Tax Code Word

8/3/2019 Tax Code Word

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IRS CODE

Sec. 61. Gross income defined(a) General definition

Except as otherwise provided in this subtitle, gross income means all income fromwhatever source derived, including (but not limited to) the following items:(1) Compensation for services, including fees, commissions, fringe benefits, andsimilar items;(2) Gross income derived from business;(3) Gains derived from dealings in property;(4) Interest;(5) Rents;(6) Royalties;(7) Dividends;

(8) Alimony and separate maintenance payments;(9) Annuities;(10) Income from life insurance and endowment contracts;(11) Pensions;(12) Income from discharge of indebtedness;(13) Distributive share of partnership gross income;(14) Income in respect of a decedent; and(15) Income from an interest in an estate or trust.

Sec. 83. Property transferred in connection with performance of

services(a) General ruleIf, in connection with the performance of services, property is transferred to anyperson other than the person for whom such services are performed, the excess of -(1) the fair market value of such property (determined without regard to anyrestriction other than a restriction which by its terms will never lapse) at the firsttime the rights of the person having the beneficial interest in such property aretransferable or are not subject to a substantial risk of forfeiture, whichever occursearlier, over

(2) the amount (if any) paid for such property, shall be included in the grossincome of the person who performed such services in the first taxable year inwhich the rights of the person having the beneficial interest in such property aretransferable or are not subject to a substantial risk of forfeiture, whichever isapplicable. The preceding sentence shall not apply if such person sells orotherwise disposes of such property in an arm's length transaction before his rightsin such property become transferable or not subject to a substantial risk offorfeiture.


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Sec. 1001. Determination of amount of and recognition of gain orloss(a) Computation of gain or lossThe gain from the sale or other disposition of property shall be the excess of theamount realized therefrom over the adjusted basis provided in section 1011 for

determining gain, and the loss shall be the excess of the adjusted basis provided insuch section for determining loss over the amount realized.(b) Amount realizedThe amount realized from the sale or other disposition of property shall be the sumof any money received plus the fair market value of the property (other thanmoney) received. In determining the amount realized -(1) there shall not be taken into account any amount received as reimbursementfor real property taxes which are treated under section 164(d) as imposed on thepurchaser, and(2) there shall be taken into account amounts representing real property taxes

which are treated under section 164(d) as imposed on the taxpayer if such taxesare to be paid by the purchaser.(c) Recognition of gain or lossExcept as otherwise provided in this subtitle, the entire amount of the gain or loss,determined under this section, on the sale or exchange of property shall berecognized.

1011. Adjusted basis for determining gain or loss.General rule. The adjusted basis for determining the gain or loss from the sale orother disposition of property, whenever acquired, shall be the basis (determined

under section 1012 or other applicable sections of this subchapter and subchaptersC (relating to corporate distributions and adjustments), K (relating to partners andpartnerships), and P (relating to capital gains and losses)), adjusted as provided insection 1016.

1012. Basis of property - costThe basis of property shall be the cost of such property, except as otherwiseprovided in this subchapter and subchapters C (relating to corporate distributionsand adjustments), K (relating to partners and partnerships), and P (relating tocapital gains and losses). The cost of real property shall not include any amount inrespect of real property taxes which are treated under section 164(d) as imposedon the taxpayer.

Sec. 63. Taxable income defined(a) In generalExcept as provided in subsection (b), for purposes of this subtitle, the term"taxable income" means gross income minus the deductions allowed by this
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chapter (other than the standard deduction).

Sec. 102. Gifts and inheritances(a) General ruleGross income does not include the value of property acquired by gift, bequest,

devise, or inheritance.(b) IncomeSubsection (a) shall not exclude from gross income -(1) the income from any property referred to in subsection (a); or(2) where the gift, bequest, devise, or inheritance is of income from property, theamount of such income. Where, under the terms of the gift, bequest, devise, orinheritance, the payment, crediting, or distribution thereof is to be made atintervals, then, to the extent that it is paid or credited or to be distributed out ofincome from property, it shall be treated for purposes of paragraph (2) as a gift,bequest, devise, or inheritance of income from property. Any amount included in

the gross income of a beneficiary under subchapter J shall be treated for purposesof paragraph (2) as a gift, bequest, devise, or inheritance of income from property.(c) Employee gifts(1) In generalSubsection (a) shall not exclude from gross income any amount transferred by orfor an employer to, or for the benefit of, an employee.(2) Cross referencesFor provisions excluding certain employee achievement awardsfrom gross income, see section 74(c).For provisions excluding certain de minimis fringes from

gross income, see section 132(e).

Sec. 1015. Basis of property acquired by gifts and transfers intrust(a) Gifts after December 31, 1920If the property was acquired by gift after December 31, 1920, the basis shall be thesame as it would be in the hands of the donor or the last preceding owner bywhom it was not acquired by gift, except that if such basis (adjusted for the periodbefore the date of the gift as provided in section 1016) is greater than the fairmarket value of the property at the time of the gift, then for the purpose ofdetermining loss the basis shall be such fair market value. If the facts necessary todetermine the basis in the hands of the donor or the last preceding owner areunknown to the donee, the Secretary shall, if possible, obtain such facts from suchdonor or last preceding owner, or any other person cognizant thereof. If theSecretary finds it impossible to obtain such facts, the basis in the hands of suchdonor or last preceding owner shall be the fair market value of such property asfound by the Secretary as of the date or approximate date at which, according to
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the best information that the Secretary is able to obtain, such property wasacquired by such donor or last preceding owner.(b) Transfer in trust after December 31, 1920If the property was acquired after December 31, 1920, by a transfer in trust (otherthan by a transfer in trust by a gift, bequest, or devise), the basis shall be the same

as it would be in the hands of the grantor increased in the amount of gain ordecreased in the amount of loss recognized to the grantor on such transfer underthe law applicable to the year in which the transfer was made.(c) Gift or transfer in trust before January 1, 1921If the property was acquired by gift or transfer in trust on or before December 31,1920, the basis shall be the fair market value of such property at the time of suchacquisition.(d) Increased basis for gift tax paid(1) In generalIf -

(A) the property is acquired by gift on or after September 2, 1958, the basis shallbe the basis determined under subsection (a), increased (but not above the fairmarket value of the property at the time of the gift) by the amount of gift tax paidwith respect to such gift, or(B) the property was acquired by gift before September 2, 1958, and has not beensold, exchanged, or otherwise disposed of before such date, the basis of theproperty shall be increased on such date by the amount of gift tax paid withrespect to such gift, but such increase shall not exceed an amount equal to theamount by which the fair market value of the property at the time of the giftexceeded the basis of the property in the hands of the donor at the time of the gift.

