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" (5) ANNUITIES.—This section shall not apply to any amount the liability for which depends in whole or in part on the life expectancy of one or more individuals and which constitutes an amount received as an annuity to which section 72 ygStat.* 8*21^*^1005. applies." ^ 26 USC 72'. (b) CLERICAL AMENDMENT.—The table of sections for such part is amended by adding at the end thereof the following new item: "Sec. 483. Interest on certain deferred payments." (c) CERTAIN CARRYING CHARGES.—Section 163(b)(1) (relating to ^^ "^^ ^^3. installment purchases where interest charge is not separately stated) is amended— (1) by striking out "personal property is purchased" and inserting in lieu thereof "personal property or educational services are purchased"; and (2) by adding at the end thereof the following new sentence: " For purposes of this paragraph, the term 'educational services' means any service (including lodging) which is purchased from an educational institution (as defined in section 151(e)(4)) 26 USC 151. and which is provided for a student of such institution." (d) EFFECTIVE DATE.—The amendments made by subsections (a) and (b) shall apply to payments made after December 31, 1963, on account of sales or exchanges of property occurring after June -30, 1963, other than any sale or exchange made pursuant to a binding written contract (including an irrevocable written option) entered into before July 1, 1963. The amendments made by subsection (c) shall apply to payments made during taxable years beginning after December 31, 1963. SEC. 225. PERSONAL HOLDING COMPANIES. (a) PERSONAL HOLDING COMPANY TAX RATE.—Section 541 (relating

^^ " ^ ^ ^'*^-

to imposition of personal holding company tax) is amended by striking out "tax equal to" and all that follows and inserting in lieu thereof: "tax equal to 70 percent of the undistributed personal holding company income." (b) DEFiNinoN OF PERSONAL HOLDING COMPANY.—Paragraph (1)

of section 542(a) (relating to the gross income requirement for personal holding company purposes) is amended to read as follows: " (1) ADJUSTED ORDINARY GROSS INCOME REQUIREMENT.—At least 60 percent of its adjusted ordinary gross income (as defined in section 543(b)(2)) for the taxable year is personal holding company income (as defined in section 543(a)), and".

^^ ^^^ ^'*^'

^gusc'sVa

(c) EXCLUDED CORPORATIONS.— (1) DOMESTIC BUILDING AND LOAN ASSOCIATIONS.—Paragraph

(2) of section 542(c) (relating to corporations excepted from the definition of personal holding company) is amended to read as follows: "(2) a bank as defined in section 581, or a domestic building and loan association within the meaning of section 7701(a)'(19) without regard to subparagraphs (D) and (E) thereof;". (2) LENDING AND FINANCE COMPANIES.—Section 542(c) is amended by striking out paragraphs (6), (7), (8), and (9), by renumbering paragraphs (10) and (11) as paragraphs (7) and (8), and by inserting after paragraph (5) the following new paragraph: " (6) a lending or finance company if— " (A) 60 percent or more of its ordinary ^ross income (as defined in section 543(b)(1)) is derived directly from the active and regular conduct of a lending or finance business; " (B) the personal holding company income for the tax-

^^ ^^^ ^^^' ^^ f}^^ ^?^-

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[78

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able year (computed without regard to income desciibed in subsection (d)(3) and income derived directly from the active and regular conduct of a lending or firiHiice business, and computed by including as personal holding company income the entire amount of the gross income from rents, royalties, produced film rents, and compensation for use of corporate property by shareholders) is not more than 20 percent of the ordinary gross income; " (C) the sum of the deductions which are directly allocable to the active and regular conduct of its lending or finance business equals or exceeds the sum of— " (i) 15 percent of so much of the ordinary gross income derived therefrom as does not exceed $500,000. plus "(ii) 5 percent of so nuich of the ordinary gross income derived therefrom as exceeds $500,000 but not $1,000,000; and " (D) the loans to a person who is a shareholder in such company during the taxable year by or for whom 10 percent or more in value of its outstanding stock is owned directiv or indirectly (including, in the case of an individual, stock owned by members of his family as defined in section 544 (a)(2)), outstanding at any time during such year do not exceed $5,000 in principal amount;". 1^3^ SPKCIAL RiTj.KS i<^)K SECTION r)42(C)(r, t.—Section 542 is amended by adding at the end thereof the following new subsection:

68A Stat. 1! 26 USC 544

26 USC 542.

•*('d) S P E C I A L R L L E S FOR A P P L Y I N G SUHSECTION (c) ((>).— " (1) L E N D I N G OR F I N A N C E BUSINESS D E F I N E D. —

,

26 USC 1504.

" (A) IN GENERAL.—Except as provided in subparagraph (B), for purposes of subsection (c)(6), the term 'lending 01' finance business' means a business of— "(i) making loans, "(ii) purchasing or discounting accounts receivable, notes, or installment obligations, "(iii) rendering services or making facilities available in connection with activities described in clauses (i) and (ii) carried on by the corporation rendering services or making facilities available, or "(iv) rendering services or making facilities available to another corporation which is engaged in the lending or finance business (within the meaning of this paragraph), if such services or facilities are related to the lending or finance business (within such meaning) of such other corporation and such other corporation and the corporation rendering services or making facilities available are members of the same affiliated group (as defined in section 1504). " (B) PJX(EPTIONS.—For purposes of subparagraph (A), ihe term 'lending or finance business' does not include the business of— " (i) making loans, or purchasing or discounting accounts receivable, notes, or installment obligations, if (at the time of the loan, purchase, or discount) the I'emaining maturity exceeds 60 monlks, unless the loans, notes, or installment obligations are evidenced or secured by contracts of conditional sale, chattel mortgages, or chattel lease agreements arising out of the sale of goods or services in the course of the bonower's or transferor's trade or business, or

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"(ii) making loans evidenced by, or purchasing, certificates of indebtedness issued w a series, under a trust indenture, and in registered form or with interest coupons attached. For purposes of clause (i), the remaining maturity shall be treated as including any period for which there may be a renewal or extension under the terms of an option exercisable by the borrower. "(2) BUSINESS DEDUCTIONS.—For purposes of subsection (c) (6)(C), the deductions which may be taken into account shall include only— " (A) deductions which are allowable only by reason of section 162 or section 404, except there shall not be included any such deduction in respect of compensation for personal services rendered by shareholders (including members of the shareholder's family as described in section 544(a)(2)), and " (B) deductions allowable under section 167, and deductions allowable under section 164 for real property taxes, but in either case only to the extent that the property with respect to which such deductions are allowable is used directly in the active and regular conduct of the lending or finance business. "(3)

INCOME

RECEIVED FROM

CERTAIN

AFFILIATED

26 USC 544. 26 USC 167. ^g USCIM*

CORPORA-

TIONS.—For purposes of subsection (c)(6)(B), in the case of a lending or finance company which meets the requirements of subsection (c)(6)(A), there shall not be treated as personal holding company income the lawful income received from a corporation which meets the requirements of subsection (c)(6) and which is a member of the same affiliated group (as defined in section 1504) of which such company is a member." (d)

68A Stat. 45. 26 USC 162, 404.

PERSONAL HOLDING COMPANY INCOME.—Subsections (a)

26 USC 1504.

and

(b) of section 543 (relating to personal holding company income) are ^^ ^^^ ^'*^' amended to read as follows: " (a) GENERAL RULE.—For purposes of this subtitle, the term 'personal holding company income' means the portion of the adjusted ordinary gross income which consists of: "(1) DIVIDENDS, ETC.—Dividends, interest, royalties (other than mineral, oil, or gas royalties or copyright royalties), and annuities. This paragraph shall not apply to— " (A) interest constituting rent (as defined in subsection (b)(3)),, " (B) interest on amounts set aside in a reserve fund under section 511 or 607 of the Merchant Marine Act, 1936, and 49^stftr2oo5?' " (C) a dividend distribution of divested stock (as defined 46 USC uei, in subsection (e) of section 1111), but only if the stock with ^^yQ^Q^^^ 4 respect to which the distribution is made was owned by the 26 USC 1111. distributee on September 6, 1961, or was owned by the distributee for at least 2 years before the date on which the antitrust order (as defined in subsection (d) of section 1111) was entered. "(2) RENTS.—The adjusted income from rents; except that such adjusted income shall not be included if— " (A) such adjusted income constitutes 50 percent or more of the adjusted ordinary gross income, and " (B) the sum of— " (i) the dividends paid during the taxable year (determined under section 562), ^^ "^^ ^^2. "(ii) the dividends considered as paid on the last dajof the taxable year under section 563(c) (as limited by ^^ ^^^ ^^^' the second sentence of section 563(b)), and

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PUBLIC LAW 88-272-FEB. 26, 1964

26 USC r*565°°'

26 USC 162.

[78 STAT.

