26 U.S.C. § 265
No deduction shall be allowed for-
Any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this subtitle, or any amount otherwise allowable under section 212 (relating to expenses for production of income) which is allocable to interest (whether or not any amount of such interest is received or accrued) wholly exempt from the taxes imposed by this subtitle.
Interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the taxes imposed by this subtitle.
In the case of a regulated investment company which distributes during the taxable year an exempt-interest dividend (including exempt-interest dividends paid after the close of the taxable year as described in section 855), that portion of any amount otherwise allowable as a deduction which the amount of the income of such company wholly exempt from taxes under this subtitle bears to the total of such exempt income and its gross income (excluding from gross income, for this purpose, capital gain net income, as defined in section 1222(9)).
Interest on indebtedness incurred or continued to purchase or carry shares of stock of a regulated investment company which during the taxable year of the holder thereof distributes exempt-interest dividends.
For purposes of paragraph (2)-
The term "interest" includes any amount paid or incurred-
If-
subparagraph (A)(i) shall not apply to such short sale.
No deduction shall be denied under this section for interest on a mortgage on, or real property taxes on, the home of the taxpayer by reason of the receipt of an amount as-
In the case of a financial institution, no deduction shall be allowed for that portion of the taxpayer's interest expense which is allocable to tax-exempt interest.
For purposes of paragraph (1), the portion of the taxpayer's interest expense which is allocable to tax-exempt interest is an amount which bears the same ratio to such interest expense as-
Any qualified tax-exempt obligation acquired after August 7, 1986, shall be treated for purposes of paragraph (2) and section 291(e)(1)(B) as if it were acquired on August 7, 1986.
For purposes of subparagraph (A), the term "qualified tax-exempt obligation" means a tax-exempt obligation-
For purposes of clause (i)(II), there shall not be treated as a private activity bond-
For purposes of subparagraph (B), the term "qualified small issuer" means, with respect to obligations issued during any calendar year, any issuer if the reasonably anticipated amount of tax-exempt obligations (other than obligations described in clause (ii)) which will be issued by such issuer during such calendar year does not exceed $10,000,000.
For purposes of clause (i), an obligation is described in this clause if such obligation is-
In the case of an issue under which more than 1 governmental entity receives benefits, if-
then the amount of such issue so allocated to an entity (and only such amount with respect to such issue) shall be taken into account under clause (i) with respect to such entity.
Not more than $10,000,000 of obligations issued by an issuer during any calendar year may be designated by such issuer for purposes of this paragraph.
Except as provided in clause (iii), in the case of a refunding (or series of refundings) of a qualified tax-exempt obligation, the refunding obligation shall be treated as a qualified tax-exempt obligation (and shall not be taken into account under clause (i)) if-
Subclause (II) shall not apply if the average maturity of the issue of which the original qualified tax-exempt obligation was a part (and of the issue of which the obligations to be refunded are a part) is 3 years or less. For purposes of this clause, average maturity shall be determined in accordance with section 147(b)(2)(A).
No obligation issued as part of an issue may be designated under this paragraph (or may be treated as designated under clause (ii)) if-
For purposes of subparagraphs (C) and (D)-
In the case of an obligation which is issued as part of a direct or indirect composite issue, such obligation shall not be treated as a qualified tax-exempt obligation unless-
In the case of obligations issued during 2009 or 2010, subparagraphs (C)(i), (D)(i), and (D)(iii)(II) shall each be applied by substituting "$30,000,000" for "$10,000,000".
In the case of a qualified 501(c)(3) bond (as defined in section 145) issued during 2009 or 2010, this paragraph shall be applied by treating the 501(c)(3) organization for whose benefit such bond was issued as the issuer.
In the case of a qualified financing issue issued during 2009 or 2010-
For purposes of this subparagraph, the term "qualified financing issue" means any composite, pooled, or other conduit financing issue the proceeds of which are used directly or indirectly to make or finance loans to 1 or more ultimate borrowers each of whom is a qualified borrower.