(2) Amount of tax paid with respect to giftFor purposes of paragraph (1), the amount of gift tax paid with respect to any giftis an amount which bears the same ratio to the amount of gift tax paid underchapter 12 with respect to all gifts made by the donor for the calendar year (orpreceding calendar period) in which such gift is made as the amount of such giftbears to the taxable gifts (as defined in section 2503(a) but computed without thededuction allowed by section 2521) made by the donor during such calendar yearor period. For purposes of the preceding sentence, the amount of any gift shall bethe amount included with respect to such gift in determining (for the purposes ofsection 2503(a)) the total amount of gifts made during the calendar year or period,reduced by the amount of any deduction allowed with respect to such gift undersection 2522 (relating to charitable deduction) or under section 2523 (relating tomarital deduction).(3) Gifts treated as made one-half by each spouseFor purposes of paragraph (1), where the donor and his spouse elected, undersection 2513 to have the gift considered as made one-half by each, the amount ofgift tax paid with respect to such gift under chapter 12 shall be the sum of theamounts of tax paid with respect to each half of such gift (computed in the manner
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provided in paragraph (2)).(4) Treatment as adjustment to basisFor purposes of section 1016(b), an increase in basis under paragraph (1) shall betreated as an adjustment under section 1016(a).(5) Application to gifts before 1955

With respect to any property acquired by gift before 1955, references in thissubsection to any provision of this title shall be deemed to refer to thecorresponding provision of the Internal Revenue Code of 1939 or prior revenuelaws which was effective for the year in which such gift was made.(6) Special rule for gifts made after December 31, 1976(A) In generalIn the case of any gift made after December 31, 1976, the increase in basisprovided by this subsection with respect to any gift for the gift tax paid underchapter 12 shall be an amount (not in excess of the amount of tax so paid) whichbears the same ratio to the amount of tax so paid as -

(i) the net appreciation in value of the gift, bears to(ii) the amount of the gift.(B) Net appreciationFor purposes of paragraph (1), the net appreciation in value of any gift is theamount by which the fair market value of the gift exceeds the donor's adjustedbasis immediately before the gift.(e) Gifts between spousesIn the case of any property acquired by gift in a transfer described in section1041(a), the basis of such property in the hands of the transferee shall bedetermined under section1041(b)(2) and not this section.

Sec. 108. Income from discharge of indebtedness(a) Exclusion from gross income(1) In generalGross income does not include any amount which (but for this subsection) wouldbe includible in gross income by reason of the discharge (in whole or in part) ofindebtedness of the taxpayer if -(A) the discharge occurs in a title 11 case,(B) the discharge occurs when the taxpayer is insolvent,(C) the indebtedness discharged is qualified farm indebtedness, or(D) in the case of a taxpayer other than a C corporation, the indebtednessdischarged is qualified real property business indebtedness.(2) Coordination of exclusions(A) Title 11 exclusion takes precedenceSubparagraphs (B), (C), and (D) of paragraph (1) shall not apply to a dischargewhich occurs in a title 11 case.(B) Insolvency exclusion takes precedence over qualified farmexclusion and qualified real property business exclusion
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Subparagraphs (C) and (D) of paragraph (1) shall not apply to a discharge to theextent the taxpayer is insolvent.(3) Insolvency exclusion limited to amount of insolvencyIn the case of a discharge to which paragraph (1)(B) applies, the amount excludedunder paragraph (1)(B) shall not exceed the amount by which the taxpayer is

insolvent.(b) Reduction of tax attributes(1) In generalThe amount excluded from gross income under subparagraph (A), (B), or (C) ofsubsection (a)(1) shall be applied to reduce the tax attributes of the taxpayer asprovided in paragraph (2).(2) Tax attributes affected; order of reductionExcept as provided in paragraph (5), the reduction referred to in paragraph (1)shall be made in the following tax attributes in the following order:(A) NOL

Any net operating loss for the taxable year of the discharge, and any net operatingloss carryover to such taxable year.(B) General business creditAny carryover to or from the taxable year of a discharge of an amount forpurposes for determining the amount allowable as a credit under section 38(relating to general business credit).(C) Minimum tax creditThe amount of the minimum tax credit available under section 53(b) as of thebeginning of the taxable year immediately following the taxable year of thedischarge.

(D) Capital loss carryoversAny net capital loss for the taxable year of the discharge, and any capital losscarryover to such taxable year under section 1212.(E) Basis reduction(i) In generalThe basis of the property of the taxpayer.(ii) Cross referenceFor provisions for making the reduction described in clause (i), see section 1017.(F) Passive activity loss and credit carryoversAny passive activity loss or credit carryover of the taxpayer under section 469(b)from the taxable year of the discharge.(G) Foreign tax credit carryoversAny carryover to or from the taxable year of the discharge for purposes ofdetermining the amount of the credit allowable under section 27.(3) Amount of reduction(A) In generalExcept as provided in subparagraph (B), the reductions described in paragraph (2)shall be one dollar for each dollar excluded by subsection (a).
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(B) Credit carryover reductionThe reductions described in subparagraphs (B), (C), and (G) shall be 33 1/3 centsfor each dollar excluded by subsection (a). The reduction described insubparagraph (F) in any passive activity credit carryover shall be 33 1/3 cents foreach dollar excluded by subsection (a).

(4) Ordering rules(A) Reductions made after determination of tax for yearThe reductions described in paragraph (2) shall be made after the determination ofthe tax imposed by this chapter for the taxable year of the discharge.(B) Reductions under subparagraph (A) or (D) of paragraph (2)The reductions described in subparagraph (A) or (D) of paragraph (2) (as the casemay be) shall be made first in the loss for the taxable year of the discharge andthen in the carryovers to such taxable year in the order of the taxable years fromwhich each such carryover arose.(C) Reductions under subparagraphs (B) and (G) of paragraph (2)

The reductions described in subparagraphs (B) and (G) of paragraph (2) shall bemade in the order in which carryovers are taken into account under this chapter forthe taxable year of the discharge.(5) Election to apply reduction first against depreciableproperty(A) In generalThe taxpayer may elect to apply any portion of the reduction referred to inparagraph (1) to the reduction under section 1017 of the basis of the depreciableproperty of the taxpayer.(B) Limitation

The amount to which an election under subparagraph (A) applies shall not exceedthe aggregate adjusted bases of the depreciable property held by the taxpayer as ofthe beginning of the taxable year following the taxable year in which the dischargeoccurs.(C) Other tax attributes not reducedParagraph (2) shall not apply to any amount to which an election under thisparagraph applies.(c) Treatment of discharge of qualified real property businessindebtedness(1) Basis reduction(A) In generalThe amount excluded from gross income under subparagraph (D) of subsection (a)(1) shall be applied to reduce the basis of the depreciable real property of thetaxpayer.(B) Cross referenceFor provisions making the reduction described in subparagraph (A), see section1017.(2) Limitations
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(A) Indebtedness in excess of valueThe amount excluded under subparagraph (D) of subsection (a)(1) with respect toany qualified real property business indebtedness shall not exceed the excess (ifany) of -(i) the outstanding principal amount of such indebtedness (immediately before

the discharge), over(ii) the fair market value of the real property described in paragraph (3)(A) (as ofsuch time), reduced by the outstanding principal amount of any other qualified realproperty business indebtedness secured by such property (as of such time).(B) Overall limitationThe amount excluded under subparagraph (D) of subsection (a)(1) shall notexceed the aggregate adjusted bases of depreciable real property (determined afterany reductions under subsections (b) and (g)) held by the taxpayer immediatelybefore the discharge (other than depreciable real property acquired incontemplation of such discharge).