"(iii) the consent dividends for the taxable year (determined under section 565), equals or exceeds the amount, if any, by which the personal holding company income for the taxable year (computed without regard to this paragraph and paragraph (6), and computed by including as personal holding company income copyright royalties and the adjusted income from mineral, oil, and gas royalties) exceeds 10 percent of the ordinary gross income. "(3) MINERAL, OIL, AND GAS ROYALTIES.—The adjusted income from mineral, oil, and gas royalties; except that such adjusted income shall not be included if— " (A) such adjusted income constitutes 50 percent or more of the adjusted ordinary gross income, " (B) the personal holding compan;^ income for the taxable year (computed without regard to this paragraph, and computed by including as personal holding company income copyright royalties and the adjusted income from rents) is not more than 10 percent of the ordinary gross income, and " (C) the sum of the deductions which are allowable under section 162 (relating to trade or business expenses) other than— " (i) deductions for compensation for personal services rendered by the shareholders, and " (ii) deductions which are specifically allowable under sections other than section 162, equals or exceeds 15 percent of the adjusted ordinary gross income. "(4) COPYRIGHT ROYALTIES.—Copyright royalties; except that copyright royalties shall not be included if— " (A) such royalties (exclusive of royalties received for the use of, or right to use, copyrights or interests in copyrights on works created in whole, or in part, by any shareholder) constitute 50 percent or more of the ordinary gross income, " (B) the personal holding company income for the taxable year computed— " (i) without regard to copyright royalties, other than royalties received for the use of, or right to use, copyrights or interests in copyrights in works created in whole, or in part, by any shareholder owning more than 10 percent of the total outstanding capital stock of the corporation, "(ii) without regard to dividends from any corporation in which the taxpayer owns at least 50 percent of all classes of stock entitled to vote and at least 50 percent of the total value of all classes of stock and which corporation meets the requirements of this subparagraph and subparagraphs (A) and (C), and "(iii) by including as personal holding company income the adjusted income from rents and the adjusted income from mineral, oil, and gas royalties, is not more than 10 percent of the ordinary gross income, and " (C) the sum of the deductions which are properly allocable to such royalties and which are allowable under section 162, other than— " (i) deductions for compensation for personal services rendered by the shareholders, "(ii) deductions for royalties paid or accrued, and "(iii) deductions which are specifically allowable under sections other than section 162,

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equals or exceeds 25 percent of the aiiiount by which the ordinary gross income exceeds the sum of the royakies paid or accrued and the amounts allowable as deductions under section 167 (relating to depreciation) with respect to copy- 76^|fa?io34.^' right royalties. .. ^^ "^^ ^^^• For purposes of this subsection, the term 'copyright royaUies' means compensation, however designated, for the use of, or the right to use, copyrights in works protected by copyriglit issued under title 17 of the United States Code (other than by reason of section 2 or 6 thereof) and to which copyright protection is also extended by the laws of any country other than the United States of America by virtue of any international treaty, convention, or agreement, or interests in any such copyrighted works, and includes payments from any person for performing rights in any such copyrighted work and payments (other than produced film rents as defined in paragraph (5)(B)) received for the use of, or right to use, films. For purposes of this paragraph, the term 'shareholder' shall include any person Avho owns 26 USC 544. stock within the meaning of section 5-14. " (5) PRODUCED FILM RENTS.—

" (A) Produced film rents; except that such rents shall not be included if such rents constitute 50 percent or more of the ordinary gross income. " (B) For purposes of this section, the term 'produced film rents- means payments received with respect to an interest in a film for the use of, or right to use, such film, but only to the extent that such interest was acquired before substantial completion of production of sudi film. " (6) U S E OF CORPORATION PROPERT'^* RV SHAREHOLDER.—Amounts

received as compensation (however designated and from whomsoever received) for the use of, or right to use, property of the corporation in any case where, at any time during the taxable year, 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for an individual entitled to the use of the property; whether such right is obtained directly from the corporation or by means of a sublease or other arrangement. This paragraph shall apply only to a corporation which has personal holding company income for the taxable year (computed without regard to this paragraph and paragraph (2), and computed by incTudina: as personal holding company income copyright royalties and the adjusted income from mineral, oil, and gas royalties) in excess of 10 percent of its ordinary gross income. " (7) PERSONAL SERVICE CONTRACTS.—

" (A) Amounts received under a contract under which the corporation is to furnish personal services; if some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the individual who is to perform the services is designated (by name or by description) in the contract; and " (B) amomits received from the sale or other disposition of such a contract. This paragraph shall apply with respect to amounts received for services under a particular contract only if at some time during the taxable year 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be

83

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26^us?*6/i-6*83.

26 "s^ 1231.

PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

(lesigiiated (by name or by description) as the one to i^erform, such services. "(8) ESTATES AXD TRUSTS.—Amounts inchidible in computing the taxable income of the corporation mider part I of subChapter J (sec. 641 and following, relating to estates, trusts, and beneficiaries). "(1) ORDINARY GROSS INCOME.—The term 'ordinary gross income' means the gross income determined by excluding— " (A) all gains from the sale or other disposition of capital assets, and " (B) all gains (other than those referred to in subparagraph (A)) from the sale or other disposition of property described in section 1231(b). "(2) ADJUSTED ORDINARY (JROSS INCOME.—The term 'adjusted ordinary gross income' means the ordinary gross income adjusted as follows: " (A) RENTS.—From the gross income from rents (as defined in the second sentence of paragraph (3) of this subsection) subtract the amount allowable as deductions for— "(i) exhaustion, wear and tear, obsolescence, and amortization of property other than tangible personal property which is not customarily retained by any one lessee for more than three years, "(ii) property taxes, "(iii) interest, and "(iv) rent, to the extent allocable, under regulations prescribed by the Secretary or his delegate, to such gross income from rents. The amount subtracted under this subparagraph shall not exceed such gross income from rents. " (B) MINERAL ROYALTIES, ETC.—From the gross income from mineral, oil, and gas royalties described in paragraph (4), and from the gross income from working interests in an oil or gas well, subtract the amount allowable as deductions for— " (i) exhaust ion, wear and tear, obsolescence, amortization, and depletion, "(ii) property and se\erance taxes, "(iii) interest, and "(iv) rent, to the extent nllocable, under regulations prescribed by the Secretary or his delegate, to such gross income from royalties or such gross income from working interests in oil or gas wells. The amount subtracted under this subparagraph with respect to royalties shall not exceed the gross income from such royalties, and the amount subtracted under this subparagraph with respect to working interests shall not exceed the gross income from such working interests. " (C) INTEREST.—There shall be excluded—" (i) interest received on a direct obligation of the United States held for sale to customers in the ordinary course of trade or business by a regular dealer who is making a primary market in such obligations, and "(ii) interest on a condemnation award, a judgment, and a tax refund. "(3) ADJUSTED INCOME FROM RENTS.—The term 'adjusted income from rents' means the gross income from rents, reduced by the amount subtracted under paragraph (2)(A) of this subsecticm.
 * ' (b) DEFINITIONS.—For purposes of this part—

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85

For purposes of the preceding sentence, the term 'rents' means compensation, however designated, for the use of, or ri^ht to use, property, and the interest on debts owed to the corporation, to the extent such debts represent the price for which real property held primarily for sale to customers in the ordinary course of its trade or business was sold or exchanged by the corporation; but does not include amounts constituting personal holding company income under subsection (a)(6), nor copyright royalties (as defined in subsection (a)(4)), nor produced film rents (as defined in subsection (a)(5)(B)). "(4)

ADJUSTED INCOME FROM MINERAL, OIL, AND GAS ROYAL-

TIES.—The term 'adjusted income from mineral, oil, and gas royalties' means the gross income from mineral, oil, and gas royalties (including production payments and overriding royalties), reduced by the amount subtracted under paragraph (2)(B) of this subsection in respect of such royalties.'' (e)

FOREIGN PERSONAL HOLDING COMPANY INCOME AND STOCK

OWNERSHIP.—Section 553 (relating to foreign personal holding company income) and section 554 (relating to stock ownership) are amended to read as follows: "SEC. 553. FOREIGN PERSONAL HOLDING COMPANY INCOME.

68A Stat. 195. 26 USC 553, 554.

" (a) FOREIGN PERSONAL HOLDING (^OMPANY INCOME.—For purposes

of this subtitle, the term 'foreign personal holding company income' means that portion of the gross income, determined for puii:)Oses of section 552, which consists of: " (1) DIVIDENDS, ETC.—Dividends, interest, royalties, and annuities. This paragraph shall not apply to a dividend distribution of divested stock (as defined in subsection (e) of section 1111) but only if the st(X'k with respect to which the distribution is made was owned by the distributee cm September 6, 1961, or was owned by the distributee for at least 2 years before the date on which the antitiiist order (as defined in subsection (d) of section 1111) was entered. " (2) STCK^K AND SECURITIES TRANSACTIONS.—Except in the case of regular dealers in stock or securities, gains from the sale or exchange of stock or securities. "(3) COMMODITIES TRANSACTIONS.—Gains from futures transactions in any commodity on or subject to the rules of a board of trade or commodity exchange. This paragraph shall not apply to gains by a producer, processor, merchant, or handler of the commodity which arise out of bona fide hedging transactions reasonably necessary to the conduct of its business in the manner in which such business is customarily and usually conducted by others. "(4) ESTATES AND TRUSTS.—Amounts includible in computing the taxable income of the corporation under part I of subchapter J (sec. 641 and following, relating to estates, trusts, and beneficiaries); and gains from the sale or other disposition of any interest in an estate or trust. "(5)

PERSONAL SERVICE CONTRACTS.—

" (A) Amounts received under a contract under which the corporation is to furnish personal services; if some person otiier than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the individual who is to perform the services is designated (l)v name or by description) in the contract; and " (B) amounts received from the sale or other disposition of such a contract.

26 USC 552.

96 USC "^i

^^ ^^^ 641-683.

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PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

This paragraph shall apply with respect to amounts received for services under a particular contract only if at some time during the taxable year 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services. " (6) U S E OF CORPORATION PROPERTY BY SHAREHOLDER.—Amounts

received as compensation (however designated and from whomsoever received) for the use of, or right to use, property of the corporation in any case where, at any time during the taxable year, 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for an individual entitled to the use of the property; whether such right is obtained directly from the corporation or by means of a sublease or other arrangement. This paragraph shall apply only to a corporation which has foreign personal holding company income for the taxable year, computed without regard to this paragraph and paragraph (7), in excess of 10 percent of its gross income, " (t) RENTS.—Rents, unless constituting 50 percent or more of the gross income. For purposes of this paragraph, the term 'rents' means compensation, however designated, for the use of, or ri^ht to use, property; but does not include amounts constituting foreign personal holding comj^any income under paragraph (6). " (b) LIMITATION ON GROSS INCOME I N CERTAIN TRANSACTIONS.—

68A^stay^95. Ante, p. 85.'

For purposes of this part— "(1) gross income and foreign personal holding company income determined with respect to transactions described in subsection (a)(2) (relating to gains from stock and security transactions) shall include only the excess of gains over losses from such transactions, and "(2) gross income and foreign personal holding company income determined with respect to transactions described in subsection (a)(3) (relating to gains from commodity transactions) shall include only the excess of gains over losses from such transactions. "vSEC. 554. STOCK OWNERSHIP. " (a) CONSTRUCTIVE OWNERSHIP.—For purposes of determining whether a corporation is a foreign personal holding company, insofar as such determination is based on stock ownership under section rM2(a)(2),section 553(a)(5), or section 553(a)(6) — " (1) S TO C K NOT OWNED BY INDIVIDUAL.

