"(1) a corporation engaged in the trade or business of farming, or (2) a partnership engaged in the trade or business of farming, if a corporation is a partner in such partnership, shall be computed on an accrual method of accounting and with the capitalization of preproductive expenses described in subsection (b). This section shall not apply to the trade or business of operating a nursery or to the raising or harvesting of trees (other than fruit and nut trees). "(b) PREPRODUCTIVE PERIOD EXPENSES. "(1) IN GENERAL.-For purposes of this section, the term 'pre- "Preproductive productive period expenses' means any amount which is attribut- period able to crops, animals, or any other property having a crop or expenses." yield during the preproductive period of such property. "(2) EXCEPTIONS.-Paragraph (1) shall not apply "(A) to taxes and interest, and "(B) to any amount incurred on account of fire, storm, flood, or other casualty or on account of disease or drought. "(3) PREPRODUCTIVE PERIOD DEFINED. For purposes of this subsection, the term 'preproductive period' means "(A) in the case of property having a useful life of more than 1 year which will have more than 1 crop or yield, the period before the disposition of the first such marketable crop or yield, or 66 (B) in the case of any other property, the period before such property is disposed of. For purposes of this section, the use by the taxpayer in the trade or business of farming of any supply produced in such trade or business shall be treated as a disposition. "(c) EXCEPTION FOR SMALL BUSINESS AND FAMILY CORPORATIONS.— For purposes of subsection (a), a corporation shall be treated as not being a corporation if it is "(1) an electing small business corporation (within the meaning of section 1371(b)), "(2) a corporation of which at least 50 percent of the total combined voting power of all classes of stock entitled to vote, and at least 50 percent of the total number of shares of all other classes of stock of the corporation, are owned by members of the same family, or "(3) a corporation the gross receipts of which meet the requirements of subsection (e). "(d) MEMBERS OF THE SAME FAMILY.-For purposes of subsection (c) (2) "(1) the members of the same family are an individual, such individual's brothers and sisters, the brothers and sisters of such individual's parents and grandparents, the ancestors and lineal descendants or any of the foregoing, a spouse of any of the foregoing, and the estate of any of the foregoing, "(2) stock owned, directly or indirectly, by or for a partnership or trust shall be treated as owned proportionately by its partners or beneficiaries, and "(3) if 50 percent or more in value of the stock in a corporation (hereinafter in this paragraph referred to as 'first corporation') is owned, directly or through paragraph (2), by or for members of the same family, such members shall be considered as owning each class of stock in a second corporation (or a wholly owned 26 USC 1371. 26 USC 1563. subsidiary of such second corporation) owned, directly or indirectly, by or for the first corporation, in that proportion which the value of the stock in the first corporation which such members so own bears to the value of all the stock in the first corporation. For purposes of paragraph (1), individuals related by the half blood or by legal adoption shall be treated as if they were related by the whole blood. "(e) CORPORATIONS HAVING GROSS RECEIPTS OF $1,000,000 OR LESS.— A corporation meets the requirements of this subsection if, for each prior taxable year beginning after December 31, 1975, such corporation (and any predecessor corporation) did not have gross receipts exceeding $1,000,000. For purposes of the preceding sentence, all corporations which are members of a controlled group of corporations (within the meaning of section 1563 (a)) shall be treated as one corporation. "(f) COORDINATION WITH SECTION 481.-In the case of any taxpayer required by this section to change its method of accounting for any taxable year "(1) such change shall be treated as having been made with the consent of the Secretary, "(2) for purposes of section 481 (a) (2), such change shall be treated as a change not initiated by the taxpayer, and "(3) under regulations prescribed by the Secretary, the net amount of adjustments required by section 481 (a) to be taken into account by the taxpayer in computing taxable income shall (except as otherwise provided in such regulations) be taken into account in each of the 10 taxable years beginning with the year of change. "(g) CERTAIN ANNUAL ACCRUAL ACCOUNTING METHODS.— "(A) for its 10 taxable years ending with its first taxable year beginning after December 31, 1975, a corporation used an annual accrual method of accounting with respect to its trade or business of farming, "(B) such corporation raises crops which are harvested not less than 12 months after planting, and "(C) such corporation has used such method of accounting for all taxable years intervening between its first taxable year beginning after December 31, 1975, and the taxable year, such corporation may continue to employ such method of accounting for the taxable year with respect to its trade or business of farming. "(2) ANNUAL ACCRUAL METHOD OF ACCOUNTING DEFINED.-For purposes of paragraph (1), the term 'annual accrual method of accounting means a method under which revenues, costs, and expenses are computed on an accrual method of accounting and the preproductive expenses incurred during the taxable year are charged to harvested crops or deducted in determining the taxable income for such years. "(3) CERTAIN REORGANIZATIONS.--For purposes of this subsection, if a corporation acquired substantially all the assets of a farming trade or business from another corporation in a transaction in which no gain or loss was recognized to the transferor or transferee corporation, the transferee corporation shall be deemed to have computed its taxable income on an annual accrual method of accounting during the period for which the transferor corporation computed its taxable income from such trade or business on an annual accrual method." (B) The table of sections for such subpart A is amended by adding at the end thereof the following: "Sec. 447. Method of accounting for corporations engaged in farming.” (2) EFFECTIVE DATE.-The amendments made by paragraph (1) shall apply to taxable years beginning after December 31, 1976. (3) ELECTION TO CHANGE FROM STATIC VALUE METHOD TO ACCRUAL METHOD OF ACCOUNTING. (A) IN GENERAL.