For purposes of this subparagraph, the term "qualified portion" means that portion of the proceeds which are used with respect to each qualified borrower under the issue.
For purposes of this subparagraph, the term "qualified borrower" means a borrower which is a State or political subdivision thereof or an organization described in section 501(c)(3) and exempt from taxation under section 501(a).
For purposes of this subsection-
The term "interest expense" means the aggregate amount allowable to the taxpayer as a deduction for interest for the taxable year (determined without regard to this subsection, section 264, and section 291). For purposes of the preceding sentence, the term "interest" includes amounts (whether or not designated as interest) paid in respect of deposits, investment certificates, or withdrawable or repurchasable shares.
The term "tax-exempt obligation" means any obligation the interest on which is wholly exempt from taxes imposed by this subtitle. Such term includes shares of stock of a regulated investment company which during the taxable year of the holder thereof distributes exempt-interest dividends.
For purposes of this subsection, the term "financial institution" means any person who-
If interest on any indebtedness is disallowed under subsection (a) with respect to any tax-exempt obligation-
This section shall be applied before the application of section 263A (relating to capitalization of certain expenses where taxpayer produces property).
In applying paragraph (2)(A), there shall not be taken into account tax-exempt obligations issued during 2009 or 2010.
The amount of tax-exempt obligations not taken into account by reason of subparagraph (A) shall not exceed 2 percent of the amount determined under paragraph (2)(B).
For purposes of this paragraph, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).
1 See References in Text note below.
26 U.S.C. § 265
EDITORIAL NOTES
REFERENCES IN TEXTThe date of the enactment of the Tax Reform Act of 1986, referred to in subsec. (b)(3)(B)(ii)(II), (C)(ii)(II), is the date of enactment of Pub. L. 99-514, which was approved Oct. 22, 1986.Sections 1312, 1313, 1316(g), and 1317 of the Tax Reform Act of 1986, referred to in subsec. (b)(3)(C)(ii)(II), are sections 1312, 1313, 1316(g), and 1317 of Pub. L. 99-514, which are set out as a note under section 141 of this title. Section 149(d)(5), referred to in subsec. (b)(3)(C)(ii)(III), was redesignated section 149(d)(2) by Pub. L. 115-97, §13532(b)(1), Dec. 22, 2017, 131 Stat. 2154.
CODIFICATIONAnother section 1084(c) of Pub. L. 105-34 amended section 264 of this title.
AMENDMENTS2009-Subsec. (b)(3)(G). Pub. L. 111-5, §1502(a), added subpar. (G).Subsec. (b)(7). Pub. L. 111-5, §1501(a), added par. (7).1997-Subsec. (b)(4)(A). Pub. L. 105-34 inserted ", section 264," before "and section 291".1990-Subsec. (a)(2). Pub. L. 101-508, §11801(c)(4), struck out before period at end ", or to purchase or carry any certificate to the extent the interest on such certificate is excludable under section 128".1988-Subsec. (b)(3). Pub. L. 100-647 amended par. (3) generally, reenacting subpar. (A) without change, revising and restating provisions of subpars. (B) to (E), and adding subpar. (F).1986-Pub. L. 99-514, §902(a), (d), designated existing provisions as subsec. (a), inserted heading, and added subsec. (b).Par. (2). Pub. L. 99-514, §902(b), struck out last sentence which read as follows: "In applying the preceding sentence to a financial institution (other than a bank) which is a face-amount certificate company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 and following) and which is subject to the banking laws of the State in which such institution is incorporated, interest on face-amount certificates (as defined in section 2(a)(15) of such Act) issued by such institution, and interest on amounts received for the purchase of such certificates to be issued by such institution, shall not be considered as interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the taxes imposed by this subtitle, to the extent that the average amount of such obligations held by such institution during the taxable year (as determined under regulations prescribed by the Secretary) does not exceed 15 percent of the average of the total assets held by such institution during the taxable year (as so determined)." Par. (6). Pub. L. 99-514, §144, added par. (6). 1984-Par. (2). Pub. L. 98-369, §16(a), repealed amendments made by Pub. L. 97-34, §302(c). See 1981 Amendment note below.Par. (5). Pub. L. 98-369, §56(c), added par. (5). 1981-Par. (2). Pub. L. 97-34, §302(c)(2), (d)(1), provided that, applicable to taxable years beginning after Dec. 31, 1984, par. (2) is amended by striking out "or to purchase or carry any certificate to the extent the interest on such certificate is excludable under section 128" and inserting in lieu thereof "or to purchase or carry obligations or shares, or to make other deposits or investments, the interest on which is described in section 128(c)(1) to the extent such interest is excludable from gross income under section 128". Section 16(a) of Pub. L. 98-369, repealed section 302(c) of Pub. L. 97-34, and provided that this title shall be applied and administered as if section 302(c), and the amendments made by such section 302(c), had not been enacted.Pub. L. 97-34, §301(b)(2), inserted ", or to purchase or carry any certificate to the extent the interest on such certificate is excludable under section 128" after "116". 1980-Par. (2). Pub. L. 96-223 inserted ", or to purchase or carry obligations or shares, or to make deposits or other investments, the interest on which is described in section 116(c) to the extent such interest is excludable from gross income under section 116" after "subtitle". 1976-Par. (2). Pub. L. 94-455, §§1901(a)(37), 1906(b)(13)(A), struck out "(other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer)" after "to purchase or carry obligations" and "or his delegate" after "Secretary".Pars. (3), (4). Pub. L. 94-455, §2137(e), added pars. (3) and (4). 1964-Par. (2). Pub. L. 88-272 provided that interest on face-amount certificates issued by a face-amount certificate company, and interest on amounts received for the purchase of such certificates to be issued by such institution, shall not be considered interest on indebtedness to purchase or carry obligations the interest on which is wholly exempt from the taxes under this subtitle, to the extent the average amount of such obligations held by such institution during the taxable year doesn't exceed 15 percent of the average total assets held by such institution during the taxable year.
STATUTORY NOTES AND RELATED SUBSIDIARIES
EFFECTIVE DATE OF 2009 AMENDMENT Pub. L. 111-5, div. B, title I, §1501(c), Feb. 17, 2009, 123 Stat. 353, provided that: "The amendments made by this section [amending this section and section 291 of this title] shall apply to obligations issued after December 31, 2008." Pub. L. 111-5, div. B, title I, §1502(b), Feb. 17, 2009, 123 Stat. 354, provided that: "The amendment made by this section [amending this section] shall apply to obligations issued after December 31, 2008."
EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105-34 applicable to contracts issued after June 8, 1997, in taxable years ending after such date, with special provisions relating to changes in contracts to be treated as new contracts, see section 1084(d) of Pub. L. 105-34, set out as a note under section 101 of this title.
