Page:United States Statutes at Large Volume 100 Part 3.djvu/427

 PUBLIC LAW 99-514—OCT. 22, 1986

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"(II) expenses (other than interest) which are clearly and directly allocable to such gross income, and "(III) interest expense properly allocable to such gross income, and "(ii) gain or loss attributable to the disposition of property— "(I) producing income of a type described in clause (i), or "(II) held for investment. For purposes of clause (ii), any interest in a passive activity shall not be treated as property held for investment. "(B)

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100 STAT. 2235

RETURN ON WORKING CAPITAL.—For purposes

of

subparagraph (A), any income, gain, or loss which is attributable to an investment of working capital shall be treated as not derived in the ordinary course of a trade or business. "(2) PASSIVE LOSSES OF CERTAIN CLOSELY HELD CORPORATIONS MAY OFFSET ACTIVE INCOME.—

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"(A) IN GENERAL.—If a closely held C corporation (other than a personal service corporation) has net active income for any taxable year, the passive activity loss of such taxpayer for such taxable year (determined without regard to this paragraph)— "(i) shall be allowable as a deduction against net active income, and "(ii) shall not be taken into account under subsection (a) to the extent so allowable as a deduction. A similar rule shall apply in the case of any passive activity credit of the taxpayer. "(B) NET ACTIVE INCOME.—For purposes of this paragraph, the term 'net active income' means the taxable 0 income of the taxpayer for the taxable year determined without regard to— "(i) any income or loss from a passive activity, and "(ii) any item of gross income, expense, gain, or loss described in paragraph (I)(A). "(3) COMPENSATION FOR PERSONAL SERVICES.—Earned income (within the meaning of section 911(d)(2)(A)) shall not be taken into account in computing the income or loss from a passive activity for any taxable year. "(4) DIVIDENDS REDUCED BY DIVIDENDS RECEIVED DEDUCTION.—

For purposes of paragraphs (1) and (2), income from dividends shall be reduced by the amount of any dividends received deduction under section 243, 244, or 245. "(f) TREATMENT OF FORMER PASSIVE ACTIVITIES.—For purposes of this section— "(1) IN GENERAL.—If an activity is a former passive activity for any taxable year— "(A) any unused deduction allocable to such activity under subsection (b) shall be offset against the income from such activity for the taxable year, "(B) any unused credit allocable to such activity under subsection (b) shall be offset against the regular tax liability (computed after the application of paragraph (1)) allocable to such activity for the taxable year, and

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