(3) Qualified real property business indebtednessThe term "qualified real property business indebtedness" means indebtednesswhich -(A) was incurred or assumed by the taxpayer in connection with real propertyused in a trade or business and is secured by such real property,(B) was incurred or assumed before January 1, 1993, or if incurred or assumed onor after such date, is qualified acquisition indebtedness, and(C) with respect to which such taxpayer makes an election to have this paragraphapply. Such term shall not include qualified farm indebtedness. Indebtedness undersubparagraph (B) shall include indebtedness resulting from the refinancing of

indebtedness under subparagraph (B) (or this sentence), but only to the extent itdoes not exceed the amount of the indebtedness being refinanced.(4) Qualified acquisition indebtednessFor purposes of paragraph (3)(B), the term "qualified acquisition indebtedness"means, with respect to any real property described in paragraph (3)(A),indebtedness incurred or assumed to acquire, construct, reconstruct, orsubstantially improve such property.(5) RegulationsThe Secretary shall issue such regulations as are necessary to carry out thissubsection, including regulations preventing the abuse of this subsection throughcross-collateralization or other means.(d) Meaning of terms; special rules relating to certain provisions(1) Indebtedness of taxpayerFor purposes of this section, the term "indebtedness of the taxpayer" means anyindebtedness -(A) for which the taxpayer is liable, or(B) subject to which the taxpayer holds property.(2) Title 11 case


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For purposes of this section, the term "title 11 case" means a case under title 11 ofthe United States Code (relating to bankruptcy), but only if the taxpayer is underthe jurisdiction of the court in such case and the discharge of indebtedness isgranted by the court or is pursuant to a plan approved by the court.(3) Insolvent

For purposes of this section, the term "insolvent" means the excess of liabilitiesover the fair market value of assets. With respect to any discharge, whether or notthe taxpayer is insolvent, and the amount by which the taxpayer is insolvent, shallbe determined on the basis of the taxpayer's assets and liabilities immediatelybefore the discharge. [(4) Repealed. Pub. L. 99-514, title VIII, Sec. 822(b)(3)(A),Oct. 22, 1986, 100 Stat. 2373](5) Depreciable propertyThe term "depreciable property" has the same meaning as when used in section1017.(6) Certain provisions to be applied at partner level

In the case of a partnership, subsections (a), (b), (c), and (g) shall be applied at thepartner level.(7) Special rules for S corporation(A) Certain provisions to be applied at corporate levelIn the case of an S corporation, subsections (a), (b), (c), and (g) shall be applied atthe corporate level, including by not taking into account under section 1366(a) anyamount excluded under subsection (a) of this section.(B) Reduction in carryover of disallowed losses and deductionsIn the case of an S corporation, for purposes of subparagraph (A) of subsection (b)(2), any loss or deduction which is disallowed for the taxable year of the discharge

under section 1366(d)(1) shall be treated as a net operating loss for such taxableyear. The preceding sentence shall not apply to any discharge to the extent thatsubsection (a)(1)(D) applies to such discharge.(C) Coordination with basis adjustments under section1367(b)(2)For purposes of subsection (e)(6), a shareholder's adjusted basis in indebtedness ofan S corporation shall be determined without regard to any adjustments madeunder section 1367(b)(2).(8) Reductions of tax attributes in title 11 cases of individualsto be made by estateIn any case under chapter 7 or 11 of title 11 of the United States Code to whichsection 1398 applies, for purposes of paragraphs (1) and (5) of subsection (b) theestate (and not the individual) shall be treated as the taxpayer. The precedingsentence shall not apply for purposes of applying section 1017 to propertytransferred by the estate to the individual.(9) Time for making election, etc.(A) TimeAn election under paragraph (5) of subsection (b) or under paragraph (3)(C) of
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subsection (c) shall be made on the taxpayer's return for the taxable year in whichthe discharge occurs or at such other time as may be permitted in regulationsprescribed by the Secretary.(B) Revocation only with consentAn election referred to in subparagraph (A), once made, may be revoked only with

the consent of the Secretary.(C) MannerAn election referred to in subparagraph (A) shall be made in such manner as theSecretary may by regulations prescribe.(10) Cross referenceFor provision that no reduction is to be made in the basis ofexempt property of an individual debtor, see section1017(c)(1).(e) General rules for discharge of indebtedness (includingdischarges not in title 11 cases or insolvency)

For purposes of this title -(1) No other insolvency exceptionExcept as otherwise provided in this section, there shall be no insolvencyexception from the general rule that gross income includes income from thedischarge of indebtedness.(2) Income not realized to extent of lost deductionsNo income shall be realized from the discharge of indebtedness to the extent thatpayment of the liability would have given rise to a deduction.(3) Adjustments for unamortized premium and discountThe amount taken into account with respect to any discharge shall be properly

adjusted for unamortized premium and unamortized discount with respect to theindebtedness discharged.(4) Acquisition of indebtedness by person related to debtor(A) Treated as acquisition by debtorFor purposes of determining income of the debtor from discharge of indebtedness,to the extent provided in regulations prescribed by the Secretary, the acquisition ofoutstanding indebtedness by a person bearing a relationship to the debtor specifiedin section 267(b) or707(b)(1) from a person who does not bear such a relationshipto the debtor shall be treated as the acquisition of such indebtedness by the debtor.Such regulations shall provide for such adjustments in the treatment of anysubsequent transactions involving the indebtedness as may be appropriate byreason of the application of the preceding sentence.(B) Members of familyFor purposes of this paragraph, sections267(b) and 707(b)(1) shall be applied as ifsection 267(c)(4)provided that the family of an individual consists of theindividual's spouse, the individual's children, grandchildren, and parents, and anyspouse of the individual's children or grandchildren.(C) Entities under common control treated as related
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For purposes of this paragraph, two entities which are treated as a single employerunder subsection (b) or (c) of section 414 shall be treated as bearing a relationshipto each other which is described in section 267(b).(5) Purchase-money debt reduction for solvent debtor treated asprice reduction

If -(A) the debt of a purchaser of property to the seller of such property which aroseout of the purchase of such property is reduced,(B) such reduction does not occur -(i) in a title 11 case, or(ii) when the purchaser is insolvent, and(C) but for this paragraph, such reduction would be treated as income to thepurchaser from the discharge of indebtedness, then such reduction shall be treatedas a purchase price adjustment.(6) Indebtedness contributed to capital

Except as provided in regulations, for purposes of determining income of thedebtor from discharge of indebtedness, if a debtor corporation acquires itsindebtedness from a shareholder as a contribution to capital -(A) section 118 shall not apply, but(B) such corporation shall be treated as having satisfied the indebtedness with anamount of money equal to the shareholder's adjusted basis in the indebtedness.(7) Recapture of gain on subsequent sale of stock(A) In generalIf a creditor acquires stock of a debtor corporation in satisfaction of suchcorporation's indebtedness, for purposes of section 1245 -

(i) such stock (and any other property the basis of which is determined in wholeor in part by reference to the adjusted basis of such stock) shall be treated assection 1245 property,(ii) the aggregate amount allowed to the creditor -(I) as deductions under subsection (a) or (b) of section 166(by reason of theworthlessness or partial worthlessness of the indebtedness), or(II) as an ordinary loss on the exchange, shall be treated as an amount allowed asa deduction for depreciation, and(iii) an exchange of such stock qualifying under section354(a), 355(a), or356(a)shall be treated as an exchange to which section 1245(b)(3) applies. The amountdetermined under clause (ii) shall be reduced by the amount (if any) included inthe creditor's gross income on the exchange.(B) Special rule for cash basis taxpayersIn the case of any creditor who computes his taxable income under the cashreceipts and disbursements method, proper adjustment shall be made in theamount taken into account under clause (ii) of subparagraph (A) for any amountwhich was not included in the creditor's gross income but which would have beenincluded in such gross income if such indebtedness had been satisfied in full.
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(C) Stock of parent corporationFor purposes of this paragraph, stock of a corporation in control (within themeaning of section 368(c)) of the debtor corporation shall be treated as stock ofthe debtor corporation.(D) Treatment of successor corporation

