[House Report 114-749]
[From the U.S. Government Publishing Office]


114th Congress    }                                      {      Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                      {     114-749

======================================================================



 
             EMERGENCY CITRUS DISEASE RESPONSE ACT OF 2016

                                _______
                                

 September 16, 2016.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

Mr. Brady of Texas, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 3957]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 3957) to amend the Internal Revenue Code of 1986 to 
temporarily allow expensing of certain costs of replanting 
citrus plants lost by reason of casualty, having considered the 
same, report favorably thereon with an amendment and recommend 
that the bill as amended do pass.

                                CONTENTS

                                                                   Page
 I. SUMMARY AND BACKGROUND............................................2
        A. Purpose and Summary...................................     2
        B. Background and Need for Legislation...................     2
        C. Legislative History...................................     3
II. EXPLANATION OF THE BILL...........................................3
        A. Expensing of Certain Costs of Replanting Citrus Plants 
            Lost by Reason of Casualty (sec. 2 of the bill and 
            sec. 263A of the Code)...............................     3
III.VOTES OF THE COMMITTEE............................................5

IV. BUDGET EFFECTS OF THE BILL........................................5
        A. Committee Estimate of Budgetary Effects...............     5
        B. Statement Regarding New Budget Authority and Tax 
            Expenditures Budget Authority........................     6
        C. Cost Estimate Prepared by the Congressional Budget 
            Office...............................................     6
 V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE........7
        A. Committee Oversight Findings and Recommendations......     7
        B. Statement of General Performance Goals and Objectives.     8
        C. Information Relating to Unfunded Mandates.............     8
        D. Applicability of House Rule XXI 5(b)..................     8
        E. Tax Complexity Analysis...............................     8
        F. Congressional Earmarks, Limited Tax Benefits, and 
            Limited Tariff Benefits..............................     8
        G. Duplication of Federal Programs.......................     9
        H. Disclosure of Directed Rule Makings...................     9
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED.............9
        A. Text of Existing Law Amended or Repealed by the Bill, 
            as Reported..........................................     9
        B. Changes in Existing Law Proposed by the Bill, as 
            Reported.............................................     9

    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Emergency Citrus Disease Response Act 
of 2016''.

SEC. 2. EXPENSING OF CERTAIN COSTS OF REPLANTING CITRUS PLANTS LOST BY 
                    REASON OF CASUALTY.

  (a) In General.--Section 263A(d)(2) of the Internal Revenue Code of 
1986 is amended by adding at the end the following new subparagraph:
                  ``(C) Special temporary rule for citrus plants lost 
                by reason of casualty.--
                          ``(i) In general.--In the case of the 
                        replanting of citrus plants, subparagraph (A) 
                        shall apply to amounts paid or incurred by a 
                        person (other than the taxpayer described in 
                        subparagraph (A)) if--
                                  ``(I) the taxpayer described in 
                                subparagraph (A) has an equity interest 
                                of not less than 50 percent in the 
                                replanted citrus plants at all times 
                                during the taxable year in which such 
                                amounts were paid or incurred and such 
                                other person holds any part of the 
                                remaining equity interest, or
                                  ``(II) such other person acquired the 
                                entirety of such taxpayer's equity 
                                interest in the land on which the lost 
                                or damaged citrus plants were located 
                                at the time of such loss or damage, and 
                                the replanting is on such land.
                          ``(ii) Termination.--Clause (i) shall not 
                        apply to any cost paid or incurred after 
                        December 31, 2025.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to costs paid or incurred after the date of the enactment of this Act.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary

    The bill, H.R. 3957, as reported by the Committee on Ways 
and Means, provides that certain taxpayers who invest in citrus 
groves may deduct their share of costs associated with 
replacing citrus trees blighted by a bacterial plant disease 
known as citrus greening.

                 B. Background and Need for Legislation

    Citrus growers in the United States are facing a dire 
situation caused by huanglongbing (HLB), a bacterial plant 
disease commonly referred to as citrus greening, which 
adversely affects the citrus fruit and eventually kills the 
citrus tree. Because there is no known cure for HLB, the 
infected trees must be destroyed and replaced with new trees. 
Experts estimate that tens of millions of citrus trees in the 
United States will have to be replaced over the next several 
years for the citrus industry to continue in this country. The 
Committee believes it is important to provide assistance to 
citrus growers to recover from this disease and to enable them 
to raise the capital necessary to replace blighted citrus 
groves. H.R. 3957 will encourage investment in the citrus 
industry by allowing new investors to expense their share of 
the replacement costs of diseased trees. The bill also will 
encourage investors to purchase entire groves of diseased 
citrus trees that might otherwise be sold off (e.g., to use the 
land for business or residential development), thereby 
maintaining the property for citrus production and helping to 
preserve the U.S. citrus industry. H.R. 3957 will provide for 
expensing of replanting costs through 2025 in order to cover 
the duration of the replanting process.

                         C. Legislative History


Background

    H.R. 3957 was introduced on November 5, 2015 and was 
referred to the Committee on Ways and Means.

Committee action

    The Committee on Ways and Means marked up H.R. 3957, the 
``Emergency Citrus Disease Response Act of 2016'' on September 
14, 2016, and ordered the bill, as amended, favorably reported 
(with a quorum being present).

Committee hearings

    The need for assistance to citrus growers working to 
recover from citrus greening was discussed at the Committee's 
Member Day Hearing on Tax Legislation on May 12, 2016.

                      II. EXPLANATION OF THE BILL


   A. Expensing of Certain Costs of Replanting Citrus Plants Lost by 
   Reason of Casualty (sec. 2 of the bill and sec. 263A of the Code)


                              PRESENT LAW

In general

    The uniform capitalization (``UNICAP'') rules, which were 
enacted as part of the Tax Reform Act of 1986,\1\ require 
certain direct and indirect costs allocable to real or tangible 
personal property produced by the taxpayer to be either 
capitalized into the basis of such property or included in 
inventory, as applicable.\2\ For real or personal property 
acquired by the taxpayer for resale, section 263A generally 
requires certain direct and indirect costs allocable to such 
property to be either capitalized into the basis of such 
property or included in inventory, as applicable.
---------------------------------------------------------------------------
    \1\Sec. 803(a) of Pub. L. No. 99-514 (1986).
    \2\Sec. 263A.
---------------------------------------------------------------------------
    Section 263A generally requires the capitalization of the 
direct and indirect costs allocable to the production of any 
property in a farming business, including animals and plants 
without regard to the length of their preproductive period.\3\ 
The costs of a plant generally required to be capitalized under 
section 263(a) include preparatory costs incurred so that the 
plant's growing process may begin, such as the acquisition 
costs of the seed, seedling, or plant. Under section 263A, the 
costs of producing a plant generally required to be capitalized 
also include the preproductive period costs of planting, 
cultivating, maintaining, and developing the plant during the 
preproductive period.\4\ Preproductive period costs may include 
management, irrigation, pruning, soil and water conservation, 
fertilizing, frost protection, spraying, harvesting, storage 
and handling, upkeep, electricity, tax depreciation and repairs 
on buildings and equipment used in raising the plants, farm 
overhead, taxes, and interest, as applicable.\5\
---------------------------------------------------------------------------
    \3\Treas. Reg. sec. 1.263A-4(b)(1).
    \4\Treas. Reg. sec. 1.263A-4(b)(1)(i).
    \5\Ibid.
---------------------------------------------------------------------------