StOCk OWUed, dlTeCtly

or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as beiii^ owned proportionately by its shareholders, partners, or beneficiaries. "(2) FAMILY AND PARTNERSHIP OWNERSHIP.—An individual shall be considered as owning the stock owned, directly o r indirectly, by or for his family or by or for his partner. For purposes of this paragraph, the family of an individual includes only his brothers and sisters (whether l\y the whole or half blood), spouse, ancestors, and lineal descendants. "(3) OPTIONS.—If any person has an option to acquire stock, such stock shall Im considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.

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PUBLIC LAW 88-272-FEB. 26, 1964

87

A F P M C ATIOX OF FAMILY-PAKTNKRSHII' AM) o m i O N IJl l.KS.

Parairisiphs {'2) and (8) shall l>e applied— " (A) for purposes of the stock ownership requirement provided in section 552(a)(2), if, but only if, the eti'ect is to make the corporation a forei<>:n personal holding company; " (B) for purposes of section 553(a)(5) (relating to personal service contracts) or of section 553(a)(6) (relating to the use of property by shareholders), if, but only if, the effect is to make the amounts therein referred to includible under such paragraph as foreign personal holding company income.

68A Stat. 195. 26ljsc*552 26 USC 552. Ante, p, 85.

" (5) CONSTRUCTIVE OWNERSHIP AS ACTUAL OWNERSHIP.—Stock

constructively owned by a person by reason of the application of paragraph (1) or (3) shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. " (6) OPTION RULE I N LIEU OF FAMILY AND PARTNERSHIP RULE.—•

I f stock may be considered as owned by an individual under either paragraph (2) or (3) it shall be considered as owned by him under paragraph (3). "(b) CONVERTIBLE SECURITIES.—Outstanding securities convertible into stock (whether or not convertible during the taxable year) shall be considered as outstanding stock— "(1) for purposes of the stock ownership requirement provided in section 552(a)(2), but only if the effect of the inclusion of all such securities is to make the corporation a foreign personal holding company; "(2) for purposes of section 553(a)(5) (relating to personal service contracts), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph as foreign personal holding company income; and "(3) for purposes of section 553(a)(6) (relating to the use of property by shareholders), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph as foreign personal holding company income. The requirement in paragraphs (1), (2), and (3) that all convertible securities must be included if any are to be included shall be subject to the exception that, where some of the outstanding securities are convertible only after a later date than in the case of others, the class having the earlier conversion date may be included although the others are not included, but no convertible securities shall be included unless all outstanding securities having a prior conversion date are also included." (f) DIVIDENDS-PAID DEDICTION.—

(1) Paragraph (2) of section 316(b) (relating to special rules for dividend defined) is amended to read as follows:

26 USC 316.

" (2) DISTRIBUTIONS BY PERSONAL HOLDING COMPAXTES.—

" (A) I n the case of a corporation which— " (i) under the law applicable to the taxable year in which the distribution is made, is a personal holding company (as defined in section 542), or "(ii) for the taxable year in respect of which the distribution is made under section 563(b) (relating to dividends paid after the close of the taxable year), or section 547 (relating to deficiency dividends), or the cor31-667 0-65—9

Ante, p. 79. 26 USC 542. 26 USC 563. 26 USC 547.

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68A Stat. 189.

'n^'®26 USC 331. Ante, p. 87. 26 USC 562.

PUBLIC LAW 88-272-FEB. 26, 1964

[78

STAT.

responding provisions of prior law, is a personal holding company under the law applicable to such taxable year, the term 'dividend' also means any distribution of property (whether or not a dividend as defined in subsection (a)) made by the corporation to its shareholders, to the extent of its undistributed personal holding company income (determined under section 545 without regard to distributions under this paragraph) for such year. " (B) For purposes of subparagraph (A), the term 'distribution of property' includes a distribution in complete liquidation occurring within 24 months after the adoption of a plan of liquidation, but— " (i) only to the extent of the amounts distributed to distributees other than corporate shareholders, and "(ii) only to the extent that the corporation designates such amounts as a dividend distribution and duly notifies such distributees of such designation, under regulations prescribed by the Secretary or his delegate, but "(iii) not in excess of the sum of such distributees' allocable share of the undistributed personal holding company income for such year, computed without regard to this subparagraph or section 562(b). " (2) Section 331(b) (relating to nonapplication of section 301) is amended by inserting after "any distribution of property" the phrase "(other than a distribution refen-ed to in paragraph (2)(B) of section 316(b))". (3) Section 562(b) (relating to distributions in liquidation) is amended to read as follows: " (b) DISTRIBUTIONS I N LiQuroATioN.—

26 USC 542. 26 USC 5 52.

26 USC 551.

"(1) Except in the case of a personal holding company described in section 542 or a foreign personal holding company described in section 552— " (A) in the case of amounts distributed in liquidation, the pait of such distribution which is properly chargeable to earnings and profits accumulated after February 28, 1913, shall be treated as a dividend for purposes of computing the dividends paid deduction, and " (B) in the case of a complete liquidation occurring within 24 months after the adoption of a plan of liquidation, any distribution within such period pursuant to such plan shall, to the extent of the earnings and profits (computed without regard to capital losses) of the corporation for the taxable year in which such distribution is made^ be treated as a dividend for purposes of computing the dividends paid deduction. "(2) I n the case of a complete liquidation of a personal holding tioiripaiiy, occurring within 24 months after the adoption of a plan of liquidation, the amount of any distribution within such period. pursuant to such plan shall be treated as a dividend for purposes of computing the dividends paid deduction, to the extent that such amount is distributed to corporate distributees and represents such corporate distributees' allocable share of the undistributed personal holding company income for the taxable year of such distribution computed without regard to this paragraph and without regard to subparagraph (B) of section 316(b)(2). " (4) Section 551(b) (relating to amount included in gross incxMne) is amended by striking out "received as a dividend" and inserting in lieu thereof "received as a dividend (determined as if

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any disti-ibution in liquidation actually made in such taxable year had not been made)". (g) O N E - M O N T H LIQUIDATIONS.—Section 333 (relating to election as to recognition of gain in certain liquidations) is amended by adding at the end thereof the following new subsection: "(g)

89

68A Stat. 103. 26 USC 333.

SPECIAL RULE. — "(1) LIQUIDATIONS BEFORE JANUARY

i. loci.—Li the case of a lixjuidation occurring before January 1, 1967, of a corporation referred to in paragraph (3)— " (A) the date 'December 31, 1953' referred to in subsections (e)(2) and (f)(1) shall be treated as if such date were 'December 31, 1962', and " (B) in the case of stock in such corporation held for more than 6 months, the term 'a dividend' as used in subsection (e)(1) shall be treated as if such term were 'long-terni capital gain'. Subparagraph (B) shall not apply to any earnings and profits to which the corporation succeeds after December 31, 1963, pursuant to any corporate reorganization or pursuant to ajiy liquidation to which section 332 applies, except earnings and profits which on December 31, 1963, constituted earnings and profits of a corporation referred to in paragraph (3), and except earnings and profits which were earned after such date by a corporation referred to in paragraph (3). "(2)

26 USC 332.

LIQUIDATIONS AFTER DECEMBER 3 I, IOOG.—

" (A) IN GENERAL.—In the case of a liquidation occurring after December 31, 1966, of a corporation to which this subparagraph applies— "(i) the date 'December 31, 1953' referred to in subsections (e)(2) and (f)(1) shall be treated as if such date were 'December 31, 1962', and "(ii) so much of the gain recognized under subsection (e)(1) as is attributable to the earnings and profits accumulated after February 28, 1913, and before January 1, 1967, shall, in the case of stock in such corporation held for more than 6 months, be treated as long-term capital gain, and only the remainder of such gain shall be treated as a dividend. (Mause (ii) shall not apply to any earnings and profits to which the corporation succeeds after December 31, 1963, pursuant to any coiporate reorganization or pursuant to any liciuidation to which section 332 applies, except earnings and profits which on December 31, 1963, constituted earnings and profits of a corporation referred to in paragraph (3), and except earnings and profits which were earned after such date by a corporation referred to in paragraph (3). " (B) CoRW)RATiONS TO WHICH APPLICABLE.—Subparagraph (A) shall apply only with respect to a corporation which is referred to in paragraph (3) and which— " (i) on January 1, 1964, owes qualified indebtedness (as defined in section 545(c)), "(ii) before January 1, 1968, notifies the Secretary or his delegate that it may wish to have subparagraph (A) apply to it and submits such information as may be reuired by regulations prescribed by the Secretary or his elevate, and "(lii) liquidates before the close of the taxable year in which such corporation ceases to owe such qualified indebtedness or (it earlier) the taxable year referred to in subparagraph (C).

a

Post, p. 90.

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PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

" (C) ADJUSTED POST-1963 EARNINGS AND PROFITS EXCEED

a ^^e^ ^*79 ^^^' "ae'usc 542.

QUALIFIED INDEBTEDNESS.—In the case of any corporation, the taxable year referred to in this subparagraph is the first taxable year at the close of which its adjusted post-1963 earnings and profits equal or exceed the amount of such corporation's qualified indebtedness on January 1, 1964. For purposes of the preceding sentence, the term 'adjusted post-1963 earnings and profits' means the sum of— " (i) the earnings and profits of such corporation for taxable ^ears beginning after December 31, 1963, without diminution by reason of any distributions made out of such earnings and profits, and "(ii) the deductions allowed for taxable years beginning after December 31, 1963, for exhaustion, wear and tear, obsolescence, amortization, or depletion. "(3) CORPORATIONS REFERRED TO.—For purposes of paragraphs (1) and (2), a corporation referred to in this paragraph is a corporation which for at least one of the two most recent taxable years ending before the date of the enactment of this subsec^^^^ ^^* ^^^ ^ pcTsoual holding company under section 542, but would have been a personal holding company under section 542 for such taxable year if the law applicable for the first taxable year beginning after December 31, 1963, had been applicable to such taxable year. "(4) MISTAKE AS TO APPLICABILITY OF SUBSECTION.—An election made under this section by a qualified electing shareholder of a corporation in which such shareholder states that such election is made on the assumption that such corporation is a corporation referred to in paragraph (3) shall haA^e no force or effect if it is determined that the corporation is not a corporation referred to in paragraph (3). " (h) EXCEPTION FOR CERTAIN CORPORATIONS.— (1) GENERAL RLTI^E.—Except as provided in paragraph

Ante. p. 89.