For purposes of this paragraph, the term "debtor corporation" includes a successorcorporation.(E) Partnership ruleUnder regulations prescribed by the Secretary, rules similar to the rules of theforegoing subparagraphs of this paragraph shall apply with respect to theindebtedness of a partnership.(8) Indebtedness satisfied by corporation's stockFor purposes of determining income of a debtor from discharge of indebtedness, ifa debtor corporation transfers stock to a creditor in satisfaction of its indebtedness,such corporation shall be treated as having satisfied the indebtedness with an

amount of money equal to the fair market value of the stock.(9) Discharge of indebtedness income not taken into account indetermining whether entity meets REIT qualificationsAny amount included in gross income by reason of the discharge of indebtednessshall not be taken into account for purposes of paragraphs (2) and (3) of section856(c).(10) Indebtedness satisfied by issuance of debt instrument(A) In generalFor purposes of determining income of a debtor from discharge of indebtedness, ifa debtor issues a debt instrument in satisfaction of indebtedness, such debtor shall

be treated as having satisfied the indebtedness with an amount of money equal tothe issue price of such debt instrument.(B) Issue priceFor purposes of subparagraph (A), the issue price of any debt instrument shall bedetermined under sections 1273 and 1274. For purposes of the preceding sentence,section 1273(b)(4) shall be applied by reducing the stated redemption price of anyinstrument by the portion of such stated redemption price which is treated asinterest for purposes of this chapter.(f) Student loans(1) In generalIn the case of an individual, gross income does not include any amount which (butfor this subsection) would be includible in gross income by reason of the discharge(in whole or in part) of any student loan if such discharge was pursuant to aprovision of such loan under which all or part of the indebtedness of the individualwould be discharged if the individual worked for a certain period of time in certainprofessions for any of a broad class of employers.(2) Student loanFor purposes of this subsection, the term "student loan" means any loan to an
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individual to assist the individual in attending an educational organizationdescribed in section 170(b)(1)(A)(ii) made by -(A) the United States, or an instrumentality or agency thereof,(B) a State, territory, or possession of the United States, or the District ofColumbia, or any political subdivision thereof,

(C) a public benefit corporation -(i) which is exempt from taxation under section 501(c)(3),(ii) which has assumed control over a State, county, or municipal hospital, and(iii) whose employees have been deemed to be public employees under State law,or(D) any educational organization described in section 170(b)(1)(A)(ii)if suchloan is made -(i) pursuant to an agreement with any entity described in subparagraph (A), (B),or (C) under which the funds from which the loan was made were provided tosuch educational organization, or

(ii) pursuant to a program of such educational organization which is designed toencourage its students to serve in occupations with unmet needs or in areas withunmet needs and under which the services provided by the students (or formerstudents) are for or under the direction of a governmental unit or an organizationdescribed in section 501(c)(3) and exempt from tax under section 501(a). The term"student loan" includes any loan made by an educational organization described insection 170(b)(1)(A)(ii) or by an organization exempt from tax under section501(a) to refinance a loan to an individual to assist the individual in attending anysuch educational organization but only if the refinancing loan is pursuant to aprogram of the refinancing organization which is designed as described in

subparagraph (D)(ii).(3) Exception for discharges on account of services performed forcertain lendersParagraph (1) shall not apply to the discharge of a loan made by an organizationdescribed in paragraph (2)(D) if the discharge is on account of services performedfor either such organization.(g) Special rules for discharge of qualified farm indebtedness(1) Discharge must be by qualified person(A) In generalSubparagraph (C) of subsection (a)(1) shall apply only if the discharge is by aqualified person.(B) Qualified personFor purposes of subparagraph (A), the term "qualified person" has the meaninggiven to such term by section 49(a)(1)(D)(iv); except that such term shall includeany Federal, State, or local government or agency or instrumentality thereof.(2) Qualified farm indebtednessFor purposes of this section, indebtedness of a taxpayer shall be treated asqualified farm indebtedness if -
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(A) such indebtedness was incurred directly in connection with the operation bythe taxpayer of the trade or business of farming, and(B) 50 percent or more of the aggregate gross receipts of the taxpayer for the 3taxable years preceding the taxable year in which the discharge of suchindebtedness occurs is attributable to the trade or business of farming.

(3) Amount excluded cannot exceed sum of tax attributes andbusiness and investment assets(A) In generalThe amount excluded under subparagraph (C) of subsection (a)(1) shall not exceedthe sum of -(i) the adjusted tax attributes of the taxpayer, and(ii) the aggregate adjusted bases of qualified property held by the taxpayer as ofthe beginning of the taxable year following the taxable year in which the dischargeoccurs.(B) Adjusted tax attributes

For purposes of subparagraph (A), the term "adjusted tax attributes" means thesum of the tax attributes described in subparagraphs (A), (B), (C), (D), (F), and(G) of subsection (b)(2) determined by taking into account $3 for each $1 of theattributes described in subparagraphs (B), (C), and (G) of subsection (b)(2) and theattribute described in subparagraph (F) of subsection (b)(2) to the extentattributable to any passive activity credit carryover.(C) Qualified propertyFor purposes of this paragraph, the term "qualified property" means any propertywhich is used or is held for use in a trade or business or for the production ofincome.

(D) Coordination with insolvency exclusionFor purposes of this paragraph, the adjusted basis of any qualified property and theamount of the adjusted tax attributes shall be determined after any reduction undersubsection (b) by reason of amounts excluded from gross income under subsection(a)(1)(B).

104. Compensation for injuries or sickness.(a) In general. Except in the case of amounts attributable to (and not in excess of)deductions allowed under section 213 (relating to medical, etc., expenses) for anyprior taxable year, gross income does not include--

(2) the amount of any damages (other than punitive damages) received (whetherby suit or agreement and whether as lump sums or as periodic payments) onaccount of personal physical injuries or physical sickness;

Sec. 72. Annuities; certain proceeds of endowment and lifeinsurance contracts(a) General rule for annuities


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Except as otherwise provided in this chapter, gross income includes any amountreceived as an annuity (whether for a period certain or during one or more lives)under an annuity, endowment, or life insurance contract.(b) Exclusion ratio(1) In general

Gross income does not include that part of any amount received as an annuityunder an annuity, endowment, or life insurance contract which bears the same ratioto such amount as the investment in the contract (as of the annuity starting date)bears to the expected return under the contract (as of such date).(2) Exclusion limited to investmentThe portion of any amount received as an annuity which is excluded from grossincome under paragraph (1) shall not exceed the unrecovered investment in thecontract immediately before the receipt of such amount.(3) Deduction where annuity payments cease before entireinvestment recovered

(A) In generalIf -(i) after the annuity starting date, payments as an annuity under the contract ceaseby reason of the death of an annuitant, and(ii) as of the date of such cessation, there is unrecovered investment in thecontract, the amount of such unrecovered investment (in excess of any amountspecified in subsection (e)(5) which was not included in gross income) shall beallowed as a deduction to the annuitant for his last taxable year.(B) Payments to other personsIn the case of any contract which provides for payments meeting the requirements

of subparagraphs (B) and (C) of subsection (c)(2), the deduction undersubparagraph (A) shall be allowed to the person entitled to such payments for thetaxable year in which such payments are received.(C) Net operating loss deductions providedFor purposes of section 172, a deduction allowed under this paragraph shall betreated as if it were attributable to a trade or business of the taxpayer.(4) Unrecovered investmentFor purposes of this subsection, the unrecovered investment in the contract as ofany date is -(A) the investment in the contract (determined without regard to subsection (c)(2)) as of the annuity starting date, reduced by(B) the aggregate amount received under the contract on or after such annuitystarting date and before the date as of which the determination is being made, tothe extent such amount was excludable from gross income under this subtitle.(c) Definitions(1) Investment in the contractFor purposes of subsection (b), the investment in the contract as of the annuitystarting date is -
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(A) the aggregate amount of premiums or other consideration paid for thecontract, minus(B) the aggregate amount received under the contract before such date, to theextent that such amount was excludable from gross income under this subtitle orprior income tax laws.

