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PUBLIC LAW 91-172-DEC. 30, 1%9

[SSSTAT

Subtitle D—Accumulation T r u s t s, Multiple Trusts, Etc. SEC. 331. TREATMENT OF EXCESS DISTRIBUTIONS BY TRUSTS. 68A Stat. 223; 76 Stat. 986.

(a) IN GENERAL.—Subpart D of part I of subchapter J of chapte 1 is amended to read as follows: ^ ' S U B P A R T D — T R E A T M ENT OF E X C E S S DISTRIBUTIONS BY T R U S T S "Sec. 665. Definitions applicable to subpart D. "Sec. 666. Accumulation distribution allocated to preceding years "Sec. 667. Denial of refund to trusts; authorization of credit to beneficiaries. "Sec. 668. Treatment of amounts deemed distributed in preceding .,, years. "Sec. 669. Treatment of capital gain deemed distributed in preceding years. "SEC. 665. DEFINITIONS APPLICABLE TO SUBPART D. "

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" (a) UNDISTRIBUTED N E T INCOME.—For purposes of this subpart the term 'undistributed net income' for any taxable year means the amount by which the distributable net income of the trust for such taxable year exceeds the sum of— "(1) the amounts for such taxable year specified in paragraphs (1) and (2) of section 661(a), and "(2) the amount of taxes imposed on the trust attributable to such distributable net income. " (b) ACCUMULATION DISTRIBUTION.—For purposes of this subpart, the term 'accumulation distribution' means, for any taxable year of the trust, the amount by which— "(1) the amounts specified in paragraph (2) of section 661(a) for such taxable year, exceed " (2) distributable net income for such year reduced (but not below zero) by the amounts specified in paragraph (1) of section 661(a). "(c) SPECIAL RULE APPLICABLE TO DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS.—For purposes of this subpart, any amount paid to a

United States person which is from a payor who is not a United States person and which is derived directly or indirectly from a foreign trust created by a United States person shall be deemed in the year of payment to have been directly paid by the foreign trust. " (d) TAXES IMPOSED ON THE TRUST.—For purposes of this subpart, the term 'taxes imposed on the trust' means the amount of the taxes which are imposed for any taxable year of the trust under this chapter (without regard to this subpart) and which, under regulations prescribed by the Secretary or his delegate, are properly allocable to the undistributed portions of distributable net mcome and gains m excess of losses from sales or exchanges of capital assets. The amount determined in the preceding sentence shall be reduced by any amount of such taxes deemed distributed under section 666(b) and (c) or 669 (d) and (e) to any beneficiary. "(e) PRECEDING TAXABLE YEAR.—For. purposes of this subpart— ^ " (1) in the case of a trust (other than a foreign trust created by ^' a United States person), the term 'preceding taxable year' does not include any taxable year of the trust— " (A) which precedes by more than 5 years the ta.xable year of the trust in which an accumulation distribution is made, if it is made in a taxable year beginning before January 1, 1974,

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Page:United States Statutes at Large Volume 83.djvu/621

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PUBLIC LAW 91-172-DEC. 30, 1%9

593

" (B) which begins before January 1, 1969, in the case of an accumulation distribution made during a taxable year beginning after December 31, 1973, or "(C) which begins before January 1, 1969, in the case of a capital gam distribution made during a taxable year beginning after December 31, 1968; and «(2) m the case of a foreign trust created by a United States person, such term does not include any taxable year of the trust to which this part does not apply. In the case of a preceding taxable year with respect to which a trust qualifies (without regard to this subpart) under the provisions of subpart B, for purposes of the application of this subpart to such trust for such taxable year, such trust shall, in accordance with regulations prescribed by the Secretary or his delegate, be treated as a trust to which subpart C applies. "(f) UNDISTRIBUTED CAPITAL G A I N. — For purposes of this subpart, the term 'undistributed capital gain' means, for any taxable year of the trust beginning after December 31, 1968, the amount by which— "(1) gains in excess of losses from the sale or exchange of capital assets, to the extent that such gains are allocated to corpus and are not (A) paid, credited, or required to be distributed to any beneficiary during such taxable year, or (B) paid, permanently set aside, or used for the purposes specifi^ed m section 642(c), exceed "(2) the amount of taxes imposed on the trust attributable to such gains. For purposes of paragraph (1), the deduction under section 1202 (relating to deduction for excess of capital gains over capital losses) shall not be taken into account. "(g) CAPITAL G A I N DISTRIBUTION,—For purposes of this subpart, the term 'capital gain distribution' for any taxable year of the trust means, to the extent of undistributed capital gain for such taxable year, that portion of— "(1) the excess of the amounts specified in paragraph (2) of section 661(a) for such taxable year over distributable net income for such year reduced (but not below zero) by the amounts specified in paragraph (1) of section 661(a), over "(2) the undistributed net income of the trust for all preceding taxable years. "SEC. 666. ACCUMULATION DISTRIBUTION ALLOCATED TO PRECEDING YEARS. "(a) AMOUNT ALLOCATED.—In the case of a trust which is subject to subpart C, the amount of the accumulation distribution of such trust for a taxable year shall be deemed to be an amount within the meaning of paragraph (2) of section 661(a) distributed on the last day of each of the preceding taxable years, commencing with the earliest of such years, to the extent that such amount exceeds the total of any undistributed net income for all earlier preceding taxable years. The amount deemed to be distributed in any such preceding taxable year under the preceding sentence shall not exceed the undistributed net income for such preceding taxable year. For purposes of this subsection, undistributed net income for each of such preceding taxable years shall be computed without regard to such accumulation distribution and without regard to any accumulation distribution determined for any succeeding taxable year. '(b)

TOTAL TAXES DEEMED DISTRIBUTED.—If any

portion of

an

accumulation distribution for any taxable year is deemed under subs^tion (a) to be an amount within the meaning of paragraph (2)

^"'^' P- SSS.

26^8*0*120^2°'

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Page:United States Statutes at Large Volume 83.djvu/622

 594 68A Stat. 220.• >

26 USC 661.

PUBLIC LAW 91-172-DEC. 30, 1969

[33 3^^

of section 661(a) distributed on the last day of any preceding taxabl ^,^^^^ ^^^^ g^^^j^ year, and such portion of such distribution is not "less than theutitlT^ less the uiicli ^ tributed net income for such preceding taxable year, the trust shall be deemed to have distributed on the last day of such preceding tax able year an additional amount within the meaning of paragraph (•;\ of section 661(a). Such additional amount shall be equal to the taxes imposed on the trust for such preceding taxable year attributable to the undistributed net income. For purposes of this subsection the nndistributed net income and the taxes imposed on the trust for such preceding taxable year attributable to such undistributed net income shall be compnted without regard to such accumulation distribution and without regard to any accumulation distribution determined for any succeeding taxable year. "(c)

PRO RATA PORTION or TAXES DEEMED DISTRIBUTP:D.—If anv

portion of an accumulation distribution for any taxable year is deemed under subsection (a) to be an amount within the meaning of paragraph (2) of section 661(a) distributed on the last day of any preceding taxable year and such portion of the accumulation distribution is less than the undistributed net income for such preceding taxable year the trust shall be deemed to have distributed on the last day of snch preceding taxable year an additional amount within the meaning of paragraph (2) of section 661(a). Such additional amount shall be equal to the taxes imposed on the trust for such taxable year attributable to the undistributed net income multiplied by the ratio of the portion of the accimiulation distribution to the undistributed net income of the trust for such year. For purposes of this subsection, the undistributed net income and the taxes imposed on the trust for such preceding taxable year attributable to such undistributed net income shall be computed without regard to the accumulation distribution and without regard to any accumulation distribution determined for any succeeding taxable year. "(d)

RULE W H E N INFORMATION I S NOT AVAILABLE.—If adequate

records are not available to determine the proper application of this subpart to an amount distributed by a trust, such amount shall be deemed to be an accumulation distribution consisting of undistributed net income earned during the earliest preceding taxable year of the trust in which it can be established that the trust was in existence. "SEC. 667. DENIAL OF REFUND TO TRUSTS; AUTHORIZATION OF CREDIT TO BENEFICIARIES. " (a) DENIAL or REFUND TO TRUSTS.—No refund or credit shall be

allowed to a trust for any preceding taxable year by reason of a distribution deemed to have been made by such trust in such year under section 666 or 669. "(b) AUTHORIZATION OF CREDIT TO BENEFICIARY.—There shall be allowed as a credit (without interest) against the tax imposed by this subtitle on the beneficiary an amount equal to the amount of the taxes deemed distributed to such beneficiary by the trust under sections 666 (b) and (c) and 669 (d) and (e) during preceding taxable years of the trust on the last day of which the beneficiary was in being, reduced by the amount of the taxes deemed distributed to such beneficiary for such preceding taxable years to the extent that such taxes are taken into account under sections 668(b)(1) and 669(b) in determining the amount of the tax imposed by section 668. "SEC. 668. TREATMENT OF AMOUNTS DEEMED DISTRIBUTED IN PRECEDING YEARS. " (a) GENERAL RULE.—The total of the amounts which are treated

under sections 666 and 669 as having been distributed by the trust in a preceding taxable year shall be included in the income of a beneficiary

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Page:United States Statutes at Large Volume 83.djvu/623

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PUBLIC LAW 91-172-DEC. 30, 1%9

of the trust when paid, credited, or required to be distributed to the nvtent that such total would have been included in the income of such beneficiary under section 662(a)(2) and (b) if such total had been paid to such beneficiary on the last day of such preceding taxable Vear. The tax imposed by this subtitle on a beneficiary for a taxable year in which any such amount is included in his income shall be determined only as provided in this section and shall consist of the sum of— "(1) a partial tax computed on the taxable income reduced by an amount equal to the total of such amounts, at the rate and iii the manner as if this section had not been enacted, "(2) a partial tax determined as provided in subsection (b) of this section, and " (3) in the case of a beneficiary of a trust which is not required to distribute all of its income currently, a partial tax determined as provided in section 669. For purposes of this subpart, a trust shall not be considered to be a trust which is not recjuired to distribute all of its income currently for any taxable year prior to the first taxable year in which income is accumulated. "(b)

TAX ON DISTRIBUTION.—

" (1) ALTERNATIVE METHODS.—Except as provided in paragraph

(2), the partial tax imposed by subsection (a)(2) shall be the lesser of— " (A) the aggregate of the taxes attributable to the amounts deemecl distributed under section 666 had they been included in the gross income of the beneficiary on the last day of each respective preceding taxable year, or " (B) the tax determined by multiplying, by the number of preceding taxable years of the trust, on the last day of which an amount is deemed under section 666(a) to have been distributed, the average of the increase in tax attributable to recomputing the beneficiary's gross income for each of the beneficiary's 3 taxable years immediately preceding the year of the accumulation distribution by adding to the income of each of such years an amount determined by dividing the amount deemed distributed under section 666 and required to be included in income under subsection (a) by such number of preceding taxable years of the trust, less an amount equal to the amount of taxes deemed distributed to the beneficiary under sections 666(b) and (c). "(2)

SPECIAL RULES.—

" (A) If a beneficiary was not in existence on the last day of a preceding taxable year of the trust with respect to which a distribution is deemed made under section 666(a), the partial tax under either paragraph (1)(A) or (1)(B) shall be computed as if the beneficiary were in existence on the last day of such year on the basis that the beneficiary had no gross income (other than amounts deemed distributed to him under sections 666 and 669 by the same or other trusts) and no deductions for such year. " (B) The partial tax shall not be computed under the provisions of subparagraph (B) of paragraph (1) if, in the same prior taxable year of the beneficiary in which any part of the accumulation distribution is deemed under section 666(a) to have been distributed to such beneficiary, some part of prior accumulation distributions by each of two or more other trusts

595

^'^ ^'^'- "o26 USC 662.