26 USC 332.

(2), in the case of a corporation referred to in section 333(g)(3) of ^}^Q Internal Revenue Code of 1954 (as added by subsection (g) of this section), the amendments made by this section (other than subsections (f) and (g)) shall not apply if there is a complete liquidation of such corporation and if the distribution of all the property under such liquidation occurs before January 1, 1966. (2) EXCEPTION.—Paragraph (1) shall not apply to any liquida^JQJJ ^Q which section 332 of the Internal Revenue Code of 1954 applies unless— (A) the corporate distributee (referred to in subsection (b)(1) of such section 332) in such liquidation is liquidated in a complete liquidation to which such section 332 does not apply, and (B) the distribution of all the property under such liquidation occurs before the 91st day after the last distribution referred to in paragraph (1) and before Januarj'^ 1, 1966.

(i) DEDUCTION FOR AMORTIZATION OF INDEBTEDNESS.—

26 USC 545.

^1) Section 545(a) (relating to definition of undistributed personal holding company income) is amended by striking out "subsection (b) " and inserting in lieu thereof "subsections (b) and (c) ". (2) Section 545 is amended by adding at the end thereof the following new subsection: " (c) SPECIAL ADJUSTMENT TO TAXABLE INCOME.—

"(1) I N GENER.\L.—Except as otherwise provided in this subsection, for purposes of subsection (a) there shall be allowed as

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Page:The Eurypterida of New York Volume 1.pdf/161

 To sum up the foregoing distinctive features in Strabops, we find that the lack of differentiation of the parts of the abdomen and the general primitive aspect of the form, together with the high geologic age of the genus warrant its recognition as distinct from Eurypterus, though it is manifest that the form is very similar thereto.

The genus Eurypterus embraces not only those representatives of the order Eurypterida longest known and most completely understood, but it also surpasses all other genera in the number of species and in geological and geographical range; it represents the most vigorous and the most typical genus of the order, although it does not contain the giants of the group. It is therefore very proper that it should have given its name to this remarkable order of the class Arachnida.

The genus was erected by James E. DeKay in 1825 for the most common of the New York species, viz,. The organization of the body of Eurypterus was first elucidated and elaborately described by Nieszkowski [1858] and James Hall [1859]; the former basing his observations on the finely preserved material from the island of Oesel in the bay of Riga, Russia, the other on that from the waterlimes of New York. Hall described seven supposed species from the New York rocks, viz,,  ,  ,  ,  ,  ,  , to which a few have been added since from the rocks of this State, viz,   (?)   Hall and Clarke [1888],   Sarle [1902] and   Clarke [1907]. A form from the Guelph dolomite of Canada ( Whiteaves), two from the waterlime of the same horizon at Kokomo, Indiana (  Miller & Gurley and   nov.) a small number of species from the Carbonic of Illinois and Pennsylvania (,  ,  ,  ,   and  ); and the species  ,


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91

a deduction amounts used, or amounts irrevocably set aside (to the extent reasonable with reference to the size and terms of the indebtedness), to pay or retire qualified indebtedness. "(2) CORPORATIONS TO WHICH APPLICABLE.—This subsection shall apply only with respect to a corporation— " (A) which for at least one of the two most recent taxable years ending before the date of the enactment of this subsection was not a personal holding company under section 542, g^tl^^^^yl' ^^^' but would have been a personal holding company under sec- 26 USC S42. tion 542 for such taxable year if the law applicable for the first taxable year beginning after December 31, 1963, had been applicable to such taxable year, or " (B) to the extent that it succeeds to the deduction referred 26 USC 381. to in paragraph (1) by reason of section 381(c) (15). Post, p. 92. " (3) Q U A L I F I E D INDEBTEDNESS.—

" (A) IN GENERAL.—Except as otherwise provided in this paragraph, for purposes of this subsection the term 'qualified indebtedness' means— " (i) the outstanding indebtedness incurred by the taxpayer after December 31, 1933, and before January 1, 1964, and "(ii) the outstanding indebtedness incurred after December 31, 1963, for the purpose of making a payment or set-aside referred to in paragraph (1) in the same taxable year, but, in the case of such a payment or setaside which is made on or after the first day of the first taxable year beginning after December 31, 1963, only to the extent the deduction otherwise allowed in paragraph (1) with respect to such payment or set-aside is treated as nondeductible by reason of the election provided in paragraph (4). " (B) EXCEPTION.—For purposes of subparagraph (A), qualified indebtedness does not include any amounts which were, at any time after December 31, 1963, and before the payment or set-aside, owed to a person who at such time owned (or was considered as owning within the meaning of section 318(a)) more than 10 percent in value of the taxpayer's outstanding stock. "(C)

REDUCTION FOR AMOUNTS IRREVOCABLY SET ASIDE.—

For purposes of subparagraph (A), the qualified indebtedness with respect to a contract shall be reduced by amounts irrevocably set aside before the taxable yetir to pay or retire such indebtedness; and no deduction shall be allowed under paragraph (1) for payments out of amounts so set aside. "(4) ELECTION NOT TO DEDUCT.—A taxpayer may elect, under regulations prescribed by the Secretary or his delegate, to treat as nondeductible an amount otherwise deductible under paragraph (1); but only if the taxpayer files such election on or before the 15th day of the third month following the close of the taxable year with respect to which such election applies, designating therein the amounts which are to be treated as nondeductible and specifying the indebtedness (referred to in paragraph (3)(A) ( i i)) incurred for the puriK)se of making the payment or set-aside. " (5) LIMITATIONS.—The deduction otherwise allowed by this subsection for the taxable year shall be reduced by the. sum of—

26 USC ais.

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SliscVi^*'

PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

" (A) the amount, if any, by which— " (i) the deductions allowed for the taxable year and all preceding taxable years beginning after December 31, 1963, for exhaustion, wear and tear, obsolescence, amortization, or depletion (other than such deductions which are disallowed in computing undistributed personal holding company income under subsection (b)(8)), exceed "(ii) any reduction, by reason of this subparagraph, of the deductions otherwise allowed by this subsection for such preceding taxable years, and " (B) the amount, if any, by which— " (i) the deductions allowed under subsection (b)(5) in computing undistributed personal holding company income for the taxable year and all preceding taxable years beginning after December 31, 1963, exceed "(ii) any reduction, by reason of this subparagraph, of the deductions otherwise allowed by this subsection for such preceding taxable years. "(6) PRO-RATA REDUCTION I N CERTAIN CASES.—For purposes of paragraph (3)(A), if property (of a character which is subject to an allowance for exhaustion, wear and tear, obsolescence, amortization, or depletion) is disposed of after December 31, 1963, the total {unounts of qualified indebtedness of the taxpayer shall be reduced pro-rata in the taxable year of such disposition by the amount, if any, by which— " (A) the adjusted basis of such property at the time of such disposition, exceeds " (B) the amount of qualified indebte<less which ceased to be qualified indebtedness with respect to the taxpayer by reason of the assumption of the indebtedness by the transferee." (3) Paragraph (15) of section 381(c) (relating to carryovers in certain corporate acquisitions) is amended to read as follows: "(15) INDEBTEDNESS OF CERTAIN PERSONAL HOLDINCJ COMPANIES.—

^usc'5^45

JQ26 USC 1011-

26 USC 1014.

The acquiring corporation shall be considered to be the distributor or transferor corporation for the purpose of detennining the applicability of subsections (b)(7) and (c) of section 545, relating to deduction with respect to payment of certain indebtedness." (j) INCREASE I N BASIS W I T H RESPECT TO CERTAIN FOREKIX PERSONAL HOLDING COMPANY STOCK OR SECURITIES.— (1) IN GENERAL.—Part II of subchapter O of chapter 1 (relat-

ing to basis rules of general application) is amended by redesignating section 1022 as section 1023 and by inserting after section 1021 the following new section: "SEC. 1022. INCREASE IN BASIS WITH RESPECT TO CERTAIN FOREIGN PERSONAL HOLDING COMPANY STOCK OR SECURITIES. " (a) GENERAL RULE.—The basis (determined under section 1014(1)) ^5)^ relating to basis of stock or securities in a foreign personal holding company') of a share of stock or a security, acquired from a decedent dying after December 31, 1963, of a corporation which was a foreign personal holding company for its most recent taxable year ending before the date of the decedent's death shall be increased by its proportionate share of any Federal estate tax attributable to the net appi"eciation in value of all of such shares and securities determined as provided in this section. "(b) PROPORTIONATE SHARE.—For purposes of subsection (a), the proportionate share of a share of stock or of a security is that amount which bears the same ratio to the aggregate increase determined under

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93

subsection (c)(2) as the appreciation in value of.such share or security bears to the aggregate appreciation in vahie of all such shares and securities having appreciation in value. "(c) SPECIAL RULES AND DEFiNmoNS.—For purposes of this section— "(1) FEDERAL ESTATE TAX.—The term 'Federal estate tax' means only the tax imposed by section 2001 or 2101, reduced by any 68Au Stat. 373. 26 s e 2001, credit allowable with respect to a tax on prior transfers by section 210I 2013 or 2102. " ^l^^^"" 2013. "(2)

FEDERAL ESTATE TAX ATTRIBUTABLE TO XET APPRECIATION

IN VALUE.—The Federal estate tax attributable to the net appreciation in value of all shares of stock and securities to which subsection (a) applies is that amount which bears the same ratio to the Federal estate tax as the net appreciation in value of all of such shares and securities bears to the value of the gross estate as determined under chapter 11 (including section 2032, relating to ^^ "^^ 2°^^. alternate valuation). "(3) NET APPRECIATION.—The net appreciation in value of all shares and securities to which subsection (a) applies is the amount by which the fair market value of all such snares and securities exceeds the adjusted basis of such property in the hands of the decedent. "(4) FAIR MARKET VALUE.—For purposes of this section, the term 'fair market value' means fair market value determined under chapter 11 (including section 2032, relating to alternate 2209.^^^ ^°°^" valuation). '*(d) LIMITATIONS.—This section shall not apply to any foreign 26 USC 342. personal holding company referred to in section 342(a)(2).'' (2) AMENDMENT OF SECTION 101 (Ma).—Section 1016(a) (re- 26 USC/o^^ lating to adjustments to basis) is amended by striking out the period at the end thereof and by inserting in lieu thereof a semicolon and by adding at the end thereof the following new paragraph: "(21) to the extent provided in section 1022, relating to inci-ease '*"'*' ^' ^^' in basis for certain loreign personal holding company stock or securities." (3) CLERICAL AMENDMENT.—The table of sections for part II of subchapter O of chapter 1 is amended by striking out "Sec. 1022. Cross references." and inserting in lieu thereof the following: "Sec. 1022. Increase in basis with rpspect to certain foreign nersonal holding company stock or securities!. "Sec. 1023. Cross references." (k) TECHNICAL AMENDMENTS.—

(1) Section 542(b) (relating to corporations filing consolidated returns) is amended by striking out "gross income*' each place it appeal's and inserting in lieu thereof "adjusted ordinary gross income". (2) Section 543 (relating to personal holding company income) is amended by striking out subsection (d) (relating to special adjustment on disposition of antitrust stock received as a dividend). (3) Section 544 (relating to rules for determining stock ownership) is amended— (A) by striking out "section 5 4 3 (a)(5) " each place it appears and inserting in lieu thereof "section 543(a)(7)", and

26 USC 542.

je use 543.