Special rules for plant farmers

    Section 263A provides an exception to the general 
capitalization requirements for taxpayers who raise, harvest, 
or grow trees.\6\ Under this exception, section 263A does not 
apply to trees raised, harvested, or grown by the taxpayer 
(other than trees bearing fruit, nuts, or other crops, or 
ornamental trees) and any real property underlying such trees. 
Similarly, the UNICAP rules do not apply to any plant having a 
preproductive period of two years or less, which is produced by 
a taxpayer in a farming business (unless the taxpayer is 
required to use an accrual method of accounting under section 
447 or 448(a)(3)).\7\ Hence, in general, the UNICAP rules apply 
to the production of plants that have a preproductive period of 
more than two years, and to taxpayers required to use an 
accrual method of accounting.
---------------------------------------------------------------------------
    \6\Sec. 263A(c)(5).
    \7\Sec. 263A(d).
---------------------------------------------------------------------------
    Plant farmers otherwise required to capitalize 
preproductive period costs may elect to deduct such costs 
currently, provided the alternative depreciation system 
described in section 168(g)(2) is used on all farm assets and 
the preproductive period costs are recaptured upon disposition 
of the product.\8\ The election is not available to taxpayers 
required to use the accrual method of accounting. Moreover, the 
election is not available with respect to certain costs 
attributable to planting, cultivating, maintaining, or 
developing citrus or almond groves.
---------------------------------------------------------------------------
    \8\Sec. 263A(d)(3), (e)(1), and (e)(2).
---------------------------------------------------------------------------
    Section 263A does not apply to costs incurred in replanting 
edible crops for human consumption following loss or damage due 
to freezing temperatures, disease, drought, pests, or 
casualty.\9\ The same type of crop as the lost or damaged crop 
must be replanted. However, the exception to capitalization 
still applies if the replanting occurs on a parcel of land 
other than the land on which the damage occurred, provided the 
acreage of the new land does not exceed that of the land to 
which the damage occurred and the new land is located in the 
United States. This exception also may apply to costs incurred 
by persons other than the taxpayer who incurred the loss or 
damage, provided (1) the taxpayer who incurred the loss or 
damage retains an equity interest of more than 50 percent in 
the property on which the loss or damage occurred at all times 
during the taxable year in which the replanting costs are paid 
or incurred, and (2) the person holding a minority equity 
interest and claiming the deduction materially participates in 
the planting, maintenance, cultivation, or development of the 
property during the taxable year in which the replanting costs 
are paid or incurred.\10\
---------------------------------------------------------------------------
    \9\Sec. 263A(d)(2). Such replanting costs generally include costs 
attributable to the replanting, cultivating, maintaining, and 
developing of the plants that were lost or damaged that are incurred 
during the preproductive period. Treas. Reg. sec. 1.263A-4(e)(1). The 
acquisition costs of the replacement trees or seedlings must still be 
capitalized under section 263(a) (see, e.g., T.D. 8897, 65 FR 50638, 
Treas. Reg. sec. 1.263A-4(e)(3), Examples 1-3, and TAM 9547002 (July 
18, 1995)), potentially subject to the special bonus depreciation 
deduction in the year of planting under section 168(k)(5).
    \10\Sec. 263A(d)(2)(B). Material participation for this purpose is 
determined in a similar manner as under section 2032A(e)(6) (relating 
to qualified use valuation of farm property upon death of the 
taxpayer).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes the special rule for farmers under 
the UNICAP rules should be expanded temporarily to apply to 
costs incurred by persons other than the taxpayer in connection 
with replanting citrus plants following a casualty. This change 
will encourage investment necessary to replace diseased citrus 
trees and ensure the continuity of the citrus crops in the 
United States.

                        EXPLANATION OF PROVISION

    The provision modifies the special rule for costs incurred 
by persons other than the taxpayer in connection with 
replanting an edible crop for human consumption following loss 
or damage due to casualty. Under the provision, with respect to 
replanting costs paid or incurred before January 1, 2026, for 
citrus plants lost or damaged due to casualty, such costs may 
also be deducted by a person other than the taxpayer if (1) the 
taxpayer has an equity interest of not less than 50 percent in 
the replanted citrus plants at all times during the taxable 
year in which the replanting costs are paid or incurred and 
such other person holds any part of the remaining equity 
interest, or (2) such other person acquires all of the 
taxpayer's equity interest in the land on which the lost or 
damaged citrus plants were located at the time of such loss or 
damage, and the replanting is on such land.

                             EFFECTIVE DATE

    The provision is effective for costs paid or incurred after 
the date of enactment.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the vote of the Committee on Ways and Means in its 
consideration of H.R. 3957, the ``Emergency Citrus Disease 
Response Act of 2016'' on September 14, 2016.
    The Chairman's amendment in the nature of a substitute was 
adopted by a voice vote (with a quorum being present).
    The bill, H.R. 3957, as amended, was ordered favorably 
reported to the House of Representatives by a voice vote (with 
a quorum being present).

                     IV. BUDGET EFFECTS OF THE BILL


               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the bill, H.R. 3957, as 
reported.
    The bill, as reported, is estimated to have the following 
effect on Federal budget receipts for fiscal years 2017-2026:

                                                  FISCAL YEARS
                                              [Millions of dollars]
----------------------------------------------------------------------------------------------------------------
  2017      2018      2019      2020      2021     2022     2023     2024     2025     2026    2017-21   2017-26
----------------------------------------------------------------------------------------------------------------
     -2        -4        -5        -5       -4       -3       -2       -2       -2       -1       -20       -30
----------------------------------------------------------------------------------------------------------------

    Pursuant to clause 8 of rule XIII of the Rules of the House 
of Representatives, the following statement is made by the 
Joint Committee on Taxation with respect to the provisions of 
the bill amending the Internal Revenue Code of 1986: The gross 
budgetary effect (before incorporating macroeconomic effects) 
in any fiscal year is less than 0.25 percent of the current 
projected gross domestic product of the United States for that 
fiscal year; therefore, the bill is not major legislation for 
purposes of requiring that the estimate include the budgetary 
effects of changes in economic output, employment, capital 
stock and other macroeconomic variables.