EFFECTIVE DATE OF 1988 AMENDMENT Pub. L. 100-647, title I, §1009(b)(3)(B)-(D), Nov. 10, 1988, 102 Stat. 3448, 3449, as amended by Pub. L. 101-239, §7811(f)(2), Dec. 19, 1989, 103 Stat. 2409, provided that:"(B) In the case of any obligation issued after August 7, 1986, and before January 1, 1987, the time for making a designation with respect to such obligation under section 265(b)(3)(B)(i)(III) of the 1986 Code shall not expire before January 1, 1989."(C) If-"(i) an obligation is issued on or after January 1, 1986, and on or before August 7, 1986, "(ii) when such obligation was issued, the issuer made a designation that it intended to qualify under section 802(e)(3) of H.R. 3838 of the 99th Congress as passed by the House of Representatives [H.R. 3838 was enacted as Pub. L. 99-514], and"(iii) the issuer makes an election under this subparagraph with respect to such obligation,for purposes of section 265(b)(3) of the 1986 Code, such obligation shall be treated as issued on August 8, 1986."(D)(i) Except as provided in clause (ii), the following provisions of section 265(b)(3) of the 1986 Code (as amended by this subparagraph (A)) shall apply to obligations issued after June 30, 1987:"(I) subparagraph (C)(ii)(III),"(II) clauses (ii) and (iii) of subparagraph (D), and"(III) subparagraphs (E) and (F). "(ii) At the election of an issuer (made at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe), the provisions referred to in clause (i) shall apply to such issuer as if included in the amendments made by section 902(a) of the Tax Reform Act of 1986 [section 902(a) of Pub. L. 99-514, amending this section]."Amendment by Pub. L. 100-647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which such amendment relates, see section 1019(a) of Pub. L. 100-647, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 144 of Pub. L. 99-514 applicable to taxable years beginning before, on, or after Dec. 31, 1986, see section 151(e) of Pub. L. 99-514, set out as a note under section 1 of this title.Pub. L. 99-514, title IX, §902(f), Oct. 22, 1986, 100 Stat. 2382, as amended by Pub. L. 100-647, title I, §1009(b)(1), (2), (7), Nov. 10, 1988, 102 Stat. 3445, 3446, 3449, provided that:"(1) IN GENERAL.-Except as provided in this subsection, the amendments made by this section [amending this section and sections 163, 291, and 1277 of this title] shall apply to taxable years ending after December 31, 1986."(2) OBLIGATIONS ACQUIRED PURSUANT TO CERTAIN COMMITMENTS.-For purposes of sections 265(b) and 291(e)(1)(B) of the Internal Revenue Code of 1986, any tax-exempt obligation which is acquired after August 7, 1986, pursuant to a direct or indirect written commitment-"(A) to purchase or repurchase such obligation, and"(B) entered into on or before September 25, 1985,shall be treated as an obligation acquired before August 8, 1986."(3) TRANSITIONAL RULES.-For purposes of sections 265(b) and 291(e)(1)(B) of the Internal Revenue Code of 1986, obligations with respect to any of the following projects shall be treated as obligations acquired before August 8, 1986, in the hands of the first and any subsequent financial institution acquiring such obligations: "(A) Park Forest, Illinois, redevelopment project. "(B) Clinton, Tennessee, Carriage Trace project. "(C) Savannah, Georgia, Mall Terrace Warehouse project. "(D) Chattanooga, Tennessee, Warehouse Row project. "(E) Dalton, Georgia, Towne Square project."(F) Milwaukee, Wisconsin, Standard Electric Supply Company-distribution facility."(G) Wausau, Wisconsin, urban renewal project."(H) Cassville, Missouri, UDAG project. "(I) Outlook Envelope Company-plant expansion."(J) Woodstock, Connecticut, Crabtree Warehouse partnership."(K) Louisville, Kentucky, Speed Mansion renovation project."(L) Charleston, South Carolina, 2 Festival Market Place projects at Union Pier Terminal and 1 project at the Remount Road Container Yard, State Pier No. 15 at North Charleston Terminal."(M) New Orleans, Louisiana, Upper Pontalba Building renovation."(N) Woodward Wight Building."(O) Minneapolis, Minnesota, Miller Milling Company-flour mill project."(P) Homewood, Alabama, the Club Apartments."(Q) Charlotte, North Carolina-qualified mortgage bonds acquired by NCNB bank ($5,250,000)."(R) Grand Rapids, Michigan, Central Bank project."(S) Ruppman Marketing Services, Inc.-building project."(T) Bellows Falls, Vermont-building project."(U) East Broadway Project, Louisville, Kentucky."(V) O.K. Industries, Oklahoma."(4) ADDITIONAL TRANSITIONAL RULE.-Obligations issued pursuant to an allocation of a State's volume limitation for private activity bonds, which allocation was made by Executive Order 25 signed by the Governor of the State on May 22, 1986 (as such order may be amended before January 1, 1987), and qualified 501(c)(3) bonds designated by such Governor for purposes of this paragraph, shall be treated as acquired on or before August 7, 1986, in the hands of the first and any subsequent financial institution acquiring such obligation. The aggregate face amount of obligations to which this paragraph applies shall not exceed $200,000,000."