26 USC 544.

^"'e, p. 83.

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PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

(B) by striking out "section 5 4 3 (a)(9) " each place it appears and inserting in lieu thereof "section 543(a)(4)". (4) REAL ESTATE INVESTMENT TRUSTS.—Paragraph (6) of section 856(a) (relating to definition of real estate investment trust) is amended by striking out "gross income" and inserting in lieu thereof "adjusted ordmary gross income (as defined in section 543(b)(2))".

26 USC*s43'. 74 Stat. 1004 26 USC 856.

(5)

68A Stat. 350.

UNINCORPORATED BUSINESS ENTERPRISES ELECTING TO BE

TAXED AS DOMESTICORPORATIONS.—Section 1361(i) (relating to personal holding company income) is amended to read as follows: " (i) PERSONAL HOLDING COMPANY INCOME.— "(1) EXCLUDED FROM INCOME OF ENTERPRISE.—There shall be

excluded from the gross income of the enterprise as to which an election has been made under subsection (a) any item of gross income (computed without regard to the adjustments provided in section 543(b)(3) or (4)) if, but for this paragraph, such item (adjusted, where applicable, as provided in section 543(b)(3) or (4)) would constitute personal holding company income (as defined in section 543(a)) of such enterprise. "(2)

INCOME AND DEDUCTIONS OF OWNERS.—Items excluded

from the gross income of the enterprise under paragraph (1), and the expenses attributable thereto, shall be treated as the income and deductions of the proprietor or partners (in accordance with their distributive shares of partnership income) of such enterprise. "(3)

DiSTRlBUnONS.—If—

" (A) the amount excluded from gross income under paragraph (2) exceeds the expenses attributable thereto, and " (B) any portion of such excess is distributed to the proprietor or partner during the year earned, such portion shall not be taxed as a corporate distribution. The portion of such excess not distributed during such year shall be considered as paid-in surplus or as a contribution to capital as of the close of such year." (6)

26 USC 6501.

PANY TAX.—Section 6501(f) (relating to personal holding company tax) is amended by striking out "gross income, described in section 543(a)," and inserting in lieu thereof "gross income and adjusted ordinarj'^ gross income, described in section 543,". (1)

26 USC 614.

ASSESSMENT AND COLLECTION OF PERSONAL HOLDING COM-

EFFECTIVE DATES.—

(1) The amendments made by this section (other than by subsections (c)(1), (f), (g), and (j)) shall apply to taxable years beginning after December 31, 1963. (2) The amendment made by subsection (c)(1) shall apply to taxable years beginning after October 16, 1962. (3) The amendments made by subsections (f) and (^) shall apply to distributions made in any taxable year of the distributing corporation beginning after December 31, 1963. (4) The amendments made by subsection (j) shall apply in respect of decedents dying after December 31, 1963. (5) Subsection (li) shall apply to taxable years beginning after December 31, 1963. SEC. 226. TREATMENT OF PROPERTY IN CASE OF OIL AND GAS WELLS. ^^^ jjj^ GENERAL.—Section 614(b) (relating to special rule as to operating mineral interests) is amended to read as follows: " (b) Si'KCiAL RULES AS TO OPERATING MINERAL INTERESI^S IX O I L AND GAS WKFJ.S.—In the case of oil and gas wells—

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"(1) I N GENERAI..—Except as otherwise provided in this subsection— " (A) all of the taxpayers operating mineral interests in a separate tract or parcel of land shall be combined and treated as one property, and " (B) the taxpayer may not combine an operating mineral interest in one tract or parcel of land with an operating mineral interest in another tract or parcel of land. "(2)

ELECTION TO TREAT PI:RATING MINERAL INTERESTS AS SEPA-

itATK PROPERTIES.—If the taxpayer has more than one operating mineral interest in a single tract or parcel of land, he may elect to treat one or more of such operating mineral interests as separate properties. The taxpayer may not have more than one combination of operating mineral interests in a single tract or parcel of land. If the taxpayer makes the election provided in this paragraph with respect to any interest in a tract or parcel of land, each operating mineral interest which is discovered or acquired by the taxpayer in such tract or parcel of land after the taxable year for which the election is made shall be treated— " (A) if there is no combination of interests in such tract or parcel, as a separate property unless the taxpayer elects to combine it with another interest, or " (B) if there is a combination of interests in such tract or parcel, as part of such combination unless the taxpayer elects to treat it as a separate property. "(3)

CERTAIN UNITIZATION OR IHIOLING ARR.\NGEMENI^.—

" (A) IN GENERAL.—Under regulations prescribed by the Secretary or his delegate, if one or more of the taxpayer's operating mineral interests participate, under a voluntary or compulsory unitization or pooling agreement, in a single cooperative or unit plan of operation, then for the period of such participation— " (i) they shall be treated for all purposes of this subtitle as one property, and "(ii) the application of paragraphs (1), (2), and (4) in respect of such interests shall be suspended. " (B) LIMITATION.—Subparagraph (A) shall apply to a voluntary agreement only if all the operating mineral interests covered by such agreement— " (i) are in the same deposit, or are in 2 or more deposits the joint development or production of which is logical from the standpoint of geology, convenience, economy, or conservation, and "(ii) are in tracts or parcels of land which are contiguous or in close proximity. " (C) S P E C I A L RULE I N THE CASE OF ARRAN(JKMENTS ENTEUEn INTO I N TAXABLE YEARS BEGINNIN(i BEFORE J A N U A R Y 1. 1 J) « 4. —

If— "(i) two or more of the taxpayer's operating mineral interests participate under a voluntary or compulsory unitization or pooling agreement entered into in any taxable year beghming before January 1, 1964, in a single cooperative or unit plan of operation, "(ii) the taxpayer, for the last taxable year begiiining before January 1, 1964, tieated such "interests as two or more separate properties, and "(iii) it is determined that such ti-eatment was proper under the law applicable to such taxable year, such taxpayer may continue to treat such interests in a consistent manner for the period of such participation.

95

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PUBLIC LAW 88-272-FEB. 26, 1964 "(4)

[78 STAT.

MANNER, TIME, AND SCOPE OF ELECTION.—

" (A) MANNER AND TIME.—Any election provided

in

paragraph (2) shall be made for each operating mineral mterest, in the manner prescribed by the Secretary or his delegate by regulations, not later than the time prescribed by law for filing the return (including extensions thereof) for whichever of the following taxable years is the later: The first taxable year beginning after December 31, 1963, or the first taxable year in which any expenditure for development or operation in respect of such operating mineral interest is made by the taxpayer after the acquisition of such interest. " (B) SCOPE.—Any election under paragraph (2) shall be for all purposes of this subtitle and shall be binding on the taxpayer for all subsequent taxable years. "(5) TREATMENT OF CERTAIN PROPERTIES.—If, on the day preceding the first day of the first taxable year beginning after December 31, 1963, the taxpayer has any openiting mineral interests which he treats under subsection (d) of this section (as in effect before the amendmeTits made by the Revenue Act of 1964), such treatment shall be continued and shall be deemed to have been adopted pursuant to paragraphs (1) and (2) of this subsection (as amended by such Act). " (b)

26 USC eu^"

TECHNICAL AMENDMENTS.—

^^^ '^'^® heading of section 614(c) is amended to read as follows: " (c) SPECIAL MINES,—"

^epe^i-

26 USC f*6i3°^*

RI'LES

AS TO OPERATINCJ MINERAL INTERESTS I N

(2) Paragraph (5) of section 614(c) is hereby repealed. (3) Section 614(d) is amended to read as follows: " (d) PERATIN(} MINERAL INTERESTS DEFINED.—For purposes of this section, the term 'operating mineral interest' inclunes only an interest in respect of which the costs of production of the mineral are required to be taken into account by the taxpayer for purposes of ctmiputing the 50 jjercent limitation provided for hi section 613, or would be so recpiired if the mine, well, or other natural deposit were in the production stage.'" (4) Sec'tion 614(e)(2) is amended by striking out "within the meaning of subsection (b)(3) ". (c)

ALLOCATION OF BASIS I N CERTAIN CASES.—For purposes

of

the Internal Revenue Code, of 1954— (1) F A I R MARKET VALUE RULE.—Except as provided in paragraph (2), if a taxpayer has a section 614(b) aggregation, then the adjusted basis (as of the first day of the first taxable year beginning after December 31, 1963) of each property included in such aggregation shall be determined by multiplying the adjusted basis of the aggregation by a fraction— (A) the numerator of which is the fair market value of su(?h property, and (B) the denominator of which is the fair market value of such aggregation. For purposes of this paragraph, the adjusted basis and the fair market value of the aggregation, and the fair market value of each property included therein, shall be determined as of the day preceding the first day of the firet taxable year which begins after Detrember 31, 1963. (2) ALLOCATION OF ADJUSTMENTS, ETC,—If the taxpayer makes an election under this paragraph with respe(t to any section 614 (b) aggregation, then the adjusted basis (as of the first day of the