(2) Adjustment in investment where there is refund featureIf -(A) the expected return under the contract depends in whole or in part on the lifeexpectancy of one or more individuals;(B) the contract provides for payments to be made to a beneficiary (or to theestate of an annuitant) on or after the death of the annuitant or annuitants; and(C) such payments are in the nature of a refund of the consideration paid, then thevalue (computed without discount for interest) of such payments on the annuitystarting date shall be subtracted from the amount determined under paragraph (1).Such value shall be computed in accordance with actuarial tables prescribed by the

Secretary. For purposes of this paragraph and of subsection (e)(2)(A), the term"refund of the consideration paid" includes amounts payable after the death of anannuitant by reason of a provision in the contract for a life annuity with minimumperiod of payments certain, but (if part of the consideration was contributed by anemployer) does not include that part of any payment to a beneficiary (or to theestate of the annuitant) which is not attributable to the consideration paid by theemployee for the contract as determined under paragraph (1)(A).(3) Expected returnFor purposes of subsection (b), the expected return under the contract shall bedetermined as follows:

(A) Life expectancyIf the expected return under the contract, for the period on and after the annuitystarting date, depends in whole or in part on the life expectancy of one or moreindividuals, the expected return shall be computed with reference to actuarialtables prescribed by the Secretary.(B) Installment paymentsIf subparagraph (A) does not apply, the expected return is the aggregate of theamounts receivable under the contract as an annuity.(4) Annuity starting dateFor purposes of this section, the annuity starting date in the case of any contract isthe first day of the first period for which an amount is received as an annuity underthe contract; except that if such date was before January 1, 1954, then the annuitystarting date is January 1, 1954.(d) Special rules for qualified employer retirement plans(1) Simplified method of taxing annuity payments(A) In generalIn the case of any amount received as an annuity under a qualified employerretirement plan -


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(i) subsection (b) shall not apply, and(ii) the investment in the contract shall be recovered as provided in thisparagraph.(B) Method of recovering investment in contract(i) In general

Gross income shall not include so much of any monthly annuity payment under aqualified employer retirement plan as does not exceed the amount obtained bydividing -(I) the investment in the contract (as of the annuity starting date), by(II) the number of anticipated payments determined under the table contained inclause (iii) (or, in the case of a contract to which subsection (c)(3)(B) applies, thenumber of monthly annuity payments under such contract).(ii) Certain rules made applicableRules similar to the rules of paragraphs (2) and (3) of subsection (b) shall applyfor purposes of this paragraph.

(iii) Number of anticipated paymentsIf the annuity is payable over the life of a single individual, the number ofanticipated payments shall be determined as follows: If the age of the annuitant onThe number the annuity starting of anticipated date is: payments is: Not more than55 360 More than 55 but not more than 60 310 More than 60 but not more than 65260 More than 65 but not more than 70 210 More than 70 160.(iv) Number of anticipated payments where more than one lifeIf the annuity is payable over the lives of more than 1 individual, the number ofanticipated payments shall be determined as follows: If the combined ages ofannuitants are: The number is: Not more than 110 410 More than 110 but not more

than 120 360 More than 120 but not more than 130 310 More than 130 but notmore than 140 260 More than 140 210.(C) Adjustment for refund feature not applicableFor purposes of this paragraph, investment in the contract shall be determinedunder subsection (c)(1) without regard to subsection (c)(2).(D) Special rule where lump sum paid in connection withcommencement of annuity paymentsIf, in connection with the commencement of annuity payments under any qualifiedemployer retirement plan, the taxpayer receives a lump-sum payment -(i) such payment shall be taxable under subsection (e) as if received before theannuity starting date, and(ii) the investment in the contract for purposes of this paragraph shall bedetermined as if such payment had been so received.(E) ExceptionThis paragraph shall not apply in any case where the primary annuitant hasattained age 75 on the annuity starting date unless there are fewer than 5 years ofguaranteed payments under the annuity.(F) Adjustment where annuity payments not on monthly basis


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In any case where the annuity payments are not made on a monthly basis,appropriate adjustments in the application of this paragraph shall be made to takeinto account the period on the basis of which such payments are made.(G) Qualified employer retirement planFor purposes of this paragraph, the term "qualified employer retirement plan"

means any plan or contract described in paragraph (1), (2), or (3) of section4974(c).(2) Treatment of employee contributions under definedcontribution plansFor purposes of this section, employee contributions (and any income allocablethereto) under a defined contribution plan may be treated as a separate contract.(e) Amounts not received as annuities(1) Application of subsection(A) In generalThis subsection shall apply to any amount which -

(i) is received under an annuity, endowment, or life insurance contract, and(ii) is not received as an annuity, if no provision of this subtitle (other than thissubsection) applies with respect to such amount.(B) DividendsFor purposes of this section, any amount received which is in the nature of adividend or similar distribution shall be treated as an amount not received as anannuity.(2) General ruleAny amount to which this subsection applies -(A) if received on or after the annuity starting date, shall be included in gross

income, or(B) if received before the annuity starting date -(i) shall be included in gross income to the extent allocable to income on thecontract, and(ii) shall not be included in gross income to the extent allocable to the investmentin the contract.(3) Allocation of amounts to income and investmentFor purposes of paragraph (2)(B) -(A) Allocation to incomeAny amount to which this subsection applies shall be treated as allocable toincome on the contract to the extent that such amount does not exceed the excess(if any) of -(i) the cash value of the contract (determined without regard to any surrendercharge) immediately before the amount is received, over(ii) the investment in the contract at such time.(B) Allocation to investment
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Any amount to which this subsection applies shall be treated as allocable toinvestment in the contract to the extent that such amount is not allocated to incomeunder subparagraph (A).(4) Special rules for application of paragraph (2)(B)For purposes of paragraph (2)(B) -

(A) Loans treated as distributionsIf, during any taxable year, an individual -(i) receives (directly or indirectly) any amount as a loan under any contract towhich this subsection applies, or(ii) assigns or pledges (or agrees to assign or pledge) any portion of the value ofany such contract, such amount or portion shall be treated as received under thecontract as an amount not received as an annuity. The preceding sentence shall notapply for purposes of determining investment in the contract, except that theinvestment in the contract shall be increased by any amount included in grossincome by reason of the amount treated as received under the preceding sentence.

