loan The term ‘‘loan’’ includes any similar ar- rangement. (g) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regula- tions which— (1) allow in appropriate cases the aggrega- tion of property subject to the same lease, and (2) provide for the determination of the allo- cation of interest expense for purposes of this section. (Added Pub. L. 108–357, title VIII, § 848(a), Oct. 22, 2004, 118 Stat. 1602; amended Pub. L. 110–172, § 7(c), Dec. 29, 2007, 121 Stat. 2482; Pub. L. 115–141, div. U, title IV, § 401(a)(120), Mar. 23, 2018, 132 Stat. 1190.) Editorial Notes AMENDMENTS 2018—Subsec. (d)(2)(B). Pub. L. 115–141 substituted ‘‘subparagraph (A)(ii)’’ for ‘‘clause (ii)’’. 2007—Subsec. (c)(2). Pub. L. 110–172, § 7(c)(1), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: ‘‘The term ‘tax-exempt use property’ has the meaning given to such term by section 168(h), except that such section shall be applied— ‘‘(A) without regard to paragraphs (1)(C) and (3) thereof, and ‘‘(B) as if property described in— ‘‘(i) section 167(f)(1)(B), ‘‘(ii) section 167(f)(2), and ‘‘(iii) section 197 intangible, were tangible property. Such term shall not include property which would (but for this sentence) be tax-exempt use property solely by reason of section 168(h)(6) if any credit is allowable under section 42 or 47 with respect to such property.’’ Subsec. (d)(1)(A). Pub. L. 110–172, § 7(c)(2), in introduc- tory provisions, substituted ‘‘(at all times during the lease term)’’ for ‘‘(at any time during the lease term)’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2007 AMENDMENT Amendment by Pub. L. 110–172 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, Page 1646 TITLE 26—INTERNAL REVENUE CODE § 471 see section 7(e) of Pub. L. 110–172, set out as a note under section 1092 of this title. EFFECTIVE DATE Pub. L. 108–357, title VIII, § 849, Oct. 22, 2004, 118 Stat. 1606, as amended by Pub. L. 109–135, title IV, § 403(ff), Dec. 21, 2005, 119 Stat. 2631, provided that: ‘‘(a) IN GENERAL.—Except as provided in this section, the amendments made by this part [part III (§§ 847–849) of subtitle B of title VIII of Pub. L. 108–357, enacting this section and amending sections 167, 168, and 197 of this title] shall apply to leases entered into after March 12, 2004, and in the case of property treated as tax-ex- empt use property other than by reason of a lease, to property acquired after March 12, 2004. ‘‘(b) EXCEPTION.— ‘‘(1) IN GENERAL.—The amendments made by this part shall not apply to qualified transportation prop- erty. ‘‘(2) QUALIFIED TRANSPORTATION PROPERTY.—For purposes of paragraph (1), the term ‘qualified trans- portation property’ means domestic property subject to a lease with respect to which a formal applica- tion— ‘‘(A) was submitted for approval to the Federal Transit Administration (an agency of the Depart- ment of Transportation) after June 30, 2003, and be- fore March 13, 2004, ‘‘(B) is approved by the Federal Transit Adminis- tration before January 1, 2006, and ‘‘(C) includes a description of such property and the value of such property. ‘‘(3) EXCHANGES AND CONVERSION OF TAX-EXEMPT USE PROPERTY.—Section 470(e)(4) of the Internal Revenue Code of 1986, as added by section 848, shall apply to property exchanged or converted after the date of the enactment of this Act [Oct. 22, 2004]. ‘‘(4) INTANGIBLES AND INDIAN TRIBAL GOVERN- MENTS.—The amendments made subsections (b)(2), (b)(3), and (e) of section 847 [amending sections 167, 168, and 197 of this title], and the treatment of prop- erty described in clauses (ii) and (iii) of section 470(c)(2)(B) of the Internal Revenue Code of 1986 (as added by section 848) as tangible property, shall apply to leases entered into after October 3, 2004.’’ SUBPART D—INVENTORIES Sec. 471. General rule for inventories. 472. Last-in, first-out inventories. 473. Qualified liquidations of LIFO inventories. 474. Simplified dollar-value LIFO method for cer- tain small businesses. 475. Mark to market accounting method for deal- ers in securities. Editorial Notes AMENDMENTS 1993—Pub. L. 103–66, title XIII, § 13223(b)(2), Aug. 10, 1993, 107 Stat. 484, added item 475. 1986—Pub. L. 99–514, title VIII, § 802(b), Oct. 22, 1986, 100 Stat. 2350, substituted ‘‘Simplified dollar-value LIFO method for certain small businesses’’ for ‘‘Elec- tion by certain small businesses to use one inventory pool’’ in item 474. 1981—Pub. L. 97–34, title II, § 237(b), Aug. 13, 1981, 95 Stat. 253, added item 474. 1980—Pub. L. 96–223, title IV, § 403(a)(2), Apr. 2, 1980, 94 Stat. 304, added item 473. § 471. General rule for inventories (a) General rule Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, inven- tories shall be taken by such taxpayer on such basis as the Secretary may prescribe as con- forming as nearly as may be to the best ac- counting practice in the trade or business and as most clearly reflecting the income. (b) Estimates of inventory shrinkage permitted A method of determining inventories shall not be treated as failing to clearly reflect income solely because it utilizes estimates of inventory shrinkage that are confirmed by a physical count only after the last day of the taxable year if— (1) the taxpayer normally does a physical count of inventories at each location on a reg- ular and consistent basis, and (2) the taxpayer makes proper adjustments to such inventories and to its estimating methods to the extent such estimates are greater than or less than the actual shrinkage. (c) Exemption for certain small businesses (1) In general In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year— (A) subsection (a) shall not apply with re- spect to such taxpayer for such taxable year, and (B) the taxpayer’s method of accounting for inventory for such taxable year shall not be treated as failing to clearly reflect in- come if such method either— (i) treats inventory as non-incidental materials and supplies, or (ii) conforms to such taxpayer’s method of accounting reflected in an applicable fi- nancial statement of the taxpayer with re- spect to such taxable year or, if the tax- payer does not have any applicable finan- cial statement with respect to such tax- able year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures. (2) Applicable financial statement For purposes of this subsection, the term ‘‘applicable financial statement’’ has the meaning given the term in section 451(b)(3). (3) Application of gross receipts test to individ- uals, etc. In the case of any taxpayer which is not a corporation or a partnership, the gross re- ceipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or part- nership. (4) Coordination with section 481 Any change in method of accounting made pursuant to this subsection shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary. (d) Cross reference For rules relating to capitalization of direct and indirect costs of property, see section 263A. (Aug. 16, 1954, ch. 736, 68A Stat. 159; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90