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Page:United States Statutes at Large Volume 83.djvu/624

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PUBLIC LAW 91-172-DEC. 30, 1969

J

[83 STAT

is deemed under section 666(a) to have been distributed such beneficiary. ™ " (C) If the partial tax is computed under pa^agrar^v (1)(B), and the amount of the undistributed net inconi deemed distributed in any preceding taxable year of the trust is less than 25 percent of the amount of the accumulation dig tribution divided by the number of preceding taxable years to which the accumulation distribution is allocated under section 666(a), the number of preceding taxable years of the trust with respect to which an amount is deemed distributed to a beneficiary under section 666(a) shall be determined without regard to such year. "(3)

EFFECT OF OTHER ACCUMULATION DISTRIBUTIONS AND CAPI-

TAL GAIN DISTRIBUTIONS.—In computing the partial tax under paragraph (1) for any beneficiary, the income of such beneficiary for each of his prior taxable years— , •; " (A) shall include amounts previously deemed distributed to such beneficiary in such year under section 666 or 669 as a result of prior accumulation distributions or capital gain distributions (whether from the same or another trust), and " (B) shall not include amounts deemed distributed to such beneficiary in such year under section 669 as a result of a capital gain distribution from the same trust in the current year. " (4)

MULTIPLE DISTRIBUTIONS IN THE SAME TAXABLE TEAR.—In

the case of accumulation distributions made from more than one trust which are includible in the income of a beneficiary in the same taxable year, the distributions shall be deemed to have been made consecutively in whichever order the beneficiary shall determine. "(5) INFORMATION REQUIREMENTS WITH FICIARY.—

RESPECT TO BENE-

" (A) Except as provided in subparagraph (B), the partial tax shall not be computed under the provisions of paragraph (1)(A) unless the beneficiary supplies such information with respect to his income, for each taxable year with which or in which ends a taxable year of the trust on the last day of which an amount is deemed distributed under section 666(a), as the Secretary or his delegate prescribes by regulations. " (B) If by reason of paragraph (2)(B) the provisions of paragraph (1)(B) do not apply, the determination of the amount of the beneficiary's income for a taxable year for which the beneficiary has not supplied the information required under subparagraph (A) shall be made by the Secretary or his delegate on the basis of information available to him. "SEC. 669. TREATMENT OF CAPITAL GAIN DEEMED DISTRIBUTED IN PRECEDING YEARS. " (a) AMOUNT ALLOCATED.—In the case of a trust which is not required to distribute all of its income currently, the amount of a capital gain distribution of such trust for a taxable year shall be deemed to be an amount properly paid, credited, or required to be distributed on the last day of each of the preceding taxable years, commencing with the earliest of such years, to the extent that such amount exceeds the total of any undistributed capital gain for all earlier preceding taxable years. The amount deemed to be distributed in any such preceding taxable year under the preceding sentence shall not exceed the undistributed capital gain for such preceding taxable year. For purposes 01

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Rh and a little later hurried to the place where the provisions were left. They found their supplies safely on hand, and, carrying them into the airship, prepared to turn back to Shopton.

As the ship rose high in the air a crowd of negro laborers passing through a distant field, saw it. At once they raised a commotion, shouting and pointing to the wonderful sight.

"We're discovered!" cried Tom.

"No matter," answered Mr. Sharp. "We'll soon be out of sight, and we'll fly high the rest of this trip."

Tom looked down on the fast disappearing little hamlet, and he thought of the pretty girl in the restaurant.

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Page:United States Statutes at Large Volume 83.djvu/625

 83 STAT. ]

PUBLIC LAW 91-172-DEC. 30, 1969

597

this subsection, undistributed capital gain for each of such preceding taxable years shall be computed without regard to such capital gain distribution and without regard to any capital gain distribution determined for any succeeding taxable year. «(b) TAX ON DISTRIBUTION.—The partial tax imposed by section 668 /a)(3) shall be the lesser of— "(1) the aggregate of the taxes attributable to the amounts deemed distributed under this section, had such amounts been included in the gross income of the beneficiary on the last day of each respective preceding taxable year, or "(2) the tax determined by multiplying by the number of preceding taxable years of the trust, on the last day of which net gains from the sale or exchange of capital assets are deemed under subsection (a) to have been distributed, the average of the increase in tax attributable to recomputing the beneficiary's gross income for each of the beneficiary's 3 taxable years immediately preceding the year of the capital gain distribution by adding to the income of each of such years an amount determined by dividing the total of the amounts deemed distributed under this section and required to be included in income under section 668(a) by such number of preceding taxable years of the trust, less an amount equal to the amount of taxes deemed distributed to the beneficiary under subsections (d) and (e) which are attributable to the capital gain distribution. "(c)

• \'

' [^'V

EFFECT OF OTHER DISTRIBUTIONS; SPECIAL RULES, E T C. — I n

computing the partial tax under subsection (b) for any beneficiary, the income of such beneficiary for each of his prior taxable years— "(1) shall include amounts previously deemed distributed to such beneficiary in such year under section 666 or 669 as a result of prior accumulation distributions or capital gain distributions (whether from the same or another trust), and "(2) shall include amounts deemed distributed to such beneficiary in such year under section 666 as a result of an accumulation distribution from the same trust in the current year. Under regulations prescribed by the Secretary or his delegate, rules similar to the rules provided by paragraphs (2), (4), and (5) of section 668(b) shall be applied for purposes of this section. "(d)

TOTAL TAXES DEEMED DISTRIBUTED.—If

any

portion of

a

capital gain distribution for any taxable year is deemed under subsection (a) to be an amount properly paid, credited or required to be distributed on the last day of any preceding taxable year, and such portion of such capital gain distribution is not less than the undistributed capital gam for such preceding taxable year, the trust shall be deemed to have properly distributed on the last day of such preceding taxable year an additional amount. Such additional amount shall be equal to the taxes imposed on the trust for such preceding taxable year attributable to such undistributed capital gain. For purposes of this subsection, the undistributed capital gain and the taxes imposed on the trust for such preceding taxable year attributable to such gain shall be computed without regard to such capital gain distribution and without regard to any capital gain distribution determined for any succeeding taxable year. "(e)

PRO RATA PORTION OF TAXES DEEMED DISTRIBUTED.—If

any

portion of a capital gain distribution for any taxable year is deemed under subsection (a) to be an amount properly paid, credited, or required to be distributed on the last day of any preceding taxable year and such portion of the capital gain distribution is less than the undistributed capital gain for such preceding taxable year, the trust shall

31-100 0 - 70 - 40

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Page:United States Statutes at Large Volume 83.djvu/626

 598

PUBLIC LAW 91-172-DEC. 30, 1969

[33 STAT.

be deemed to have properly distributed on the last day of such preceding taxable year an additional amount. Such additional amount shall be equal to the taxes imposed on the trust for such taxable year attributable to such undistributed capital gain multiplied by the ratio of the portion of the capital gain distribution to the undistributed capital gain of the trust for such year. For purposes of this subsection the undistributed capital gain and the taxes imposed on the trust for such preceding taxable year attributable to such gain shall be computed without regard to the capital gain distribution and without regard to any capital gain distribution determined for any succeeding taxable year. "(f) CHARACTER OF CAPITAL GAIN.—For purposes of this section the character of the capital gain of a trust for any taxable year with respect to a beneficiary shall be the same as it was with respect to the trust." (b)

68A Stat 222.

DISTRIBUTIONS I N FIRST SIXTY-FIVE DAYS OF TAXABLE YEAR.—

Se(.tion 663(b)(2) (relating to limitation on sixty-five day rule) is

2 6 UoC^ 0 0 0,

79 Stat. 168.

1 1 1

1

i» n

amended to read as follows: "(2) LIMITATION.—Paragraph (1) shall apply with respect to any taxable year of a trust only if the fiduciary of such trust elects in such manner and at such time as the Secretary or his delegate prescribes by regulations, to have paragraph (1) apply for such taxable year." ^^^ EXCESSIVE CREDITS.—Section 6401(b) (relating to excessive credits) is amended— (1) by striking out "UNDER SECTIONS 31 AND 39" in the heading of such section; (2) by striking out "and 39 (relating" in the text of such section and inserting in lieu thereof ", 39 (relating"; and (3) by inserting after "lubricating o i l) " in the text of such section "and 667 (b) (relating to taxes paid by certain trusts)". (d)

EFFECTIVE DATE.— (1) GENERAL RULE.—Except

as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 1968. (2) EXCEPTIONS.—

Ante, p. 5 9 3.