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PUBLIC LAW 88-272-FEB. 26, 1964

first taxable year beginning after December 31, 1963) of each property included in such a g ^ e g a t i o n shall be the adjusted basis of such property at the time it was first included in the aggregation by the taxpayer, adjusted for that portion of those adjustments to the basis of the aggregation which are i"easonably attributable to such property. If, under the preceding sentence, the total of the adjusted bases of the interests included in the aggregation exceeds the adjusted basis of the aggregation (^as of the day preceding the first day of the first taxable year which begins after Deceml^r 31, 1963), the adjusted bases of the properties which include such interests shall be adjusted, under regulations prescribed by the Secretary of the Treasury or his delegate, so that the total of the adjusted bases of such interests equals the adjusted basis of the aggregation. An election under this paragraph shall be made at such time and in such manner as the Secretary of the Treasury or his delegate shall by regulations prescribe. (3) DEFINITIONS.—For purposes of this subsection— (A) SECTION 614(b) AGGREGATION,—The term "section 614(b) aggregation" means any aggregation to which section 614(b)(1)(A) of the Internal Revenue Code of 1954 (as in effect before the amendments made b j subsection (a) of this section) applied for the day preceding the first day of the first taxable year beginning after December 31, 1963. (B) PROPERTY.—The term "property" has the same meaning as is applicable, under section 614 of the Internal Revenue Code of 1954, to the taxpayer for the first taxable year beginning after December 31, 1963. (d) EFFECTIVE DATE.—The amendments made by subsections (a) and (b) shall apply to taxable years beginning after December 31, 1963. SEC. 227. TREATMENT OF CERTAIN IRON ORE ROYALTIES. (a)

IN GENERAL.— (1) AMENDMENT

OF SECTION (5.SI (C).—Section 631(c) (relating to disposal of coal with a retained economic interest) is amended— (A) by striking out the heading and inserting in lieu thereof the following:

97

^^^ul*c*6iV°"

26 USC eai.

"(c) DISPOSAL OF COAL OR DOMESTIC IRON ORE W I T H A RETAINED ECONOMIC INTEREST.—";

(B) by inserting "or iron ore mined in the United States," after "coal (including lignite),"; (C) by inserting "or iron ore" after "coal" each other place it appeal's in section 631(c); and (D) by adding at the end thereof the following new sentence: "This subsection shall not apply to any disposal of iron ore— "(1) to a person whose relationship to the person disposing of such iron ore would result in the disallowance of losses under section 267 or 707 (b), or "(2) to a person owned or controlled directly or indirectly by the same interests which own or control the person disposing of such iron ore." (2) AMENDMENT OF SPXTION.12.M (b).—Section 1231(b)(2) (defining property used in the trade or business) is amended to read as follows: "(2) TIMBER, COAL, OR DOMESTIC IRON ORE.—Such term includes timber, coal, and iron ore with respect to which section 631 applies."

^e use 267,707.

26 USC 1231.

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26^scr*27*2^'

PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

^'^^ AMKXDMKNT OF sKCTiox 272.—The tt>xt of section 272 (relating to disposal of coal) is anieiuled by inserting "or iron ore" after "coal*' each place it appears. (b) CLERICAL AMENDMENTS.—

Ante, p. 97. 26 USC 631.

n\

^|jg headini>' of section (531 is amended to read as follows:

^ ' 'SEC. 631. GAIN OR LOSS IN THE CASE OF TIMBER, COAL, OR DOMESTIC IRON ORE."

(2) The table of sections for part III of subchapter I of chapter 1 is amended by striking out "Sec. 631. Gain or loss in the case of timber or coal."

and inserting in lieu thereof the following: "Sec. 631. Gain or loss in the case of timber, coal, or domestic iron ore."

(3) The heading of section 272 is amended to read as follows: "SEC. 272. DISPOSAL OF COAL OR DOMESTIC IRON ORE."

(4) The table of sections for part IX of subchapter B of chapter 1 is amended by striking out "Sec. 272. Disposal of coal."

and inserting in lieu thereof the following: "Sec. 272. Disposal of coal or domestic iron ore."

26 USC 1016.

^5^ Section 1016(a) (15) is amended by inserting "or domestic iron ore" after "coal". 26 USC rt02. (0) Section 142(a)(3)(B) is amended to read as follows: " (B) from the cutting of timber, or the disposal of timber, coal, or iron ore, if section 631 applies to such gain or loss, or" 68^stItr'io?5!' C^').Section 211(a)(3) of the Social Security Act is amended 42 USC 411. by striking out clause (B) and inserting in lieu thereof " (B) from the cutting of timber, or the disposal of timber, coal, or iron ore, if section 631 of the Internal Revenue Code of 1954 applies to such gain or loss,". (c) EFFECTIVE DATE.—The amendments made by this section shall apply with respect to amounts received or accrued in taxable years beginning after December 31, 1963, attributable to iron ore mined in such taxjible years. SEC. 228. INSURANCE COMPANIES. (a) CERTAIN MUTUAMZATION DISTUIBUTIONS MADE I N 1962.— (1)

75^stat^*i2o^^' 26 USC 80*9.

D E D U C T F O N FOR CERTAIN 3IUTUALIZATI0N DISTRIBUTIONS.—

Section 809(d) (11) (relating to deductions in computing ^ahi from operations in the case of certain mutualization distributions) IS amended by striking out "and 1961" and inserting in lieu thereof "1961, and 1962". (2) APPLICATION OF SECTION sir..—Section 809(g)(3) (relating to application of section 815 to certain mutualization distributions) is amended by striking out "or 1961" and inserting in lieu thereof "1961, or 1962". (b) ACCRUAL OF BOND DISCOUNT.—

73 Stat. 133.

26 USC 171. 26 USC 103. 26 USC 1232.

(J) LiFE INSURANCE COMPANIES.—Section 818(b) (relating to amortization of premium and accrual of discount) is amended by adding at the end thereof the following new paragraph: "(3) EXCEPTION.—For taxable years beginning after December 31, 1962, no accrual of discount shall be required under paragraph (1) on any bond (as defined in section 171(d)), except iu the case of discount which is— " (A) interest to which section 103 applies, or " (B) original issue discount (as denned in section 1232(b)).

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99

73 Stat. 118. For purposes of section 805(b)(3)(A), the curi-ent eariiiiigs rate 26 USC 80 5. for any taxable year beginning before January 1, 1063, shall be determined as if the preceding sentence applied to such taxable year." Stat. 261. (2) MUTUAL INSURANCE COMPANIES.—Section 822(d)(2) (relat- 68Au s e 822. 26 ing to amortization of premium and accrual of discount) is amended by adding at the end thereof the following new sentence: "For taxable years beginning after December 31, 1962, no accrual of discount shall be required under this paragraph on any bond (as defined in section 171(d))." ^e use 171. (c) CONTRIBUTIONS TO QUALIFIED, ETC., PLANS.—Section 832(c) (10) ^^ "^^ ^22. (relating to deductions allowed in computing taxable income of certain insurance companies) is amended by inserting before the semicolon at the end thereof "and in part I of subchapter D (sec. 401 and following, relating to pension, profit-sharing, stock bonus ^6ifsc'4of-407°" plans, etc.)". (d) EFFECTIVE DATES.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1961. The amendment made by subsection (c) shall apply to taxable year's beginning after December 31, 1953, and ending after August 16, 1954. SEC. 229. REGULATED INVESTMENT COMPANIES. (a) T I M E FOR MAILING CERTAIN NOTICES TO SHAREiiorj)ERS.—The following provisions (relating to notices to shareholders by regulated investment companies) are amended by striking out "30 days", wherever appearing therein, and inserting in lieu thereof "45 days": (1) Section 8 5 2 (b)(3)(C), 26 use852.855. (2) Section 852(b)(3)(D)(i), (3) Section 853(c), (4) Section 854(b)(2), and (5) Section 855(c). (b) CERTAIN REDEMPITONS BY U N I T INVKSTMKNT TRUSTS.—Section

852 (relating to taxation of regulated investment companies and their shareholders) is amended by adding at the end thereof the following new subsection: "(d)

DlSTRIBlTIONS IN REDEMPTION OF I N T E K K S T S IX T^NIT I N V E S T -

MKNT TRUSTS.—In the case of a unit investment trust— "(1) which is registered under the Investment Company A d of 1940 and issues periodic pavmeiit plan certificates (as defined 1

.

,v

-1

^

^

•••

^-

^

in such Act), and "(2) substantially all of the assets of which consist of securities issued by a management company (as defined in such Act), section 562(c) (relating to preferential dividends) shall not apply to a distribution by such trust to a holder of an intere.st in snch trust in redemption of part or all of sudi interest, with respect to the net (•apital gain of such trust attributable to such redemption." (c) EFFECTIVE DATES.—The amendments made by subsection (a) shall apply to taxable years of regulated investment companies ending on or after the date of the enactment of this Act. The amendment made by subsection (b) shall apply to taxable years of regulated investment companies ending after December 31, 1963.

f f^f*- '^^^• ^ 15 USC 80a-51.

26 USC 562.

SEC. 230. CAPITAL LOSS CARRYOVERS FOR TAXPAYERS OTHER THAN CORPORATIONS.

(a) IN GENKKAL.—Section 1212 (relating to capital loss carryover) is amended— (1) by striking out "If for any taxal)le year the taxpayer" and inserting in lieu thereof: " (a) ('ORPORATioNs.—If for any taxable year a corporation": and (2) by adding at the en<l thereof the following new subsection: " (b) {y\H¥.v. TAXPAYERS.—

26 USC 1212.

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^^A |tat. 321. 26 USC 1211.

PUBLIC LAW 88-272-FEB. 26, 1964

"(1) IN GENERAL.—If a taxpayer other than a corporation has a net capital loss for any taxable year beginning after December 31, 1963— " (A) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss in the succeeding taxable year, and " (B) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss in the succeeding taxable year. For purposes of this paragraph, in determining such excesses an amount equal to the excess of the sum allowed for the taxable year under section 1211(b) over the gains from sales or exchanges of capital assets (determined without regard to this sentence) shall be treated as a short-term capital gain in such year. " (2) TRANSITIONAL RULE.—In the case of a taxpayer other than a corporation, there shall be treated as a short-term capital loss in the first taxable year beginning after December 31, 1963, anjamount which is treated as a short-term capital loss in such year under this subchapter as in effect immediately before the enactment of the Revenue Act of 1964." (b)

26 USC 1222.

TECHNICAL AMENDMENTS.—

(1) Section 1222(9) (relating to net capital gain) is amended to read as follows: "(9) N E T CAPITAL GAIN.—In the case of a corporation, the term 'net capital gain' means the excess of the gams from sales or exchanges of capital assets over the losses from such sales or exchanges." (2) The second sentence of section 1222(10) (relating to net capital loss) is amended by striking out "For the purpose" and inserting in lieu thereof "In the case of a corporation, for the purpose". (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1963. SEC. 231. GAIN FROM DISPOSITIONS REALTY. (a)

26 USC 1231^

1249.