EFFECTIVE DATE OF 1984 AMENDMENT Amendment by section 16(a) of Pub. L. 98-369 applicable to taxable years ending after Dec. 31, 1983, see section 18(a) of Pub. L. 98-369, set out as a note under section 48 of this title.Amendment by section 56(c) of Pub. L. 98-369 applicable to short sales after July 18, 1984, in taxable years ending after that date, see section 56(d) of Pub. L. 98-369, set out as a note under section 163 of this title.
EFFECTIVE DATE OF 1981 AMENDMENT Pub. L. 97-34, title III, §301(d), Aug. 13, 1981, 95 Stat. 270, provided that:"(1) IN GENERAL.-Except as provided in paragraph (2), the amendments made by this section [enacting section 128 of this title and amending this section and sections 584, 643, and 702 of this title] shall apply to taxable years ending after September 30, 1981. "(2) CONFORMING AMENDMENTS.-The amendments made by subsection (b)(6) [amending sections 584, 643, and 702 of this title] shall apply to taxable years beginning after December 31, 1981."
EFFECTIVE AND TERMINATION DATES OF 1980 AMENDMENTPub. L. 96-223, title IV, §404(c), Apr. 2, 1980, 94 Stat. 308, as amended by Pub. L. 97-34, title III, §302(b)(1), Aug. 13, 1981, 95 Stat. 272, provided that: "The amendments made by this section [amending this section and sections 116, 584, 643, 702, 854, and 857 of this title] shall apply with respect to taxable years beginning after December 31, 1980, and before January 1, 1982."
EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1901(a)(37) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as a note under section 2 of this title. Amendment by section 2137(e) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1975, see section 2137(e) of Pub. L. 94-455, set out as a note under section 852 of this title.
EFFECTIVE DATE OF 1964 AMENDMENT Pub. L. 88-272, title II, §216(b), Feb. 26, 1964, 78 Stat. 56, provided that: "The amendment made by subsection (a) [amending this section] shall apply with respect to taxable years ending after the date of the enactment of this Act [Feb. 26, 1964]."
SAVINGS PROVISIONFor provisions that nothing in amendment by Pub. L. 101-508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101-508, set out as a note under section 45K of this title.
CLARIFICATION OF TREATMENT OF AMOUNTS EXCLUDED UNDER SECTION 597Pub. L. 99-514, title IX, §904(c)(2)(B), Oct. 22, 1986, 100 Stat. 2385, provided that this section shall not deny any deduction by reason of such deduction being allocable to amounts excluded from gross income under section 597 of this title as in effect on Oct. 21, 1986, prior to repeal by Pub. L. 101-73, §1401(a)(3)(B), Aug. 9, 1989, 103 Stat. 549.
- Internal Revenue Code of 1986
- The term "Internal Revenue Code of 1986" means this title, and the term "Internal Revenue Code of 1939" means the Internal Revenue Code enacted February 10, 1939, as amended.
- Secretary of the Treasury
- The term "Secretary of the Treasury" means the Secretary of the Treasury, personally, and shall not include any delegate of his.
- Secretary
- The term "Secretary" means the Secretary of the Treasury or his delegate.
- State
- The term "State" shall be construed to include the District of Columbia, where such construction is necessary to carry out provisions of this title.
- corporation
- The term "corporation" includes associations, joint-stock companies, and insurance companies.
- person
- The term "person" shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.
- stock
- The term "stock" includes shares in an association, joint-stock company, or insurance company.
- taxable year
- The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the taxable income is computed under subtitle A. "Taxable year" means, in the case of a return made for a fractional part of a year under the provisions of subtitle A or under regulations prescribed by the Secretary, the period for which such return is made.
- taxpayer
- The term "taxpayer" means any person subject to any internal revenue tax.
- trade or business
- The term "trade or business" includes the performance of the functions of a public office.