(A) Amounts paid, credited, or required to be distributed by a trust (other than a foreign trust created by a United States person) on or before the last day of a taxable year of the trust beginning before January 1, 1974, shall not be deemed to be accumulation distributions to the extent that such amounts were accumulated by a trust in taxable years of such trust beginning before January 1, 1969, and would have been excepted from the definition of an accumulation distribution by reason of paragraphs (1), (2), (3), or (4) of section 665(b) of the Internal Revenue Code of 1954, as in effect on - i - December 31, 1968, if they had been distributed on the last J" V January 1, 1969. (B) For taxable years of a trust begimiing before January 1, 1970, the first sentence of section 666(a) of the Internal Revenue Code of 1954 (as amended by this section) shall not apply, and the amount of the accumulation distribution of the trust for such taxable years shall be deemed to be an amount within the meaning of paragraph (2) of section 661(a) distributed on the last day of each of the preceding taxable years
 * - i. 5 • day of the last taxable year of the trust beginning before

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Page:United States Statutes at Large Volume 83.djvu/627

 83 STAT. ]

PUBLIC LAW 91-172-DEC. 30, 1%9

599

to the extent that such amount exceeds the total of any undistributed net income for any taxable years intervening between the taxable year with respect of which the accumulation distribution is determined and such preceding taxable year. (C) I n the case of a trust which was in existence on December 31, 1969, section 669 of the Internal Revenue Code of 1954, as amended by this section, shall not apply to capital gain distributions made to a beneficiary before January 1, 1972. If the beneficiary receives capital gain distributions from more than one such trust before January 1, 1972, the preceding sentence shall apply to capital gain distributions from only one of such trusts, such one to be designated by the taxpayer in accordance with regulations prescribed by • the Secretary or his delegate. For purposes of the preceding ' ' ' ' ""'• sentence, capital gain distributions received from a trust qualifying under section 2056(b)(5) of the Internal Revenue Code of 1954 by a surviving spouse (who is the beneficiary 26'us*c*2ol6^' of only one such trust) shall be disregarded. SEC. 332. TRUST INCOME FOR BENEFIT OF A SPOUSE. P; .s.o^^ (a) INCOME FOR BENEFIT OF GRANTOR'S SPOUSE.—

(1) Paragraphs (1), (2), and (3) of section 677(a) (relating to income for benefit of grantor) are amended by striking out "the oTantor" each place it appears and inserting in lieu thereof "the grantor or the grantor's spouse". (2) Section 677(b) is amended by striking out "beneficiary'' and inserting in lieu thereof "beneficiary (other than the grantor's spouse)". (b) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply in respect of property transferred in trust after October 9, 1969.

TITLE IV—ADJUSTMENTS PRIMARILY AFFECTING CORPORATIONS Subtitle A—Multiple Corporations SEC. 401. MULTIPLE CORPORATIONS. (a) I N

GENERAL.—

78 Stat. 116. (1) Section 1561 (relating to surtax exemptions in case of certain controlled corporations) is amended to read as follows: •SEC. 1561. LIMITATIONS ON CERTAIN MULTIPLE TAX BENEFITS IN THE CASE OF CERTAIN CONTROLLED CORPORATIONS. "(a) GENERAL RULE.—The component members of a controlled group of corporations on a December 31 shall, for their taxable years which include such December 31, be limited for purposes of this subtitle to;,. "(1) one $25,000 surtax exemption under section 11(d), ' ^^ ^'^'- ^^^ " (3) one $25,000 amount for purposes of computing the limitation on the small business deduction of life insurance companies 73 Stat, 115. under sections 804(a)(4) and 809(d) (10). The amount specified in paragraph (1) shall be divided equally i^mong the component members of such group on such December 31 unless all of such component members consent (at such time and in such manner as the Secretary or his delegate shall by regulations prescribe) fo an apportionment plan providing for an unequal allocation of such amount. The amounts specified in paragraphs (2) and (3) shall be
 * '(2) one $100,000 amount for purposes of computing the accumulated earnings credit under section 535(c)(2) and (3), and 72^8^3^*1680^°'

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Page:United States Statutes at Large Volume 83.djvu/628

 600

PUBLIC LAW 91-172-DEC. 30, 1969

78 Stat. 25. 68A Stat. 180; 72 Stat. 1680. 73 Stat. 115.

78 Stat. 120. 26 USC 1563. ^^p^^^-

[33 STAT

divided equally among the component members of such group on such December 31 unless the Secretary or his delegate prescribes regulations permitting an unequal allocation of such amounts. ''(b) CERTAIN SHORT TAXABLE YEARS.—If a corporation has a short taxable year which does not include a December 31 and is a component member of a controlled group of corporations with respect to such taxable year, then for purposes of this subtitle— "(1) the surtax exemption under section 11(d), " (2) the amount to be used in computing the accumulated earnings Credit under section 535(c)(2) and (3), and a ^3^ ^^le amouut to be used in computing the limitation on the small business deduction of life insurance companies under sections 804(a)(4) and 809(d) (10), of such corporation for such taxable year shall be the amount specified in subsection (a)(1), (2), or (3), as the case may be, divided by the number of corporations which are component members of such group on the last day of such taxable year. For purposes of the preceding sentence, section 1563(b) shall be applied as if such last day were subgtituted for December 31." (2) Section 1562 (relating to privilege of groups to elect multiple surtax exemptions) is repealed. (3) The table of sections for part II of subchapter B of chapter 6 is amended by striking out the items relating to sections 1561 and 1562 and inserting in lieu thereof the following: "Sec. 1561. Limitations on certain multiple tax benefits in the case of certain controlled corporations." (b)

TRANSITIONAL

RULES

FOR

CONTROLLED

GROUPS

OF

CORPORA-

TIONS.—

78 Stat. 116.

^ ^ Part II of subchapter B of chapter 6 (relating to certain controlled corporations) is amended by adding at the end thereof the following new section: "SEC. 1564. TRANSITIONAL RULES IN THE CASE OF CERTAIN CONTROLLED CORPORATIONS. " (a)

LIMITATION ON ADDITIONAL B E N E F I T S. —

"(1) IN GENERAL.—With respect to any December 31 after 1969 and before 1975, the amount of— " (A) each additional $25,000 surtax exemption under section 1562 in excess of the first such exemption, " (B) each additional $100,000 amount under section 535(c) (2) and (3) in excess of the first such amount, and " (C) each additional $25,000 limitation on the small business deduction of life insurance companies under sections 804(a)(4) and 809(d) (10) in excess of the first such limitation, otherwise allowed to the component members of a controlled group of corporations for their taxable years which include such December 31 shall be reduced to the amount set forth in the following schedule: k^^iyr-u

••'cM\ v !; i -

?H.«i«'r"Taxable years including— Dec. 31, 1970 Dec. 31, 1971 Dec. 31, 1972 Dec 31, 1973 Dec 31, 1974

>:;•:.• r^W'-'^J':-^-?''--., ^ Surtax exemption 520,833 16,667 12,500 8,333 4,167

Amount under sec. 535(c)(2) and (3)

Small business deduclmn limitation

J83,333 66,667 50,000 33,333 16,667

J?5'Hi ^}'fl 12.500 J-fS

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Page:United States Statutes at Large Volume 83.djvu/629

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601

"(2) ELECTION.—With respect to any December 31 after 1969 and before 1975, the component members of a controlled group of corporations shall elect (at such time and in such manner as the Secretary or his delegate shall by regulations prescribe) which component member of such group shall be allowed for its taxable year which includes such December 31 the surtax exemption, the amount under section 535(c)(2) and (3), or the small business SSA Stat. iso; deduction limitation which is not reduced under paragraph (1), ^^ ^*^** ^^*°' "(b) DIVIDENDS RECEIVED BY CORPORATIONS.— Ul) GENERAL RULE.—If—

" (A) an election of a controlled group of corporations (as defined in paragraph (1), or in so much of paragraph (4) as relates to paragraph (1), of section 1563(a)) under section ^^ ^*^*- ^^o. 1562(a) (relating to privilege of a controlled group of cor- ^"^^' P- ^°°porations to elect to have each of its component members make its returns without regard to section 1561) was made ' ' ''"' '•"' on or before April 22, 1969, and " (B) such election is effective with respect to the taxable year of each component member of such group which includes December 31, 1969, then, with respect to a dividend distributed on or before December 31, 1977, out of earnings and profits of a taxable year which includes a December 31 after 1969 and before 1975, subsections (a)(3) and (b) of section 243 (relating to dividends received by H ^g^- ^^^ corporations) shall be applied to such component members comprising an affiliated group (as defined in section 243(b)(5)) in the manner set forth in paragraph (2). ' j i: " (2) SPECIAL RULES.—

" (A) An election under section 243(b)(2) may be made for a taxable year which includes a December 31 after 1969 and before 1975, notwithstanding that an election under section 1562(a) is in effect for the taxable year. " (B) Section 243(b)(1)(B) (ii) shall not apply with respect to a dividend distributed on or before December 31, 1977, out of earnings and profits of a taxable year which includes a December 31 after 1969 and before 1975 for which an election under section 1562(a) is in effect, and in lieu of the percentage specified in section 243(a)(3) with respect to such dividend, the percentage shall be the percentage set forth in the following schedule: "If the dividend is distributed out of the earnings and profits of the distributing corporation's taxable year which includes— December 31, 1970 December 31, 1971 December 31, 1972 December 31, 1973 December 31, 1974

^ ^

', >

The percentage shall be— 87% percent. 90 percent. 921/3 percent. 95 percent. 971/3 percent.

" (C) For taxable years which include a December 31 after 1969 for which an election under section 1562(a) is in effect, section 243(b)(3)(C)(v) shall not be applied to limit the number of surtax exemptions.

'(c) CERTAIN SHORT TAXABLE YEARS.—If—

"(1) a corporation has a short taxable year beginning after December 31, 1969, and ending before December 31, 1974, which does not include a December 31, and

,,,.,,;>,„=,

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Page:United States Statutes at Large Volume 83.djvu/630

 602

PUBLIC LAW 91-172-DEC. 30, 1969

Ante, p. 600. 78 Stat. 2 5. 68A Stat. 182.

73 Stat. 115.

[83 STAT.

"(2) such corporation is a component member of a controllei group of corporations with respect to such taxable year (deter mined by applying section 1563(b) as if the last day of such taxable year were substituted for December 31), then subsections (a) and (b) shall be applied as if the last day of s^pj^ taxable year were the nearest December 31 to such day." (2)(A) The first sentence of section 1562(b)(1) is amended by striking out "$25,000"' and inserting in lieu thereof "the amount of such corporation's surtax exemption for such taxable year". (B) Section 11(d) is amended by striking out "section 1561" and inserting in lieu thereof "section 1561 or 1564". (C) Section 535(c)(5) is amended by striking out "section 1551" and inserting in lieu thereof "section 1551, and for limitation on such credit in the case of certain controlled corporations see sections 1561 and 1564". (D) Section 804 is amended by adding after subsection (c) the following new subsection: " (d) CROSS REFERENCE.— ^ "For reduction of the $25,000 amount provided in subsection (a)(4) in the case of certain controlled corporations, see sections 1561 and 1564."

