PUBLIC LAW 105-34—AUG. 5, 1997 111 STAT. 953 "(C) COORDINATION WITH PARAGRAPH (2).— Any policy or contract to which paragraph (1) does not apply by reason of this paragraph shall not be taken into account under paragraph (2). "(D) 20-PERCENT OWNER.—For purposes of subparagraph (A), the term '20-percent owner' has the meaning given such term by subsection (e)(4). "(5) EXCEPTION FOR POLICIES AND CONTRACTS HELD BY NATURAL PERSONS; TREATMENT OF PARTNERSHIPS AND S COR- PORATIONS. — "(A) POLICIES AND CONTRACTS HELD BY NATURAL PER- SONS. — "(i) IN GENERAL. —T his subsection shall not apply to any policy or contract held by a natural person, "(ii) EXCEPTION WHERE BUSINESS IS BENEFICIARY. — If a trade or business is directly or indirectly the beneficiary under any policy or contract, such policy or contract shall be treated as held by such trade or business and not by a natural person, "(iii) SPECIAL RULES. — "(I) CERTAIN TRADES OR BUSINESSES NOT TAKEN INTO ACCOUNT.— Clause (ii) shall not apply to any trade or business carried on as a sole proprietorship and to any trade or business performing services as an employee. "(II) LIMITATION ON UNBORROWED CASH VALUE.— The amount of the unborrowed cash value of any policy or contract which is taken into account by reason of clause (ii) shall not exceed the benefit to which the trade or business is directly or indirectly entitled under the policy or contract. "(iv) REPORTING. —The Secretary shall require such reporting from policyholders and issuers as is necessary to carry out clause (ii). Any report required under the preceding sentence shall be treated as a statement referred to in section 6724(d)(1). "(B) TREATMENT OF PARTNERSHIPS AND S CORPORA- TIONS.— In the case of a partnership or S corporation, this subsection shall be applied at the partnership and corporate levels. " (6) SPECIAL RULES. — "(A) COORDINATION WITH SUBSECTION (a) AND SECTION 265.—If interest on any indebtedness is disallowed under subsection (a) or section 265— "(i) such disallowed interest shall not be taken into account for purposes of applying this subsection, and "(ii) the amount otherwise taken into account under paragraph (2)(B) shall be reduced (but not below zero) by the amount of such indebtedness. "(B) COORDINATION WITH SECTION 263A.—T h is subsection shall be applied before the application of section 263A (relating to capitalization of certain expenses where taxpayer produces property). "(7) INTEREST EXPENSE.— The term 'interest expense' means the aggregate amount allowable to the taxpayer as a deduction
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