[78 STAT.

OF CERTAIN

DEPRECIABLE

G A I N FROM DISPOSITIONS OF CERTAIN DEPRECIABLE REALTY.—

Part IV of subchapter P of chapter 1 (relating to special rules for determining capital gains and losses) is amended by adding at the end thereof the following new section: "SEC. 1250. GAIN FROM DISPOSITIONS OF CERTAIN DEPRECIABLE REALTY. '*(a) GENERAL RULE. — "(1) ORDINARY INCOME.—Except

as otherwise provided in this section, if section 1250 property is disposed of after December 31, 1963, the applicable percentage of the lower of— " (A) the additional depreciation (as defined in subsection (b)(1)) in respect of the property, or '*(B) the excess of— "(i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over "(ii) the adjusted basis of such jnoperty, shall be trejited as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231. Such gain shall be recognized notwithstanding any other provision of this snbtitle. "(2) APPLICABLE PERCENTAGE.—For pinposes of paragraph (1), the term 'applicable percentage^ means 100 percent minus

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one percentage point for each full month the property was held after the date on which the property was held 20 full months, "^b) ADDmoNAL DEPRECIATION DEFINED.—For purposes of this section— " (1) I N OBNER.VL,.—The term 'additional depreciation' means, in the case of any property, the depreciation adjustments in respect of such property; except that, in the cjise of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment. For purposes of the preceding sentence, if a useful life (or salvage value) was used in determining the amount allowed as a deduction for any taxable year, such life (or value) shall be used in determining the depreciation adjustments which would have resulted for such year under the straight line method. " (2) PROPERTY HELD BY LESSEE.—In the case of a lessee, in determining the depreciation adjustments which would have resulted in respect of any building erected (or other improvement made) on the leased property, or in respect of any cost of acquiring the lease, the lease period shall be treated as including all renewal periods. For purposes of the preceding sentence-— " (A) the term 'renewal period' means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but " (B) the inclusion of renewal periods shall not extend the period taken into account b ^ more than % of the period on the basis of which the depreciation adjustments were allowed. "(3) DEPRECIATION ADJUSTMENTS.—The term 'depreciation adjustments' means, in respect of any property, all adjustments attributable to periods after Decemlier 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed. " (c) SECTION 1250 PROPERTY.—For purposes of this section, the term 'section 1250 property' means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depi'eciation provided in section 167.

101

26 USC r*i6'8!'

76 Stat. 1032. 26 USC 1245.

^^ "^^ ^^''•

" (d) ExcaiTONs AND LIMITATIONS.—

"(1) GIFTS.—Subsection (a) shall not apply to a disposition by

gift. "(2) TRANSFERS AT DEATH.—Except as provided in section 691 ^e use 691.. (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death. " (3) CERTAIN TAX-FREE TILVNSACTIONS.—If the basis of property in the hands of a transferee is determined by reference to its tmsis in the hands of the transferor by reason of the application of section 332, 351, 361, 371 (a), 374(a), 721, or 731, then the amount Jf ^^c 332,351, of gain taken into account by the transferor mider subsection 721,' 731! (a)(1) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). This paragraph shall not apply to a disposition

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ae'uscr^s?^^*

PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

to an organization (other than a cooperative described in section ^^^^ which is exempt from the tax imposed by this chapter. " (4) L I K E KIND EXCHANGES; INVOLUNTARY CONVERSIONS, ETC.— " (A) RECOGNITION LIMIT.—If property is disposed of

10^3^"^^ '°^^'

and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the greater of the following: " (i) the amount of gain recognized on the disposition (determined without regard to this section), increased as provided in subparagraph (B), or (ii) the amount determined under subparagraph ,(C). " (B) INCREASE FOR CERTAIN STOCK.—^W'^ith respect to any transaction, the increase provided by this subparagraph is the amount equal to the fair market value of any stock purchased in a corporation which (but for this paragraph) would result in nonrecognition of gain under section 1033 (a)(3)(A). " (C) ADJUSTMENT WHERE INSUFFICIENT SECTION 1250 PROPERTY IS ACQUIRED.—With respect to any transaction, the

amount determined under this subparagraph shall be the excess of— "(i) the amount of gain which would (but for this paragraph) be taken into account under subsection (a) (1), over "(ii) the fair market vahie (or cost in the case of a transaction described in section 1033(a)(3)) of the section 1250 property acquired in the transaction. " (I)) BASIS OF PROPERTY ACQUIRED.—In the case of property purchased by the taxpayer in a transaction described n\ section 1033(a)(3), in applying the hist sentence of section 1033 (c), such sentence shall be applied— " (i) first solely to section 1250 properties and to the amount of gain not taken into account under subsection (a) (1^ by reason of this paragraph, and "(ii) then to all purchased properties to which such sentence applies and to the remaining gain not recognized on the transaction as if the cost of the section 1250 properties were the basis of such properties computed under clause (i). In the case of property acquired in any other transaction to which this paragraph applies, rules consistent with the pre(eding sentence shall be applied under regulations prescribed by the Secretary or his delegate. " (E) ADDITIONAL DEPRECIATION WITH RESPECT TO PROPERTY

Ante. p. 101.

108^1."^^ ^°^^'

DISPOSED OF.—In the case of any transaction described in section 1031 or 1033, the additional depreciation in respect Qf f^Q section 1250 property acquired which is attributable to the section 1250 property disposed of shall be an amount equal to the amount of the gain which was not taken into account under subsection (a)(1) by reason of the application of this paragraph. " ( ^) SECTION 1071 AND losi TRANSACTIONS.—Under regulations prescribed by the Secretary or his delegate, rules consistent with paragraphs (3) and (4) of this subsection and with subsections (e) and (f) shall apply in the case of transactions described in section 1071 (relating to o-nin from sale or exchange to effectuate

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policies of F C C) or section 1081 (relating to exchanges in 26^scr*io8\^" obedience to S E C orders). "(6)

PROPERTY DISTRIBUTED BY A PARTNERsmr TO A P A R T N E R, —

" (A) IN GENERAL,.—For purposes of this section, the basis of section 1250 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership. " (B) ADDITIONAL DEPRECIATION.—In respect of any property described in subparagraph (A), the additional depreciation attributable to periods before the distribution by the partnership shall be— " (i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time and the applicable percentage for the property had been 100 percent, reduced by " (ii) if section 751(b) applied to any part of such gain, the amount of such gain to which section 751(b) would have applied if the applicable percentage for the property had been 100 percent. "(7) DISPOSITION OF PRINCIPAL RESIDENCE.—Subsection (a) shall not apply to a disposition of— " (A) property to the extent used by the taxpayer as his principal residence (within the meaning of section 1034, relating to sale or exchange of residence), and " (B) property in respect of which the taxpayer meets the age and ownership requirements of section 121 (relating to gains from sale or exchange of residence of individual who has attained the age of 65) but only to the extent that he meets the use requirements of such section in respect of such property. "(e) HOLDING PERIOD,—For purposes of determining the applicable percentage under this section, the provisions of section 1223 shall not apply, and the holding period of section 1250 property shall be determined under the following rules: "(1) BEGINNING OF HOLDING PERIOD.—The holding period of section 1250 property shall be deemed to begin— " (A) in the case of property acquired by the taxpayer, on the day after the date of acquisition, or " (B) in the case of property constructed, reconstructed, or erected by the taxpayer, on the first day of the month during which the property is placed in service. "(2) PROPERTY WITH TRANSFERRED BASIS.—If the basis of property acquired in a transaction described in paragraph (1), (2), (3), or (5) of subsection (d) is determined by reference to its basis in the hands of the transferor, then the holding period of the property in the hands of the transferee shall include the holding period of the property in the hands of the transferor. "(3) PRINCIPAL RESIDENCE.—If the basis of property acquired in a transaction described in paragraph (7) of subsection (d) is determined by reference to the basis in the hands of the taxpayer of other property, then the holding period of the property acquired shall include the holding period of such other property. " (f) SPECIAL RULES FOR PROPERTY W H I C H I s SUBSTANTIALLY IMPROVED.— "(1) AMOUNT TREATED AS ORDINARY IXCO^IE.—If, in the case

of a disposition of section 1250 property, the property is treated as consisting of more than one element by reason of paragraph 31-667 0-65—10

^^ "^^ ^^ ^•

26 USC 1034. Ante, p. 38.

^^ ^^^ ^^^^'

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26^scr*i23"'

PUBLIC LAW 88-272~FEB. 26, 1964

[78 STAT.

(3), then the amount taken into account under subsection (a)(1) in respect of such section 1250 property as gain from the sale or exchange of property which is neither a capital asset nor prop^^^y described in section 1231 shall be the sum of the amounts determined under paragraph (2). " (2) ORDINARY INCOME ATTRIBUTABLE TO AN ELEMENT.—For

purposes of paragraph (1), the amount taken into account for any element shall be the amount determined by multiplying— " (A) the amount which bears the same ratio to the lower of the amounts specified in subparagraph (A) or (B) of subsection (a)(1) for the section 1250 property as the additional depreciation for such element bears to the sum of the additional depreciation for all elements, by " (B) the applicable percentage for such element. For purposes o f this paragraph, determinations with respect to any element shall be made as if it were a separate property. " ( 3 ^ PROPERTY CONSISTING OF MORE THAN ONE ELEMENT.—In Ante, p. 101.