(E) The table of sections for part II of subchapter B of chapter 6 is amended by adding at the end thereof the following: "Sec. 1564. Transitional rules in the case of certain corporations."

llfl^^'}^2^ 26 USC

1563.

controlled

(c) BROTIIER-SISTER CONTROLLED GROUPS.—Section 1563(a)(2) is T

T,

-I

p ^^

\ / \ /

amended to read as follows: "(2) BROTIIER-SISTER CONTROLLED GROUP.—Two or more corpo,,^. rations if 5 or fewer persons who are individuals, estates, or trusts own (within the meaning of subsection (d)(2)) stock uossessinj;— " (A) at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of the stock of each corporation, and " (B) more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of ,;,. each corporation, taking into account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each such corporation." (d) EXCLUDED STOCK: RULES.—

68A Stat, 163.

(1) Section 1563(c)(2)(A) is amended by striking out "or" at the end of clause ( i i); by striking out "stock." at the end of clause (iii) and inserting in lieu thereof "stock, or"; and by adding after •• clause (iii) the following new clause: '.: " ( i v) stock in the subsidiary corporation owned (within . ],~.' the meaning of subsection (d)(2)) by an organization (other ^hau the parent corporation) to which section 501 (relating to certain educational and charitable organizations which are _, ^ ^,, exempt from tax) applies and which is controlled directly or .»,i.,.i indirectly by the parent corporation or subsidiary corporai»- tion, by an individual, estate, or trust that is a principal stock~ ' holder (within the meaning of clause (ii)) of the parent corporation, by an officer of the parent corporation, or by any combination thereof."

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]

PUBLIC LAW 91-172-DEC. 30, 1969

603

(2) Section 1563(c)(2)(B) isamended— (A) by striking out "a person who is an individual, estate, or trust (referred to in this paragraph as 'common owner') owns" and inserting in lieu thereof "5 or fewer persons who are individuals, estates, or trusts (referred to in this subparagraph as 'common owners') own"; (B) by striking out "or" at the end of clause (i); (C) by striking out in clause (ii) "such common owner", "the common owner", and "stock." and inserting in lieu thereof "any of such common owners", "any of the common owners", and "stock, or", respectively; and (D) by adding after clause (ii) the following new clause: "(iii) stock in such corporation owned (within the meaning of subsection (d)(2)) by an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such corporation, by an individual, estate, or trust that is a principal stockholder (within the meaning of subparagraph (A) ( i i)) of such corporation, by an officer of such corporation, or by any combination thereof."

78 Stat. 120. ^^ "^^ ^^""

•->. ^SA Stat. lea.

(e) INVESTMENT CREDIT.—

(1) Section 46(a)(5) is amended to read as follows: "(5) CONTROLLED GROUPS.—In the case of a controlled group, the $25,000 amount specified under paragraph (2) shall be reduced for each component member of such group by apportioning $25,000 among the component members of such group in such manner as the Secretary or his delegate shall by regulations prescribe. For purposes of the preceding sentence, the term 'controlled group' has the meaning assigned to such term by section 1563(a)." (2) Section 48(c)(2)(C) is amended to read as follows: " (C) CONTROLLED GROUPS.—In the case of a controlled group, the $50,000 amount specified under subparagraph (A) shall be reduced for each component member of the group by apportioning $50,000 among the component members of such group in accordance with their respective amounts of used section 38 property which may be taken into account." (3) Section 48(c)(3)(C) is amended to read as follows: " (C) CONTROLLED GROUP.—The term 'controlled group' has the meaning assigned to such term by section 1563(a), except that the phrase 'more than 50 p e r c e n t ^ a l l be substituted for the phrase 'at least 80 percent' each place it appears in section 1563(a)(1)." (4) Section 48(d)(2) is amended to read as follows: " (2) if such property is leased by a corporation which is a component member of a controlled group (within the meaning of section 4 6 (a)(5)) to another corporation which is a component member of the same controlled group, the basis of such property to the lessor." (f)

ADDITIONAL FIRST-YEAR

DEPRECIATION.—Section

179(d)

'^^ ^*^*- ^^3.

.

,, .- . ' '

Supra.

is

amended— (1) by amending paragraph (2)(B) to read as follows: " (B) the property is not acquired by one component member of a controlled group from another component member of the same controlled group, and"; and

72 Stat. 1679.

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Page:United States Statutes at Large Volume 83.djvu/632

 PUBLIC LAW 91-172-DEC. 30, 1969

604 72 Stat. 1680.

(2) by amending paragraphs (6) and (7) to read as follo^vs"(6)

Ante, p. 602.

DOLLAR LIMITATION OF CONTROLLED GROUP.—For purposes

of subsection (b) of this section— " (A) all component members of a controlled group shall be treated as one taxpayer, and " (B) the Secretary or his delegate shall apportion the dollar limitation contained in such subsection (^b) among the component members of such controlled group in such manner as he shall by regulations prescribe. " (7) CONTROLLED GROUP DEFINED.—For purposes of paragraphs (2) and (6), the term 'controlled group' has the meaning assigned to it by section 1563(a); except that, for such purposes, the phrase 'more than 50 percent' shall be substituted for the phrase 'at least 80 percent' each place it appears in section 1563(a)(1)." (g)

Ante, p. 600.

[33 ST^T

RETROACTIVE TERMINATION OF SECTION 1562 ELECTIONS.—If an

affiliated group of corporations makes a consolidated return for the taxable year which includes December 31, 1970 (hereinafter in this subsection referred to as "1970 consolidated return year"), then on or before the due date prescribed by law (including any extensions thereof) for filing such consolidated return such affiliated group of corporations may terminate the election under section 1562 of the Internal Revenue Code of 1954 with respect to any prior December 31 which is included in a taxable year of any of such corporations from which there is a net operating loss carryover to the 1970 consolidated return year. A termination of an election under this subsection shall be valid only if it meets the requirements of sections 1562(c)(1) and 1562(e) of such Code (other than making the termination before the expiration of the 3-year period specified in section 1562(e)). (h) EFFECTIVE DATTIS.—

(1) The amendments made by subsection (a) shall apply with respect to taxable years beginning after December 31, 1974. (2) The amendments made by subsection (b) shall apply with respect to taxable years beginning after December 31, 1969. (3) The amendments made by subsections (c), (d), (e), and (f) shall apply with respect to taxable years ending on or after December 31, 1970. Subtitle B—Debt-Financed Corporate Acquisitions and Related Problems

68A Stat. 76; Ante, p. 573. 26 USC 2 6 1.

SEC. 411. INTEREST ON INDEBTEDNESS INCURRED BY CORPORATION TO ACQUIRE STOCK OR ASSETS OF ANOTHER CORPORATION. (a) DISALLOWANCE OF INTEREST DEDUCTION.—Part IX of sub-

chapter B of chapter 1 (relating to items not deductible) is amended by adding at the end thereof the following new section: "SEC. 279. INTEREST ON INDEBTEDNESS INCURRED BY CORPORATION TO ACQUIRE STOCK OR ASSETS OF ANOTHER CORPORATION. " (a) GENERAL RULE.—No deduction shall be allowed for any

.'i''Mi,'.arS S-

interest paid or incurred by a corporation during the taxable year with respect to its corporate acquisition indebtedness to the extent that such interest exceeds— "(1) $5,000,000, reduced by "(2) the amount of interest paid or incurred by such corporation during such year on obligations (A) issued after December 31, 1967, to provide consideration for an acquisition described in paragraph (1) of subsection (b), but (B) which are not corporate acquisition indebtedness.

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PUBLIC LAW 91-172~DEC. 30, 1%9

605

"(b) CORPORATE ACQUISITION INDEBTEDNESS.—For purposes of this section, the term 'corporate acquisition indebtedness' means any obligation evidenced by a bond, debenture, note, or certificate or other evidence of indebtedness issued after October 9, 1969, by a corporation (hereinafter in this section referred to as 'issuing corporation') if— "(1) such obligation is issued to provide consideration for the acquisition of— " (A) stock in another corporation (hereinafter in this section referred to as 'acquired corporation'), or " (B) assets of another corporation (hereinafter in this section referred to as 'acquired corporation') pursuant to a plan under vehich at least two-thirds (in value) of all the assets (excluding money) used in trades and businesses carried on by such corporation are acquired, "(2) such obligation is either— " (A) subordinated to the claims of trade creditors of the issuing corporation generally, or " (B) expressly subordinated in right of payment to the payment of any substantial amount of unsecured indebtedness, whether outstanding or subsequently issued, of the issuing corporation, " (3) the bond or other evidence of indebtedness is either— " (A) convertible directly or indirectly into stock of the issuing corporation, or " (B) part of an investment unit or other arrangement which includes, in addition to such bond or other evidence of indebtedness, an option to acquire, directly or indirectly, stock in the issuing corporation, and " (4) as of a day determined under subsection (c)(1), either— " (A) the ratio of debt to equity (as defined in subsection (c)(2)) of the issuing corporation exceeds 2 to 1, or " (B) the projected earnings (as defined in subsection (c)(3)) do not exceed 3 times the annual interest to be paid or incurred (determined under subsection (c)(4)). " (c) RULES FOR APPLICATION OF SUBSECTION (b)(4).—For purposes

of subsection (b)(4)— " (1) T I M E OF DETERMINATION.—Determinations are to be made as of the last day of any taxable year of the issuing corporation in which it issues any obligation to provide consideration for an acquisition described in subsection (b)(1) of stock in, or assets of, the acquired corporation. "(2) RATIO OF DEBT TO EQUITY.—The term 'ratio of debt to equity' means the ratio which the total indebtedness of the issuing corporation bears to the sum of its money and all its other assets (in an amount equal to their adjusted basis for determining gain) less such total indebtedness. "(3) PROJECTED EARNINGS.—

" (A) The term 'projected earnings' means the 'average annual earnings' (as defined in subparagraph (B)) of— " (i) the issuing corporation only, if clause (ii) does not apply, or "(ii) both the issuing corporation and the acquired corporation, in any case where the issuing corporation has acquired control (as defined in section 368(c)), or has acquired substantially all of the properties, of the acquired corporation.