B. Statement Regarding New Budget Authority and Tax Expenditures Budget 
                               Authority

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
bill involves no new or increased budget authority. The 
Committee further states that the revenue-reducing tax 
provisions involve increased tax expenditures. See amounts in 
table in Part IV.A. above.

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring a cost estimate 
prepared by the CBO, the following statement by CBO is 
provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 16, 2016.
Hon. Kevin Brady,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3957, the 
Emergency Citrus Disease Response Act of 2016.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Peter 
Huether.
            Sincerely,
                                                        Keith Hall.
    Enclosure.

H.R. 3957--Emergency Citrus Disease Response Act of 2016

    H.R. 3957 would amend the Internal Revenue Code to allow 
certain investors to deduct the costs of replanting lost or 
damaged citrus plants in the year in which the costs are paid 
or incurred. Under current law, only the taxpayer who incurs 
the casualty loss to citrus plants or an investor with a 
minority interest who materially participates in the planting 
and related activities can deduct the replanting costs in the 
year of the activity rather than capitalizing those costs and 
taking the deductions over a number of years. H.R. 3957 would 
allow minority owners who do not materially participate in the 
business to similarly deduct the costs of replanting. The bill 
would also allow a person who purchases the entire property for 
the purpose of replanting the lost or damaged citrus plants to 
take the same accelerated deduction. The provisions would 
expire for costs paid or incurred after December 31, 2025.
    The staff of the Joint Committee on Taxation (JCT) 
estimates that the legislation would reduce revenues, thus 
increasing federal budget deficits, by $30 million over the 
2016-2026 period.
    The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting 
revenues and direct spending. Enacting HR. 3957 would reduce 
revenues; therefore, pay-as-you-go procedures apply. The net 
changes in revenues and that are subject to those pay-as-you-go 
procedures are shown in the following table. Enacting the bill 
would not affect direct spending.

         CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 3957, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON SEPTEMBER 14, 2016
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                     By fiscal year, in millions of dollars
                                                      --------------------------------------------------------------------------------------------------
                                                        2016   2017   2018   2019   2020   2021   2022   2023   2024   2025   2026  2016-2021  2016-2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Effects......................      0      2      4      5      5      4      3      2      2      2      1        20         30
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.

    JCT and CB0 estimate that enacting the bill would not 
increase net direct spending in any of the four consecutive 10-
year periods beginning in 2027, and would increase on-budget 
deficits after 2027 by negligible amounts.
    JCT has determined that the bill contains no 
intergovernmental or private-sector mandates as defined in the 
Unfunded Mandates Reform Act.
    The CBO staff contact for this estimate is Peter Huether. 
The estimate was approved by John McClelland, Assistant 
Director for Tax Analysis.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE


          A. Committee Oversight Findings and Recommendations

    With respect to clause 3(c)(1) of rule XIII of the Rules of 
the House of Representatives (relating to oversight findings), 
the Committee advises that it was as a result of the 
Committee's review of the provisions of H.R. 3957 that the 
Committee concluded that it is appropriate to report the bill, 
as amended, favorably to the House of Representatives with the 
recommendation that the bill do pass.

        B. Statement of General Performance Goals and Objectives

    With respect to clause 3(c)(4) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that the 
bill contains no measure that authorizes funding, so no 
statement of general performance goals and objectives for which 
any measure authorizes funding is required.

              C. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                D. Applicability of House Rule XXI 5(b)

    Rule XXI 5(b) of the Rules of the House of Representatives 
provides, in part, that ``A bill or joint resolution, 
amendment, or conference report carrying a Federal income tax 
rate increase may not be considered as passed or agreed to 
unless so determined by a vote of not less than three-fifths of 
the Members voting, a quorum being present.'' The Committee has 
carefully reviewed the bill, and states that the bill does not 
involve any Federal income tax rate increases within the 
meaning of the rule.

                       E. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (``IRS Reform Act'') 
requires the staff of the Joint Committee on Taxation (in 
consultation with the Internal Revenue Service and the Treasury 
Department) to provide a tax complexity analysis. The 
complexity analysis is required for all legislation reported by 
the Senate Committee on Finance, the House Committee on Ways 
and Means, or any committee of conference if the legislation 
includes a provision that directly or indirectly amends the 
Internal Revenue Code of 1986 and has widespread applicability 
to individuals or small businesses.
    Pursuant to clause 3(h)(1) of rule XIII of the Rules of the 
House of Representatives, the staff of the Joint Committee on 
Taxation has determined that a complexity analysis is not 
required under section 4022(b) of the IRS Reform Act because 
the bill contains no provisions that amend the Internal Revenue 
Code of 1986 and that have ``widespread applicability'' to 
individuals or small businesses, within the meaning of the 
rule.

  F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff 
                                Benefits

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                   G. Duplication of Federal Programs

    In compliance with Sec. 3(g)(2) of H. Res. 5 (114th 
Congress), the Committee states that no provision of the bill 
establishes or reauthorizes: (1) a program of the Federal 
Government known to be duplicative of another Federal program, 
(2) a program included in any report from the Government 
Accountability Office to Congress pursuant to section 21 of 
Public Law 111-139, or (3) a program related to a program 
identified in the most recent Catalog of Federal Domestic 
Assistance, published pursuant to the Federal Program 
Information Act (Public Law 95-220, as amended by Public Law 
98-169).

                 H. Disclosure of Directed Rule Makings

    In compliance with Sec. 3(i) of H. Res. 5 (114th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires no 
directed rule makings within the meaning of such section.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED


  A. Text of Existing Law Amended or Repealed by the Bill, as Reported

    In compliance with clause 3(e)(1)(A) of rule XIII of the 
Rules of the House of Representatives, the text of each section 
proposed to be amended or repealed by the bill, as reported, is 
shown below:

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e)(1)(A) of rule XIII of the 
Rules of the House of Representatives, the text of each section 
proposed to be amended or repealed by the bill, as reported, is 
shown below:

                     INTERNAL REVENUE CODE OF 1986




           *       *       *       *       *       *       *
Subtitle A--Income Taxes

           *       *       *       *       *       *       *


CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *


Subchapter B--Computation of Taxable Income

           *       *       *       *       *       *       *


PART IX--ITEMS NOT DEDUCTIBLE

           *       *       *       *       *       *       *



SEC. 263A. CAPITALIZATION AND INCLUSION IN INVENTORY COSTS OF CERTAIN 
                    EXPENSES.