(B) Treatment of policyholder dividendsAny amount described in paragraph (1)(B) shall not be included in gross incomeunder paragraph (2)(B)(i) to the extent such amount is retained by the insurer as apremium or other consideration paid for the contract.(C) Treatment of transfers without adequate consideration(i) In generalIf an individual who holds an annuity contract transfers it without full andadequate consideration, such individual shall be treated as receiving an amountequal to the excess of -(I) the cash surrender value of such contract at the time of transfer, over

(II) the investment in such contract at such time, under the contract as an amountnot received as an annuity.(ii) Exception for certain transfers between spouses orformer spousesClause (i) shall not apply to any transfer to which section 1041(a) (relating totransfers of property between spouses or incident to divorce) applies.(iii) Adjustment to investment in contract of transfereeIf under clause (i) an amount is included in the gross income of the transferor of anannuity contract, the investment in the contract of the transferee in such contractshall be increased by the amount so included.(5) Retention of existing rules in certain cases(A) In generalIn any case to which this paragraph applies -(i) paragraphs (2)(B) and (4)(A) shall not apply, and(ii) if paragraph (2)(A) does not apply, the amount shall be included in grossincome, but only to the extent it exceeds the investment in the contract.(B) Existing contracts
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This paragraph shall apply to contracts entered into before August 14, 1982. Anyamount allocable to investment in the contract after August 13, 1982, shall betreated as from a contract entered into after such date.(C) Certain life insurance and endowment contractsExcept as provided in paragraph (10) and except to the extent prescribed by the

Secretary by regulations, this paragraph shall apply to any amount not received asan annuity which is received under a life insurance or endowment contract.(D) Contracts under qualified plansExcept as provided in paragraph (8), this paragraph shall apply to any amountreceived -(i) from a trust described in section 401(a) which is exempt from tax undersection 501(a),(ii) from a contract -(I) purchased by a trust described in clause (i),(II) purchased as part of a plan described in section 403(a),

(III) described in section 403(b), or(IV) provided for employees of a life insurance company under a plan describedin section 818(a)(3), or(iii) from an individual retirement account or an individual retirement annuity.Any dividend described in section 404(k) which is received by a participant orbeneficiary shall, for purposes of this subparagraph, be treated as paid under aseparate contract to which clause (ii)(I) applies.(E) Full refunds, surrenders, redemptions, and maturitiesThis paragraph shall apply to -(i) any amount received, whether in a single sum or otherwise, under a contract in

full discharge of the obligation under the contract which is in the nature of arefund of the consideration paid for the contract, and(ii) any amount received under a contract on its complete surrender, redemption,or maturity. In the case of any amount to which the preceding sentence applies, therule of paragraph (2)(A) shall not apply.(6) Investment in the contractFor purposes of this subsection, the investment in the contract as of any date is -(A) the aggregate amount of premiums or other consideration paid for thecontract before such date, minus(B) the aggregate amount received under the contract before such date, to theextent that such amount was excludable from gross income under this subtitle orprior income tax laws. [(7) Repealed. Pub. L. 100-647, title I, Sec. 1011A(b)(9)(A), Nov. 10, 1988, 102 Stat. 3474](8) Extension of paragraph (2)(b)1 to qualified plans(A) In generalNotwithstanding any other provision of this subsection, in the case of any amountreceived before the annuity starting date from a trust or contract described inparagraph (5)(D), paragraph (2)(B) shall apply to such amounts.
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(B) Allocation of amount receivedFor purposes of paragraph (2)(B), the amount allocated to the investment in thecontract shall be the portion of the amount described in subparagraph (A) whichbears the same ratio to such amount as the investment in the contract bears to theaccount balance. The determination under the preceding sentence shall be made as

of the time of the distribution or at such other time as the Secretary may prescribe.(C) Treatment of forfeitable rightsIf an employee does not have a nonforfeitable right to any amount under any trustor contract to which subparagraph (A) applies, such amount shall not be treated aspart of the account balance.(D) Investment in the contract before 1987In the case of a plan which on May 5, 1986, permitted withdrawal of anyemployee contributions before separation from service, subparagraph (A) shallapply only to the extent that amounts received before the annuity starting date(when increased by amounts previously received under the contract after

December 31, 1986) exceed the investment in the contract as of December 31,1986.(9) Extension of paragraph (2)(B) to qualified tuition programsand Coverdell education savings accountsNotwithstanding any other provision of this subsection, paragraph (2)(B) shallapply to amounts received under a qualified tuition program (as defined in section529(b)) or under a Coverdell education savings account (as defined in section530(b)). The rule of paragraph (8)(B) shall apply for purposes of this paragraph.(10) Treatment of modified endowment contracts(A) In general

Notwithstanding paragraph (5)(C), in the case of any modified endowmentcontract (as defined in section 7702A) -(i) paragraphs (2)(B) and (4)(A) shall apply, and(ii) in applying paragraph (4)(A), "any person" shall be substituted for "anindividual".(B) Treatment of certain burial contractsNotwithstanding subparagraph (A), paragraph (4)(A) shall not apply to anyassignment (or pledge) of a modified endowment contract if such assignment (orpledge) is solely to cover the payment of expenses referred to in section 7702(e)(2)(C)(iii) and if the maximum death benefit under such contract does not exceed$25,000.(11) Anti-abuse rules(A) In generalFor purposes of determining the amount includible in gross income under thissubsection -(i) all modified endowment contracts issued by the same company to the samepolicyholder during any calendar year shall be treated as 1 modified endowmentcontract, and
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(ii) all annuity contracts issued by the same company to the same policyholderduring any calendar year shall be treated as 1 annuity contract. The precedingsentence shall not apply to any contract described in paragraph (5)(D).(B) Regulatory authorityThe Secretary may by regulations prescribe such additional rules as may be

necessary or appropriate to prevent avoidance of the purposes of this subsectionthrough serial purchases of contracts or otherwise.(f) Special rules for computing employees' contributionsIn computing, for purposes of subsection (c)(1)(A), the aggregate amount ofpremiums or other consideration paid for the contract, and for purposes ofsubsection (e)(6), the aggregate premiums or other consideration paid, amountscontributed by the employer shall be included, but only to the extent that -(1) such amounts were includible in the gross income of the employee under thissubtitle or prior income tax laws; or(2) if such amounts had been paid directly to the employee at the time they were

contributed, they would not have been includible in the gross income of theemployee under the law applicable at the time of such contribution. Paragraph (2)shall not apply to amounts which were contributed by the employer afterDecember 31, 1962, and which would not have been includible in the grossincome of the employee by reason of the application of section 911 if suchamounts had been paid directly to the employee at the time of contribution. Thepreceding sentence shall not apply to amounts which were contributed by theemployer, as determined under regulations prescribed by the Secretary, to providepension or annuity credits, to the extent such credits are attributable to servicesperformed before January 1, 1963, and are provided pursuant to pension or annuity

plan provisions in existence on March 12, 1962, and on that date applicable tosuch services, or to the extent such credits are attributable to services performed asa foreign missionary (within the meaning of section 403(b)(2)(D)(iii), as in effectbefore the enactment of the Economic Growth and Tax Relief Reconciliation Actof 2001.2(g) Rules for transferee where transfer was for valueWhere any contract (or any interest therein) is transferred (by assignment orotherwise) for a valuable consideration, to the extent that the contract (or interesttherein) does not, in the hands of the transferee, have a basis which is determinedby reference to the basis in the hands of the transferor, then -(1) for purposes of this section, only the actual value of such consideration, plusthe amount of the premiums and other consideration paid by the transferee afterthe transfer, shall be taken into account in computing the aggregate amount of thepremiums or other consideration paid for the contract;(2) for purposes of subsection (c)(1)(B), there shall be taken into account only theaggregate amount received under the contract by the transferee before the annuitystarting date, to the extent that such amount was excludable from gross incomeunder this subtitle or prior income tax laws; and
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(3) the annuity starting date is January 1, 1954, or the first day of the first periodfor which the transferee received an amount under the contract as an annuity,whichever is the later. For purposes of this subsection, the term "transferee"includes a beneficiary of, or the estate of, the transferee.(h) Option to receive annuity in lieu of lump sum