^^^ ^^^^ ^^^ 26 USC 368. *

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PUBLIC LAW 91-172-DEC. 30, 1969

2^1JS*C*3OV"

" (B) The average annual earnings referred to in subparagraph (A) is, for any corporation, the amount of its earnings and profits for any 3-year period ending with the last day of a taxable year of the issuing corporation described in paragraph (1), computed without reduction for— "(i) interest paid or incurred, "(ii) depreciation or amortization allowed under this ,. chapter, " (iii) liability for tax under this chapter, and '•'• "(^^^ distributions to which section 301(c)(1) ap•*, plies (other than such distributions from the acquired to the issuing corporation), and reduced to an annual average for such 3-year period pursuant to regulations prescribed by the Secretary or his delegate. Such regulations shall include rules for cases where > any corporation was not in existence for all of such 3-year period or such period includes only a portion of a taxable year of any corporation. "(4) A N N U A L INTEREST TO BE PAID OR INCURRED.—The term 'annual interest to be paid or incurred' means— " (A) if subparagraph (B) does not apply, the annual interest to be paid or incurred by the issuing corporation only, determined by reference to its total indebtedness outstanding, or " (B) if projected earnings are determined under clause (ii) of paragraph (3)(A), the annual interest to be paid or incurred by both the issuing corporation and the acquired corporation, determined by reference to their combined total indebtedness outstanding. "(5)

26 USC 581.

.

[33 STAT

SPECIAL RULES FOR BANKS AND LENDING OR FINANCE COM-

PANIES.—With respect to any corporation which is a bank (as defined in section 581) or is primarily engaged in a lending or finance business— " (A) in determining under paragraph (2) the ratio of debt to equity of such corporation (or of the affiliated group of which such corporation is a member), the total indebtedness of such corporation (and the assets of such corporation) shall be reduced by an amount equal to the total indebtedness owed to such corporation which arises out of the banking business of such corporation, or out of the lending or finance business of such corporation, as the case may be; " (B) in determining under paragraph (4) the annual interest to be paid or incurred by such corporation (or by the issuing and acquired corporations referred to in para. graph (4)(B) or by the affiliated group of which such corporation is a member) the amount of such interest (determined without regard to this paragraph) shall be reduced by an amount which bears the same ratio to the amount of such interest as the amount of the reduction for the taxable year •:• under subparagraph (A) bears to the total indebtedness of such corporation; and " (C) in determining under paragraph (3)(B) the average annual earnings, the amount of the earnings and profits for the 3-year period shall be reduced by the sum of the reductions under subparagraph (B) for such period. For purposes of this paragraph, the term 'lending or finance business' means a business of making loans or purchasing or discounting accounts receivable, notes, or installment obligations.

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PUBLIC LAW 91-172-DEC. 30, 1%9

607

"(d) TAXABLE YEARS TO W H I C H APPLICABLE.—In applying this section— "(1) FIRST YEAR OF DISALLOWANCE.—The deduction of interest

on any obligation shall not be disallowed under subsection (a) before the hrst taxable year of the issuing corporation as of the last day of which the application of either subparagraph (A) or subparagraph (B) of subsection (b)(4) results in such obligation being corporate acquisition indebtedness. "(2) GENERAL RULE FOR SUCCEEDING YEARS.—Except as provided in paragraphs (3), (4), and (5), if an obligation is determined to be corporate acquisition indebtedness as of the last day of any taxable year of the issuing corporation, it shall be corporate acquisition indebtedness for such taxable year and all subsequent taxable years. "(3) REDETERMINATION WHERE CONTROL, ETC., IS ACQUIRED.—

If an obligation is determined to be corporate acquisition indebt^,^,. edness as of the close of a taxable year of the issuing corporation " in which clause (i) of subsection (c)(3)(A) applied, but would not be corporate acquisition indebtedness if the determination were made as of the close of the first taxable year of such corporation thereafter in which clause (ii) of subsection (c)(3)(A) could apply, such obligation shall be considered not to be corporate acquisition indebtedness for such later taxable year and all taxable years thereafter. "(4) SPECIAL 3-YEAR RUT:,E.—If an obligation which has been determined to be corporate acquisition indebtedness for any taxable year would not be such indebtedness for each of any 3 consecutive taxable years thereafter if subsection (b)(4) were applied as of the close of each of such 3 years, then such obligation shall not be corporate acquisition indebtedness for all taxable years after such 3 consecutive taxable years. "(5) 5 PERCENT STOCK RULE.—In the case of obligations issued to provide consideration for the acquisition of stock in another corporation, such obligations shall be corporate acquisition indebtedness for a taxable year only if at some time after October 9, 1969, and before the close of such year the issuing corporation owns 5 percent or more of the total combined voting power of all classes of stock entitled to vote of such other corporation. "(e) CERTAIN NONTAXABLE TRANSACTIONS.—An acquisition of stock of a corporation of which the issuing corporation is in control (as defined in section 368(c)) in a transaction in which gain or loss is not 26^?c*368^°' recognized shall be deemed an acquisition described m paragraph (1) of subsection (b) only if immediately before such transaction (1) the acquired corporation was in existence, and (2) the issuing corporation was not in control (as defined in section 368(c)) of such corporation. "(f) EXEMPTION FOR CERTAIN ACQUISITIONS OF FOREIGN CORPORA-

TIONS.—For purposes of this section, the term 'corporate acquisition indebtedness' does not include any indebtedness issued to any person to provide consideration for the acquisition of stock in, or assets of, any foreign corporation substantially all of the income of which, for the ^-year period ending with the date of such acquisition or for such part of such period as the foreign corporation was in existence, is from sources without the United States. ,(g) AFFILIATED GROUPS.—In any case in which the issuing corporation is a member of an affiliated group, the application of this section shall be determined, pursuant to regulations prescribed by the Secretary or his delegate, by treating all of the members of the affiliated group in the aggregate as the issuing: corporation, except that the ratio 01 debt to equity of, projected earnings of, and annual interest to be

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 608

PUBLIC LAW 91-172-DEC. 30, 1969

[83 STAT

paid or incurred by any corporation (other than the issuing; corporation determined without regard to this subsection) shall be included in the determinations required under subparagraphs (A) and (B) of subsection (b)(4) as of any day only if such corporation is a member of the affiliated group on such day, and, in determining projected earnings of such corporation under subsection (c)(3), there shall be taken mto account only the earnings and profits of such corporation for the period during which it was a member of the affiliated group For purposes of the preceding sentence, the term 'affiliated group' has 68A Stat. 369. the meaning assigned to such term by section 1504(a), except that all 26 USC 1504. corporations other than the acquired corporation shall be treated as includible corporations (without any exclusion under section 1504(b)) and the acquired corporation shall not be treated as an includible corporation. " (h) CHANGES I N OBLIGATION.—For purposes of this section— "(1) Any extension, renewal, or refinancing of an obligation evidencing a preexisting indebtedness shall not be deemed to be the issuance of a new obligation. "(2) Any obligation which is corporate acquisition indebtedness of the issuing corporation is also corporate acquisition indebtedness of any corporation which becomes liable for such obligation as guarantor, endorser, or indemnitor or which assumes liability for such obligation in any transaction. " (i) CERTAIN OBLIGATIONS ISSUED AFTER OCTOBER 9, 1969.—For purposes of this section, an obligation shall not be corporate acquisition indebtedness if issued after October 9, 1969, to provide consideration for the acquisition of— "(1) stock or assets pursuant to a binding written contract. which was in effect on October 9, 1969, and at all times thereafter before such acquisition, or " (2) stock in any corporation where the issuing corporation, on October 9, 1969, and at all times thereafter before such acquisition, owned at least 50 percent of the total combined voting power of all classes of stock entitled to vote of the acquired corporation. Paragraph (2) shall cease to apply when (at any time on or after October 9, 1969) the issuing corporation has acquired control (as 26 USC 368. defined in section 368(c)) of the acquired corporation. " (j) EFFECT ON OTHER PROVISIONS.—No inference shall be drawn from any provision in this section that any instrument designated as a bond, debenture, note, or certificate or other evidence of indebtedness by its issuer represents an obligation or indebtedness of such issuer in applying any other provision 01 this title." (b) CLERICAL AMENDMENT.—The table of sections for part IX of subchapter B of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 279. Interest on indebtedness incurred by corporation to acquire stock or assets of another corporation." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to the determination of the allowability of the deduction of interest paid or incurred with respect to indebtedness incurred aft«r October 9,196». •' SEC. 412. INSTALLMENT METHOD. 26 USC 453.

(a)

CERTAIN EVIDENCES OF INDEBTEDNESS DEEMED To

B E PAY-

MENT.—Section 453(b) (relating to sales of realty and casual sales of personalty) is amended by adding at the end thereof the following new paragraph: " (3) PURCHASER EVIDENCES OF INDEBTEDNESS PAYABLE ON DEMAND OR READILY TRADABLE.—In applying this subsection, a bond or other

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PUBLIC LAW 91-1^2-DEC. 30, 1969

609

evidence of indebtedness which is payable on demand, or which is issued by a corporation or a government or political subdivision thereof (A) with interest coupons attached or in registered form (other than one in registered form which the taxpayer establishes will not be readily tradable in an established securities market), or (B) in any other form designed to render such bond or other evidence of indebtedness readily tradable in an established securities market, shall not be treated as an evidence of indebtedness of the purchaser." (b) EFFECTIVE DATE.—The aniendment made by subsection (a) shall apply to sales or other dispositions occurring after May 27, 1969, which are not made pursuant to a binding written contract entered into on or before such date. SEC. 413. BONDS AND OTHER EVIDENCES OF INDEBTEDNESS.