  (a) Nondeductibility of Certain Direct and Indirect Costs.--
          (1) In general.--In the case of any property to which 
        this section applies, any costs described in paragraph 
        (2)--
                  (A) in the case of property which is 
                inventory in the hands of the taxpayer, shall 
                be included in inventory costs, and
                  (B) in the case of any other property, shall 
                be capitalized.
          (2) Allocable costs.--The costs described in this 
        paragraph with respect to any property are--
                  (A) the direct costs of such property, and
                  (B) such property's proper share of those 
                indirect costs (including taxes) part or all of 
                which are allocable to such property.
        Any cost which (but for this subsection) could not be 
        taken into account in computing taxable income for any 
        taxable year shall not be treated as a cost described 
        in this paragraph.
  (b) Property to Which Section Applies.--Except as otherwise 
provided in this section, this section shall apply to--
          (1) Property produced by taxpayer.--Real or tangible 
        personal property produced by the taxpayer.
          (2) Property acquired for resale.--
                  (A) In general.--Real or personal property 
                described in section 1221(a)(1) which is 
                acquired by the taxpayer for resale.
                  (B) Exception for taxpayer with gross 
                receipts of $10,000,000 or less.--Subparagraph 
                (A) shall not apply to any personal property 
                acquired during any taxable year by the 
                taxpayer for resale if the average annual gross 
                receipts of the taxpayer (or any predecessor) 
                for the 3-taxable year period ending with the 
                taxable year preceding such taxable year do not 
                exceed $10,000,000.
                  (C) Aggregation rules, etc..--For purposes of 
                subparagraph (B), rules similar to the rules of 
                paragraphs (2) and (3) of section 448(c) shall 
                apply.
        For purposes of paragraph (1), the term ``tangible 
        personal property'' shall include a film, sound 
        recording, video tape, book, or similar property.
  (c) General Exceptions.--
          (1) Personal use property.--This section shall not 
        apply to any property produced by the taxpayer for use 
        by the taxpayer other than in a trade or business or an 
        activity conducted for profit.
          (2) Research and experimental expenditures.--This 
        section shall not apply to any amount allowable as a 
        deduction under section 174.
          (3) Certain development and other costs of oil and 
        gas wells or other mineral property.--This section 
        shall not apply to any cost allowable as a deduction 
        under section 167(h), 179B, 263(c), 263(i), 291(b)(2), 
        616, or 617.
          (4) Coordination with long-term contract rules.--This 
        section shall not apply to any property produced by the 
        taxpayer pursuant to a long-term contract.
          (5) Timber and certain ornamental trees.--This 
        section shall not apply to--
                  (A) trees raised, harvested, or grown by the 
                taxpayer other than trees described in clause 
                (ii) of subsection (e)(4)(B) (after application 
                of the last sentence thereof), and
                  (B) any real property underlying such trees.
          (6) Coordination with section 59(e).--Paragraphs (2) 
        and (3) shall apply to any amount allowable as a 
        deduction under section 59(e) for qualified 
        expenditures described in subparagraphs (B), (C), (D), 
        and (E) of paragraph (2) thereof.
          (7) Coordination with section 168(k)(5).--This 
        section shall not apply to any amount allowed as a 
        deduction by reason of section 168(k)(5) (relating to 
        special rules for certain plants bearing fruits and 
        nuts).
  (d) Exception for Farming Businesses.--
          (1) Section not to apply to certain property.--
                  (A) In general.--This section shall not apply 
                to any of the following which is produced by 
                the taxpayer in a farming business:
                          (i) Any animal.
                          (ii) Any plant which has a 
                        preproductive period of 2 years or 
                        less.
                  (B) Exception for taxpayers required to use 
                accrual method.--Subparagraph (A) shall not 
                apply to any corporation, partnership, or tax 
                shelter required to use an accrual method of 
                accounting under section 447 or 448(a)(3).
          (2) Treatment of certain plants lost by reason of 
        casualty.--
                  (A) In general.--If plants bearing an edible 
                crop for human consumption were lost or damaged 
                (while in the hands of the taxpayer) by reason 
                of freezing temperatures, disease, drought, 
                pests, or casualty, this section shall not 
                apply to any costs of the taxpayer of 
                replanting plants bearing the same type of crop 
                (whether on the same parcel of land on which 
                such lost or damaged plants were located or any 
                other parcel of land of the same acreage in the 
                United States).
                  (B) Special rule for person with minority 
                interest who materially participates.--
                Subparagraph (A) shall apply to amounts paid or 
                incurred by a person (other than the taxpayer 
                described in subparagraph (A)) if--
                          (i) the taxpayer described in 
                        subparagraph (A) has an equity interest 
                        of more than 50 percent in the plants 
                        described in subparagraph (A) at all 
                        times during the taxable year in which 
                        such amounts were paid or incurred, and
                          (ii) such other person holds any part 
                        of the remaining equity interest and 
                        materially participates in the 
                        planting, maintenance, cultivation, or 
                        development of such the plants 
                        described in subparagraph (A) during 
                        the taxable year in which such amounts 
                        were paid or incurred.
                The determination of whether an individual 
                materially participates in any activity shall 
                be made in a manner similar to the manner in 
                which such determination is made under section 
                2032A(e)(6).
          (3) Election to have this section not apply.--
                  (A) In general.--If a taxpayer makes an 
                election under this paragraph, this section 
                shall not apply to any plant produced in any 
                farming business carried on by such taxpayer.
                  (B) Certain persons not eligible.--No 
                election may be made under this paragraph by a 
                corporation, partnership, or tax shelter, if 
                such corporation, partnership, or tax shelter 
                is required to use an accrual method of 
                accounting under section 447 or 448(a)(3).
                  (C) Special rule for citrus and almond 
                growers.--An election under this paragraph 
                shall not apply with respect to any item which 
                is attributable to the planting, cultivation, 
                maintenance, or development of any citrus or 
                almond grove (or part thereof) and which is 
                incurred before the close of the 4th taxable 
                year beginning with the taxable year in which 
                the trees were planted. For purposes of the 
                preceding sentence, the portion of a citrus or 
                almond grove planted in 1 taxable year shall be 
                treated separately from the portion of such 
                grove planted in another taxable year.
                  (D) Election.--Unless the Secretary otherwise 
                consents, an election under this paragraph may 
                be made only for the taxpayer's 1st taxable 
                year which begins after December 31, 1986, and 
                during which the taxpayer engages in a farming 
                business. Any such election, once made, may be 
                revoked only with the consent of the Secretary.
  (e) Definitions and Special Rules for Purposes of Subsection 
(D).--
          (1) Recapture of expensed amounts on disposition.--
                  (A) In general.--In the case of any plant 
                with respect to which amounts would have been 
                capitalized under subsection (a) but for an 
                election under subsection (d)(3)--
                          (i) such plant (if not otherwise 
                        section 1245 property) shall be treated 
                        as section 1245 property, and
                          (ii) for purposes of section 1245, 
                        the recapture amount shall be treated 
                        as a deduction allowed for depreciation 
                        with respect to such property.
                  (B) Recapture amount.--For purposes of 
                subparagraph (A), the term ``recapture amount'' 
                means any amount allowable as a deduction to 
                the taxpayer which, but for an election under 
                subsection (d)(3), would have been capitalized 
                with respect to the plant.
          (2) Effects of election on depreciation.--
                  (A) In general.--If the taxpayer (or any 
                related person) makes an election under 
                subsection (d)(3), the provisions of section 
                168(g)(2) (relating to alternative 
                depreciation) shall apply to all property of 
                the taxpayer used predominantly in the farming 
                business and placed in service in any taxable 
                year during which any such election is in 
                effect.
                  (B) Related person.--For purposes of 
                subparagraph (A), the term ``related person'' 
                means--
                          (i) the taxpayer and members of the 
                        taxpayer's family,
                          (ii) any corporation (including an S 
                        corporation) if 50 percent or more (in 
                        value) of the stock of such corporation 
                        is owned (directly or through the 
                        application of section 318) by the 
                        taxpayer or members of the taxpayer's 
                        family,
                          (iii) a corporation and any other 
                        corporation which is a member of the 
                        same controlled group described in 
                        section 1563(a)(1), and
                          (iv) any partnership if 50 percent or 
                        more (in value) of the interests in 
                        such partnership is owned directly or 
                        indirectly by the taxpayer or members 
                        of the taxpayer's family.
                  (C) Members of family.--For purposes of this 