26 USC 1016.

applying this subsection in the case of any section 1250 property, there shall be treated as a separate element— " (A) each separate improvement, " (B) if, before completion of section 1250 property, imits thereof (as distinguished from improvements) were placed in service, each such unit of section 1250 property, and " (C) the remaining property which is not taken into account under subparagraphs (A) and (B). ''(4) PROPERTY WHICH IS SUBSTANTIALLY IMPROVED.—For purposes of this subsection— " (A) IN GENERAL.—The term 'separate improvement means each improvement added during the 36-month period ending on the last day of any taxable year to the capital account for the property, but only if the sum of the amounts added to such account during such period exceeds the greatest of— " (i) 25 percent of the adjusted basis of the property, "(ii) 10 ]>ercent of the adjusted basis of the property, determined without regard to the adjustments provided in paragraphs (2) and (3) of section 1016(a), or '^(iii) $5,000. For purposes of clauses (i) and (ii), the adjusted basis of the property shall be determined as of the beginning of the first day of such 36-month period, or of the holding period of the property (within the meaning of subsection (e)), whichever is the later. " (B) EXCEPTION.—Improvements in any taxable year shall be taken into account for purposes of subparagraph (A) only if the sum of the amounts added to the capital account for the property for such taxable year exceeds the greater of— «(i) $2,000, or "(ii) one percent of the adjusted basis referred to in subparagraph (A) (ii), determined, however, as of the beginning of such taxable year. For purposes of this section, if the amoiuit added to the capital account for any separate improvement does not exceed the greater of clause (i) or (ii), such improvement shall be treated as placed in service on the first day, of a calendar month, which is closest to the middle of the taxable year. " (C) IMPROVEMENT.—The term 'impi*ovement' means, in the case of any section 1260 property, any addition to capital

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105

account for such property after the initial acquisition or after completion of the property. '•(g) ADJUSTMENTS TO BASIS.—The Secretary or his delegate shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under fiubsection (a). " (h) APPLICATION OF SECTION.—This section shall apply notwithstanding any other provision of this subtitle." (b) TECHNICAL AMENDMENTS.— (1) SPECIAL RULE FOR CHARITABLE CONTRIBUTIONS.—

1034. (A) The heading of section 170(e) (relating to special rule 76 Stat. 170. 26 USC for charitable contributions of section 1245 property) is amended by striking out "SECTION 1245 PROPERTY" and inserting in lieu thereof "CERTAIN PROPERTY". (B) The text of such section 170(e) is amended by striking out "section 1245(a)" and inserting in lieu thereof "section 1245(a) or 1250(a)". J,l26 USC 1245, ^^^oot

(2) CORPORATE DISTRIBUTIONS OF PROPERTY.—Subsections (b)

and (d) of section 301 (relating to amount distributed) are each amended by striking out "under section 1245(a)" and inserting in lieu thereof "under section 1245(a) or 1250 (a) ". (3) EFFECT ON EARNINGS AND PROFITS.—Paragraph (3) of section 312(c) (relating to adjustments of earnings and profits) is amended by striking out "or under section 1245(a) " and inserting in lieu thereof "or under section 1245(a) or 1250(a)". (4) COLLAPSIBLE CORPORATIONS.—Paragraph (12) of section

341 (e) (relating to collapsible corporations) is amended by striking out "section 1245(a)" and inserting in lieu thereof "sections 1245(a) and 1250(a)". (5) INSTALLMENT OBLIGATIONS I N CERTAIN LIQUIDATIONS.—Sub-

paragraphs (A) and (B) of section 453(d)(4) (relating to distribution of installment obligations in certain corporate liquidations) are each amended by striking out "section 1245(a)" and inserting in lieu thereof "section 1245(a) or 1250(a)". (6) SPECIAL RULE FOR PARTNERSHIPS.—Section 751(c) (relating to definition of "unrealized receivables" for purposes of subchapter K) is amended by striking out " ( a s defined in section 1245(a)(3)) " and inserting in lieu thereof "(as defined in section 1245 (a)(3)) and section 1250 property (as defined in section 1250(c))" and by striking out "to which section 1245(a)" and inserting in lieu thereof "to which section 1245(a) or 1250(a)". (7) The table of sections for part IV of subchapter P of chapter 1 is amended by adding at the end thereof the following: "Sec. 1250. Gain from dispositions of certain depreciable realty."

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to dispositions after December 31, 1963, in taxable years ending after such date. SEC. 232. AVERAGING. (a) GENERAL RULE. — Part I of subchapter Q of chapter 1 is

amended to read as follows: "PART I—INCOME AVERAGING "Sec. "Sec. "Sec. "Sec. "Sec.

1301. Limitation on tax. 1302. Definition of averagable income; related definitions. 1303. Eligible individuals. 1304. Special rules. 1305. Regulations.

26 USC 301.

26 USC 312.

26 USC 341.

26 USC 453.

26 USC 751.

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an^tl^ f^fg ^' 26'use i'.

PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

"SEC. 1301. LIMITATION ON TAX. "If an eligible individual has averagable income for the computation year, and if the amount of such income exceeds $3,000, then the ^^^ imposed by section 1 for the computation year which is attributable to averagable income shall be 5 times the increase in tax under such section which would result from adding 20 percent of such income to the sum of— "^1) 1331^ percent of average base period income, and "(2) the amount (if any) of the average base period capital gain net income. "SEC. 1302. DEFINITION OF AVERAGABLE INCOME; RELATED DEFINITIONS. " (a) AVERAGABLE INCOME.—For purposes of this part— "(1) IN GENERAL.—The term 'averagable income' means the amount (if any) by which adjusted taxable income exceeds ISZy^ percent of average base period income. " (2) ADJUSTMENT I N CERTAIN CASES FOR CAPITAL, GAINS.—If—

" (A) the average base period capital gain net income, exceeds " (B) the capital gain net income for the computation year, then the term 'averagable income" means the amount determined under paragraph (1), reduced by an amount equal to such excess. "(b) ADJUSTED TAXABLE INCOME.—For purposes of this part, the term 'adjusted taxable income' means the taxable income for the computation year, decreased by the sum of the following amounts: " (1) CAPITAL GAIN NET INCOME FOR THE COMPUTATION YEAR.—

The amount (if any) of the capital gain net income for the computation year. " (2) INCOME ATTRIBUTABLE TO GIFTS, BEQUESTS, ETC.—

26 USC 2.

" (A) IN GENERAL.—The amount of net income attributable to an interest in property where such interest was received by the taxpayer as a gift, bequest, devise, or inheritance during the computation year or any case period year. This paragraph shall not apply to gifts, bequests, devises, or inheritances between husband and wife if they make a joint return, or if one of them makes a return as a surviving spouse (as defined in section 2(b)), for the computation year. " (B) AMOUNT OF NET INCOME.—Unless the taxpayer other-

26 USC 2001, 2501.

wise establishes to the satisfaction of the Secretary or his delegate, the amount of net income for any taxable year attributable to an interest described in subparagraph (A) shall be deemed to be 6 percent of the fair market value of such interest (as determined in accordance with the provisions of chapter 11 or chapter 12, as the case may be). " (C) LIMITATION.—This paragraph shall apply only if the sum of the net incomes attributable to interests described in subparagraph (A) exceeds $3,000. " (D) N E T INCOME.—For purposes of this paragraph, the term 'net income' means, with respect to any interest, the excess of— " (i) items of gross income attributable to such interest, over "(ii) the deductions properly allocable to or chargeable against such items. For purposes of computing such net income, capital gains and losses shall not be taken into account. "(3) WAGEUIN<4 INCOME.—The amount (if any) by which the gains from wagering transactions for the computation year exceed^the losses from such transactions.

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 78 STAT. ] "(4)

PUBLIC LAW 88-272-FEB. 26, 1964 CERTAIN

AMOUNTS

RECEIVED

BY

107

OWNER-EMPLOYEES.—

821. The amount (if any) to which section 72(m)(5) (relating to 76 Stat. 72. 26 USC penalties applicable to certain amounts received by owneremployees) applies. "(c) AVERAGE BASE PERIOD INCOME.—For purposes of this part— " (1) IN GENERAL.—The term 'average base period income' means one-fourth of the sum of the base period incomes for the base period. "(2) BASE PERIOD INCOME.—The base period income for any taxable year is the taxable income for such year first increased and then decreased (but not below zero) in the following order: " (A) Taxable income shall be increased by an amount equal to the excess of— " (i) the amount excluded from gross income under section 911 (relating to earned income from sources ^e use 9n ^* without the United States) and subpart D of part III of subchapter N (sec. 931 and following, relating to ^^ "^^ 931-934. income from sources within possessions of the United States), over "(ii) the deductions which would have been properly allocable to or chargeable against such amount but for the exclusion of such amount from gross income. " (B) Taxable income shall be decreased by the capital gain net income. " (C) If the decrease provided by paragraph (2) of subsection (b) applies to the computation year, the taxable income shall be decreased under the rules of such paragraph (2) (other than the limitation contained in subparagraph (C) thereof). " (d) CAPITAL G A I N N E T INCOME, ETC.—For purposes of this part— "(1) CAPITAL GAIN NET INCOME.—The term 'capital gain net income' means the amount equal to 50 percent of the excess of the net long-term capital gain over the net short-term capital loss. " (2) AVERAGE BASE PERIOD CAPITAL GAIN NET INCOME.—The term 'average base period capital gain net income* means one-fourth of the sum of the capital gain net incomes for the base period. For purposes of the preceding sentence, the capital gain net income for any base period year shall not exceed the base period income for sue!) year computed without regard to subsection (c)(2)(B). " (e) OTHER RELATED DEFINITIONS.—For purposes of this pari— "(1) COMPUTATION YEAR.—The term 'computation year' means the taxable year for which the taxpayer chooses the benefits of this part. " (2) BASE PERIOD.—The term 'base period' means the 4 taxable years immediately preceding the computation year. "(3) BASE PERIOD YEAR.—The term 'base period year' means any of the 4 taxable years immediately preceding the computation year. "(4) JOINT RETURN.—The term 'joint return' means the return of a husband and wife made under section 6013. ^^'^J^^I^l^^* 2o u s e 60 13.

"SEC. 1303. ELIGIBLE INDIVIDUALS. " (a) GENERAL RULE.—Except as otherwise provided in this sec-

f if)ii, for purposes of this part the term 'eligible individual' means any individual who is a citizen or resident of the United States throughout the computation year. " (b) NONRESIDENT A L I E N INDIVIDUALS.—For purposes of this part, an individual shall not be an eligible individual for the computation

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