'^ '- ' '•"^*''

(a) BONDS AND OTHER EVIDENCES OF INDEBTEDNESS.—Section 1232

(a) (relating to general rule) is amended to read as follows: "(a) GENERAL RULE. — For purposes of this subtitle, in the case of bonds, debentures, notes, or certificates or other evidences of indebtedness, which are capital assets in the hands of the taxpayer, and which are issued by any corporation, or by any government or political subdivision thereof— "(1) RETIREMENT.—Amounts received by the holder on retirement of such bonds or other evidences of indebtedness shall be considered as amounts received in exchange therefor (except that in the case of bonds or other evidences of indebtedness issued before January 1, 1955, this paragraph shall apply only to those issued with interest coupons or in registered form, or to those in such form on March 1, 1954). "(2) SALE OR EXCHANGE.— " (A) CORPORATE BONDS ISSUED AFTER

M A Y 27, 1969.—

Except as provided in subparagraph (C), on the sale or exchange of bonds or other evidences of indebtedness issued by a corporation after May 27, 1969, held by the taxpayer more than 6 months, any gain realized shall (except as provided in the following sentence) be considered gain from the sale or exchange of a capital asset held for more than 6 months. If at the time of original issue there was an intention to call the bond or other evidence of indebtedness before maturity, any gain realized on the sale or exchange thereof which does not exceed an amount equal to the original issue discount (as defined in subsection (b)) reduced by the portion of original issue discount previouslj^ includible in the gross income of any holder (as provided in paragraph (3)(B)) shall be considered as gain from the sale or exchange of property which is not a capital asset. " (B) CORPORATE BONDS ISSUED ON OR BEFORE MAT 27, 1969, AND GOVERNMENT BONDS.—Except as provided in subparagraph (C), on the sale or exchange of bonds or other evidences of indebtedness issued by a government or political subdivision thereof after December 31, 1954, or by a corporation after December 31, 1954, and on or before May 27, 1969, held by the taxpayer more than 6 months, any gain realized which does not exceed— " (i) an amount equal to the original issue discount (as defined in subsection (b)), or " (ii) if at the time of original issue there was no intention to call the bond or other evidence of indebtedness

^SA Stat. 326, ^^ "^*^ ^^^^'

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PUBLIC LAW 91-172-DEC. 30, 1969

[83 STAT.

before maturity, an amount which bears the same ratio to the original issue discount (as defined in subsection (j^u as the number of complete months that the bond or other evidence of indebtedness was held by the taxpayer bears to the number of complete months from the date of original issue to the date of maturity, shall be considered as gain from the sale or exchange of prop. erty which is not a capital asset. Gain in excess of such amount shall be considered gain from the sale or exchange of a capital asset held more than 6 months. " (C) EXCEPTIONS.—This paragraph shall not apply to— " (i) obligations the interest on which is not includible in gross income under section 103 (relating to certain ^ governmental obligations), or "(ii) any holder who has purchased the bond or other evidence of indebtedness at a premium.

J Post, p. 656.

"(D)

DOUBLE INCLUSION IN INCOME NOT REQUIRED.—This

section shall not require the inclusion of any amount previously includible in gross income. "(3) INCLUSION IN INCOME or ORIGINAL ISSUE DISCOUNT ON CORPORATE BONDS ISSUED AFTER MAY 27, 1 969.— " (A) GENERAL RULE.—There shall be included in the gross

income of the holder of any bond or other evidence of indebtedness issued by a corporation after May 27, 1969, the ratable monthly portion of original issue discount multiplied by the ' number of complete months (plus any fractional part of a month determined in accordance with the last sentence of this subparagraph) such holder held such bond or other evidence of indebtedness during the taxable year. Except as provided in subparagraph (B), the ratable monthly portion of original issue discount shall equal the original issue discount (as ' • defined in subsection (b)) divided by the number of complete months from the date of original issue to the stated maturity '' date of such bond or other evidence of indebtedness. For purposes of this section, a complete month commences with the date of original issue and the corresponding day of each succeeding calendar month (or the last day of a calendar month in which there is no corresponding d a y); and, in any case where a bond or other evidence of indebtedness is acquired on any other day, the ratable monthly portion of original issue dis' count for the complete month in which such acquisition occurs shall be allocated between the transferor and the transferee in accordance with the number of days in such complete month each held the bond or other evidence of indebtedness. "(B)

"-' ' «'•

REDUCTION IN CASE OF ANY SUBSEQUENT HOLDER.—

For purposes of this paragraph, the ratable monthly portion of original issue discount shall not include an amount, determined at the time of any purchase after the original issue of such bond or other evidence of indebtedness, equal to the excess of— " (i) the cost of such bond or other evidence of indebtedness incurred by such holder, over "(ii) the issue price of such bond or other evidence of indebtedness increased by the portion of original discount previously includible in the gross income of any holder (computed without regard to this subparagraph),

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divided by the number of complete months (phis any fractional part of a month commencin«r with the date of purchase) from the date of such purchase to the stated maturity date of such bond or other evidence of indebtedness. " (C) PURCHASE DEFINED.—For purposes of subparagraph (B), the term 'purchase' means any acquisition of a bond or other evidence of indebtedness, but only if the basis of the bond or other evidence of indebtedness is not determined in Avhole or in part by reference to the adjusted basis of such bond or other evidence of indebtedness in the hands of the person from whom acquired, or under section 1014(a) (relat- SSA Stat. 296. ing to property ac(piired from a decedent). ^e use 1014. ' ' (D) EXCEPTIONS.—This paragraph shall not apply to any holder— "(i) who has purchased the bond or other evidence of indebtedness at a premium, or "(ii) which is a life insurance company to which section 818(b) applies. 73 Stat. 133. " (E) BASIS ADJUSTMENTS.—The basis of any bond or other evidence of indebtedness in the hands of the'holder thereof shall be increased by the amount included in his gross income pursuant to subparagraph (A)."' (b) ISSUE PRICE.—Section 1232(b)(2) (relating to issue price) is esA Stat. 326; amended by adding at the end thereof the following: ^^ ^'^'- ^'*^"In the case of a bond or other evidence of indebtedness and an option or other security issued together as an investment unit, the issue price for such investment unit shall be determined in accordance with the rules stated in this paragraph. Such issue price attributable to each element of the investment unit shall be that portion thereof which the fair market value of such element bears to the total fair market value of all the elements in the investment unit. The issue price of the bond or other evidence of indebtedness included in such investment unit shall be the portion so allocated to it. I n the case of a bond or other evidence of indebtedness, or an investment unit as described in this i^aragraj)!! (other than a bond or other evidence of indebtedness or an investment unit issued pursuant to a plan of reorganization within the meaning of section 068(a)(1) or an insolvency reorganization 26 USC 368. within the meaning of section.371, 373, or 374)", which is issued 68A Stat. 121. for property and which— ^ 70 Stat. 402. " (A) is part of an issue a portion of which is traded on an established securities market, or " (B) is issued for stock or securities which are traded on an established securities market, the issue price of such bond or other evidence of indebtedness or investment unit, as the case may be, shall be the fair market value . _, of such property. Except in cases to which the preceding sentence applies, the issue price of a bond or other evidence of indebtedness (whether or not issued as a part of an investment unit) which is issued for property (other than money) shall be the stated redemption price at maturity." (c) REQUIREMENT OF REroRTiNO.—Section 0049(a)(1) (relating to 76 Stat. io56. requirements of reporting interest) is amended to read as follows: "(1) IN GENERAL.—Evcrv pci'sou— " (A) who makes payments of interest (as defined in subsection (b)) aggregating $10 or more to any other person during any calendar year,

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Ante, p. 609.

76 Stat. 1056. 26 USC 6049.

[83 STAT

•'(B) who receives payments of interest as a nominee and who makes payments aggregating $10 or more during anv calendar year to any other person with respect to the interest so received, or " (C) which is a corporation that has outstanding any bond debenture, note, or certificate or other evidence of indebtedness in registered form as to which there is during any calendar year an amount of original issue discount aggregating $10 or more includible in the gross income of any holder under section 1232(a)(3) without regard to subparagraph (B) thereof, shall make a return according to the forms or regulations prescribed by the Secretary or his delegate, setting forth the aggregate amount of such payments and such aggregate amount includible in the gross income of any holder and the name and address of the person to whom paid or such holder." (d) STATEMENTS TO B E FURNISHED TO PERSONS "WITH RESPECT TO AVHOIM INFORMATION Is FuRNisHED.—Section 6049(c) (relating to

statements to be furnished to persons with respect to whom information is furnished) is amended to read as follows: W H O M INFORMATION I S FURNISHED.—Every person making a return
 * '(c) STATEMENTS To B E FURNISHED TO PERSONS W I T H RESPECT TO

under subsection (a)(1) shall furnish to each person whose name is set forth in such return a written statement showing— "(1) the name and address of the person making such return, and "(2) the aggregate amount of payments to, or the aggregate amount includible in the gross income of, the person as shown on such return. The written statement required under the preceding sentence shall be furnished to the person on or before January 31 of the year following the calendar year for which the return under subsection (a)(1) was made. No statement shall be required to be furnished to any person under this subsection if the aggregate amount of payments to, or the aggregate amount includible in the gross income of, such person shown on the return made with respect to subparagraph (A), (B), or (C), as the case may be, of subsection (a)(1) is less than $10." (e) EFFECTIVE DATE.—The amendments made by this section shall apply with respect to bonds and other evidences of indebtedness issued after May 27, 1969 (other than evidences of indebtedness issued pursuant to a written commitment which was binding on May 27, 1969, and at all times thereafter). SEC. 414. LIMITATION ON DEDUCTION OF BOND PREMIUM ON REPURCHASE. (a) LIMITATION ON DEDUCTION OF BOND PREMIUM ON REPUB-

68A Stat. 72.

.<5?;9i -ie>fe'-;

CHASE.—Part VIII of Subchapter B of chapter 1 (relating to special deductions for corporations) is amended by adding at the end thereof the following new section: "SEC. 249. LIMITATION ON DEDUCTION OF BOND PREMIUM ON REPURCHASE. " (a) GENERAL RULE.—No deduction shall be allowed to the issuing corporation for any premium paid or incurred upon the repurchase of a bond, debenture, note, or certificate or other evidence of indebtedness which is convertible into the stock of the issuing corporation, or a corporation in control of, or controlled by, the issuing corporation, to the extent the repurchase price exceeds an amount equal to the adjusted issue price plus a normal call premium on bonds or other evidences of

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PUBLIC LAW 91-172-DEC. 30, 1969

613

indebtedness which are not convertible. The preceding sentence shall not apply to the extent that the corporation can demonstrate to the satisfaction of the Secretary or his delegate that such excess is attributable to the cost of borrowing and is not attributable to the conversion "(b) SPECIAL RULES.—For purposes of subsection (a) — "(1) ADJUSTED ISSUE PRICE.—The adjusted issue price is the issue price (as defined in section 1232(b)) increased by any amount of discount deducted before repurchase, or, in the case of bonds or other evidences of indebtedness issued after February 28, 1913, decreased by any amount of premium included in gross income before repurchase by the issuing corporation. " (2) CONTROL.—The term 'control' has the meaning assigned to such term by section 368(c)." (b) CLERICAL AMENDMENT.—The table of sections for part VIII of subchapter B of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 249. Limitation on deduction of bond premium on repurchase." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to a convertible bond or other convertible evidence of indebtedness repurchased after April 22, 1969, other than such a bond or other evidence of indebtedness repurchased pursuant to a binding obligation incurred on or before April 22, 1969, to repurchase such bond or other evidence of indebtedness at a specified call premium, but no inference shall be drawn from the fact that section 249 of the Internal Revenue Code of 1954 (as added by subsection (a) of this section) does not apply to the repurchase of such convertible bond or other convertible evidence of indebtedness. SEC. 4 5 TREATMENT OF CERTAIN CORPORATE INTERESTS AS STOCK 1. OR INDEBTEDNESS. (a) IN GENERAL.—Subchapter C of Chapter 1 (relating to corporate distributions and adjustments) is amended by redesignating part VI (relating to effective date of subchapter C) as part VII and by inserting after part V the following new part:

Arite.p.en.