                paragraph, the term ``family'' means the 
                taxpayer, the spouse of the taxpayer, and any 
                of their children who have not attained age 18 
                before the close of the taxable year.
          (3) Preproductive period.--
                  (A) In general.--For purposes of this 
                section, the term ``preproductive period'' 
                means--
                          (i) in the case of a plant which will 
                        have more than 1 crop or yield, the 
                        period before the 1st marketable crop 
                        or yield from such plant, or
                          (ii) in the case of any other plant, 
                        the period before such plant is 
                        reasonably expected to be disposed of.
                For purposes of this subparagraph, use by the 
                taxpayer in a farming business of any supply 
                produced in such business shall be treated as a 
                disposition.
                  (B) Rule for determining period.--In the case 
                of a plant grown in commercial quantities in 
                the United States, the preproductive period for 
                such plant if grown in the United States shall 
                be based on the nationwide weighted average 
                preproductive period for such plant.
          (4) Farming business.--For purposes of this section--
                  (A) In general.--The term ``farming 
                business'' means the trade or business of 
                farming.
                  (B) Certain trades and businesses included.--
                The term ``farming business'' shall include the 
                trade or business of--
                          (i) operating a nursery or sod farm, 
                        or
                          (ii) the raising or harvesting of 
                        trees bearing fruit, nuts, or other 
                        crops, or ornamental trees.
                For purposes of clause (ii), an evergreen tree 
                which is more than 6 years old at the time 
                severed from the roots shall not be treated as 
                an ornamental tree.
          (5) Certain inventory valuation methods permitted.--
        The Secretary shall by regulations permit the taxpayer 
        to use reasonable inventory valuation methods to 
        compute the amount required to be capitalized under 
        subsection (a) in the case of any plant.
  (f) Special Rules for Allocation of Interest to Property 
Produced by the Taxpayer.--
          (1) Interest capitalized only in certain cases.--
        Subsection (a) shall only apply to interest costs which 
        are--
                  (A) paid or incurred during the production 
                period, and
                  (B) allocable to property which is described 
                in subsection (b)(1) and which has--
                          (i) a long useful life,
                          (ii) an estimated production period 
                        exceeding 2 years, or
                          (iii) an estimated production period 
                        exceeding 1 year and a cost exceeding 
                        $1,000,000.
          (2) Allocation rules.--
                  (A) In general.--In determining the amount of 
                interest required to be capitalized under 
                subsection (a) with respect to any property--
                          (i) interest on any indebtedness 
                        directly attributable to production 
                        expenditures with respect to such 
                        property shall be assigned to such 
                        property, and
                          (ii) interest on any other 
                        indebtedness shall be assigned to such 
                        property to the extent that the 
                        taxpayer's interest costs could have 
                        been reduced if production expenditures 
                        (not attributable to indebtedness 
                        described in clause (i)) had not been 
                        incurred.
                  (B) Exception for qualified residence 
                interest.--Subparagraph (A) shall not apply to 
                any qualified residence interest (within the 
                meaning of section 163(h)).
                  (C) Special rule for flow-through entities.--
                Except as provided in regulations, in the case 
                of any flow-through entity, this paragraph 
                shall be applied first at the entity level and 
                then at the beneficiary level.
          (3) Interest relating to property used to produce 
        property.--This subsection shall apply to any interest 
        on indebtedness allocable (as determined under 
        paragraph (2)) to property used to produce property to 
        which this subsection applies to the extent such 
        interest is allocable (as so determined) to the 
        produced property.
          (4) Definitions.--For purposes of this subsection--
                  (A) Long useful life.--Property has a long 
                useful life if such property is--
                          (i) real property, or
                          (ii) property with a class life of 20 
                        years or more (as determined under 
                        section 168).
                  (B) Production period.--The term ``production 
                period'' means, when used with respect to any 
                property, the period--
                          (i) beginning on the date on which 
                        production of the property begins, and
                          (ii) ending on the date on which the 
                        property is ready to be placed in 
                        service or is ready to be held for 
                        sale.
                  (C) Production expenditures.--The term 
                ``production expenditures'' means the costs 
                (whether or not incurred during the production 
                period) required to be capitalized under 
                subsection (a) with respect to the property.
  (g) Production.--For purposes of this section--
          (1) In general.--The term ``produce'' includes 
        construct, build, install, manufacture, develop, or 
        improve.
          (2) Treatment of property produced under contract for 
        the taxpayer.--The taxpayer shall be treated as 
        producing any property produced for the taxpayer under 
        a contract with the taxpayer; except that only costs 
        paid or incurred by the taxpayer (whether under such 
        contract or otherwise) shall be taken into account in 
        applying subsection (a) to the taxpayer.
  (h) Exemption for Free Lance Authors, Photographers, and 
Artists.--
          (1) In general.--Nothing in this section shall 
        require the capitalization of any qualified creative 
        expense.
          (2) Qualified creative expense.--For purposes of this 
        subsection, the term ``qualified creative expense'' 
        means any expense--
                  (A) which is paid or incurred by an 
                individual in the trade or business of such 
                individual (other than as an employee) of being 
                a writer, photographer, or artist, and
                  (B) which, without regard to this section, 
                would be allowable as a deduction for the 
                taxable year.
        Such term does not include any expense related to 
        printing, photographic plates, motion picture films, 
        video tapes, or similar items.
          (3) Definitions.--For purposes of this subsection--
                  (A) Writer.--The term ``writer'' means any 
                individual if the personal efforts of such 
                individual create (or may reasonably be 
                expected to create) a literary manuscript, 
                musical composition (including any accompanying 
                words), or dance score.
                  (B) Photographer.--The term ``photographer'' 
                means any individual if the personal efforts of 
                such individual create (or may reasonably be 
                expected to create) a photograph or 
                photographic negative or transparency.
                  (C) Artist.--
                          (i) In general.--The term ``artist'' 
                        means any individual if the personal 
                        efforts of such individual create (or 
                        may reasonably be expected to create) a 
                        picture, painting, sculpture, statue, 
                        etching, drawing, cartoon, graphic 
                        design, or original print edition.
                          (ii) Criteria.--In determining 
                        whether any expense is paid or incurred 
                        in the trade or business of being an 
                        artist, the following criteria shall be 
                        taken into account:
                                  (I) The originality and 
                                uniqueness of the item created 
                                (or to be created).
                                  (II) The predominance of 
                                aesthetic value over 
                                utilitarian value of the item 
                                created (or to be created).
                  (D) Treatment of certain corporations.--
                          (i) In general.--If--
                                  (I) substantially all of the 
                                stock of a corporation is owned 
                                by a qualified employee-owner 
                                and members of his family (as 
                                defined in section 267(c)(4)), 
                                and
                                  (II) the principal activity 
                                of such corporation is 
                                performance of personal 
                                services directly related to 
                                the activities of the qualified 
                                employee-owner and such 
                                services are substantially 
                                performed by the qualified 
                                employee-owner,
                        this subsection shall apply to any 
                        expense of such corporation which 
                        directly relates to the activities of 
                        such employee-owner in the same manner 
                        as if such expense were incurred by 
                        such employee-owner.
                          (ii) Qualified employee-owner.--For 
                        purposes of this subparagraph, the term 
                        ``qualified employee-owner'' means any 
                        individual who is an employee-owner of 
                        the corporation (as defined in section 
                        269A(b)(2)) and who is a writer, 
                        photographer, or artist.
  (i) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section, including--
          (1) regulations to prevent the use of related 
        parties, pass-thru entities, or intermediaries to avoid 
        the application of this section, and
          (2) regulations providing for simplified procedures 
        for the application of this section in the case of 
        property described in subsection (b)(2).