—If— (i) a corporation has computed its taxable income on an annual accrual method of accounting together with a static value method of accounting for deferred costs of growing crops for the 10 taxable years ending with its first taxable year beginning after December 31, 1975, (ii) such corporation raises crops which are harvested not less than 12 months after planting, and 26 USC 447 note. 26 USC 447 note. (iii) such corporation elects, within one year after such change shall be treated as having been made with the (B) COORDINATION WITH SECTION 447 OF THE CODE.—A cor- (C) CERTAIN CORPORATE REORGANIZATIONS. For purposes of this paragraph, if a corporation acquired substantially all the assets of a farming trade or business from another corporation in a transaction in which no gain or loss was recognized to the transferor or transferee corporation, the transferee corporation shall be deemed to have computed its taxable income on an annual accrual method of accounting together with a static value method of accounting for deferred costs of growing crops during the period for which the transferor corporation computed its taxable income from such trade or business on such accrual and static value method. SEC. 208. TREATMENT OF PREPAID INTEREST. (a) GENERAL RULE.-Section 461 (relating to general rule for tax- 26 USC 461. able year of deduction) is amended by adding at the end thereof the following new subsection: 26 USC 461 note. 26 USC 163. "(g) PREPAID INTEREST. "(1) IN GENERAL.-If the taxable income of the taxpayer is computed under the cash receipts and disbursements method of accounting, interest paid by the taxpayer which, under regulations prescribed by the Secretary, is properly allocable to any period "(A) with respect to which the interest represents a charge for the use or forbearance of money, and "(B) which is after the close of the taxable year in which paid, shall be charged to capital account and shall be treated as paid in the period to which so allocable. "(2) EXCEPTION.-This subsection shall not apply to points paid in respect of any indebtedness incurred in connection with the purchase or improvement of, and secured by, the principal residence of the taxpayer to the extent that, under regulations prescribed by the Secretary, such payment of points is an established business practice in the area in which such indebtedness is incurred, and the amount of such payment does not exceed the amount generally charged in such area." (b) EFFECTIVE DATE. (1) IN GENERAL.-Except as provided in paragraph (2), the amendment made by subsection (a) shall apply to amounts paid after December 31, 1975, in taxable years ending after such date. (2) CERTAIN AMOUNTS PAID BEFORE 1977. The amendment made by subsection (a) shall not apply to amounts paid before January 1, 1977, pursuant to a binding contract or written loan commitment which existed on September 16, 1975 (and at all times thereafter), and which required prepayment of such amounts by the taxpayer. SEC. 209. LIMITATION ON INTEREST DEDUCTION. (a) IN GENERAL.-Subsection (d) of section 163 (relating to limitation on interest on investment indebtedness) is amended (1) by striking out paragraphs (1) and (2) and inserting in lieu thereof the following: "(1) IN GENERAL.-In the case of a taxpayer other than a corporation, the amount of investment interest (as defined in paragraph (3) (D)) otherwise allowable as a deduction under this chapter shall be limited, in the following order, to— "(A) $10,000 ($5,000, in the case of a separate return by a married individual), plus "(B) the amount of the net investment income (as defined in paragraph (3) (A)), plus the amount (if any) by which the deductions allowable under this section (determined without regard to this subsection) and sections 162, 164 (a) (1) or (2), or 212 attributable to property of the taxpayer subject to a net lease exceeds the rental income produced by such property for the taxable year. In the case of a trust, the $10,000 amount specified in subparagraph (A) shall be zero. "(2) CARRYOVER OF DISALLOWED INVESTMENT INTEREST.-The amount of disallowed investment interest for any taxable year shall be treated as investment interest paid or accrued in the succeeding taxable year."; (2) by adding at the end of paragraph (3) (A) the following new sentence: "If the taxpayer has investment interest for the taxable year to which this subsection (as in effect before the Tax Reform Act of 1976) applies, the amount of the net investment Ante, p. 1520. income taken into account under this subsection shall be the amount of such income (determined without regard to this sentence) multiplied by a fraction the numerator of which is the excess of the investment interest for the taxable year over the investment interest to which such prior provision applies, and the denominator of which is the investment interest for the taxable year."; (3) by striking out "limitations in paragraphs (1) and (2) (A)" in paragraph (3) (E) and inserting in lieu thereof "limitation in paragraph (1)"; (4) by striking out paragraph (5) and redesignating paragraphs (6) and (7) as paragraphs (5) and (6), respectively; (5) by adding at the end of paragraph (5) (as so redesignated) the following: "For taxable years beginning after December 31, 1975, this paragraph shall be applied on an allocation basis rather than a specific item basis."; and (6) by adding at the end thereof the following new paragraph: "(7) SPECIAL RULE WHERE TAXPAYER OWNS 50 PERCENT OR MORE OF ENTERPRISE.— "(A) GENERAL RULE.-In the case of any 50 percent owned corporation or partnership, the $10,000 figure specified in paragraph (1) shall be increased by the lesser of "i) $15,000, or "(ii) the interest paid or accrued during the taxable In the case of a separate return by a married individual, "(B) OWNERSHIP REQUIREMENTS.-This paragraph shall (b) EFFECTIVE DATE. 26 USC 163 (1) IN GENERAL.-Except as provided in paragraph (2), the note. amendments made by subsection (a) shall apply to taxable years beginning after December 31, 1975. (2) INDEBTEDNESS INCURRED BEFORE SEPTEMBER 11, 1975.-In the case of indebtedness attributable to a specific item of property which (A) is for a specified term, and (B) was incurred before September 11, 1975, or is incurred after September 10, 1975, pursuant to a written contract or commitment which on September 11, 1975, and at all times thereafter before the incurring of such indebtedness, is binding on the taxpayer, the amendments made by this section shall not apply, but section 163 (d) of the Internal Revenue Code of 1954 (as in effect before the enactment of this Act) shall apply. For purposes of the preceding sentence, so much of the net investment income (as defined in section 163 (d) (3) (A) of such Code) for any taxable year as |