If -(1) a contract provides for payment of a lump sum in full discharge of anobligation under the contract, subject to an option to receive an annuity in lieu ofsuch lump sum;(2) the option is exercised within 60 days after the day on which such lump sumfirst became payable; and(3) part or all of such lump sum would (but for this subsection) be includible ingross income by reason of subsection (e)(1), then, for purposes of this subtitle, nopart of such lump sum shall be considered as includible in gross income at thetime such lump sum first became payable. [(i) Repealed. Pub. L. 94-455, title XIX,

Sec. 1951(b)(1)(A), Oct. 4, 1976, 90 Stat. 1836](j) InterestNotwithstanding any other provision of this section, if any amount is held under anagreement to pay interest thereon, the interest payments shall be included in grossincome. [(k) Repealed. Pub. L. 98-369, div. A, title IV, Sec.421(b)(1),July 18, 1984, 98 Stat. 794](l) Face-amount certificatesFor purposes of this section, the term "endowment contract" includes a face-amount certificate, as defined in section 2(a)(15) of the Investment Company Actof 1940 (15 U.S.C., sec. 80a-2), issued after December 31, 1954.

(m) Special rules applicable to employee annuities anddistributions under employee plans[(1) Repealed. Pub. L. 93-406, title II, Sec. 2001(h)(2), Sept.2, 1974, 88 Stat. 957](2) Computation of consideration paid by the employeeIn computing -(A) the aggregate amount of premiums or other consideration paid for thecontract for purposes of subsection (c)(1)(A) (relating to the investment in thecontract), and(B) the aggregate premiums or other consideration paid for purposes ofsubsection (e)(6) (relating to certain amounts not received as an annuity), anyamount allowed as a deduction with respect to the contract under section 404which was paid while the employee was an employee within the meaning ofsection 401(c)(1)shall be treated as consideration contributed by the employer,and there shall not be taken into account any portion of the premiums or otherconsideration for the contract paid while the employee was an owner-employeewhich is properly allocable (as determined under regulations prescribed by theSecretary) to the cost of life, accident, health, or other insurance.
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(3) Life insurance contracts(A) This paragraph shall apply to any life insurance contract -(i) purchased as a part of a plan described in section 403(a), or(ii) purchased by a trust described in section 401(a) which is exempt from taxunder section 501(a) if the proceeds of such contract are payable directly or

indirectly to a participant in such trust or to a beneficiary of such participant.(B) Any contribution to a plan described in subparagraph (A)(i) or a trustdescribed in subparagraph (A)(ii) which is allowed as a deduction under section404, and any income of a trust described in subparagraph (A)(ii), which isdetermined in accordance with regulations prescribed by the Secretary to havebeen applied to purchase the life insurance protection under a contract described insubparagraph (A), is includible in the gross income of the participant for thetaxable year when so applied.(C) In the case of the death of an individual insured under a contract described insubparagraph (A), an amount equal to the cash surrender value of the contract

immediately before the death of the insured shall be treated as a payment undersuch plan or a distribution by such trust, and the excess of the amount payable byreason of the death of the insured over such cash surrender value shall not beincludible in gross income under this section and shall be treated as provided insection 101. [(4) Repealed. Pub. L. 97-248, title II, Sec. 236(b)(1), Sept. 3, 1982,96 Stat. 510](5) Penalties applicable to certain amounts received by 5-percentowners(A) This paragraph applies to amounts which are received from a qualified trustdescribed in section 401(a) or under a plan described in section 403(a) at any time

by an individual who is, or has been, a 5-percent owner, or by a successor of suchan individual, but only to the extent such amounts are determined, underregulations prescribed by the Secretary, to exceed the benefits provided for suchindividual under the plan formula.(B) If a person receives an amount to which this paragraph applies, his tax underthis chapter for the taxable year in which such amount is received shall beincreased by an amount equal to 10 percent of the portion of the amount soreceived which is includible in his gross income for such taxable year.(C) For purposes of this paragraph, the term "5-percent owner" means anyindividual who, at any time during the 5 plan years preceding the plan year endingin the taxable year in which the amount is received, is a 5-percent owner (asdefined in section 416(i)(1)(B)).(6) Owner-employee definedFor purposes of this subsection, the term "owner-employee" has the meaningassigned to it by section 401(c)(3) and includes an individual for whose benefit anindividual retirement account or annuity described in section 408(a) or (b) ismaintained. For purposes of the preceding sentence, the term "owner-employee"shall include an employee within the meaning of section 401(c)(1).
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(7) Meaning of disabledFor purposes of this section, an individual shall be considered to be disabled if heis unable to engage in any substantial gainful activity by reason of any medicallydeterminable physical or mental impairment which can be expected to result indeath or to be of long-continued and indefinite duration. An individual shall not be

considered to be disabled unless he furnishes proof of the existence thereof in suchform and manner as the Secretary may require. [(8) Repealed. Pub. L. 97-248, titleII, Sec. 236(b)(1), Sept. 3,1982, 96 Stat. 510] [(9) Repealed. Pub. L. 98-369, div. A, title VII, Sec. 713(d)(1),July 18, 1984, 98 Stat. 957](10) Determination of investment in the contract in the case ofqualified domestic relations ordersUnder regulations prescribed by the Secretary, in the case of a distribution orpayment made to an alternate payee who is the spouse or former spouse of theparticipant pursuant to a qualified domestic relations order (as defined in section

414(p)), the investment in the contract as of the date prescribed in such regulationsshall be allocated on a pro rata basis between the present value of such distributionor payment and the present value of all other benefits payable with respect to theparticipant to which such order relates.(n) Annuities under retired serviceman's family protection plan orsurvivor benefit planSubsection (b) shall not apply in the case of amounts received after December 31,1965, as an annuity under chapter 73 of title 10 of the United States Code, but allsuch amounts shall be excluded from gross income until there has been soexcluded (under section 122(b)(1) or this section, including amounts excluded

before January 1, 1966) an amount equal to the consideration for the contract (asdefined by section122(b)(2)), plus any amount treated pursuant to section 101(b)(2)(D) (as in effect on the day before the date of the enactment of the SmallBusiness Job Protection Act of 1996) as additional consideration paid by theemployee. Thereafter all amounts so received shall be included in gross income.(o) Special rules for distributions from qualified plans to whichemployee made deductible contributions(1) Treatment of contributionsFor purposes of this section and sections 402 and 403, notwithstanding section414(h), any deductible employee contribution made to a qualified employer planor government plan shall be treated as an amount contributed by the employerwhich is not includible in the gross income of the employee. [(2) Repealed. Pub.L. 100-647, title I, Sec. 1011A(c)(8), Nov.10, 1988, 102 Stat. 3476](3) Amounts constructively received(A) In generalFor purposes of this subsection, rules similar to the rules provided by subsection(p) (other than the exception contained in paragraph (2) thereof) shall apply.
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(B) Purchase of life insuranceTo the extent any amount of accumulated deductible employee contributions of anemployee are applied to the purchase of life insurance contracts, such amount shallbe treated as distributed to the employee in the year so applied.(4) Special rule for treatment of rollover amounts