           *       *       *       *       *       *       *


      B. Changes in Existing Law Proposed by the Bill, as Reported

    In compliance with clause 3(e)(1)(B) of rule XIII of the 
Rules of the House of Representatives, changes in existing law 
proposed by the bill, as reported, are shown as follows 
(existing law proposed to be omitted is enclosed in black 
brackets, new matter is printed in italics, existing law in 
which no change is proposed is shown in roman):

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e)(1)(B) of rule XIII of the 
Rules of the House of Representatives, changes in existing law 
proposed by the bill, as reported, are shown as follows (new 
matter is printed in italics and existing law in which no 
change is proposed is shown in roman):

                     INTERNAL REVENUE CODE OF 1986




           *       *       *       *       *       *       *
Subtitle A--Income Taxes

           *       *       *       *       *       *       *


CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *


Subchapter B--Computation of Taxable Income

           *       *       *       *       *       *       *


PART IX--ITEMS NOT DEDUCTIBLE

           *       *       *       *       *       *       *



SEC. 263A. CAPITALIZATION AND INCLUSION IN INVENTORY COSTS OF CERTAIN 
                    EXPENSES.

  (a) Nondeductibility of Certain Direct and Indirect Costs.--
          (1) In general.--In the case of any property to which 
        this section applies, any costs described in paragraph 
        (2)--
                  (A) in the case of property which is 
                inventory in the hands of the taxpayer, shall 
                be included in inventory costs, and
                  (B) in the case of any other property, shall 
                be capitalized.
          (2) Allocable costs.--The costs described in this 
        paragraph with respect to any property are--
                  (A) the direct costs of such property, and
                  (B) such property's proper share of those 
                indirect costs (including taxes) part or all of 
                which are allocable to such property.
        Any cost which (but for this subsection) could not be 
        taken into account in computing taxable income for any 
        taxable year shall not be treated as a cost described 
        in this paragraph.
  (b) Property to Which Section Applies.--Except as otherwise 
provided in this section, this section shall apply to--
          (1) Property produced by taxpayer.--Real or tangible 
        personal property produced by the taxpayer.
          (2) Property acquired for resale.--
                  (A) In general.--Real or personal property 
                described in section 1221(a)(1) which is 
                acquired by the taxpayer for resale.
                  (B) Exception for taxpayer with gross 
                receipts of $10,000,000 or less.--Subparagraph 
                (A) shall not apply to any personal property 
                acquired during any taxable year by the 
                taxpayer for resale if the average annual gross 
                receipts of the taxpayer (or any predecessor) 
                for the 3-taxable year period ending with the 
                taxable year preceding such taxable year do not 
                exceed $10,000,000.
                  (C) Aggregation rules, etc..--For purposes of 
                subparagraph (B), rules similar to the rules of 
                paragraphs (2) and (3) of section 448(c) shall 
                apply.
        For purposes of paragraph (1), the term ``tangible 
        personal property'' shall include a film, sound 
        recording, video tape, book, or similar property.
  (c) General Exceptions.--
          (1) Personal use property.--This section shall not 
        apply to any property produced by the taxpayer for use 
        by the taxpayer other than in a trade or business or an 
        activity conducted for profit.
          (2) Research and experimental expenditures.--This 
        section shall not apply to any amount allowable as a 
        deduction under section 174.
          (3) Certain development and other costs of oil and 
        gas wells or other mineral property.--This section 
        shall not apply to any cost allowable as a deduction 
        under section 167(h), 179B, 263(c), 263(i), 291(b)(2), 
        616, or 617.
          (4) Coordination with long-term contract rules.--This 
        section shall not apply to any property produced by the 
        taxpayer pursuant to a long-term contract.
          (5) Timber and certain ornamental trees.--This 
        section shall not apply to--
                  (A) trees raised, harvested, or grown by the 
                taxpayer other than trees described in clause 
                (ii) of subsection (e)(4)(B) (after application 
                of the last sentence thereof), and
                  (B) any real property underlying such trees.
          (6) Coordination with section 59(e).--Paragraphs (2) 
        and (3) shall apply to any amount allowable as a 
        deduction under section 59(e) for qualified 
        expenditures described in subparagraphs (B), (C), (D), 
        and (E) of paragraph (2) thereof.
          (7) Coordination with section 168(k)(5).--This 
        section shall not apply to any amount allowed as a 
        deduction by reason of section 168(k)(5) (relating to 
        special rules for certain plants bearing fruits and 
        nuts).
  (d) Exception for Farming Businesses.--
          (1) Section not to apply to certain property.--
                  (A) In general.--This section shall not apply 
                to any of the following which is produced by 
                the taxpayer in a farming business:
                          (i) Any animal.
                          (ii) Any plant which has a 
                        preproductive period of 2 years or 
                        less.
                  (B) Exception for taxpayers required to use 
                accrual method.--Subparagraph (A) shall not 
                apply to any corporation, partnership, or tax 
                shelter required to use an accrual method of 
                accounting under section 447 or 448(a)(3).
          (2) Treatment of certain plants lost by reason of 
        casualty.--
                  (A) In general.--If plants bearing an edible 
                crop for human consumption were lost or damaged 
                (while in the hands of the taxpayer) by reason 
                of freezing temperatures, disease, drought, 
                pests, or casualty, this section shall not 
                apply to any costs of the taxpayer of 
                replanting plants bearing the same type of crop 
                (whether on the same parcel of land on which 
                such lost or damaged plants were located or any 
                other parcel of land of the same acreage in the 
                United States).
                  (B) Special rule for person with minority 
                interest who materially participates.--
                Subparagraph (A) shall apply to amounts paid or 
                incurred by a person (other than the taxpayer 
                described in subparagraph (A)) if--
                          (i) the taxpayer described in 
                        subparagraph (A) has an equity interest 
                        of more than 50 percent in the plants 
                        described in subparagraph (A) at all 
                        times during the taxable year in which 
                        such amounts were paid or incurred, and
                          (ii) such other person holds any part 
                        of the remaining equity interest and 
                        materially participates in the 
                        planting, maintenance, cultivation, or 
                        development of such the plants 
                        described in subparagraph (A) during 
                        the taxable year in which such amounts 
                        were paid or incurred.
                The determination of whether an individual 
                materially participates in any activity shall 
                be made in a manner similar to the manner in 
                which such determination is made under section 
                2032A(e)(6).
                  (C) Special temporary rule for citrus plants 
                lost by reason of casualty.--
                          (i) In general.--In the case of the 
                        replanting of citrus plants, 
                        subparagraph (A) shall apply to amounts 
                        paid or incurred by a person (other 
                        than the taxpayer described in 
                        subparagraph (A)) if--
                                  (I) the taxpayer described in 