68A Stat. 120. 26 USC 368. -

Ante. p. 612.

oe^us^^^'g^^^'

"Part VI—Treatment of Certain Corporate Interests as Stock or Indebtedness "See. 385. Treatment of certain interests in corporations as stock or indebtedness. "SEC. 3 5 TREATMENT OF CERTAIN INTERESTS IN CORPORATIONS AS 8. STOCK OR INDEBTEDNESS. "(a)

AUTHORITY To PRESCRIBE REGULATIONS.—The Secretary or his

delegate is authorized to prescribe such regulations as may be necessary or appropriate to determine whether an interest in a corporation is to be treated for purposes of this title as stock or indebtedness. "(b) FACTORS.—The regulations prescribed under this section shall set forth factors which are to be taken into account in determining with respect to a particular factual situation whether a debtor-creditor relationship exists or a corporation-shareholder relationship exists. The factors so set forth in the regulations may include among other ractors: "(1) whether there is a written unconditional promise to pay on demand or on a specified date a sum certain in money in return for an adequate consideration in money or money's worth, and to pay a fixed rate of interest,

31-100 O - 70 - 41

.>

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[83 STAT

"(2) whether there is subordination to or preference over a indebtedness of the corporation, ^^ " (3) the ratio of debt to equity of the corporation, " (4) whether there is convertibility into the stock of the corno ration, and ^" "(5) the relationship between holdings of stock in the cortDo ration and holdings of the interest in question." ^" (b) CLERICAL AMENDMENT.—The table of parts for subchapter C of chapter 1 is amended by striking out the last line and inserting in li^y thereof the following: "Part VI. -

^

Treatment of certain corporate interests as stock or indebtedness. "Part VII. Effective date of subchapter C."

• 26^s*c*305°"

Subtitle C—Stock Dividends

SEC. 421. STOCK DIVIDENDS. (^) -^^ GENERAL.—Section 305 (relating to distributions of stock and stock rights) is amended to read as follows: "SEC. 305. DISTRIBUTIONS OF STOCK AND STOCK RIGHTS. " (a) GENERAL RULE.—Except as otherwise provided in this section gross income does not include the amount of any distribution of the stock of a corporation made by such corporation to its shareholders with respect to its stock. ''(b) EXCEPTIONS.—Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies— "(1) DISTRIBUTIONS I N LIEU OF MONEY.—If the distribution is, at the election of any of the shareholders (whether exercised before or aft^r the declaration thereof), payable either— " (A) in its stock, or " (B) in property. ''(2) DISPROPORTIONATE DISTRIBUTIONS.—If the distribution (or

a series of distributions of which such distribution is one) has the result of— " (A) the receipt of property by some shareholders, and " (B) an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation. " (3) DISTRIBUTIONS or COMMON AND PREFERRED STOCK.—If the

distribution (or a series of distributions of which such distribution is one) has the result of— " (A) the receipt of preferred stock by some common shareholders, and " (B) the receipt of common stock by other common shareholders. "(4) DISTRIBUTIONS ON PREFERRED STOCK.—If the distribution is with respect to preferred stock, other than an increase in the conversion ratio of convertible preferred stock made solely to take account of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible. "(5) DISTRIBUTIONS OF CONVERTIBLE PREFERRED STOCK.—If tn^

distribution is of convertible preferred stock, unless it is established to the satisfaction of the Secretary or his delegate that such distribution will not have the result described in paragraph (2) • " (c) CERTAIN

26 USC 301.

TRANSACTIONS

TREATED

AS DISTRIBUTIONS.—For

purposes of this section and section 301, the Secretary or his delegate shall prescribe regulations under which a change in conversion ratio,

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PUBLIC LAW 91-172-DEC. 30, 1969

„ change in redemption price, a difference between redemption price a and issue price, a redemption which is treated as a distribution to which section 301 applies, or any transaction (including a recapitalization) having a similar effect on the interest of any shareholder shall be treated as a distribution with respect to any shareholder whose proportionate interest in the earnings and profits or assets of the corporal-ion is increased by such change, difference, redemption, or similar transaction. "(d)

DEFINITIONS.— "(1) EIGHTS TO ACQUIRE STOCK.—For

purposes of this section, the term 'stock' includes rights to acquire such stock. "(2) SHAREHOLDERS.—For purposes of subsections (b) and (c), the term 'shareholder' includes a holder of rights or of convertible securities. -••:•>.. • nr-.r^f^;::;:.^::.:- ;-: • v^; "(e)

CROSS REFERENCES.—

"For special rules— "(1) Relating to the receipt of stock and stock rights in corporate organizations and reorganizations, see part III (sec. 351 and following). "(2) In the case of a distribution which results in a gift, see section 2501 and following. "(3) In the case of a distribution which has the effect of the payment of compensation, see section 61(a)(1)," (b) EFFECTIVE DATES.—

(1) Except as otherwise provided in this subsection, the amendment made by subsection (a) shall apply with respect to distributions (or deemed distributions) made after January 10, 1969, in taxable years ending after such date. (2)(A) Section 305(b)(2) of the Internal Revenue Code of 1954 (as added by subsection (a)) shall not apply to a distribution (or deemed distribution) of stock made before January 1, 1991, with respect to stock (i) outstanding on January 10, 1969, (ii) issued pursuant to a contract binding on January 10, 1969, on the distributing corporation, (iii) which is additional stock of that class of stock which (as of January 10, 1969) had the largest fair market value of all classes of stock of the corporation (taking into account only stock outstanding on January 10, 1969, or issued pursuant to a contract binding on January 10, 1969), (iy) described in subparagraph (C) (iii), or (v) issued in a prior distribution described in clause (i), ( i i), (iii), or (iv). (B) Subparagraph (A) shall apply only if— (i) the stock as to which there is a receipt of property was outstanding on January 10, 1969 (or was issued pursuant to a contract binding on January 10, 1969, on the distributing corporation), and (ii) if such stock and any stock described in subparagraph (A)(i) were also outstanding on January 10, 1968, a distribution of property was made on or before January 10, 1969, with respect to such stock, and a distribution of stock was made on or before January 10, 1969, with resx)ect to such stock described in subparagraph (A)(i). (C) Subparagraph (A) shall cease to apply when at any time after October 9, 1969, the distributing corporation issues any of its stock (other than in a distribution of stock with respect to stock of the same class) which is not— (i) nonconvertible preferred stock, (ii) additional stock of that class of stock which meets the requirements of subparagraph (A) (iii),or

615

68A Stat. 84. 26 USC 301.

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[33 ST^

(iii) preferred stock which is convertible into stock whpli meets the requirements of subparagraph (A) (iii) at a fix d conversion ratio which takes account of all stock dividend and stock splits with respect to the stock into which such con vertible stock is convertible. (D) For purposes of this paragraph, the term "stock" include, rights to acquire such stock. (3) In cases to which Treasury Decision 6990 (promulgated January 10, 1969) would not have applied, in applying paragraphs iivv (1) and (2) April 22, 1969, shall be substituted for Januarv 10 1969. ^ ' (4) Section 305(b)(4) of the Internal Revenue Code of 1954 (as added by subsection (a)) shall not apply to any distribution (or deemed distribution) with respect to preferred stock (including any increase in the conversion ratio of convertible stock) made before January 1, 1991, pursuant to the terms relating to the
 * issuance of such stock which were in effect on January 10, 1969.

'• (5) With respect to distributions made or considered as made after January 10, 1969, in taxable years ending after such date to the extent that the amendment made by subsection (a) does not apply by reason of paragraph (2), (3), or (4) of this subsection, section 305 of the Internal Revenue Code of 1954 (as in effect before the amendment made by subsection (a)) shall continue to apply. Subtitle D—Financial Institutions

^"'«' P- ^1^-

SEC. 431. RESERVE FOR LOSSES ON LOANS; NET OPERATING LOSS CARRYBACKS. (a)

26'\js(^'58^i-^' 584.

26 USC 581. Posf. pp. 620,

subchapter H of chapter 1 (relating to rules of general application to banking institutions) is amended by adding at the end thereof the following new sections: "SEC. 585. RESERVES FOR LOSSES ON LOANS OF BANKS. " (a) INSTITUTIONS TO W H I C H SECTION APPLIES.—This section shall apply to the following financial institutions: «(]^) any bank (as defined in section 581) other than an organization to which section 593 applies, and "(2) any corporation to which paragraph (1) would apply except for the fact that it is a foreign corporation, and in the case of any such foreign corporation this section shall apply only with respect to loans outstanding the interest on which is effectively connected with the conduct of a banking business within the United States. " (b)

68A Stat. 50.

?i.