For purposes of sections 402(c), 403(a)(4), and 403(b)(8), 408(d)(3), and 457(e)(16), the Secretary shall prescribe regulations providing for such allocations ofamounts attributable to accumulated deductible employee contributions, and forsuch other rules, as may be necessary to insure that such accumulated deductibleemployee contributions do not become eligible for additional tax benefits (or freedfrom limitations) through the use of rollovers.(5) Definitions and special rulesFor purposes of this subsection -(A) Deductible employee contributionsThe term "deductible employee contributions" means any qualified voluntary

employee contribution (as defined in section219(e)(2)) made after December 31,1981, in a taxable year beginning after such date and made for a taxable yearbeginning before January 1, 1987, and allowable as a deduction under section219(a) for such taxable year.(B) Accumulated deductible employee contributionsThe term "accumulated deductible employee contributions" means the deductibleemployee contributions -(i) increased by the amount of income and gain allocable to such contributions,and(ii) reduced by the sum of the amount of loss and expense allocable to such

contributions and the amounts distributed with respect to the employee which areattributable to such contributions (or income or gain allocable to suchcontributions).(C) Qualified employer planThe term "qualified employer plan" has the meaning given to such term bysubsection (p)(3)(A)(i).(D) Government planThe term "government plan" has the meaning given such term by subsection (p)(3)(B).(6) Ordering rulesUnless the plan specifies otherwise, any distribution from such plan shall not betreated as being made from the accumulated deductible employee contributions,until all other amounts to the credit of the employee have been distributed.(p) Loans treated as distributionsFor purposes of this section -(1) Treatment as distributions(A) Loans
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If during any taxable year a participant or beneficiary receives (directly orindirectly) any amount as a loan from a qualified employer plan, such amountshall be treated as having been received by such individual as a distribution undersuch plan.(B) Assignments or pledges

If during any taxable year a participant or beneficiary assigns (or agrees to assign)or pledges (or agrees to pledge) any portion of his interest in a qualified employerplan, such portion shall be treated as having been received by such individual as aloan from such plan.(2) Exception for certain loans(A) General ruleParagraph (1) shall not apply to any loan to the extent that such loan (when addedto the outstanding balance of all other loans from such plan whether made on,before, or after August 13, 1982), does not exceed the lesser of -(i) $50,000, reduced by the excess (if any) of -

(I) the highest outstanding balance of loans from the plan during the 1-yearperiod ending on the day before the date on which such loan was made, over(II) the outstanding balance of loans from the plan on the date on which suchloan was made, or(ii) the greater of (I) one-half of the present value of the nonforfeitable accruedbenefit of the employee under the plan, or (II) $10,000. For purposes of clause (ii),the present value of the nonforfeitable accrued benefit shall be determined withoutregard to any accumulated deductible employee contributions (as defined insubsection (o)(5)(B)).(B) Requirement that loan be repayable within 5 years

(i) In generalSubparagraph (A) shall not apply to any loan unless such loan, by its terms, isrequired to be repaid within 5 years.(ii) Exception for home loansClause (i) shall not apply to any loan used to acquire any dwelling unit whichwithin a reasonable time is to be used (determined at the time the loan is made) asthe principal residence of the participant.(C) Requirement of level amortizationExcept as provided in regulations, this paragraph shall not apply to any loan unlesssubstantially level amortization of such loan (with payments not less frequentlythan quarterly) is required over the term of the loan.(D) Related employers and related plansFor purposes of this paragraph -(i) the rules of subsections (b), (c), and (m) of section 414 shall apply, and(ii) all plans of an employer (determined after the application of suchsubsections) shall be treated as 1 plan.(3) Denial of interest deductions in certain cases(A) In general
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No deduction otherwise allowable under this chapter shall be allowed under thischapter for any interest paid or accrued on any loan to which paragraph (1) doesnot apply by reason of paragraph (2) during the period described in subparagraph(B).(B) Period to which subparagraph (A) applies

For purposes of subparagraph (A), the period described in this subparagraph is theperiod -(i) on or after the 1st day on which the individual to whom the loan is made is akey employee (as defined in section 416(i)), or(ii) such loan is secured by amounts attributable to elective deferrals described insubparagraph (A) or (C) of section 402(g)(3).(4) Qualified employer plan, etc.For purposes of this subsection -(A) Qualified employer plan(i) In general

The term "qualified employer plan" means -(I) a plan described in section 401(a) which includes a trust exempt from taxunder section 501(a),(II) an annuity plan described in section 403(a), and(III) a plan under which amounts are contributed by an individual's employer foran annuity contract described in section 403(b).(ii) Special ruleThe term "qualified employer plan" shall include any plan which was (or wasdetermined to be) a qualified employer plan or a government plan.(B) Government plan

The term "government plan" means any plan, whether or not qualified, establishedand maintained for its employees by the United States, by a State or politicalsubdivision thereof, or by an agency or instrumentality of any of the foregoing.(5) Special rules for loans, etc., from certain contractsFor purposes of this subsection, any amount received as a loan under a contractpurchased under a qualified employer plan (and any assignment or pledge withrespect to such a contract) shall be treated as a loan under such employer plan.(q) 10-percent penalty for premature distributions from annuitycontracts(1) Imposition of penaltyIf any taxpayer receives any amount under an annuity contract, the taxpayer's taxunder this chapter for the taxable year in which such amount is received shall beincreased by an amount equal to 10 percent of the portion of such amount which isincludible in gross income.(2) Subsection not to apply to certain distributionsParagraph 1 shall not apply to any distribution -(A) made on or after the date on which the taxpayer attains age 59 1/2 ,
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(B) made on or after the death of the holder (or, where the holder is not anindividual, the death of the primary annuitant (as defined in subsection (s)(6)(B))),(C) attributable to the taxpayer's becoming disabled within the meaning ofsubsection (m)(7),(D) which is a part of a series of substantially equal periodic payments (not less

frequently than annually) made for the life (or life expectancy) of the taxpayer orthe joint lives (or joint life expectancies) of such taxpayer and his designatedbeneficiary,(E) from a plan, contract, account, trust, or annuity described in subsection (e)(5)(D),(F) allocable to investment in the contract before August 14, 1982, or3(G) under a qualified funding asset (within the meaning of section 130(d), butwithout regard to whether there is a qualified assignment),(H) to which subsection (t) applies (without regard to paragraph (2) thereof),(I) under an immediate annuity contract (within the meaning of section72(u)(4)),

or(J) which is purchased by an employer upon the termination of a plan describedin section 401(a) or403(a) and which is held by the employer until such time asthe employee separates from service.(3) Change in substantially equal paymentsIf -(A) paragraph (1) does not apply to a distribution by reason of paragraph (2)(D),and(B) the series of payments under such paragraph are subsequently modified(other than by reason of death or disability) -

(i) before the close of the 5-year period beginning on the date of the first paymentand after the taxpayer attains age 59 1/2 , or(ii) before the taxpayer attains age 59 1/2 , the taxpayer's tax for the 1st taxableyear in which such modification occurs shall be increased by an amount,determined under regulations, equal to the tax which (but for paragraph (2)(D))would have been imposed, plus interest for the deferral period (within the meaningof subsection (t)(4)(B)).(r) Certain railroad retirement benefits treated as received underemployer plans(1) In generalNotwithstanding any other provision of law, any benefit provided under theRailroad Retirement Act of 1974 (other than a tier 1 railroad retirement benefit)shall be treated for purposes of this title as a benefit provided under an employerplan which meets the requirements of section 401(a).(2) Tier 2 taxes treated as contributions(A) In generalFor purposes of paragraph (1) -
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(i) the tier 2 portion of the tax imposed by section 3201 (relating to tax onemployees) shall be treated as an employee

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