                                subparagraph (A) has an equity 
                                interest of not less than 50 
                                percent in the replanted citrus 
                                plants at all times during the 
                                taxable year in which such 
                                amounts were paid or incurred 
                                and such other person holds any 
                                part of the remaining equity 
                                interest, or
                                  (II) such other person 
                                acquired the entirety of such 
                                taxpayer's equity interest in 
                                the land on which the lost or 
                                damaged citrus plants were 
                                located at the time of such 
                                loss or damage, and the 
                                replanting is on such land.
                          (ii) Termination.--Clause (i) shall 
                        not apply to any cost paid or incurred 
                        after December 31, 2025.
          (3) Election to have this section not apply.--
                  (A) In general.--If a taxpayer makes an 
                election under this paragraph, this section 
                shall not apply to any plant produced in any 
                farming business carried on by such taxpayer.
                  (B) Certain persons not eligible.--No 
                election may be made under this paragraph by a 
                corporation, partnership, or tax shelter, if 
                such corporation, partnership, or tax shelter 
                is required to use an accrual method of 
                accounting under section 447 or 448(a)(3).
                  (C) Special rule for citrus and almond 
                growers.--An election under this paragraph 
                shall not apply with respect to any item which 
                is attributable to the planting, cultivation, 
                maintenance, or development of any citrus or 
                almond grove (or part thereof) and which is 
                incurred before the close of the 4th taxable 
                year beginning with the taxable year in which 
                the trees were planted. For purposes of the 
                preceding sentence, the portion of a citrus or 
                almond grove planted in 1 taxable year shall be 
                treated separately from the portion of such 
                grove planted in another taxable year.
                  (D) Election.--Unless the Secretary otherwise 
                consents, an election under this paragraph may 
                be made only for the taxpayer's 1st taxable 
                year which begins after December 31, 1986, and 
                during which the taxpayer engages in a farming 
                business. Any such election, once made, may be 
                revoked only with the consent of the Secretary.
  (e) Definitions and Special Rules for Purposes of Subsection 
(D).--
          (1) Recapture of expensed amounts on disposition.--
                  (A) In general.--In the case of any plant 
                with respect to which amounts would have been 
                capitalized under subsection (a) but for an 
                election under subsection (d)(3)--
                          (i) such plant (if not otherwise 
                        section 1245 property) shall be treated 
                        as section 1245 property, and
                          (ii) for purposes of section 1245, 
                        the recapture amount shall be treated 
                        as a deduction allowed for depreciation 
                        with respect to such property.
                  (B) Recapture amount.--For purposes of 
                subparagraph (A), the term ``recapture amount'' 
                means any amount allowable as a deduction to 
                the taxpayer which, but for an election under 
                subsection (d)(3), would have been capitalized 
                with respect to the plant.
          (2) Effects of election on depreciation.--
                  (A) In general.--If the taxpayer (or any 
                related person) makes an election under 
                subsection (d)(3), the provisions of section 
                168(g)(2) (relating to alternative 
                depreciation) shall apply to all property of 
                the taxpayer used predominantly in the farming 
                business and placed in service in any taxable 
                year during which any such election is in 
                effect.
                  (B) Related person.--For purposes of 
                subparagraph (A), the term ``related person'' 
                means--
                          (i) the taxpayer and members of the 
                        taxpayer's family,
                          (ii) any corporation (including an S 
                        corporation) if 50 percent or more (in 
                        value) of the stock of such corporation 
                        is owned (directly or through the 
                        application of section 318) by the 
                        taxpayer or members of the taxpayer's 
                        family,
                          (iii) a corporation and any other 
                        corporation which is a member of the 
                        same controlled group described in 
                        section 1563(a)(1), and
                          (iv) any partnership if 50 percent or 
                        more (in value) of the interests in 
                        such partnership is owned directly or 
                        indirectly by the taxpayer or members 
                        of the taxpayer's family.
                  (C) Members of family.--For purposes of this 
                paragraph, the term ``family'' means the 
                taxpayer, the spouse of the taxpayer, and any 
                of their children who have not attained age 18 
                before the close of the taxable year.
          (3) Preproductive period.--
                  (A) In general.--For purposes of this 
                section, the term ``preproductive period'' 
                means--
                          (i) in the case of a plant which will 
                        have more than 1 crop or yield, the 
                        period before the 1st marketable crop 
                        or yield from such plant, or
                          (ii) in the case of any other plant, 
                        the period before such plant is 
                        reasonably expected to be disposed of.
                For purposes of this subparagraph, use by the 
                taxpayer in a farming business of any supply 
                produced in such business shall be treated as a 
                disposition.
                  (B) Rule for determining period.--In the case 
                of a plant grown in commercial quantities in 
                the United States, the preproductive period for 
                such plant if grown in the United States shall 
                be based on the nationwide weighted average 
                preproductive period for such plant.
          (4) Farming business.--For purposes of this section--
                  (A) In general.--The term ``farming 
                business'' means the trade or business of 
                farming.
                  (B) Certain trades and businesses included.--
                The term ``farming business'' shall include the 
                trade or business of--
                          (i) operating a nursery or sod farm, 
                        or
                          (ii) the raising or harvesting of 
                        trees bearing fruit, nuts, or other 
                        crops, or ornamental trees.
                For purposes of clause (ii), an evergreen tree 
                which is more than 6 years old at the time 
                severed from the roots shall not be treated as 
                an ornamental tree.
          (5) Certain inventory valuation methods permitted.--
        The Secretary shall by regulations permit the taxpayer 
        to use reasonable inventory valuation methods to 
        compute the amount required to be capitalized under 
        subsection (a) in the case of any plant.
  (f) Special Rules for Allocation of Interest to Property 
Produced by the Taxpayer.--
          (1) Interest capitalized only in certain cases.--
        Subsection (a) shall only apply to interest costs which 
        are--
                  (A) paid or incurred during the production 
                period, and
                  (B) allocable to property which is described 