BAD DEBT DEDUCTIONS OF FINANCIAL INSTITUTIONS.—Part I of

ADDITION TO RESERVES FOR BAD DEBTS.— «^1) GENERAL RULE.—For purposes of section

166(c), the reasonable addition to the reserve for bad debts of any financial institution to which this section applies shall be an amount determined by the taxpayer which shall not exceed the greater of— " (A) for taxable years beginning before 1988 the addition to the reserve for losses on loans determined under the per• • centage method as provided in paragraph (2), or " (B) the addition to the reserve for losses on loans deter'* •' -' mined under the experience method as provided in paragraph (3). "(2) PERCENTAGE METHOD.—The amount determined under this fi paragraph for a taxable year shall be the amount necessary to increase the balance of the reserve for losses on loans (at the close

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of the taxable year) to the allowable percentage of eligible loans outstanding at such time, except that— " (A) If the reserve for losses on loans at the close of the base year is less than the allowable percentage of eligible loans outstanding at such time, the amount determined under this paragraph with respect to the difference shall not exceed one-fifth of such difference. " (B) If the reserve for losses on loans at the close of the base year is not less than the allowable percentage of eligible loans outstanding at such time, the amount determined under this paragraph shall be the amount necessary to increase the balance of the reserve at the close of the taxable year to (i) the allowable percentage of eligible loans outstanding at such time, or (ii) the balance of the reserve at the close of the base year, whichever is greater, but if the amount of eligible loans outstanding at the close of the taxable year is less than the amount of such loans outstanding at the close of the base year, the amount determined under clause (ii) shall be the amount necessary to increase the balance of the reserve at the close of the taxable year to the amount which bears the same ratio to eligible loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of eligible loans outstanding at the close of the base year. For purposes of this paragraph, the term 'allowable percentage' means 1.8 percent for taxable years beginning before 1976; 1.2 percent for taxable years beginning after 1975 but before 1982; and 0.6 percent for taxable years beginning after 1981. The amount determined under this paragraph shall not exceed 0.6 percent of eligible loans outstanding at the close of the taxable year or an amount sufficient to increase the reserve for losses on loans to 0.6 percent of eligible loans outstanding at the close of the taxable year, whichever is greater. For purposes of this paragraph, the term 'base year' means: for taxable years beginning before 1976, the last taxable year beginning on or before July 11, 1969, for taxable years beginning after 1975 but before 1982, the last taxable year beginning before 1976, and for taxable years beginning after 1981, the last taxable year beginning before 1982; except that for purposes of subparagraph (A) such term means the last taxable year before the most recent adoption of the percentage method, if later. "(3) EXPERIENCE METHOD.—The amount determined under this paragraph for a taxable year shall be the amount necessary to increase the balance of the reserve for losses on loans (at the close of the taxable year) to the greater of— "(A) the amount which bears the same ratio to loans outstanding at the close of the taxable year as (i) the total bad debts sustained during the taxable year and the 5 preceding taxable years (or, with the approval of the Secretary or his delegate,"a shorter period), adjusted for recoveries of bad debts durnig such period, bears to (ii) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or x i" (B) the lower of— ' ^ "(i) the balance of the reserve at the close of the base year, or "(ii) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable

617

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L83 STAT.

year as the balance of the reserve at the close of the ba year bears to the amount of loans outstanding at the Q\ of the base year. ^^^ For purposes of this paragraph, the base year shall be the last taxabl year before the most recent adoption of the experience method, excent that for taxable years beginning after 1987 the base year shali be th last taxable year beginning before 1988. ^ "(4)

68A^|t^aUg202.

26 USC 165.

15 USC e^i' note.

retary or his delegate shall define the terms 'loan' and 'eligible loan' and prescribe such regulations as may be necessary to carry out the purposes of this section; except that the term 'eligible loan' shall not include— , • " (A) a loau to a bank (as defined iu section 581), ' " (B) a loan to a domestic branch of a foreign corporation to which subsection (a)(2) applies, " (C) a loan secured by a deposit (i) in the lending bank or (ii) in an institution described in subparagraph (A) or (B) if the lending bank has control over withdrawal of such deposit " (D) a loan to or guaranteed by the United States, a possession or instrumentality thereof, or a State or a political subdivision thereof, " (E) a loan evidenced by a security as defined in section 165 (g)(2)(C), " (F) a loan of Federal funds, and " (G) commercial paper, including short-term promissory notes which may be purchased on the open market. "SEC. 586. RESERVES FOR LOSSES ON LOANS OF SMALL BUSINESS INVESTMENT COMPANIES, ETC. " (a) INSTITUTIONS TO W H I C H SECTION APPLIES.—This section shall apply to the following financial institutions: "(1) any small business investment company operating under "(2) any business development corporation. For purposes of this section, the term 'business development corporation' means a corporation which was created by or pursuant to an act of a State legislature for purposes of promoting, maintaining, and assisting the economy and industry within such State on a regional or statewide basis by making loans to be used in trades and businesses which would generally not be made by banks (as defined in section 581) within such region or State in the ordinary course of their business (except on the basis of a partial participation), and which is operated primarily for such purposes. " (b)
 * ^® Small Business Investment Act of 1958, and

68A Stat. 50.

REGULATIONS; DEFINITION OF ELIGIBLE LOAN, ETC.—The Seo

ADDITION TO RESERVES FOR BAD DEBTS.— «(]^) GENERAL RULE.—For purposes of section

166(c), except as provided in paragraph (2) the reasonable addition to the reserve for bad debts of any financial institution to which this section applies shall be an amount determined by the taxpayer which shall not exceed the amount necessary to increase the balance • of the reserve for bad debts (at the close of the taxable year) to h the greater of— " (A) the amount which bears the same ratio to loans outstanding at the close of the taxable year as (i) the total bad Wjir' • debts sustained during the taxable year and the 5 preceding taxable years (or, with the approval of the Secretary or 1 ^ ^^ delegate, a shorter period), adjusted for recoveries of bad debts during such period, bears to (ii) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or

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" (B) the lower of— " (i) the balance of the reserve at the close of the base year, or " (ii) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year. For purposes of this.subparagraph, the term 'base year' means the last taxable year beginning on or before July 11, 1969. " (2) N E W FINANCIAL INSTITUTIONS.—In the case of any taxable year beginning not more than 10 years after the day before the first day on which a financial institution (or any predecessor) was authorized to do business as a financial institution described in subsection (a), the reasonable addition to the reserve for bad debts of such financial institution shall not exceed the larger of the amount determined under paragraph (1) or the amount necessary to increase the balance of the reserve for bad debts at the close of the taxable year to the amount which bears the same ratio (as determined by the Secretary or his delegate) to loans outstanding at the close of the taxable year as (i) the total bad debts sustained by all institutions described in the applicable paragraph of subsection (a) during the 6 preceding taxable years (adjusted for recoveries of bad debts during such period), bears to (ii) the sum of the loans by all such institutions outstanding at the close of such taxable years." (b) 10-YEAR N E T OPERATING Loss CARRYBACK.—Section 172(b)(1) j^l^J^f^g^^' (relating to net operating loss deduction) is amended by striking out gi stat! 732! in subparagraph (A)(i) thereof "and (E) " and inserting in lieu 26 USC 172. thereof " (E), (F), and (G) ", and by adding at the end thereof the following new subparagraphs: " (F) I n the case of a financial institution to which section '''" 585, 586, or 593 applies, a net operating loss for any taxable J^'^^^- p^^ie^ year beginning after December 31, 19T5, shall be a net oper- 622°^' ating loss carryback to each of the 10 taxable years preceding the taxable year of such loss and shall be a net operating loss carryover to each of the 5 taxable years following the taxable year of such loss. " (G) I n the case of a Bank for Cooperatives (organized and chartered pursuant to section 2 of the F a r m Credit Act of 1933 (12 U.S.C. 1134)), a net operating loss for any tax70 Stat. 664. able year beginning after December 31, 1969, shall be a net operating loss carryback to each of the 10 taxable years preceding the taxable year of such loss and shall be a net operating loss carryover to each of the 5 taxable years following the taxable year of such loss." (c) TECHNICAL AND CLERICAL AMENDMENTS.—

(1) Subsection (h) of section 166 (relating to bad debts) is amended by adding at the end thereof the following new paragraph: "(4) For special rule for bad debt reserves of banks, small business investment companies, etc., see sections 585 and 586."

26 USC 166.

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PUBLIC LAW 91-172-DEC. 30, 1969

68A Stat. 202.

76 Stat. 978. 26 USC 593.

[83 ST^T

(2) The table of sections for part I of subchapter H of chant 1 is amended— ^ (A) by striking out: "Sec. 582. Bad debt and loss deduction with respect to seenrif held by banks." ^^ ^^ and inserting in lieu thereof: "Sec. 582. Bad debts, losses, and gains with respect to securitip / held by financial institutions." ^ (B) by adding at the end thereof the following: ".*'• ' "Sec. 585. Reserves for losses on loans of banks. . • "Sec. 586. Reserves for losses on loans of small business investment companies, etc." (d) EFFECTIVE DATE.—The amendments made by subsections (a) and (c) shall apply to taxable years beginning after July 11, 1969. SEC. 432. MUTUAL SAVINGS BANKS, ETC. (a) EESERVE FOR LOSSES ox LOANS.—Section 593(b) (relating to addition to reserves for bad debts) is amended— (1) by striking out subparagraph (A) of paragraph (1) and inserting in lieu thereof the following: " (A) the amount determined to be a reasonable addition to the reserve for losses on nonqualifying loans, computed in the same manner as is provided with respect to additions to the reserves for losses on loans of banks under section 585(b)(3), plus". (2) by striking out paragraphs (2), (3), (4), and (5) and inserting in lieu thereof the following: " (2)

PERCENTAGE OF TAXABLE INCOME METHOD.—

" (A) IN GENERAL.—Subject to subparagraphs (B), (C), and (D), the amount determined under this paragraph for the taxable year shall be an amount equal to the applicable percentage of the taxable income for such year (determined under the following table): The applicable percentage under "For a taxable year beginning in— this paragraph shall be— 1969 60 percent 1970 57 percent 1971 54 percent 1972 51 percent 1973 49 percent 1974 47 percent 1975 45 percent 1976 43 percent 1977 42 percent 1978 41 percent 1979 or thereafter 40 percent "(B)

Post,

p. 622.

REDUCTION OF APPLICABLE PERCENTAGE IN CERTAIN

CASES.—If, for the taxable year, the percentage of the assets of a taxpayer described in subsection (a), which are assets described in section 7701(a) ( 1 9)(C), i s less than— " (i) 82 percent of the total assets in the case of a tax;;:-i, payer other than a mutual savings bank, the applicable percentage for such year provided by subparagraph (A) a^sif:.,^ |s> - shall be reduced by % of 1 percentage point for each 1 percentage point of such difference, or "(ii) 72 percent of the total assets in the case of a mutual savings bank, the applicable percentage for such
 * •,H;

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