                in subsection (b)(1) and which has--
                          (i) a long useful life,
                          (ii) an estimated production period 
                        exceeding 2 years, or
                          (iii) an estimated production period 
                        exceeding 1 year and a cost exceeding 
                        $1,000,000.
          (2) Allocation rules.--
                  (A) In general.--In determining the amount of 
                interest required to be capitalized under 
                subsection (a) with respect to any property--
                          (i) interest on any indebtedness 
                        directly attributable to production 
                        expenditures with respect to such 
                        property shall be assigned to such 
                        property, and
                          (ii) interest on any other 
                        indebtedness shall be assigned to such 
                        property to the extent that the 
                        taxpayer's interest costs could have 
                        been reduced if production expenditures 
                        (not attributable to indebtedness 
                        described in clause (i)) had not been 
                        incurred.
                  (B) Exception for qualified residence 
                interest.--Subparagraph (A) shall not apply to 
                any qualified residence interest (within the 
                meaning of section 163(h)).
                  (C) Special rule for flow-through entities.--
                Except as provided in regulations, in the case 
                of any flow-through entity, this paragraph 
                shall be applied first at the entity level and 
                then at the beneficiary level.
          (3) Interest relating to property used to produce 
        property.--This subsection shall apply to any interest 
        on indebtedness allocable (as determined under 
        paragraph (2)) to property used to produce property to 
        which this subsection applies to the extent such 
        interest is allocable (as so determined) to the 
        produced property.
          (4) Definitions.--For purposes of this subsection--
                  (A) Long useful life.--Property has a long 
                useful life if such property is--
                          (i) real property, or
                          (ii) property with a class life of 20 
                        years or more (as determined under 
                        section 168).
                  (B) Production period.--The term ``production 
                period'' means, when used with respect to any 
                property, the period--
                          (i) beginning on the date on which 
                        production of the property begins, and
                          (ii) ending on the date on which the 
                        property is ready to be placed in 
                        service or is ready to be held for 
                        sale.
                  (C) Production expenditures.--The term 
                ``production expenditures'' means the costs 
                (whether or not incurred during the production 
                period) required to be capitalized under 
                subsection (a) with respect to the property.
  (g) Production.--For purposes of this section--
          (1) In general.--The term ``produce'' includes 
        construct, build, install, manufacture, develop, or 
        improve.
          (2) Treatment of property produced under contract for 
        the taxpayer.--The taxpayer shall be treated as 
        producing any property produced for the taxpayer under 
        a contract with the taxpayer; except that only costs 
        paid or incurred by the taxpayer (whether under such 
        contract or otherwise) shall be taken into account in 
        applying subsection (a) to the taxpayer.
  (h) Exemption for Free Lance Authors, Photographers, and 
Artists.--
          (1) In general.--Nothing in this section shall 
        require the capitalization of any qualified creative 
        expense.
          (2) Qualified creative expense.--For purposes of this 
        subsection, the term ``qualified creative expense'' 
        means any expense--
                  (A) which is paid or incurred by an 
                individual in the trade or business of such 
                individual (other than as an employee) of being 
                a writer, photographer, or artist, and
                  (B) which, without regard to this section, 
                would be allowable as a deduction for the 
                taxable year.
        Such term does not include any expense related to 
        printing, photographic plates, motion picture films, 
        video tapes, or similar items.
          (3) Definitions.--For purposes of this subsection--
                  (A) Writer.--The term ``writer'' means any 
                individual if the personal efforts of such 
                individual create (or may reasonably be 
                expected to create) a literary manuscript, 
                musical composition (including any accompanying 
                words), or dance score.
                  (B) Photographer.--The term ``photographer'' 
                means any individual if the personal efforts of 
                such individual create (or may reasonably be 
                expected to create) a photograph or 
                photographic negative or transparency.
                  (C) Artist.--
                          (i) In general.--The term ``artist'' 
                        means any individual if the personal 
                        efforts of such individual create (or 
                        may reasonably be expected to create) a 
                        picture, painting, sculpture, statue, 
                        etching, drawing, cartoon, graphic 
                        design, or original print edition.
                          (ii) Criteria.--In determining 
                        whether any expense is paid or incurred 
                        in the trade or business of being an 
                        artist, the following criteria shall be 
                        taken into account:
                                  (I) The originality and 
                                uniqueness of the item created 
                                (or to be created).
                                  (II) The predominance of 
                                aesthetic value over 
                                utilitarian value of the item 
                                created (or to be created).
                  (D) Treatment of certain corporations.--
                          (i) In general.--If--
                                  (I) substantially all of the 
                                stock of a corporation is owned 
                                by a qualified employee-owner 
                                and members of his family (as 
                                defined in section 267(c)(4)), 
                                and
                                  (II) the principal activity 
                                of such corporation is 
                                performance of personal 
                                services directly related to 
                                the activities of the qualified 
                                employee-owner and such 
                                services are substantially 
                                performed by the qualified 
                                employee-owner,
                        this subsection shall apply to any 
                        expense of such corporation which 
                        directly relates to the activities of 
                        such employee-owner in the same manner 
                        as if such expense were incurred by 
                        such employee-owner.
                          (ii) Qualified employee-owner.--For 
                        purposes of this subparagraph, the term 
                        ``qualified employee-owner'' means any 
                        individual who is an employee-owner of 
                        the corporation (as defined in section 
                        269A(b)(2)) and who is a writer, 
                        photographer, or artist.
  (i) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section, including--
          (1) regulations to prevent the use of related 
        parties, pass-thru entities, or intermediaries to avoid 
        the application of this section, and
          (2) regulations providing for simplified procedures 
        for the application of this section in the case of 
        property described in subsection (b)(2).

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